Insolvency Oracle

Developments in UK insolvency by Michelle Butler


4 Comments

The draft revised SIP13: has it sold out to SIP16?

IMG_0917

The consultation release explained that the SIP13 revision involved using “(wherever possible) language which is consistent with SIP16”. The resulting draft gives me the impression that the working group started with a blank sheet of paper and asked themselves: how can we adapt SIP16 for on-liquidation sales?

I agree that much of the current SIP13 is redundant, as it simply reproduces principles from the Code of Ethics (albeit that the Code rarely makes such direct applications), it does seem to me that the diversity of scenarios for connected party sales in and around insolvency processes has been lost in this redraft. This SIP’s primary focus clearly has become post-appointment connected party sales that are contemplated prior to appointment.

Why chop out so many connected party sales that are caught by the current SIP13? Will this improve perceptions?  Will we lose valuable transparency if we assume that the only connected party transactions worthy of disclosure are quasi pre-packs?

Requirements on office holders

The only requirements that the draft revised SIP13 puts on IPs in office are:

  1. “If an office holder subsequently relies on a valuation or advice other than by an appropriate independent valuer and/or advisor with adequate professional indemnity insurance this should be disclosed along with the rationale for doing so and the reasons why the office holder was satisfied with any valuation obtained, explained.”
  2. “When considering the manner of disposal of the business or assets the office holder should be able to demonstrate that their duties under the legislation have been met.”
  3. “The office holder should demonstrate that they have acted with due regard to creditors’ interests by providing creditors with a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered. Such disclosure should be made in the next report to creditors after the transaction has been concluded, which should be issued at the earliest opportunity.”

Item 2 is pointless: a SIP should not have to state that IPs need to be able to demonstrate that they have complied with legislation.

The other two items are generally reasonable, but I think the application of these requirements is confused by the preceding section headed “Preparatory Work”. In fact, item 1 above appears in the “Preparatory Work” section, which adds to the perception that the entire SIP relates only to quasi pre-packs.

“Preparatory Work” – a confusing context

This section states:

“An insolvency practitioner should keep a detailed record of the reasoning behind both the decision to make a sale to a connected party and all alternatives considered.”

“An insolvency practitioner should exercise professional judgement in advising the client whether a formal valuation of any or all of the assets is necessary.”

The SIP’s “principles” explain that “insolvency practitioner” is to be read as relating to acting in advisory engagements prior to commencement of the insolvency process.

The “preparatory work” heading and the reference to the pre-appointment “decision to make a sale” lead me to wonder whether the sections that follow – “after appointment” and “disclosure” – apply only to sales where pre-appointment preparatory work has been undertaken.  Another issue with the heading – and the fact that the first sentence above is a copy of para 10 of SIP16 (with the omission of “pre-pack”) – is that it suggests that SIP13 does not capture sales completed pre-appointment.

But does it make sense to reduce SIP13 to a SIP16 baby brother?

Does the SIP work for liquidation sales?

Often business and/or asset sales to connected parties are conducted in or around a CVL process. Sometimes the sale happens pre-liquidation: sometimes without the advising IP’s involvement, but sometimes with their knowledge and assistance.  In other cases, the IP takes no steps to sell the assets until his/her formal appointment as liquidator; indeed, in some cases the IP will not even have met or spoken with the directors before the S98 meeting as they replace the members’ choice of IP as liquidator.

What are the disclosure requirements for pre-liquidation sales? This draft revised SIP13 omits all such disclosure.  True, at present SIP8 requires some disclosure, but:

  • SIP8 only requires disclosure of transactions in the year before the directors resolved to wind up the company, so there remains a crucial reporting gap;
  • SIP8 only requires disclosure to the S98 meeting, so technically it need not be in the post-S98 report that is circulated to creditors; and
  • SIP8 will be changed enormously by the 2016 Rules and rumour has it that SIP8 might even disappear completely.

How many companies go into CVL having sold/lost all their chattel assets already? I reviewed the filing of 10 one year old CVLs chosen at random:

  • 6 had no chattel assets at the point of liquidation, although the previous accounts of 3 of these attributed some value to chattel assets (and one of the others had no filed accounts);
  • 3 involved post-CVL connected party sales; and
  • 1 involved a post-CVL unconnected party sale.

Of course, there can be all kinds of reasons why a company goes into CVL with no chattel assets, but if the revised SIP13 is issued, how many connected party transactions will go entirely unreported in future? Might it even influence more directors to dispose of assets before an insolvency office holder is appointed so that the sale falls under the radar?

Perceptions

Of course, the insolvency office holder will make appropriate investigations into a pre-liquidation (or any other insolvency process) sale. Therefore, is there really any harm done if the details of the sale are not provided to creditors?

I guess not, but doesn’t the omission de-value the efforts to ensure that office holders disclose post-appointment sales? What are the chances that the distinction between a pre and post sale will be lost on some creditors?  If they see solely a cash at bank lump sum received by the liquidator of a once asset-rich company and few details, what might their sceptical minds conclude?

Not quite SIP16

As I mentioned at the start, this draft revised SIP13 seems to have been produced from a blank sheet of paper and a copy of SIP16. However, fortunately, this SIP seems to have avoided the prescriptive shackles of its fellow.

The consultation release referred to SIP13 having been drafted “in a proportionate way and without being onerous, recognising that it may apply to low value transactions”. Notwithstanding that some liquidation business/asset sales may be as hefty as some pre-packs, I think this is good news: the draft SIP13 does not contain a SIP16-style shopping list of disclosure items (bravo!) and sticks to the principle of providing “a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered”.

Therefore, whilst I suspect that disclosure of material business sales may be expected to contain a number of SIP16 elements, at least selling an old computer to the director for £50 will not require a chapter-and-verse account. However, it will take diligence on the part of those drafting and reviewing creditors’ reports to ensure that an adequate explanation, depending on the specific circumstances, is given. As with the new SIP9, formulaic approaches to report-writing will not work.

Wider scope?

Assuming that the pre-appointment “preparatory work” context is not meant to rule out disclosure of cold post-appointment sales, the draft revised SIP13 would have a wider reach than the current SIP13 in some respects:

  • Sales with connected parties (or at least as they are defined by statute), not just with directors, are caught; and
  • Personal insolvency processes are caught, so for example it would include a bankrupt’s family member buying out the Trustee’s interest.

Consultation deadline

I agree that a revision of SIP13 is long overdue: for one thing, its reference to a Rule 2.2 report lost all relevance in 2003!

The consultation – available at http://goo.gl/D91QMo – ends on 11 May 2016. I’ll be submitting a response, so if you want to counter my opinions, you’d better getting writing.

 

By the way, if you’ve been wondering how the picture relates to the story: there’s no connection, it’s just that I’ve recently returned from a spectacular trip to Bolivia and Chile.

Advertisements


Leave a comment

SIP16: it’s more than just a Pool

IMGP5313

The Pre Pack Pool launched to sounds of applause from the likes of Anna Soubry MP and Teresa Graham, whilst most IPs have been keeping their own counsel at best.  For IPs and their agents, the new SIP16 contains changes of more practical consequence than the Pool.

On the Compliance Alliance blog, I have set out some pointers on how to implement the changes into internal processes and documentation (http://thecompliancealliance.co.uk/blog/sips/sip16/).  I’d also like to make a plug for my Fees Rules article for the ICAEW’s Insolvency & Restructuring Group’s newsletter, which I have reproduced on the CompAll blog (http://thecompliancealliance.co.uk/blog/practical/octfees/).  I plan to present a webinar on the combined subjects of SIP9 and SIP16 in a few weeks’ time.

Here, I thought I’d explore the outlook from over the SIP16 parapet.

How many applications will the Pre Pack Pool see?

Shall we open a book on that question?

Here are the Administration and pre-pack stats:

ADMs

 

 

 

 

 

 

I’ve drawn from the Insolvency Service’s insolvency appointments tables, extrapolating for a full year’s figures, and their annual regulatory and SIP16 monitoring reports.

If the pre-pack proportions are consistent, there would be 340 pre-packs over 2015 of which 228 would be to connected parties.  In one respect, it’s a shame that the Insolvency Service has handed over SIP16-monitoring to the RPBs, as I guess we may lose this insight into the numbers in future.

The Pool has 19 members (I’m not sure why 20 is often-quoted, unless there is an anonymous member!) – the names are at https://www.prepackpool.co.uk/about-the-pool – so each one could be expecting up to one review each month.  Of course, as many have noted, the reality could be far fewer given that applications are not mandatory.  Although the government’s threat of statutory measures to control pre-packs has been breathed hotly, why should this prospect persuade the pre-pack purchasers of today to apply to the Pool?

Also, as the graph illustrates, Administrations have been on the decline for a number of years and I suspect that the additional hurdles raised via the revised SIP16 and the fear in some IPs’ minds of their regulator picking up on an unintentional SIP16 clanger will force the numbers lower still, as instead more deals may be done either before or after Liquidation (which I think is already a far more frequent occurrence).

How will the regulators view absent Pool opinions?

There seems to be some anxiety that the regulatory bodies will be critical of IPs who complete connected party (“CP”) sales that lack a Pool review.  However, the new SIP16 puts little responsibility on the IP to press for a Pool application.  It merely states:

“the insolvency practitioner should ensure that any connected party considering a pre-packaged purchase is aware of their ability to approach the pre-pack pool and the potential for enhanced stakeholder confidence from the connected party approaching the pre-pack pool and preparing a viability statement for the purchasing entity” (paragraph 9).

‘The IP should ensure that [the party] is aware of their ability…’ – that is pretty light touch.

The IP also needs to ask the CP for a copy of any Pool opinion, but of course there is no obligation on the CP to concede to that request.  I understand that the CP can tick a box during the application to tell the Pool to provide a copy of the opinion to the IP, which at least might cut out the potential for some delay.

How should an IP react to a Pool application?

What would you do if you knew that the CP had applied to the Pool, would you wait for the opinion before concluding the sale?  I asked this question of an IP the other day and I confess that I was surprised when he said that he would wait.

Admittedly, 48 hours might not be long to wait in the great scheme of things, although this presupposes that the CP gets their application in pretty sharpish.  In view of the Pool’s wish-list (albeit not prerequisites), some of which carry not insignificant cost, the fact that the CP is probably being bombarded with issues from all directions and feeling ragged given their involvement in a limping company, and of course the inevitable reaction of “so you’re telling me I don’t have to make an application?”, the odds do seem stacked against a swift and comprehensive application to the Pool.

What would you do if the Pool’s answer was negative?  The Pool’s Q&As are factually correct but tight-lipped on the consequence for a potential sale of a negative Pool opinion (remembering of course that a negative opinion means “there is insufficient evidence that the grounds for the pre-packaged sale is reasonable”):

“It is for the IP to decide whether to proceed with such a sale or not.

“IPs are subject to regulation and authorised to act as IPs by recognised professional bodies. The insolvency regulators look at practitioners’ conduct through complaints received and proactive monitoring. Where systemic problems are identified, the regulators have the ability to take appropriate action.

“A complaint would not be well founded solely on the basis that a pre-packaged sale transaction was entered into when an opinion had been issued that the evidence was insufficient to support the grounds for a pre-packaged sale.”

I think that everyone reasonable now appreciates that the IP has got to do what the IP has got to do.  What would an IP do with a negative Pool opinion?  Would it make him think again about the sale, even though he would not know what had been behind the Pool member’s decision?  If it would not – on the basis that the IP knows what needs doing and can fully justify his actions – then why wait for the opinion?

Fortunately, I think negative Pool opinions will be very rare in any event.  After all, why would a CP go to the time and expense of voluntarily applying to the Pool, if he thought that he would struggle to persuade the Pool that the pre-pack was reasonable?  If the Pool does not a record a near-100% “pass” rate, I will be very surprised.

But would a 100% pass rate mean that the Pool has failed?  I do hope it won’t be seen that way!  After all, I suspect that applications will only be made to the Pool if the IP is moving towards concluding a sale; if the IP thinks the sale should happen, then let’s hope that the Pool rarely, if ever, disagrees.  Also, I think there’s an argument that, if applications to the Pool become the norm (although I am not convinced they will be), then the absence of an approach to the Pool might lead onlookers to presume that the CP was uncertain it would pass muster.  Therefore, even if the Pool notches up a 100% pass rate, creditors should feel confident that the wheat is distinguished from the chaff… so job done as regards improving confidence!

Quality agents step forward

For all its publicity, practically the Pool does not present the biggest SIP16 sea change for IPs.  Of far more practical effect to IPs are the additions as regards marketing.  This doesn’t mean that IPs’ past work has necessarily been at odds with the new standards, but inevitably practices and disclosures need to be adjusted to fit the now-codified standards.

Some agents have questioned the emphasis placed on having adequate PII as now required by the SIP, as they feel that qualifications – and especially RICS registration – are far better indicators of high quality and ethical services.  I can see their point, however I think that the quality agent could ease the IP’s SIP16 compliance burden in a new way.

I’d summarise the SIP16 marketing essentials this way:

  • The marketing strategy should be designed to achieve the best available outcome for creditors as a whole in all the circumstances.
  • The business should be marketed as widely as possible proportionate to the nature and size of the business.
  • Consideration should be given to the type of media used to reach the widest group of potential purchasers in the time available. Online communication should be included alongside other media by default.
  • Marketing should be undertaken for an appropriate length of time to ensure that the best available outcome for creditors as a whole in all the circumstances has been achieved.
  • Any previous marketing of the business by the Company is not justification in itself for avoiding further marketing. The adequacy and independence of the marketing should be considered in order to achieve the best available outcome.

Although much of the strategising is likely to be conducted in conversations in view of the urgency of the situation, SIP16 compliance requires good record-keeping.  Could agents help IPs on this?  Could they perhaps set out the “reasons underpinning the marketing and media strategy used” in a form that the IP could transfer readily to the SIP16 Statement?  After all, an agent worth his salt will be familiar with the new SIP16 and will understand well the pre-pack tensions that need to be managed in order to get the best sale away.  IPs look to their agents to propose and execute effective marketing strategies, so wouldn’t it follow that the agents fully justify their recommendations and actions in writing?  Such a helpful service might also attract a premium rate or repeat instructions, mightn’t it?

Before I move away from the marketing topic, I’ve been asking myself: how can we decide if a valuation agent’s PII is “adequate”?

For starters, I suggest that IPs who do more than the occasional pre-pack set up central registers of the PII details of the agents that they use, rather than deal with this on a case-by-case basis.  In this way, you need only ask your agents for PII information once and you can update your central register when the PII renewal dates come along.

Secondly, you might find RICS’ PII guidance useful: http://goo.gl/IAd7TX.  This describes minimum terms for PII required by RICS in a style that will be familiar to all IPs.

Curly additions to SIP16

In the process of updating the CompAll SIP16 Statement template, I discovered that there were several sneaky additions to the new SIP16.  I’ve attached at SIP16 comparison a tracked-changes comparison of the 2013 version and the current SIP16.

Some – but by no means all – of the lesser-publicised changes, which will affect standard documents and processes, are (in italics):

  • IPs should make it clear that their role is not to advise either the directors or any parties connected with the purchaser.
  • IPs should keep a detailed record of both the decision to do a pre-pack and all alternatives considered.
  • If the Administrator has been unable to send his Proposals with the SIP16 Statement, the Proposals should include an explanation for the delay.
  • Confirmation in the SIP16 Statement “that the sale price achieved was the best reasonably obtainable in all the circumstances” has been replaced by confirmation that the outcome achieved was the best available outcome for creditors as a whole in all the circumstances.
  • Disclosure of the extent of the Administrator’s involvement pre-appointment has been extended to involvement of the Administrator’s firm and/or any associates.
  • Disclosure of the alternative courses of action considered has been widened to the alternative options considered, both prior to and within formal insolvency by the IP and the company, and on appointment [of] the Administrator.
  • Disclosure should include explanations of why no consultation took place with major – or representative – creditors; why no requests were made to potential funders; and why no security was taken for deferred security (including the basis for the decision that none was required), if any of these were the case.
  • Disclosure of the names of directors/former directors involved in the management or ownership of the purchaser has been extended to include their associates and to any involvement in financing the purchasing entity.
  • Disclosure of fixed/floating charge allocations of consideration needs to include the method by which the allocation was applied.

 

Although these SIP16 changes will make compliance staff’s (and consultants’) lives a little more unpleasant as we try hard to avoid SIP16 Statement slip-ups, I would welcome that extra bit of misery if the pay-off were the Holy Grail of “improved confidence”. I am yet to be convinced that this will be the outcome.


3 Comments

Ethics hits the headlines again: should we be worried?

Peru163

The big story of last week was the disciplinary sanction ordered to an EY IP for breaches of the Ethics Code.  But I think this is just one more straw on the camel’s back.  Every new criticism of apparent poor ethical standards that is added to the pile increases the risk of a regulatory reaction that would be counter-productive to the effective and ethical work of the majority.

 

Journalistic fog

Plenty has been said about the “noise” around pre-packs.  Therefore, I was not entirely surprised – but I was disappointed and frustrated – to read that the latest sanction had been twisted to fit one journalist’s evident attempt to keep shouting: “It was the classic cosy insolvency I wrote about last month: a company calls in insolvency advisers who conduct an ‘independent business review’, take the job of administrator and act on the sale as well.  On Wind Hellas, the creditors could not see how Ernst & Young could take both appointments without compromising their integrity. Six-and-a-half years later, the professional body has at last agreed with them.” (http://goo.gl/aIY9rU)

Actually, a look at the ICAEW notice (https://goo.gl/H7jUov) suggests that they did nothing of the sort.  The relationship that got the IP into hot water related to the fact that an associated company, Ernst & Young Societe Anonyme, had carried on audit related work during the three years before the IP took the appointment as Joint Administrator of the company.

It is unfortunate that a failure to join the ethical dots between a potential insolvency appointment and the firm’s audit-related connection with the company has been used to pick at the pre-pack wound that we might have hoped was on the way to being healed.

 

Speed of complaints-handling

Is the journalist’s reference to 6½ years another distortion of the facts?  I was surprised to read an article in the Telegraph from February 2011 (http://goo.gl/8902YO).  Apparently, the ICAEW’s investigation manager wrote to the IP way back then, saying that “the threat to Ms Mills’ objectivity ‘should have caused you to decline, or resign, from that appointment’”.  Given that that conclusion had been drawn back in 2011, it does seem odd that it took a further four years for the ICAEW to issue the reprimand (plus a fine of £250,000 to the firm and £15,000 to the IP).  Perhaps the recouping of £95,000 of costs is some indication of why it took four years to conclude.

I found it a little surprising to read in the Insolvency Service’s monitoring report in June 2015 (https://goo.gl/Lm5vdU) that the Service considers the that ICAEW operates a “strong control environment” for handling complaints, although it did refer to some “relatively isolated and historical incidents” as regards delays in complaint-processing (well, they would be historic, wouldn’t they?). In addition, in its 2014 annual review (https://goo.gl/MZHeHK), the Service reported that two of the other RPBs evidenced “significant delays” in the progression of three complaints referred to the Service.

Although I do understand the complexities and the need for due process, I do worry that the regulators risk looking impotent if they are not seen to deal swiftly with complaints.  I also know that not a few IPs are frustrated and saddened by the length of time it takes for complaints to be closed, whilst in the meantime they live under a Damocles Sword.

 

Ethics Code under review

In each of the Insolvency Service’s annual reviews for the last three years (maybe longer, I didn’t care to check), the Service has highlighted ethical issues – and conflicts of interest in particular – as one of its focal points for the future.  In its latest review, it mentions participating in “a JIC working group that has been formed to consider amendments to the Code”.

Ethical issues still feature heavily in the complaints statistics… although they have fallen from 35% of all complaints in 2013 to 21% in 2014 (SIP3 and communication breakdown/failure accounted for the largest proportions at 27% apiece).  Almost one third of the 2014 ethics-based complaints related to conflicts of interest.

The Service still continues to receive high profile complaints of this nature: its review refers to the Comet complaint, which appears to be as much about the “potential conflict of interest” in relation to the pre-administration advice to the company and connected parties and the subsequent appointment as it has to do with apparent insufficient redundancy consultation.

I suspect that the question of how much pre-appointment work is too much will be one of the debates for the JIC working group.  Personally, I think that the current Ethics Code raises sufficient questions probing the significance of prior relationships to help IPs work this out for themselves… but this does require IPs to step away and reflect dispassionately on the facts as well as try to put themselves in the shoes of “a reasonable and informed third party, having knowledge of all relevant information” to discern whether they would conclude the threat to objectivity to be acceptable.

It is evident that there exists a swell of opinion outside the profession that any pre-appointment work is too much.  Thus, at the very least, perhaps more can be done to help people understand the necessary work that an IP does prior to a formal appointment and how this work takes full account of the future office-holder’s responsibilities and concerns.  Are Administrators’ Proposals doing this part of the job justice?

 

Criticisms of Disciplinary Sanctions

Taking centre stage in the Insolvency Service’s 2014 review are the Service’s plans “to ensure that the sanctions applied where misconduct is identified are consistent and sufficient, not only to deal with that misconduct, but also to provide reassurance to the wider public”.

Regrettably, the body of the review does not elaborate on this subject except to explain the plan to “attempt to create a common panel [of reviewers for complaints] across all of the authorising bodies”.  I am sure the Service is pleased to be able to line up for next year’s review that, with the departure of the Law Society/SRA from IP-licensing, the Complaints Gateway will cover all but one appointment-taking IP across the whole of the UK.

But these are just cosmetic changes, aren’t they?  Has there been any real progress in improving consistency across the RPBs?  It is perhaps too early to judge: the Common Sanctions Guidance and all that went with it were rolled out only in June 2013.  Over 2014, there were only 19 sanctions (excluding warnings and cautions) and seven have been published on the .gov.uk website (https://goo.gl/F3PaHj) this year.

A closer look at 2014’s sanctions hints at what might be behind the Service’s comment: 15 of the 19 sanctions were delivered by the IPA; and 20 of the 24 warnings/cautions were from the IPA too.  To license 34% of all appointment-taking IPs but to be responsible for over 80% of all sanctions: something has got to be wrong somewhere, hasn’t it?

The ICAEW has aired its own opinion on the Common Sanctions Guidance: its response to the Insolvency Service’s recommendation from its monitoring visit that the ICAEW “should ensure that sanctions relating to insolvency matters are applied in line with the Common Sanctions Guidelines” was to state amongst other things that the Guidance should be subject to a further review (cheeky?!).

 

Other Rumbles of Discontent

All this “noise” reminded me of the House of Commons’ (then) BIS Select Committee inquiry into insolvency that received oral evidence in March 2015 (http://goo.gl/CCmfQp).  There were some telling questions regarding the risks of conflicts of interest arising from pre-appointment work, although most of them were directed at Julian Healy, NARA’s chief executive officer.  Interestingly, the Select Committee also appeared alarmed to learn that not all fixed charge receivers are Registered Property Receivers under the RICS/IPA scheme.  Although it seems contrary to the de-regulation agenda, I would not be surprised to see some future pressure for mandatory regulation of all fixed charge receivers.

The source of potential conflicts that concerned the Select Committee was the seconding of IPs and staff to banks.  I thought that the witnesses side-stepped the issue quite adeptly by saying in effect, of course the IP/receiver who takes the appointment would never be the same IP/receiver who was sitting in the bank’s offices; that would be clearly unacceptable!  It was a shame that the Committee seemed to accept this simple explanation.  But then perhaps, when it comes to secondments, the primary issue is more about the ethical risk of exchanging consideration for insolvency appointments, rather than the risk that a seconded IP/staff member would influence events on a particular case to their firm’s advantage.

Bob Pinder, ICAEW, told the Committee: “It used to be quite prevalent that there were secondments, but he [a Big Four partner] was saying that that is becoming less so these days because of the perception of conflict… There is a stepping away from secondments generally”, so I wonder whether there might not be so much resistance now if the JIC were to look more closely at the subject of secondments when reconsidering the Ethics Code.

The FCA’s review of RBS’ Global Restructuring Group, which was prompted by the Tomlinson report (and which clearly was behind much of the Committee’s excitement), is expected to be released this summer (http://goo.gl/l96vtl).  When it does, I can see us reeling from a new/revived set of criticisms – one more straw for the camel’s back.


1 Comment

The Future is… Complicated

 

 

1933 Yosemite

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

  • Enterprise & Regulatory Reform Act 2013;
  • Deregulation Bill (est. commencement: May/October 2015);
  • Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);
  • The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;
  • New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and
  • A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

  • IP fees (consultation closed in March 2014);
  • DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and
  • Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

  • Ethics Code Review;
  • SIP 1;
  • SIPs 16 & 13;
  • SIP 9 (depending on how the government turns on the issue of IP fees);
  • New Insolvency Guidance Paper on retention of title; and
  • Other SIPs affected by new statute.

 

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

  • Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).
  • There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.
  • The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones).  Will that be a future compromise?  What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

  • Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.
  • The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.
  • A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.
  • In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.
  • It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.
  • S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.
  • The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.
  • The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum.  My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right.  Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript).  Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on.  He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation.  Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors.  A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd).  The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis.  I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

  • A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.
  • Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.
  • As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.
  • SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.
  • A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.


Leave a comment

The Small Business Enterprise and Employment Bill: Part 2 – insolvency odds and sods

IMGP5554

My second post on the Small Business Enterprise and Employment Bill focuses on the proposed changes to the Insolvency Act as a consequence of the Red Tape Challenge… with a couple of sneaky additions thrown in.

Changes to the Insolvency Act 1986

The Red Tape Challenge proposals require changes both to the Act and the Rules. Therefore, this Bill is not the whole story and many of the practicalities of the new processes will only become evident when the Insolvency Rules are changed.

The Insolvency Service’s current targets on the Rules consolidation exercise appear to be finalisation of the statutory instrument in October 2015 so that it has an effective date of April 2016.

The Bill’s Impact Assessment (“IA”) summarises the changes as follows:

1. “Removing meetings of creditors as the default position in insolvencies
2. Abolition of final meetings
3. Removal of requirement for liquidator to be present at a S98 meeting
4. Opting out of further correspondence
5. Administration extensions
6. Allowing an office-holder to pay a dividend in respect of a debt of less than £1,000 without the need for the creditor to submit a formal claim
7. Removal of requirement to seek sanction for certain actions in liquidation and bankruptcy
8. Crystallisation of Scottish floating charges
9. Abolition of Fast Track Voluntary Arrangements
10. Official Receiver to be appointed trustee on the making of a bankruptcy order
11. Clarification that a court application under paragraph 65 of Schedule B1 is not required where an administrator intends to make a prescribed part payment to unsecured creditors
12. Clarification that a progress report must be issued to creditors where the liquidator changes within the first year of a CVL
13. Alignment of the time limit for an appeal against the outcome of an IVA where there is no interim order with that where there is an interim order in place”

“Deemed consent” and non-physical meetings

The savings that will result from complete removal of “physical” meetings seem to be built on the premise that all IPs are charging room hire of £64 and 1.5 hours of administrator/manager time each time a meeting is “held”. Although the vast number of circulars still refer to a place and time for meetings, I suspect that rarely does this involve any more cost than if the business were conducted by correspondence.

Firstly, the Bill introduces a “deemed consent procedure” (S110 and 111) that seems to work like this:

• The office holder provides creditors with written notice of his “proposed decision” on a matter.
• If less than 10% (or perhaps “10% or less” – the IA does not make it clear and the Rules will prescribe this) of total creditors by value object to the proposed decision, the creditors are treated as having made the decision.
• If more than 10% (or “10% or more”) object to the proposed decision, then the office holder must follow a “qualifying decision procedure”.

The Bill lists several decisions that cannot be handled by the deemed consent procedure:

• “Any matter relating to a proposal” for a VA;
• Removal of an office holder;
• “Any matter relating to the remuneration of an office holder”, which I guess will wrap in S98s and consideration of Administrators’ Proposals (unless Para 52(1)(b) applies);
• Where the court so orders; and
• “Any matter prescribed as an excluded matter by the Rules”.

The IA suggests that the process will not disadvantage small-value creditors, as “they will still have the facility to object to [the proposals] and raise any concerns with the office holder, who will in turn have a duty to consider whether deemed consent is the most appropriate mechanism to use”, which seems most odd: does the Service expect office holders to start the deemed consent process and, even if the 10% threshold has not been passed, they might decide that minority objecting creditors deserve a voice and thus they can spend estate monies in following a more inclusive decision-making process? This also seems contrary to the Bill, which states that, if less than the prescribed proportion of creditors object, the creditors are to be treated as having made the proposed decision (S246ZF(4) under S110).

The IA does point out that use of the deemed consent procedure is discretionary; it states that “office holders will be able to use their experience to identify situations where the creditors are unlikely to agree with its use” and thus go straight to an alternative decision procedure. However, the Service also waves the stick of regulatory action, if it seems that an IP has lost sight of achieving “value for money”.

The Bill’s memorandum states: “in most cases the intention is that the office holder will be able to use a process of deemed consent”. However, given the exclusions listed above, how many opportunities will there be for the deemed consent procedure in any event? How many meetings (other than final meetings, which are dealt with elsewhere) do not include a resolution on fees?

The Bill doesn’t prescribe the qualifying decision procedures – the Rules will “prescribe examples of procedures” – but the IA indicates that these will not include a physical meeting, unless 10% or more request a physical meeting. The procedures will include business by correspondence, remote meetings, and electronic voting.

Given that most meetings are convened at present to deal with the excluded matters listed above and that physical meetings will not be an option unless creditors ask for one, I really cannot see why the IA has estimated a reduction of only 50% in the number of physical meetings. It states that “50% was seen as prudent, given because this will be ‘new ground’ for office holders and creditors, who may feel decide (sic.) that they would prefer to have meetings in some cases”. Don’t you get it, Insolvency Service? How many times do we have to say it? On the whole, creditors don’t vote! Why on earth would they – in 50% of cases! – ask for a physical meeting?!

The IA states that “it is not anticipated that the time taken to undertake a virtual meeting will be any more or less than the time taken to undertake a physical meeting” – I agree – but it then states “where a physical meeting is not being held the proportion of instances where a virtual or remote meeting is held is likely to be small, given that deemed consent will be available as well as other cheaper methods”. The IA then applies a best estimate of 50% reduction in meetings, whether virtual or physical, and eliminates entirely the time costs of an estimated 1.5 hours for holding a meeting. Crazy! As is clear above, there will barely be an opportunity to use deemed consent and, as the time incurred in completing unattended meetings is mostly about collating and considering proofs and proxies and drafting minutes, these pretty-much will still need to be spent in any other decision procedure. Okay, business by correspondence will be cheaper than a physical or virtual meeting where people actually turn up, but it is not cost-free!

Is it any wonder that the Service has managed to come up with savings for this measure alone of £50 million over ten years?!

Final meetings

The IA states that the proposal “scraps all final meetings of creditors where they occur”, although the Bill (S114) provides only that the SoS be empowered to remove Insolvency Act meetings, so I think there is another step required to amend S106 etc. It is not clear whether the Service envisages that the deemed consent procedure will apply to a proposed resolution for release, or whether the draft final report simply will be issued and creditors will need to request a meeting, if they want to object to the office holder’s release.

The IA suggests that this measure will save £6 million per year (in addition to the £50 million above), based on room hire of £64 per meeting and 45 minutes of time, although, if the deemed consent procedure were necessary, it will carry with it some costs to wrap up. The Bill does not refer to any requirement to tell creditors the outcome of any attempt at obtaining deemed consent; hopefully the Rules changes will add nothing, as this would return any costs saved in abolishing final meetings.

S98 meetings

The Bill and IA seem confused over the fate of S98 meetings: are they being abolished? If not, who gets to decide how they should be held? And practically, how can such decisions be managed?

One thing is clear: the need for the company’s liquidator to be present at the S98 meeting will be removed (although it is not in the Bill, as it is a Rules provision). The IA states that “in most cases it will be an insolvency manager who has best knowledge of the intricacies of a CVL rather than the office holder themselves and it represents much better value for the creditors for that person to attend the meeting” – charming! Don’t they think that creditors will want and deserve to see the liquidator in person? The IA does acknowledge that, if there is significant creditor interest in the proceedings, suggestion of director misconduct or “negotiations that the office holder in person may wish to lead”, the IP may “feel that their presence would be necessary or beneficial”. The IA estimates this may occur in 30% of cases.

I know that some have aired grave concerns over the prospect of creditor disengagement by abolishing physical S98 meetings. Chuka Umunna MP commented on this when the Bill had its second reading – see column 922 at http://goo.gl/VGOE07.

But are physical S98 meetings being abolished? The IA estimates there will be a 50% reduction in physical S98 meetings, which suggests that they aren’t. However, from my reading of the Bill, it seems that S98s will be subject to the “qualifying decision procedure” rules, which means that a physical meeting could only be held where over 10% of creditors request one, so, without this, an IP may only decide to “attend” a meeting remotely. Also don’t directors technically convene S98 meetings..? So a director who doesn’t want to face creditors – even remotely – can decide to conduct business by correspondence..?

Given that creditors only receive seven days’ notice of S98 meetings, I am not sure how a creditor’s request for a physical meeting will work practically. Presumably, directors/IPs may do well to predict cases where there is likely to be sufficient creditor interest and set up a meeting room in advance (although this will be wasted if the requisite creditors do not request a meeting). Otherwise, they could be looking at expensive last-minute conference room bookings – and you would need to give timely notice to all creditors of the venue – or a postponed S98 meeting, albeit not for long given the need to get on with the liquidation and the Centrebind restrictions.

So much for saving costs!

Creditors’ circulars

The Bill provides (Ss 112, 113) that creditors may opt out of receiving correspondence from office holders (excluding notices of (proposed) distributions, which presumably include notices of intended dividends).

Again, I think the Service has over-estimated the savings to be made: personally, I cannot see their assumption of 20% of creditors deciding to opt out becoming reality, although apparently “a representative of a leading firm of insolvency practitioners, a partner in a large regional firm, and a major creditor representative all said that they agreed that the assumption was reasonable and two of them thought the 20% figure to be conservative”, so what do I know..? I also note the IA assumption that no creditors will opt out where the OR is in office: if this provision is such a cost-saver, why is it only being imposed on IPs? They have also provided no provision for the costs to the office holder of managing two creditor databases.

What I want to know is: where has the other Red Tape Challenge proposal gone? If the Service is serious about IPs’ saving costs, then they should progress the proposal to allow office holders to post everything on a website without the need to write to each creditor every time notifying them that the document had been released. Maybe this will turn up in the Rules revision…

Extending administration extensions

Para 76(2)(b) of Schedule B1 is to be changed so that an administration may be extended by up to one year by consent (S115).

It is a shame the Service has not taken this opportunity to change the consent requirements, so that it does not require the administrator to seek the approval of every secured creditor, irrespective of their recovery prospects. Oh well. This may mean that the Service’s prediction that all administrations set to last up to two years will be extended by consent in future may prove to be an over-estimate also.

Dividend processes

Ss119 and 120 of the Bill provide for creditors who have not proved small debts (to be prescribed, although the IA proposes a threshold of £1,000) “to be treated as having done so”. The IA points out that, as with any proving creditor, this does not stop the office holder asking for further evidence from the creditor if thought necessary, although it states that this measure will “permit the insolvency office holder to rely upon the debtor’s own records”. Also, a creditor can always submit a proof, if it is owed more than the debtor’s records indicate.

I must admit that I have often struggled with the office holder’s duty as regards adjudicating on claims and I have even more difficulty with it in this “value for money” world: on the one hand, an office holder is expected to be diligent to ensure that he distributes the estate’s monies to those who are entitled to it; however, on the other hand, every minute he spends on scrutinising claims, asking for, and examining further evidence, eats away at the funds available to distribute. I guess this provision sets out more clearly the government’s expectation: just take small claims as read… unless you have reason to doubt them, e.g. if you think that the director who swore the SoA has added all his friends and neighbours to the list of creditors.

A Red Tape Challenge proposal that would really help put this measure into context is that small dividend payments – £5 or £10 were mentioned – would not be sent to individual creditors, but would be pooled for use by the disqualification unit or the Treasury. If this also were introduced, then, yes indeed, don’t waste any time considering whether to admit small claims, as the chances are that those creditors will not see their dividends anyway. However, this proposal hasn’t made it to the Bill. Is it another one for the Rules or will we never see it again..? (UPDATE 02/11/2014: I understand this proposal has now been dropped, as the Service had received advice that it would prove too contentious to deprive certain creditors of the right to receive a dividend, however small that might be.)

The Bill includes two measures affecting administration distributions. The IA describes them as clarifications and as removing ambiguities, although personally I think that the provisions change the Act, which seems pretty clear-cut to me.

S116 contains two parts:

• To Paragraph 65(3) will be added the power to distribute the prescribed part in an administration.
• Paragraph 83 will include a further restriction on moving from administration to CVL: this will only be possible where the administrator thinks that a non-prescribed part distribution will be made to unsecured creditors.

It is a shame that Schedule B1 of the Act is not being amended so that dividends generally can be paid through administration. The IA hints at why this is not considered appropriate: it states that liquidation “provides for more engagement” of unsecured creditors. Personally, I see no difference in creditor engagement in administrations and liquidations: there are the same powers to form a committee and to approve fees (as we are not talking about Para 52(1)(b) cases here), and the changes to liquidators’ powers mentioned below bring the office holders’ needs to seek sanction on a par. The IA has estimated a cost of £8,250 on converting an administration to liquidation, so why not save by eliminating the need to move to liquidation?

Pre-packs

S117 of the Bill is the Dear IP 62 threat to “ban ‘pre-pack’ administration sales to connected parties if certain criteria are not met”. The Bill’s memorandum elaborates, referring to Teresa Graham’s recommendations: “Clause 117 is in response to the recommendation to take a legislative power to legislate in the event that the recommendation to establish third party scrutiny is not adopted on a voluntary basis… It is considered that by taking a legislative power, this will act as an incentive to encourage connected parties to adopt the voluntary proposals set out in the Graham Review”. Hmm… I can’t see that the threat of future legislation is going to matter one jot to connected parties presently contemplating a sale! However, “the Government is fairly confident that voluntary reforms backed by this ‘backstop’ power will act as sufficient incentive to change behaviours and so it will not be necessary to exercise the power.” I know that R3 and others are working frantically to see what can be done with the Graham recommendations and I will not list my own views and concerns, as there have been plenty of other loud critics.

The Bill empowers the SoS to make regulations “prohibiting or imposing requirements or conditions in relation to the disposal hiring out or sale of property of a company by the administrator to a connected person in circumstances specified in the regulations”. Note that regulations may not be limited to pre-packs, but may affect any transaction involving a connected person (which is also defined by the section), whenever they occur and however large or small the property transferred. This fits in with Teresa Graham’s recommendations, although I haven’t seen any commentary refer to this wider scope.

S117 provides that, in particular, future regulations may require approval (or provide for the imposition of requirements/conditions) by creditors, the court, or “a person of a description specified by the regulations”.

Other fixes

The Bill also contains:

• S107: the proceeds of claims or assignments arising from Ss213, 214, 238, 239, 242, 243, and 244 are not to be available for floating charge holders, i.e. they will not be part of the company’s net property. I believe that some have expressed concern over this, but doesn’t this simply put case precedent into the Act?

• S108: liquidators may exercise any of the powers in Parts 1 to 3 of Schedule 4 of the Act without sanction (S109 provides similarly in relation to trustees and Schedule 5)… although I’m wondering why the Parts need to exist at all.

• S118: provides that, when an administrator of a Scottish company obtains permission from the court to pay a dividend to unsecured creditors, floating charges crystallise.

• S121: the OR will become trustee on the making of a bankruptcy order (if an IP isn’t made trustee at that time). The IA explains that the motivation for this is to improve the efficiency of asset realisations by not restricting the OR’s immediate activities only to protecting the estate. I can see some value in having the bankrupt’s estate vest in the OR immediately on bankruptcy, avoiding some of the confusion illustrated in the Pathania v Adedeji case (http://goo.gl/AcktAk), although there is obvious concern that this process disenfranchises creditors, as this erodes creditors’ opportunities to make a decision on who they want to administer the estate.

• S122: changes S262(3)(a) of the Act so that the 28 day time period for challenging an IVA meeting decision counts from the decision where there is no interim order and from the filing of the report to court in interim order cases… although I’m wondering why the time of the meeting’s decision could not work for all cases; it’s hardly “alignment”, as the IA suggests.

• S124: removes reference to producing progress reports only for (E&W) VLs that last longer than one year. This deals with the nonsensical position that, if the liquidator changes during the first year, it seems that he must predict if the case will last longer than one year in order to decide whether to issue a progress report on the change-over – an issue highlighted by Bill Burch (http://goo.gl/6K4a4E) – although it does not deal with the unnecessary costs of issuing progress reports mid-year and the re-setting of deadlines caused by changing liquidators. Courts usually deal with these matters in block transfer orders, but let’s hope that the revised Rules will effect a change.

That’s almost the whole of the Bill’s insolvency measures covered. It just leaves the provisions impacting on IP regulation… for another day.


Leave a comment

And now for a qualitative review of the IP Regulation Report

19Picture 704low res

Having explored the statistics, I thought I’d turn to the Insolvency Service’s 2013 IP regulation report’s hints at issues currently at the top of the regulators’ hit list:

• Ethical issues;
• Consultation with employees;
• SIP16; and
• Dodgy introducers;

All the Service’s regulatory reviews can be found at http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports.

Ethical Issues

The Insolvency Service has “asked that regulators make ethical issues one of their top priorities in the coming year, following concerns arising from both our own investigations and elsewhere” (Dr Judge’s foreword). What might this mean for IPs? Personally, I find it difficult to say, as the report is a bit cloudy on the details.

The report focuses on the fact that 35% of the complaints lodged in 2013 have been categorised as ethics-related. On the face of it, it does appear that ethics-categorised complaints have been creeping up: they were running at between 10% and 20% from 2008 to 2011, and in 2012 they were 24%. Without running a full analysis of the figures, I cannot see immediately which categories have correspondingly improved over the years: “other” complaints have been running fairly consistently between 30% and 40% (which does make me wonder at the value of the current system of categorising complaints!) and the other major categories – communication breakdown, sale of assets, and remuneration – have been bouncing along fairly steadily. The only sense I get is that, generally, complaints were far more scattered across the categories than they were in 2013, so I am pleased that the Insolvency Service reports an intention to refine its categorisation to better understand the true nature of complaints made about ethical issues. Now that the Service is categorising complaints as they pass through the Gateway, they are better-placed than ever to explore whether there are any trends.

In one way, I think that this ethics category peak is not all bad news: I would worry if some of the other categories – e.g. remuneration, mishandling of employee claims, misconduct/irregularity at creditors’ meetings – recorded high numbers of complaints.

Do the complaints findings give us any clues as to what these ethical issues might be about? Briefly, the findings listed in the report involved:

• Failing to conduct adequate ethical checks and a SIP16 failure;
• Failing to pay a dividend after issuing a Notice of Intended Dividend or retract the notice (How many times does this happen, I wonder!) and a SIP3 failure regarding providing a full explanation in a creditors’ report;
• Three separate instances (involving different IPs) of SIP16 failures;

Unfortunately, the report does not describe all founded complaints, but it appears to me that few ethics-categorised complaints convert into sanctions. However, it is interesting to see that some of these complaints don’t seem to go away: two of the complaints lodged with the Service about the RPBs, and which are still under investigation, involve allegations of conflict of interest, so it is perhaps not surprising that the Service’s interest has been piqued. The report describes a matter “of wider significance which we will take forward with all authorising bodies”, that of “concerns around the perceived independence of complaints handling, where the RPB also acts in a representative role for its members” (page 6). Noisy assumptions that RPBs won’t bite the hands that feed them have always been with us, but there were some very good reasons why complaints-handling was not taken away from the RPBs as a consequence of the 2011 regulatory reform consultation and I would be very surprised if the situation has worsened since then.

So, as a profession, we seem to be encountering a significant number of ethics-related complaints, few of which lead to any sanctions. This suggests to me that behaviour that people on the “outside” feel is unethical is somehow seen as justified when viewed from the “inside”. It cannot be simply an issue of communicating unsuccessfully, because wouldn’t that in itself be a breach of the ethical principle of transparency that might lead to a sanction? The Service seems to be focussing on the Code of Ethics: “we are working with the insolvency profession to establish whether the current ethical guidance and its application is sufficiently robust or whether any changes are needed to further protect all those with an interest in insolvency outcomes” (page 4). Personally, I struggle to see that the Code of Ethics is somehow deficient; it cannot endorse practices that deviate from the widely-accepted ethical norm, because it sets as the standard the view of “a reasonable and informed third party, having knowledge of all the relevant information”. I guess whether or not disciplinary committees are applying this standard successfully is another question, which, of course, the Service may be justified in asking. However, I do hope that (largely, I confess, because I shared the pain of many who were involved in the years spent revising the Guide) the outcome doesn’t involve tinkering with the Code, which I believe is an extremely carefully-written, all-encompassing, timeless and elevated, set of principles.

Consultation with employees

This topic pops up only briefly in relation to the Service’s monitoring visits to RPBs. It is another matter “of wider significance which we will take forward with all authorising bodies”: “regulation in relation to legal requirements to consult with employees where there are collective redundancies” (page 4).

Although I’ve been conscious of the concern over employee consultation over the years – I recall the MP’s letter to all IPs a few years’ ago – I was still surprised at the number of “reminders” published in Dear IP when I had a quick scroll down Chapter 11. On review, I thought that the most recent Article, number 44 (first issued in October 2010), was fairly well-written, although it pre-dated the decision in AEI Cables Limited v GMB, which acknowledged that it may be simply not possible to give the full consultation period where pressures to cease trading are felt (see, e.g., my blog post at http://wp.me/p2FU2Z-3i), and it all seems so impractical in so many cases – to engage in an “effective and meaningful consultation”, including ways of avoiding or reducing the number of redundancies – but then it wouldn’t be the first futile thing IPs have been instructed to do…

If this is a regulator hot topic going forward, then it may be beneficial to have a quick review of standards and procedures to ensure that you’re protecting yourself from any obvious criticism. For example, do your engagement letters cover off the consultation requirements adequately? Does staff consultation appear high up the list of day one priorities? If any staff are retained post-appointment, do you always document well the commencement of consultation, ensuring that discussions address (and contemporaneous notes evidence the addressing of) the matters required by the legislation?

SIP16

Oh dear, yes, SIP16-monitoring is still with us! It seems that 2012’s move away from monitoring strict compliance with the checklist of information in SIP16 to taking a bigger picture look at the pre-pack stories for hints of potential abuse has been abandoned. It seems that the Service’s idea of “enhanced” monitoring simply was to scrutinise all SIP16 disclosures, instead of just a sample. In addition, unlike previous reports, the 2013 report does not describe what intelligence has come to the Service via its pre-pack hotline, nor does it mention what resulted from any previous years’ ongoing investigations. Oh well.

I guess it was too much to ask that the release of a revised SIP16 on 1 November 2013 might herald a change in approach to any pre-pack monitoring by the Service. Nope, they’re still examining strict compliance, although at least there has been some progress in that the Service is now writing to all IPs where it identifies minor SIP16 disclosure non-compliances (with the serious breaches being passed to the authorising body concerned). I really cannot get excited by the news that the Service considered that 89% of all SIP16 disclosures, issued after the new SIP16 came into force, were fully compliant. Where does that take us? Will IPs continue to be monitored (and clobbered) until we achieve 100%? What will be the reaction, if the percentage compliant falls next time around?

Dodgy Introducers

The Service has achieved a lot of mileage – in some respects, quite rightly so – from the winding up, in the public interest, of eight companies that were “wrongly promoting pre-packaged administrations as an easy way for directors to escape their responsibilities”. Consequently, I found this sentence in the report interesting: “We have also noted that current monitoring by the regulators has not picked up on the insolvency practitioner activities that were linked to the winding up of a number of ‘introducer’ companies, and are in discussions with the authorising bodies over how this might be addressed in the coming year” (page 6). Does this refer specifically to the six IPs with links to the wound-up companies who have been referred to their authorising bodies? Or does this mean that the Service will be looking at how the regulators target (if at all) IPs’/introducers’ representations as regards the pre-pack process on IP monitoring visits?

Having heard last week a presentation by Caroline Sumner, IPA, at the R3 SPG Technical Review, it would seem to me that regulators are, not only on the look-out for introducers of dodgy pre-packs, but also of dodgy packaged CVLs where an IP has little, if any, involvement with the insolvent company/directors until the S98 meeting. Generally, IPs are vocal in their outrage and frustration at unregulated advisers who seek to persuade insolvent company directors that they need to follow the direction of someone looking out for their personal interests, but someone must be picking up the formal appointments…

.
Unfortunately, the Insolvency Service’s report has left me with a general sense that it’s all rather cryptic. The report seems to be full of breathed threats but nothing concrete and, having sat on the outside of the inner circle of regulatory goings-on for almost two years now, I appreciate so much more how inactive that arena all seems. It’s a shame, because I know from experience that a great deal of work goes on between the regulators, but it simply takes too long for any message to escape their clutches. It seems that practices don’t have to move at the pace of a bolting horse to evade an effective regulatory reaction.


Leave a comment

The Deregulation Bill

1228 Port Douglas

Tuesday’s announcement from the Insolvency Service reminded me that I’d buried its 2012 Annual Review of IP Regulation deep within a pile of court judgments that I’ve also not blogged about. I’ll tackle the easy job here: let’s look at the recent IS/BIS announcements…

“New Measures to Streamline Insolvency Regulation Announced” (1 July 2013)
http://insolvency.presscentre.com/Press-Releases/New-measures-to-streamline-insolvency-regulation-announced-68efa.aspx

SoS authorisations to come to an end

The Business Minister, Jo Swinson, announced proposals to transfer the regulation of SoS-authorised IPs to “independent regulators” in the interests of removing “a perceived conflict of interest” and in view of the limited powers of sanction when compared with the RPBs’.

This is not new. At the end of 2011, Ed Davey – two Ministers’ ago – described the Government’s intention to remove the Secretary of State from direct authorising, which was a conclusion of the consultation into IP Regulation. This also was a recommendation emanating from the OFT’s study into corporate insolvency, which was published in June 2010. And the idea has been bubbling along for years earlier than that.

However, perhaps I should not focus on how long it is taking the Department to progress this change; finally it has a name: the “Deregulation Bill”.

Limited Licences

The announcement also referred to proposals to allow “IPs to qualify as specialists in either corporate insolvency or personal insolvency, or both, [which] will reduce the time and money it takes to qualify for those who choose to specialise. This will open up the industry to more people and improve competition”.

This also is not new. Almost as soon as S389A was introduced via the IA2000, people have been asking for it to change. That Section sought to allow IPs to specialise by only authorising them to act as Nominee and Supervisor of (Company or Individual) Voluntary Arrangements. The regulatory structure was never put in place to allow such licences to be issued – the Secretary of State never recognised any bodies for the purpose of issuing such limited licences – but it was also soon appreciated that there would be little use in such licences: for example, if someone wanted to administer an IVA, it would also be useful for them to be able to become a Trustee in Bankruptcy, but this is not possible under S389A.

However, there was also much clamour from many IPs who felt that it was dangerous to allow IPs to specialise only in one field of insolvency. Many felt that the knowledge of someone who has passed only the personal insolvency JIEB paper was insufficient to enable them to deal successfully with the range of debtor circumstances that likely they would encounter even if they only took formal appointments on IVAs and Bankruptcies.

It certainly seems that the current Government proposals, which highlight the benefit of a fast track to a licence – 1-2 years for “the new qualifications” – will lead to limited-licence IPs narrowing their field of vision at the JIEB-stage.

Although there are many IPs who only take appointments in either the personal or corporate insolvency arena, I doubt that many would have chosen a limited licence route, even if that had been available. The corporate specialists tend to have got where they are either through a relatively many-runged large firm ladder or by having begun as a jack-of-all-trades, albeit with a corporate emphasis, in a smaller firm. Of course, the IPs who have lived and breathed IVAs for much of their professional life may have taken advantage of a limited licence route and they are unlikely to be taking on the complex bespoke IVA cases for which knowledge of corporate insolvency might be valuable, so personally I don’t feel too strongly about this being a bad idea… although I’m reluctant to call it a good idea, and I am not convinced that the profession needs to be opened up to more people and competition improved, does it?

Other aspects of the Deregulation Bill

The press release mentions a couple of other planned changes regarding the SoS’s and OR’s access to information on directors’ misconduct and the choice of interim receivers. Also hidden in the small print is reference to the Government’s proposals “to strengthen the powers of the Secretary of State as oversight regulator” – I’m not quite sure what they are, though…

“Consumers benefit and business to save over £30m per year from insolvency reforms” (5 June 2013)
http://insolvency.presscentre.com/Press-Releases/Consumers-benefit-and-business-to-save-over-30m-per-year-from-insolvency-reforms-68db0.aspx

Complaints Gateway

Business Minister, Jo Swinson, said: “An easy route to complain is important for consumers… This new Complaints Gateway will help consumers dealing with the insolvency industry to get speedier resolution of problems and easier access to the right information”.

“An easy route”? Firstly, the Complaints Gateway does not include complaints about Northern Ireland insolvencies. Nor does it include complaints against IPs licensed by the SRA/Law Societies. Nor does it, presumably, cover complaints about an IP’s conduct in relation to Consumer Credit Licensable activities..? Or at least it won’t if the IP/firm has their own Consumer Credit Licence… I’m not certain about IPs covered by a group licence… clear as mud!

“Speedier resolution”? Well the Service’s Complaints FAQs admit that complainants will normally be informed whether or not their complaint is being passed to the relevant authorising body within 15 working days of the Gateway receiving the complaint”. That’s a 3-week delay that would not have occurred under the old system.

Having said that, if the Complaints Gateway at least makes the public perceive IP regulation as more joined up and less self-serving than has been the perception to date, then that’s great!

Red Tape Challenge Outcomes

The press release details other proposed changes, although I do wonder at the “savings of over £30m per year” tagline:

• “Removing the requirement for IPs to hold meetings with creditors where they are not necessary”. Final meetings, presumably? With the exception of S98s, meetings are never actually held, are they, so I can’t see this measure resulting in less work/costs for IPs?
• “Enabling IPs to make greater use of electronic communications, for example making it easier to place notices on websites instead of sending individual letters to creditors”. So perhaps moving away from an opt out of the snail mail process to a default of website-only communication..? Anything less than that is pretty-much what we have already, isn’t it?
• “Allowing creditors to opt out of receiving further communications where they no longer have an interest in the insolvency.” Hmm… personally I can’t see creditors bothering to put “pen” to “paper” and opt out…
• “Streamlining the process by which IPs report misconduct by directors of insolvent companies to the Secretary of State, enabling investigations to be commenced earlier.” Well, yes, a much-reduced wishlist from the Service would be welcome, although that doesn’t require legislation, just re-revised Guidance Notes. Not sure how else you can “streamline” the process unless you make in online… but is that really going to make much difference..?
• “Removing the requirements on IPs to record time spent on cases, where their fees have not been fixed on a time cost basis, and to maintain a separate record of certain case events.” – good, about time too! No more Reg 13s..? What will the RPB monitors find to have a gripe about now?!
• “Removing the requirement for trustees in bankruptcy and liquidators in court winding-ups to apply to creditor committees before undertaking certain functions, to achieve consistency with powers in administrations”
• Radically reducing the prescriptive content required for progress and final progress reports – sorry, this one is a fiction; it’s my own suggestion of how a huge chunk of unnecessary regulation might be removed in an instant!

2012 Annual Review of Insolvency Practitioner Regulation (June 2013)
http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports

This was released without a murmur, slipped into the notes of the press release above. It’s not really surprising that it created little noise – has everyone had enough of pre-pack bashing for now? – but I thought I’d try to extract some items of interest.

Monitoring of SIP16 Compliance

Given that only 51% of SIP16 statements were reviewed by the Service during the first six months of 2012, it would seem to me that the decision to move away from box-ticking SIP16 compliance was made some time before it was abandoned half way through 2012, but at least the Service could report that their work was “in line with [their] previous commitments”. Consequently, I really can’t get excited about the Service’s findings on their SIP16 compliance monitoring, although it still irritates me to read that the Service considers IPs have not complied with SIP16 because they have not provided information “as to the nature of the business undertaken by the company”, which is not a SIP16 requirement (and I cannot see that this is essential to explaining every pre-pack) but only appears in Dear IP 42.

Monitoring of pre-packs using SIP16 disclosures

In the second half of the year, the Service reports that they “moved to sample monitoring of the pre-pack itself in order to identify whether there is any evidence of abuse of pre-packs”.

The statistics are interesting. Out of 42 cases referred to the authorising bodies, over 80% of them, 34, related to IPs authorised by the Secretary of State. Given that the SoS authorised less than 5% of all appointment-taking IPs in 2012, that’s a fair old hit-rate. It has to be mentioned, however, that the 34 referrals involved only six IPs, so perhaps they are zoning in on particular IPs who seem to attract a disproportionate amount of criticism. It is a shame that, although the report describes the outcome of referrals to the RPBs, nothing is mentioned about the outcome of these 34 referrals to the SoS. Perhaps we will read it in next year’s regulatory report… or perhaps the Service hopes that the plans to drop their authorisation role will intervene…

It is also a shame that the Service does not report on the outcome of the 23 complaints on pre-packs/SIP16 received in the year from external parties; it mentions only that six were referred to the RPBs. The report’s Executive Summary states that “pre-pack administrations continue to cause concern amongst the unsecured creditor community”, but it would be very interesting to learn exactly what kinds of concerns are being reported. In view of the fact that 17 complaints did not make it past the starting post after the Service had only “considered the nature of the complaint”, it would seem to me that there is still a lot of dissatisfaction out there about the process itself, which unfortunately is sometimes translated into suspicions of IP misconduct. I will give the Service some credit, though, as their website now includes some FAQs on pre-packs that do attempt to counter the “it just cannot be right!” reaction.

A good news point to take away from the report is: “we have not found evidence of any widespread abuse of the pre-pack procedure”.

Themed Review on Introducers

It is good to see the Service taking action to tackle websites that misrepresent professional insolvency services, although the limit of the Service’s powers appears evident. The report indicates that five websites, which were not identified as being connected with an IP, were changed as a consequence of the Service’s requests, but it seems that several more likely made no changes. The report mentions recourse available to the Advertising Standards Authority and recent coverage of an ASA ruling (www.insolvencynews.com/article/15416/corporate/insolvency-ad-banned-after-r3-complaint), albeit on the back of an R3 complaint, does show that this can generate results.

The report indicates that IPs can expect the RPB monitors/inspectors to be more inquisitive in this area: the Service believes that RPB monitors should be “robustly questioning insolvency practitioners as to their sources of work and testing the veracity of answers to ensure confidence that insolvency practitioners are complying with the Insolvency Code of Ethics”.

Regulatory and disciplinary outcomes

Let’s look at the visit stats for 2012: IS stats 2012

Hmm… does this hint at perhaps another reason why the SoS might think the time is right to drop authorising..? I’m referring to the average number of years between visits – 5.82 years for SoS-authorised IPs compared to an average of 2.92 for the RPBs as a whole – not the percentage of IPs subject to targeted visits, as I think that’s a two-edged sword for authorising bodies: it could mean that you have more than the average number of problem cases or it could mean that you are tougher than the rest.

The only other points I gleaned from this section were:

• The ICAEW clearly takes its requirement for IPs to carry out compliance reviews very seriously: three out of its four regulatory penalties were for failures to undertake compliance reviews.
• The heftiest fines/costs resulting from the complaints process were generated as follows:
o £10,000 fine for failure to register 884 IVAs with the Insolvency Service
o £10,000 fine for failure to comply with the Ethics Code by reason of an affiliation with a third party website that contained misleading and disparaging statements about IPs and the profession
o £4,000 penalty and £30,000 costs for taking fees from a bankrupt as well as being paid by the AiB as agent
• According to the Executive Summary, apparently there have been concerns about “the relatively low number of complaints that are upheld and result in a sanction”… so can we expect the RPBs to “please” the Service by issuing more sanctions in future or will the RPBs satisfy the Service that their complaints-handling is just and that it is simply that there is nothing in the majority of complaints?

The future

The Service intends to look further at the “considerable concern in relation to ensuring that insolvency practitioners consult employees as fully as is required by law in an insolvency situation”. I think the case of AEI Cables v GMB (http://wp.me/p2FU2Z-3i) demonstrates the issues facing a company in an insolvency situation – something has to give: which statutory duty takes precedence? – and I cannot believe that the position for IPs is any easier. It will be interesting to learn what the Service discovers.

And of course, we’re all waiting expectantly for the outcome of the Kempson review on fees; the Service’s regulatory report states: “A report is expected by July”…


Leave a comment

No summer holidays for the Insolvency Service?

0828 Noosa

Yesterday, the Government published its response to the House of Commons BIS Committee’s February 2013 report on the Insolvency Service. My immediate reaction is: it looks like the Service is going to be very busy over the summer!

The report describes plans in the areas of:

• Funding models
• CDDA work
• SIP16 – and now potential pre-pack abuse – monitoring
• Interaction with the RPBs and complaints about IPs
• S233 continuation of supply changes
• Review of IPs’ fees

In addition, the response includes reference to the Service’s ongoing plans in relation to “estate rationalisation”, which was picked up by Insolvency Today: (http://www.insolvencynews.com/article/15147/corporate/government-responds-to-insolvency-service-concerns).

The Government’s full response can be found at: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/1115/1115.pdf

Funding models

There is a BIS/Insolvency Service joint project to review potential funding models, which is also considering fee structures. The response states that they are also exploring “the possibility of fees being paid by instalments and/or linked to the discharge of the bankrupt” (paragraph 33). I thought that was an interesting addition to the mix of ideas: so instead of an automatic 1-year discharge, it could be extended until the bankrupt has paid his/her instalments? It would mean fewer recoveries via IPOs/IPAs, wouldn’t it, so the OR would have to write off more administration fees..?

CDDA work

Reference is made to the efforts of R3, the RPBs, IPs and the Insolvency Service “to simplify reporting processes, enhance guidance and ensure improved feedback on the outcomes of ‘possible misconduct’ reports provided by IPs” (paragraph 36). Personally, I feel that the efforts to put D-forms online are one step forward compared to the two steps back of the Service’s revised guidance on CDDA reporting, which adds yet more to the document/information wish-list when submitting D-reports. However, I think the Service’s presentations at courses and conferences on what they are looking for in D-reports and what IPs can dismiss as immaterial are useful – I would recommend them – albeit in some respects the points are difficult for IPs to apply in practice for fear of being criticised for using their professional judgment too liberally.

As an aside, I was interested to note the proportion of D1 reports to non-compulsory corporate cases: 35% in 2010-11 and 28% in 2011-12 (paragraph 42) – perhaps useful benchmarks for IPs, although of course every IP has his/her own make-up of appointments that will lead to more or less D1s in his/her particular case.

I found the Service’s confession of staff turnovers quite alarming. Within its Investigation and Enforcement teams in recent years, they reported a 38% internal turnover of employees, with over 60% in front-line investigation roles (paragraph 40). It is not surprising that, along with the impact of austerity measures on resources, “investigation and enforcement outputs have dipped since 2010”. The report sounds positive, however, that perhaps a corner has been turned with the agency “delivering closer to expectations” in the second half of this year (paragraph 41).

Despite these positive sounds, the response includes: “given the concerns raised by the Committee and feedback from insolvency practitioners on the numbers of ‘possible misconduct’ reports being taken forward, the Insolvency Service intends to look again at how it assesses and prioritises cases. This will be done during 2013/14, with the goal of ensuring greater transparency on its processes and shared expectations on its investigation and enforcement outputs” (paragraph 48).

Pre-packs

It seems to me that there is a shift away from focussing, excessively in my view, on SIP16 compliance towards investigating potential abuse of the pre-pack process – personally, I welcome this shift.

However, I feel that the response unsatisfactorily addresses the Committee’s recommendation that the Service’s SIP16 monitoring should include “feedback to each insolvency practitioner… where SIP16 reports have been judged to be non-compliant”. The response simply refers to: (i) the Service’s education programme “including a webinar” to ensure that the requirements of the SIP are understood; (ii) reporting significant issues to the relevant RPB; (iii) revising SIP16; and (iv) Dear IP 42 issued in October 2009. It seems nonsensical to me that the Service would spend time reviewing the SIP16s, deciding whether they are compliant or not including, as acknowledged in the report “minor and technical” non-compliances, and then do not inform the IPs direct of their conclusion. Fine, report the serious cases to the relevant RPB, but how does the Service expect IPs to learn by their mistakes if they are not told about them?!

The Government response highlights proposed changes to SIP16, which “will require IPs to move faster in informing creditors about pre-packs. It will also require a specific and explicit statement by the IP to confirm that a pre-pack was the most appropriate method of producing the best return for creditors” (paragraph 58). Personally, those proposed changes to the SIP, as appearing in recent RPB consultation, do not concern me, but does that mean that the rejection of the lengthening of the SIP16 bullet point information list (as per the consultation draft SIP16) will not be a deal-breaker with the Service? The Government doesn’t seem too concerned about adding to the list. I think I know what my consultation response will be…

As I mentioned, I am pleased to see the Service’s apparent new focus on cases “where there is evidence of material detriment to creditors as a result of IP behaviours” (paragraph 60) and “targeted investigation… going beyond simply reviewing SIP compliance to assess potential abuse of the pre-pack procedure” (paragraph 63). The Service “has been investigating, on a risk assessed basis, the use of pre-packs by small to medium sized IP firms where there have been a number of previous instances of breaches of SIP16 [and] monitoring the relationship between IPs and online introducers to see whether the pre-pack process is being abused through misleading advertising” (paragraph 52). I hope that this monitoring moves on to getting under the skin of the cases, so that it doesn’t just turn into a statistical review black-marking IPs simply working in a particular market irrespective whether there is any real abuse – and for that, perhaps we should look to the RPBs dealing with the Service’s referrals – but overall I say “Hurrah!”

The Government response also confirms that a review into pre-packs “will be launched in the summer after the Service has reported on its current monitoring of pre-packs… and the new SIP 16 controls on pre-packs have been put in place” (paragraph 51).

Interaction with the RPBs and complaints about IPs

Nestled within the pre-pack comments is this: “The Insolvency Service is strengthening its role as the oversight regulator of the IP profession. A new senior post to lead related activities will be filled shortly. This will include working with the insolvency regulators to drive action on commitments that will enhance enforcement and improve confidence in the proper use of insolvency frameworks” (paragraph 57).

The response also states that “common sanction guidance is close to implementation. This is expected to be in place over coming months” (paragraph 58). It also refers to a summer implementation of the new complaints gateway, which will mean that “in future virtually all complaints about IPs will come first to the Insolvency Service, where they will be subject to an initial assessment before being forwarded, as appropriate, to the relevant RPB for action” (paragraph 73). We also await the Insolvency Service’s Annual Review of IP Regulation.

S233 continuation of supply changes

A short one this: the Enterprise and Regulatory Reform Bill – now “Act”, as the Bill received Royal Assent on 24 April 2013 (see https://www.gov.uk/government/news/enterprise-and-regulatory-reform-bill-receives-royal-assent – although that’s another story entirely) – includes the power to create of secondary legislation to extend the scope of S233. However, we still await the consultation before the Government decides “how and in what terms to exercise the new powers” (paragraph 70).

Review of IPs’ fees

Another short one: Professor Kempson’s review “is expected to produce final recommendations for consideration by the Secretary of State and the Minister with responsibility for insolvency issues by the end of June 2013” (paragraph 77).

Goodness, what a busy summer it will be!


Leave a comment

HoC BIS Committee recommendations on the Insolvency Service: will they help?

Goodness, what a busy week it has been! Consultations, draft Regulations, a DMP Protocol, and a bit of a backlog of High Court decisions… but they will have to wait.

Although the release of the House of Commons’ BIS Select Committee’s report on the Insolvency Service has already been reported widely, I wonder if you, like me, sigh at the tone of the press coverage, which all seems to lie somewhere on the spectrum between cold neutrality and wholehearted support. Don’t you wish people would come out and say what they really think? Therefore, I thought I would give it a go…

If you want to read all the Committee’s recommendations, this is not the place for you – I have only described the ones that have raised my hackles or got me thinking. You can access the report in full at: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/675/675.pdf

Changes to debtors’ bankruptcy fees

“At present, individual debtor bankrupts have to pay an upfront fee of £525. Given the level of debt relief they can receive we agree with the Insolvency Service that it would not be unreasonable to increase that fee, possibly on a sliding scale. We also agree that the fee should not be automatically required to be paid up front but could be staggered along similar lines as payments to debt management companies. We will expect the Insolvency Service to set out progress in both of these areas in its response to this Report.” (paragraph 43)

It is clear that the Insolvency Service’s sums currently do not add up; something must change (and the BIS Committee made other recommendations to this effect). However, I had always thought that the charges relating to the bankruptcy process reflected the work carried out (setting aside the need for cross-subsidisation, which gives rise to another debate entirely). How does the service provided differ depending on a debtor’s level of debt? Whatever the individual’s liabilities, he/she has to go through pretty much the same process to enter bankruptcy as anyone else. True, the higher the debt level, often the more time-consuming the bankruptcy administration, but this is usually also reflected in the asset values, and as asset realisations attract a percentage fee, this already means that a high-liability bankruptcy is paying more.

I am not saying that individuals with large debts should not pay more, but I feel it is quite a step-change to structure fees, not as proportionate to the work undertaken, but to reflect somehow the level of debt relief that the individual is receiving. I am certain that it would not work in other fields of insolvency: could an IP justify basing the cost of putting a company into liquidation on the level of creditors’ claims, rather than on how much work was involved in preparing the Statement of Affairs and convening/holding the meetings? There is a Dear IP (no. 18, July 1991) warning against such a practice!

It is widely accepted that the cost of the petition and court fee restricts access to bankruptcy for many individuals. Graham Horne told the Committee that the Service would look at the DMCs’ model of paying fees in instalments. However, from the consultation and response on bankruptcy petition reform, it appears to me that the Service is looking only at the possibility of individuals paying instalments prior to entering bankruptcy, not after bankruptcy. Quite simply, this is not the DMCs’ model, which involves providing the service of administering a debt management plan whilst being paid the fee by instalments. It will be of little use to individuals to have to make payments to the Service… over how long, 6 months, 12 months..? but not get the relief of a bankruptcy order until the £700 (or more) is paid in full. I can imagine the Service’s suspense account soon bulging with countless numbers of one or two months’ staged payments from individuals who intended to go bankrupt, but because of the continuing stress of fighting off creditors they handed their affairs over to a DMC simply for a break from it all.

If a bankruptcy order cannot be made until the petition and court fees have been paid in full, it is still an up-front fee notwithstanding whether this is paid in instalments, and it will remain a barrier to bankruptcy for many.

Would the Service contemplate providing for the fees to be paid after bankruptcy? The Service already charges £1,625 to each bankruptcy estate and the report acknowledges that this is not recouped “in the majority of cases” (paragraph 35), so a post-bankruptcy application fee would simply be another unrecovered cost to write-off. There would be a few cases that could bear this cost, but then who really would be paying? The creditors.

Pre-packs

“We therefore recommend that together, the Department and the Insolvency Service commission research to renew the evidential basis for pre-pack administrations.” (paragraph 72)

Some have greeted this with an “oh please, not this old chestnut again!” Personally, I would welcome this step. Arguments against the use of pre-packs as a principle (or at least those that involve connected parties, “phoenixes”) usually relate to the perception that the connected party has achieved an unfair advantage – the directors have been able to under-cut their competitors because they have left creditors standing with Oldco and they have bought the business and assets at a steal. There is the additional allegation that there is no overall benefit to the economy because, whilst jobs may be saved in the business transfer from Oldco to Newco, jobs are lost in rival companies and/or with creditors. I think that the difficulty the insolvency profession has in responding to these arguments is that all IPs can do is their best, their statutory duty to maximise realisations of the insolvent company’s assets; even if these anti-pre-pack arguments were valid and that pre-packs were not good for the world at large, if IPs were to adjust their actions somehow to accommodate these wider concerns, i.e. resist completing a pre-pack in favour of a break-up or an expensive trading-on in the hope that an independent buyer comes along, they could be failing in their statutory duties.

If these arguments against pre-packs hold water, then let’s see the evidence and then watch the policy-makers decide whether some or all pre-packs should be banned in the public interest. In the meantime, all IPs can do is their best to fulfil their statutory duties in relation to each insolvency over which they are appointed.

One small point: I sincerely hope that the researchers avoid falling into the trap occupied by the pre-pack protesters. The arguments of unfair advantage and of creditors being left high and dry whilst the phoenix rises apply to business sales to connected parties, not to pre-packs. If an IP trades on a business in administration and then sells it to a connected party, the same allegations apply, don’t they? It seems strange to me that there is so much antagonism towards pre-packs when, really, I see little difference between a pre-pack administration and the Receivership business sales of the 1990s. In fact, I would suggest that pre-pack administrations are an improvement over Receivership business sales because at least the administrator is an officer of the court with wider responsibilities to creditors as a whole.

I’m not sure how the researchers will test the allegations. However, if they limit the research to a comparison of the direct outcomes of pre-pack sales compared with longer-running administration business sales, then I do not believe it will do anything to answer those who cry unfairness.

SIP16

“Despite the introduction of Statement of Insolvency Practice Note 16 and additional guidance, pre-pack administrations remain a controversial practice. The Insolvency Service is committed to continue to monitor SIP 16 compliance, but to make this effective, non-compliance needs to be followed through with stronger penalties by way of larger fines and stronger measures of enforcement. We have some sympathy with the concerns of the regulator R3, which argues that noncompliant insolvency practitioners are not made aware of the criteria on which they are being judged by The Insolvency Service, or given any feedback on their reports. We recommend that the Insolvency Service amend its monitoring processes to include feedback to each insolvency practitioner and their regulatory body where SIP 16 reports have been judged to be non-compliant. We further recommend that the criteria by which SIP 16 reports are judged should be published alongside the guidance.” (paragraphs 80 and 81)

This time I will cry: “oh please, not this old chestnut again!” Given the perceptions of unfairness surrounding pre-packs – or to describe the issue more accurately, business sales to connected parties – as explained above, it is not surprising that “despite the introduction of SIP16 and additional guidance, pre-pack administrations remain a controversial practice”. Even with 100% compliance with SIP16, the controversy would never fall away. SIP16 is simply about helping creditors to understand why the pre-pack sale was conducted; it will never answer the allegations that the practice of pre-packing businesses in general is unfair.

However, this limitation of SIP16 disclosures can never be an excuse for IPs failing to meet the requirements of the SIP. It is not beyond the ability of professional IPs to get this right.

Unfortunately, the key principle of SIP16 of “providing a detailed explanation and justification of why a pre-packaged sale was undertaken so that [creditors] can be satisfied that the administrator has acted with due regard for their interests” (SIP16, paragraph 8) does not fit well with a checklist of pieces of information. If an IP were to sit a creditor down and say “let me tell you why I did this sale this way”, I believe that it is very likely that, on a case-by-case basis, not every last detail required by SIP16 paragraph 9 would always be relevant to telling this story and it may even be that other factors not strictly required by SIP16 paragraph 9 would be valuable in helping the creditor understand. It makes me wonder how we got into this position – where unique stories describing a vast range of demised businesses and complex rescues are reduced to a monitoring exercise on a par with recounting Old Macdonald Had a Farm!

However, I repeat: this limitation of SIP16 monitoring should never be allowed to fuel the pre-pack critics. If IPs are being judged on strict compliance with SIP16, why can we not get it right?

There is no doubt in my mind that the absence of Insolvency Service feedback on each individual SIP16 disclosure has not helped. It also seems insensible to me that the Service would make these assessments and not inform each IP where they thought he/she had gone wrong. What on earth was the point of carrying out the review in the first place?!

However, I foresee a problem: in 2011, there were 1,341 appointment-taking IPs and 723 pre-packs. I appreciate that an average of 0.5 pre-packs per IP does not reflect reality, but even so it would seem to me that pre-packs are not that common; IPs might only conduct one or two each year and some IPs might go years before doing another pre-pack. In 2011, the Insolvency Service only reviewed 58% of all SIP16 disclosures, so there’s a big chunk of all SIP16s where no feedback is possible. In addition, 32% of the 2011 SIP16 disclosures reviewed were considered non-compliant by the Service. If our profession is lucky, it might be that these non-compliant SIP16s are being produced by the same bunch of IPs. However, my hunch (having worked in the IPA’s regulation department) is that sometimes an IP gets it right, sometimes he/she misses something. If this is the case, then years might pass before (i) an IP receives feedback on where he/she slipped up with SIP16 compliance and then when (ii) he/she can apply that feedback to his/her next pre-pack. Waiting for IPs to apply the Service’s feedback will not crack this nut: I suspect that, if the 2013 SIP16 monitoring report shows similar levels of non-compliance, there will be hell to pay!

Thus, I feel it is down to each and every IP to work at producing perfect SIP16 disclosures. Some may rebel at this formulaic approach to recounting the skills used in getting the best out of an insolvent company – I do! – but the threat of more legislation, which I suggest could be even more prescriptive and restrictive than SIP16, remains loud. Can we not just try to get it right?

Continuation of supply

“We recommend that the Department undertake a consultation as a matter of urgency on the rules relating to the continuation of supply to businesses on insolvency in order to assess whether a greater number of liquidations or further damage to businesses could be avoided if that supply was better protected.” (paragraph 86)

I shall use this opportunity to update you on the progress of the Enterprise and Regulatory Reform Bill. On 21 January, I reported that the House of Lords was considering a proposed amendment to S233 regarding the continuation of utilities and other contracted services and goods (https://insolvencyoracle.com/2013/01/21/more-on-the-err-bill-and-two-cases-1-scottish-court-shows-more-than-the-usual-interest-in-provisional-liquidators-fees-and-2-court-avoids-unpardonable-waste-or-scarce-resources/). Unfortunately, the Grand Committee threw the amendments out in full on the ground that there needed to be proper consideration of the consequences of such amendments. In hindsight, I can see that it was very unlikely that such changes could be slipped in to the Bill at such a late stage, but I guess that at least it keeps the issue on the table.

My personal view is that, whilst changes to S233 will be welcome, I do feel that some are over-egging the advantages. The BIS Committee picked up on R3’s research suggesting that “over 2,000 additional businesses could be saved each year, rather than being put into liquidation”, if suppliers were obliged to continue to supply on insolvency (paragraph 82). I bow to R3’s and IPs’ greater experience, however I cannot help but wonder whether companies really are resorting to liquidation, rather than trading on in an administration, simply because contracts with suppliers are terminated on insolvency. I would have thought that there were far more substantial barriers to trading-on that will remain even after S233 is changed.

Regulating the RPBs

“We agree that the Insolvency Service, in regulating the recognised professional bodies (RPBs), should have a wider range of powers, very much akin to those that the RPBs themselves have in disciplining their members.” (paragraph 97)

I note this simply because I was stunned at this non sequitur – none of the preceding paragraphs hinted that there was a problem with the RPBs that needed to be fixed or that this was any solution.

Having said that, personally I have no issues with the Service having such powers. In my experience at the IPA, whilst there may have been some tendency to want to push back on some of the Service’s recommendations from time to time (to be perfectly honest, usually more on my part than on the part of my employer!), it would always end up with the RPB taking the required action. I cannot see that the Service needs to be able formally to warn, fine, or restrict RPBs, but if it helps perception, why not?

.
As I mentioned at the start, there were other Committee recommendations, which I would encourage you to read if you have not already done so, as I believe they help us to see how the profession is viewed from the outside and, whether we agree with them or not, those views will continue to influence the shape of our profession in the years to come.


4 Comments

Some inflammatory remarks made as the BIS Committee interrogates the Insolvency Service

On 23 October 2012, the BIS Committee put questions to Dr Richard Judge, the Inspector General and Chief Executive of the Insolvency Service, and Graham Horne, the Deputy Inspector General and Deputy Chief Executive.  The recording of the session can be found in the archive section of www.parliamentlive.tv.

Here I have set out the main points I drew from it and I have used quotes to avoid putting my own spin on the proceedings (although I could not refrain completely from adding some of my own observations).  It is a long entry, I’m afraid, but here are the topics that I have covered:

  • Allegation of “age-old problem” of asset sales at an undervalue by IPs
  • What is being done about forcing suppliers to continue to supply?
  • Apparent disjoint between number of D1 reports and number of disqualifications being pursued
  • Proposals to affect pre-packs and what is to be done about continuously “disappointing” levels of SIP16 compliance?
  • Is the lower level of complaints as a whole a reflection of the current low-value cases or an indication of increased confidence in IPs?
  • The evolving plans to change complaints processes
  • Prospects for a single regulator
  • Progress in enhancing creditors’ powers to challenge excessive fees
  • Ideas arising from the Red Tape Challenge
  • “Perceived cosy relationship between IPs and asset-based lenders”

The session also covered questions on the Insolvency Service’s current and prospective resources, their projections of insolvency case numbers, the drop in their customer satisfaction rates, and more, but I realised that I had to stop somewhere!

Asset sales at an undervalue (timed at 9.47am in the recording)

Brian Binley (Conservative MP) started the discussion: “I’m particularly concerned about many small businesses who should be in receipt of some return for a sizeable build-up of debt and that build-up occurs because they daren’t be too heavy because the business has been fragile for 5 years or so and yet insolvency agents sell off at 10% irrespective and they feel very badly let down”.

I thought that Graham Horne did a reasonable job of explaining the considerable write-down of asset value on facing a fire-sale for a company in an insolvency process, but Mr Binley had not finished: “I do know how angry it makes people and particularly people running small businesses when they know the value is sizeably higher but where there is a culture of, because of the firewall (sic.) that you talk about, oh get rid of it, 10% will do…  Can I ask you seriously to look into this matter and can I ask you to come back to me because I’m not satisfied with your answers and I think they have been sizeably complacent and I think that a consideration of SME is where hopefully the growth is going to come from and it needs to be higher up your list of priorities than it appears to be.”

It seems to me that there is still much work to do, primarily by R3 I would suggest, in progressing education of the public and politicians about the realities of insolvency.  I would add that I think this is largely outside of insolvency regulation, is it not?  An IP instructs a professional agent to do a professional job; I cannot see that they can be criticised for using accredited agents (say, by RICS and/or NAVA; I’m not sure of any other such bodies) to do their job, can they?

Continuation of supplies (10.00am)

Graham Horne stated that, in relation to the “regulated industries… we should do something about it and are doing something about it, so it’s no right that regulated industries should seek to profit because a company is going insolvent, whereas with a contracting party, it’s trickier.  We’re aware of the issues; we are discussing them with IPs and others.  It will require legislation.  It’s really those unforeseen consequences – if you put a lever over here, you’re not totally sure what the consequences are over there at the moment – but certainly I think there’s a fair amount of forbearance around at the moment.”

The Insolvency Service’s record on director disqualifications (10.10am)

Mike Crockart (Lib Dem MP) observed that last year 5,401 D-reports were submitted, but only 1,151 resulted in disqualifications and he suggested that the perception is that directors who have been alleged as guilty of misconduct are not being tackled.  Dr Judge responded by explaining the Insolvency Service’s strategy in prioritising high risk cases.  He also explained that some cases are not taken forward because, inter alia, the evidence may not be there and he accepted that the Service has not been particularly good at explaining to IPs why cases have not been taken forward.

Mike Crockart responded: “You seem to be handing it back to IPs and saying, you’re sending too many… IPs are seeing something there that they believe you should be dealing with because the numbers are going up, but you seem to be quite satisfied with the number that you’re dealing with.”

I was surprised that Dr Judge responded: “To be clear on what I’ve said, there are 5,000 indications of misconduct – I say ‘indications’ because I think that’s an important point; not every one is going to be severe or even, you know, there are people who are innocent in that…”  At least Graham Horne tempered this a little with the observation that IPs are statutorily obliged to report metaphorically those driving 31mph in a 30mph zone and consequently not all cases are taken forward, but even so I thought it was interesting to hear what comes into the new Inspector General’s mind.

Pre-packs (10.22am)

The Committee Chairman started: “Widespread dissatisfaction with them [pre-packs]; proposals that had been mooted were shelved earlier this year…”  Was there scope for further reform?

Dr Judge repeated the Insolvency Service’s view that pre-packs are seen as a useful tool in the rescue culture, they have saved jobs, and in conducting their monitoring “we haven’t come across widespread evidence of abuse”.  He also explained the general view that the real concern is sales to connected parties and that SIP16 has “tried to” address concerns over transparency.

Graham Horne explained the reason the proposals for 3 days notice was shelved, due to a desire to avoid introducing legislation affecting small businesses, “although it has not been ruled out”.  He also hinted at the relevance of the director disqualifications, reporting that 161 disqualifications were where directors had entered into transactions to the detriment of creditors; 56 for misappropriating assets; and 102 for “conduct that was quasi-criminal”.

He continued: “Transparency is something that we continue to work on and we’re not satisfied that IPs are doing enough to persuade creditors that they’re doing a good job in the way that they’ve handled pre-packs.  We don’t see evidence that the pre-pack wasn’t the right thing to do or that it wasn’t the best option in the circumstances.  What I don’t think IPs are doing enough of is explaining to people why they chose that option and giving the circumstances for that”.  He confirmed that no other specific suggestions arising from the stakeholder meetings into improving confidence in pre-packs are being considered.

Brian Binley queried the relevance of the disqualification statistics.  He added: “It is about SMEs in pre-packs, small businesses who often think that the whole deal is done above their heads; they don’t get any information whatsoever and they feel either that the Inland Revenue or the banks or the big companies have wrapped it up without any recognition of the relative size of the hit to a small business.  To a bank, £50,000 is not a great deal of money, but to a small business it’s very often the difference between survival or going under and in terms of pre-packs it is often the SME, the very small business, that is totally left out of any considerations.  Is that fair and if there is a hint of concern there, what are you doing about it to find out how great that concern is?”

Personally, I do wonder at the level of acumen of a business that provides life-or-death levels of credit to a company and thus how sensibly they could contribute to, or absorb the details of, any pre pre-pack completion process.

Graham Horne responded that he understood the concern.  He believed that the forbearance of HMRC and the banks is helping; companies are not being pushed into insolvency, but he recognised that it is the absence of information before the sale that is the concern.  “That is why we’ve not ruled out going back to the idea that people should give notice and we do encourage – and it is part of the practice of IPs – to market the company’s assets because I think one answer here would be to say to people: what is anyone prepared to pay for these assets? Because this is what it’s all about… a fair open market to say what’s anyone prepared to pay? And I think the issue on pre-packs is often that it’s behind closed doors.  The SIP is supposed to be telling IPs to give information about what marketing they’ve done and this is where we pull them up and their compliance I’m afraid is disappointing”.

I was interested to note that Graham Horne referred to sales of assets, not businesses, which supports my perception that perhaps he still does not quite appreciate the damage that can be done to some businesses in indiscreetly seeking to attract purchasers before the commencement of insolvency.  Having said that, I do wonder if some IPs may still feel that as long as sale consideration is comparable to, or a slight improvement over, a valuation, then it is as good as selling on the open market and I wonder if adequate contemplation of open market selling occurs.

In response to Ann McKechin’s (Labour MP) question of whether the Service was satisfied with the last SIP16 monitoring report’s results – 32% not fully compliant and 7% substantially deficient – Graham Horne stated: “No, I’m not at all satisfied with that.  It is disappointing that the industry has been unable to get that level up to where I’d expect it to be.  I mean, they are professional people, it’s a complicated SIP and it’s got quite a lot of elements to it, but one would expect them to be able to comply with that to a far higher level that 68%.  I would say that the non-compliances are slightly technical, so it’s not as though in those cases that the pre-pack is in any way wrong or was the wrong thing to do or there was abuse.  It is simply the point that they’re not giving enough information to creditors and that’s why again as part of the reforms we are looking at strengthening the rules and regulations relating to the supply of information to really put it on a statutory footing, rather than the footing that it is with the SIP”.

I was disappointed that, whilst Ann McKechin was seeking confirmation that “the SIP is at the moment voluntary guidance provided by your department”, Graham Horne nodded and muttered “yes”.  Ms McKechin continued by asking whether Mr Horne would prefer it to be statutory.  He responded: “I’m not sure that my personal opinion particularly carries much weight, but it is something that ministers would want to look at and it’s part of the consultation that went out”.  Then Ann McKechin asked: “Have any of the professional regulators that are involved adopted the SIP16 guidance into their own regulatory environments and the fact that there are penalties for non-compliance?”  Disappointingly again, Graham Horne did not put the Committee straight on the status of SIPs within the RPBs, but he responded: “Oh there are penalties for non-compliance, yes, and when we complain, penalties are imposed, fines are imposed and undertakings are given, so there are some regulatory consequences of the failure to comply.  My disappointment is that those penalties have not had the impact of improving compliance levels and I think what we’re trying to do with the RPBs is urge them to up the game to say, look, you need to do more, to ensure they do reach acceptable levels of compliance.  I think our view is that the penalties imposed so far have not really been of the size, of the level, that we would have liked to have seen in some cases.  In some cases we think that perhaps RPBs could have taken a little bit of a firmer line with some of the non-compliance cases.”

Personally, I was really disappointed at the style and wording of SIP16 when it was released (my disappointment perhaps is heightened, as I was the IPA secretariat attendee at the JIC when the SIP was being worked on – I believe that there was plenty of effort on the IPA’s part to get the SIP into a better shape).  I do believe that the checklist style has led to some SIP16 disclosures lacking real substance or a sensible explanation of why and how the pre-pack was undertaken.  I do think that more could be done to make the disclosures useful, although I fear that the Insolvency Service’s apparent checklist style of monitoring has not helped, as I wonder if some IPs are sticking to the checklist approach in order to prove to the Service that a disclosure does meet SIP16 requirements.  If that is the case, perhaps these IPs put too much emphasis on the bullet point list in the SIP when they perhaps should be reflecting on SIP16’s paragraph 8: “It is important, therefore, that they [unsecured creditors] are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard for their interests”.

I would hope that the JIC could be left alone to revise SIP16 (and perhaps SIP13 too?) – and when I left the IPA in May this year, a JIC working group (including someone from the Insolvency Service) was working on this endeavour.  However, it is clear that the threat of the current SIP16-style legislation remains alive.

Complaints in general (10.39am)

Ann McKechin followed up an observation that complaints against IPs had fallen by 16% with an interesting question: does this reflect the value of cases at present or is it an indication of increased confidence in the profession?  Unfortunately, the Insolvency Service did not grasp hold of this idea, but instead Graham Horne responded: “If you read the OFT report, you might think it was possibly because of a lack of awareness of how to complain and maybe there’s a little bit of an issue there about the mechanisms by which you complain, the way in which you complain.  Levels of insolvency are fairly static at the moment, so we would not expect increasing levels of complaints and IPs in fairness do a difficult job and do it well in the main and the level of complaints is comparatively small compared to the sorts of cases they deal with.”

Evolving plans for changes to complaints processes

Graham Horne immediately continued: “What we are doing is trying to work with the RPBs on a measure to have a single gateway for complaints and we’re pretty close to hopefully announcing a basket of measures where we will host a gateway for complaints so people will be able to see the way in which they can complain.”

He confirmed to Ms McKechin that this was considered an alternative to the creation of a single complaints body and he added: “we’re close to hopefully getting ministerial approval to launch shortly.  We’re also working on common sanctions so it won’t matter which body you’re complaining to, there’ll be a consistent approach to the misconduct, common appeals process as well, so you get many of the advantages of a single regulator but by bringing it together with a single front-end and approach to complaints.”

Prospects for a single regulator (10.41am)

In response to Brian Binley’s question regarding the apparent demise of the proposal for a single regulator, Graham Horne acknowledged that the consultation had generated “quite a lot of strong support for that”, but that “ministers have ruled out at this stage legislation.  The previous minister said he would want to explore achieving the same aims through voluntary means, which is this package of measures I’ve been talking about…  We haven’t ruled out and ministers haven’t ruled out a single independent regulator, needs Parliamentary time, needs to think about that, but what we’re trying to achieve through this set of measures is some of the advantages it would give us.”

Mr Binley observed that R3’s survey reported that the vast majority would like fewer regulatory bodies and asked how quickly the Service was moving, to which Mr Horne observed that it is in the hands of ministers.  Dr Judge added that they “could probably reinforce” the Service’s oversight function; he noted that they are limited to the “nuclear action”, but he pointed out that it did not stop the Service from making their expectations clear to the RPBs.

Creditors’ powers to challenge excessive fees (10.48am)

Rebecca Harris (Conservative MP) asked what progress was being made in enabling creditors to challenge excessive fees.  Graham Horne responded: “This is an area where we’ve made some progress, but I have to say not as much progress as we would have liked with our dealings with the RPBs…  They will be able to raise complaints about fees and RPBs will look at those where the circumstances surrounding the fees amount to misconduct – so an IP has not got proper authority for fees, where an IP cannot support a calculation for the fees, or where the fee levels are very egregious – so they will look at those and that will give creditors some avenues to complain. The position is still that in most cases the recourse is to the court if you’re not happy with the way IPs have handled fees.  Most fees are approved by creditors…  We are looking at whether we can push this voluntary measure a little further because the recourse again would come back to legislation and we haven’t ruled out looking at secondary legislation to give RPBs the right to examine the quantum of fees and I think their natural concern is getting into a commercial discussion/debate about: was that the appropriate fee in that particular case?  We think it is right that there should be some mechanism where someone looks at that and decides whether, not down to the last pence (he was interrupted by a Committee member asking another question)…  We are doing all we can in our role as creditor, albeit we become a creditor after the event, to use our powers as a creditor to look at IPs’ conduct and to raise issue and HMRC do quite a lot as well, although they would have to take it on a resource basis; they can’t take on every case because they are a creditor in every case.”  Mr Horne’s additional comments suggest that the Insolvency Service has devoted new resources to this endeavour and recently formed an RPO team to look particularly, from a creditor’s perspective, at how IPs have administered cases.

The Red Tape Challenge (“RTC”) (10.53am)

Graham Horne set out the timescale: the revised rules are planned to come into force in October 2014 and a set of rules will be sent to a focus group in early 2013.  He said that the revised rules would be made available to the public at least 6 months before implementation, as he appreciated that people needed time to adjust their systems.  Personally, I thought that suggestion of any public consultation on revised rules was conspicuous by its absence.

Mr Horne explained that the “D-form issue” was a particular issue arising from the RTC; the rest of the suggestions were generally around the process of insolvency, meetings, whether modern means of communication could be incorporated more widely, for example with the current need to use first class post.  He said there were no big ideas, but “incremental pruning” should make reasonably significant improvements overall.

Mike Crockart referred to the apparent desire amongst IPs for an electronic D-form, but commented that it seemed a “moratorium” had stalled this development.  Graham Horne confirmed that the idea was certainly not shelved but he acknowledged there were some legislative barriers to look at.  He also said that the Service wants to take a wider look at the whole D-report/return process, for example is a D2 nil return really necessary?  Should there be a form or reporting requirement?  He noted that the risk of a form is that it becomes something completed by rote.

“Perceived cosy relationship between IPs and asset-based lenders” (11.01am)

The above words were what the Chairman used to introduce the next subject and he then handed over to Brian Binley: “I understand you are to meet with officials from the BIS department and with the Treasury and the Campaign for Regulation of Asset-based Finance – due to take place this week”, although Graham Horne later said that discussions were ongoing, rather than confirming a meeting this week.  Mr Binley referred to a case involving a bakery which was given 2.5 days over the Jubilee period by Bibby to find other funders and then Bibby wanted a £92,000 termination fee.  He asked whether this kind of power was unfair and continued: “Some factoring companies put companies into administration and appoint a friendly insolvency firm and some go even further – they pass leads to lenders who are owned by the insolvency practice firm themselves.  Now this is pretty-much of an unacceptable mess, isn’t it?”

Dr Judge acknowledged that this was a relatively recent concern brought to the Service’s attention and pointed out that the Service’s function is limited to insolvency and that this appeared to fall to other departments.  He encouraged people to provide specific evidence of any concerning events.  Graham Horne’s follow-up comments suggest to me that the Service may not have fully grasped Mr Binley’s particular concern: “I think that the regulatory framework is in place.  We don’t need any more tools.  If people have taken out charges late-on prior to the insolvency, those charges could be rendered invalid.  These sorts of things can be looked at in the way the company’s business was restructured just before the insolvency.  This is stuff that we can do with our current powers, so what we need to do is get complaints to us.  We’ve got powerful powers to investigate companies.”

Mr Binley was keen to highlight the banks’ role in this matter, although in so doing, I wonder if he is muddling two different issues: “It’s the banks that almost stipulate that some of their small businesses actually use an associated factoring company, so the whole loop sort-of has the smell about, which is not overly savoury.”

Shortly afterward, the Chairman wrapped up the session by reminding the Service representatives that further written evidence covering a number of matters was expected – the story continues…