Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: pre-packs


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Revised SIP16 and SIP13 affect more than Administrations

30 April 2021: Connected Persons Disposal Regs, InsS Guidance, SIP13, SIP16, new IVA Protocol (with eight annexes), SIP9 FAQs from the RPBs and Dear IP 126 – wow!  Even Usain Bolt would struggle to keep up with the pace of regulatory change right now!

Firstly, I’ll look at the SIPs. 

“No changes have been made to the SIPs other than those required by the change in the law”

stated some of the RPB/R3 releases.  Well, that’s not quite true…

 

What needs changing?

In summary, solely to deal with the SIPs (i.e. not including the Connected Persons Disposal Regs at all), I think the following needs to be done:

  • Ensure that all staff know the widened scope of SIP13 – i.e. affecting all corporate insolvencies – and consider including prompts within checklists, progress reports etc. to ensure that any sales to less directly connected parties are picked up
  • In the pre-ADM letter template to connected parties (and letter of engagement, where relevant), replace the old Pre-Pack Pool reference with the new evaluator’s report requirement… and repeat the letter template (tweaked) for any post-appointment substantial disposals
  • Ensure that pre-pack connected parties that are not also connected persons are notified of the potential benefits of a viability statement
  • Tweak the SIP16 statement to remove references to the Pre-Pack Pool and viability statement, except where a viability statement has been provided, and add reference to enclosing any evaluator’s report with an explanation if it has been redacted

 

SIP13’s scope enlarged…

The old SIP13 affected sales to parties connected to the insolvent debtor or company by reason of S249 and S435 (but excluding certain secured creditors).  Now, SIP13 defines a connected party as:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”

If SIP13 had been changed solely to reflect the new regulations, why has the reach of SIP13 been expanded far wider than the regulations’ scope?  And what does “any connection” mean exactly?  Are we talking friendships?  Even if “any connection” is still intended to mean something approaching the statutory definition, including connections with the associates of directors, shareholders – and secured creditors – wraps in a whole host of business and familial relationships that were not captured by S249, S435 or Para 60A(3) Sch B1.

…but also narrowed..?

There is a curious omission from the above definition: reference to any connections with the debtor.  Presumably this is an error, as the SIP still states that it “applies to both personal and corporate insolvency appointments”.  Oops!

 

Connected person communications

The above definition is of a connected party, but both SIPs also refer to connected persons.  These are the statutorily-defined connected persons caught by the new regulations, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, as defined by Para 60A(3) of Schedule B1.  Of course, it is sensible for IPs to ensure that any connected person considering a regulations-caught disposal is aware of the requirement to obtain a qualifying evaluator’s report to enable the disposal to be completed without creditor approval.  This is now also a SIP requirement.

Because SIP16 is concerned only with pre-packs, the requirement appears also in SIP13 in order to capture substantial disposals in Administrations that are not pre-packs.  In my mind, this means substantial disposals that occur in the first 8 weeks of an Admin where there have been no pre-appointment negotiations (and, I guess, the odd “hiring out” or non-sale “disposal” of all or a substantial part of the business/assets), i.e. truly post-appointment sales.  Indeed, the R3/RPB releases explained that the 8-week time frame of the new regulations led to the changes in SIP13.

However, the changes are odd.  SIP13 requires the “insolvency practitioner” to ensure that the connected person is made aware of the regulations, but SIP13 states that:

“for the purposes of this Statement of Insolvency Practice only, the role of ‘insolvency practitioner’ is to be read as relating to the advisory engagement that an insolvency practitioner or their firm and or/any (sic.) associates may have in the period prior to commencement of the insolvency process.  The role of ‘office holder’ is to be read as the formal appointment as an office holder”. 

So the new SIP13 requirement for connected person communications applies to IPs acting pre-appointment, not to office holders post-appointment.  Given we are talking about non pre-pack disposals here, would it not have made more sense for the SIP13 requirement to be on office holders?

But don’t worry RPBs, I am sure that no Administrator is going to spend time negotiating a deal with a connected person without ensuring that they are in a position to complete.  They hardly need a SIP to tell them to warn a relevant purchaser that they’ll need a qualifying evaluator’s report where necessary.

 

Viability Statements’ appearance narrowed…

I reported at https://insolvencyoracle.com/2020/10/30/pre-pack_reforms/ that the Insolvency Service’s report that led to the regulations had noted the government’s plan to “work with stakeholders to encourage greater use” of viability statements.  I was most surprised, therefore, to see viability statements take a step further into the shadows in the revised SIP16.

The old SIP16 required Administrators to report to creditors on the existence or otherwise of a viability statement and, if there were none, on the fact that the Administrators had at least asked for one.  Now, the only appearance of reference to a viability statement in a SIP16 statement is where one exists, in which case it should be attached.

…but also enlarged!

But we cannot ignore viability statements entirely: the new SIP16 has retained the need to make certain purchasers “aware of the potential for enhanced stakeholder confidence in preparing a viability statement”.  You might think: well, that’s fine, it had been in my letters to connected purchasers when I told them about the Pre-Pack Pool, so now I’ll leave in the viability statement bit and just tweak those letters to include the bit about the evaluator’s report instead.

Ah, if only it were that simple!  Now this requirement applies “where the purchaser is connected to the insolvent entity”… and this time, “connected” means:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”. 

So, if you are contemplating a pre-pack to someone who isn’t connected to such an extent that the new regulations apply, but they still have some kind of connection, you will need to write to them solely to tell them about the “potential for enhanced stakeholder confidence” of a viability statement.  What is the point?!

 

Copy evaluator’s report in SIP16 statement

Unsurprisingly, the new SIP16 requires a copy of any qualifying evaluator’s report to be included with the SIP16 statement circular (whether or not this is at the same time as the Proposals). 

The SIP does not mirror the regulations’ provision that the copy qualifying report (when included with the Proposals) may exclude any information that the Administrator considers is confidential or commercially sensitive, but presumably this would be acceptable provided that, as per SIP16 para 19, the Administrator explains why the report in full is not being provided.

 

More changes to come?

Yes, I’m afraid so.  Dear IP 126 states that:

“SIP16 will be reviewed and amended further during the next 6 to 12 months”. 

I shall be interested to see the trend of Administrations in the future.  I suspect that it is not so much the evaluator’s report that will discourage pre-packs but rather the endless tinkering!


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It’s not just connected pre-packs and it’s not just legislation

If the draft regs and pre-packs were a Venn diagram…

The new draft legislation requiring an evaluator’s opinion on connected pre-packs has drawn most attention.  But the measures will affect more than just connected pre-packs and the Insolvency Service’s report reveals other planned efforts to influence IPs’ activities and disclosures.

In this article, I focus on the less-publicised changes that are afoot, including:

  • The impact on post-appointment connected party sales
  • The option of seeking creditors’ approval, rather than getting an independent opinion
  • The government’s desire to increase the use of viability statements
  • The emphasis on SIP16’s “comply or explain” requirement
  • The government’s wish for RPBs to probe into cases where marketing is not undertaken
  • The need for greater compliance with SIP16’s disclosure requirements

The Insolvency Service’s Pre-Pack Sales in Administration Report and the draft regulations are at: https://www.gov.uk/government/publications/pre-pack-sales-in-administration.

 

The draft regulations are not about pre-packs

No, really, they’re not.  The draft regulations impose new requirements on:

  • Connected party sales only
  • But not just connected party pre-packs, also any sales of “all or a substantial part of the company’s business or assets” within 8 weeks of the start of the Administration
  • How is a “substantial part” defined? It isn’t.  It will be up to Administrators to form an opinion about whether a sale involves a substantial part
  • And the regs will capture not just sales, but also the “hiring out” of all or a substantial part of the business or assets

 

Why interfere with post-appointment sales?

The Insolvency Service’s report does not explain or seek to justify this step.  It seems to suggest that, because the SBEE Act’s power to legislate extended to all connected party sales, they were free to regulate all such sales.  However, they have graciously decided “only” to apply the requirements to sales within 8 weeks of the start of the Administration.

So… a secured lender appoints Administrators perhaps in a hostile manner.  The Administrators have had no contact with the director before their appointment, but they soon learn that the director is anxious to hold onto the business so will offer almost anything.  The Administrators are keen to recover as much as possible for their appointor and, as is their statutory duty, to care also for other creditors’ interests, so they play hard ball to squeeze out the best deal.  The Administrators’ agents recommend that they snap up the offer – maybe they’ve now carried out some marketing, maybe it’s a no brainer that no unconnected party in their right mind would offer anything approaching the director’s offer – the secured lender is happy with it, and the Administrators make sure that the purchaser is good for the money.  But still the purchaser must instruct an independent evaluator?

 

What will the evaluator evaluate?

The evaluator’s report must state whether or not they are:

“satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances”

It seems to me that the people best-placed to evaluate whether the consideration is reasonable are professional agents, aren’t they?  Shame that independent, qualified, PII’d agents instructed by the Administrators to do just that cannot be trusted with this task, isn’t it?

How does someone assess whether “the grounds for the substantial disposal” are reasonable?  It’s not “the grounds for Administration”, so this will not address the cynics’ belief that directors engineer companies into Administration to “dump debts” and start again.  I’m not saying this happens often, if at all.  Unnecessarily putting yourself through an Administration and then battling to restore, or to build new, trust of suppliers, employees, and customers seems a drastic step to take.  I think that many connected purchasers underestimate the struggles ahead of them.

Presumably, “the grounds for the substantial disposal” relates to the question: could a better price be achieved by a different strategy?  This sounds like a debate about the marketing strategy, the prospects of alternative offers, and going concern v break-up, so again professional and experienced agents seem best-placed to make this evaluation.

 

But why not just ask the Pool?

I understand the noises of: what’s wrong with simply asking the Pre-Pack Pool?  But I return to the question: why have an opinion in the first place?  It won’t dispel the suspicions that the whole thing has been designed by the directors who shouldn’t be allowed to use Administration or Liquidation and it won’t answer the many who just believe that it’s wrong for a director to be allowed to buy the business or assets from an Administrator or Liquidator.  The public comments below The Times’ articles on pre-packs say it clearly: some people call connected party sales (and CVAs) “fraud” or “legal theft”.  How do you persuade these people to see things differently?

The strongest argument I could find in the Insolvency Service report for a Pool opinion was:

“Whilst some stakeholders said that an opinion from the Pool (or lack of one) would not affect their decision to trade with a business that was sold to a connected party purchaser, other creditor groups said that their members valued the Pool’s decision, and that the opinion did influence their decision as to whether to trade with the new company.  They also stated that where the Pool had been utilised, the opinion given helped to demonstrate to creditors that in some circumstances a sale to a connected party provided a reasonable outcome for creditors.”

So some say it helps, some say it doesn’t.

Somehow the Insolvency Service concluded that their “review has found that some connected party pre-packs are still a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors”, but I saw nowhere in the report where those perceptions originate.  The report referred to the media and the CIG Bill Parliamentary debates.  Is that your evidence?  Oh yes, some Parliamentarians have been very colourful in their descriptions of pre-packs; one said that the directors offer “a nominal sum – maybe only £1 or a similarly trivial sum”.  Their ignorance – or the way they have been misled to believe this stuff – is shameful and on the back of such statements, distrust of connected party pre-packs grows and so the case for an independent opinion is made.

And now the R3 President is reported as saying that “effectively anyone will be allowed to provide an independent opinion on a connected party pre-pack sale, which risks abuse of the system that undermines the entire rationale of these reforms”.  Again, we feed the beast that bellows that IPs – and professional agents – cannot be trusted.

So, ok, if it makes you happy, fine, let it be a Pre-Pack Pool opinion.  In my view, they have fallen far short of justifying their existence, but if it shuts the mouths of some who see pre-packs as “Frankenstein monsters” (The Times) or at least gives them pause, then so be it.

 

Getting creditors’ approval as an alternative

The draft regulations provide that, as an alternative to getting an evaluator’s opinion, a substantial disposal to a connected party may be completed if:

“the administrator seeks a decision from the company’s creditors under paragraph 51(1) or paragraph 52(2) of Schedule B1 and the creditors approve the administrator’s proposals without modification, or with modification to which the administrator consents”

This must be achieved before the substantial disposal is made, so it will not be available for pre-packs… unless you can drag out the deal for 14+ days.

Could it help for post-appointment business sales?  Provided that you don’t make a Para 52(1)(a), (b) or (c) statement in your proposals, it might.  And let’s face it, if you’re issuing proposals immediately on appointment and before you’ve sold the business and assets, you may be hard pressed to make any positive statement about the outcome of the Administration.

But if you issue proposals immediately, i.e. before you have negotiated a potential deal with anyone, what exactly would the creditors be approving?  Presumably, they would be informed of your strategy to market the business and assets and shake out the best deal from that.  They would not be informed of what offers (if any) are on the table and it would be commercial suicide for the proposals to include valuations.  Would such vague proposals achieve what the Insolvency Service is expecting from this statutory provision?

Could it be that the Service recognises that true post-appointment connected party sales (i.e. not those that avoid the pre-pack label by resisting negotiation until a minute past appointment) do not require independent scrutiny and this is their way of avoiding putting them all in that basket?

 

Smartening up on SIP16 statement compliance

The Insolvency Service reports that SIP16 statement compliance has improved: since the RPBs took on monitoring compliance in late 2015, the annual non-compliance rate has dropped from 38% to 23%.  The report states, however, that:

“the level of non-compliance continues to be a concern, as SIP16 reporting is a key factor in ensuring transparency and maintaining stakeholder confidence in pre-pack sales”

Hang on, when did SIP16 require a “report”?  The Insolvency Service refers throughout to a SIP16 report.  It’s funny, isn’t it, how something that started off as “disclosure”, then became a “statement”, and now is considered a “report”?  I think this demonstrates how the SIP16 disclosure requirements have grown legs.  And, while the report acknowledges that the RPBs state that most of the non-compliances are “minor technical breaches” and that there is “now more information available to creditors as a result of the SIP16 changes”, it seems to suggest that stakeholder confidence can only be enhanced if we eliminate even those minor breaches.

The report focuses on three areas where it seems that “greater consistency needs to be promoted across the profession”: viability statements, marketing activity and valuations.

 

The value of viability statements

The report indicated that, of the 2016 connected party SIP16 statements reviewed, 28% of them “stated viability reviews/cash flow forecasts had been provided”.  69% of the purchasers in these cases were still trading 12 months later.  However, in the category of cases where no viability statements were evidenced, 87% of those purchasers were still trading after 12 months.  This suggests to me that disclosure of a viability statement does not particularly help Newco to gain trust with creditors!

Of course, rightly so the report states that the purchasers may well have carried out their own viability work but have been unwilling to share it.  What I was far less pleased about was that the report stated that “alternatively, it may be that the insolvency practitioner… is not requesting the purchaser to provide a viability statement, which would indicate non-compliance with the requirements of SIP16”.  The cheek of it!  If a progress report omitted the date that creditors had approved an office holder’s fees, would the Service suspect that this was because it never happened?  Actually, I can believe that they would.  The Insolvency Service has no evidence of non-compliance in this regard, but they can’t help but stick the boot in and foment doubts over IPs’ professionalism and competence.

Having said that, IPs would do well to double-check that they are asking for viability statements and making sure that there’s evidence of requests on the file, don’t you think..?

I wonder whether a future change will be that the RPBs will ask to be sent, not only the SIP16 statement, but also evidence of having asked the purchaser for a viability statement.

The report’s conclusion is puzzling:

“In discussions with stakeholders no concerns were raised regarding the lack of viability statements. However, the government considers that there continue to be benefits to completing viability statements for the reasons highlighted in the Graham Review. Therefore, we will work with stakeholders to encourage greater use.”

Hmm… so no one seems bothered about their absence, but the government wants to see more of them.  Logical.

 

Compliance with the SIP16 marketing essentials

The review sought to analyse 2016 connected party SIP16 statements as regards explaining compliance with the six principles of marketing set out in the SIP.  The report states:

“the principles that encourage exposure of the business to the market ‘publicised’ (54% compliance), ‘broadcast’ (53% compliance) and ‘marketed online’ (56% compliance) have only been complied with in just over 50% of cases.”

Given that they were reviewing only the SIP16 statements, I’m not sure they can say that the marketing principles have not been complied with.  Might it just be that the IPs failed to explain compliance in the SIP16 statement?

Having said that, the review also revealed that, “of those that deviated from the marketing principles, over 80% of administrators provided justification for their marketing strategy”, i.e. they complied with the SIP16 “comply or explain” principle.  This suggests to me that 20% of that c.50% need to try harder to get their SIP16 statements complete.

 

The value of marketing

The report acknowledges that “in some limited cases it may be acceptable for no marketing… to be undertaken”.  I think that many would go further than this: in some limited cases, it may be advantageous not to market.  The review stated that no marketing had been carried out in 21% of the 2016 connected pre-packs reviewed.  This does seem high to me and I think does not help counteract suspicions of undervalue selling.

Interestingly, though, where marketing was undertaken, 46% of those connected party sales were below the valuation.  But where marketing was not undertaken, 43% were below “the valuation figure”.  As most IPs get valuations on both going concern/in situ and forced sale bases, I’m not sure which “figure” the Service is measuring against here.  But nevertheless perhaps this is some comfort that marketing doesn’t make a whole lot of difference… unless of course it attracted an independent purchaser, which would have taken the case outside the scope of the Service’s review entirely.  Shame that they didn’t analyse any unconnected SIP16s!

 

The compliance problem

The government’s response to the diversity in approach to marketing and to SIP16 disclosure includes that they will:

“work with the regulators to ensure: there is greater adherence to the principles of marketing”; and “there is a continued increase in compliance with the reporting requirements under SIP16”.

As I mentioned above, the report stated that SIP16 statement non-compliance was at 23% in 2019… but in her recent virtual roadshow presentation, Alison Morgan of the ICAEW stated that their IPs’ 2019/2020 rate was at c.50%.  We must do better, mustn’t we?!

I too am frustrated about the levels of compliance with SIP16.  I realise it’s a killer of a SIP – some of the requirements don’t follow chronologically or logically and some leave you wondering what you’re being asked to disclose.  I realise that almost no pre-packs fit neatly into the from-a-to-b SIP16 ticksheet.  But I don’t know when I last saw a 100% fully compliant SIP16 disclosure!  I know I’m harsh, harsher it seems that some of the RPB reviewers, but whatever SIP16 asks for, please just write it down… and tell your staff not to mess with templates – they/you may think that some statements are pointless or blindingly obvious, but please just leave it in.

 

Expect to be “probed”!

Another part of the government’s response is to:

“ensure that where no marketing has been undertaken, the explanation provided by the administrator is probed by the regulator where necessary”.

True, SIP16 allows for a “comply or explain” approach, but if a large proportion of businesses are not being marketed, it just opens us up to the cheap shot that the sale might have been at an undervalue, doesn’t it?

What is a valid reason for not marketing?  Again in her recent presentation, Alison Morgan indicated that a fear of employees walking out or of a competitor stealing the business may not in themselves be sufficient justification.

 

SIP16 changes in prospect

So what changes will we see in SIP16?  The government response is that they:

“will work with the industry and the RPBs to prepare guidance to accompany the regulations and to ensure SIP16 is compatible with the legislation.”

Guidance?  Sigh!  If it’s anything like the moratorium guidance, then I don’t see why they bother: what more can they say apart from regurgitate the regulations, which are only 6 pages long?

And how is SIP16 incompatible with the regulations?  Well, obviously in referring specifically to getting an opinion from the Pre-Pack Pool… but I wonder how the regulations will look when they’re finalised.  With all the murmurings about almost anyone being able to call themselves an evaluator, I suspect it may be the regulations that will be brought more into line with SIP16 on this point!

But let’s hope that SIP16 is not changed to accommodate the regulations’ capture of all connected party Administration business/”substantial” asset sales within the first 8 weeks.  That truly would be sledgehammer-nut territory, wouldn’t it?

The government has also threatened to:

“look to strengthen the existing regulatory requirements in SIP 16 to improve the quality of information provided to creditors”.

“Strengthen” the requirements?  I wonder what they have in mind…

 

What about valuations?

Oh yes, I forgot: that was the third area the government highlighted for greater consistency.

Right, well, they weren’t happy that 18% of the SIP16s they reviewed failed to state whether the valuer had PII.  I don’t know what they think IPs do, have a chat with a guy in a pub?  So, yes, we need to check that our SIP16 ticksheets are working on that point.

The report also noted that some SIP16s didn’t have enough information to compare valuations to the purchase price, although they didn’t make a big deal of it.  In her recent roadshow presentation, Alison Morgan repeated her request that IPs produce SIP16s that neatly detail the valuations per asset category alongside the price paid.  (You’ll have gathered that Alison had a lot to say about SIP16 compliance – I recommend her presentation!)  Although I share Alison’s view, working through the SIP’s requirements in the order listed is not conducive to presenting the valuation figures alongside the sale price, so this is definitely a SIP16 area that I think could be usefully changed.

 

What if SIP16 compliance does not improve?

Ooh, the government is waving its stick about here:

“Should these non-legislative measures be unsuccessful in improving regulatory compliance, the quality of the information provided to creditors and the transparency of pre-pack sales in administration, government will consider whether supplementary legislative changes are necessary.”

SIPs have pretty-much the same degree of clout as legislation.  In the case of SIP16, arguably it carries a greater threat.  There have been several RPB reprimands for SIP16 breaches published over recent years.  How many court applications does the government think will result if they enshrine SIP16 in legislation?  More than the number of RPB reprimands?  If IPs are failing to comply with SIP16, it’s not because the SIP is toothless.

 

Will the measures solve the pre-pack “problem”?

In my view, no.  There is just too much general cynicism about IPs being in cahoots with directors and about directors being determined to stiff their creditors.

What I think might help a little is if our regulators – the Insolvency Service and the RPBs – reported a balanced perspective of SIP16 compliance.  I know that the report acknowledges that most SIP16 disclosure breaches are “minor technical” ones, but the simple stats grab the headline.  We also need a simpler SIP16 so that compliance is easier to achieve and to measure.  Concentrating on the minutiae and concluding that the statement is non-compliant just does not help.  Are the minutiae really necessary?  Does it improve the “quality” of the information and the transparency of the sale?  I know, I know, the SIP isn’t going to get any simpler, is it?

I think the regulators might also help if they were to defend themselves and in so doing defend IPs as a whole.  Do they not realise that the perceptions that pre-packs are not in creditors’ best interests is also a slight on how they may be failing to regulate IPs effectively?  No one naïvely claims that all IPs are ethical and professional, so what steps have the RPBs taken to tackle the actual, suspected or alleged abusers of the process?  If they have identified them and are dealing with them, then can they not publicise that fact and confirm that the rest of the IP population are doing the right thing?  Instead, all we hear especially from the Insolvency Service is that, while pre-packs are a useful tool, IPs do a poor job of acting transparently and that there needs to be an independent eye scrutinising the proposed deal to give creditors confidence.  Are not the regulators the policemen in this picture?


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The Changing Face of Pre-Packs

To explore pre-pack trends, I reviewed 120 SIP16 statements issued over the last 3 years.  Coupled with the Insolvency Service’s intriguing revised guidance on the phoenix rules and their summer report, I’ve been wondering how far we have come in 3 years and what else needs to change.

In this blog, I explore:

  • What is the Government’s timetable for changing pre-packs?
  • How many pre-pack purchasers themselves go out of business? And how many of these were connected purchasers?
  • Does the survival of pre-pack purchasers indicate that the Pool is working?
  • What is the trend in using the Pool?
  • Why do more connected Newcos fail?
  • Are there many serial pre-packers? Do they use the same IPs?
  • What effect will the new anti-phoenix provisions have?
  • What is going on with the Insolvency Service’s revisions of their S216/17 guidance?
  • Will HMRC’s move to preferential creditor change things?
  • How should pre-pack regulation change?

 

Has the heat on pre-packs cooled off?

A significant item on the Insolvency Service’s to-do list for the past few years has been the “pre-pack review”.  The Service’s 2017 Regulatory Report (published in May 2018) referred to the Government’s “review to evaluate the impact of the voluntary measures in order to inform any future decisions on whether legislative measures are required to regulate connected party sales in administration” and the anticipation back then was that the review would be completed by the autumn of 2018.

The Service’s 2018 Regulatory Report (published in May 2019) stated that the Service “have carried out” the review and “the Government hopes to be able to publish the findings and outcome from the review shortly”.

Of course, the Government’s more pressing pre-occupations inevitably have delayed this publication.  Also, since May 2019, the IS/RPB focus seems to have been squarely on the regulation of Volume IVA Providers.  Perhaps there has been little to say on pre-packs because the Service has been waiting for its review to reach the top of the Secretary of State’s pile, but that document is a year older now.  I wonder if its findings and outcome are quite so relevant.

 

The sunset clause is setting

Hanging over this topic, of course, is Section 129 of the Small Business, Enterprise and Employment Act 2015, which allows the Government to make regulations prohibiting or imposing conditions on Administration sales of property to connected parties – pre-packs or otherwise.

This power will end on 26 May 2020.

There is no time left to consult on draft legislation.  The review was carried out behind closed doors and remains under wraps.  Presumably, the profession will have no opportunity, publicly, to engage in the proposals.

Have we seen any hints about what we are likely to see?  I suspect the RPBs have been involved in the Service’s review, so I was intrigued to read the IPA’s Oct-19 response to the Service’s call for evidence on regulation slip in: “the IPA supports the consideration of changes to the pre-pack pool to better scrutinise connected party sales”.  As we all feared, the focus still appears to be on the Pool.

In its May-18 submission to the Service’s pre-pack review, R3 emphasised the value of looking wider: “The Government should support and help develop the reforms made in 2015 and should look at the impact of the reforms as a whole, not just the Pre-pack Pool.”  Hear, hear.

Presumably, the Government’s review will consider the question: are pre-packs any different now than they were before the November 2015 changes?

 

What makes a pre-pack bad?

The answer to this question very much depends on who you ask.  I think that IPs in general will say that a bad pre-pack is one that does not maximise the realisation of the company’s property.  I think that the world before the Teresa Graham report would have said that a bad pre-pack was one that did not instill confidence that the company and the IPs were acting in creditors’ best interests.  That’s what the revised SIP16 and the Pool were intended to fix by providing more information on the pre-pack strategy in the SIP16 Statement and by the Pool providing an independent opinion on whether there are “reasonable grounds” for the proposed deal.  One of my frustrations with the Pool is that they have never explained how they measure such reasonableness.  How do they decide what is bad?

In my review of 120 SIP16 Statements, I came across one brave IP who, despite the prospective purchaser receiving a negative opinion from the Pool member, decided to do the deal anyway.  In his Administration Proposals, he had added a one-page summary, over and above the standard SIP16 disclosure, of why he had decided to complete the sale.  It made perfect sense to me and went to the core of the Administrator’s role: to achieve an Administration objective, which generally involves returning as much value as possible to creditors.  The Administrator also had explained why he believed the submission to the Pool was materially flawed.

 

What about the survival of Newco?

One of the accusations levelled against pre-packs is that they simply give new life to a business that ought to be terminated.  The more sceptical suspect that some directors hatch plans to phoenix by pre-pack and what is to stop them doing it all over again?

Therefore, I decided to test the survival of Newco: how many companies that purchased a business by a pre-pack later terminated?

* Sample size: 120 cases with no repeat of Administrator firm in any one period.  “Terminated” includes dissolutions and MVLs.

Now I know that, of course, the more recently the pre-pack occurred, the more likely Newco will still be alive.  But I still find this graph striking: my 2015 pre reforms group dated from June to October 2015, so how is it that their outcomes are so different from Nov/Dec 2015 cases?  This suggests to me that the measures introduced in November 2015, including the new SIP16, significantly changed the face of pre-packs.

 

Doesn’t this show that the Pre-Pack Pool is working?

No!  Only 6 cases in my sample involved the Pool.  It’s true that all those Newcos are still live companies, but setting those aside, the graph is still the same shape: the change in the survival rate of Newco from before the 2015 reforms cannot be attributed wholly (or even largely) to the Pool.

The Pre-Pack Pool’s 2018 report described its aim as “to provide assurance for creditors that independent experts have reviewed a proposed connected party pre-pack transaction before it is completed”, but it then acknowledged that “for this independent scrutiny to be seen to be effective, reference to the pre-pack pool needs to be seen as an essential part of the pre-pack administration process by both creditors and prospective applicants”.  So… at the moment, there is general apathy towards the Pool – from creditors and applicants – so it cannot do its job of providing assurance that someone other than the IP has considered the proposed sale..?  But perhaps the general apathy towards the Pool is because creditors and applicants do not see a need for the Pool opinion.  Perhaps they do not require the Pool’s opinion, not least I think because it is not at all clear what the Pool is measuring.

 

How many pre-packs have the Pre-Pack Pool reviewed?

Use of the Pool continues to fall.  The Pool’s 2018 report stated that, in 2018, there were 24 referrals to the Pool.  This is more referrals than in 2017, when there were 23 referrals, but as a percentage of the total number of connected party sales, 2018’s referrals were down on 2017.

With such a tiny referral rate, I do not think that the Pool can take any creditor for any material changes in pre-pack practices.

 

Would it help if the Pool were made compulsory for all connected party pre-packs? 

Help how?  What is the ill that the Pool is trying to remedy?  Is it still the case that there is a general lack of confidence?  If there is a general distaste for connected pre-packs, does this not simply stem from the general perception that it cannot be right for a director to fold Oldco, buy the business and assets, and then trade on with Newco?  I cannot see that increasing the frequency of the Pool’s opinion will counteract this perception.

I would be very interested to read how the Government’s review explains what is currently wrong with pre-packs.  I think that many in the profession think that, if the Government simply wants to “do something”, then making the Pool compulsory is the least damaging answer and far preferable than restricting Administrators’ powers to complete pre-packs.  That’s as may be, but I cannot see that expanding the Pool’s scope would achieve anything other than adding to the costs of the process.

 

Are connected party Newcos any more likely to fail?

This graph looks at how many of the failed Newcos had been connected to Oldco, compared to how many of the sample as a whole had been connected:

* Failures exclude terminations by MVL or dissolution

This graph does indicate that, with the exception of 2018 pre-packs, there has been a greater percentage of connected party Newco failures than there should have been if they were evenly spread across the whole population of Newcos… in my small sample, at least.  That’s not such good news for anyone hoping to avoid regulation.

My personal view is that this demonstrates how some directors of failing businesses struggle to face realities: they cannot come to terms with the thought of walking away from the business.  Of course, it is especially difficult for those who have tied up their personal assets in the fate of the business.  I wonder if connected potential purchasers need to be better advised on the challenges facing them, how Newco risks repeating Oldco’s mistakes and may even face new challenges in retaining disillusioned customers and suppliers.  The problem is that the potential Administrator is not in a position to give that advice, given the conflict of interests.  So does this mean that no one helps these directors face realities?

 

What about serial pre-packers?

Of course, there could be another reason for connected Newco failures: are some directors abusing pre-packs to dump debts and start again?  If this is the case, then wouldn’t we see serial pre-packers: if a director gets away with it once, then wouldn’t they be sorely tempted to do it again a few years down the line?

Firstly, here is a breakdown of the terminations in my sample:

So yes, I accept that seven Newco ADMs is a very small sample, but this in itself suggests that serial pre-packing is not widespread.  Arguably, though, even this small number is too many.

Here is a summary of the fates of the purchasers who themselves went into Administration:

It is interesting that two of the businesses were sold to connected parties for a second time.  It is alarming to see that one of those Newco-v2s went into CVL c.1 year after the second pre-pack sale.  It will be interesting to see how the other second connected purchaser fares with a bit more time.

The breaking point seems to be generally around the 2-year mark.  If this is the case, then it is encouraging to see that only one 2017 case and no 2018 cases failed.  Contrasting this with the four 2015 pre reform pre-pack purchasers that failed, doesn’t this again suggest that something happened with pre-pack practices after the 2015 reforms?  The purchasers after the 2015 reforms seem more robust than those before.  Also, my pre-2015 reforms cases only number 17% of the total, so it is even more disproportionate that so many purchaser failures appear in this group.

… and again, I cannot see that the Pool can take credit for this.  Did something else happen to refine the pre-pack process?

 

Should IPs be handling serial pre-packs?

It is alarming to see that, in one of the cases (Case 3), the same IPs then carried out the CVL of the second connected Newco.  I cannot tell you what happened to the assets of the Newco-v2 in this case, because the liquidators have not yet filed a progress report (despite the fact that the anniversary was in September!).  Even if the IPs felt that they were not conflicted from the appointment, surely there would be a significant perceived conflict, wouldn’t there?

 

Will the new anti-phoenix provisions change things?

In essence, the Finance Bill 2019-2020 provides that, where a director has been involved in at least two insolvent companies in a 5-year period and the same director is involved in a further Newco, HMRC can make that director joint and severally liable for the past tax liabilities of all those companies (https://www.gov.uk/government/publications/tax-abuse-using-company-insolvencies).

On the face of it, Cases 3 and 5 above might have fallen foul of these provisions (subject to the finer detail of the criteria) had they been in force at the time.  Of course, it is possible that other cases in my sample had been bought out of a pre-pack prior to 2015, so perhaps it would have affected more.  I also haven’t analysed the 14 CVLs, which may include some other cases where directors have sought to stay in the same business.

Although the provisions will only capture tax liabilities arising after the legislation comes into force, I think the new Finance Bill 2019-2020 has great potential to discourage serial pre-packers and thus I think it could do more to improve creditors’ confidence in pre-packs than the Pool.

I also think that the Insolvency Service’s new approach to R22.4 may impact on connected party pre-packs.

 

What have the current phoenix provisions got to do with pre-packs?

Over the past year, the Insolvency Service have been tweaking their “Re-use of company names” guidance.

In March 2019, Dear IP 87 tweaked the guidance to make clear that, although R22.4(3) provides a 28-day timescale for issuing the notice to creditors/Gazette, it must nevertheless be given and published before the director begins acting in relation to a successor business.  Then, in November 2019, their online guidance expressed the opinion that directors “cannot give notice under this rule if the company is not already in liquidation, administration, administrative receivership or in a CVA”.

So how can a R22.4 notice be given in a pre-pack?

If the sale is completed on the day that the Administration begins, it seems to me that it will be impossible for anyone to comply with R22.4 unless the purchaser decides to close its doors for a couple of days to allow time for the notices to be “given and published”.

 

But the phoenix provisions only apply to liquidations, not Administrations, don’t they?

True, a director can only fall foul of the phoenix provisions if Oldco goes into liquidation.  Of course, some Administrations do exit into liquidation.  Assuming that moves to CVL occur c.1 year after the Administration begins, the stats for the year ending 30 September 2019 suggest that c.28% of all Administrations moved to CVL in that year.  So directors involved in connected pre-packs need to be aware of the phoenix provisions.

The problem is that there is no logic to the application of S216/17 to Para 83 CVLs.

It seems to me that directors of the healthier businesses are targeted.  If the company has sufficient property for a non-prescribed part dividend, the Administration moves to CVL… and thus S216/17 are triggered.  But if the company has no money for unsecured creditors (other than by way of a prescribed part), then it probably will move to dissolution… and S216/17 are not triggered.  In other words, if the directors have pulled the plug when the company’s assets are still relatively meaty, then they risk falling foul of the phoenix provisions.  But if they have bled the company dry and then bought the remaining business for a negligible sum, then they can avoid the phoenix issues!

 

Could ADM-to-dissolution be an abuse of the process?

Of course, a company should only go into Administration if it can achieve an objective.  One of the big unanswered questions is: regardless of whether unsecured creditors receive a dividend from the Administration, does the survival of the business (involving TUPE-transferred employees, landlords with no gap in tenancy, customers with continuing services and products) achieve the second Administration objective of a better result for creditors as a whole than winding-up?  I understand views are divided on this.

Setting this aside though, I think that it will be much easier to achieve the third Administration objective from April 2020.  One of the problems with achieving the third objective in pre-pack scenarios is that there are usually no prefs, as all the employees are transferred to Newco.  However, from April 2020, HMRC will become a (secondary) preferential creditor in the vast majority of insolvencies.  Therefore, where a company has no employee prefs, the third Administration objective may be fairly easily achieved by paying a small distribution to HMRC… and then moving to dissolution.  HMRC has handed would-be phoenix-avoiders a lifeline.

 

But if HMRC is a pref, won’t they control the process?

Some of you may be groaning: does this mean that we risk going back to the bad old days when HMRC used to modify Administrators’ Proposals so that most Administrations exited to liquidation?  I don’t think so.

If the Administrator thinks that neither of the first two Administration objectives are achievable, then they make this statement – a Paragraph 52(1)(c) statement – in their Proposals.  The consequence is that they don’t ask any creditors to decide whether to approve their Proposals, but these are deemed approved if no creditors requisition a decision.  If HMRC (or any creditor, for that matter) wants to modify the Proposals to ensure that S216/17 are triggered by the Administration exiting to liquidation, they would need to put their hand in their pocket and pay Administrators to convene a decision process.  I can’t see HMRC doing this, can you?

Of course, HMRC may still vote on Administrators’ fees – that’s a whole different concern.

 

What effect will all this have on pre-packs?

In summary, my thoughts on the future are:

  • If the Pool is made compulsory for connected party pre-packs, undoubtedly this will reduce the number of pre-packs. Businesses will continue to be sold, but they will avoid falling into the statutory definition of “pre-pack”.  Even now, we’re seeing more business sales that are considered to fall outside the SIP16 definition, with some IPs going to the length of getting legal advice for comfort.
  • The new phoenix provisions, where HMRC will chase directors of serial insolvencies, will also reduce the number of pre-packs. Businesses will continue to be sold, but connections with former directors will be less likely (or simply less clear).
  • Theoretically, the Insolvency Service’s focus on the technical intricacies of the current phoenix provisions should reduce the number of pre-packs or at least reduce the number of pre-pack Administrations exiting to liquidation… but it is not clear to me whether the Service is clobbering directors for technical breaches of compliance with Rs22.
  • HMRC’s leg-up to preferential creditor could make pre-packs more attractive, as directors could more easily avoid the S216/17 provisions, but in reality I think this is too small a factor to influence directors’ decisions.
  • It seems to me from my small sample that pre-pack practices have changed materially from early 2015. Therefore, what I would prefer to see from the Government’s review is empirical evidence on what has been achieved by all the 2015 reforms and what still remains to be remedied, before they take steps to legislate pre-packs.

 

 


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Is the Pre-Pack’s Sun Setting?

As HMV has demonstrated, buying a business out of an administration does not guarantee its survival.  But the sale of the HMV business 5 years’ ago was not a pre-pack – the Company had traded for several months in administration before the deal was done.  Does the pre-pack deserve to be demonised?  In view of the SBEE Act’s sunset clause deadline of May 2020, what are the pre-pack’s chances of survival?

As promised way back in July, this is my third article looking at the Insolvency Service’s 2017 review of regulation.  My sincere apologies to regular readers.  I have soooo wanted to blog, I have had articles aplenty in my head, but I’ve simply not had the time to get them out.  I will try harder in 2019!

The Insolvency Service’s 2017 Review of IP Regulation can be found at:  https://tinyurl.com/ycndjuxz

The Pre Pack Pool’s 2017 Review is at: https://tinyurl.com/y92fvvqf

 

SIP16 Compliance Rate Flatlines

Of course, we all know that compliance with the SIP16 disclosure requirements has no real relevance to whether a pre-pack is “good” or “bad”.  Personally, I’d also argue that strict compliance with the disclosure requirements does little to improve perceptions… not when compliance is measured on whether or not the IP has ticked every last little disclosure box.  However, this is what the RPBs are measuring us on, so it can only be to our advantage to try to meet the mark.The analysis of this rate by each RPB shows an intriguing effect:Last year, the stats for the two largest RPBs appeared poles apart: the IPA’s compliance rate was 91% but the ICAEW’s was less than half this figure, at 39%.  But now look at those two RPBs’ rates: they have converged on 59%.  How odd.

I very much doubt that the IPA’s IPs have got decidedly worse at SIP16 compliance over the year.  I wonder if it has more to do with RPB staff changes – perhaps it is more than coincidental that an ICAEW monitoring staff member moved to take up a senior role within the IPA in late 2016.

What about the change in the ICAEW’s IPs’ fortunes last year?  It is more difficult to identify a trend in the ICAEW’s figures, as they reviewed only 23% of all SIP16 statements received in 2017 – they were the only RPB to have reviewed only a sample, which they chose on a risk-assessment basis.  The ICAEW had focused on SIP16 statements submitted by IPs for the first time, or for the first time in a long time, or by IPs whose previous statements had fallen short of compliance.  On this basis, it is encouraging to see such an improved compliance rate emerging from what might seem to be the high risk cases.  It makes me wonder what the compliance rate would have been, had the ICAEW reviewed all their SIP16 statements: rather than the flatline, would we have seen an overall strong improvement in the compliance rate?

From my personal reviewing experience, I am finding that many SIP16 statements are still missing the 100% compliant ideal, but the errors and omissions are far more trivial than they were years’ ago.  I suspect that few of the 38% non-compliant statements spotted by the RPBs contained serious errors.  Having said that, earlier this year the IPA published two disciplinary consent orders for SIP16 breaches, so we should not become complacent about compliance, especially as pre-packs continue to be a political hot potato and now that the RPBs have been persuaded by the Insolvency Service to publicise IPs’ firms’ names along with their own names when disciplinary sanctions are issued. 

 

A Resurgence of Connected Party Sales

Regrettably, the Insolvency Service’s 2017 review provided less information on pre-packs than previous reviews.  No longer are we able to examine how many pre-packs involved marketing or deferred consideration, but we can still look at the number of sales to connected parties:

Last year, I pondered whether the pressure on IPs to promote the Pre Pack Pool may have deterred some connected party sales.  I was therefore interested to see that, not only had the percentage of connected party sales increased for 2017, but the percentage of referrals to the Pool has decreased – coincidence?

Personally, now I wonder whether the presence of the Pool has any material influence on pre-pack sales at all.  I suspect that the increased percentage of connected party sales may have more to do with the economic climate: who would want to take on an insolvent business with such economic uncertainties around us?  I suspect that now it is more and more often the case that connected parties are the only bidders in town.

 

Insights of the Pre Pack Pool

With such a tiny referral rate – the Pool reviewed only 23 proposed sales over the whole of 2017 (there were 53 referrals in the previous 14 months, since the Pool began) – does the Pool have any real visibility on pre-packs?

The Pre Pack Pool issued its own annual review in May this year.  Here is an analysis of the opinions delivered by the Pool:

This seems to suggest that the quality of applications being received by the Pool is deteriorating.  But, as the Pool gives nothing much away about how they measure applications, I am not surprised.

The Pool’s review states that: “Although the referral rate is much lower than expected, the Pool does perform a useful function where it has been approached.  Feedback from both connected party purchasers and creditors has been positive where we have received it.”

But what exactly are the benefits of using the Pool?

The Pool suggests that creditors/suppliers could put more pressure on Newcos to make use of the Pool, but it also notes that less than 1% of all complaints to the InsS in 2016 were about pre-packs (shame the Pool’s report did not refer to the number of pre-pack complaints in 2017: zero).  Maybe there is little pressure put on purchasers to approach the Pool, because the reasonableness or not of the pre-pack doesn’t really come into it when creditors are deciding to supply to Newcos.  The Pool review suggests that major stakeholders such as lenders and HMRC could insist on a Pool referral, but why should they when the Pool has yet to prove its value?

 

What makes a Bad Pre-Pack?

Stuart Hopewell, director of the Pool, has been quoted as stating that he “has seen cases where the objective [of the pre-pack] was avoidance of liabilities”, which led to the tagline that “businesses are sidestepping tax bills amounting to tens of millions of pounds using an insolvency procedure that the government is considering banning” (Financial Times, 26/11/2018).

How does Hopewell spot these abuses?  The Pool itself is not at all transparent about what, in its eyes, results in a “case not made” opinion, but the same article referred to the Pool giving “a red card, based on the tax situation”.  This suggests to me that their focus may be more on how the company became insolvent, rather than whether the pre-pack sale is the best outcome for the creditors at that point in time.  It seems to me that the Pool may be deciding that the pre-pack is the final step in a director’s long-term plan to rack up liabilities and walk away from them, whereas I suspect that most IPs first see a director who – as a result of wrong decisions or for reasons outside their control – is at the end of the road, having racked up liabilities they can no longer manage.  What should happen?  If the pre-pack were refused, the likely outcome would be liquidation with strong chances that the director would, via a S216 notice, start up again, possibly with a cluster of the original workforce and assets purchased at liquidation prices.  On the other hand, if the pre-pack were completed, it would most certainly generate more sales consideration and would be less disruptive for the employees, customers and suppliers.  But wouldn’t refusing a pre-pack result instead in a business sale to someone else, an unconnected party, even if at a reduced price?  I think that this is doubtful in the vast majority of cases.

 

It’s not all about the Pool

The Insolvency Service’s annual review lists some questions that its pre-Sunset Clause pre-pack review will seek to answer:

  • “Has the Pool increased transparency and public confidence in connected party pre-pack administrations?
  • “What numbers of connected party purchasers have chosen not to approach the Pool and why?
  • “What is the success rate of the new company where purchasers approached the Pool between 1 January 2016 and 31 December 2016?”

While these are all valid questions, I do hope the questions won’t stop there.

Ever since Teresa Graham’s recommendations in 2015, the Pre Pack Pool has occupied the limelight.  I think that’s a real shame, as I believe that other things are responsible for the improvements to the pre-pack process that we have seen over time.  Although I complain about the micro-monitoring that the Insolvency Service has inflicted on SIP16 compliance, it cannot be denied that the regulators’ emphasis on SIP16 compliance has improved the amount of detail provided.  More importantly perhaps, the RPBs’ emphasis on documenting decisions has helped some IPs question why certain strategies are pursued – most IPs do this anyway, but I think that some need to challenge their habitual reactions and sometimes exercise a bit more professional scepticism at what they’re being told.

The mood music around the pre-pack review seems to be about increasing the Pool’s reach, potentially making a referral to the Pool mandatory (for example, see R3’s May 2018 submission: https://tinyurl.com/y7kf22ul).  However, as with all proposed reforms, the first steps are to identify the problem and to define what one wants to achieve.  I would question whether the problem is still a lack of public confidence in pre-packs – it seems to be more about a lack of confidence in dealing justly with directors who ignore their fiduciary duties in a host of different ways – and, even if it were about confidence in pre-packs, we’re a long way from determining whether the Pool is the best tool to fix this.

 

Slow Progress

Finally, here is a summary of other items that were on the Insolvency Service’s to-do list at the time of publication of their 2017 annual review.  Of course, to be fair the government has kept the Insolvency Service otherwise occupied over the year.  You might be forgiven for having a sense of deja-vu – it looks frighteningly similar to 2017’s list and I assume that the tasks will now be carried over to 2019:

  • Replacement of the IS/RPB Memorandum of Understanding with “Guidance” – their initial draft required “a number of changes” and, as at May 2018, was being run past the “DfE” (Department for Education?). Nevertheless, the Service had anticipated that the guidance would “come into effect during the course of 2018”.
  •  A solution to the bonding “problem”? – the Insolvency Service’s call for evidence closed in December 2016 and they expected a follow-on consultation “soon”. A Claims Management Protocol, i.e. to set out how bond claims should proceed, is being developed: “possible publication, later this year”.  The Service is also looking at the bond wording.
  • Cash for complainants? – the early message that the Service was exploring with the RPBs if a redress mechanism for complainants could work seems to have evolved into work to determine how redress will be incorporated. “Once agreement has been reached”, the Service plans to include information on the Complaints Gateway website “to ensure complainants are aware of this recent development”.  Oh well, that’s one way to reverse the trend in falling complaint numbers!
  •  Revised IVA Protocol – although .gov.uk holds minutes of the IVA Standing Committee only up to July 2017, the Service reported that the Committee anticipated that we could look forward to a revised IVA Protocol likely later in 2018.
  • Revised Ethics Code – this was also expected later in 2018. I understand that accountancy bodies’ ethics code is currently being revised and therefore the JIC has decided to wait and see what emerges from this before finalising a revised insolvency code.

 


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

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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.


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SIP16: it’s more than just a Pool

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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.


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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.


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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.


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

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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.


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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…

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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.