Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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No summer holidays for the Insolvency Service?

0828 Noosa

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

The report describes plans in the areas of:

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

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

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

Funding models

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

CDDA work

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

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

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

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

Pre-packs

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

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

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

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

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

Interaction with the RPBs and complaints about IPs

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

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

S233 continuation of supply changes

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

Review of IPs’ fees

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

Goodness, what a busy summer it will be!


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

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

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

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

Changes to debtors’ bankruptcy fees

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

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

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

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

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

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

Pre-packs

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

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

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

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

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

SIP16

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

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

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

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

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

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

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

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

Continuation of supply

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

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

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

Regulating the RPBs

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

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

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

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


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

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

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

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

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

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

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

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

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

Continuation of supplies (10.00am)

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

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

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

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

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

Pre-packs (10.22am)

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

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

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

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

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

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

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

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

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

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

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

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

Complaints in general (10.39am)

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

Evolving plans for changes to complaints processes

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

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

Prospects for a single regulator (10.41am)

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

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

Creditors’ powers to challenge excessive fees (10.48am)

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

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

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

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

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

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

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

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

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

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