Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Still not the Eurosail Judgment

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Even if you’ve been living in a cave for the past few weeks, you will not have escaped the flood of comprehensive legal updates on Eurosail. Consequently, I’m not even going to attempt to cover the case here.

Instead, something completely different: I thought I would convey my thoughts on the recent SIP re-drafts, now that the consultations are over.

SIP3A (Scotland)

I feel ill-equipped to comment on this SIP, so I am sure that my peripheral thoughts stack up poorly against those of you who deal with Trust Deeds on a daily basis.

Having seen the substantial tone change of the draft SIP3 (E&W), i.e. the stripping-out of a vast amount of prescription from the current SIP3, I felt that this new draft SIP3A stood in stark contrast, containing much of the existing prescription and even adding to it in some areas. I sense that a fairly large proportion of insolvency professionals prefer prescription to principles – as I mention below, personally I don’t place myself in that crowd – but I do wonder whether even those people would feel that this SIP3A draft has the balance wrong.

I had to chuckle at the SIP consultation response form mentioning that “matters being addressed in the PTD Regulations will not be included in SIP3A”; I counted at least 13 paragraphs that pretty-much simply repeat a statutory requirement. For example, what exactly is the point of including in a SIP: “Trustees should comply with the procedures for bringing the Protected Trust Deed to a close as detailed in the Regulations”?!

I understand that I was not alone in questioning the SIP’s directions regarding face-to-face meetings. Put into an historical context, I am not surprised to see this draft SIP3A require visits to the business premises in all cases where the debtor is carrying on a business. E&W followed a 2-stage process to drop physical meetings for IVAs: the current SIP3 (E&W) requires meetings in person for trading individuals, but – thankfully, in my opinion – the re-draft SIP3 has left this to the IP’s judgment. However, do PTD Trustees need to take the same incremental steps? Can we not focus on what is the purpose of a physical meeting? Are all debtors in business so untrustworthy and difficult to read that the IP/staff have to check out every story for themselves?

There seem to have been some unhelpful cut-and-pastes from the AiB Guidance, resulting in some contradictions and some matters, which I feel are not fit for a SIP (e.g. the purely procedural requirement to advise the AiB of the debtor’s date of birth). There seems to be a contradiction in that para 6.9 requires the IP to “quantify the equity in each property as accurately as possible before the debtor signs the Trust Deed”, but para 6.13 sets a deadline of the presentation of the Trust Deed to creditors. This para also prescribes how the equity should be assessed, but it seems to me that desk-tops and drive-bys might meet para 6.13 but not the (excessive?) accuracy criterion set out in para 6.9. And what if the equity is clearly hopelessly negative? Does the IP really have to go to the expense of quantifying it as accurately as possible before the Trust Deed is signed?

I have never been keen on SIP3A covering fees issues that I feel should be placed in SIP9. This historical mismatch has led to a fees process for PTDs that, to my mind, has never mirrored that for other insolvency processes as per SIP9. This issue is repeated in this draft. For example, SIP3A para 8.4 refers to payments to associated parties as defined in statute, whereas for some time now SIP9 has wrapped up, not only payments to statutorily-defined associates, but also payments “that could reasonably be perceived as presenting a threat to the office-holder’s objectivity by virtue of a professional or personal relationship” (para 25). SIP3A’s overlap, but not quite, of this SIP9 point is less than helpful: Trustees might be lulled into a false sense of security in feeling that they are complying with SIP3A whilst overlooking a breach of SIP9.

I also feel that it is a shame that this draft repeats the current SIP3A words: “all fees must be properly approved in the course of the Trust Deed and in advance of being paid” (para 8.6). I know what the drafter is getting at, but how is it that fees that are properly set out in a Trust Deed, which has subsequently achieved protected status, are not already “properly approved”? And why do Trustees have to go through an additional step in the process that is not required for any other insolvency process per SIP9?

SIP3 (IVAs)

I understand that some have taken issue with the draft SIP’s perceived more onerous tone. I can see that repeated use of words like “be satisfied”, “ensure”, “demonstrate”, and “assessment” seem more onerous than the current heavily-prescriptive SIP3, but, speaking from my perspective as formerly working within a regulator, I am not sure if it is intended to mean much more in practice. If IPs are not already recording what they do, how they do it, and what conclusions they come to, I would have thought they were at risk of criticism by their authorising body. In addition, many of the requirements relate to having “procedures in place” to achieve an objective, which is how I think it should be – IPs should be free to use their own methods applied to their own circumstances; I believe that it is the outcome that should be defined, not the process – but I do accept that this means more thinking-time for IPs and perhaps more uncertainty as to whether they have the processes right so that they’re not doing too little or too much.

Overall, I think that the draft SIP focuses attention where it is needed; it highlights the softer skills needed by an IP that draw on ethical principles rather than statutory requirements.

I also welcome the reduced prescription. Although I suspect that many IPs will not change their standards as regards, for example, content of Nominees’ reports and Proposals, at least they may find that they are picked up less frequently than in the past where a document has failed to tick a particular SIP3 box… provided, of course, that they meet the principle of providing clear and accurate information to enable debtors and creditors to make informed decisions.

There are a few areas where I feel that more careful drafting is needed. For example, there seems to be a difference in expectations as regards the advice received by a debtor depending on who gives the advice. Paragraph 11 d states that, if an IP is giving the advice, “the debtor is provided with an explanation of all the options available, and the advantages and disadvantages of each, so that the solution best suited to the debtor’s circumstances can be identified and is understood by the debtor”. However, the level of satisfaction required by an IP who becomes involved with a debtor at a later stage is simply that he/she “has had, or receives, the appropriate advice in relation to an IVA” (paragraphs 12 a and 13 a). It would seem to me that “appropriate advice in relation to an IVA” may be interpreted as being far more limited than that described in paragraph 11 d.

Although I applaud the move to freeing IPs to exercise their professional judgment as to how to meet the principles and objectives, I confess that there are a few current SIP3 items that I am sad to see go. And having griped about SIP3A’s interference with fees issues, I feel doubly embarrassed to admit that I quite like the current SIP3’s treatment of disclosure of payments to referrers, which is narrowed in scope in the draft new SIP3 (e.g. under the new draft, a referring DMC’s fees (whether the DMC is independent of the IP/firm or not) for handling the debtor’s previous DMP need not be disclosed). I also like the current SIP3’s requirement to disclose information in reports if the original fees estimate will be exceeded (para 8.2) and the current SIP3’s direction on treatment of proxies where modifications have been proposed (paras 7.8 and 7.9). But I accept that, as a supporter of the principles-based SIP, I should be prepared to let these go.

Talking of principles v prescription…

SIP16

Before the draft revised SIP16 had been released, I had been encouraged by the Insolvency Service’s statement dated 12 March 2013, reporting the Government’s announcement of a review of pre-packs, which stated: “Strengthened measures are being introduce (sic) to improve the quality of the information insolvency practitioners are required to provide on pre-pack deals” (http://www.bis.gov.uk/insolvency/news/news-stories/2013/Mar/PrePackStatement). I was therefore most disappointed to read a re-draft SIP16 adding 14 new items of information for disclosure – would this really improve the quality of information or simply the quantity?

For example, would the addition of “a statement confirming that the transaction enables the statutory purpose of the administration to be achieved and that the price achieved was the best reasonably obtainable in the circumstances” really improve the quality? And what exactly is meant by “best price”? Does that take account of, say, the avoidance of some hefty liabilities on achieving a going-concern sale or the security of getting paid consideration up-front rather than substantially deferred from a less than reliable source or the avoidance of large costs of disposal and risk of depressed future realisations?

There also seems to be a mismatch between the explicit purpose of the disclosure – justification of why a pre-pack was undertaken, to demonstrate that the administrator has acted with due regard for creditors’ interests – and the bullet-point list. For example, how exactly does disclosure of the fact that the business/assets have been acquired from an IP within the previous 24 months (“or longer if the administrator deems that relevant to creditors’ understanding”!) support that objective? Such an acquisition may raise questions regarding the way the business was managed prior to the sale or it might even raise some suspicions of a serial pre-packer at work (wherever that gets you), but I think it contributes little, if anything, to the justification of the pre-pack sale itself.

I understand that there has been some dissatisfaction at the introduction of a 7 calendar day timescale (counting from when?) for disclosure. Personally, I think that it is damaging to the profession if creditors are not made aware of a sale for some time, but I would have preferred for there to be a relaxation of the detailed disclosure requirements so that initial notification, even if it is not complete in all respects (surely much of the detail can be provided later?), is pretty immediate. There may be all kinds of practical difficulties in getting a complete SIP16 disclosure out swiftly, particularly with the proposed additions, and I think it would be an own-goal if this meant that some IPs relied on the “unless it is impractical to do so” words to delay issuing the disclosure until they were sure that their SIP16 disclosure was perfect in all respects. Fortunately, I feel that IPs generally are cognisant of the criticisms/suspicions levelled at the profession when it comes to pre-packs and most will pretty-much clear their desks to ensure that a complete SIP16 disclosure gets out on time.

Finally, returning to my point about unnecessarily repeating statute in SIPs: it is a shame that the drafters have not taken the opportunity to remove the words: “the administrator should hold the initial creditors’ meeting as soon as practicable after appointment”, which apart from omitting the word “reasonably” (is that intended?) is an exact repetition of Paragraph 51(2) of Schedule B1 of the IA86.

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I could go on, but I’m sure I’ve bored you all already. I am certain that many of you will have come up with many more thoughts on the drafts – after all, that is the purpose of sending them out for consultation – I do hope that you have conveyed them to your RPB so that the resultant SIPs can be well-crafted, practical, unambiguous documents that support the high ethical standards of the profession.


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Legislative changes on the horizon: PTDs, TUPE, and gift vouchers

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Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:

• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors

AiB’s proposed changes to PTDs and DAS

28/02/2013: The AiB published some welcome (by me, anyway) fine-tuning to her developing “vision of a Financial Health Service” (http://www.aib.gov.uk/news/releases/2013/02/bankruptcy-law-reform-update).

She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.

The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).

So what now does she propose to introduce? Some new significant items for PTDs:

• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.

The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.

BIS TUPE Consultation

17/01/2013: The BIS consultation on proposed changes to the Transfer of Undertaking (Protection of Employment) Regulations 2006 was issued and closes on 11 April 2013 (https://www.gov.uk/government/consultations/transfer-of-undertakings-protection-of-employment-regulations-tupe-2006-consultation-on-proposed-changes – a 72-page document that takes some reading!).

Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.

The proposals do include some elements that may be more useful:

• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).

Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.

Gift Voucher Creditors

15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.

MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:

“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.

(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”

As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.

To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)

There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).

(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS.  R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN.  This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)

 

Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…