Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The Deregulation Bill

1228 Port Douglas

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

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

SoS authorisations to come to an end

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

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

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

Limited Licences

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

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

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

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

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

Other aspects of the Deregulation Bill

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

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

Complaints Gateway

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

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

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

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

Red Tape Challenge Outcomes

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

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

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

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

Monitoring of SIP16 Compliance

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

Monitoring of pre-packs using SIP16 disclosures

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

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

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

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

Themed Review on Introducers

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

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

Regulatory and disciplinary outcomes

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

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

The only other points I gleaned from this section were:

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

The future

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

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

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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.