Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: remuneration


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Compliance Hot Topics

I think we all need a break from new legislation and threats of more changes, don’t we?  How about settling back into something more familiar and, I think, strangely comforting: common non-compliances.

Usually, late spring brings us the Insolvency Service’s annual review of regulation, but there’s no sign of it this year.  But we do have the ICAEW’s reports, which are well worth a read for any IP, as they highlight common issues that I think we’re all seeing.  This year, there are three ICAEW reports, although this blog only looks at their Insolvency Monitoring Report at: www.icaew.com/-/media/corporate/files/technical/insolvency/regulations-and-standards/annual-return-and-monitoring/insolvency-monitoring-report.ashx

In the report, the ICAEW highlights the following areas that have brought IPs to the Committee’s attention:

  1. Remuneration
  2. Ethics
  3. Investigations
  4. Statutory Deadlines
  5. Insolvency Compliance Reviews
  6. Information to Debtors

The ICAEW report identifies several other areas of concern as well as providing some useful tips on conducting SIP11 reviews.

 

Issues that have led to Committee-referral

The ICAEW reports that the following have led IPs to face the Insolvency Licensing Committee (“ILC”):

1. Remuneration

The ICAEW reported instances of:

  • Drawing fees without proper authority

The issues that I have seen include: drawing pre-CVL fees that do not meet the R6.7 definition; getting in a muddle with who is required to approve Administrators’ fees (and failing to make sure that this tallies with the Proposals); and accepting shareholders’ informal approval of MVL fees, rather than getting a proper resolution.

  • Fees (or proposed fees) appearing excessive or unreasonable

When I have spoken with monitors (ICAEW and IPA), I have been given examples of excessive/unreasonable fees that truly are toe-curling, although I have seen other cases that do not appear particularly damning.  I understand that both RPBs have a number of cases working through their disciplinary procedures, but I have yet to see any sanction published under this heading.  It may be a difficult allegation to make stick, but for some time I have felt that the RPBs and the InsS have been looking for a worthy scalp.

  • Failing to follow the decision procedure rules

This one frustrates me: despite the comprehensive checklists and templates that many firms have, somehow several people still manage to overlook a key component in fee proposal packs.  Often, the missing piece is a Notice of Decision Procedure when seeking a vote by correspondence.  Sometimes, it is an Invitation to Nominate Committee Members and/or a failure to seek a decision on the formation of a Committee.  In some other cases, fee proposal packs have not been circulated to all the relevant creditors, sometimes because a bunch of creditors (usually the employees) have not been provided previously with a R1.50 website notice and sometimes because IPs have assumed that, as the RPO is the major preferential creditor, it is the only one who needs to be asked to approve an Administrator’s fees in a relevant Para 52(1)(b) case.

  • Failing to provide fee estimates, where required

This is scary, considering that the Rules changed in 2015!  Personally, I haven’t seen this in a few years now.  I do still see, however, fee proposal packs lacking details of expenses, which is a necessary statutory component of all ADM, CVL, WUC and BKY fee proposal packs (and a SIP9 expectation in all case types).

The ICAEW’s tips to improve in this area are:

  • Consider using a billing authority form so that evidence of statutory approval is provided whenever a bill is raised/paid from the estate

I agree that this is valuable, although it will not ensure that valid approval has been achieved unless minutes of meetings/records of decision are signed off with similarly rigorous checks.

  • Critically review fee proposal packs: does the pack explain clearly the work done or to be done and, in light of the explanation, do the costs seem reasonable?

Yep, I agree with this too.  When considering fee estimates, I find it useful to consider the hours being proposed.  For example, it might look like good value to estimate time costs of £5,000 to recover £30,000, but if this means you’re expecting to spend three whole days to collect one book debt, then without more explanation this will look unreasonable.

 

2. Ethics

The ICAEW reported three instances where:

  • Prior relationships had not been considered

I see this so often that it makes me want to weep.  In these cases, the reviewer’s view was that the IP should have concluded that it was unethical to accept the appointment: now, that will get you into hot water.

Unsurprisingly, the ICAEW’s tips are:

  • Simply do proper ethics reviews and write them down before appointment

I wonder if this goes wrong because people independent from the case (and/or people who don’t really understand ethics) are tasked with completing the ethics review… and then the prospective office holder signs it off without thinking.  IPs, please think before you sign off an ethics review: does it disclose all prior relationships and are they well explained and evaluated?

 

3. Investigations

The ICAEW reported:

  • A systemic failure to record sufficient SIP2 work

Over recent years, there has been a trend away from lengthy checklists.  While I can understand this for routine case administration not least as checklists are often completed after-the-event, this approach simply does not work for SIP2 investigations.  The RPBs expect to see contemporaneous evidence of what work has been done and the office-holder’s thinking on whether anything is worth looking into further.

  • Failure to pursue antecedent transactions

I have seen SIP2 investigations fail to pick up weird goings-on like money moving out of accounts after the company had apparently stopping trading.  I have also seen SIP2 checklists identify a potential action and then the trail goes cold.  Both are just not acceptable and, I think, usually stem from an overflowing caseload or disorganised case administration.

The ICAEW’s tips are:

  • Do the work at an early stage and then follow up; and
  • Document decisions not to continue pursuit

The ICAEW reminds us that litigation funders may be able to help.  Some IPs screw their noses up at this suggestion based on rejections they received many years’ ago.  Times have changed, so I would recommend trying again.  And if you still get a rejection, at least this can form part of your decision.  Of course, your decision will also be based on your target’s wealth: it may be a no-brainer decision, but always write it down.

 

4. Statutory Deadlines

The ICAEW reported:

  • An increasing number of systemic failures to meet deadlines

This isn’t an issue I have seen.  Perhaps it derives from poor diary/task templates?  I have seen some sub-standard designs since the 2016 Rules were introduced, but I think those issues have largely been ironed out now.  Could the problem be overwhelming caseloads?  Firms weren’t exactly working at full pelt last year, so if this is your problem, then heaven help you in 2020/21!  Also, try not to get into the habit of running off progress reports at the very end of the deadline (and remember that ADM deadlines are one month, not two): if you do that, then there is no wriggle-room when you have a flurry of new work.

The ICAEW’s tips are:

  • Have robust diary prompts and case-specific checklists; and
  • Consider appointing a staff member to oversee/chase compliance

If diaries are very detailed, sometimes it is difficult to see the wood for the trees.  Having this as one person’s duty (or requiring, say, all managers to monitor/chase) can help sift out the vital diary prompts from the not-so-important ones.  It also helps more junior staff to learn which diary lines are non-negotiable.

 

5. Insolvency Compliance Reviews

 The ICAEW reported:

  • Weak or non-existence ICRs

It is worth remembering that the ICAEW does take this seriously, so please do give ICRs a great deal of attention.

  • Failure to implement changes

Sometimes actually conducting the ICR is the easy bit.  The time required to make the necessary changes can be substantial.

The ICAEW’s tips are:

  • Use a robust checklist to carry out the ICR

The ICAEW provides a checklist (note: this works for corporate and personal cases): www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/corporate-insolvency-casework.  Some questions are subjective, e.g. re case progression, but if used critically with no preconceptions it covers all the major statutory bases.  The ICR also needs to consider key areas on a firm-wide basis.  The ICAEW’s Review of Internal Controls and Systems Helpsheet – at www.icaew.com/regulation/insolvency/support-for-insolvency-practitioners/insolvency-compliance-review-helpsheets – is a good start, but remember that, aside from the ICR itself, SIP11, client money and the Money Laundering Regs require more thorough individual attention.

  • Make the necessary changes

I recommend getting the easy wins, e.g. fixing document templates and diary lines, out of the way quickly.  Meatier tasks may take months to resolve, especially if they involve changing procedures, training staff and making sure that they have adapted to new requirements.  Plan to tackle these tasks methodically, assign the tasks to appropriate staff and follow up with chasers/meetings to make sure that progress continues to be made.  Then, review the effectiveness of the changes ideally before the next ICR is due and keep going until the issue is resolved.

 

6. Information to Debtors

The ICAEW reported:

  • Delivery of poor information to debtors presumably in a pre-IVA context

…including: omitting relevant options; rushing calls; leading the debtor; and not sufficiently explaining the pros and cons of options.

The ICAEW’s tips are:

  • Train staff;
  • Review and update scripts regularly;
  • Regularly review calls for quality; and
  • Ensure that calls are tailored to the individual and give them time to consider their options

Nothing more needs to be said, really.  Quality-controlling advice calls is a never-ending job and one that needs to be well-resourced.

 

The Worst of the Rest

Yes, there’s more… lots more.

The above issues will get you in front of the ILC, but the ICAEW’s report also highlights other issues that are worth double-checking:

  • Miscalculation of delivery timescales

Be careful of assuming first class delivery times and then using second class post.  Take care also to exclude the date of delivery and the date of a decision when calculating notice periods.

  • Flaws in reports and fee estimates

In addition to the issues raised above, a plethora of qualitative issues arise, e.g. does the narrative explain the WIP or fee requested; are the numbers consistent throughout the doc; and are generic statements relevant to the case in question?  Something I see missing a lot are explanations as to whether the fee and expenses estimates have been (or will be) exceeded and if so why.  In some other cases, these explanations do not stack up with the WIP analysis, e.g. it might be reported that the fee estimate has been exceeded because of difficulties pursuing a certain asset, but the WIP analysis shows the fee estimate has only been exceeded in the Admin & Planning category.  Sometimes this can point to poor time-recording practices.

  • Poor case progression and dividend practices

The ICAEW reports some delays in asset recovery and in progressing dividends, as well as miscalculation of claims, especially those of employees.  Remember that in most cases you have only 2 months after the last date for proving to declare the dividend and, if you miss that, then you will need to go through the NOID rigmarole again (and, if you don’t have a good reason for missing it, then your second attempt should be at your own cost).  The ICAEW expects payment of interim dividends in appropriate cases.  I have also seen IPs put off progressing a preferential distribution until they can see their way clear to an unsecured dividend, which is not acceptable.  The ICAEW has also highlighted an issue with IPs telling creditors that they will apply the small debt provisions and then they fail to follow this through.  I have seen some initial letters and progress reports state such an intention and, although personally I think this is not binding until the NOID is issued (R14.31), to avoid any creditor confusion, I strongly recommend removing such statements from these early circulars: if you decide later to apply the small debt rules, then you can make this clear in the NOID.

  • Inadequate annual AML tasks

The ICAEW report reminds readers about the need to review the firm-based AML risk assessment annually and to carry out a full AML review.  I’ll take a closer look at this topic in a future blog when I review the ICAEW’s other annual reports.

  • Clients’ Money Regulations: a reminder for non-ICAEW IPs

The ICAEW report highlights that its Clients’ Money Regs apply to more than just ICAEW-licensed IPs.  If you work in an ICAEW-defined firm or the ICAEW is the firm’s AML Supervisor, then you need to comply with the ICAEW’s Clients’ Money Regs whether or not you are licensed as an IP by them.  To be honest, there are few differences between the IPA’s and the ICAEW’s Regs, but one notable difference is that the ICAEW requires an annual review of the operation of a client account.

  • Inadequate GDPR checks

The ICAEW reports that some are not considering on a case-by-case basis what personal data is held by the insolvent, whether it is secure and for what purpose it is held/processed.  The ICAEW also expects IPs to check whether the entity was registered with the ICO… although it is not clear what they expect you to do subsequently.  I recall that R3 asked the ICO way back in 2018 whether IPs should be maintaining (or even initiating) insolvents’ ICO registrations, which of course would attract additional costs to the estate.  But then 2018’s problems seem so last year!

 

SIP11 Reviews

The ICAEW devotes a whole page to this topic in its report.  Noteworthy points include:

  • Make sure the financial controls and safeguards are written down in the first place

I have seen more than one firm try to carry out a SIP11 review without having taken this step.  How can you check whether the firm’s processes have been followed, if they’re not written down?  SIP11 lists nine areas in paragraph 9 to document… and then adds a tenth (insurance cover) in paragraph 11.  In effect, these areas result in a cashiering manual setting out what happens to money in, payments out, bank recs etc.

  • Then review them annually

The ICAEW report highlights that traditional ICRs will not cover everything required of a SIP11 review.  Jo and I concur: if you want us to do a SIP11 review alongside your ICR, please let us know this and expect the ICR to be longer (and more expensive).  There is no prescription as regards a SIP11 review, but the ICAEW report lists four points that could be considered:

  • Review a sample of cases to see whether procedures have been followed correctly

To some extent, this will be covered by a traditional ICR, but the reviewer may only carry out full reviews of a couple of cases, which will be insufficient for SIP11 purposes.

  • Review the findings of the annual client account compliance review

From a SIP11 perspective, key issues include: how quickly client account money is moved to estate accounts; whether all post-appointment transactions are reflected on the case’s cash-book; and what happens to any interest credited to the client account.

  • Run reports from IPS etc. to review money held and bank rec frequency

I would also recommend running reports on balances held in closed cases or in “suspense” accounts.

  • Review a sample of bank recs

I have seen bank recs with uncleared adjusting entries or uncleared receipts signed off month after month without any apparent thought as to what is behind these.  Understandably, uncleared payments can sit around for longer, but they do need to be resolved at some stage.

Although not included in the ICAEW’s list, the report does note that the firm’s bonding and insurance procedures also need to be reviewed as part of the SIP11 exercise.  This could include a comparison of your open case list against your bond insurer’s, which would help identify whether bonds are being released appropriately.  You could also review whether bond schedules are issued before the 20th day of the following month – look particularly at appointments occurring right at the end of the month, as they can easily fail to hit IPS etc. in time for the following month’s bordereau – and see how swiftly increases are arranged.  Of course, the firm’s insurances are reviewed annually on renewal, but you could prove SIP11 compliance by keeping a record of that renewal consideration by the IP(s) in the same location as the SIP11 review docs.

 


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.


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Reflecting on New Fees Proposals

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I reckon that Administrations are the most complex insolvency procedures and the Oct 15 fees Rules made them a whole lot worse.  However, Administrators’ Proposals provide valuable indications of how IPs – and creditors – have reacted to the new fees regime over insolvencies as a whole.

Only for Administrations are the fees proposals filed at Companies House, so they were ripe for review. I have gleaned many lessons on what not to do and I’ve also gathered a view of how IPs in general are structuring fees proposals in this brave new world.

I shared the fruits of my review at the R3 SPG Technical Reviews. If you missed my presentation, I set out here some of the highlights.  The full presentation is also available as a webinar via The Compliance Alliance (see the end of this article for more details).

 

How many IP practices have I looked at?

Using the Gazette and Companies House, I have gathered 108 sets of Administrators’ Proposals on 2016 cases:

  • Proposals from 69 different IP practices where unsecured creditors were asked to approve fees (i.e. a creditors’ meeting was convened or business was conducted by correspondence)
  • Proposals from 39 different IP practices where fees-approval was limited to secured creditors (and in some cases preferential creditors)
  • In total, 85 different IP practices are represented, from “SPG-sized” (i.e. using R3’s smaller practices criteria) to Big 4.

 

Time costs basis is still king

Ok, so that’s not a bombshell. I also accept that, if I were to look at CVL fees proposals, I might see a different picture.

However, this is the spread of fee bases for my Administration sample:

Feebasis

I’d be interested in running the exercise again, say in January 2017, to see if the picture has changed at all. I think that it depends, however, on whether creditors are looking any more kindly on non-time costs fees.

 

How are creditors voting?

Where unsecured creditors voted on fees proposals:

  • 58 fees resolutions were passed by creditors with no modifications
  • 6 fee proposals were modified
  • Creditors’ committees were formed in two other cases
  • One set of Proposals was rejected

The modified fees look like this:

  1. A fixed fee was reduced from £55K to £47.5K.
  2. A fixed fee of £10K plus 50% of realisations of uncharged assets was limited to the fixed £10K alone.
  3. A fixed fee of £33K plus all future time costs was restricted to a fixed sum of £40K.
  4. A time costs fee with an estimate of £30K was limited to £20K.
  5. A time costs fee with an estimate of £1.26m was subject to a complicated cap which effectively meant a reduction of c.6%.
  6. A time costs fee with no estimate was limited to the WIP at the date of the meeting of c.£20K.

I think it is interesting that proportionately more non-time costs fee cases were capped – 50% of all capped fees cases involved fixed/% fees, whereas fixed/% fees cases represent only 27% of the whole.  It was a fixed/% case that suffered the greatest cut: a hefty 79%!  The average reduction was 29% of the fees requested.

Four of the cases listed above also involved new IPs being appointed – in three cases as the subsequent liquidators and, in the other case, the administrator was replaced. In these cases, the original IPs were forced to vacate office early, so it is understandable that the proposed fees were clipped.

However, the IP who had been clobbered with a 79% reduction was not being fairly remunerated in my opinion. I found this case doubly depressing, as the Proposals were of good quality, lots of useful information was given and it was clear that the IP had worked hard.  On the other hand, I saw lots of Proposals that at best were clumsy and vague and at worst contained fundamental breaches of statutory requirements.

 

Statutory and SIP slip-ups

My presentation included some examples of seriously scary statutory breaches that really should never have happened, but I will spare the authors’ blushes by covering them here. However, we’re all trying hard to comply with Rules and SIPs that often make you go “hmm…”, so I can understand why slip-ups happen.

Sharing only some information with unsecured creditors, because fees are being approved by the secured creditors alone

Do you need to provide full details of the fees that you are seeking in your Administrator’s Proposals, if the Act/Rules only require you to seek secured creditors’ approval? My sample indicates that a couple of IPs at least believe not.

Personally, I think that the Oct 15 Rules are clear: the office holder must, “prior to the determination of which of the [fees] bases… are to be fixed, give to each creditor of the company of whose claim and address the administrator is aware” either the fees estimate (if time costs are being sought) or details of the work the office holder proposes to undertake (if another base is being sought) and in all cases details of current/future expenses.

I do not think it complies with statute to state that this information is only going to be given to the secured creditors (or indeed to a committee, which is a similar scenario). Of course, this does not mean that you must provide all this information in the Administrators’ Proposals – although remember that R2.33 requires Proposals to include the “basis on which it is proposed that the Administrator’s remuneration should be fixed”.  The fees-related information (to support a request for approval of the basis) could be provided under separate cover, but it does need to be sent to all creditors.

Failing to justify fixed/% fees

I think that some IPs have been caught out by the SIP9 requirement that we need to “explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”.

Some Proposals seemed to lack any attempt to provide this explanation. This included one set of Proposals on which the fees were proposed on a time cost basis plus a “success fee” of 7.5% of asset realisations on top, which clearly needed substantial justification.

Other Proposals simply included a statement such as “I consider the proposed basis is a fair and reasonable reflection of the work that I propose to undertake” – not good enough, in my opinion.

The R3 SIP9 Guidance Note suggests referring to “prevailing market rates”. Before the new OR fees had been announced, I wondered how this might work in practice, but now I think that many fixed/% fees can be more than justified by comparing them to the OR’s starting point of £6,000 + £2,000 to £5,000 + 15% of all realisations (what, even cash at bank?).

Personally, though, I do think that time costs is generally a fair and reasonable reflection of work undertaken, so I think that comparison of a fixed/% fee to what the time costs might be is justification, isn’t it? I don’t mean that you need to include time costs information, but simply a statement that you would not expect a time costs basis to be any cheaper… although make sure that you can back this up internally, as I understand that some monitors are querying the quantum of some fixed/% fees.

 

Presentation problems

There is no doubt that over the years many layers have been added to statutory reports such that Administrators’ Proposals and progress reports for all case types have become ridiculously unwieldy – and of course very expensive to create and check. Then, we have the SIPs that layer on yet more requirements to reports.  And don’t get me started on the R3 SIP9 Guidance Note!

With this backdrop, I have to bite my lip whenever I hear/read a regulator or similar express the opinion that items such as fees proposals can be dealt with in short order. I’ve even read that, for simple cases, a fees estimate could be “little more than a few lines of text”! I am ever conscious, however, that it is a temptation of compliance specialists to throw kitchen sinks at statutory and SIP requirements.

Although I accept that Administrators’ Proposals involve often lengthy schedules such as creditors’ lists, my sample had an average length of 41 pages and the longest was 97 pages! It has become silly, hasn’t it?

The mass of information provided in Proposals leads to presentation problems over and above simply helping creditors to trawl through it all.

Documents that just don’t match up

Administrators’ Proposals involving fees proposed on a time costs basis should contain the following numerical items:

  • A receipts and payments account
  • A statement of affairs (“SoA”) or estimated financial position
  • An estimated outcome statement (“EOS”) (optional)
  • A fees estimate
  • A schedule of anticipated expenses (“expenses estimate”)
  • A time costs breakdown (proportionate to the costs incurred)
  • A statement of pre-administration costs

A common problem in my sample was that all these documents did not cross-check against each other. Most frequently, the expenses on the EOS did not match the expenses estimate.  The picture was generally worse in non-time cost cases where sometimes an expenses estimate (or at least “details” of expenses anticipated to be incurred) was missing altogether.  Another issue in non-time cost or mixed bases cases was that my calculation of the expected fee did not match that listed in the EOS.

It is not surprising that mistakes happen with so many schedules to produce and I do realise that we need to manage costs and get these documents out reasonably swiftly, but I do think that a failure to get all these items cross-referring correctly is an easy way to get on the wrong side of a voting creditor (and RPB monitor).

Estimating dividends

I don’t wish to discourage you from providing anticipated dividend figures – especially as we now have the SIP9 requirement that “where it is practical, you should provide an indication of the likely return to creditors” – but it was noticeable that some Proposals that included estimated dividend figures were fraught with difficulties.

How can you estimate the dividend from an Administration if:

  • you only disclose fees on a milestone basis, e.g. for the first six months; or
  • where a non-prescribed part dividend is anticipated, you only estimate the Administrator’s fees, not the fees and expenses of the subsequent CVL?

In these cases, I think you need to make it clear that the bottom line of any EOS does not equate to a dividend, not even to a “surplus available for creditors”, but perhaps the balance after six months (or whatever the milestone happens to be) or the estimated funds to be transferred to the liquidator.

The worst case I saw was an EOS that suggested a 14p in the £ dividend, but when the rest of the Proposals were factored in (especially some expenses that hadn’t made their way to the EOS), it was evident that there would be no dividend and the IP would not recover his time costs in full.

I think it is important to manage creditors’ expectations; do not set yourself up for a fall.

Liquidation estimates

Few Proposals included clear information on the subsequent Liquidators’ fees and expenses: this was present in 10 Proposals out of 63 that indicated a likely non-prescribed part dividend. That is fine, this information is optional under the Rules.

What concerned me, however, was how muddy the water looked in some of the other 53 cases. For example, one Proposal listed adjudicating on claims and paying a (non-prescribed part) dividend in the work to be undertaken, but the surrounding text suggested that the estimate was for the Administration only.

I think it is important to be clear on what the fee estimate covers and also what it does not cover, especially if non-routine investigation work is to be dealt with separately or later.

Although the Rules provide that the basis of the Administrators’ fees carries over automatically to the Liquidation (provided that the IP is the same and that both the Administration and the Liquidation commenced after 1 Oct 15), it seems to me that the quantum of fees that have been approved could be a little trickier to determine.  This does not just concern time costs: when you start working through an actual case, you realise that the Rules are very woolly (and I believe even conflict in some respects) as regards Liquidators’ fees approved on a fixed/% basis in the prior Administration.

The narrative

I am the first to confess that I struggle to get the balance right as regards the Rules and SIP9 requirements for narrative. As my blogs demonstrate, I’m not known for being concise!

My review of over 100 Proposals, however, has led me to the following personal conclusions:

  • A good EOS can tell the story far better than pages of text. I hated seeing an EOS or an SoA with strings of “uncertain” assets.
  • I guess we need to include some narrative to explain the statutory and general administration tasks, but, really, once you’ve read one, you’ve read them all. Yawn!
  • The R3 SIP9 Guidance Note suggests adding the number of creditors, number of statutory reports, returns etc. to your narrative. In view of the costs incurred in tailoring this information to each individual case, I really don’t see that it is effort well spent. Will creditors really thank us?
  • Ok, yes, explaining prospective/past asset realisations is the meat of our reports. Especially if you do not have an EOS or if realisation values truly are uncertain, fleshing out what you have to realise and how you are going to go about unusual realisations would be valuable.
  • What to do about Investigations? I wriggled a bit when I was asked this question at the R3 event. Many IPs are being sensibly cagey when it comes to proposing what Investigations will involve. This is an area where proportionality really is key: if you are expecting to charge a lot, then I think you do need to give creditors some of the story, although you will want to be careful of your timing and the risk of potentially giving the game away.

 

Other Insights

In my presentation, I also shared other insights from my Proposals dataset, such as whether the amounts of proposed fees tallied with the expected realisations and what was the average and range of charge-out rates, but I think it would be insensitive to share the detail so publicly here.

Nevertheless, here are some general observations from my review:

  • I saw no real difference in the ratio of fees proposed to asset realisations where unsecured creditors controlled approval as compared to that where secured creditors were in control. Although I am no statistician, I think this is interesting in view of the OFT’s conclusion in 2010 that fees were higher when unsecured creditors were in control.
  • Although time costs are still overwhelmingly preferred, other and mixed bases are being proposed in a variety of cases, including some with substantial assets.
  • Only 26% of time cost fee estimates broke down anticipated time into staff member/grade, i.e. to the level of detail suggested in the R3 SIP9 Guidance Note. I am yet to be persuaded that it is in creditors’ interests to go to the expense of providing this level of detail, which I do not believe is required by the Rules or SIP9.

 

Personally, I’ve learnt a lot from the review – what can go wrong, where some seem to be getting into a muddle, how IPs and creditors have reacted to the new fees regime. Although I spent many (sad) evenings trawling through Proposals, I shall be doing this again sometime to see whether things have changed.

If you would like to listen to the full webinar (£250+VAT for firm-wide access to all our webinars for one year), please drop a line to info@thecompliancealliance.co.uk.


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SIP9 – the easy bits

0902 Monument Valley

There’s no doubt that the October Rules and the revised SIP9 generated many questions. However, in this blog (first published on The Compliance Alliance), I summarise the known impacts of the new SIP9 for those who want to double-check that they have the basics right.

Scope

Have you remembered that the scope of the new SIP9 reaches wider than simply cases affected by the October Rules? It also affects:

  • Pre-October 2015 appointments;
  • Case types not affected by the October Rules, i.e. CVAs, IVAs, Receiverships and MVLs; and
  • Pre-appointment fees (where these are paid from the estate), e.g. SoA/S98 fees and VA drafting fees;
  • But it does not apply to Scottish or NI appointments, which continue to be subject to the “old” SIP9.

Key disclosure

I think that paragraph 9 of SIP9 is key. Whenever you are “providing information about payments, fees and expenses to those with a financial interest in the level of payments from an insolvent estate”, you should address the following:

Prospective disclosure:

  • What work will be done
  • Why it is necessary
  • How much it will cost (both fees and expenses)
  • “Whether it is anticipated that the work will provide a financial benefit to creditors and if so what anticipated benefit (or if the work provides no direct financial benefit, but is required by statute)”

Retrospective disclosure:

  • What work has been done
  • Why it was necessary
  • How much it has cost (both fees and expenses)
  • “Whether the work has provided a financial benefit to creditors and if so what benefit (or if the work provided no direct financial benefit, but is required by statute)”

The information given should be transparent, useful and proportionate to the circumstances of the case (which makes a rigid template approach difficult and dangerous), but also consistent throughout the life of the case. Therefore, whilst you might have made wholesale changes to requests/reports for new cases, you have probably designed a half-way house for older cases.  Although the new SIP9 avoids pretty-much all reference to numerical information, if you have already provided tables for a case on the lines of the old SIP9, it seems that you cannot drop them for future reports.  However, you should review the narrative elements of pre-December 2015 case reports to make sure that they meet the new disclosure requirements.

As mentioned above, these narrative requirements also apply to fees/costs that are new to the SIP9 scope and that are not affected by the October Rules. Therefore, have you checked off your documentation relating to MVL, SoA/S98, and VA drafting/Nominees’/Supervisors’ fees?

Fixed or percentage fees

Have you ensured that, whenever you are seeking approval for fees on a fixed or percentage basis, you have included some kind of prompt/explanation as to “why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken” (paragraph 10)?

Also with SIP9 paragraph 25 in mind, have you made sure that this explanation is covered when you are hoping to get approval for the following (which are often sought on a fixed/% basis) where they are to be drawn from the estate:

  • SoA/S98 fees;
  • Nominees’ fees;
  • Supervisors’ fees; and
  • MVL fees?

SoA/S98 fees

As you can see above, the new SIP9 seems to affect SoA/S98 fees quite substantially. I believe it has been rare to see pre-S98 circulars disclose much at all about these fees.  Personally, I find it difficult to see how the principles of SIP9 can be met without disclosing in the pre-S98 circular the quantum of the proposed SoA/S98 fee, if the IP is hoping to get this approved for payment from the estate at the S98 meeting.  However, I do not think that SIP9 is at all clear on this point, so I’ll put this one in the “known unknown” category.

Numerical information

As mentioned above, the new SIP9 has distanced itself from a formulaic numbers-say-it-all approach in favour of case-tailored narrative. However, the SIP does require some numerical information, not all of which I think flows naturally.

Are your systems set up so that, for cases where (October Rules) fees estimates have been provided, the progress reports disclose:

  • “the actual hours and average rate (or rates) of the costs charged for each part… for comparison purposes” (paragraph 13); and
  • “when reporting the amount of remuneration charged [i.e. time costs incurred] or expenses incurred… figures for both the period being reported upon and on a cumulative basis” (paragraph 17)?

Having now looked at some fee estimates, I have to say that I really do not think that the average rate for each work category adds anything at all – although I can see that an overall average rate has some value – so why the JIC felt that this was so vital that it had to be prescribed, I do not know! But I do know that it has added expense to some IPs in getting their time recording systems set up to produce these numbers.

The second requirement adds further complication. The 2010 Rules require progress reports to disclose expenses incurred (whether or not paid) in the period and SIP7 requires expenses paid in the period and cumulative, but now SIP9 requires also expenses incurred on a cumulative basis: that’s four different numbers.  So much for transparency!

Back to the beginning

The new SIP9 has introduced some subtle changes as regards disclosure of parties’ rights.

Information to creditors about how to access information on their rights has been moved to earlier in the process: no longer should this occur in the first communication following appointment, but simply “within the first communication with them” (and in each subsequent report).  Therefore, have you checked that this is covered in the pre-S98 circular?  But have you also kept it as standard in any post-S98 template, just in case you take an appointment without having been the IP advising member for the S98 meeting?

Personally, I’ve been struggling to work out how to meet the requirement above for MVLs: does there exist an “official” sensible explanation of creditors’ rights in an MVL?  The Creditors’ Guide to Liquidators’ Fees doesn’t really do the job, but I am not convinced that the RPBs expect IPs to draft something themselves, do they..?  Perhaps this is another “known unknown”.

Whilst we’re on the subject of Creditors’ Guides… I think that many IPs assumed that, as the new SIP9 applies to old and new cases, the new Guides also apply to both old and new cases.  However, if we remember that the purpose behind directing creditors to the Guide is to inform them of “their rights under insolvency legislation”, then it is evident that the pre-April 2010 Guides are still relevant to pre-April 2010 cases, as new rights were introduced in April 2010.  It is regrettable, however, that all the old Guides set out the requirements of the old SIP9 – and I would suggest that this might render them no longer “suitable information” – but as regards a creditor’s statutory rights, they’re generally reasonable.

Therefore, do your circulars/reports direct creditors to the Guide appropriate to the case type and appointment date? If you display the Guides on your own website, do you have Guides covering the full range of appointment dates?  The R3 website only goes back to 1 November 2011, but the ICAEW website, http://goo.gl/kjZlJC, (for example) has Guides going way back.

Heavy hints

The new SIP9 includes several items that fall short of being prescriptive, but the language indicates to me that monitors will still be looking out for them. These include:

  • Providing “an indication of the likely return to creditors” when seeking approval of the fee basis “where it is practical to do so”;
  • Dividing narrative explanations into the six categories listed in paragraph 12… whilst making sure that not every case follows exactly the same categories (we have to demonstrate that we’ve considered each case’s specific circumstances); and
  • Using “blended rates” for fees estimates.

And don’t forget…

Some old SIP9 requirements have survived the revision process. Items that sometimes get overlooked include:

  • Disclosure of “any business or personal relationships with parties responsible for approving his or her remuneration or who provide services to the office holder in respect of the insolvency appointment where the relationship could give rise to a conflict of interest”;
  • Explanation of why any sub-contractors are being used to do work that could otherwise be done by the IP/staff; and
  • An existing SIP7 requirement: disclosure of any pre-appointment costs paid, detailing the amount paid, name of the payor, their relationship to the estate and the nature of the payment.

Simple?

I get the feeling that the RPBs have been inundated with queries over the practical application of the October Rules and the revised SIP9, many originating from compliance consultants (including The Compliance Alliance). I haven’t raised these queries here; there is no real point, as there are few reliable answers at present.

In many respects, I doubt that we will get straight answers, at least not for some time to come. A recent response from one of my RPB contacts was heavily caveated with the observation that it was only her personal understanding and that the RPB’s stance would be formed by its committees over time.  Therefore, please bear with your compliance consultants.  You might hear us saying that we don’t know how your authorising body or its monitors view a certain matter and you may find that our recommendations change over time, as we try to remain alert to the shifting sands of interpretation around the Rules and SIP.  We will do our best to highlight the issues as we see them, whether they are clear breaches or whether they fall into the currently numerous known unknowns.


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More on the ERR Bill and two cases: (1) Scottish Court shows more than the usual interest in provisional liquidator’s fees; and (2) Court avoids “unpardonable waste of scarce resources” by striking out evidence

I present a bit of a mixed bag here:
• The Enterprise & Regulatory Reform Bill – developments since my blog post of 12 January
• Nimmo – the Scottish Court of Session takes more than a passing interest in a provisional liquidator’s fees
• Secretary of State v Potiwal – despite the seeming absence of a technical argument, the court saves the taxpayers’ money in proving a case a second time

Update on the Enterprise & Regulatory Reform Bill

New Bankruptcy Application Process

On 12 January, I posted to this blog my thoughts on the insolvency parts of the ERR Bill. Last week, some interesting tweaks to the Bill had been proposed: that the adjudicator be allowed to apply to the court for directions (which might have helped if the adjudicator had been presented with a bankruptcy application with tricky COMI dimensions); and that, if the adjudicator felt that an alternative remedy were more suitable, the individual be given ten days to seek advice and potentially withdraw the bankruptcy application. Unfortunately, both these proposals were withdrawn following the House of Lords’ debate.

In relation to the subject of applying to court for directions, Viscount Younger of Leckie said: “Persons appointed as adjudicators will have the skills they need to do the job without the need for recourse to the court. It is acknowledged that the court still has a role to play. Where the adjudicator refuses to make a bankruptcy order because the criteria are not met, the debtor will have the right to appeal to the court. That provides a route to court in those cases where it is needed” (Lords Hansard on House of Lords Grand Committee 16 January 2013, http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/130116-gc0002.htm).

With regard to allowing the individual time to explore alternative solutions, Viscount Younger said: “I reassure noble Lords that before making their bankruptcy application, applicants will be strongly encouraged to take independent debt advice to ensure that bankruptcy is really the right option for them. My officials will work with the Money Advice Service and providers within the debt advice sector to ensure that applicants have the information they need to make an informed decision. Furthermore, within the electronic application process itself, we propose to include a series of warnings to ensure that applicants are made fully aware of the serious implications of bankruptcy before they make their application. We will also ensure that the process flags up any alternative debt remedies that may better suit their circumstances. The Government consider that these safeguards are sufficient to ensure that debtors are empowered to make an informed decision as to whether or not bankruptcy is the right option for them before they take the serious step of making a bankruptcy application. The Government believe that these amendments would unnecessarily complicate the process by requiring the adjudicator to exercise discretion on a case-by-case basis. That would increase administration costs with an impact on the application fee. It would also delay access to debt relief for the debtor, who would have elected for bankruptcy in full knowledge of their other options.”

Whilst I understand the government’s intention to formulate a simple administrative process to replace the current court-led debtor’s bankruptcy petition process (although those IA86 provisions are not being repealed via the Bill, presumably so that individuals who cannot/do not wish to apply online can still instigate their own bankruptcy), it seems inevitable to me that such a process will be ill equipped to deal with out-of-the-norm cases.

Continuation of contracted supplies in corporate insolvencies

It seems that R3’s “Holding Rescue to Ransom” campaign is paying off! Added to the list of proposed amendments to the Bill are the following proposed changes to S233 of IA86:

• To include “a supply of computer hardware or software or infrastructure permitting electronic communications” as another utility that must continue to be supplied (subject to the current S233 conditions) on request by the office holder.
• Utility supplies to be caught by the provisions irrespective of the identity of the supplier.
• To include that “any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) [i.e. administration, administrative receivership, S1A moratorium, CVA, liquidation, or appointment of a provisional liquidator] is void” – this does not seem to be limited only to utility supplies.

It remains to be seen, however, if these proposed changes survive the debate in the House of Lords (next sitting is scheduled for 28 January 2013).

Scottish Court of Session not content to take as read the court auditor’s and reporter’s recommendations of approval of provisional liquidator’s fees

Nimmo, as liquidator of St Margaret’s School, Edinburgh, Limited [2013] ScotCS CSOH 4 (11 January 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH4.html

Summary: Despite both the reporter and the court auditor recommending that the provisional liquidator’s remuneration of c.£120,000 be allowed, the court sought further information in justification of the fee. Whilst IPs can take some comfort in the result that the judge allowed the fees in full, his comments suggest some lingering concern and hinted at a desire for a review of the court procedures.

The Detail: Over 20 days, a provisional liquidator managed “a high profile and extremely sensitive appointment” (paragraph 9) over a school and incurred time costs of c.£120,000. Later, the IP was appointed liquidator of the same company with his fees for the liquidation being approved by the liquidation committee. Interestingly, Lord Malcolm disapproved of the use of the word “cost” when referring to as yet unauthorised remuneration: “For the future I would advise that in reports to committees the proposed fee should not be described as ‘a cost’ already incurred by the liquidator. It should be made clear that the committee is being asked to exercise a judgment as to whether the proposed remuneration is reasonable and appropriate (or words to that effect). A proposed fee is in a different category from outlays. The scope for disagreement or questioning should be obvious to the readers of the report” (paragraph 31). The IP’s fees as provisional liquidator remained to be approved by the court.

Both the reporter and the court auditor considered that the provisional liquidator’s fees were reasonable, but the judge requested further information. Despite learning of the complexities handled by the IP, Lord Malcolm stated: “nonetheless I retain a sense of surprise and concern at a proposed fee of over £120,000 (exclusive of vat) for 20 days work, and I suspect that many will find it remarkable that the winding up of a middling size private school can generate fees of over £620,000 (again exclusive of vat)” (paragraph 31). However, the judge allowed the fee, noting that “the court cannot simply reject the clear advice of the reporter and the auditor of court without cogent and objectively justifiable reasons for doing so” (paragraph 35).

Lord Malcolm’s closing comments suggest a desire for more widespread consideration of the issue of insolvency office-holders’ remuneration: “Perhaps it is no bad thing that, now and again, an opinion is issued which shows how these matters are presented to, and addressed by the court. Generally they are resolved without any public hearing or publicity. There is at least a risk that the fee levels and general practices and procedures seen as normal in the corporate insolvency world become, when the court is asked to adjudicate, in a sense self-fulfilling. This highlights the important role of the auditor of court in the current system, given that he is not directly involved in such work. It may also be that, from time to time, and in the light of experience, the judges should review current practice to check whether there is room for improvements in the court’s procedures which might help it to exercise its jurisdiction under the insolvency rules” (paragraph 38).

Court avoids “unpardonable waste of scarce resources” by striking out director’s evidence in disqualification proceedings

Secretary of State for Business, Innovation & Skills v Potiwal (Rev 4) [2012] EWHC 3723 (Ch) (21 December 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3723.html

Summary: In relation to disqualification proceedings, the Secretary of State (“SoS”) sought to rely on the fact that a VAT Tribunal had already proven a director’s knowledge of his company’s fraud. The court found that, although the SoS’ argument that the director was estopped from denying knowledge failed because the SoS and HMRC were not privies, it agreed that it would be manifestly unfair and it would bring the administration of justice into disrepute to require the SoS to prove the director’s knowledge a second time.

The Detail: An earlier VAT Tribunal had concluded that the director knew of the company’s VAT fraud, but in evidence to defend disqualification proceedings the director denied having such knowledge. The SoS sought to have that part of the director’s evidence struck out on the grounds that he was estopped from denying that he had this knowledge; or that his denial was an abuse of process, as it would be manifestly unfair for the SoS to be put to the substantial cost and delay of proving the allegation; and/or that to permit the issue to be re-litigated would bring the administration of justice into disrepute.

For the argument of estoppel to win out, the parties to the disqualification proceedings – the SoS and the director – had to be in privity with the parties to the earlier VAT Tribunal – HMRC and the insolvent company. Given the director’s role in the company and in the VAT Tribunal proceedings, the judge had no difficulty in concluding that the director and his company were privies. However, he decided that the SoS and HMRC were not privies: “I consider that it would therefore go against the grain of the development of the law about abuse of process to identify for the first time a new class of privity of interest between two very different arms of government pursuing different aspects of the public interest, and being motivated in particular cases by different policy and funding considerations when doing so” (paragraph 21). Consequently, in relation to the first ground, Mr Justice Briggs concluded that, because there was no privity of interest between the SoS and HMRC, the proven position in the VAT Tribunal could not be carried forward into the disqualification proceedings.

However, Briggs J then considered whether “hundreds of thousands of pounds” of tax-payers’ money should be used to prove the allegation a second time. Having considered the circumstances of the VAT Tribunal, which was funded by the taxpayer throughout, the judge concluded that it would be manifestly unfair to impose the cost of re-litigating the issue on the SoS. With regard to the argument that re-litigation would also bring the administration of justice into disrepute, Briggs J stated: “Where, as here, the issue as to a director’s knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue re-litigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again” (paragraph 29). Thus, he ordered that parts of the director’s evidence be struck out as an abuse of process.