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Developments in UK insolvency by Michelle Butler


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Two old(ish) debates: S100 fees decisions and old rules IVAs

 

Firstly, I should warn you: if you find my singular views often wind you up, you might want to skip this post. Here, I air what I suspect are unpopular opinions about two New Rules issues that have been doing the rounds over the past few months: (1) can fees decisions be taken by means of a correspondence vote set to run concurrently with a S100 deemed consent decision; and (2) to what extent do the 2016 Rules apply to IVAs that were approved before 6 April 2017 or that have been approved since then but with terms that refer to 1986 Rules?


 

1. Correspondence votes running concurrently with S100 deemed consent decisions

The Problem with S100 Deemed Consent Decisions

As we know, the deemed consent process cannot be used “to make a decision about the remuneration of any person” and the Insolvency Service has confirmed on its Rules blog that this applies to decisions approving the payment of any SoA/S100 fee. Therefore, unless you are paid the SoA/S100 fee before the liquidation begins, at some stage you will need to instigate a qualifying decision procedure to seek approval and of course you will also want to seek approval of your fees as liquidator at some point.

If these decisions cannot be posed via the S100 deemed consent process, what do you do? Do you wait until after your appointment has been confirmed via the S100 process and then seek a decision, e.g. via a correspondence vote? Or can you instigate a correspondence vote before your appointment? After all, doesn’t R18.16(10) provide for a “proposed liquidator” in a CVL to deliver information on their fees to creditors and doesn’t the table at R15.11(1) refer to “decisions of creditors for appointment of liquidator (including any decision made at the same time on the liquidator’s remuneration)”?

 

The Problems with Pre-Appointment Correspondence Votes

  1. Signing the Notice of Decision Procedure

Can the proposed liquidator sign the notice convening the proposed decision by correspondence? I don’t see any rule empowering a proposed liquidator to act as “convener” of such a process.  Could a director sign the notice?  R6.14 empowers a director to sign a notice for a decision by deemed consent or virtual meeting, but that’s all.  The rules do not appear to empower a director to sign a notice for correspondence vote.

Do the rules need to empower someone to sign such a notice? Isn’t it sufficient that they don’t say that it cannot be done?

It is true that “convener” is defined as an office holder or other person who seeks a decision in accordance with Part 15 of the Rules… but that is simply a definition. To view this definition as giving free rein for any old decision under Part 15 seems a nonsense to me.  If a proposed liquidator or director (other than as provided for under R6.14) were entitled to convene any decision procedure they liked, then this entitlement could surely extend to any “other person”, e.g. a creditor, shareholder, company agent/adviser, receiver… Surely it cannot be open to just anyone to instigate a decision procedure on anything, can it?

Ok, what about if the members had already appointed a liquidator? Could the liquidator sign a notice of decision procedure if he had already been appointed in a Centrebind process? I think the difficulty here is S166(2), which restricts the liquidator’s powers before the S100 decision. The only powers the liquidator can exercise at this time are those in S166(3) and I do not think that instigating a decision procedure on fees falls into the categories of taking control of or protecting company property and disposing of perishable/diminishing-value goods.

  1. Clashing timelines (1)

Setting aside the issue above about who signs the notices, I think there are other reasons why the concurrent correspondence vote for fees pre-S100 does not work: the impossible statutory timelines governing these processes.

R15.11(1) sets the notice period of 3 business days for the S100 decision on the appointment of the liquidator and “any decision made at the same time on the liquidator’s remuneration”.  If the S100 decision is sought by deemed consent and a fees decision is sought by a correspondence vote, two processes are set in motion. That’s fine so far: you could set both processes going with the same decision date, say 14 September. With R15.11(1) in mind, let’s “deliver” the notices on 8 September, to give a clear 3 business days’ notice.

If a >10% creditor objects to the deemed consent decision, then that process terminates and the director must now convene a physical meeting for the purpose of seeking the S100 decision on the appointment of a liquidator. But what happens to the correspondence vote process? This is a different process altogether, so it seems to me that it keeps on going.

But does this create a problem? Yes, I think so. As I mentioned, R15.11(1) sets the notice period for a “decision made at the same time” as the S100 decision at 3 business days, but the correspondence vote decision has now deviated from the S100 decision; the decisions will no longer be made at the same time. However, the notice period for correspondence votes not made at the same time as a S100 decision is 14 days, so in hindsight the liquidator/director has failed to provide enough notice for the correspondence vote. Does this mean that the correspondence vote decision is invalid? Could you abandon the correspondence vote process? There doesn’t seem to be any power in the rules to postpone or cancel a correspondence vote process once started (unless it is terminated by reason of a physical meeting request).

Ok, so one solution might be to make sure that the correspondence vote is arranged with at least 14 days’ notice in any event, so that you don’t fall foul of the notice period if the two processes were to diverge. That may be so, but surely the fact that you could breach the statutory notice period in hindsight in this way is an indication that it was not envisaged that the rules would provide that two independent processes could run concurrently with a shorter notice period.

  1. Clashing timelines (2)

Returning to the example above: notices of a S100 deemed consent decision and a correspondence vote are delivered on 8 September with decision dates of 14 September. What happens if a >10% creditor submits a request for a physical meeting on 15 September? That’s a silly question, you may think, surely they are out of time as the decisions have been made.

I would agree that they out of time for the S100 decision, because R6.14(6)(a) states that “such a request may be made at any time between the delivery of the notice… and the decision date”. However, are they out of time for the correspondence vote? As the correspondence vote for fees is not provided for in R6.14, it would have a deadline for physical meeting requests of 5 business days from the date of delivery of the notice (R15.6(1)). Therefore, notwithstanding that the decision date had already passed, it seems that the creditor’s physical meeting request could impact the proposed fees decision. That’s nonsense, you say. I would agree, so I believe this is another reason why the rules could not have been intended to provide for a correspondence vote to run concurrently with a S100 deemed consent process.

Ok, what if you followed the same solution suggested above: convene the correspondence vote with at least 14 days’ notice? Wouldn’t this easily accommodate the 5 business days timescale for requesting a physical meeting? Yes, I suppose it could, but imagine then that you received a request for a physical meeting on business day 6. What would be the consequence: would you consider that the request only stopped the S100 liquidator decision, whereas the correspondence vote on fees could continue to its original decision date? Interesting… so the S100 physical meeting could decide on a different liquidator, who would take office with an already-approved fees decision in which he had taken no part. That would be odd!

 

So where does this leave correspondence votes running concurrently with a S100 deemed consent decision?

I think that, for these reasons, concurrent correspondence votes just do not work: the statutory timescales throw up all sorts of impossible or at least risky scenarios, but more fundamentally there is no one empowered by the rules to sign the notice of decision procedure.

 

But then why do the rules allow proposed liquidators to issue fees-related information?

I believe this is because a fees decision could be proposed pre-appointment: via a S100 virtual – or indeed, where required, a physical – meeting.

Such meetings do not suffer any of the problems described above:

  • the notice of the meeting decision procedure is signed by the director under R6.14;
  • the fees decision(s) can be proposed and made at the meeting “at the same time” as the S100 liquidator decision and therefore the fees decisions can be sought on 3 business days’ notice;
  • there is no possibility of the S100 liquidator decision and the fees decisions diverging, because a S100 virtual meeting can only be stalled by a physical meeting request (not also by a deemed consent objection) and this would terminate the virtual meeting process set up to consider all the decisions; and
  • as the fees decisions have been proposed via a notice of decision procedure issued under R6.14(2)(b), the deadline for requests for a physical meeting is set by R6.14(6), which would apply to all decisions proposed for consideration at the virtual meeting.
  • The possibility of proposing fees decisions via a S100 virtual/physical meeting also makes sense of R18.16(10), because in order for the creditors to consider a fees decision at the meeting, the proposed liquidator needs to send the fees-relevant information beforehand.

 

Haven’t we been here before?

I accept that my concerns above are purely technical. I am reminded that so too was the debate that arose in October 2015 about whether IPs could issue fee-related information before they were appointed liquidators so that fees resolutions could be considered at the S98 meetings. It seemed to me that the profession quickly became divided into two camps: those who took comfort in Dear IP 68 that stated that the intention was not to preclude pre-appointment fee estimates and those who, notwithstanding the clarification of such intention, chose to avoid falling foul of an apparent technicality in the rules by seeking fee approval only after appointment. The 2016 Rules – R18.16(10) referred to above – have resolved that old issue, but we now have a different set of technicalities affecting attempts to seek fee approval by S100-concurrent correspondence votes.

Can we expect the regulators to clarify their intentions and regulatory expectations on this question? We can only hope! However, if the answer were on the lines of Dear IP 68 (i.e. the rules might not exactly say this, but this is what we intended), then would this help or would we, without a legislative fix, still be left to choose between two camps? I hasten to add that I have no idea on which side of the fence the regulators might fall on this new question in any event.

 

Are the issues only about the technical?

In exploring the above issues with people at the Insolvency Service and the IPA, both have raised concerns – aside from the purely technical – about the appropriateness of proposing decisions on liquidators’ fees before appointment.

I understand that there are concerns about the huge amount of documentation – the Statement of Affairs, SIP6 information, fees and expenses related information – that creditors would be expected to absorb and vote on potentially in less than 3 business days. There seems to be slightly less concern attaching to fee-approval sought via a S100 virtual meeting, I think because this is seen to provide creditors with a forum in which to explore matters in an attempt to assess the reasonableness of fee requests. However, I believe there are also concerns about how IPs can put forward a reasoned and justifiable case for post-appointment fees before they have got stuck into the appointment.

There are clearly lots of factors to weigh up here, factors that may impact more than simply the rights and wrongs of correspondence votes running concurrently with S100 deemed consent decisions. In view of the serious ramifications of getting fees decisions wrong, I do hope that the regulators put their heads above the parapet and tell us all their views on these matters soon.


 

2. VAs incorporating 1986 Rules

The Problems with VAs based on 1986 Rules: the story so far

The issue I’ve blogged about before (https://insolvencyoracle.com/2017/05/02/new-rules-emerging-interpretations-part-1/) is: how far should you apply the 2016 Rules as regards VAs that incorporate 1986 Rules?

Dear IP 76 contains the following statements by the Insolvency Service:

  • the IVA Protocol’s Standard Terms’ reference to calling meetings “in accordance with the Act and the Rules” means the amended Act and the 2016 Rules;
  • the Act and 2016 Rules “remain silent on how decisions are taken” in VAs;
  • supervisors should not “feel restricted to only using a physical meeting”; and
  • the Insolvency Service “expect[s] supervisors to take advantage of the new and varied decision making procedures”.

I blogged my concerns about these statements:

  • If calling meetings “in accordance with the Act and the Rules” means the new provisions, which are indeed silent as regards meetings in approved VAs, then we must look to the statutory provisions for Trustees, because paragraph 4(3) of the Protocol Standard Terms states that supervisors should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”. Therefore, does this mean that in fact a supervisor is prohibited from calling a physical meeting by reason of S379ZA(2) in the same way as a Trustee is?
  • How can a term stating that “a supervisor may… summon and conduct meetings” equate to “a supervisor may seek a decision by, say, an electronic vote”?
  • Dear IP focused on the wording of the IVA Protocol, whereas I believe that consideration of the R3 Standard Terms leads to very different conclusions, because the R3 Standard Terms are almost entirely independent from any Act and Rules provisions.

However, after I’d blogged, R3 issued its own statement, which included:

“The current R3 Standard Conditions refer to ‘meetings of creditors’ rather than making specific reference to the Rules. R3 is also of the opinion that IPs are not restricted to using physical meetings of creditors only when seeking the views of creditors and that the full range of decision making procedures introduced by the new Rules are available to the supervisor. It could also be argued that section 379ZA of the Act which prevents physical meetings being held except in limited, defined circumstances, applies to existing arrangements…

“We are of the opinion that the current version of the Standard Conditions continues to be relevant and supervisors using the current version of the Standard Conditions for arrangements approved post 6 April 2017 should apply the new Rules when seeking decisions of creditors. For the avoidance of doubt however nominees may wish to seek their own legal advice on the wording to be used when seeking variations of the arrangement and supervisors may wish to seek their own legal advice on the procedures to be followed for decisions of creditors to be taken on arrangements approved before the introduction of the new Rules.”

My problems with R3’s Statement

R3’s statement floored me. Not only did it repeat what I consider are the Insolvency Service’s flawed arguments, but in view of the wording of R3’s Standard Conditions for IVAs, it gave me even more reasons to disagree:

  • Again, how can the R3 Standard Conditions’ “meetings of creditors” be translated to mean “the full range of decision making procedures”, especially as the R3 Standard Conditions do not make specific reference to the Rules? That is, the R3 Standard Conditions contain the entire process of calling and holding a meeting, which is not dependent on any Rules, and so what entitles a supervisor of an IVA incorporating the R3 Conditions to walk away from those Conditions and decide to do something completely different contained in Rules, which are “silent” on VA processes?
  • I am doubtful that S379ZA “applies to existing arrangements” that incorporate the R3 Standard Conditions. The reason why I blogged that S379ZA(2) might apply to Protocol IVAs is because the Protocol Standard Terms refer to calling meetings “in accordance with the Act and the Rules”, but these words are missing from R3’s Standard Conditions. S379ZA(1) states that the section “applies where, for the purpose of this Group of Parts, a person seeks a decision from an individual’s creditors about any matter”. The “Group of Parts” comprises Ss251A to 385, but as we all know this Group of Parts does not refer to a decision to vary an IVA (it only speaks of approving the IVA). Therefore, how can S379ZA, which prevents physical meetings from being held unless requested by creditors, apply to already-approved IVAs incorporating R3’s Standard Conditions? I appreciate that R3 has only stated that “it could… be argued”, but is it responsible to give some weight to such a feather-light argument?
  • I am also not persuaded that “supervisors using the current version of the Standard Conditions for arrangements approved post 6 April 2017 should apply the new Rules when seeking decisions of creditors” because of the principles in the case set out below.
  • (And, if I wanted to be really picky, I’d question what “nominees” have to do with varying arrangements!)

 

William Hare Ltd v Shepherd Construction Ltd

In the case of in William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 1603 (TCC) (25 June 2009), a subcontractor (“H”) was engaged in December 2008 to carry out some work for the main contractor (“S”). The sub-contract defined the employer’s insolvency with reference to: the appointment of an administrative receiver, insolvent liquidation, winding-up by court order and “an administration order made by the court”.

When the employer was placed into administration, S issued notices withholding payment. H argued that, because the employer had gone into administration via a directors’ appointment and not via a court administration order, the withholding notices were invalid, as the employer had not gone insolvent according to the sub-contract’s definition. S argued that it would be absurd for the sub-contract to be construed as ignoring the later amendments to the 1986 Act and that all routes to administration under the 1986 Act as amended were covered by the wording of the sub-contract.

The judge was “in no doubt” that H’s construction of the sub-contract was to be preferred and he held that the court should not rewrite the sub-contract to allow for the amendments to the 1986 Act. His reasons included the following:

  • The meaning of the words was plain and there was no reason to believe that the parties did not intend to use the words as they were written or that they had made a mistake in using the words. In contrast, S’s construction involved “a significant rewording of the clause”.
  • The sub-contract had been made long after the Act had been amended. In this case, the parties agreed that they must be deemed to have known about the amendments to the Act when they made the sub-contract. “In these circumstances it is appropriate to view the failure to amend clause 32 as a choice, as a deliberate decision to include one particular method of administration.”
  • If it were needed, the principle of contra proferentem – that, when there is doubt about the meaning of a contract term, the words may be construed against the person who put them forward – supported H’s construction.
  • Because the sub-contract was executed after the change in the legislation, sections 17 and 23 of the Interpretation Act 1978 (which incidentally are the provisions that Dear IP cited in support of the opinion that the 2016 Rules replaced the 1986 Rules in the Protocol Terms, because they refer to the 1986 Rules “as amended”) were not relevant.

 

The relevance of this case to New IVAs using Old Rules Terms

Say, you are a supervisor of an IVA that was approved last week and the IVA Proposal incorporates R3’s current Standard Terms (or indeed any Terms) that continue to refer throughout to the 1986 Rules.

Surely the principles in the case above cast serious doubt on whether you are free to translate those 1986 Rules into 2016 Rules, don’t they? You, as the debtor’s adviser, had deliberately put forward a Proposal that refers to 1986 Rules in the knowledge that the Rules have changed and it seems that the Interpretation Act 1978, which was the backbone of the Insolvency Service’s argument set out in Dear IP 76, is of no effect. Therefore, is there not a strong argument that you intended to incorporate 1986 Rules into the IVA?

I think also about the debtor and unsophisticated creditors: based on the Terms, they might expect a meeting of creditors in order to vary the Proposal, so what could their reaction be if they were to receive notice of a correspondence vote or perhaps even a notice seeking deemed consent? It seems to me that, if you were to say: “ah yes but the 2016 Rules changed things”, I might respond: “yes, but those changes happened in April, so why did you produce Terms after this that still referred to creditors’ meetings?”

 

Maybe I should accept that the Emperor is wearing clothes!

I have no doubt that the Insolvency Service and R3 have opinions backed up with legal advice. Of course, I am not suggesting for one moment that their statements should be ignored, but I feel I must say things as I see them. I am also not the only one who believes that the InsS and R3 have got this one wrong. I am not surprised therefore that R3 refers to seeking legal advice. No one can be certain how a challenge in court would pan out.

But in practice does the answer to this question really matter? If debtors, creditors and supervisors are happy to consider agreeing variations proposed in a manner that is not strictly according to the Terms, who is going to challenge it? Presumably also the RPBs aren’t going to take a different tack to that set out in Dear IP. And even if a debtor were to dispute the soundness, say, of a creditors’ decision to terminate an IVA, maybe the court would conclude that it was simply a technicality that has no real practical effect on the majority creditors’ wishes… but nevertheless it could make for an expensive debate.

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More little gems from the Insolvency Service’s blog

As promised in my last blog (but later than planned – sorry), here is my second selection of news from the Insolvency Service’s blog and Dear IP 76 that I think is worthy of spreading… with some further commentary from me, of course.

The questions fall into the following topics:

  • S100 Decisions
  • Other Decision Processes
  • Timing Issues

As I mentioned previously, I am very pleased that the Insolvency Service has shared their views on many issues and I do hope they will continue to be this open. I would also like to thank the technical and compliance managers and consultants with whom I have spent many hours debating the rules; without these valuable exchanges, many of the issues would not have occurred to me.

 

S100 Decisions

  • Can the Statement of Affairs and SIP6 Report be delivered by website?

As the director is responsible for delivering the Statement of Affairs, it is the Insolvency Service’s view that the Statement cannot be delivered by means of a website, as the rules governing website delivery – Rs 1.49 and 1.50 – only apply to office holders. Therefore, the Statement must be either posted or emailed to creditors.

Of course, delivery of the SIP6 report is not a statutory requirement and strictly-speaking SIP6 simply requires the report to “ordinarily be available”. I understand that at least one RPB is content for the SIP6 report to be made available via a website.

  • Does an invitation to decide on whether to form a committee need to be sent along with the S100 proposed decision notice?

The question arises because R6.19 requires such an invitation where any decision is sought from creditors in a CVL, whereas usually the company is not in CVL when the S100 proposed decision notice is signed.

The Insolvency Service has answered “yes”, the director needs to seek a decision from creditors on whether to form a committee when they propose the S100 appointment.

  • Can the SoA/S100 fee be approved via deemed consent?

In view of the Insolvency Service’s approach to IPs’ fees in general, the answer to this might seem an obvious “no”. However, the background to the query was that the rules require creditors to approve the payment of the fee, not its quantum, and therefore it is not quite so obviously “a decision about the remuneration of any person”, which the Act limits to decision procedures, i.e. not including the deemed consent process.

But unsurprisingly the Service answered: “no”.

This has led some people to rethink their process of getting paid the SoA/S100 fee. We have been receiving quite a few questions on whether such fees need approval if they are paid pre-appointment and/or by a third party.

The Insolvency Service has confirmed that R6.7(5) – which requires approval of payments made to the liquidator or an associate – applies to payments referred to in R6.7(4), i.e. those made by the liquidator. R6.7(3) provides that, where payment is made from the company’s assets before the winding-up resolution, the director must provide information on the payment along with the SoA, but they do not require creditor approval.

  • Does R15.11’s timescale for decisions on the liquidator’s remuneration (when made at the same time as the S100 decision on the liquidator) apply also to decisions on the SoA/S100 fee?

R15.11 provides that at least 3 business days’ notice must be given for S100 proposed decisions on the liquidator. This rule also provides that the same timescale applies to “any decision made at the same time on the liquidator’s remuneration”. It stands to reason that, if a virtual meeting were convened to consider a decision on the SoA/S100 fee at the same time as the decision on the liquidator, the same notice requirements would apply, but does the SoA/S100 fee strictly fall under “the liquidator’s remuneration”?

The Insolvency Service has stated that R15.11 should be taken to include the proposed pre-liquidation payments referred to in R6.7(5).

 

Other Decision Processes

  • What access information needs to be provided on a notice summoning a virtual meeting?

This question arises from the requirement of R15.5 that the notice to creditors must contain “any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”.

The Insolvency Service has answered: “we think that sending a contact number or email address for creditors to contact in order to obtain such details is also acceptable under this rule”.

Personally, I am pleased with this answer, as I think it makes the logistics of virtual meetings far more manageable. It almost eliminates the risk of unknown “excluded persons”, as you would know who is planning to attend. You could also set up ways of verifying who participants are; you could contact them beforehand, maybe send them agendas and meeting packs. Also during the meeting if they get cut off, you would have a ready alternative contact for them, and it would be easier to count votes or set participants up with electronic voting. I don’t think that some kind of pre-meeting contact is too much to ask from creditors; to illustrate, if I want to sign up to an open-access webinar, I think nothing of contacting the convener beforehand in order for a link to be sent to me.

  • Can creditors ask upfront for an Administrator’s Para 52(1) Proposals to be considered at a physical meeting?

As we know, when Administrators include a Para 52(1) Statement in their Proposals, they do not ask creditors to vote on whether to approve the Proposals, but they must start a decision process going if the requisite number of creditors ask for a decision within 8 business days of delivery of the Proposals. Para 52(2) makes it clear that the request from creditors is for a decision, not a meeting as was the case before the Small Business Act. However, R15.6(1) states that “a request for a physical meeting may be made before or after the notice of the decision procedure or deemed consent procedure has been delivered”. Therefore, if the consequence of creditors asking for a Para 52(2) decision is that the Administrator issues a notice of decision procedure (say, a correspondence vote on the Proposals), then this rule seems to allow creditors to ask for a physical meeting before this notice is delivered.

The Insolvency Service has confirmed that this is the case: “there is no reason that the requisitioning creditor should not at the same time request a physical meeting. We note your comment that the request for a physical meeting is being made here before a decision process has even commenced, but we think that is it reasonable to interpret the rules this way on this occasion because the request does clearly relate to a decision”.

  • Ok, so does a creditor asking for a physical meeting to consider the Para 52(1) Proposals need to pay a deposit to cover the costs of this meeting?

R15.6 sets out how creditors’ requests for a physical meeting should be handled. It includes no reference to paying a deposit to cover the costs of the meeting. Mention of paying a deposit appears at R15.18, which relates to requisitioning decisions.

Therefore, quite rightly (albeit unfairly) in my view, the Insolvency Service has stated that “it would follow that where costs of the decision are met by the requisitioning creditor then these would be for a decision which is not made by a physical meeting. Any costs of the physical meeting over and above the security paid by the creditor for a decision process would be an expense to the estate”.

Thus, it would seem that, on receiving sufficient requests for a physical meeting to be summoned to consider Para 52(1) Proposals, the Administrator would need to calculate hypothetically how much it would cost to organise this via a non-physical-meeting procedure and ask the requisitioning creditor for this sum. As the rules require “itemised details” of this sum to be delivered to the creditor, this would take some explaining in order to put the creditor’s mind at ease that we weren’t ignoring their request for a physical meeting even though we were asking them to pay the costs for conducting, say, a correspondence vote!

  • Does a creditor need to lodge a proof of debt in support of a request for a physical meeting?

The Insolvency Service’s simple answer is “no”. This is what I thought when I read the rules, but it does seem odd… and could lead to all sorts of controversy.

  • Can approval for an Administration extension be sought by deemed consent?

Understandably I think, the Insolvency Service has answered “yes”. It almost goes without saying, however, that seeking secured creditors’ consents is not a decision process; the positive approval of each and every secured creditor is required (just thought I’d mention it).

  • How do you deal with the need to invite creditors to make a decision on whether to form a committee when seeking a decision by deemed consent?

The Insolvency Service has confirmed that this committee decision can be posed by deemed consent.

Via Dear IP 76, the Service also endorses the format of a proposed decision in the negative, i.e. that a committee shall not be formed… although it adds a sticky proviso: “in this way, if creditors have already indicated a lack of desire to appoint a committee, the office holder could simply propose that no committee be formed”. How do creditors indicate a lack of desire? In S100 CVLs, this seems straightforward enough in view of the fact that, as mentioned above, the director will have needed to invite such a decision in the first place. However, whether an absence of anything but the usual creditor concerns in, say, the first few weeks of an Administration is sufficient to indicate a lack of desire to satisfy the Service, I don’t know.

What is the alternative: that a positive deemed consent decision be posed, i.e. that a committee will be formed? The problem here is that, unless creditors object, then this decision will be made by default. In the light of probable creditor apathy, this could be unhelpful. Therefore, if a positive deemed consent decision is posed, it would seem necessary to describe it something like “a committee will be formed if there are sufficient creditors nominated by [date] and willing to act as members”, which to be fair is almost the wording set out in the Rules (e.g. R10.76). In this way, if the invitation for nominations is similarly ignored, then the positive decision, even if technically made, is of no effect.

However, it’s all a bit of a faff, isn’t it? It hardly makes for a Plain English process. I also dislike the idea that an office holder must propose a decision that he/she may not support. It doesn’t sit right with me for an IP to invite creditors to approve a decision to form a committee when the IP does not see the need or advantage in having one on the case in hand.   However an IP words the proposed decision, creditors can take action to appoint a committee and, as the Rules do not prescribe a form of words, then surely office holders are free to propose a decision as they see fit.

  • If a Notice of General Use of Website has already been issued, what is the effect of Rs3.54(3/4), 2.25(6/7) and 8.22(4/5), which require additional wording about website-delivery in certain circumstances?

This question requires some explaining. As we know, R1.50 provides that the office holder can send one notice to creditors informing them that all future circulars (with a few statutory exceptions) will be posted onto a website with no further notice to them – this is what I mean by a Notice of General Use of Website. However, we also have R1.49, which repeats the 2010 provision that each new circular can be delivered by posting out a one-pager notifying creditors that the specific document has been uploaded to a website.

Things get complicated when looking at Rs3.54, 2.25 and 8.22. These rules govern how we invite creditors to decide on an Administration extension and a CVA/IVA Proposal. They state that the notice regarding such a decision may also state that the outcome of the decision will be made available for viewing and downloading on a website and that no other notice will be delivered to creditors and these rules go on to specify additional contents of such a notice, which draw from R1.49.

So the question arises: if you have already given notice under R1.50 to confirm that a website is going to be used for (almost) everything, do you need this extra gumpf?

The Insolvency Service has clarified that you don’t. If you have already followed (or are following simultaneously) the R1.50 process, then you need not worry about adding such references to your R3.54/2.25/8.22 notices; you can simply issue the notice via the website and then issue the outcome via the website also. Of course, given that you’re inviting creditors to consider an important decision, you might also want to post something out to them, but this does not appear necessary under the rules.

 

Timing Issues

  • If an Administration has already been extended pre-April 2017, when should I next produce a progress report?

As covered in a previous blog, the issue here is that, before April 2017, an extension would have resulted in the reporting schedule moving away from 6-monthly from the date of appointment and instead it will be 6-monthly from the date of the progress report that accompanied the request to approve the extension. As drafted, the 2016 Rules had not provided a carve-out for these cases, so it seemed that the reporting schedule for these extended Admins would be reset on 6 April back to 6-monthly from the date of appointment.

An attempt was made to fix this in the Amendment Rules, but in my view it was not wholly successful. They state: “Where rules 18.6, 18.7 or 18.8 prescribe the periods for which progress reports must be made but before the commencement date an office-holder has ceased to act resulting in a change in reporting period under 1986 rule 2.47(3A), 2.47(3B) 4.49B(5), 4.49C(3), or 6.78A(4), the period for which reports must be made is the period for which reports were required to be made under the 1986 Rules immediately before the commencement date.” The intention is clear: where the 1986 Rules have moved a reporting schedule away from the date of appointment, this adjusted schedule should continue. However, the reference to an IP ceasing to act is unfortunate, because in the scenario described above, this has not happened.

The Insolvency Service acknowledged that this rule “could perhaps have been more explicit” (ahem, I think the problem is that it was too explicit), but emphasised that the intention is clear. Presumably therefore the Registrar of Companies will not reject filings made on the extended 6-monthly schedule.

Also, just in case you haven’t already picked it up, I should mention that the Amendment Rules have most definitely fixed the issue I raised some months ago about the length of a month, so progress reporting now continues pretty-much in the pre-April way… although of course we now have to factor in the time taken to deliver reports.

  • Do Administrators’ Proposals really have to include a delivery date?

Sorry, this is more just me having a whinge: R3.35(1)(e) requires Administrators’ Proposals to state the date that the Proposals “are delivered” to creditors. When the Proposals are signed off, this will be a date in the future.

The Insolvency Service has confirmed that this is the case: they require the future “deemed” delivery date to be listed.

Of course, there are practical issues with this. If you deliver Proposals using more than one method, e.g. by R1.50 general website-delivery but also by post where some creditors have asked for hard copies (which admittedly will be rare), then you may well have more than one delivery date.

More practically, how will you/your staff complete this little nugget? It is commonplace for Proposals to go through lengthy drafting processes (despite some non-appointment taking IPs’ views that Proposals should be simple to produce in the first few days especially where there has been a pre-pack); drafts are turned over to several different people, being edited as they go. It is going to be a real faff to keep an eye on this insignificant date. My personal recommendation, if the issue date cannot be guaranteed at the outset, is to keep this delivery date coloured/highlighted on draft Proposals so that it is the very last item completed just before the Proposals are signed off.

  • Do you have to wait until the MVL final account has been delivered to members before submitting a copy to the Registrar of Companies?

When closing an MVL, the liquidator is required to confirm to the Registrar that s/he “has delivered” the final account to members (R5.10(3)).

The Insolvency Service does not believe that the liquidator has to wait until the final account has been “delivered” to members at this stage; it is sufficient that the liquidator has sent it. From what I can decipher, it seems they are viewing delivery here as “deemed” delivery, i.e. once it has left your office, it will end up being delivered a couple of days’ later (if sent by post).   Personally, I still think it is odd to confirm at this point that the final account has been delivered, but at least we have an answer for any pedant who wants to debate this.

  • Do you have to wait until the Notice of Establishment of the Committee is delivered to the Registrar/Court before holding the first Committee meeting?

Despite the paradoxical “no” for the previous question, the answer to this one is “yes”.

The issue arises because R17.5(5) states that “the committee is not established (and accordingly cannot act) until the office-holder has delivered a notice of its membership” to the Registrar/Court.   The Insolvency Service has confirmed that, yes, the notice must be delivered before the first meeting is held.

The frustration here, of course, is that we will no longer be able to hold the first committee meeting immediately after any meeting that establishes it, but because the rules require us to hold a first meeting (although this can be by remote attendance), we will have to call the committee members back again.

Personally, I wonder if practically it would still be valuable to hold an informal meeting with the (elected) committee members immediately – so that matters for investigation can be discussed and so that you can help them understand how committees work, maybe even discuss the office-holder’s fee proposal with a view to agreeing this later on – and then, hopefully, the actual first meeting will be little more than a formality.

 

The next instalment..?

As we apply the new rules in practice, I am sure that more issues and ambiguities will emerge. As I mentioned previously, I am grateful to the Insolvency Service for their openness.

Emerging interpretations and views force me to revisit my previous conclusions, which is a good thing, although I am very conscious that earlier blog posts and presentations quickly become out-of-date. Even my presentation for the R3 SPG Technical Review at the end of March needed an update and this is now available to Compliance Alliance webinar subscribers (drop me a line – info@thecompliancealliance.co.uk– if you want to know more 😉 ).

I am also looking forward (err… sort-of!) to presenting on the rules at other R3 events – 6 June SPG Technical Review in Leeds; 7 June Southern Region meeting in Reading; 28 June North East Region meeting; and 4 July SPG Technical Review in Bristol. I welcome your queries and quirky observations on the rules, which will help me to make my presentations useful to the audience. I’m sure there are many more gems to unearth.


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Navigating Obstacles: S100s for Work-Winners

I suspect that many of you (like me) have heard plenty of theory on the New Rules’ decision-making changes. Maybe reading it from the practical perspective of the work-winner will give it a freshness.

Some non London-centric IPs who missed out on my recent presentation for R3 expressed disappointment, so I thought a blog post was warranted. Here I have concentrated only on the S100 process.

 

S100 CVLs: Deemed Consent or Virtual Meeting?

Before we start thinking about what we might discuss with directors, I think it’s worth weighing up the pros and cons of the two possible routes in to a CVL appointment… well, apart from a physical meeting, of course, but a physical meeting might be required whichever initial decision process we start with.

  • Material Transactions

The rules don’t define a material transaction, but they do say that (R6.17):

“where the statement of affairs sent to creditors… does not, or will not, state the company’s affairs at the creditors’ decision date, the directors must cause a report… to be made to the creditors… on any material transactions relating to the company occurring between the date of the making of the statement and the decision date”.

That sounds to me like it’s any transaction that changes the SoA, but the InsS people I’ve spoken to don’t see this as wrapping in, say, changes in asset class where book debts are converted into cash at bank or where a forgotten van pops up. They say they intended the rule to ensure that creditors learn of events that might impact on the independence of the proposed liquidator, i.e. things that happened with his involvement or since his appointment in Centrebind cases.

Personally, I found this interpretation most surprising, as it’s really not what the rules say – and I’d love to get this down in writing from the InsS, as I think it’ll make a huge difference to the frequency of material transactions.  (UPDATE 02/05/2017: Dear IP 76 simply states that a New Rules’ material transaction “is the same as 1986 rules 4.53B-CVL(1) and should be interpreted as such”… so we’re on our own on this one.)

So why should it matter?

Well, it won’t matter if you’re having a meeting, because you’d just report the material transaction to the meeting – it’s in our rules now, but it is never done (well I’ve never seen it done) because the SoA is usually signed off minutes before the meetings.

But it will matter if you’re working with the Deemed Consent process.

In this case, you must send out the report to creditors and if the report is delivered within 3 business days of the Decision Date, then the decision date moves to the end of 3 business days from delivery of the report.

This could leave you either in an unexpected Centrebind or needing to adjourn the members’ meeting.

  • Fees Decisions – who knows?!

I have put question marks on the table above, as the rules are very unclear when it comes to proposing fees decisions around the S100 time. That’s so helpful, isn’t it? It’s not as if fees is something we need to get absolutely spot-on, is it..?!

The only thing we do know for certain is that Deemed Consent cannot be used for “a decision about the remuneration of any person” (S246ZF(2)). The rest is unclear.

Can you propose a fees decision via a correspondence vote to run concurrently with the S100 Deemed Consent process? I struggle with this, as I cannot see who has authority under the rules to “convene” such a Decision Procedure. The IP isn’t in office (and if he is the members’ liquidator, his limited powers do not extend to seeking fee approval) and the director only has the power to convene a decision by Deemed Consent or by virtual meeting.

Can fees decisions be considered at a virtual meeting? There is nothing in the rules that expressly addresses this, but at least the director does have the power to convene the virtual meeting. Is it not arguable that tagging on (pre and post) fees decisions corresponds to what we do with S98s now (especially as the New Rules expressly provide for the “proposed liquidator” to circulate fees information – R18.16(10))?

I have received conflicting opinions on the routes available from reliable sources. As the consequences of getting this wrong are so serious, I’m very reluctant to pass further comment and I do hope that the powers-that-be will put us all out of misery and tell us categorically – and before 6 April! – how/whether fees decisions can be made at the same time as the S100 decision, as R15.11(1) seems to suggest is possible… somehow.

  • Timing

The deadline for the Deemed Consent process is 1 minute to midnight. The disadvantage here is that you won’t be certain on the decision until the next morning. I get the sense that most IPs are planning to hold their members’ meeting on the day of the Deemed Consent process, but this will still leave us with an inescapable Centrebind – it may be for only a few hours, but it’s worth thinking about it for insurance purposes at least.

On the other hand, virtual meetings can be held at anytime – the old between-10-and-4 rule has not been repeated in the New Rules. However, the convener still needs to “have regard to the convenience of those invited to participate when fixing the venue for a decision procedure” (R15.10), so the virtual meeting’s timing and “platform” (which has been added to the definition of “venue”) is still a factor to consider.

  • Excluded Persons

The rules describe an excluded person as (R15.36):

“someone who has taken all steps necessary [to attend the meeting virtually or remotely, but the arrangements] do not enable that person to attend the whole or part of that meeting.”

In other words, the technology or signal for the virtual meeting has failed.

If the chair becomes aware of an excluded person, he can continue the meeting, suspend it for up to an hour, or adjourn it. If the chair decides to continue the meeting, resolutions can be taken and these will be valid but they’re subject to complaints from the excluded person or from any other attendee who claims they were prejudiced by the exclusion.

The timescale for complaints is short – before 4pm on the next business day from the meeting or from receipt of an “indication” of what occurred at the meeting – but the consequences can be far-reaching. The chair could review the voting and conclude that the excluded person’s vote overturns resolutions that had been thought passed.

Practically, where would this leave a liquidator who thought they were free to publicise their appointment and perhaps also to complete asset sales? I am not certain that these actions would be covered by the S232 defects-deemed-valid provision.

Clearly it is vital that office holders know where they stand immediately after a meeting, but how would they know whether there were any excluded persons? They may know if someone drops out of contact mid-stream, but what if someone could not get online in the first place? Obviously, this is a risk if the notice of the virtual meeting includes all the information necessary to attend… but is this what the Rules require?

R15.5 states that the notice to creditors must provide:

“any necessary information as to how to access the virtual meeting including any telephone number, access code or password required”

A couple of InsS people have told me that they believe that simply giving out a contact number so that creditors can ask for the login details before the meeting would satisfy this Rule – it is “necessary information”, after all. Clearly, this would be a great help in identifying excluded persons as well as going some way to “safeguard[ing] against participation by persons who are not properly entitled to participate” (SIP6) and helping to plan for sufficient access to a virtual meeting. Hopefully the InsS will confirm this in writing when they respond to a question about this on their blog.  (UPDATE 02/05/2017: Dear IP 76 describes the Insolvency Service’s view as explained here.)

 

S100 CVLs: What Directors Need to Know

Please bear in mind that it has been a loooong time since I worked on the frontline. I do not feel worthy of explaining to IPs what they should discuss with directors pre-appointment. However, with the New Rules – and new SIP6 – in mind, here are my suggestions:

  • S100/SoA fees

With the lack of clarity in the Rules, you’ll probably want to get your fees paid upfront. But what happens if you have to convene a physical meeting? Who is going to pay for that? It might be an idea to factor this in to your engagement letter: make sure that it’s clear what the fixed fee covers and what effect the cost of an additional physical meeting might make.

  • Quick information

You’ll want to line the director up to providing information very quickly, given the short timeframes for compiling the SoA and the SIP6 report (see below).

  • Post-SoA material transactions

It might be helpful to make the directors aware of the consequences of any material transactions occurring after the SoA is produced. The risk of a postponement in the Decision Date might help them to focus on giving you the whole story and avoid doing anything silly in the hiatus period.

  • Postponed decisions

Material transactions or the need for a physical meeting will delay the S100 decision. If these events happen early enough, there might be a chance to adjourn the members’ meeting. But of course, if this happens, then the directors will be in control of the company for longer. What effect will this have on the CVL strategy?

You might also want to warn the director that they may need to attend a physical meeting. And will you be around for the physical meeting? Fortunately, the new rules have been relaxed a bit so that the members’ liquidator need not attend the physical meeting, he can appoint someone else in his stead (another IP or an experienced staff member), but if a physical meeting has been requested, then you might want to make sure you’re there.

  • SIP6 additions to engagement letters

The new SIP6 states that the assisting IP should “take reasonable steps to ensure that the convener is made fully aware of their duties and responsibilities”, so you may need to beef up your engagement letter to set out the director’s duties to take appropriate action as regards objections, requests for a physical meeting, material transactions and excluded persons, all of which are the convener’s/chair’s responsibilities; and to provide the SoA/SIP6 required information swiftly.

SIP6 also requires “reasonable steps to ensure that… the instructions to the IP to assist are adequately recorded”. I’m not sure what the RPBs are getting at here, other than expecting a signed engagement letter. Do they want you to have set out whether your instructions are to proceed with the Deemed Consent or the virtual meeting route? And/or should you specify that you’ll be assisting with assessing objections and requests for physical meetings?

Connected with this is SIP6’s requirement to “take reasonable steps to ensure that the convener and/or chair is informed that it may be appropriate for them to obtain independent assistance in determining the authenticity of a prospective participant’s authority or entitlement to participate and the amount for which they are permitted to do so in the event these are called into question”. This isn’t surprising given that something similar is in SIP8 regarding the conflict risk when counting proxies, but it may be a good idea to put it in your engagement letter if it isn’t already.

  • Excluded persons

Given the risk of excluded persons changing the outcome of meetings, you might want to be careful about what you indicate to directors that you plan to do on the day of, and the day after, the meeting.

 

S100 CVLs: The Unintended Centrebind

So what does the new S100 process look like? What needs to happen when?

Here is a timeline for a no-complication Deemed Consent, demonstrating the shortest notice possible:

A virtual meeting timeline would work the same, but it would just mean that you’d be able to schedule the meeting on Business Day 7 for a sensible time instead of a minute to midnight.

In particular, note the time needed to send the SoA and SIP6 report in order to accommodate delivery in time.  (UPDATE 23/03/17: it has been pointed out to me that SIP6 only requires the report to be “made available”, so some are interpreting this to mean that it does not have to be delivered to creditors (although the SoA still does need to be).)

But what if creditors object to the Deemed Consent at the last minute (i.e. after the members’ meeting had been held on business day 7)?

(UPDATE 23/03/17: it has been pointed out to me that requests for a physical meeting must be received “between the delivery of the notice and the decision date” (R6.14(6)) and thus it has been suggested that a physical meeting request received on the decision date will be too late. (UPDATE2 02/05/2017: the Insolvency Service’s view, as set out in Dear IP 76, is explored further in my post, https://goo.gl/ygnWjg.)  The deadline for deemed consent objections, however, is “not later than the decision date” (R15.7(2)), so I believe the timelines above and below are still relevant.)

You could fit the physical meeting within the statutory 14 calendar day timescale, provided that you can get the director to move quickly to convene it, but it would leave you managing an unintended Centrebind.

The picture looks grimmer if a material transaction occurs:

 

As you can see, there isn’t enough time to deal with a material transaction and a physical meeting.  (UPDATE 02/05/2017: the Insolvency Service has expressed the view on its blog that “it is sufficient that the original decision date was within the required timescale”.)

Virtual meetings avoid this issue, as the report on the material transaction would occur at the virtual meeting. It’s not the whole answer to avoiding a Centrebind, as creditors could still request a physical meeting, but at least it could be held within the 14 days.

 

There’s More

As I mentioned at the start, I’ve limited this blog post to S100 decisions only – it’s long enough already.

If you want to listen to my whole presentation, you can purchase it via The Compliance Alliance (£250+VAT for firm-wide access to all our webinars for a year) – just drop a line to info@thecompliancealliance.co.uk.

Other topics covered include:

  • The timeline of an intended Centrebind
  • S100s for the IP acting for creditors
  • VAs: correspondence vote or virtual meeting?
  • Creditors’ powers and the process to seek an IP appointment in bankruptcies and compulsories
  • Administrations: the pros and cons of seeking approval of Proposals by Deemed Consent or a decision procedure
  • How creditors can stay in the loop on communications