Insolvency Oracle

Developments in UK insolvency by Michelle Butler


2 Comments

The New Rules: Part 1… of many

0501-santa-fe

We’ve all heard overviews of the new Rules by now, but time is short – less than 5 months to go – and so it’s about time that we started delving into the nitty gritty.

 

Starting at the start

It would be wrong to assume that, with the exception of the SBEE changes that everyone has already talked about, the new Rules are simply the old rules in a different order. I thought that starting with the introductory Rules and definitions would be straightforward and frankly dull, but the new Rules are peppered with unexpected intricacies that make such assumptions dangerous.

 

New Rules, new approach to transitional provisions

No doubt you have heard that the new Rules are a departure from the tradition of leaving old cases to run out under the old rules. This has some advantages: no longer will we need to think twice about the date of an appointment before deciding how to approach a statutory matter, nor will we need to maintain old checklists, diaries and templates to cope with a variety of aged cases. Eliminating this complication should mean that we could run all cases, present and future, on one system… but is that true…?

 

If you don’t want the confusion, clear away pre-2010 CVLs (and MVLs)

The transitional provisions (Schedule 2 of the new Rules) refer specifically to cases commencing (i.e. orders in the case of bankruptcies (“BKYs”) and compulsory liquidations (“WUCs”)) before 6 April 2010:

  • BKYs & WUCs: this is the easy bit – the new Rules’ provisions on progress reports do not apply
  • CVLs: “a progress meeting required by section 104A of the Act” continues and “R4.223-CVL as it had effect immediately before 6 April 2010 continues to apply”
  • No specific reference to MVLs – did the Insolvency Service assume that all pre-2010 MVLs would be closed?

In pretty-much all other respects, the new Rules apply to these old cases.

What is “a progress meeting”?! Search all you like in the current Act and Rules, you won’t find one. And what is the relevance of S104A to meetings? S104A was the method used to replace the old S105 annual meetings by progress reports.

I think that the Insolvency Service planned for annual meetings to continue on old CVLs, as well as the old six-monthly R&Ps, which had been required under the old R4.223… but I accept that this takes a bit of a stretch of the imagination. Perhaps we will receive some clarity before April.

(UPDATE 23/03/17: the recently-issued Amendment Rules have changed the references to “progress meeting” and S104A so that it now refers to “meetings required by sections 93 and 105 of the Act”.  Therefore, it seems to me that annual meetings on pre-04/2010 MVLs and CVLs should continue to be convened after 04/2017.)

 

Perhaps also avoid calling a meeting to be held after 6 April 2017

Schedule 2 also includes transitional and savings provisions to enable meetings called before the Rules’ commencement date to be held after that date and for all the usual items resolved upon in meetings, e.g. fixing the basis of fees, to be decided. In a similar way, the old rules will apply also where an invitation to vote on a resolution by correspondence was issued prior to 6 April 2017 but where the deadline for voting falls afterward.

The Schedule includes potential catch-all references, e.g. “governance of the meeting”, stating that “the 1986 Rules relating to the following continue to apply”. Presumably, this will also cover matters such as adjournments.

It is not clear to me whether these transitional provisions will also work where a draft final report has been issued but where, say, R4.126(1D) kicks in after 6 April 2017. That is, what should happen where you have not complied with R4.49D, e.g. because something unexpected has occurred in the 8-week period? Should you follow old R4.126(1D) and issue a revised draft final report and fresh notice of a final meeting under the old rules? It looks like it to me, but I would prefer to avoid straddling the April date with any meeting convened under the old rules.

 

Other transitionals

Schedule 2 contains many other transitional and savings provisions, including:

  • old rules apply where any progress report became due pre-6 April 2017 but where it has not been issued by that date;
  • conversions from Administration (“ADM”) to CVL started under the old rules generally continue; and
  • all statements of affairs due on pre-6 April 2017 cases continued to be expected under the old rules.

 

(UPDATE 23/03/2017: the recently-issued Amendment Rules have resolved the issues explored in these next two sections.)

How long is one month?

The mind-bending Schedule 5, “Calculation of Time Periods”, also appears in Part 1 of the Rules.

It starts sensibly enough: “days” are calculated according to the CPR (there is no definition of “weeks” in the Rules).

There are two ways of calculating “months”, depending on whether the date specified is the start date (e.g. the time period within which a progress report should be issued or the progress report review period) or the end date. As I’m struggling to think of any specified end dates involving months, let’s look at a scenario where the start date is specified:

  1. the month in which the period ends is the specified number of months after the month in which it begins, and
  2. the date in the month on which the period ends is:
    • the date corresponding to the date in the month on which it begins, or
    • if there is no such date in the month in which it ends, the last day of that month.

If I’m reading this correctly, then one month from 10 April is 10 May – one month and one day.

 

Reporting transactions on a period-end date

Let’s say that you received some money on 10 April 2017 on a CVL that began on 10 April 2016. How would this be reported in your progress reports?

  • The review period of your first progress report would be 10 April 2016 to 10 April 2017, so you would report it.
  • The review period of your second progress report would be 10 April 2017 to 10 April 2018… err… so you would report it..?!

This cannot be right, can it?! It would skew all your R&Ps, as the c/f and b/f figures would not tally. In the same way, your time cost breakdowns would be confusing if you incurred any time costs on the threshold day.

What I’m struggling with is why the Insolvency Service has seen fit to redefine the length of a month: what was wrong with the way us mortals measure time?

(UPDATE 17/01/2017: the Insolvency Service responded to my query on their blog: “We have taken legal advice on this matter and will be looking at whether and how we can clarify the definition of a period expressed in months in Schedule 5 so that there is no day which occurs in two different reporting cycles.”  Phew!)

(UPDATE 23/03/2017: the recently-released Amendment Rules have fixed this – no more time-shifting: a month is a month long again.)

 

So what is the deadline for sending out progress reports?

Let’s take an ADM with a period end date of 10 April 2017. You have “one month after the end of the period” in which to deliver a progress report. Setting aside whether “after” starts the day after – which would add another day to your timescale – let’s assume that this period ends on 10 May 2017.

Ah, but there’s a catch. The report must be “delivered”, not “sent”, by this date. The new Rules define “delivery” as follows:

  • 1st class post is “treated as delivered on the 2nd business day after the day on which it is posted”; and
  • 2nd class post is “treated as delivered on the 4th business day after the day on which it is posted”.

Therefore, you need to factor the delivery times into your statutory timescale. If you left it until 9 May 2017 to put the progress reports in the post, you would be too late. When the new Rules refer to “deliver”, in fact they are referring to the time that the document is deemed to be received by the recipient.

 

So will every statutory deadline need to factor in the time to deliver the document?

Unfortunately, it is not that simple. For example, the new Rule on issuing progress reports in CVLs – R18.7 – sets the 2-month deadline with reference to the sending of the report, not its delivery. “Send” is not defined in the new Rules.  (UPDATE 23/03/17: the Amendment Rules have changed this “send” to “deliver”, so that all filing deadlines are now consistent.)

However, notwithstanding this inconsistency (I thought that making the rules consistent was one of the main objectives behind the new Rules!), you could do worse than factor time periods to deliver documents into your processes. At least that way you should always meet the deadlines (and you would avoid any debate over semantics -v- the perceived “spirit” of the Rules with your regulator).

 

Opting out

In her November Technical Update https://goo.gl/XBTAFV, Jo Harris summarised the new Rules under which creditors can send to office holders a notice asking to be excluded from most future standard circulars. This provision – along with the wider website use described below – are two significant changes introduced by the Small Business, Enterprise & Employment Act 2015 that appear in Part 1 of the Rules.

I won’t go into detail on these points, but I will just add to Jo’s observations:

  • Ensuring that you provide information on opting out in your “first communication with a creditor” could take some managing. You will need to make sure you include this when you first communicate with newly-discovered creditors. The new Rules are also silent on how this applies to a successor office holder.
  • As Jo mentions, you will need to designate opted-out creditors differently on your system, but also ensure that they are included in the exempted circulars, such as “notices of intended distribution” (R1.37)… or should that be “notices of proposed dividend” (R1.39)… or perhaps even “notices of intention to declare a dividend” (R14.29)!
  • If you are taking on a consecutive insolvency proceeding, you will need to ask the predecessor for a list of opted-out creditors, as you must exclude them from the defined circulars.

Personally, I don’t expect many creditors to opt out – after all, if they are not engaged enough to be interested in future updates, then are they likely to be sufficiently engaged to sign and return an opting-out notice? However, this new section will add yet another page (no really – the prescribed contents do go on a bit) of information to first circulars, which we will need to take care to get right.

 

Wider website use

Finally, this is something in the new Rules that put a smile on my face! Again as Jo explained in her Update, under the new Rules office holders will be able to issue to creditors just one notice explaining that future communications will only be uploaded to a website, rather than issue such a notice every time a communication is uploaded as is currently the case.

I have heard some unrest about this provision. Many feel that it will simply help to distant creditors even further from the process. I agree, it will. However, I do not feel that this is sufficient reason to avoid taking advantage of this provision. The Insolvency Service seems to have been charged with the aims of increasing engagement and reducing costs – two aims that are clearly in opposition to one another, as demonstrated also by the new Rules’ abolition of office holder-convened physical meetings – but I wonder how much engagement really is achieved by progress reports that are necessarily unwieldy in order to comply with the plethora of SIPs and statutory requirements. On the other hand, I think that the new provision allowing for website use alone most certainly will reduce costs.

 

Part 1: just the beginning

As I hope I’ve demonstrated, there are plenty of revisions in Part 1 of the new Rules that will require some thoughtful planning… and that generate more than the odd furrowed brow. I am looking forward to posing a few questions on the Insolvency Service’s forum, which we expect to be launched in the next few weeks.

If you would like to listen to my webinar that explores this Part in more depth and that will be available in the next few days, please drop a line to info@thecompliancealliance.co.uk.

The second webinar in this series, which will review the new Rules on Reporting and Remuneration, will be presented by Jo Harris in a few weeks’ time.

Advertisements


Leave a comment

Digging deeper into the new Acts & Rules

0605 Scene

I am delighted to say that I’ve had some productive exchanges with people at the Insolvency Service on the practical applications of parts of the SBEE Act, the Deregulation Act and the new fees Rules.  I have found them generally very reasonable and pragmatic.  That’s not to say, however, that it’s all good news!

Small Business Enterprise and Employment Act 2015

I’ve not covered the Small Business Enterprise and Employment Act 2015 since it was just a draft in autumn 2014.  Even now, considering that several provisions take effect from 26 May 2015, I don’t see the need to repeat the detail here.  Most of you will have received R3’s Technical Alert by email on 17 April 2015, which I think did a pretty good job of telling us all what we need to know right now.  However, there is one item that I think deserves more explanation.

CVLs – Progress Reports

As you know, the words “continuing/continues for more than one year” will be removed from S92A and S104A.  This means that, where a liquidator ceases to act at any time during a liquidation, he/she will need to issue a progress report in compliance of R2.47(3A) (for E&W only; I can see no equivalent in the Scottish Rules).

Although this may seem fairly innocuous, it now encompasses one circumstance that occurs quite frequently: the replacement of the members’ liquidator with the creditors’ choice at the S98 meeting.  The Insolvency Service has confirmed to me that this change does indeed mean that any members’ liquidator who leaves office at the S98 meeting will need to issue a progress report on his/her term in office.  There is no reason why this will not apply where the company general meeting immediately precedes the S98 meeting, although it is very difficult to see what the members’ liquidator will have to report other than an hour or so of time costs!

If the company general meeting is held on a different day to the S98 meeting, the creditors’ liquidator will also need to remember that R2.47(3A) resets the progress reporting clock and so, rather than issue a progress report for the first 12 months of the liquidation (i.e. from the date of the members’ meeting), the creditors’ liquidator will need to report every 12 months from the date of his/her appointment.

Although this seems a bit of a nonsense, I am optimistic that the progress reporting rules will become much simpler when the new Insolvency Rules come into force, which is the plan for April 2016.  Although there is still much work to be done on the draft Rules, the ones that are currently on the .gov.uk website (https://goo.gl/kr1CSR) hint that progress reports on office-holder switches will be far more flexible.  See, for example, draft Rule 18.8(4).

Deregulation Act 2015

This is an odd Act: it began life far earlier than the SBEE Act, but its progress seemed to stall when all eyes turned to the SBEE Act.  Thus, it is not surprising that it contains some items that, I think, are far more pressing for IPs than the 26 May provisions of the SBEE Act.

Correcting Minmar

Oh dear!  How long will we have to put up with the Minmar state of affairs where Notices of Intention to Appoint an Administrator (NoIA) have to be issued even on some cases where there is no floating charge holder?!

The answer is: not much longer.

The answer is in the Deregulation Act: its paragraph 6 of schedule 6 will amend Para 26 of Schedule B1 so that the need to issue an NoIA is restricted to cases only where there is a floating charge holder.  This will then flow through nicely to the existing Insolvency Rules.  The problem is that unfortunately it doesn’t yet have a commencement date.

I have been told that it is the Insolvency Service’s current intention to commence this provision in October 2015 (although, of course, that was under the previous Business Secretary).

New Fees Rules (The Insolvency (Amendment) Rules 2015)

A month ago, I blogged on this subject – see http://wp.me/p2FU2Z-a3 – and now I’m able to update some of my queries.

When is a liquidator not a liquidator?

As mentioned previously, R4.127 will be amended to state that “where the liquidator proposes to take [remuneration on a time costs basis], the liquidator must prior to the determination… give to each creditor… the fees estimate”, but does this mean that the IP needs to be in office as liquidator when he/she issues the fees estimate?

The Insolvency Service does not believe this is limited to the liquidator once he/she is in office.  In other words, the prospective liquidator may provide the fees estimate before the members’ meeting.  This means that, provided the IP can produce an early estimate, these new rules should not impact on the current practice of holding members’ meetings and S98 meetings on the same day.

It is worth noting that the new rules do not stipulate how long before the creditors’ meeting (or postal decision) the fees estimate should be sent: thus, it could be sent along with the S98 notice or at any time before the meeting is held.  As the fees estimate needs to be provided to all creditors, however, it will not be sufficient to hand out the fees estimate only at the S98 meeting.

Exceptional treatment needed for SoS-appointed liquidators

As noted in my previous blog, the transitional provisions operate so that, generally, if an IP takes office (as administrator, liquidator, or trustee) after 1 October 2015, he/she will need to follow the new rules in fixing the basis of his/her fees.  However, whilst the rules cover compulsory liquidations where the liquidator is appointed by: creditors’ meeting (S139(4)); contributories’ meeting (139(3)); and the court following an administration or CVA (S140), they do not refer to appointments by the Secretary of State (S137).

The consequence of this is that the new rules will apply to all SoS-appointment liquidations, irrespective of when the liquidator was appointed.  However, the Insolvency Service has stated that, if the basis of the liquidator’s fees has already been approved before 1 October 2015, then the new rules will have no effect on that case (unless the liquidator seeks to change the basis of his/her fees).

Thus, you may want to look to get your fees fixed on all existing SoS appointment compulsory liquidations before 1 October 2015; otherwise you will need to have some system in place to ensure that you follow the new rules, despite your appointment commencing before 1 October.

Block transfers

As the transitional provisions define that the new rules apply generally wherever there is an administrator/liquidator/trustee appointed after 1 October 2015, I wondered how this would impact, say, cases involving block transfer orders after 1 October 2015: does this mean that the new office-holder would need to go through the fees estimate etc. process?

The answer I received was: not where the new office-holder is continuing to draw remuneration under any prior approval.  Only where a new office-holder seeks to change the basis of his/her fees will the new rules kick in.

I look forward to meeting some of you, and hearing more on these and other developments, at R3’s SPG Technical Review series, the first one being held on Tuesday 12 May 2015 in Manchester.  There’s a lot going on!


Leave a comment

Regulatory Hot Topics: (2) Administration Technicalities

IMGP2906

I’m itching to blog about the new legislation, but that’s all a bit taxing so close to the Easter weekend.  Therefore, I’ll continue with my summary of points made in the R3 webinar.  This week: Administration Technicalities.

For my clients, this post may sound all very familiar, as I’ve pulled most of this from my last newsletter.  However, I’ve added some new points about the SBEE Act at the end of this post.

Matthew Peat and I agreed that failing to meet the statutory provisions for administrations is one of the most common issues identified on review visits.  I’m not at all surprised, as the legislation is extraordinarily (and in many respects, I think, unnecessarily) complicated… and it’s only going to get even more complicated with the Small Business, Enterprise & Employment Act and the Insolvency (Amendment) Rules 2015 (the IP fees rules) – but that’s for another day.

Areas that seem to cause difficulties include:

Pre-administration costs

It should be remembered that the requirement to disclose in the Proposals (and seek approval of any unpaid) pre-administration costs relates, not only to the charges of the IP, but to other costs incurred pre-appointment such as the solicitors’ or agents’ fees.

It is also evident that the RPBs do not believe that estimates of pre-administration costs comply with the Rules and they expect you to contact third parties and establish the quantum of their pre-administration costs in order to disclose them properly in the Proposals.  Also, if any payments from the estate to third parties exceed the (estimated) pre-administration costs as they appeared in the Proposals, do not be surprised if an RPB monitor suggests that the excess is unauthorised.

Most IPs have cottoned on by now that the Rules specifically state that approval of pre-administration costs does not form part of the Administrator’s Proposals (even though R2.33 requires that the Proposals include details of pre-administration costs).  However, there seem to be still the odd flawed template or two in circulation that do not present a separate specific resolution for the approval of pre-administration costs.

Statement of affairs

There have occasions when a statement of affairs (“SoA”) has not been submitted by the director(s), but the Proposals haven’t included the alternative required by R2.33(2)(g) of details of the financial position of the company (which usually takes the form of the Administrator’s own estimated SoA).

It is perhaps worth adding that this rule also requires a list of creditors (names, addresses, debts and any security) – whether or not the directors have submitted an SoA – and “an explanation as to why there is no statement of affairs” (although personally I cannot see that any explanation is going to be likely, other than “it has been requested but the director has not yet provided one”, particularly where Proposals have been issued swiftly after appointment).

How the purpose of the administration is to be achieved

If the Proposals explain that the Administrator thinks that the second administration objective is achievable, then the Proposals should explain why you believe that the result for creditors as a whole is going to be better than if the company were wound up (without first having been in administration).

Statement of expenses

Progress reports – not only in administrations, but in all other cases (apart from VAs and Receiverships) – all need to include a statement of the expenses incurred by the office holder during the period of the report, whether or not payment has been made in respect of them during the period.

It is important to remember that this includes more than simply the office holder’s time costs and disbursements, so this again means that solicitors, agents etc. need to be contacted to establish what is on their clocks.  Also, do not forget items such as insurance premiums and statutory advertising.  In addition, the Rules do not set a de minimis: all and any expenses incurred must be disclosed.  There have been some suggestions that the regulators might take a proportionate view of the disclosure of expenses, but personally I wouldn’t risk it.

Extensions

If seeking an extension via creditors’ consent, make sure that you approach the right creditors.

In every case, you will need to obtain the consent of all the secured creditors.

Whether you approach also the preferential or unsecured creditors as a whole will depend on what you wrote in the Proposals: per Para 78(2), if you have made a Para 52(1)(b) statement, you need to approach preferential creditors, if you think that a distribution to them will be made.  This is different from seeking approval to fees: in that case, under R2.106(5A) you need to seek preferential creditors’ approval to fees, not only if you intend paying a distribution, but also if you have paid a distribution.

However, events could have moved on since you issued the Proposals: by the time you contemplate an extension, the anticipated outcome might have changed.  What if your Proposals did not include a Para 52(1)(b) statement, but now you don’t think that a dividend will be paid to non-prefs?  Who do you approach for approval of an extension?

Assuming that your Proposals have accommodated alternative outcomes (such that you don’t believe you need to issue revised Proposals), Para 78 still indicates that whether you go to prefs or unsecureds in general depends on what you stated the anticipated outcome was in your Proposals.  However, to show consideration for the apparent spirit behind the provisions, it would seem prudent to consider also which creditors are in the frame at the time that you seek an extension, to ensure that you achieve the requisite majority from them too.

Extension Progress Reports

Whichever way you seek consent to an extension, you will need to issue a progress report (which is one reason why I am nervous about including in Proposals the power for the Administrator to extend without further recourse – because Proposals are not a progress report).  The usual one month deadline applies to these extension progress reports, so if you have only asked secureds/prefs to consent to the extension, make sure that you circulate the progress report to all other creditors – as well as send a copy to the Registrar for filing – within the month.

The same goes for court extensions: you will have produced a progress report to accompany your court application and, in the event that the court does not grant your extension before the month-end, you will need to send a copy of the report to all creditors and for filing and then send another circular (for the Notice of Extension) once you have received the order for the extension.

Finally, remember that the 6 month cycle for progress reports is counted from the period-end of the last report.  Therefore, where a progress report to accompany an extension request has been issued – which can be at any time – diaries will need changing so that the next progress report is 6 months after that report (i.e. no longer 6-monthly from the date of appointment).  This can prove a nightmare for automated diary systems… and, as you need to provide sufficient lead-time before any extension period ends in order to consider whether to apply for a further extension, make sure that you don’t leave diary prompts for progress reports too tight on the 6-month deadlines.

Exits

RPBs appear to be expecting decisions over exit routes to be clearly and contemporaneously evidenced.  This is also valuable in the event that things do not turn out the way you had hoped, e.g. where you moved to CVL because you had thought that there would be sufficient realisations to pay a dividend to unsecured creditors, but something happened later to scupper that outcome.

I also understand that it is generally accepted that Para 83’s reference to an Administrator thinking that a distribution will be made to unsecured creditors is a reference to non-preferential unsecured creditors only.  Thus, if you are nearing the end of the administration and you think that only a preferential distribution will be paid, you will need to seek an extension and pay it through the administration.  Alternatively – and if HMRC (or, of course, any other creditor) has modified the Proposals so that the exit must be by liquidation – you will need to seek a compulsory winding-up order.

Small Business, Enterprise & Employment Act 2015

I couldn’t resist one point on this new Act.  Although some items come into force on 26 May 2015, there are no transitional provisions (yet).  In other words, unless a new Order changes things, the provisions will apply to all existing insolvency appointments, not only future ones.

The Act amends Para 65 to the effect that, from 26 May 2015, administrators may pay a prescribed part dividend without the court’s permission.  However, the Act also amends Para 83 so that it will read that an administration may move to CVL only where the administrator thinks (“that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him” – no change there – and) “that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”, i.e. a prescribed part distribution.  In other words, from 26 May 2015, the Para 83 move to CVL cannot be used to pay a prescribed part dividend (unless you also think there is going to be a non-prescribed part dividend as well).

Thus I would strongly recommend that you revisit your standard Proposals template to make sure that they do not run contrary to the post-May position: you do not want to be stuck with approved Proposals requiring you to exit by CVL to pay a prescribed part dividend, when the Act won’t allow you to do it.  Having looked at some standard Proposals, I reckon many will have sufficient wriggle-room to avoid you having your hands tied, but it would be worth checking the Proposals of any cases where you anticipate a prescribed part dividend: you still have a month or so during which you can do a Para 83 move to CVL before the Act takes effect.

My thanks to Deborah Manzoori and Jo Harris for pointing out this issue to me.

My thoughts on more wrinkles in the new legislation will follow soon.  In the meantime, have a lovely long weekend.