Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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SIP16 and the Pool: Great Expectations as yet Unrealised?

I think we’ve all shared in the pain of SIP16 compliance. We’ve tried really hard, haven’t we? So why is it that the wholly-compliant rate dropped from 87% in 2015 to 62% last year? Where are we going wrong?

In this blog, I air my suspicions about the stats, not only on SIP16 compliance, but also on the changing profile of pre-packs and the role of the Pool, as presented in the Insolvency Service’s and the Pre Pack Pool’s 2016 Reviews. Yes, I know I’m a little late on this story (I blame the 2016 Rules!).

The Insolvency Service’s 2016 Review of IP Regulation can be found at: https://goo.gl/Jkwz19

The Pre Pack Pool’s 2016 Review is at: https://goo.gl/fPEXTe

 

SIP16 Compliance Rates Fall Back to Square One

There has been a significant drop in the reported rate of SIP16 compliance – at 62% of 2016’s SIP16 statements considered wholly compliant, it is the lowest annual rate on record (note: several years are estimates because not all SIP16 statements received were compliance-reviewed):

Why is this? It’s true that it takes time to adapt to a new SIP and this is bound to hit compliance, but is this the whole story? Or has the shift of the job of reviewing SIP16s from the Insolvency Service to the RPBs introduced an element of inconsistency into the process?

Let’s drill down into the overall compliance rate of 62% to see how the rate varies from RPB to RPB:

As you can see, the rates range from ICAS’ 100% of SIP16 statements wholly compliant to the ICAEW’s 39%.

I consider it highly unlikely that ICAEW-licensed IPs are in reality far worse at complying with SIP16 than other IPs, so this indicates strongly to me that there is a great diversity in the standards being applied. Given that the ICAEW reviewed 54% of all SIP16s received last year, it’s not surprising that the overall compliance dropped from 2015’s 87% to 62%.

The Insolvency Service’s Review does not help us to understand what might be behind the non-compliances, although it gives us some comfort. It states: “for the vast majority of non-compliant statements, the breach was not deemed to be serious and was merely of a technical nature”.

The ICAEW has published some feedback on their reviewing (Feb 2017, available to their Insolvency & Restructuring Group members at https://goo.gl/YkExP7), which suggests that the following have been lacking in some cases:

  • An explanation of the pre- and post-appointment roles of the IP (the ICAEW acknowledges that SIP16 does not strictly require this explanation in the SIP16 Statement, but it needs to be delivered to creditors and directors somewhere);
  • An explanation of why no requests were made to potential funders to fund working capital (even if in some cases, it is obvious);
  • If the business has not been marketed on the internet, an explanation why not (even if the nature of the business makes this obvious);
  • An explanation of the reasons underpinning the marketing strategy (whereas some appear to have simply provided a list of what marketing has been done);
  • An explanation of the reasons behind the length of time of the marketing (even if there were obviously financial pressures that limited this);
  • The date of the initial introduction – not simply “in December 2016”;
  • An explanation of the rationale behind the basis/bases of valuations (helpfully, the ICAEW give a clear steer on what they expect: “where you have obtained going concern and forced sale valuations, tell [creditors] that you’ve obtained valuations on both bases as you’re seeking to understand whether realisations will be maximised by breaking up the business and selling the assets on a piecemeal basis or whether it’s better to try to find a buyer for the business as a going concern”);
  • If goodwill is valued, an explanation and basis for the valuation provided; and
  • An explanation of the method by which consideration was allocated to different asset classes.

Given the prevalence of some apparent failures to state the bleedin’ obvious, perhaps other RPB reviewers are measuring compliance against a different list of tick-boxes.

 

The Shifting Profile of Pre-Packs

Probably the main difference between the old and the new SIP16 was the introduction of the “marketing essentials”, with the clear message that an absence of marketing should most definitely be the exception. Has the new SIP16 pushed up the frequency of marketing?

I certainly think that the SIP16 pressure has influenced attitudes towards marketing, as this graph indicates. Even in cases where the offer on the table looks too good to beat, I suspect that many view some marketing effort as essential to shield one from criticism. I doubt that safety-blanket marketing in these cases increases realisations and it will increase costs, but if it answers the sceptics’ questions about possible undervalue sales, then it seems to have everyone’s blessing.

Then again, perhaps I am being unfair: is it merely coincidental that the graph above shows that, as the frequency of marketing has increased, the prevalence of connected party purchasers has taken a dive? Could it be that increased marketing has widened the pool of potential purchasers, resulting in more occasions when connected interested parties lose out to the competition?

I am surprised that no one (as far as I have seen) has connected these two trends with this simple cause-and-effect explanation. Rather, perhaps I am not the only person who suspects that the fall in the number of connected purchasers is more a consequence of the new SIP16 pressures on connected party pre-packs, including the pressure to apply to the pre-pack pool. As revealed in its 2016 Review, the Pre Pack Pool is evidently of this view:

“It may be that the introduction of the Pool and the wider post-Graham reforms have deterred some connected party pre-packs from being proposed in the first place.”

But what has replaced these pre-packs? Are connected party sales avoiding the SIP16 obstacles altogether?

Perhaps hurdles are being overcome by having connected party sales accompany liquidations instead of Administrations. Well, I was surprised to discover that the numbers of Gazette notices for S216 re-use of a prohibited name do not follow a trend suggesting more sales in liquidation:

So could it be that Administration sales are being shifted out of the pre-pack definition either by being completed before Administration or perhaps negotiations are not starting until after appointment? This doesn’t ring true either: SIP16 statements as a percentage of the total number of Administrations has been fairly steady since the introduction of the Pool (2015: 29%; 2016: 24%):

* The SIP16 review actually covered 14 months, but for the purpose of this graph the number has been pro rated for 12 months.

Although the number of Administrations continues to fall, I find this picture encouraging: at least the SIP16 and Pool pressure does not seem to be persuading people to find ways around the measures. Pre-packs have a role and it seems that IPs are sticking with them.

 

Is the Pre Pack Pool making its mark?

In light of the second-hand warnings I’ve heard over the past years about how strongly the Insolvency Service feels about the need for IPs to embrace the Pool, I found the Service’s annual review surprisingly dead-pan. In contrast, the ICAEW’s release on the subject stated that the number of referrals to the pool was “disappointingly low”.

However, the ICAEW was relatively subtle about IPs’ role in the referral process: “the aim of the pool is to increase transparency and confidence around prepacks and low level use of the pool is unlikely to achieve that. We know you can’t compel a connected party to approach the pool but encouraging them to do so supports the overall aim of the pool”. I found the Pre Pack Pool less subtle: “the insolvency profession and creditors have important roles to play in ensuring connected party purchasers are informed of the option to use the Pool and putting pressure on them to do so”. How does the Pool expect IPs to “put pressure” on potential purchasers, I wonder.

The Pool also acknowledges that “creditor awareness of the Pool has been low and few have taken the time to read through administrators’ reports”. On the other hand, they report that “those connected party purchasers who have used the Pool have said it has been an important step in building credibility and trust in the ‘NewCo’ among creditors”. The Pool’s Review does not elaborate, but there are some interesting quotes in an article written by Stuart Hopewell, director of Pre Pack Pool Limited, and David Kerr, IPA’s Chief Executive, for Credit Magazine in November 2016 (www.insolvency-practitioners.org.uk/download/documents/1467).

As shown on one of the graphs above, 13% of all pre-packs were referred to the Pool. This represents 28% of all connected party pre-packs. Personally, I’m surprised it was that many! My personal view is that those who find this uptake disappointingly low had unrealistic expectations.

 

The Performance of the Pool

Given that referral to the Pool is voluntary, personally I wasn’t expecting any negative decisions to emerge. After all, if you didn’t have to sit an exam, you wouldn’t do so unless you were certain of passing it, would you? I was wrong…

The breakdown of the Pool’s opinions over the 14 months to the end of 2016 is as follows:

  • 34 referrals: the case for the pre-pack is “not unreasonable”
  • 13 referrals: the case is “not unreasonable but there are minor limitations in the evidence provided”
  • 6 referrals (although 4 were a group of connected companies): the case for the pre-pack is “not made”

I appreciate that the Pool doesn’t want to give away its secrets, but unfortunately the Review gives nothing away about what factors tipped the balance or indeed how they measure a good pre-pack from the bad. The author ends the Review by stating that “hopefully referrals to the Pool will increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides”, but without more feedback than simple statistics I cannot see this happening.

 

The Future of Pre-Packs

As we know, the Small Business Act included a reserve power to legislate the operation of pre-packs, with a sunset clause ending in May 2020. The Service’s Review continued its dead-pan mood, simply stating that they would carry out an evaluation “in due course”.

The Pool seemed barely more enthusiastic, simply stating in its Review that “it would be a shame to lose” pre-packs.

 

The Future of the Pool?

Back in May, the Times reported (https://goo.gl/QRcVZc) that Frank Field, Labour MP and Chair of the House of Commons’ Work & Pensions Select Committee, found the number of referrals to the Pool “deeply worrying” and he raised the prospect of the Committee scrutinising the Pool after the election. Sir Vince Cable also said that the number of referrals raised “worrying questions” and said that moves should be made towards making Pool referrals mandatory.

The Pre Pack Pool may be contemplating how to enlarge its role, but not necessarily with mandatory pre-pack referrals in mind. In the Credit Magazine article mentioned earlier (www.insolvency-practitioners.org.uk/download/documents/1467), Stuart Hopewell and David Kerr considered the extension of the Pool’s remit in the context of the revision of SIP13, suggesting “perhaps there is a role for the Pool to represent [creditors’] interests in all connected sale situations?” Although I continue to be concerned that much of the media outrage at connected party sales is levelled at the liquidation equivalents of pre-packs, surely the Pool must first provide convincing evidence that it is achieving the objective for which it was created before we seek to cast its net farther afield.

Are we to conclude that Hopewell/Kerr’s perception is that SIP13 sales to connected parties is an issue and having an independent review will regulate these sales?  I am not aware of any research into whether Liquidation connected party sales need regulating, so it would seem again that the tide is pulling us to tackle perceptions. Considering that the regulatory objectives include “promoting that maximisation of the value of returns to creditors” and encouraging IPs to provide “high quality services at a cost to the recipient which is fair and reasonable”, I struggle to see how these objectives are met by contributing further to this expensive over-regulated PR exercise.


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Monitoring the monitors: targeting consistency and transparency

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The Insolvency Service’s 2014 Review had the target of transparency at its core. This time, the Insolvency Service has added consistency.  Do the Annual Reviews reveal a picture of consistency between the RPBs?

My second post on the Insolvency Service’s 2015 Annual Review of IP regulation looks at the following:

  • Are the RPBs sticking to a 3-year visit cycle?
  • How likely is it that a monitoring visit will result in some kind of regulatory action?
  • What action are the RPBs likely to take and is there much difference between the RPBs?
  • What can we learn from 6 years of SIP16 monitoring?
  • How have the RPBs been faring in their own monitoring visits conducted by the Insolvency Service?
  • What have the Service set in their sights for 2016?

 

RPBs converge on a 3-yearly visit cycle

The graph of the percentages of IPs that had a monitoring visit last year gives me the impression that a 3-yearly visit cycle has most definitely become the norm:

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(Note: because the number of SoS IPs dropped so significantly during the year – from 40 to 28 – all the graphs in this article reflect a 2015 mid-point of SoS-authorised IPs of 34.)

Does this mean that IPs can predict the timing of their next routine visit? I’m not sure.  It seems to me that some standard text is slipping into the Insolvency Service’s reports on their monitoring visits to the RPBs.  The words: “[RPB] operates a 3-year cycle of rolling monitoring visits to its insolvency practitioners. The nature and timing of visits is determined annually on a risk-assessment basis” have appeared in more than one InsS report.

What do these words mean: that every IP is visited once in three years, but some are moved up or down the list depending on their risk profile? Personally, this doesn’t make sense to me: either visits are timed according to a risk assessment or they are carried out on a 3-year cycle, I don’t see how you can achieve both.  If visit timings are sensitive to risk, then some IPs are going to receive more than one visit in a 3-year period and, unless the RPB records >33% of their IP number as having a visit every year (which the graph above shows is generally not the case), the corollary will be that some IPs won’t be visited in a 3-year period.

My perception on the outside is that, generally, the timing of visits is pretty predictable and is now pretty-much 3-yearly. I’ve seen no early parachuting-in on the basis of risk assessments, although I accept that my field of vision is very narrow.

 

Most RPBs report reductions in negative outcomes from monitoring visits

The following illustrates the percentage of monitoring visits that resulted in a “negative outcome” (my phrase):

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As you can see, most RPBs are clocking up between c.10% and 20% of monitoring visits leading to some form of negative consequence and, although individual records have fluctuated considerably in the past, the overall trend across all the regulatory bodies has fallen from 30% in 2008 to 20%.

However, two bodies seem to be bucking the trend: CARB and the SoS.

Last year, I didn’t include CARB (the regulatory body for members of the Institute of Chartered Accountants in Ireland), because its membership was relatively small. It still licenses only 41 appointment-taking IPs – only 3% of the population – but, with the exit of SoS authorisations, I thought it was worth adding them to the mix.

I am sure that CARB’s apparent erratic history is a consequence of its small population of licensed IPs and this may well explain why it is still recording a much greater percentage of negative outcomes than the other RPBs. Nevertheless, CARB does seem to have recorded exceptionally high levels for the past few years.

The high SoS percentage is a little surprising: 50% of all 2015 visits resulted in some form of negative outcome – these were all “plans for improvement”. CARB’s were a mixture of targeted visits, undertakings and one penalty/referral for disciplinary consideration.

So what kind of negative outcomes are being recorded by the other RPBs? Are there any preferred strategies for dealing with IPs falling short of expected standards?

 

What responses are popular for unsatisfactory visits?

The following illustrates the actions taken by the top three RPBs over the last 4 years:

Graph9

* The figures for ICR/self certifications requested and further visits should be read with caution. These categories do not appear in every annual review, but, for example, it is clear that RPBs have been conducting targeted visits, so this graph probably does not show the whole picture for the 2012 and 2013 outcomes.  In addition, of course the ICAEW requires all IPs to carry out annual ICRs, so it is perhaps not surprising that this category has rarely featured.

I think that all this graph suggests is that there is no trend in outcome types!  I find this comforting: it might be difficult to predict what outcome to expect, but it suggests to me that the RPBs are flexible in their approaches, they will implement whatever tool they think is best fitted for the task.

 

Looking back on 6 years of SIP16 monitoring
We all remember how over the years so many people seemed to get hot under the collar about pre-packs and we recall some appallingly misleading headlines that suggested that around one third of IPs were failing to comply with regulations. Where have the 6 years of InsS monitoring of SIP16 Statements got us?  I will dodge that question, but I’ll simply illustrate the statistics:

Graph10

Note: several years are “estimates” because the InsS did not always review all the SIP16 Statements they received. Also, the Service ended its monitoring in October 2015.  Therefore, I have taken the stats in these cases and pro rated them up to a full year’s worth.

Does the graph above suggest that a consequence of SIP16 monitoring has been to discourage pre-packs? Well, have a look at this one…

Graph11

As you can see, the dropping number of SIP16s is more to do with the drop in Administrations. In fact, the percentage of pre-packs has not changed much: it was a peak of 31% of all Administrations in 2012 and was at its lowest in 2014 at 24%.

I guess it could still be argued that the SIP16 scrutiny has persuaded some to sell businesses/assets in the pre (or immediately post) liquidation period, rather than use Administration.  I’m not sure how to test that particular theory.

So, back to SIP16 compliance, the graph-but-one above shows that the percentage of Statements that were compliant has increased. It might be easier to see from the following:

Graph12

Unequivocal improvements in SIP16 compliance – there’s a good news story!

A hidden downside of all this focus on improving SIP16 compliance, I think, is the costs involved in drafting a SIP16 Statement and then, as often happens, in getting someone fairly senior in the practice to double-check the Statement to make sure that it ticks every last SIP16 box.  Is this effort a good use of resources and of estate funds?

Now that the Insolvency Service has dropped SIP16 monitoring, does that mean we can all relax a bit? I think this would be unwise.  The Service’s report states that it “will review the outcome of the RPBs’ consideration of SIP16 compliance and will continue to report details in the Annual Review”, so I think we can expect SIP16 to remain a hot regulatory topic for some time to come.

 

The changing profile of pre-packs

The Service’s reports on SIP16 Statements suggest other pre-pack trends:

Graph13

Personally, I’m surprised at the number of SIP16 Statements that disclose that the business/assets were marketed by the Administrator: last year it was 56%. I’m not sure if that’s because some SIP16 Statements are explaining that the company was behind some marketing activities, but, if that’s not the reason, then 56% seems very low to me.  It would be interesting to see if the revised SIP16, which introduced the “marketing essentials”, makes a difference to this rate.

 

Have some pity for the RPBs!

The Service claimed to have delivered on their commitments in 2015 (incidentally, one of their 2014 expectations was that the new Rules would be made in the autumn of 2015 and they would come into force in April 2016 – I’m not complaining that the Rules are still being drafted, but I do think it’s a bit rich for the Executive Foreword to report pleasure in having met all the 2014 “commitments”).

The Foreword states that the reduction in authorising bodies is “a welcome step”. With now only 5 RPBs to monitor and the savings made in dropping SIP16 monitoring (which was the reported reason for the levy hike in 2009), personally I struggle to see the Service’s justification for increasing the levy this year.  The report states that it was required in view of the Service’s “enhanced role as oversight regulator”, but I thought that the Service did not expect to have to flex its new regulatory muscles as regards taking formal actions against RPBs or directly against IPs.

However, the tone of the 2015 Review does suggest a polishing of the thumb-screws. The Service refers to the power to introduce a single regulator and states that this power will “significantly shape” the Service’s work to come.

In 2015, the Service carried out full monitoring visits to the ICAEW, ICAS and CARB, and a follow-up visit to the ACCA. This is certainly more visits than previous years, but personally I question whether the visits are effective.  Of course, I am sure that the published visit reports do not tell the full stories – at least, I hope that they don’t – but it does seem to me that the Service is making mountains out of some molehills and their reports do give me the sense that they’re concerned with processes ticking the Principles for Monitoring boxes, rather than being effective and focussing on good principles of regulation.

For example, here are some of the molehill weaknesses identified in the Service’s visits that were resisted at least in part by some of the RPBs – to which I say “bravo!”:

  • Pre-visit information requested from the IPs did not include details of complaints received by the IP. The ICAEW responded that it was not convinced of the merits of asking for this on all visits but agreed to “consider whether it might be appropriate on a visit by visit basis”.
  • Closing meeting notes did not detail the scope of the visit. The ICAEW believed that it is important for the closing meeting notes to clearly set out the areas that the IP needs to address (which they do) and it did not think it was helpful to include generic information… although it seems that, by the time of the follow-up visit to the ICAEW in February 2016, this had been actioned.
  • The Service remains “concerned” that complainants are not provided with details of the independent assessor on their case. “ACCA regrets it must continue to reject this recommendation as ACCA does not believe naming assessors will add any real value to the process… There is also the risk of assessors being harassed by complainants where their decision is not favourable to them.”
  • Late bordereaux were only being chased at the start of the following month. The Service wanted procedures put in place to “ensure that cover schedules are provided within the statutory timescale of the 20th of each month and [to] follow up any outstanding returns on 21st or the next working day of each month”. Actually, CARB agreed to do this, but it’s just a personal bug-bear of mine. The Service’s report to the ICAEW went on about the “vital importance” of bonding – with which I agree, of course – but it does not follow that any bordereaux sent by IPs to their RPB “demonstrate that they have sufficient security for the performance of their functions”. It simply demonstrates that the IP can submit a schedule on time every month. I very much suspect that bordereaux are not checked on receipt by the RPBs – what are they going to do: cross-check bordereaux against Gazette notices? – so simply enforcing a zero tolerance attitude to meeting the statutory timescale is missing the point and seems a waste of valuable resources, doesn’t it?

 

Future Focus?

The Annual Review describes the following on the Insolvency Service’s to-do list:

  • Complaint-handling: in 2015, the Service explored the RPBs’ complaint-handling processes and application of the Common Sanctions Guidance. The Service has made a number of recommendations to improve the complaints process and is in discussion with the RPBs. They expect to publish a full report on this subject “shortly”.
  • Debt advice: also in 2015, they carried out a high-level review of how the RPBs are monitoring IPs’ provision of debt advice and they are currently considering recommendations for discussion with the RPBs.
  • Future themed reviews: The Service is planning themed reviews (which usually mean topic-focussed questionnaires to all RPBs) over 2016 and 2017 covering: IP monitoring; the fees rules; and pre-packs.
  • Bonding: the Service has been examining “the type and level of cover offered by bonds and considering both the legislative and regulatory arrangements to see if they remain fit for purpose”. They are cagey about the outcomes but do state that they “will work with the industry to effect any regulatory changes that may be necessary” and they refer to “any legislative change” being subject to consultation.
  • Relationship with RPBs: the Service is contemplating whether the Memorandum of Understanding (“MoU”) with the RPBs is still needed, now that there are statutory regulatory objectives in place. The MoU is a strange animal – https://goo.gl/J6wmuN. I think that it reads like a lot of the SIPs: a mixture of principles and prescription (e.g. a 10-day acknowledgement of complaints); and a mixture of important standards and apparent OTT trivia. It would be interesting to see how the Service approaches monitoring visits to the RPBs if the MoU is removed: they will have to become smarter, I think.
  • Ethics? The apparent focus on ethical issues seems to have fallen from the list this year. In 2015, breaches of ethics moved from third to second place in the list of complaints received by subject matter (21% in 2014 and 27% in 2015), but reference to the JIC’s work on revising the Ethics Code has not been repeated in this year’s Review. Presumably the work is ongoing… although there is certainly more than enough other tasks to keep the regulators busy!

 

 


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The draft revised SIP13: has it sold out to SIP16?

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The consultation release explained that the SIP13 revision involved using “(wherever possible) language which is consistent with SIP16”. The resulting draft gives me the impression that the working group started with a blank sheet of paper and asked themselves: how can we adapt SIP16 for on-liquidation sales?

I agree that much of the current SIP13 is redundant, as it simply reproduces principles from the Code of Ethics (albeit that the Code rarely makes such direct applications), it does seem to me that the diversity of scenarios for connected party sales in and around insolvency processes has been lost in this redraft. This SIP’s primary focus clearly has become post-appointment connected party sales that are contemplated prior to appointment.

Why chop out so many connected party sales that are caught by the current SIP13? Will this improve perceptions?  Will we lose valuable transparency if we assume that the only connected party transactions worthy of disclosure are quasi pre-packs?

Requirements on office holders

The only requirements that the draft revised SIP13 puts on IPs in office are:

  1. “If an office holder subsequently relies on a valuation or advice other than by an appropriate independent valuer and/or advisor with adequate professional indemnity insurance this should be disclosed along with the rationale for doing so and the reasons why the office holder was satisfied with any valuation obtained, explained.”
  2. “When considering the manner of disposal of the business or assets the office holder should be able to demonstrate that their duties under the legislation have been met.”
  3. “The office holder should demonstrate that they have acted with due regard to creditors’ interests by providing creditors with a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered. Such disclosure should be made in the next report to creditors after the transaction has been concluded, which should be issued at the earliest opportunity.”

Item 2 is pointless: a SIP should not have to state that IPs need to be able to demonstrate that they have complied with legislation.

The other two items are generally reasonable, but I think the application of these requirements is confused by the preceding section headed “Preparatory Work”. In fact, item 1 above appears in the “Preparatory Work” section, which adds to the perception that the entire SIP relates only to quasi pre-packs.

“Preparatory Work” – a confusing context

This section states:

“An insolvency practitioner should keep a detailed record of the reasoning behind both the decision to make a sale to a connected party and all alternatives considered.”

“An insolvency practitioner should exercise professional judgement in advising the client whether a formal valuation of any or all of the assets is necessary.”

The SIP’s “principles” explain that “insolvency practitioner” is to be read as relating to acting in advisory engagements prior to commencement of the insolvency process.

The “preparatory work” heading and the reference to the pre-appointment “decision to make a sale” lead me to wonder whether the sections that follow – “after appointment” and “disclosure” – apply only to sales where pre-appointment preparatory work has been undertaken.  Another issue with the heading – and the fact that the first sentence above is a copy of para 10 of SIP16 (with the omission of “pre-pack”) – is that it suggests that SIP13 does not capture sales completed pre-appointment.

But does it make sense to reduce SIP13 to a SIP16 baby brother?

Does the SIP work for liquidation sales?

Often business and/or asset sales to connected parties are conducted in or around a CVL process. Sometimes the sale happens pre-liquidation: sometimes without the advising IP’s involvement, but sometimes with their knowledge and assistance.  In other cases, the IP takes no steps to sell the assets until his/her formal appointment as liquidator; indeed, in some cases the IP will not even have met or spoken with the directors before the S98 meeting as they replace the members’ choice of IP as liquidator.

What are the disclosure requirements for pre-liquidation sales? This draft revised SIP13 omits all such disclosure.  True, at present SIP8 requires some disclosure, but:

  • SIP8 only requires disclosure of transactions in the year before the directors resolved to wind up the company, so there remains a crucial reporting gap;
  • SIP8 only requires disclosure to the S98 meeting, so technically it need not be in the post-S98 report that is circulated to creditors; and
  • SIP8 will be changed enormously by the 2016 Rules and rumour has it that SIP8 might even disappear completely.

How many companies go into CVL having sold/lost all their chattel assets already? I reviewed the filing of 10 one year old CVLs chosen at random:

  • 6 had no chattel assets at the point of liquidation, although the previous accounts of 3 of these attributed some value to chattel assets (and one of the others had no filed accounts);
  • 3 involved post-CVL connected party sales; and
  • 1 involved a post-CVL unconnected party sale.

Of course, there can be all kinds of reasons why a company goes into CVL with no chattel assets, but if the revised SIP13 is issued, how many connected party transactions will go entirely unreported in future? Might it even influence more directors to dispose of assets before an insolvency office holder is appointed so that the sale falls under the radar?

Perceptions

Of course, the insolvency office holder will make appropriate investigations into a pre-liquidation (or any other insolvency process) sale. Therefore, is there really any harm done if the details of the sale are not provided to creditors?

I guess not, but doesn’t the omission de-value the efforts to ensure that office holders disclose post-appointment sales? What are the chances that the distinction between a pre and post sale will be lost on some creditors?  If they see solely a cash at bank lump sum received by the liquidator of a once asset-rich company and few details, what might their sceptical minds conclude?

Not quite SIP16

As I mentioned at the start, this draft revised SIP13 seems to have been produced from a blank sheet of paper and a copy of SIP16. However, fortunately, this SIP seems to have avoided the prescriptive shackles of its fellow.

The consultation release referred to SIP13 having been drafted “in a proportionate way and without being onerous, recognising that it may apply to low value transactions”. Notwithstanding that some liquidation business/asset sales may be as hefty as some pre-packs, I think this is good news: the draft SIP13 does not contain a SIP16-style shopping list of disclosure items (bravo!) and sticks to the principle of providing “a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered”.

Therefore, whilst I suspect that disclosure of material business sales may be expected to contain a number of SIP16 elements, at least selling an old computer to the director for £50 will not require a chapter-and-verse account. However, it will take diligence on the part of those drafting and reviewing creditors’ reports to ensure that an adequate explanation, depending on the specific circumstances, is given. As with the new SIP9, formulaic approaches to report-writing will not work.

Wider scope?

Assuming that the pre-appointment “preparatory work” context is not meant to rule out disclosure of cold post-appointment sales, the draft revised SIP13 would have a wider reach than the current SIP13 in some respects:

  • Sales with connected parties (or at least as they are defined by statute), not just with directors, are caught; and
  • Personal insolvency processes are caught, so for example it would include a bankrupt’s family member buying out the Trustee’s interest.

Consultation deadline

I agree that a revision of SIP13 is long overdue: for one thing, its reference to a Rule 2.2 report lost all relevance in 2003!

The consultation – available at http://goo.gl/D91QMo – ends on 11 May 2016. I’ll be submitting a response, so if you want to counter my opinions, you’d better getting writing.

 

By the way, if you’ve been wondering how the picture relates to the story: there’s no connection, it’s just that I’ve recently returned from a spectacular trip to Bolivia and Chile.


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SIP16: it’s more than just a Pool

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The Pre Pack Pool launched to sounds of applause from the likes of Anna Soubry MP and Teresa Graham, whilst most IPs have been keeping their own counsel at best.  For IPs and their agents, the new SIP16 contains changes of more practical consequence than the Pool.

On the Compliance Alliance blog, I have set out some pointers on how to implement the changes into internal processes and documentation (http://thecompliancealliance.co.uk/blog/sips/sip16/).  I’d also like to make a plug for my Fees Rules article for the ICAEW’s Insolvency & Restructuring Group’s newsletter, which I have reproduced on the CompAll blog (http://thecompliancealliance.co.uk/blog/practical/octfees/).  I plan to present a webinar on the combined subjects of SIP9 and SIP16 in a few weeks’ time.

Here, I thought I’d explore the outlook from over the SIP16 parapet.

How many applications will the Pre Pack Pool see?

Shall we open a book on that question?

Here are the Administration and pre-pack stats:

ADMs

 

 

 

 

 

 

I’ve drawn from the Insolvency Service’s insolvency appointments tables, extrapolating for a full year’s figures, and their annual regulatory and SIP16 monitoring reports.

If the pre-pack proportions are consistent, there would be 340 pre-packs over 2015 of which 228 would be to connected parties.  In one respect, it’s a shame that the Insolvency Service has handed over SIP16-monitoring to the RPBs, as I guess we may lose this insight into the numbers in future.

The Pool has 19 members (I’m not sure why 20 is often-quoted, unless there is an anonymous member!) – the names are at https://www.prepackpool.co.uk/about-the-pool – so each one could be expecting up to one review each month.  Of course, as many have noted, the reality could be far fewer given that applications are not mandatory.  Although the government’s threat of statutory measures to control pre-packs has been breathed hotly, why should this prospect persuade the pre-pack purchasers of today to apply to the Pool?

Also, as the graph illustrates, Administrations have been on the decline for a number of years and I suspect that the additional hurdles raised via the revised SIP16 and the fear in some IPs’ minds of their regulator picking up on an unintentional SIP16 clanger will force the numbers lower still, as instead more deals may be done either before or after Liquidation (which I think is already a far more frequent occurrence).

How will the regulators view absent Pool opinions?

There seems to be some anxiety that the regulatory bodies will be critical of IPs who complete connected party (“CP”) sales that lack a Pool review.  However, the new SIP16 puts little responsibility on the IP to press for a Pool application.  It merely states:

“the insolvency practitioner should ensure that any connected party considering a pre-packaged purchase is aware of their ability to approach the pre-pack pool and the potential for enhanced stakeholder confidence from the connected party approaching the pre-pack pool and preparing a viability statement for the purchasing entity” (paragraph 9).

‘The IP should ensure that [the party] is aware of their ability…’ – that is pretty light touch.

The IP also needs to ask the CP for a copy of any Pool opinion, but of course there is no obligation on the CP to concede to that request.  I understand that the CP can tick a box during the application to tell the Pool to provide a copy of the opinion to the IP, which at least might cut out the potential for some delay.

How should an IP react to a Pool application?

What would you do if you knew that the CP had applied to the Pool, would you wait for the opinion before concluding the sale?  I asked this question of an IP the other day and I confess that I was surprised when he said that he would wait.

Admittedly, 48 hours might not be long to wait in the great scheme of things, although this presupposes that the CP gets their application in pretty sharpish.  In view of the Pool’s wish-list (albeit not prerequisites), some of which carry not insignificant cost, the fact that the CP is probably being bombarded with issues from all directions and feeling ragged given their involvement in a limping company, and of course the inevitable reaction of “so you’re telling me I don’t have to make an application?”, the odds do seem stacked against a swift and comprehensive application to the Pool.

What would you do if the Pool’s answer was negative?  The Pool’s Q&As are factually correct but tight-lipped on the consequence for a potential sale of a negative Pool opinion (remembering of course that a negative opinion means “there is insufficient evidence that the grounds for the pre-packaged sale is reasonable”):

“It is for the IP to decide whether to proceed with such a sale or not.

“IPs are subject to regulation and authorised to act as IPs by recognised professional bodies. The insolvency regulators look at practitioners’ conduct through complaints received and proactive monitoring. Where systemic problems are identified, the regulators have the ability to take appropriate action.

“A complaint would not be well founded solely on the basis that a pre-packaged sale transaction was entered into when an opinion had been issued that the evidence was insufficient to support the grounds for a pre-packaged sale.”

I think that everyone reasonable now appreciates that the IP has got to do what the IP has got to do.  What would an IP do with a negative Pool opinion?  Would it make him think again about the sale, even though he would not know what had been behind the Pool member’s decision?  If it would not – on the basis that the IP knows what needs doing and can fully justify his actions – then why wait for the opinion?

Fortunately, I think negative Pool opinions will be very rare in any event.  After all, why would a CP go to the time and expense of voluntarily applying to the Pool, if he thought that he would struggle to persuade the Pool that the pre-pack was reasonable?  If the Pool does not a record a near-100% “pass” rate, I will be very surprised.

But would a 100% pass rate mean that the Pool has failed?  I do hope it won’t be seen that way!  After all, I suspect that applications will only be made to the Pool if the IP is moving towards concluding a sale; if the IP thinks the sale should happen, then let’s hope that the Pool rarely, if ever, disagrees.  Also, I think there’s an argument that, if applications to the Pool become the norm (although I am not convinced they will be), then the absence of an approach to the Pool might lead onlookers to presume that the CP was uncertain it would pass muster.  Therefore, even if the Pool notches up a 100% pass rate, creditors should feel confident that the wheat is distinguished from the chaff… so job done as regards improving confidence!

Quality agents step forward

For all its publicity, practically the Pool does not present the biggest SIP16 sea change for IPs.  Of far more practical effect to IPs are the additions as regards marketing.  This doesn’t mean that IPs’ past work has necessarily been at odds with the new standards, but inevitably practices and disclosures need to be adjusted to fit the now-codified standards.

Some agents have questioned the emphasis placed on having adequate PII as now required by the SIP, as they feel that qualifications – and especially RICS registration – are far better indicators of high quality and ethical services.  I can see their point, however I think that the quality agent could ease the IP’s SIP16 compliance burden in a new way.

I’d summarise the SIP16 marketing essentials this way:

  • The marketing strategy should be designed to achieve the best available outcome for creditors as a whole in all the circumstances.
  • The business should be marketed as widely as possible proportionate to the nature and size of the business.
  • Consideration should be given to the type of media used to reach the widest group of potential purchasers in the time available. Online communication should be included alongside other media by default.
  • Marketing should be undertaken for an appropriate length of time to ensure that the best available outcome for creditors as a whole in all the circumstances has been achieved.
  • Any previous marketing of the business by the Company is not justification in itself for avoiding further marketing. The adequacy and independence of the marketing should be considered in order to achieve the best available outcome.

Although much of the strategising is likely to be conducted in conversations in view of the urgency of the situation, SIP16 compliance requires good record-keeping.  Could agents help IPs on this?  Could they perhaps set out the “reasons underpinning the marketing and media strategy used” in a form that the IP could transfer readily to the SIP16 Statement?  After all, an agent worth his salt will be familiar with the new SIP16 and will understand well the pre-pack tensions that need to be managed in order to get the best sale away.  IPs look to their agents to propose and execute effective marketing strategies, so wouldn’t it follow that the agents fully justify their recommendations and actions in writing?  Such a helpful service might also attract a premium rate or repeat instructions, mightn’t it?

Before I move away from the marketing topic, I’ve been asking myself: how can we decide if a valuation agent’s PII is “adequate”?

For starters, I suggest that IPs who do more than the occasional pre-pack set up central registers of the PII details of the agents that they use, rather than deal with this on a case-by-case basis.  In this way, you need only ask your agents for PII information once and you can update your central register when the PII renewal dates come along.

Secondly, you might find RICS’ PII guidance useful: http://goo.gl/IAd7TX.  This describes minimum terms for PII required by RICS in a style that will be familiar to all IPs.

Curly additions to SIP16

In the process of updating the CompAll SIP16 Statement template, I discovered that there were several sneaky additions to the new SIP16.  I’ve attached at SIP16 comparison a tracked-changes comparison of the 2013 version and the current SIP16.

Some – but by no means all – of the lesser-publicised changes, which will affect standard documents and processes, are (in italics):

  • IPs should make it clear that their role is not to advise either the directors or any parties connected with the purchaser.
  • IPs should keep a detailed record of both the decision to do a pre-pack and all alternatives considered.
  • If the Administrator has been unable to send his Proposals with the SIP16 Statement, the Proposals should include an explanation for the delay.
  • Confirmation in the SIP16 Statement “that the sale price achieved was the best reasonably obtainable in all the circumstances” has been replaced by confirmation that the outcome achieved was the best available outcome for creditors as a whole in all the circumstances.
  • Disclosure of the extent of the Administrator’s involvement pre-appointment has been extended to involvement of the Administrator’s firm and/or any associates.
  • Disclosure of the alternative courses of action considered has been widened to the alternative options considered, both prior to and within formal insolvency by the IP and the company, and on appointment [of] the Administrator.
  • Disclosure should include explanations of why no consultation took place with major – or representative – creditors; why no requests were made to potential funders; and why no security was taken for deferred security (including the basis for the decision that none was required), if any of these were the case.
  • Disclosure of the names of directors/former directors involved in the management or ownership of the purchaser has been extended to include their associates and to any involvement in financing the purchasing entity.
  • Disclosure of fixed/floating charge allocations of consideration needs to include the method by which the allocation was applied.

 

Although these SIP16 changes will make compliance staff’s (and consultants’) lives a little more unpleasant as we try hard to avoid SIP16 Statement slip-ups, I would welcome that extra bit of misery if the pay-off were the Holy Grail of “improved confidence”. I am yet to be convinced that this will be the outcome.


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Pre-packs: an oxbow lake in the making?

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Yes, I know it’s an odd title, but all will become clear, I hope.

Water takes the line of least resistance, so when a river course forces water to make a laborious curve, the water eventually finds a short-cut, bypassing the tiresome curve and leaving it high and dry, as a lake cut off from the dynamic water-flow.

I understand the political imperatives behind the pre-pack puffing and blowing… I think.  I also know that Teresa Graham’s vision of a revised SIP16, along with the voluntary pre-pack pool, viability review, and generally sensible marketing essentials, will come to fruition.  However, I suspect that this may be only postponing another inevitable: legislation, which finally may choke the life out of pre-packs… but only because industry will find another way.

When Teresa Graham’s report was released in June 2014 (http://goo.gl/oVhnXt), I resisted the urge to blog my thoughts, mainly because there were plenty of other people more authoritative than me who were saying much the same things that I was thinking.  Bill Burch’s blog was a good one: http://goo.gl/Esm5yr.

Whatever our criticisms are, the Graham Report has reached the status of something indisputable in the same way that the OFT market study on corporate insolvency has.  I feel that we are past the point where the principles are up for debate, as demonstrated by the ICAEW’s announcement of the SIP16 consultation: the JIC is “solely seeking views on whether it will be practical for an insolvency practitioner to comply with the requirements contained in the revised version of the SIP” (http://goo.gl/yVepVw).  Still, it’s nice of them to ask.

To Market or Not to Market?

I think we have come a long way in a relatively short time: Dr Frisby’s 2007 research suggested that perhaps only 8% of pre-packed businesses had been marketed, whereas I would not be surprised if now less than 8% of pre-packed businesses were not marketed.

Is a sale preceded by zero marketing ever acceptable anymore?  Ms Graham accepted as “true in some circumstances” that marketing is not possible or that marketing itself will harm creditors’ proposals (paragraph 9.24).  However, I am not sure what message we should be taking away from the revised SIP16, which states that “marketing a business is an important element in ensuring that the best available price is obtained for it”: does this mean that, if a business is not marketed, the best available price is never ensured?  And where does best outcome fit in?  The best sale price is not the whole story.

“Comply or Explain”

For many years, we have regarded SIPs as required practice, not best practice.  Thus, when we are told to do something, we know we should do it or be prepared to face the wrath of our regulator.  Of course, there will always be circumstances in which one has to decide to break a rule – a bit like needing to drive across a road’s solid white line in the interests of safety – but I feel that a rule-book that states: “this is what you should do” and then immediately follows this with: “but if you don’t, then this is what you should do” lacks credibility, doesn’t it?

The SIP (paragraph 10) states that “any marketing should conform to the marketing essentials”.  However, it then states that “where there has been deviation from any of the marketing essentials, the administrator is to explain how a different strategy has delivered the best available price.”  Ah, so as long as we can justify that our focus has been to achieve “the best available price”, then we don’t need to follow the “marketing essentials”.  Not only does that not make them particularly essential, but it also makes me wonder: why have them at all?  Why not simply state: “do (and explain) what you think is right to achieve the best possible price”?  Possibly because that was the world before the first SIP16 was born – and evidently it was not enough to instil confidence in the process.

Hindsight is a Wonderful Thing

The marketing essentials include: “particularly with sales to connected parties… the administrator needs to explain how the marketing strategy has achieved the best outcome for creditors”.  This assumes that the correct marketing strategy will always achieve the best outcome for creditors.  With the best will in the world, this is unrealistic.

For example, a director offers £100,000 to purchase the business and assets.  Attempts are made to attract other interested parties, but no one else comes forward, so the deal is done with the director at £100,000.  Taking the marketing costs into consideration, has this achieved the best outcome for creditors?  And what if, seeing that no one else is interested and, perhaps in the pre-administration pause, nervous staff or customers jump ship, the director decides to drop his offer to £80,000, has the marketing strategy still achieved the best outcome for creditors?  With hindsight, maybe the best marketing strategy would have been not to have marketed at all.

Maybe we’re being asked not to measure creditors’ outcome in financial terms alone.  Ms Graham reported that some people she spoke to “stated that, if returns are to be low, they would not mind a slightly reduced return… if the sale and marketing process was more transparent” (paragraph 7.26).  So maybe “best outcome” includes a sense of contentment that at least there were attempts to search out the best offer.  I doubt that this is how we’re meant to interpret the SIP – after all, a few creditors might prefer to see a business destroyed rather than to see it back in the hands of the directors – and of course an administrator can only really measure success in terms of achieving the statutory purpose of administration.  It seems a big ask to expect marketing strategies always to achieve the best outcome.

I should point out that I am not anti-marketing.  I just struggle with this unrealistic SIP.  If I close my critical eye, I can see that, in general, the revised SIP’s approach to marketing is sensible.  Whether it will make a difference to prices paid for businesses, I don’t know.  It seems to me that all too often the present incumbents are so emotionally caught up in a business that they offer more than anyone independent in any event.  I also regularly see IPs playing hard-ball, declining a hand-shake in an effort to extract increased offers.  If the revised SIP ensures that all IPs do the sensible thing in marketing (or even in deciding not to market) a business and are seen to be doing it, then fair enough.

Improving Confidence

Will the revised SIP improve confidence in pre-packs?

I do believe that the pre-pack pool may persuade some that the deal was right (although there are bound to be those who simply widen their scope of conspirators to include the pool).  I suspect the pool will be used sometimes, but I do wonder whether we will see many viability reviews: why would a director put his neck on the line (given the risk of Newco’s failure), if he doesn’t have to?  What’s the worst that will happen if no viability review were created?  The administrator would report that he’d asked for one, but not received it.  If the existing statutory offence for failing to submit a Statement of Affairs does not persuade directors to submit one, I cannot see that a SIP requirement for a viability review will have any greater success.

And will the review be worth the paper it’s written on?  It’s not as if the director is going to forecast a meltdown.  Teresa Graham hopes that viability reviews “will reduce incidences of failure… by focussing the minds of those controlling new companies” (paragraph 8.27).  Well, I guess it could clean the rose-tinted specs of some directors reluctant to accept defeat; it might make a few think twice about going through with Newco at all, perhaps resulting in more fire-sales.

Cutting off the Flow

The SIP requirements for connected parties (or is that “purchasing entities”?  The revised SIP is inconsistent on this point) to approach the pool and to prepare a viability review are voluntary, but the government has waved its stick, proposing in the current Bill a reserve power to restrict pre-packs (and potentially all sales in administrations), which “would only be used if the voluntary reforms are not successfully implemented” (http://goo.gl/IbQsLd).

How will the government measure success?  Will it be in increased sales considerations (which would be difficult to compare and which might happen simply because of more buoyant market conditions)?  Or by creditors reporting “improved confidence” in pre-packs?

The issue I have is that, to paraphrase Gloria Hunniford (in her One Show report in June 2013: http://goo.gl/wqcQJd), the perception of a company going bust one day and re-opening the next with the same directors and the same products in the same spot will always be greeted by some with horror and disgust.  As long as something approaching this occurs – whether it is a pre-pack administration with all the bells and whistles or something else – I cannot see these critics feeling any more comfortable about them.

Teresa Graham wrote: “To hobble the whole process to eliminate some areas of sub-optimal behaviour seems to me to be akin to throwing the baby out with the bathwater” (paragraph 8.11).  I think that the expectation of the use of the pre-pack pool and viability reviews, along with the ever-more complex disclosure requirements of the revised SIP16, does hobble the process, especially so if the government resorts to legislation in the future.

Ever since the first SIP16 was released, we’ve seen the flow of business sales start to diverge away from pre-pack administrations.  I remember being at a conference shortly after the first SIP16 was released and an IP telling me that it heralded the death-knell for pre-pack administrations; he’d envisaged that all sales would be done pre-liquidation or immediately on liquidation.  And of course, as currently worded, SIP16 does not apply to sales where there have been no negotiations with the purchaser prior to the appointment of administrators.  A coach and horses can also be driven easily through the SIP16’s use of an undefined “connected party” (personally, I’d prefer to see something on the lines of SIP9, e.g. “proposed sales that could reasonably be perceived as presenting a threat to the vendor’s objectivity by virtue of a professional or personal relationship with the proposed purchaser”).  With such burdens thrown on connected party pre-pack administrations, does anyone seriously think that this will be the option of choice over simpler, cheaper, methods?

Pre-pack administrations could end up being rarely used, left high and dry whilst a dynamic stream of businesses are bought and sold along a more efficient route.  Having all but legislated pre-pack administrations out of existence, what will the government do then?  Who knows – but by then, we will probably have a new government ministering to us.

The consultation closes on 2 February 2015 – the ICAEW has released it as a JIC consultation, but I’ve not seen any other body announce it.  I thought I’d add my penny’s worth.  My response is here: MB SIP16 response 25-01-15, although I have to confess that I’ve only tackled the semantics: if we’re to be measured against this SIP, then at least I’d like to see it less ambiguous.


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The Future is… Complicated

 

 

1933 Yosemite

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

  • Enterprise & Regulatory Reform Act 2013;
  • Deregulation Bill (est. commencement: May/October 2015);
  • Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);
  • The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;
  • New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and
  • A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

  • IP fees (consultation closed in March 2014);
  • DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and
  • Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

  • Ethics Code Review;
  • SIP 1;
  • SIPs 16 & 13;
  • SIP 9 (depending on how the government turns on the issue of IP fees);
  • New Insolvency Guidance Paper on retention of title; and
  • Other SIPs affected by new statute.

 

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

  • Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).
  • There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.
  • The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones).  Will that be a future compromise?  What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

  • Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.
  • The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.
  • A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.
  • In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.
  • It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.
  • S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.
  • The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.
  • The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum.  My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right.  Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript).  Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on.  He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation.  Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors.  A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd).  The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis.  I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

  • A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.
  • Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.
  • As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.
  • SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.
  • A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.


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And now for a qualitative review of the IP Regulation Report

19Picture 704low res

Having explored the statistics, I thought I’d turn to the Insolvency Service’s 2013 IP regulation report’s hints at issues currently at the top of the regulators’ hit list:

• Ethical issues;
• Consultation with employees;
• SIP16; and
• Dodgy introducers;

All the Service’s regulatory reviews can be found at http://www.bis.gov.uk/insolvency/insolvency-profession/Regulation/review-of-IP-regulation-annual-regulation-reports.

Ethical Issues

The Insolvency Service has “asked that regulators make ethical issues one of their top priorities in the coming year, following concerns arising from both our own investigations and elsewhere” (Dr Judge’s foreword). What might this mean for IPs? Personally, I find it difficult to say, as the report is a bit cloudy on the details.

The report focuses on the fact that 35% of the complaints lodged in 2013 have been categorised as ethics-related. On the face of it, it does appear that ethics-categorised complaints have been creeping up: they were running at between 10% and 20% from 2008 to 2011, and in 2012 they were 24%. Without running a full analysis of the figures, I cannot see immediately which categories have correspondingly improved over the years: “other” complaints have been running fairly consistently between 30% and 40% (which does make me wonder at the value of the current system of categorising complaints!) and the other major categories – communication breakdown, sale of assets, and remuneration – have been bouncing along fairly steadily. The only sense I get is that, generally, complaints were far more scattered across the categories than they were in 2013, so I am pleased that the Insolvency Service reports an intention to refine its categorisation to better understand the true nature of complaints made about ethical issues. Now that the Service is categorising complaints as they pass through the Gateway, they are better-placed than ever to explore whether there are any trends.

In one way, I think that this ethics category peak is not all bad news: I would worry if some of the other categories – e.g. remuneration, mishandling of employee claims, misconduct/irregularity at creditors’ meetings – recorded high numbers of complaints.

Do the complaints findings give us any clues as to what these ethical issues might be about? Briefly, the findings listed in the report involved:

• Failing to conduct adequate ethical checks and a SIP16 failure;
• Failing to pay a dividend after issuing a Notice of Intended Dividend or retract the notice (How many times does this happen, I wonder!) and a SIP3 failure regarding providing a full explanation in a creditors’ report;
• Three separate instances (involving different IPs) of SIP16 failures;

Unfortunately, the report does not describe all founded complaints, but it appears to me that few ethics-categorised complaints convert into sanctions. However, it is interesting to see that some of these complaints don’t seem to go away: two of the complaints lodged with the Service about the RPBs, and which are still under investigation, involve allegations of conflict of interest, so it is perhaps not surprising that the Service’s interest has been piqued. The report describes a matter “of wider significance which we will take forward with all authorising bodies”, that of “concerns around the perceived independence of complaints handling, where the RPB also acts in a representative role for its members” (page 6). Noisy assumptions that RPBs won’t bite the hands that feed them have always been with us, but there were some very good reasons why complaints-handling was not taken away from the RPBs as a consequence of the 2011 regulatory reform consultation and I would be very surprised if the situation has worsened since then.

So, as a profession, we seem to be encountering a significant number of ethics-related complaints, few of which lead to any sanctions. This suggests to me that behaviour that people on the “outside” feel is unethical is somehow seen as justified when viewed from the “inside”. It cannot be simply an issue of communicating unsuccessfully, because wouldn’t that in itself be a breach of the ethical principle of transparency that might lead to a sanction? The Service seems to be focussing on the Code of Ethics: “we are working with the insolvency profession to establish whether the current ethical guidance and its application is sufficiently robust or whether any changes are needed to further protect all those with an interest in insolvency outcomes” (page 4). Personally, I struggle to see that the Code of Ethics is somehow deficient; it cannot endorse practices that deviate from the widely-accepted ethical norm, because it sets as the standard the view of “a reasonable and informed third party, having knowledge of all the relevant information”. I guess whether or not disciplinary committees are applying this standard successfully is another question, which, of course, the Service may be justified in asking. However, I do hope that (largely, I confess, because I shared the pain of many who were involved in the years spent revising the Guide) the outcome doesn’t involve tinkering with the Code, which I believe is an extremely carefully-written, all-encompassing, timeless and elevated, set of principles.

Consultation with employees

This topic pops up only briefly in relation to the Service’s monitoring visits to RPBs. It is another matter “of wider significance which we will take forward with all authorising bodies”: “regulation in relation to legal requirements to consult with employees where there are collective redundancies” (page 4).

Although I’ve been conscious of the concern over employee consultation over the years – I recall the MP’s letter to all IPs a few years’ ago – I was still surprised at the number of “reminders” published in Dear IP when I had a quick scroll down Chapter 11. On review, I thought that the most recent Article, number 44 (first issued in October 2010), was fairly well-written, although it pre-dated the decision in AEI Cables Limited v GMB, which acknowledged that it may be simply not possible to give the full consultation period where pressures to cease trading are felt (see, e.g., my blog post at http://wp.me/p2FU2Z-3i), and it all seems so impractical in so many cases – to engage in an “effective and meaningful consultation”, including ways of avoiding or reducing the number of redundancies – but then it wouldn’t be the first futile thing IPs have been instructed to do…

If this is a regulator hot topic going forward, then it may be beneficial to have a quick review of standards and procedures to ensure that you’re protecting yourself from any obvious criticism. For example, do your engagement letters cover off the consultation requirements adequately? Does staff consultation appear high up the list of day one priorities? If any staff are retained post-appointment, do you always document well the commencement of consultation, ensuring that discussions address (and contemporaneous notes evidence the addressing of) the matters required by the legislation?

SIP16

Oh dear, yes, SIP16-monitoring is still with us! It seems that 2012’s move away from monitoring strict compliance with the checklist of information in SIP16 to taking a bigger picture look at the pre-pack stories for hints of potential abuse has been abandoned. It seems that the Service’s idea of “enhanced” monitoring simply was to scrutinise all SIP16 disclosures, instead of just a sample. In addition, unlike previous reports, the 2013 report does not describe what intelligence has come to the Service via its pre-pack hotline, nor does it mention what resulted from any previous years’ ongoing investigations. Oh well.

I guess it was too much to ask that the release of a revised SIP16 on 1 November 2013 might herald a change in approach to any pre-pack monitoring by the Service. Nope, they’re still examining strict compliance, although at least there has been some progress in that the Service is now writing to all IPs where it identifies minor SIP16 disclosure non-compliances (with the serious breaches being passed to the authorising body concerned). I really cannot get excited by the news that the Service considered that 89% of all SIP16 disclosures, issued after the new SIP16 came into force, were fully compliant. Where does that take us? Will IPs continue to be monitored (and clobbered) until we achieve 100%? What will be the reaction, if the percentage compliant falls next time around?

Dodgy Introducers

The Service has achieved a lot of mileage – in some respects, quite rightly so – from the winding up, in the public interest, of eight companies that were “wrongly promoting pre-packaged administrations as an easy way for directors to escape their responsibilities”. Consequently, I found this sentence in the report interesting: “We have also noted that current monitoring by the regulators has not picked up on the insolvency practitioner activities that were linked to the winding up of a number of ‘introducer’ companies, and are in discussions with the authorising bodies over how this might be addressed in the coming year” (page 6). Does this refer specifically to the six IPs with links to the wound-up companies who have been referred to their authorising bodies? Or does this mean that the Service will be looking at how the regulators target (if at all) IPs’/introducers’ representations as regards the pre-pack process on IP monitoring visits?

Having heard last week a presentation by Caroline Sumner, IPA, at the R3 SPG Technical Review, it would seem to me that regulators are, not only on the look-out for introducers of dodgy pre-packs, but also of dodgy packaged CVLs where an IP has little, if any, involvement with the insolvent company/directors until the S98 meeting. Generally, IPs are vocal in their outrage and frustration at unregulated advisers who seek to persuade insolvent company directors that they need to follow the direction of someone looking out for their personal interests, but someone must be picking up the formal appointments…

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Unfortunately, the Insolvency Service’s report has left me with a general sense that it’s all rather cryptic. The report seems to be full of breathed threats but nothing concrete and, having sat on the outside of the inner circle of regulatory goings-on for almost two years now, I appreciate so much more how inactive that arena all seems. It’s a shame, because I know from experience that a great deal of work goes on between the regulators, but it simply takes too long for any message to escape their clutches. It seems that practices don’t have to move at the pace of a bolting horse to evade an effective regulatory reaction.


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SIP16: A Clean Slate

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Will this new SIP16 quench the fires burning for pre-packagers? Will it improve the transparency of, and confidence in, pre-packs, which was the stated aim three Secretaries of State ago when this SIP16 revision process began? Who knows, but woe betide any IP who turns out a non-compliant SIP16 disclosure after 1 November!

So what changes do firms need to make over the next four weeks?

Diaries

The new SIP16 timescale is half that of Dear IP 42: the explanation should be provided with the first notification to creditors and in any event within seven calendar days of the transaction (paragraph 11).

The “Information Disclosure Requirements”

Now that there are 25 disclosure points (as compared with the previous 17), I think there is no practical way of ensuring compliance unless templates stick rigidly to the list in the SIP; personally, I think that’s a shame, but there it is. To avoid any possible confusion, perhaps it is best to create a standalone document, which can form an appendix/attachment/enclosure to the letter to creditors and to the administrator’s proposals, as SIP16 now requires that the statement is provided in proposals (although I think most IPs are doing this already).

You may find that some disclosure points that look familiar to those in the current SIP have acquired subtle differences – e.g. not only does “any connection between the purchaser and the directors, shareholders or secured creditors of the company” need to be disclosed under the new SIP, but “or their associates” has been added. Therefore, rather than trying to edit SIP16 lists appearing in existing templates, perhaps it’s as well to tear them up and start afresh. Also, the new SIP16 groups points under sub-headings, which creates a better structure for the disclosure than the previous SIP, so I think it would help coherence (and help anyone checking off compliance) to follow the SIP’s order.

The old SIP’s paragraph 8, which was so loved by the regulators as encapsulating what the SIP16 disclosure was all about, appears almost word-for-word as a key principle in this new SIP. Paragraph 4 states: “Creditors should be provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, to demonstrate that the administrator has acted with due regard for their interests”. Although the Information Disclosure Requirements seem all-encompassing, could someone argue that ticking all those boxes does not meet the paragraph 4 requirement but that, in some cases, a bit more fleshing-out is required? Now that they have been beefed up, I don’t think there’s much risk that the Insolvency Service/RPBs would expect more than those Information Disclosure points, but it does suggest that a degree of sense-checking would be valuable: perhaps someone in the IP’s firm (but not involved in the case) could cold-read draft SIP16 disclosures and see whether they hang together well or whether they leave the reader with questions. I know that it’s a practice that some IP firms already conduct in the interests of transparency.

Other Required Disclosures

I think it would be easy to focus exclusively on the “Information Disclosure Requirements”, but that would be a mistake as there are other items nestled within the SIP that need to be taken care of.

• Paragraph 3 states: “An insolvency practitioner should differentiate clearly the roles that are associated with an administration that involves a pre-packaged sale (that is, the provision of advice to the company before any formal appointment and the functions and responsibilities of the administrator). The roles are to be explained to the directors and the creditors.” Although a similar paragraph appeared in the old SIP with regard to communicating with directors, it might be well to double-check that this, as well as the additional points in paragraph 5 of the SIP, are covered off in the engagement letter to directors. And note that, now, the distinction between the roles of the IP also needs to be explained to the creditors.

• Paragraph 9 introduces a new requirement. It states that the pre-pack explanation should include “a statement explaining the statutory purpose pursued and confirming that the sale price achieved was the best reasonably obtainable in all the circumstances”.

As in the old SIP16, if the disclosure points are not provided, the administrator should explain why. There are a couple of other required explanations for not providing things that are new:

• If the seven day timescale is not met for the SIP16 disclosure, the administrator should “provide a reasonable explanation for the delay” (paragraph 11). If this timescale cannot be met, the SIP requires the administrator to provide a reasonable explanation of the delay. Although the SIP does not state it, presumably you would provide this explanation within your SIP16 disclosure that you would send as swiftly as possible, albeit late.

• If the administrator has been unable to meet the requirement to seek the requisite approval of his proposals as soon as reasonably practicable after appointment, he should explain the reasons for the delay (paragraph 12), again presumably within the proposals whenever they are issued.

Internal Documents

The new SIP pretty-much repeats the old SIP’s requirements for some internal documents:

• Under the heading, Preparatory Work, paragraph 7 states: “An administrator should keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale” (this was in the old SIP’s introductory paragraphs).

• Under the heading, After Appointment, paragraph 8 states: “When considering the manner of disposal of the business or assets as administrator, an insolvency practitioner should be able to demonstrate that the duties of an administrator under the legislation have been considered”. Okay, it doesn’t mention explicitly internal documents, but it seems to me that contemporaneous file notes – justifying the manner of disposal as in the interests of creditors as a whole or, if the administrator does not believe that either of the first two administration objectives are achievable, that it does not unnecessarily harm the interests of the creditors as a whole (i.e. Paragraphs 3(2) and 3(4) of Schedule B1 of the Insolvency Act 1986) – should help demonstrate such consideration.

The Future

So is there anything in the old SIP that has been left out of the new SIP? No, nothing of any real consequence, although it did strike me how far we’ve come – that it was felt that the 2008 SIP16 needed to explain, with case precedent references, that administrators have the power to sell assets without the prior approval of the creditors or court. Have we moved on sufficiently from those days, do you think?

When you think of it, it wasn’t too long ago when we were faced with draft regulations requiring three days’ notice to creditors of any pre-pack; they were set to come into force on 1 October 2011. And I don’t think the other ideas, for example that all administrations involving pre-packs should exit via liquidation with a different IP/OR appointed liquidator, have completely disappeared.

However, I think that what this new SIP does is provide us with a clean slate. To some extent, we can file away the Insolvency Service’s statistics of non-compliance with the old SIP16 along with our copies of Dear IP 42 and we can concentrate on getting it right this time. However frustrated and irritated we might feel at having to meet these rigid disclosure requirements, I hope that IPs will strive hard to meet them. It may not silence the critics – let’s face it, it won’t – but it will give them one less stick with which to beat up the profession.


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The Deregulation Bill

1228 Port Douglas

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

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

SoS authorisations to come to an end

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

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

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

Limited Licences

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

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

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

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

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

Other aspects of the Deregulation Bill

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

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

Complaints Gateway

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

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

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

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

Red Tape Challenge Outcomes

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

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

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

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

Monitoring of SIP16 Compliance

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

Monitoring of pre-packs using SIP16 disclosures

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

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

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

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

Themed Review on Introducers

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

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

Regulatory and disciplinary outcomes

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

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

The only other points I gleaned from this section were:

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

The future

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

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


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Still not the Eurosail Judgment

0937 Antelope

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

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

SIP3A (Scotland)

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

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

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

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

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

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

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

SIP3 (IVAs)

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

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

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

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

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

Talking of principles v prescription…

SIP16

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

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

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

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

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

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