Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Revised SIP16 and SIP13 affect more than Administrations

30 April 2021: Connected Persons Disposal Regs, InsS Guidance, SIP13, SIP16, new IVA Protocol (with eight annexes), SIP9 FAQs from the RPBs and Dear IP 126 – wow!  Even Usain Bolt would struggle to keep up with the pace of regulatory change right now!

Firstly, I’ll look at the SIPs. 

“No changes have been made to the SIPs other than those required by the change in the law”

stated some of the RPB/R3 releases.  Well, that’s not quite true…

 

What needs changing?

In summary, solely to deal with the SIPs (i.e. not including the Connected Persons Disposal Regs at all), I think the following needs to be done:

  • Ensure that all staff know the widened scope of SIP13 – i.e. affecting all corporate insolvencies – and consider including prompts within checklists, progress reports etc. to ensure that any sales to less directly connected parties are picked up
  • In the pre-ADM letter template to connected parties (and letter of engagement, where relevant), replace the old Pre-Pack Pool reference with the new evaluator’s report requirement… and repeat the letter template (tweaked) for any post-appointment substantial disposals
  • Ensure that pre-pack connected parties that are not also connected persons are notified of the potential benefits of a viability statement
  • Tweak the SIP16 statement to remove references to the Pre-Pack Pool and viability statement, except where a viability statement has been provided, and add reference to enclosing any evaluator’s report with an explanation if it has been redacted

 

SIP13’s scope enlarged…

The old SIP13 affected sales to parties connected to the insolvent debtor or company by reason of S249 and S435 (but excluding certain secured creditors).  Now, SIP13 defines a connected party as:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”

If SIP13 had been changed solely to reflect the new regulations, why has the reach of SIP13 been expanded far wider than the regulations’ scope?  And what does “any connection” mean exactly?  Are we talking friendships?  Even if “any connection” is still intended to mean something approaching the statutory definition, including connections with the associates of directors, shareholders – and secured creditors – wraps in a whole host of business and familial relationships that were not captured by S249, S435 or Para 60A(3) Sch B1.

…but also narrowed..?

There is a curious omission from the above definition: reference to any connections with the debtor.  Presumably this is an error, as the SIP still states that it “applies to both personal and corporate insolvency appointments”.  Oops!

 

Connected person communications

The above definition is of a connected party, but both SIPs also refer to connected persons.  These are the statutorily-defined connected persons caught by the new regulations, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, as defined by Para 60A(3) of Schedule B1.  Of course, it is sensible for IPs to ensure that any connected person considering a regulations-caught disposal is aware of the requirement to obtain a qualifying evaluator’s report to enable the disposal to be completed without creditor approval.  This is now also a SIP requirement.

Because SIP16 is concerned only with pre-packs, the requirement appears also in SIP13 in order to capture substantial disposals in Administrations that are not pre-packs.  In my mind, this means substantial disposals that occur in the first 8 weeks of an Admin where there have been no pre-appointment negotiations (and, I guess, the odd “hiring out” or non-sale “disposal” of all or a substantial part of the business/assets), i.e. truly post-appointment sales.  Indeed, the R3/RPB releases explained that the 8-week time frame of the new regulations led to the changes in SIP13.

However, the changes are odd.  SIP13 requires the “insolvency practitioner” to ensure that the connected person is made aware of the regulations, but SIP13 states that:

“for the purposes of this Statement of Insolvency Practice only, the role of ‘insolvency practitioner’ is to be read as relating to the advisory engagement that an insolvency practitioner or their firm and or/any (sic.) associates may have in the period prior to commencement of the insolvency process.  The role of ‘office holder’ is to be read as the formal appointment as an office holder”. 

So the new SIP13 requirement for connected person communications applies to IPs acting pre-appointment, not to office holders post-appointment.  Given we are talking about non pre-pack disposals here, would it not have made more sense for the SIP13 requirement to be on office holders?

But don’t worry RPBs, I am sure that no Administrator is going to spend time negotiating a deal with a connected person without ensuring that they are in a position to complete.  They hardly need a SIP to tell them to warn a relevant purchaser that they’ll need a qualifying evaluator’s report where necessary.

 

Viability Statements’ appearance narrowed…

I reported at https://insolvencyoracle.com/2020/10/30/pre-pack_reforms/ that the Insolvency Service’s report that led to the regulations had noted the government’s plan to “work with stakeholders to encourage greater use” of viability statements.  I was most surprised, therefore, to see viability statements take a step further into the shadows in the revised SIP16.

The old SIP16 required Administrators to report to creditors on the existence or otherwise of a viability statement and, if there were none, on the fact that the Administrators had at least asked for one.  Now, the only appearance of reference to a viability statement in a SIP16 statement is where one exists, in which case it should be attached.

…but also enlarged!

But we cannot ignore viability statements entirely: the new SIP16 has retained the need to make certain purchasers “aware of the potential for enhanced stakeholder confidence in preparing a viability statement”.  You might think: well, that’s fine, it had been in my letters to connected purchasers when I told them about the Pre-Pack Pool, so now I’ll leave in the viability statement bit and just tweak those letters to include the bit about the evaluator’s report instead.

Ah, if only it were that simple!  Now this requirement applies “where the purchaser is connected to the insolvent entity”… and this time, “connected” means:

“a person with any connection to the directors, shareholders or secured creditors of the company or their associates”. 

So, if you are contemplating a pre-pack to someone who isn’t connected to such an extent that the new regulations apply, but they still have some kind of connection, you will need to write to them solely to tell them about the “potential for enhanced stakeholder confidence” of a viability statement.  What is the point?!

 

Copy evaluator’s report in SIP16 statement

Unsurprisingly, the new SIP16 requires a copy of any qualifying evaluator’s report to be included with the SIP16 statement circular (whether or not this is at the same time as the Proposals). 

The SIP does not mirror the regulations’ provision that the copy qualifying report (when included with the Proposals) may exclude any information that the Administrator considers is confidential or commercially sensitive, but presumably this would be acceptable provided that, as per SIP16 para 19, the Administrator explains why the report in full is not being provided.

 

More changes to come?

Yes, I’m afraid so.  Dear IP 126 states that:

“SIP16 will be reviewed and amended further during the next 6 to 12 months”. 

I shall be interested to see the trend of Administrations in the future.  I suspect that it is not so much the evaluator’s report that will discourage pre-packs but rather the endless tinkering!


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It’s not just connected pre-packs and it’s not just legislation

If the draft regs and pre-packs were a Venn diagram…

The new draft legislation requiring an evaluator’s opinion on connected pre-packs has drawn most attention.  But the measures will affect more than just connected pre-packs and the Insolvency Service’s report reveals other planned efforts to influence IPs’ activities and disclosures.

In this article, I focus on the less-publicised changes that are afoot, including:

  • The impact on post-appointment connected party sales
  • The option of seeking creditors’ approval, rather than getting an independent opinion
  • The government’s desire to increase the use of viability statements
  • The emphasis on SIP16’s “comply or explain” requirement
  • The government’s wish for RPBs to probe into cases where marketing is not undertaken
  • The need for greater compliance with SIP16’s disclosure requirements

The Insolvency Service’s Pre-Pack Sales in Administration Report and the draft regulations are at: https://www.gov.uk/government/publications/pre-pack-sales-in-administration.

 

The draft regulations are not about pre-packs

No, really, they’re not.  The draft regulations impose new requirements on:

  • Connected party sales only
  • But not just connected party pre-packs, also any sales of “all or a substantial part of the company’s business or assets” within 8 weeks of the start of the Administration
  • How is a “substantial part” defined? It isn’t.  It will be up to Administrators to form an opinion about whether a sale involves a substantial part
  • And the regs will capture not just sales, but also the “hiring out” of all or a substantial part of the business or assets

 

Why interfere with post-appointment sales?

The Insolvency Service’s report does not explain or seek to justify this step.  It seems to suggest that, because the SBEE Act’s power to legislate extended to all connected party sales, they were free to regulate all such sales.  However, they have graciously decided “only” to apply the requirements to sales within 8 weeks of the start of the Administration.

So… a secured lender appoints Administrators perhaps in a hostile manner.  The Administrators have had no contact with the director before their appointment, but they soon learn that the director is anxious to hold onto the business so will offer almost anything.  The Administrators are keen to recover as much as possible for their appointor and, as is their statutory duty, to care also for other creditors’ interests, so they play hard ball to squeeze out the best deal.  The Administrators’ agents recommend that they snap up the offer – maybe they’ve now carried out some marketing, maybe it’s a no brainer that no unconnected party in their right mind would offer anything approaching the director’s offer – the secured lender is happy with it, and the Administrators make sure that the purchaser is good for the money.  But still the purchaser must instruct an independent evaluator?

 

What will the evaluator evaluate?

The evaluator’s report must state whether or not they are:

“satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances”

It seems to me that the people best-placed to evaluate whether the consideration is reasonable are professional agents, aren’t they?  Shame that independent, qualified, PII’d agents instructed by the Administrators to do just that cannot be trusted with this task, isn’t it?

How does someone assess whether “the grounds for the substantial disposal” are reasonable?  It’s not “the grounds for Administration”, so this will not address the cynics’ belief that directors engineer companies into Administration to “dump debts” and start again.  I’m not saying this happens often, if at all.  Unnecessarily putting yourself through an Administration and then battling to restore, or to build new, trust of suppliers, employees, and customers seems a drastic step to take.  I think that many connected purchasers underestimate the struggles ahead of them.

Presumably, “the grounds for the substantial disposal” relates to the question: could a better price be achieved by a different strategy?  This sounds like a debate about the marketing strategy, the prospects of alternative offers, and going concern v break-up, so again professional and experienced agents seem best-placed to make this evaluation.

 

But why not just ask the Pool?

I understand the noises of: what’s wrong with simply asking the Pre-Pack Pool?  But I return to the question: why have an opinion in the first place?  It won’t dispel the suspicions that the whole thing has been designed by the directors who shouldn’t be allowed to use Administration or Liquidation and it won’t answer the many who just believe that it’s wrong for a director to be allowed to buy the business or assets from an Administrator or Liquidator.  The public comments below The Times’ articles on pre-packs say it clearly: some people call connected party sales (and CVAs) “fraud” or “legal theft”.  How do you persuade these people to see things differently?

The strongest argument I could find in the Insolvency Service report for a Pool opinion was:

“Whilst some stakeholders said that an opinion from the Pool (or lack of one) would not affect their decision to trade with a business that was sold to a connected party purchaser, other creditor groups said that their members valued the Pool’s decision, and that the opinion did influence their decision as to whether to trade with the new company.  They also stated that where the Pool had been utilised, the opinion given helped to demonstrate to creditors that in some circumstances a sale to a connected party provided a reasonable outcome for creditors.”

So some say it helps, some say it doesn’t.

Somehow the Insolvency Service concluded that their “review has found that some connected party pre-packs are still a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors”, but I saw nowhere in the report where those perceptions originate.  The report referred to the media and the CIG Bill Parliamentary debates.  Is that your evidence?  Oh yes, some Parliamentarians have been very colourful in their descriptions of pre-packs; one said that the directors offer “a nominal sum – maybe only £1 or a similarly trivial sum”.  Their ignorance – or the way they have been misled to believe this stuff – is shameful and on the back of such statements, distrust of connected party pre-packs grows and so the case for an independent opinion is made.

And now the R3 President is reported as saying that “effectively anyone will be allowed to provide an independent opinion on a connected party pre-pack sale, which risks abuse of the system that undermines the entire rationale of these reforms”.  Again, we feed the beast that bellows that IPs – and professional agents – cannot be trusted.

So, ok, if it makes you happy, fine, let it be a Pre-Pack Pool opinion.  In my view, they have fallen far short of justifying their existence, but if it shuts the mouths of some who see pre-packs as “Frankenstein monsters” (The Times) or at least gives them pause, then so be it.

 

Getting creditors’ approval as an alternative

The draft regulations provide that, as an alternative to getting an evaluator’s opinion, a substantial disposal to a connected party may be completed if:

“the administrator seeks a decision from the company’s creditors under paragraph 51(1) or paragraph 52(2) of Schedule B1 and the creditors approve the administrator’s proposals without modification, or with modification to which the administrator consents”

This must be achieved before the substantial disposal is made, so it will not be available for pre-packs… unless you can drag out the deal for 14+ days.

Could it help for post-appointment business sales?  Provided that you don’t make a Para 52(1)(a), (b) or (c) statement in your proposals, it might.  And let’s face it, if you’re issuing proposals immediately on appointment and before you’ve sold the business and assets, you may be hard pressed to make any positive statement about the outcome of the Administration.

But if you issue proposals immediately, i.e. before you have negotiated a potential deal with anyone, what exactly would the creditors be approving?  Presumably, they would be informed of your strategy to market the business and assets and shake out the best deal from that.  They would not be informed of what offers (if any) are on the table and it would be commercial suicide for the proposals to include valuations.  Would such vague proposals achieve what the Insolvency Service is expecting from this statutory provision?

Could it be that the Service recognises that true post-appointment connected party sales (i.e. not those that avoid the pre-pack label by resisting negotiation until a minute past appointment) do not require independent scrutiny and this is their way of avoiding putting them all in that basket?

 

Smartening up on SIP16 statement compliance

The Insolvency Service reports that SIP16 statement compliance has improved: since the RPBs took on monitoring compliance in late 2015, the annual non-compliance rate has dropped from 38% to 23%.  The report states, however, that:

“the level of non-compliance continues to be a concern, as SIP16 reporting is a key factor in ensuring transparency and maintaining stakeholder confidence in pre-pack sales”

Hang on, when did SIP16 require a “report”?  The Insolvency Service refers throughout to a SIP16 report.  It’s funny, isn’t it, how something that started off as “disclosure”, then became a “statement”, and now is considered a “report”?  I think this demonstrates how the SIP16 disclosure requirements have grown legs.  And, while the report acknowledges that the RPBs state that most of the non-compliances are “minor technical breaches” and that there is “now more information available to creditors as a result of the SIP16 changes”, it seems to suggest that stakeholder confidence can only be enhanced if we eliminate even those minor breaches.

The report focuses on three areas where it seems that “greater consistency needs to be promoted across the profession”: viability statements, marketing activity and valuations.

 

The value of viability statements

The report indicated that, of the 2016 connected party SIP16 statements reviewed, 28% of them “stated viability reviews/cash flow forecasts had been provided”.  69% of the purchasers in these cases were still trading 12 months later.  However, in the category of cases where no viability statements were evidenced, 87% of those purchasers were still trading after 12 months.  This suggests to me that disclosure of a viability statement does not particularly help Newco to gain trust with creditors!

Of course, rightly so the report states that the purchasers may well have carried out their own viability work but have been unwilling to share it.  What I was far less pleased about was that the report stated that “alternatively, it may be that the insolvency practitioner… is not requesting the purchaser to provide a viability statement, which would indicate non-compliance with the requirements of SIP16”.  The cheek of it!  If a progress report omitted the date that creditors had approved an office holder’s fees, would the Service suspect that this was because it never happened?  Actually, I can believe that they would.  The Insolvency Service has no evidence of non-compliance in this regard, but they can’t help but stick the boot in and foment doubts over IPs’ professionalism and competence.

Having said that, IPs would do well to double-check that they are asking for viability statements and making sure that there’s evidence of requests on the file, don’t you think..?

I wonder whether a future change will be that the RPBs will ask to be sent, not only the SIP16 statement, but also evidence of having asked the purchaser for a viability statement.

The report’s conclusion is puzzling:

“In discussions with stakeholders no concerns were raised regarding the lack of viability statements. However, the government considers that there continue to be benefits to completing viability statements for the reasons highlighted in the Graham Review. Therefore, we will work with stakeholders to encourage greater use.”

Hmm… so no one seems bothered about their absence, but the government wants to see more of them.  Logical.

 

Compliance with the SIP16 marketing essentials

The review sought to analyse 2016 connected party SIP16 statements as regards explaining compliance with the six principles of marketing set out in the SIP.  The report states:

“the principles that encourage exposure of the business to the market ‘publicised’ (54% compliance), ‘broadcast’ (53% compliance) and ‘marketed online’ (56% compliance) have only been complied with in just over 50% of cases.”

Given that they were reviewing only the SIP16 statements, I’m not sure they can say that the marketing principles have not been complied with.  Might it just be that the IPs failed to explain compliance in the SIP16 statement?

Having said that, the review also revealed that, “of those that deviated from the marketing principles, over 80% of administrators provided justification for their marketing strategy”, i.e. they complied with the SIP16 “comply or explain” principle.  This suggests to me that 20% of that c.50% need to try harder to get their SIP16 statements complete.

 

The value of marketing

The report acknowledges that “in some limited cases it may be acceptable for no marketing… to be undertaken”.  I think that many would go further than this: in some limited cases, it may be advantageous not to market.  The review stated that no marketing had been carried out in 21% of the 2016 connected pre-packs reviewed.  This does seem high to me and I think does not help counteract suspicions of undervalue selling.

Interestingly, though, where marketing was undertaken, 46% of those connected party sales were below the valuation.  But where marketing was not undertaken, 43% were below “the valuation figure”.  As most IPs get valuations on both going concern/in situ and forced sale bases, I’m not sure which “figure” the Service is measuring against here.  But nevertheless perhaps this is some comfort that marketing doesn’t make a whole lot of difference… unless of course it attracted an independent purchaser, which would have taken the case outside the scope of the Service’s review entirely.  Shame that they didn’t analyse any unconnected SIP16s!

 

The compliance problem

The government’s response to the diversity in approach to marketing and to SIP16 disclosure includes that they will:

“work with the regulators to ensure: there is greater adherence to the principles of marketing”; and “there is a continued increase in compliance with the reporting requirements under SIP16”.

As I mentioned above, the report stated that SIP16 statement non-compliance was at 23% in 2019… but in her recent virtual roadshow presentation, Alison Morgan of the ICAEW stated that their IPs’ 2019/2020 rate was at c.50%.  We must do better, mustn’t we?!

I too am frustrated about the levels of compliance with SIP16.  I realise it’s a killer of a SIP – some of the requirements don’t follow chronologically or logically and some leave you wondering what you’re being asked to disclose.  I realise that almost no pre-packs fit neatly into the from-a-to-b SIP16 ticksheet.  But I don’t know when I last saw a 100% fully compliant SIP16 disclosure!  I know I’m harsh, harsher it seems that some of the RPB reviewers, but whatever SIP16 asks for, please just write it down… and tell your staff not to mess with templates – they/you may think that some statements are pointless or blindingly obvious, but please just leave it in.

 

Expect to be “probed”!

Another part of the government’s response is to:

“ensure that where no marketing has been undertaken, the explanation provided by the administrator is probed by the regulator where necessary”.

True, SIP16 allows for a “comply or explain” approach, but if a large proportion of businesses are not being marketed, it just opens us up to the cheap shot that the sale might have been at an undervalue, doesn’t it?

What is a valid reason for not marketing?  Again in her recent presentation, Alison Morgan indicated that a fear of employees walking out or of a competitor stealing the business may not in themselves be sufficient justification.

 

SIP16 changes in prospect

So what changes will we see in SIP16?  The government response is that they:

“will work with the industry and the RPBs to prepare guidance to accompany the regulations and to ensure SIP16 is compatible with the legislation.”

Guidance?  Sigh!  If it’s anything like the moratorium guidance, then I don’t see why they bother: what more can they say apart from regurgitate the regulations, which are only 6 pages long?

And how is SIP16 incompatible with the regulations?  Well, obviously in referring specifically to getting an opinion from the Pre-Pack Pool… but I wonder how the regulations will look when they’re finalised.  With all the murmurings about almost anyone being able to call themselves an evaluator, I suspect it may be the regulations that will be brought more into line with SIP16 on this point!

But let’s hope that SIP16 is not changed to accommodate the regulations’ capture of all connected party Administration business/”substantial” asset sales within the first 8 weeks.  That truly would be sledgehammer-nut territory, wouldn’t it?

The government has also threatened to:

“look to strengthen the existing regulatory requirements in SIP 16 to improve the quality of information provided to creditors”.

“Strengthen” the requirements?  I wonder what they have in mind…

 

What about valuations?

Oh yes, I forgot: that was the third area the government highlighted for greater consistency.

Right, well, they weren’t happy that 18% of the SIP16s they reviewed failed to state whether the valuer had PII.  I don’t know what they think IPs do, have a chat with a guy in a pub?  So, yes, we need to check that our SIP16 ticksheets are working on that point.

The report also noted that some SIP16s didn’t have enough information to compare valuations to the purchase price, although they didn’t make a big deal of it.  In her recent roadshow presentation, Alison Morgan repeated her request that IPs produce SIP16s that neatly detail the valuations per asset category alongside the price paid.  (You’ll have gathered that Alison had a lot to say about SIP16 compliance – I recommend her presentation!)  Although I share Alison’s view, working through the SIP’s requirements in the order listed is not conducive to presenting the valuation figures alongside the sale price, so this is definitely a SIP16 area that I think could be usefully changed.

 

What if SIP16 compliance does not improve?

Ooh, the government is waving its stick about here:

“Should these non-legislative measures be unsuccessful in improving regulatory compliance, the quality of the information provided to creditors and the transparency of pre-pack sales in administration, government will consider whether supplementary legislative changes are necessary.”

SIPs have pretty-much the same degree of clout as legislation.  In the case of SIP16, arguably it carries a greater threat.  There have been several RPB reprimands for SIP16 breaches published over recent years.  How many court applications does the government think will result if they enshrine SIP16 in legislation?  More than the number of RPB reprimands?  If IPs are failing to comply with SIP16, it’s not because the SIP is toothless.

 

Will the measures solve the pre-pack “problem”?

In my view, no.  There is just too much general cynicism about IPs being in cahoots with directors and about directors being determined to stiff their creditors.

What I think might help a little is if our regulators – the Insolvency Service and the RPBs – reported a balanced perspective of SIP16 compliance.  I know that the report acknowledges that most SIP16 disclosure breaches are “minor technical” ones, but the simple stats grab the headline.  We also need a simpler SIP16 so that compliance is easier to achieve and to measure.  Concentrating on the minutiae and concluding that the statement is non-compliant just does not help.  Are the minutiae really necessary?  Does it improve the “quality” of the information and the transparency of the sale?  I know, I know, the SIP isn’t going to get any simpler, is it?

I think the regulators might also help if they were to defend themselves and in so doing defend IPs as a whole.  Do they not realise that the perceptions that pre-packs are not in creditors’ best interests is also a slight on how they may be failing to regulate IPs effectively?  No one naïvely claims that all IPs are ethical and professional, so what steps have the RPBs taken to tackle the actual, suspected or alleged abusers of the process?  If they have identified them and are dealing with them, then can they not publicise that fact and confirm that the rest of the IP population are doing the right thing?  Instead, all we hear especially from the Insolvency Service is that, while pre-packs are a useful tool, IPs do a poor job of acting transparently and that there needs to be an independent eye scrutinising the proposed deal to give creditors confidence.  Are not the regulators the policemen in this picture?


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Is the Pre-Pack’s Sun Setting?

As HMV has demonstrated, buying a business out of an administration does not guarantee its survival.  But the sale of the HMV business 5 years’ ago was not a pre-pack – the Company had traded for several months in administration before the deal was done.  Does the pre-pack deserve to be demonised?  In view of the SBEE Act’s sunset clause deadline of May 2020, what are the pre-pack’s chances of survival?

As promised way back in July, this is my third article looking at the Insolvency Service’s 2017 review of regulation.  My sincere apologies to regular readers.  I have soooo wanted to blog, I have had articles aplenty in my head, but I’ve simply not had the time to get them out.  I will try harder in 2019!

The Insolvency Service’s 2017 Review of IP Regulation can be found at:  https://tinyurl.com/ycndjuxz

The Pre Pack Pool’s 2017 Review is at: https://tinyurl.com/y92fvvqf

 

SIP16 Compliance Rate Flatlines

Of course, we all know that compliance with the SIP16 disclosure requirements has no real relevance to whether a pre-pack is “good” or “bad”.  Personally, I’d also argue that strict compliance with the disclosure requirements does little to improve perceptions… not when compliance is measured on whether or not the IP has ticked every last little disclosure box.  However, this is what the RPBs are measuring us on, so it can only be to our advantage to try to meet the mark.The analysis of this rate by each RPB shows an intriguing effect:Last year, the stats for the two largest RPBs appeared poles apart: the IPA’s compliance rate was 91% but the ICAEW’s was less than half this figure, at 39%.  But now look at those two RPBs’ rates: they have converged on 59%.  How odd.

I very much doubt that the IPA’s IPs have got decidedly worse at SIP16 compliance over the year.  I wonder if it has more to do with RPB staff changes – perhaps it is more than coincidental that an ICAEW monitoring staff member moved to take up a senior role within the IPA in late 2016.

What about the change in the ICAEW’s IPs’ fortunes last year?  It is more difficult to identify a trend in the ICAEW’s figures, as they reviewed only 23% of all SIP16 statements received in 2017 – they were the only RPB to have reviewed only a sample, which they chose on a risk-assessment basis.  The ICAEW had focused on SIP16 statements submitted by IPs for the first time, or for the first time in a long time, or by IPs whose previous statements had fallen short of compliance.  On this basis, it is encouraging to see such an improved compliance rate emerging from what might seem to be the high risk cases.  It makes me wonder what the compliance rate would have been, had the ICAEW reviewed all their SIP16 statements: rather than the flatline, would we have seen an overall strong improvement in the compliance rate?

From my personal reviewing experience, I am finding that many SIP16 statements are still missing the 100% compliant ideal, but the errors and omissions are far more trivial than they were years’ ago.  I suspect that few of the 38% non-compliant statements spotted by the RPBs contained serious errors.  Having said that, earlier this year the IPA published two disciplinary consent orders for SIP16 breaches, so we should not become complacent about compliance, especially as pre-packs continue to be a political hot potato and now that the RPBs have been persuaded by the Insolvency Service to publicise IPs’ firms’ names along with their own names when disciplinary sanctions are issued. 

 

A Resurgence of Connected Party Sales

Regrettably, the Insolvency Service’s 2017 review provided less information on pre-packs than previous reviews.  No longer are we able to examine how many pre-packs involved marketing or deferred consideration, but we can still look at the number of sales to connected parties:

Last year, I pondered whether the pressure on IPs to promote the Pre Pack Pool may have deterred some connected party sales.  I was therefore interested to see that, not only had the percentage of connected party sales increased for 2017, but the percentage of referrals to the Pool has decreased – coincidence?

Personally, now I wonder whether the presence of the Pool has any material influence on pre-pack sales at all.  I suspect that the increased percentage of connected party sales may have more to do with the economic climate: who would want to take on an insolvent business with such economic uncertainties around us?  I suspect that now it is more and more often the case that connected parties are the only bidders in town.

 

Insights of the Pre Pack Pool

With such a tiny referral rate – the Pool reviewed only 23 proposed sales over the whole of 2017 (there were 53 referrals in the previous 14 months, since the Pool began) – does the Pool have any real visibility on pre-packs?

The Pre Pack Pool issued its own annual review in May this year.  Here is an analysis of the opinions delivered by the Pool:

This seems to suggest that the quality of applications being received by the Pool is deteriorating.  But, as the Pool gives nothing much away about how they measure applications, I am not surprised.

The Pool’s review states that: “Although the referral rate is much lower than expected, the Pool does perform a useful function where it has been approached.  Feedback from both connected party purchasers and creditors has been positive where we have received it.”

But what exactly are the benefits of using the Pool?

The Pool suggests that creditors/suppliers could put more pressure on Newcos to make use of the Pool, but it also notes that less than 1% of all complaints to the InsS in 2016 were about pre-packs (shame the Pool’s report did not refer to the number of pre-pack complaints in 2017: zero).  Maybe there is little pressure put on purchasers to approach the Pool, because the reasonableness or not of the pre-pack doesn’t really come into it when creditors are deciding to supply to Newcos.  The Pool review suggests that major stakeholders such as lenders and HMRC could insist on a Pool referral, but why should they when the Pool has yet to prove its value?

 

What makes a Bad Pre-Pack?

Stuart Hopewell, director of the Pool, has been quoted as stating that he “has seen cases where the objective [of the pre-pack] was avoidance of liabilities”, which led to the tagline that “businesses are sidestepping tax bills amounting to tens of millions of pounds using an insolvency procedure that the government is considering banning” (Financial Times, 26/11/2018).

How does Hopewell spot these abuses?  The Pool itself is not at all transparent about what, in its eyes, results in a “case not made” opinion, but the same article referred to the Pool giving “a red card, based on the tax situation”.  This suggests to me that their focus may be more on how the company became insolvent, rather than whether the pre-pack sale is the best outcome for the creditors at that point in time.  It seems to me that the Pool may be deciding that the pre-pack is the final step in a director’s long-term plan to rack up liabilities and walk away from them, whereas I suspect that most IPs first see a director who – as a result of wrong decisions or for reasons outside their control – is at the end of the road, having racked up liabilities they can no longer manage.  What should happen?  If the pre-pack were refused, the likely outcome would be liquidation with strong chances that the director would, via a S216 notice, start up again, possibly with a cluster of the original workforce and assets purchased at liquidation prices.  On the other hand, if the pre-pack were completed, it would most certainly generate more sales consideration and would be less disruptive for the employees, customers and suppliers.  But wouldn’t refusing a pre-pack result instead in a business sale to someone else, an unconnected party, even if at a reduced price?  I think that this is doubtful in the vast majority of cases.

 

It’s not all about the Pool

The Insolvency Service’s annual review lists some questions that its pre-Sunset Clause pre-pack review will seek to answer:

  • “Has the Pool increased transparency and public confidence in connected party pre-pack administrations?
  • “What numbers of connected party purchasers have chosen not to approach the Pool and why?
  • “What is the success rate of the new company where purchasers approached the Pool between 1 January 2016 and 31 December 2016?”

While these are all valid questions, I do hope the questions won’t stop there.

Ever since Teresa Graham’s recommendations in 2015, the Pre Pack Pool has occupied the limelight.  I think that’s a real shame, as I believe that other things are responsible for the improvements to the pre-pack process that we have seen over time.  Although I complain about the micro-monitoring that the Insolvency Service has inflicted on SIP16 compliance, it cannot be denied that the regulators’ emphasis on SIP16 compliance has improved the amount of detail provided.  More importantly perhaps, the RPBs’ emphasis on documenting decisions has helped some IPs question why certain strategies are pursued – most IPs do this anyway, but I think that some need to challenge their habitual reactions and sometimes exercise a bit more professional scepticism at what they’re being told.

The mood music around the pre-pack review seems to be about increasing the Pool’s reach, potentially making a referral to the Pool mandatory (for example, see R3’s May 2018 submission: https://tinyurl.com/y7kf22ul).  However, as with all proposed reforms, the first steps are to identify the problem and to define what one wants to achieve.  I would question whether the problem is still a lack of public confidence in pre-packs – it seems to be more about a lack of confidence in dealing justly with directors who ignore their fiduciary duties in a host of different ways – and, even if it were about confidence in pre-packs, we’re a long way from determining whether the Pool is the best tool to fix this.

 

Slow Progress

Finally, here is a summary of other items that were on the Insolvency Service’s to-do list at the time of publication of their 2017 annual review.  Of course, to be fair the government has kept the Insolvency Service otherwise occupied over the year.  You might be forgiven for having a sense of deja-vu – it looks frighteningly similar to 2017’s list and I assume that the tasks will now be carried over to 2019:

  • Replacement of the IS/RPB Memorandum of Understanding with “Guidance” – their initial draft required “a number of changes” and, as at May 2018, was being run past the “DfE” (Department for Education?). Nevertheless, the Service had anticipated that the guidance would “come into effect during the course of 2018”.
  •  A solution to the bonding “problem”? – the Insolvency Service’s call for evidence closed in December 2016 and they expected a follow-on consultation “soon”. A Claims Management Protocol, i.e. to set out how bond claims should proceed, is being developed: “possible publication, later this year”.  The Service is also looking at the bond wording.
  • Cash for complainants? – the early message that the Service was exploring with the RPBs if a redress mechanism for complainants could work seems to have evolved into work to determine how redress will be incorporated. “Once agreement has been reached”, the Service plans to include information on the Complaints Gateway website “to ensure complainants are aware of this recent development”.  Oh well, that’s one way to reverse the trend in falling complaint numbers!
  •  Revised IVA Protocol – although .gov.uk holds minutes of the IVA Standing Committee only up to July 2017, the Service reported that the Committee anticipated that we could look forward to a revised IVA Protocol likely later in 2018.
  • Revised Ethics Code – this was also expected later in 2018. I understand that accountancy bodies’ ethics code is currently being revised and therefore the JIC has decided to wait and see what emerges from this before finalising a revised insolvency code.

 


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The stats of IP Regulation – Part 1: Complaints

My annual review of the Insolvency Service’s 2017 IP regulation report has thrown up the following:

  • The number of IPs drops again – the third year in a row
  • Good news: 2017 saw half as many complaints referred through the Gateway as 2015
  • This may be partly due to the Insolvency Service’s sifting process: almost half of all complaints put to the Gateway in 2017 were sifted out
  • Sadly, despite the overall reduction, there were more sifted-in complaints from creditors in 2017 than in the previous year
  • The RPBs seem to be generating more complaints sanctions: 10 years’ ago, 1 IP in 100 could receive a complaints sanction; now it is c.1 in 20

The Insolvency Service’s report can be found at: https://tinyurl.com/ycndjuxz

 

IPs leaving the profession

As the following graph shows, the number of appointment-taking IPs has fallen for the third year in a row:In ICAS’ 2017 monitoring report (https://www.icas.com/regulation/insolvency-monitoring-annual-reports), that RPB puts the decrease down to the number of IPs who have retired, which I suspect is probably the case across the board.  And we’re not seeing their number being replaced by new appointment-takers.  I can’t say I’m surprised at that either: regulatory burdens and personal risks continue to mushroom, formal insolvency cases (especially those with assets) appear more sparse and the media has nothing good to say about the profession.  Why would anyone starting out choose formal insolvency as their career choice?

Admittedly, it’s not an alarming fall… not yet… but one has to wonder how the Insolvency Service proposes to address this trend, given that one of their regulatory objectives introduced in 2015 was to encourage an independent and competitive profession.

But what is life like for current IPs?  Is there no good news?

 

Another dramatic fall in complaints

Much more striking is the fall in the numbers of complaints referred to the RPBs:No one – the Insolvency Service, RPBs or R3 – is shouting about this good news: the fact that the complaint number has halved since 2015, the first full year of the Complaints Gateway’s operation?  I would have thought that the InsS could have easily spun it into a story about the success of the Gateway or of their policing of insolvency regulation generally, no? 😉

 

Where are the rem and pre-pack complaints?

I wonder if the subject matter of the complaints is one reason why the InsS may not be keen to draw attention to complaints trends.

The following analyses the complaints put through the Gateway:If we were asked what areas of apparent misconduct we thought were the top of the InsS’s hit-list, I suspect most of us would answer: IP fees and pre-packs.  But, as you can see, these two topics have never featured large in complaints.

Despite the fees regime becoming more and more complex and involving the delivery of more information and rights to creditors to question or challenge fees, you can see that the complaints about fees have dropped: there were 19 in 2014 and only one last year.  And last year, there were no complaints about pre-packs.

This graph demonstrates what might be behind the drop in complaint numbers: there is a marked decrease in complaints about SIP3 and communication breakdowns.  I think that’s certainly good news to shout about.

So in what areas could we perhaps try harder to avoid attracting complaints?

 

Complaint danger zones?

The following analysis supports the perception that IVAs are attracting fewer complaints than in recent years, although IVAs are still number one.  In fact, it demonstrates that all insolvency proceedings are attracting fewer complaints.However, when looked at as a percentage of complaints received…… it would seem that complaints about ADMs and PTDs aren’t dropping quite as quickly as those for other processes.  Putting the two analyses together leads me to wonder whether ethics-related complaints involving ADMs now form a disproportionately large category of complaints, particularly in view of the relatively small number of ADMs compared with IVAs and LIQs.  Press coverage would also appear to support this area as a growing concern.

 

Creditors are lodging more complaints

The following graph gives us a little more insight into the origin of complaints:This shows that creditors are the only category of complainant that has seen an increase in the number of complaints lodged over the past year.  Could the profession do more to help creditors understand insolvency processes and especially ethics?

The Insolvency Service has reported for a few years now that the Insolvency Code of Ethics has been under review.  As we know, the JIC/RPBs launched a consultation on a draft Code last year – the consultation closure date has almost hit its anniversary!  The InsS 2017 review reported that a revised Insolvency Code of Ethics “is expected to be issued later this year”.  It seems to me that a fresh and clear revised Code could help us address the number of complaints lodged.

 

Not every complaint is a complaint

I highlighted last year that it seemed the InsS had been sifting out a greater number of complaints as not meeting the criteria for referring over to the relevant RPB.  This shows how that trend has developed:Wow!  So for the first time, the InsS rejected more complaints that it referred: almost half of all complaints were rejected (48%) and only 41% were referred.  Compare this to the first few months of the Gateway’s operation when only 25% were rejected and 72% were referred.  Nevertheless, setting aside the number of rejected complaints, it is good to see that even the trend for the number of complaints received is a nice downwards slope.  And in case you’re wondering, I suspect that the remaining 11% of complaints received are still being processed by the IS – a fair old number, but pleasingly a lot less than existed at the end of 2016.

Of course, the Gateway is still relatively young and it is good to read that the InsS is continually refining its sifting processes, as can be seen from the following graph:This indicates that a large part of the increase in rejected complaints is because more complainants have not responded to the Insolvency Service’s requests for further information.

For 2017, the Insolvency Service added a new category of rejections: complaints that were about the effect of an insolvency procedure.  Although there will always be some creditors and debtors who complain about the fairness of insolvency processes, perhaps an unintended benefit of the Complaints Gateway is that the InsS receives first-hand expressions of dissatisfaction about the design of the insolvency process… although let’s hope the InsS considers using such intelligence to amend legislation where sensible, rather than try to force IPs to fudge legislative flaws via Dear IPs and the like.

You might expect that, as the Insolvency Service rejects more complaints, so the percentage of sanctions arising from complaints that make it past the sifting process should increase.

 

Roughly one complaint out of every five results in a sanction

Well, you’d be right.The trendline here suggests that a complaint was twice as likely to end up in a sanction in 2017 as it was 10 years’ ago.

You might be wondering what is going on with ACCA-licensed IPs: how can over half of their complaints result in a sanction compared to an average elsewhere of around 10-20%?!

I agree that the figures are odd.  However, it should be remembered that complaints are not always closed in the year that they are opened.  And in this respect, the ACCA’s stats appear particularly odd.  For example, in last year’s InsS report, it was stated that the ACCA had only one 2013 complaint remaining open, but in this year’s report, apparently there are now thirteen 2013 open complaints against ACCA-licensed IPs!  The ACCA went through some enormous changes last year, as their complaints-handling and monitoring functions were taken over by the IPA with effect from 1 January 2017.  Could this structural change be behind the unusual stats?  Or perhaps the ACCA had been handling some particularly sticky complaints in 2014 and 2015, when their sanctions were low, and those investigations have now come to fruition.

The same effect of sanction clustering could be operating within the other RPBs in view of the spiky lines above.  Therefore, perhaps it would be wise to avoid drawing conclusions about apparent inconsistencies between RPBs’ complaints processes based on 2017’s figures alone.  However, averaging out the figures over the past three years, we can see that 23% of complaints against IPA-licensed IPs resulted in a sanction, whereas only 5% of complaints against ICAEW-licensed IPs did so.  I believe that the IPA licenses more than its fair share of IVA-specialists, so this might account for at least some of the difference.

 

Increased sanctions are not just a Gateway-sifting effect

But what about my suggestion above: that the increased number of sifted-out complaints has led to a larger proportion of complaints allowed through the Gateway leading to a sanction?

That’s not the whole story:This shows that the number of complaints sanctions per IP has also been on an upward trend: around 1 in 100 IPs received a sanction in 2008, whereas this figure was closer to 1 in 20 in 2017.

What is behind this trend?  I really don’t believe that it’s because more IPs now conduct themselves in ways meriting sanctions (or because there are a few IPs who behave badly more often).  And as we’ve seen, the number of complaints lodged doesn’t support a theory that more people complain now.

It must be because expectations have been raised, don’t you think?  Or perhaps because the increased prescription in rules and SIPs has led to more traps?

Hidden measuring-sticks?

For example, the InsS report describes one IP’s disciplinary order, stating that the IP had breached SIP16 “by failing to provide a statement as to whether the connected party had been made aware of their ability to approach the pre-pack pool and/or had approached the pre-pack pool and whether a viability statement had been requested from the connected party but not provided”.  Firstly, SIP16 doesn’t strictly require IPs to state whether connected parties have been made aware of the pool.  Secondly, SIP16 states that the SIP16 Statement should include “one of” two listed statements, only one being whether the pool had been approached.  Yes, I’ll accept that it seems the IP did not provide information on the existence of a viability statement, although I would have thought that, if a copy of a viability statement were not provided with the SIP16 Statement, then surely the likelihood is that the IP was not provided with one.  I appreciate I am splitting hairs here, but if a SIP is not crystal-clear on what is required of IPs, is it any wonder that slip-ups will be made?  And if a disciplinary consent order were generated every time an IP had omitted to meet every last letter of the SIPs and Rules, then I suspect no IP would be found entirely blameless.  Ok yes, there exists a mysterious fanaticism around SIP16 compliance and we would do well to check, check and check again that SIP16 Statements are complete (and hang the cost?).  However, I think this demonstrates how standards have changed: 10 years’ ago, would an IP have been fined £2,500 and have his name in lights for omitting one line from a report (hint: SIP16 began life in 2009)?

 

In my next blog, I’ll explore the RPB statistics on monitoring visits.


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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:

Graph7

(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):

Graph8

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.