Insolvency Oracle

Developments in UK insolvency by Michelle Butler


2 Comments

Compliance Hot Topics

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

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

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

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

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

 

Issues that have led to Committee-referral

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

1. Remuneration

The ICAEW reported instances of:

  • Drawing fees without proper authority

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

  • Fees (or proposed fees) appearing excessive or unreasonable

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

  • Failing to follow the decision procedure rules

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

  • Failing to provide fee estimates, where required

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

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

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

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

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

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

 

2. Ethics

The ICAEW reported three instances where:

  • Prior relationships had not been considered

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

Unsurprisingly, the ICAEW’s tips are:

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

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

 

3. Investigations

The ICAEW reported:

  • A systemic failure to record sufficient SIP2 work

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

  • Failure to pursue antecedent transactions

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

The ICAEW’s tips are:

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

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

 

4. Statutory Deadlines

The ICAEW reported:

  • An increasing number of systemic failures to meet deadlines

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

The ICAEW’s tips are:

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

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

 

5. Insolvency Compliance Reviews

 The ICAEW reported:

  • Weak or non-existence ICRs

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

  • Failure to implement changes

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

The ICAEW’s tips are:

  • Use a robust checklist to carry out the ICR

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

  • Make the necessary changes

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

 

6. Information to Debtors

The ICAEW reported:

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

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

The ICAEW’s tips are:

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

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

 

The Worst of the Rest

Yes, there’s more… lots more.

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

  • Miscalculation of delivery timescales

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

  • Flaws in reports and fee estimates

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

  • Poor case progression and dividend practices

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

  • Inadequate annual AML tasks

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

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

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

  • Inadequate GDPR checks

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

 

SIP11 Reviews

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

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

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

  • Then review them annually

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

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

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

  • Review the findings of the annual client account compliance review

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

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

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

  • Review a sample of bank recs

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

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

 


Leave a comment

Regulatory Hot Topics: (1) the SIPs

4017 Uluru

Last month, I conducted a webinar for R3 with Matthew Peat, senior compliance officer with ACCA, entitled Regulatory Hot Topics.  The aim was to highlight some areas that we both had seen some IPs stumble over.  I thought there might be value in summarising some of the issues we covered.  In this post, I cover just the SIPs.

SIP2 – Investigations by Office Holders in Administrations and Insolvent Liquidations

Some firms are using checklists that are not well-designed for the task of carrying out a SIP2 investigation.  In particular:

  • Checklists should reflect the fundamental difference between a SIP2 investigation and considering matters of relevance for a D-report/return. SIP2 requires the administrator/liquidator to consider whether there may be any prospect of recovery in relation to antecedent transactions.
  • Checklists should guide you through the SIP2 requirement of conducting an initial assessment on all cases and then moving on to making a decision on what further work, if any, is merited.
  • Checklists should help you meet the SIP2 requirement to document findings, considerations and conclusions reached.

Other recommendations include:

  • Make collection of books and records a priority in the early days of an appointment.
  • SIP2 also requires the outcome of the initial assessment to be reported to creditors in the next progress report.  Although there is an obvious tension between full disclosure and keeping one’s powder dry for progressing any claims, it is not sufficient to report in every case that all investigations are confidential, remembering that SIP2 is not referring to D-reporting matters. If nothing has been revealed that might lead to a potential recovery, this should be reported; if something has been identified, then some thought will need to be given as to what can be disclosed.

SIP3.1 & SIP3.2 – IVAs & CVAs

The “new” SIPs have been in force now for eight months, so all work should now have been done to adapt processes to the new requirements.  In particular, the SIPs require “procedures in place to ensure”, which is achieved more often by clear and evidenced internal processes.  It is also arguable that, even if particular problems have not appeared on the cases reviewed on a monitoring visit, you could still come in for criticism if the procedures themselves would not ensure that an issue were dealt with properly if it arose.

The SIPs require assessments to be made “at each stage of the process”, i.e. when acting as adviser, preparing the proposal, acting as Nominee, and acting as Supervisor.  At each stage, files need to evidence consideration of questions such as:

  • Is the VA still appropriate and viable?
  • Can I believe what I am being told and is the debtor/director going to go through with this?
  • Are necessary creditors going to support it?
  • Do the business and assets need more protection up to the approval of the VA?

The SIPs elevate the need to keep generous notes on all discussions and, in addition to the old SIP3’s meeting notes, require that all discussions with creditors/ representatives be documented.

I would recommend taking a fresh look at advice letters to ensure that every detail of SIP3.1/3.2 is addressed.  The following suggested ways of dealing with some of the SIP requirements are only indicators and do not represent a complete answer:

  • “The advantages and disadvantages of each available option”

Personally, I think the Insolvency Service’s “In Debt – Dealing with your Creditors” makes a better job at covering this item than R3’s “Is a Voluntary Arrangement right for me?” booklet, although neither will be sufficient on its own: in your advice letter, you should make application to the debtor’s personal circumstances so that they clearly understand their options.

Similarly, you can create a generic summary of a company’s options, which would be a good accompaniment to your more specific advice letter for companies contemplating a CVA.

  • “Any potential delays and complications”

This suggests to me that you should cover the possibilities of having to adjourn the meeting of creditors, if crucial modifications need to be considered.

  • “The likely duration of the IVA (or CVA)”

Mention of the IVA indicates that a vague reference to 5 years as typical for IVAs will not work; the advice letter needs to reflect the debtor’s personal circumstances.

  • “The rights of challenge to the VA and the potential consequences”

This appears to be referring to the rights under S6 and S262 regarding unfair prejudice and material irregularity.  I cannot be certain, but it would seem unlikely that the regulators expect to see these provisions in detail, but rather a plain English reference to help impress on the debtor the seriousness of being honest in the Proposal.

  • “The likely costs of each [option available] so that the solution best suited to the debtor’s circumstances can be identified”

This is a requirement only in relation to IVAs, not CVAs, and includes the provision of the likely costs of non-statutory solutions (depending, of course, on the debtor’s circumstances).

An Addendum: SIP3.3 – Trust Deeds

After the webinar, I received a question on whether similar points could be gleaned from SIP3.3, which made me feel somewhat ashamed that we’d not covered it at all.  To be fair, neither Matthew nor I has had much experience reviewing Trust Deeds, so personally I don’t feel that I can contribute much to the understanding of people working in this field, but I thought I ought to do a bit of compare-and-contrast.

An obvious difference between SIP3.3 and the VA SIPs is that the former includes far more detail and prescription regarding consideration of the debtor’s assets (especially heritable property), fees, and ending the Trust Deed.  However, setting those unique items aside, I was interested in the following comparisons:

  • The stages and roles in the process

SIP3.3 identifies only two stages/roles: advice-provision and acting as Trustee.  I appreciate that the statutory regime does involve the IP acting only in one capacity (as opposed to the two in VAs), but I am still a little surprised that there is no “right you’ve decided to enter into a Trust Deed, so now I will prepare one for you” stage.

SIP3.3 also omits reference to having procedures in place to ensure that, “at each stage of the process”, an assessment is made (SIP3.1 para 10).  Rather, SIP3.3 requires only that an assessment is made “at an appropriate stage” (SIP3.3 para 18).  Personally I prefer SIP3.3 in this regard, as I fear that SIP3.1/3.2’s stage-by-stage approach is too cumbersome and risks the assessment being rushed through by a bunch of tick-boxes, instead of considering the circumstances of each case more intelligently and purposefully.

  • The options available

There are some differences as regards the provision of information and advice on the options available, but I am not sure if this is intended to be anything more than just stylistic differences.

For example, SIP3.1 prompts for the provision of information on the advantages and disadvantages of each available option at paras 8(a) (advice), 11(a) (documentation), and 12(e) (initial advice), but SIP3.3 refers to this information only at para 20(a) (documentation).  Does this mean that IPs are not required to discuss advantages and disadvantages, but just hand over details to the debtor?

In addition, SIP3.3 does not specifically require “the likely costs of each [option]” (SIP3.1 para 12(e)).  The assessment section also does not include “the solutions available and their viability” (SIP3.1 para 10(a)); I wonder if this is because there is less opportunity in a Trust Deed to revisit the decision to go ahead with it, whereas in VAs the Proposal-preparation/Nominee stage can be lengthy giving rise to a need to revisit the decision depending on how events unfold.

Having said that, I do like SIP3.3’s addition that the IP “should be satisfied that a debtor has had adequate time to think about the consequences and alternatives before signing a Trust Deed” (para 34).

  • Additional requirements

Other items listed in SIP3.3 that an IP needs to deal with pre-Trust Deed (for which there appears to be no direct comparison with SIP3.1/3.2) include:

  1. Advise in the initial circular to creditors, the procedure for objections (para 9);
  2. Assess whether the debtor is being honest and open (para 18(a));
  3. Assess the attitude (as opposed to the likely attitude in SIP3.1/3.2) of any key creditors and of the general body of creditors (para 18(c));
  4. Maintain records of the way in which any issues raised have been resolved (para 20(d));
  5. Summaries of material discussions/information should be sent to the debtor (para 20) (in IVAs, this need be done only if the IP considers it appropriate); and
  6. Advise the debtor that it is an offence to make false representations or to conceal assets or to commit any other fraud for the purpose of obtaining creditor approval to the Trust Deed (para 24).

 

SIP9 – Payments to Insolvency Office Holders and their Associates

The SIP9 requirement to “provide an explanation of what has been achieved in the period under review and how it was achieved, sufficient to enable the progress of the case to be assessed” fits in well with the statutory requirements governing most progress reports as regards reporting on progress in the review period.  Thus, although it often will be appropriate to provide context by explaining some events that occurred before the review period, try to avoid regurgitating lots of historic information and make it clear what actually occurred in the review period.

In addition, in order to meet the SIP9 principle, it would be valuable to reflect on the time costs incurred and the narrative of any progress report.  For example:

  • If time costs totalling £30,000 have been incurred making book debt recoveries of £20,000, why is that?       Are there some difficult debts still being pursued? Or perhaps you are prepared to take the hit on time costs. If these are the case, explain the position in the report.
  • If the time costs for trading-on exceed any profit earned, explain the circumstances: perhaps the ongoing trading ensured that the business/asset realisations were far greater than would have been the case otherwise; or perhaps something unexpected scuppered ongoing trading, which had been projected to be more successful.
  • If a large proportion of time costs is categorised under Admin & Planning, provide more information of the significant matters dealt with in this category, for example statutory reporting.

Other SIP9 reminders include:

  • If you are directing creditors to Guides to Fees appearing online, make sure that the link has not become obsolete and that it relates directly to the Guide, rather than to a home or section page.
  • Make sure that the Guide to Fees referenced (or enclosed) in a creditors’ circular is the appropriate one for the case type and the appointment date.
  • Make sure that reference is made to the location of the Guide to Fees (or it is enclosed) in, not only the first communication with creditors, but also in all subsequent reports.

 

In future posts, I’ll cover some points on the Insolvency Code of Ethics, case progression, technical issues in Administrations, and some tips on how monitors might review time costs.


Leave a comment

SIP2 – No Spin

1303 Las Vegas

A couple of months ago, I presented a webinar for R3 on SIP2. I thought I’d make the most of my efforts and post here some key points of that presentation. There’s nothing critical or new here; it’s just offered as a reminder of the contents and application of SIP2.

For ease of reference, SIP2 (or at least the E&W copy) can be found at http://www.r3.org.uk/index.cfm?page=1746 along with R3’s Practical Guidance Note, to which I also refer below.

The Purpose of SIP2

I think there’s a risk that SIP2 is viewed sometimes as setting the standards of investigation for D-reporting purposes. That seems to be how the Insolvency Service presents it in its Guidance Notes for Completion of CDDA Reports/Returns (http://www.bis.gov.uk/insolvency/Publications/publications-by-theme/insolvency-practitioners-publications). However, that’s clearly not the emphasis of SIP2 itself. The only reference to CDDA work is way down at paragraph 18: “an office holder should be mindful of the impact of the outcome of investigations on reports on the conduct of directors”.

The key purposes behind SIP2 are set out in the introduction. One purpose is to help office holders “to carry out appropriate investigations in order to address the specific duties of the office holder” (paragraph 2), which are described as investigating “what assets there are (including potential claims against third parties including the directors) and what recoveries can be made” (paragraph 1).

The introduction also describes the need for an office holder to carry out appropriate investigations “to allay if possible the legitimate concerns of creditors and other interested parties”. In the webinar, I described what those legitimate concerns might be and how office holders could allay them, although, to be honest, I found it a difficult topic to cover: unless the office holder goes to great lengths to investigate and explain the circumstances of a company’s demise, would creditors’ concerns ever truly be allayed? And is there a risk that an office holder could spend too much time (and money) exploring creditors’ concerns, which hold out no hope of enhancing any dividend prospect? Is that really what SIP2 is endorsing?

Therefore, in the webinar I majored on what I believe is the key purpose of SIP2: to identify what assets there are, including potential recoveries from challenges to antecedent transactions. As this objective is quite different from identifying what might be appropriate for a D-report (albeit that it might reveal matters relevant to a D-report), personally I feel SIP2 should have a different place in the case administration process. I do not believe that any SIP2 review/checklist should be nestled within a CDDA review. I also believe that it should be carried out – at least informally – much earlier than the traditional timing of CDDA reviews, which pretty-much seems to happen in month 5. Identifying the potential of hidden assets is often what being an office holder is all about and it is where office holders can really demonstrate their skills and add value to the insolvency process.

The R3 Practical Guidance Note

I suspect that there are many SIP2 checklists out there that pre-date the revised SIP2, which was released in May 2011, and I can see that, apart from the extension of SIP2 to Administrations, the current SIP2 plus R3 Guidance Note do not differ much from the old SIP2. However, there was a purpose in stripping out much of the prescription that was in the old SIP2. One of the two overriding principles of the current SIP2 is that investigations should be “proportionate to the circumstances of the case”. The JIC recognised that not every checklist item in the old SIP2 was a proportionate measure on every case. I know how IPs love to create step-by-step recipes for most aspects of case administration, but I think that the motive behind the 2011 SIP2 revision included an attempt to encourage IPs to be more intelligent about investigations.

However, the downside of less prescription is a nervousness on the part of some IPs as to how the regulatory bodies would measure concepts such as proportionality. How is an IP to know whether the extent of investigations he feels are proportionate meets the RPB’s expectations? Although I have some sympathy with this, I would suggest that IPs who keep in touch with their RPBs via newsletters, roadshows, and monitoring visits, with developing case law, and with what their peers are doing, by means of a healthy exchange of competent staff and by having a friendly IP or two (or a consultant, of course) to chat things over with, should be able to make a reasonable judgment of what is acceptable and appropriate. And IPs who document their thought-processes adequately should be in a position to set out a reasonable defence of their actions, if challenged.

But, once upon a time, when SIPs were “best”, rather than required practice, the old SIP2’s prescriptive steps-to-take-for-a-successful-investigation had been useful to IPs. As a consequence, this information was reproduced in the R3 Practical Guidance Note so that it was not lost forever. But it is worth remembering that this note is only guidance – it would be wrong to follow it slavishly for every case without having regard for the specific circumstances.

The Structure

The SIP identifies a two-stage process:

• Steps expected on all cases, culminating in an “initial assessment”
• Deciding on and proposing further investigation, seeking appropriate sanction and communicating with creditors

Steps expected on all administrations and insolvent liquidations

Locate, secure and list books and records

Helpful resources (if you need/want any such material!) include:

• Insolvency Guidance Paper: “Systems for Control of Accounting and other Business Records” (March 2006): http://www.icaew.com/~/media/Files/Technical/Insolvency/insolvency-guidance-papers/tech-03-06-insolvency-guidance-paper-systems-for-control-of-accounting-and-other-business-records.pdf (strangely not publicly available on the R3, IPA or Insolvency Service websites)
• R3 Technical Bulletin 104, section 5 (June 2013)
• Dear IP 57, page 10.54 (March 2013): http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/hardcopy.htm. Whilst this relates to disqualification cases, it does help, I think, to convey the difficulties the Service has encountered when an IP’s record-securing process is less than robust.
• Insolvency Service’s CDDA guidance notes – again, this is not strictly SIP2 territory, but it is worth noting that, in disqualification proceedings, “the courts will expect the office holder to have made every reasonable effort to secure accounting records which inevitably means requesting them on more than one occasion” (page 19).

Invite parties to provide information

Invitations are to be sent to creditors (at the first communication/meeting – don’t forget that this applies to Administrations too), committee members, and predecessors in office. The SIP states that you’re asking them “whether prior transactions by the company, or the conduct of any person involved with the company, could give rise to action for recovery” (paragraph 6), so again the purpose is to unearth hidden assets, not to gather information for a D-report.

Make enquiries of directors and senior employees

It is pretty standard procedure for IPs to send questionnaires to the directors… but do you think about senior employees? Also, whilst standard questionnaires do the job adequately, I have seen forms tailored to the specific circumstances of a case. After all, often IPs quickly develop suspicions of where potential recoveries might be hiding – why not slip in the odd question to get right to the point?

The “Initial Assessment”

This should be done “notwithstanding any shortage of funds”, but how much work do you put into this? It might help to focus on what you’re trying to achieve. The SIP states that you should get to a position of being able to decide “whether there could be any matters that might lead to recoveries for the estate and what further investigations may be appropriate” (paragraph 10), so you’re not expected to have positively identified causes of action, but you are expected to have identified possibilities and to have an idea of what you might do to get to that stage.

The R3 Guidance Note recommends (i) comparing the SoA with the last filed/management accounts and (ii) carrying out a preliminary review of the books, records and minutes over the last 6 months. I also think it is a good idea simply to list the possible rights of action – the list of sections of the IA86 and CA06 that appears in the Guidance Note – and ask yourself: have I any suspicion that any of these might have occurred?

Over and above this, the extent of your investigations should be determined by taking account of:

• The public interest
• Potential recoveries
• The funds likely to be available to fund an investigation; and
• The costs involved (paragraph 11).

What exactly is the office holder’s public interest role and how much of an influence will this have over the extent of your investigations? Good question, particularly considering that I’m sure we all know of CDDA cases that were not taken forward on the basis that it was not in the public’s interest. I thought the comments of Mr Justice Newey in Wood & Anor v Mistry [2012] (http://www.bailii.org/ew/cases/EWHC/Ch/2012/1899.html) were helpful in noting the liquidator’s public interest role – the case involved liquidators making their own application for a disqualification under the CDDA. Newey J describes the circumstances that might prevail for such an application (paragraph 30).

Seeking Sanction

The statutory requirements for a Liquidator seeking sanction are contained in Schedule 4 of the IA86 and Rules 4.218A to E (for litigation expenses to be paid from floating charge realisations). The statutory requirements for an Administrator are..? Given that Administrators can challenge many antecedent transactions – S213 and 214 being the obvious exceptions – I’m surprised that there seems to be a perception that a Liquidator is better-placed to pursue these matters (although, of course, the duration of likely actions is a consideration). In particular, I understand that HMRC is still in the habit of modifying Administrators’ Proposals to seek the swift move into liquidation on the apparent basis that more will be done about antecedent goings-on… maybe HMRC wants the control over the office holder provided by the statutory requirements to seek sanction (yes I know, it’s highly unlikely that the HMRC appreciates this subtlety). If so, it might be disappointed to note that the recent Red Tape Challenge consultation includes the proposal that the sanction requirements on liquidators of Schedule 4 be dropped.

Although SIP2 does not add further requirements to seek sanction, it does recommend that IPs consider consulting or seeking sanction where they “conclude that the outcome is uncertain and the costs that would be incurred would materially affect the funds available for distribution” (paragraph 13). This makes sense: sometimes creditors are happy for you to spend the estate funds in pursuit of a potential recovery, especially if they think it may mean some pain for the directors, but in some cases they may prefer to cut their losses and run.

Disclosure

In order to obtain sanction, it will be necessary to provide some information on what you’re planning to do. The SIP recognises that it may be more discrete to consult with select creditors, either the major ones or committee members (subject to the statutory requirements mentioned above).

However, the SIP also sets out expectations of communicating with the entire body of creditors “regarding investigations, any action taken, and whether funding is being provided by third parties” (paragraph 17). It does acknowledge the issues of privilege and confidentiality. R3’s recent Technical Bulletin 103 provides some useful information on legal professional privilege and, in relation to confidentiality, you could do worse than consider the Insolvency Ethics Code’s description of the principle.

It may be a difficult balance to achieve, but SIP2 does require “as a minimum” that the office holder includes within the first progress report “a statement dealing with the office holder’s initial assessment, whether any further investigations or action were considered, and the outcome; and include within subsequent reports a statement dealing with investigations and actions concluded during the period and those that are continuing” (paragraph 17). It should be remembered that usually in effect creditors’ money is being used to further investigations and the Ethics Code’s principle of transparency requires office holders to observe their professional duty to report openly to those with an interest in the outcome of the insolvency. In addition, keeping in mind that SIP2 investigations are primarily concerned with identifying hidden assets, it is clear that a bland statement in progress reports such as “the office holders have complied with their requirements to report to the Insolvency Service in relation to CDDA matters but the contents of such a report are confidential” does not meet the SIP2 disclosure requirement.

Further Investigations

The R3 Practical Guidance Note suggests some areas that, “where it is agreed to conduct further investigations.., may be usefully borne in mind, depending on the circumstances of the case and the nature of the investigations”. The suggested areas are pretty-much the old SIP2 points, but my personal opinion is that, if IPs have got to this stage, they should be in an position to decide for themselves how best to conduct further investigations. Surely this is the point at which an IP’s professional judgment comes into play.