Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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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.


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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.