Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: SIP9


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New SIPs, what new SIPs? Part 1: SIP9

The new SIPs might be the RPBs’ worst-kept secret: they’re available on the ICAEW’s website, but the ICAEW has yet to announce their release; in its recent webinar advert, the IPA mentioned in passing that three revised SIPs are “due to be issued in the beginning of March”; whereas ICAS has already presented a (free) webinar on them.

And thank goodness ICAS has been upfront about them!  While R3 stated that “the changes are not expected to be far reaching”, Jo and I think that they very well could be for IPs who still bill Category 2 disbursements.

 

In this blog, I take a look at the revised SIP9, which takes effect from 1 April 2021 in relation to all relevant cases, i.e. including existing cases.  My recommended to-do list includes:

  • Review whether your existing Category 2 disbursements recharges will be prohibited from 1 April and set up safeguards to avoid billing these from that date
  • Revisit all documents that refer to Category 1 or 2 disbursements and change definitions to meet the new SIP9’s, including referring now to Category 1 and 2 “expenses”
  • Ensure that fee proposal and/or progress report templates meet the enhanced disclosure requirements for:
    • The use of associates or those with whom you have a professional or personal relationship that falls short of a legal association
    • Sub-contracting work that could be done by you or your staff
    • Explaining what you expect to be paid (not only what it should cost) and an indication of the likely return to creditors in all cases
    • Making clear what direct costs are included in fixed/percentage fee bases
  • For fees estimates, check that you calculate a blended rate correctly
  • Don’t get too hung up on your MVL documentation, as MVLs are (almost) carved out of the new SIP9

You can access all the revised SIPs (for E&W) from https://www.icaew.com/regulation/insolvency/sips-regulations-and-guidance/statements-of-insolvency-practice/statements-of-insolvency-practice-sips-england

You can access ICAS’ webinar at http://ow.ly/tcGU50DKuCp

 

Changes to recharging costs to estates

Jungle drums have been rumbling for several years now on the topic of whether a cost can be recharged to an estate as an expense or whether it is an overhead that is not permitted to be recharged.  This SIP9 goes some way to clarifying the distinction:

  • Whereas the current SIP9 (I’ll call this the old SIP9 from here on) states that “basic overhead costs” are not permissible as disbursements, the new SIP9 widens the scope to “any overheads other than those absorbed in the charge out rates”.
  • The new SIP9 no longer refers to Category 1 and 2 “disbursements”, but to Category 1 and 2 “expenses”. If you managed to avoid getting into a debate about this with an RPB monitor over the past few years, you may find this an odd and subtle change.  The point is that a “disbursement” is an expense that is first paid by a party (e.g. the IP/firm) and only later recharged to the estate.  The consequence of this change is that direct payments from an estate to an associate are now Category 2 expenses (whereas under the old SIP9, such a payment would be neither a Category 1 nor 2 disbursement, as it is not a disbursement at all).  A more frustrating consequence is that lots of templates – fee proposal packs, disbursements policies, progress reports, Fees Guides – will also need changing to reflect the new terminology.
  • The most important change is the new SIP9’s statement that:

“All payments should be directly attributable to the estate from which they are being made or sought”.

 

Is this the end of Category 2 disbursements?

What does “directly attributable” mean?  Does this mean that you will no longer be able to be paid Category 2 disbursements on a roughly calculated basis, say, £x per creditor to cover stationery and photocopying?  Or internal room hire of £x per meeting?

Here’s the odd thing: although only “directly attributable” costs can be passed on, the SIP still allows “shared or allocated payments”.  An example of a shared cost that David Menzies of ICAS gave in his webinar was where an office holder hires an external conference room for physical meetings in relation to three connected insolvencies: this charge could be split up and passed on to the three cases… but as it is a shared cost, it would be a Category 2 expense… so it would need to be approved before being paid from the estate.

David Menzies helpfully suggested that, for a cost to be directly attributable, there needs to be a direct causal relationship between the cost and the case.  He suggested asking yourself the question: would the cost have been incurred if the case did not exist?  On this basis, it seems to me that photocopying and internal room hire charges could not be viewed as “shared costs”, as the firm would still incur the cost of the photocopier or premises rental whether or not the one case to which you are aiming to recharge the costs existed.

 

What is an “overhead”?

David’s own definition was that overheads are costs that are not directly attributable to an individual insolvency estate but which are incurred in support of insolvency appointments for the IP or are costs associated with other services that the IP/firm provides as part of their business.

So if the cost is incurred to support the administration of a case plus other aspects of the business, it is likely to be an overhead.  Here are some other examples from ICAS’ webinar:

  • Where an IP’s office space is used to store company records, the IP could not charge the estate for storage
  • Where an external storage company charges, e.g., £x per box per quarter, this could be charged to an estate based on the number of boxes stored on that case
  • Where an external storage company charges a global fee for the facility, which is used to store case files and office admin files, this is probably an overhead that could not be split up and charged to the estate
  • Where a mailing company produces a monthly itemised bill, the items relevant to each case could be charged to the estate as a Category 1 expense
  • Where a software provider charges on a per case basis, this could be considered an expense
  • Where a firm pays a global fee for software, e.g. a Microsoft licence, this could not be split up across the cases

I have tried to reflect as closely as possible what was said on the ICAS webinar – and I do see the logic of these examples – but please note that the strict wording of the revised SIP9 does not lead unequivocally to these conclusions.  We expect to see some additional guidance from the RPBs, which may help clearly define the boundaries explored by these examples.

 

How will this affect recharging?

Although the revised SIP comes into force on 1 April 2021, it does not relate only to new appointments from that date.  Therefore, even if you have already obtained approval for Category 2 disbursements that will not be allowed under the revised SIP, you will not be able to draw payment for them from the estate after 1 April.

I suggest that you revisit all your current Category 2 disbursements practices and decide now how you will put safeguards in place to make sure that no “overheads” are inappropriately billed after 1 April.

 

Other Category 2 clarifications: Associates

The revised SIP9 makes it clearer that even the charges from parties with whom the IP/firm has no legal association may fall within the scope of Category 2 treatment.  It states: “Where a reasonable and informed third party might consider there would be an association, payments should be treated as if they are being made to an associate”, i.e. they will need to be approved as a Category 2 expense.

But what is an “association”?  In my response to the JIC consultation, I gave the example that, as an IPA member, I have “an association” with the IPA, so does this mean that I would treat the IPA as an associate (e.g. if I were to hire its boardroom for a creditors’ meeting)?  David Menzies was helpful in his webinar: he suggested that the context here might be the Code of Ethics’ significant professional or personal relationship concept – if such a relationship were present (or might be perceived by a reasonable and informed third party to be present), then this would equate to an association for the purposes of SIP9.

The revised SIP9 adds to the required disclosure: now, office holders must disclose “the form and nature of any professional or personal relationships between the office holder and their associates”… presumably where it is proposed that the insolvent estate shall bear the associate’s fees/costs.

 

It’s not all extra burdens

I suspect that a big relief to many IPs will come in the form of a reduction in scope of SIP9.  With effect from 1 April, SIP9 will no longer apply to MVLs… “unless those paying the fees require such disclosures”.

In the ICAS webinar, it was suggested that a prospective liquidator might ask the members upfront whether they want to receive such disclosures and keep evidence that they had been so asked and what their response is.  But this isn’t in the SIP and personally I hope that this does not become the regulatory expectation for all MVLs.  Quite frankly, if a party is paying your fees, I’m sure you will give them whatever information they so require irrespective of what a SIP does or does not say.

Sensibly, the new SIP9 clarifies that it does not reach to Moratoriums, although I’m not sure that this needed saying considering there isn’t really an “estate” in a Moratorium appointment, is there, there’s simply a “client”?

 

The small print

Here are the other most material changes in the revised SIP that I have seen:

  • Proportionate payments

“All payments from an estate should be fair and reasonable and proportionate to the insolvency appointment” – how do you measure proportionality?

I often query IPs who instruct agents to deal with chattels that are only worth, say, £3,000 when they include agents’ costs of £3,000 (and in some cases, more!) in an expenses estimate.  The IPs often respond that the agents are doing much more than simply realising chattels – will arguments like this fall foul of the proportionate test in future?  Instructing solicitors is another minefield: hindsight sometimes makes such costs look disproportionate to what has been achieved.

 

  • Consider who is approving your fees

“Payments should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest”.

For example… a firm’s IPs are often appointed on Admins by a secured creditor and now you need your fees approved by that secured creditor.  Or… you have paid or plan to pay the company’s accountants for helping on a Statement of Affairs, as you have done on a number of cases before, and those accountants are the only unsecured creditor to vote on your fees.

These relationships certainly give rise to self-interest threats, but do they overstep the SIP9 conflict of interests threshold?  David Menzies suggested that the barrier is reached where there is an unacceptable conflict, not simply an ethical threat that can be managed to an acceptable level with safeguards.

 

  • More disclosure on sub-contractors

The old SIP9 required disclosure where the office holder sub-contracts work that could otherwise by carried out by them or their staff.  Now the disclosure must also include “what is being done and how much it will cost”.

 

  • Not so much what it will cost, but what do you expect to be paid?

Whereas the old SIP9 included as a key issue of concern the anticipated cost of work proposed to be done, now the SIP includes the anticipated payment for the work.  So, for example, while a fees estimate may set out that time costs of £30,000 are anticipated to be incurred, it seems you now need to disclose that, due to insufficient assets, you only expect to be paid £10,000.  Also, where you are seeking (or have approved) a percentage basis, what payment will this likely equate to?

 

  • Always provide an indication of the likely return to creditors

Further crystal ball-gazing now appears necessary: whereas the old SIP stated that “where it is practical to do so”, you need to provide “an indication of the likely return to creditors when seeking approval for the basis of” fees, this has been toughened to a requirement in all cases, whether or not it is practical to do so.

 

  • What is included in your fixed/percentage fee?

Oddly, “where a set amount or a percentage basis is being used, an explanation should be provided of the direct costs included”.  I would think it were more important to be clear about what direct costs are excluded.  The new SIP continues: “The office holder should not seek to separately recover sums already included in a set amount or percentage basis fee and should be transparent in presenting any information”.

 

  • How to calculate a blended rate

Helpfully, the SIP now explains what is meant by a “blended rate”: it “is calculated as the prospective average cost per hour for the appointment (or category of work in the appointment), based upon the estimated time to be expended by each grade of staff at their specific charge out rate”.

You might think this is an obvious definition.  However, I have seen several fees estimates based on a “blended rate” calculated as simply the average of the charge-out rates, e.g. IP at £400 per hour and case-worker at £200 per hour, so the estimate is calculated at £300 per hour.  This method generates an artificially inflated fees estimate where, as you would expect, the case-worker spends the majority of time on the case.

The method that the SIP now promotes is use of a blended rate that reflects the estimated time to be spent on the case.  In the above example, if the IP is estimated to spend 10 hours and the case-worker 60 hours on the case, the blended rate would be c.£229 per hour, leading to a total fees estimate of £16,000, which is much more realistic than the £21,000 (i.e. 70 hours at £300) reflected by the earlier method.

 

There’s more

Yep, there’s a new SIP7 and SIP3.2… and we expect a revision to SIP16 before the end of April.  Never a dull moment!

 


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The Regulators present a unified front on fees

 

In an unprecedented step, the IPA and the ICAEW have issued largely consistent articles on fees, SIP9 and reporting. I think some of the points are well worth repeating, not only because in the past few months, I’ve seen more IPs get into a fix over fees than anything else, the new rules having simply compounded the complexities, but also because the articles contain some important new messages.

In this post, I explore how you can make your fee proposals bullet-proof:

  • What pre-administration work is an allowable expense?
  • What pre-administration costs detail is often missing?
  • What pre-CVL work is allowable as an expense?
  • What Rules/SIP9 detail is commonly missing from fee proposals?
  • How do the monitors view Rules/SIP9 omissions?
  • What problems can arise when using percentage or mixed basis fees?

The articles can be found at:

The effort seems to have originated from a well-received presentation at the autumn’s R3 SPG Forum, given by the ICAEW’s Manager, Alison Morgan (nee Timperley) and the IPA’s Senior Monitoring Manager, Shelley Bullman.

As the ICAEW and the IPA monitor c.90% of all appointment-taking IPs, I think this is a fantastic demonstration of how the RPBs can get out to us useful guidance. Of course, such articles do not have the regulatory clout of SIPs or statute (see below). However, I believe it is an essential part of the RPBs’ role to reach out to members in this way in written form. Although roadshow presentations are valuable, they can only reach the ears of a proportion of those in need and the messages soon settle into a foggy memory (if you’re lucky!).

  • Do the articles represent the RPBs’ views?

The IPA article ends with a disclaimer that “IPA staff responses” cannot fetter the determinations of the IPA’s committees and the ICAEW article is clearly authored by Alison Morgan, rather than being something that can strictly be relied upon as representing the ICAEW’s views (for the sake of simplicity, I have referred throughout to the articles as written by “the monitors”).

That’s a shame, but I know only so well how extraordinarily troublesome it is to push anything through the impenetrable doors of an RPB – that’s why SIPs seem to emerge so often long after the horse has bolted… and I suspect why we are still waiting for an insolvency appendix to the new CCAB MLR guidance. However, at a time when the Insolvency Service’s mind is beginning to contemplate again the question of a single regulator, issuing prompt and authoritative guidance serves the RPBs’ purposes, not only ours.

 

Pre-Administration Costs

Over the past few years, I’ve seen an evolving approach from the RPBs. In the early days, the focus was on the process of getting pre-administration costs approved. The statutory requirement for pre-administration costs to be approved by a resolution separate from the Proposals has taken a while to sink in… and the fact that the two articles repeat this requirement suggests that it is still being overlooked on occasion.

Then, the focus turned to the fact that it was, not only pre-administration fees that required approval, but also other costs. I still see cases where IPs only seek approval of their own costs, apparently not recognising that, if the Administration estate is going to be paying, say, agents’ or solicitors’ costs incurred pre-administration, these also need to go through the approval process.

  • What pre-administration work is an allowable expense?

Now, it seems that the monitors’ focus has returned to the IP’s own fees. Their attention seems fixed on the definition of pre-administration costs being (R3.1):

“fees charged, and expenses incurred by the administrator, or another person qualified to act as an insolvency practitioner in relation to the company, before the company entered administration but with a view to it doing so.”

The IPA article states that this “would exclude any insolvency or other advice that may or may not lead directly to the administration appointment” and the ICAEW article states that it “would exclude any general insolvency or other advice”.

I do wonder at the fuzzy edges: if a secured creditor who is hovering over the administration red button asks an IP to speak with a director, doesn’t the IP’s meeting with the director fit the description? Or if an IP seeks the advice of an agent or solicitor about what might happen if an administration were pursued, wouldn’t this advice count? But nevertheless, the monitors do have a point. If a firm were originally instructed to conduct an IBR, this work would not appear to fall into the definition of pre-administration costs. Also, if an IP originally took steps to help a company into liquidation but then the QFCH decided to step in with an Administration, the pre-liquidation costs could not be paid from the Administration estate.

  • What pre-administration costs detail is often missing?

As mentioned above, the monitors remind us that pre-administration costs require a decision separate from any approval of the Proposals – there is no wriggle-room on this point and deemed consent will not work. The monitors also list other details required by statute that are sometimes missing, of which these are my own bugbears:

  • R3.35(10): a statement that the payment of any unpaid pre-administration costs as an expense of the Administration is subject to approval under R3.52 and is not part of the Proposals subject to approval under Para 53 of Schedule B1
  • R3.36(a): details of any agreement about pre-administration fees and/or expenses, including the parties to the agreement and the date of the agreement
  • R3.36(b): details of the work done
  • R3.36(c): an explanation of why the work was done before the company entered administration and how it had been intended to further the achievement of an Administration objective
  • R3.36(d) makes clear that details of paid pre-administration costs, as well as any that we don’t envisage paying from the Administration estate, should be provided
  • R3.36(e): the identities of anyone who has made a payment in respect of the pre-administration costs and which type(s) of costs they discharged
  • R3.36(g) although it will be a statement of the obvious if you have provided the above, you also need to detail the balance of unpaid costs (per category)

 

Pre-CVL Costs

Another example of an evolving approach relates to the scope of pre-CVL costs allowable for payment from the liquidation estate. Again, over recent years we have seen the RPB monitors get tougher on the fact that the rules (old and new) do not provide that the IP’s costs of advising the company can be charged to the liquidation estate. This has been repeated in the recent articles, but the IPA’s article chips away further still.

  • A new category of pre-CVL work that is not allowable as an expense?

R6.7 provides that the following may be paid from the company’s assets:

  • R6.7(1): “Any reasonable and necessary expenses of preparing the statement of affairs under Section 99” and
  • R6.7(2): “Any reasonable and necessary expenses of the decision procedure or deemed consent procedure to seek a decision from the creditors on the nomination of a liquidator under Rule 6.14”.

Consequently, the IPA article states that:

“Pre-appointment advice and costs for convening a general meeting of the company cannot be drawn from estate funds after the date of appointment, even if you have sought approval for them.”

So how do you protect yourself from tripping up on this?

If you’re seeking a fixed fee for the pre-CVL work, make sure that your paperwork reflects that the fee is to cover only the costs of the R6.7(1) and (2) work listed above. Of course, SIP9 also requires an explanation of why the fixed fee sought is expected to produce a fair and reasonable reflection of the R6.7(1)/(2) work undertaken. Does this mean that you should be setting the quantum lower than you would have done under the 1986 Rules, given that you should now exclude the costs of obtaining the members’ resolutions? Well, personally, I don’t see that the effort expended under the 2016 Rules is any less than it was before, even if you cut out the work in dealing with the members, but you will need to consider (and, at least in exceptional cases, document) how you assess that the quantum reflects the “reasonable and necessary” costs of dealing with the R6.7(1)/(2) work.

Alternatively, if you’re seeking pre-CVL fees on a time costs basis, make sure that you isolate the time spent in carrying out only the R6.7(1)/(2) work and that you don’t seek to bill anything else to the liquidation estate.

Although the articles don’t cover it, I think it’s also worth mentioning that, as liquidator, you need to take care when discharging any other party’s pre-CVL costs that they fall into the R6.7(1)/(2) work.

 

Proposing a Decision on Office Holders’ Fees

  • What Rules/SIP9 detail is commonly missing from fee proposals?

The articles list some relatively common shortcomings in fee proposals (whether involving time costs or otherwise):

  • lack of detail of anticipated work and why the work is necessary
  • no statement about whether the anticipated work will provide a financial benefit to creditors and, if so, what benefit
  • no indication of the likely return to creditors (SIP9 requires this “where it is practical to do so” – personally, I cannot see how it would be impractical if you’re providing an SoA/EOS and proposed fees/expenses)
  • generic listings of tasks to be undertaken that include items irrelevant to the case in question
  • last-minute delivery of information, resulting in the approving body having insufficient time to make an informed judgment

The IPA article states that “presenting the fee estimate to the meeting is not considered to be giving creditors as a body sufficient time to make a reasoned judgement”. Personally, I would go further and question whether giving the required information to only some of the creditors (i.e. only those attending a meeting) meets the requirement in R18.16(4) to “deliver [it] to the creditors”. At the R3 SPG Forum, one of the monitors also expressed the view that, if fee-related information is being delivered along with the Statement of Affairs at the one business day point for a S100 decision, this is “likely to be insufficient time”.

  • fee estimates not based on the information available or providing for alternative scenarios or bases

I wonder whether the monitors are referring primarily to the fairly common approaches to investigation work, where an IP might estimate the time costs where nothing of material concern is discovered and those that might arise where an action to be pursued is identified down the line. You might also be tempted to set out different scenarios when dealing with, say, a bankrupt’s property: will a straightforward deal be agreed or will you need to go the whole hog with an order for possession and sale?

Some IPs’ preference for seeking fee approval only once is understandable – it would save the costs of reverting to creditors and potentially of hassling them to extract a decision – but at the SPG Forum the monitors recommended a milestone approach to deal with such uncertainties: a fee estimate to deal with the initial assessment and later an “excess fee” request for anything over and above this once the position is clearer. This approach would often require a sensitive touch, as you would need to be careful how you presented your second request as regards the next steps you proposed to undertake to pursue a contentious recovery and the financial benefit you were hoping to achieve. But it better meets what is envisaged by SIP2 and would help to justify your decision either to pursue or to drop an action.

Alternatively, perhaps the monitors have in mind the fees proposed on the basis of only a Statement of Affairs containing a string of “uncertain”-valued assets. Depending on what other information you provide, it could be questioned whether creditors have sufficient information to make an informed judgment.

  • no disclosure of anticipated expenses

Under the Rules, this detail must be “deliver[ed] to the creditors” prior to the determination of the fee basis, whether time costs or otherwise, for all but MVLs and VAs… and SIP9 and SIPs3 require it in those other cases as well. It is important to remember also that this relates to all expenses, not simply Category 2 disbursements, and including those to be paid directly from the estate, e.g. to solicitors and agents.

  •  How do the monitors view Rules/SIP9 omissions?

At the R3 SPG Forum, one of the monitors stated that, if the Rules and SIP9 requirements are not strictly complied with, the RPB could ask the IP to revert to creditors with the omitted information in order to make sure that the creditors understood what they were approving and that this would be at the cost of the IP, not the estate. The IPA’s article states that “where a resolution for fees has been passed and insufficient information is provided we would recommend that the correct information is provided to creditors at the next available opportunity and ratification of the fee sought”. Logically, such a recommendation would depend on the materiality of the omission.

When considering the validity of any fee decision, personally I would put more weight on the Rules’ requirements, rather than SIP9 (nothing personal RPBs, but I believe the court would be more concerned with a breach of the Rules). For example, I would have serious concerns about the validity of a fees decision where no details of expenses are provided – minor technical breaches may not be fatal to a fees decision, but surely there comes a point where the breach kills the purported decision.

 

Fixed and Percentage Fees

  • How can you address the SIP9 “fair and reasonable” explanation?

It is evident that in some cases the SIP9 (paragraph 10) requirement for a “fair and reasonable” explanation for proposed fixed or % fees is not being met to the monitors’ expectations. The ICAEW article highlights the need to deal with this even for IVAs… which could be difficult, as I suspect that most IPs proposing an IVA would consider that the fee that would get past creditors is both unfair and unreasonable! MVL fixed fees also are usually modest sums in view of the work involved.

The articles don’t elaborate on what kind of explanation would pass the SIP9 test. Where the fee is modest, I would have thought that a simple explanation of the work proposed to be undertaken would demonstrate the reasonableness, but a sentence including words such as “I consider the proposed fee to be a fair and reasonable reflection of the work to be undertaken, because…” might help isolate the explanation from the surrounding gumpf. For IVAs, it might be appropriate to note how the proposed fee compares to the known expectations of what the major/common creditors believe to be fair and reasonable.

  • What is an acceptable percentage?

Soon after the new fees regime began, the RPB monitors started expressing concern about large percentage fees sought on simple assets, such as cash at bank. Their concerns have now crystallised into something that I think is sensible. Although a fee of 20% of cash at bank may seem alarming in view of the work involved in recovering those funds, very likely the fee is intended to cover other work, perhaps all other work involved in the case from cradle to grave. In addressing the fair and reasonable test, clearly it is necessary to explain what work will be covered by the proposed fee. Of course, if you were to seek 20% of a substantial bank balance simply to cover the work in recovering the cash, you can expect to be challenged!

Equally, it is important to be clear on what the proposed fee does not cover. For example, as mentioned above, the extent of investigation work and potential recoveries may be largely unknown when you seek fee approval. It may be wise to define to which assets a % fee relates and flag up to creditors the potential for other assets to come to light, which may involve other work excluded from the early-day proposed fee. The IPA article repeats the message that a fee cannot be proposed on unknown assets.

 

Mixed Fee Bases

It seems to me that it can be tricky enough to get correct the fee decision and billing of a single basis fee, without complicating things by looking for more than one basis! To my relief, personally I have seen few mixed fee bases being used.

  • How is mixing time costs with fixed/% viewed?

In particular, I think it is hazardous to seek a fee on time costs plus one other basis. Only where tasks are clearly defined – for example, a % on all work related to book debt collections and time costs on everything else – could I see this working reasonably successfully. The IPA article notes that:

  • when proposing fees, you need to state clearly to what work each basis relates; and
  • your time recording system must be “sufficiently robust to ensure the correct time is accurately recorded against the appropriate tasks”.
  • I would add a third: mistakes are almost inevitable, so I would recommend a review of the time costs incurred before billing – the narrative or staff members involved should help you spot mis-postings.

 

Of course, there are plenty of other Rules/SIP areas where mistakes are commonly made – for example, the two articles highlight some common issues with progress reports, which are well worth a read. However, few breaches of Rules or SIPs have the potential to be more damaging. Therefore, I welcome the RPB monitors’ efforts in highlighting the pitfalls around fees. Prevention is far better than cure.


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.


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Reflecting on New Fees Proposals

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I reckon that Administrations are the most complex insolvency procedures and the Oct 15 fees Rules made them a whole lot worse.  However, Administrators’ Proposals provide valuable indications of how IPs – and creditors – have reacted to the new fees regime over insolvencies as a whole.

Only for Administrations are the fees proposals filed at Companies House, so they were ripe for review. I have gleaned many lessons on what not to do and I’ve also gathered a view of how IPs in general are structuring fees proposals in this brave new world.

I shared the fruits of my review at the R3 SPG Technical Reviews. If you missed my presentation, I set out here some of the highlights.  The full presentation is also available as a webinar via The Compliance Alliance (see the end of this article for more details).

 

How many IP practices have I looked at?

Using the Gazette and Companies House, I have gathered 108 sets of Administrators’ Proposals on 2016 cases:

  • Proposals from 69 different IP practices where unsecured creditors were asked to approve fees (i.e. a creditors’ meeting was convened or business was conducted by correspondence)
  • Proposals from 39 different IP practices where fees-approval was limited to secured creditors (and in some cases preferential creditors)
  • In total, 85 different IP practices are represented, from “SPG-sized” (i.e. using R3’s smaller practices criteria) to Big 4.

 

Time costs basis is still king

Ok, so that’s not a bombshell. I also accept that, if I were to look at CVL fees proposals, I might see a different picture.

However, this is the spread of fee bases for my Administration sample:

Feebasis

I’d be interested in running the exercise again, say in January 2017, to see if the picture has changed at all. I think that it depends, however, on whether creditors are looking any more kindly on non-time costs fees.

 

How are creditors voting?

Where unsecured creditors voted on fees proposals:

  • 58 fees resolutions were passed by creditors with no modifications
  • 6 fee proposals were modified
  • Creditors’ committees were formed in two other cases
  • One set of Proposals was rejected

The modified fees look like this:

  1. A fixed fee was reduced from £55K to £47.5K.
  2. A fixed fee of £10K plus 50% of realisations of uncharged assets was limited to the fixed £10K alone.
  3. A fixed fee of £33K plus all future time costs was restricted to a fixed sum of £40K.
  4. A time costs fee with an estimate of £30K was limited to £20K.
  5. A time costs fee with an estimate of £1.26m was subject to a complicated cap which effectively meant a reduction of c.6%.
  6. A time costs fee with no estimate was limited to the WIP at the date of the meeting of c.£20K.

I think it is interesting that proportionately more non-time costs fee cases were capped – 50% of all capped fees cases involved fixed/% fees, whereas fixed/% fees cases represent only 27% of the whole.  It was a fixed/% case that suffered the greatest cut: a hefty 79%!  The average reduction was 29% of the fees requested.

Four of the cases listed above also involved new IPs being appointed – in three cases as the subsequent liquidators and, in the other case, the administrator was replaced. In these cases, the original IPs were forced to vacate office early, so it is understandable that the proposed fees were clipped.

However, the IP who had been clobbered with a 79% reduction was not being fairly remunerated in my opinion. I found this case doubly depressing, as the Proposals were of good quality, lots of useful information was given and it was clear that the IP had worked hard.  On the other hand, I saw lots of Proposals that at best were clumsy and vague and at worst contained fundamental breaches of statutory requirements.

 

Statutory and SIP slip-ups

My presentation included some examples of seriously scary statutory breaches that really should never have happened, but I will spare the authors’ blushes by covering them here. However, we’re all trying hard to comply with Rules and SIPs that often make you go “hmm…”, so I can understand why slip-ups happen.

Sharing only some information with unsecured creditors, because fees are being approved by the secured creditors alone

Do you need to provide full details of the fees that you are seeking in your Administrator’s Proposals, if the Act/Rules only require you to seek secured creditors’ approval? My sample indicates that a couple of IPs at least believe not.

Personally, I think that the Oct 15 Rules are clear: the office holder must, “prior to the determination of which of the [fees] bases… are to be fixed, give to each creditor of the company of whose claim and address the administrator is aware” either the fees estimate (if time costs are being sought) or details of the work the office holder proposes to undertake (if another base is being sought) and in all cases details of current/future expenses.

I do not think it complies with statute to state that this information is only going to be given to the secured creditors (or indeed to a committee, which is a similar scenario). Of course, this does not mean that you must provide all this information in the Administrators’ Proposals – although remember that R2.33 requires Proposals to include the “basis on which it is proposed that the Administrator’s remuneration should be fixed”.  The fees-related information (to support a request for approval of the basis) could be provided under separate cover, but it does need to be sent to all creditors.

Failing to justify fixed/% fees

I think that some IPs have been caught out by the SIP9 requirement that we need to “explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”.

Some Proposals seemed to lack any attempt to provide this explanation. This included one set of Proposals on which the fees were proposed on a time cost basis plus a “success fee” of 7.5% of asset realisations on top, which clearly needed substantial justification.

Other Proposals simply included a statement such as “I consider the proposed basis is a fair and reasonable reflection of the work that I propose to undertake” – not good enough, in my opinion.

The R3 SIP9 Guidance Note suggests referring to “prevailing market rates”. Before the new OR fees had been announced, I wondered how this might work in practice, but now I think that many fixed/% fees can be more than justified by comparing them to the OR’s starting point of £6,000 + £2,000 to £5,000 + 15% of all realisations (what, even cash at bank?).

Personally, though, I do think that time costs is generally a fair and reasonable reflection of work undertaken, so I think that comparison of a fixed/% fee to what the time costs might be is justification, isn’t it? I don’t mean that you need to include time costs information, but simply a statement that you would not expect a time costs basis to be any cheaper… although make sure that you can back this up internally, as I understand that some monitors are querying the quantum of some fixed/% fees.

 

Presentation problems

There is no doubt that over the years many layers have been added to statutory reports such that Administrators’ Proposals and progress reports for all case types have become ridiculously unwieldy – and of course very expensive to create and check. Then, we have the SIPs that layer on yet more requirements to reports.  And don’t get me started on the R3 SIP9 Guidance Note!

With this backdrop, I have to bite my lip whenever I hear/read a regulator or similar express the opinion that items such as fees proposals can be dealt with in short order. I’ve even read that, for simple cases, a fees estimate could be “little more than a few lines of text”! I am ever conscious, however, that it is a temptation of compliance specialists to throw kitchen sinks at statutory and SIP requirements.

Although I accept that Administrators’ Proposals involve often lengthy schedules such as creditors’ lists, my sample had an average length of 41 pages and the longest was 97 pages! It has become silly, hasn’t it?

The mass of information provided in Proposals leads to presentation problems over and above simply helping creditors to trawl through it all.

Documents that just don’t match up

Administrators’ Proposals involving fees proposed on a time costs basis should contain the following numerical items:

  • A receipts and payments account
  • A statement of affairs (“SoA”) or estimated financial position
  • An estimated outcome statement (“EOS”) (optional)
  • A fees estimate
  • A schedule of anticipated expenses (“expenses estimate”)
  • A time costs breakdown (proportionate to the costs incurred)
  • A statement of pre-administration costs

A common problem in my sample was that all these documents did not cross-check against each other. Most frequently, the expenses on the EOS did not match the expenses estimate.  The picture was generally worse in non-time cost cases where sometimes an expenses estimate (or at least “details” of expenses anticipated to be incurred) was missing altogether.  Another issue in non-time cost or mixed bases cases was that my calculation of the expected fee did not match that listed in the EOS.

It is not surprising that mistakes happen with so many schedules to produce and I do realise that we need to manage costs and get these documents out reasonably swiftly, but I do think that a failure to get all these items cross-referring correctly is an easy way to get on the wrong side of a voting creditor (and RPB monitor).

Estimating dividends

I don’t wish to discourage you from providing anticipated dividend figures – especially as we now have the SIP9 requirement that “where it is practical, you should provide an indication of the likely return to creditors” – but it was noticeable that some Proposals that included estimated dividend figures were fraught with difficulties.

How can you estimate the dividend from an Administration if:

  • you only disclose fees on a milestone basis, e.g. for the first six months; or
  • where a non-prescribed part dividend is anticipated, you only estimate the Administrator’s fees, not the fees and expenses of the subsequent CVL?

In these cases, I think you need to make it clear that the bottom line of any EOS does not equate to a dividend, not even to a “surplus available for creditors”, but perhaps the balance after six months (or whatever the milestone happens to be) or the estimated funds to be transferred to the liquidator.

The worst case I saw was an EOS that suggested a 14p in the £ dividend, but when the rest of the Proposals were factored in (especially some expenses that hadn’t made their way to the EOS), it was evident that there would be no dividend and the IP would not recover his time costs in full.

I think it is important to manage creditors’ expectations; do not set yourself up for a fall.

Liquidation estimates

Few Proposals included clear information on the subsequent Liquidators’ fees and expenses: this was present in 10 Proposals out of 63 that indicated a likely non-prescribed part dividend. That is fine, this information is optional under the Rules.

What concerned me, however, was how muddy the water looked in some of the other 53 cases. For example, one Proposal listed adjudicating on claims and paying a (non-prescribed part) dividend in the work to be undertaken, but the surrounding text suggested that the estimate was for the Administration only.

I think it is important to be clear on what the fee estimate covers and also what it does not cover, especially if non-routine investigation work is to be dealt with separately or later.

Although the Rules provide that the basis of the Administrators’ fees carries over automatically to the Liquidation (provided that the IP is the same and that both the Administration and the Liquidation commenced after 1 Oct 15), it seems to me that the quantum of fees that have been approved could be a little trickier to determine.  This does not just concern time costs: when you start working through an actual case, you realise that the Rules are very woolly (and I believe even conflict in some respects) as regards Liquidators’ fees approved on a fixed/% basis in the prior Administration.

The narrative

I am the first to confess that I struggle to get the balance right as regards the Rules and SIP9 requirements for narrative. As my blogs demonstrate, I’m not known for being concise!

My review of over 100 Proposals, however, has led me to the following personal conclusions:

  • A good EOS can tell the story far better than pages of text. I hated seeing an EOS or an SoA with strings of “uncertain” assets.
  • I guess we need to include some narrative to explain the statutory and general administration tasks, but, really, once you’ve read one, you’ve read them all. Yawn!
  • The R3 SIP9 Guidance Note suggests adding the number of creditors, number of statutory reports, returns etc. to your narrative. In view of the costs incurred in tailoring this information to each individual case, I really don’t see that it is effort well spent. Will creditors really thank us?
  • Ok, yes, explaining prospective/past asset realisations is the meat of our reports. Especially if you do not have an EOS or if realisation values truly are uncertain, fleshing out what you have to realise and how you are going to go about unusual realisations would be valuable.
  • What to do about Investigations? I wriggled a bit when I was asked this question at the R3 event. Many IPs are being sensibly cagey when it comes to proposing what Investigations will involve. This is an area where proportionality really is key: if you are expecting to charge a lot, then I think you do need to give creditors some of the story, although you will want to be careful of your timing and the risk of potentially giving the game away.

 

Other Insights

In my presentation, I also shared other insights from my Proposals dataset, such as whether the amounts of proposed fees tallied with the expected realisations and what was the average and range of charge-out rates, but I think it would be insensitive to share the detail so publicly here.

Nevertheless, here are some general observations from my review:

  • I saw no real difference in the ratio of fees proposed to asset realisations where unsecured creditors controlled approval as compared to that where secured creditors were in control. Although I am no statistician, I think this is interesting in view of the OFT’s conclusion in 2010 that fees were higher when unsecured creditors were in control.
  • Although time costs are still overwhelmingly preferred, other and mixed bases are being proposed in a variety of cases, including some with substantial assets.
  • Only 26% of time cost fee estimates broke down anticipated time into staff member/grade, i.e. to the level of detail suggested in the R3 SIP9 Guidance Note. I am yet to be persuaded that it is in creditors’ interests to go to the expense of providing this level of detail, which I do not believe is required by the Rules or SIP9.

 

Personally, I’ve learnt a lot from the review – what can go wrong, where some seem to be getting into a muddle, how IPs and creditors have reacted to the new fees regime. Although I spent many (sad) evenings trawling through Proposals, I shall be doing this again sometime to see whether things have changed.

If you would like to listen to the full webinar (£250+VAT for firm-wide access to all our webinars for one year), please drop a line to info@thecompliancealliance.co.uk.


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SIP9 – the tricky bits

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Warning: this blog post may lead to disappointment.

I know that I am not alone in feeling that SIP9 poses as many questions as it answers. To be fair, much of our dissatisfaction originates from inadequate rules, but the fact that my earlier post, “SIP9 – the easy bits” (http://goo.gl/Xu7DM4), generated contrary feedback indicates to me just how much clarification is needed.

Regrettably, I don’t have the answers, certainly not here and now. I could offer my best guesses, but my opinions don’t count.  We need to know how the RPBs will measure compliance with the SIP and how they want SIP9 applied.  I’m currently waiting for answers to a number of questions I’ve put to some RPB monitors, but I do hope that the regulators – via monitors, committees or the Insolvency Service – issue guidance publicly, so that all IPs and insolvency professionals can benefit.  Allison Broad, ICAEW, has made a fantastic start with her webinar, but SIP9 raises far more questions.

What are the questions?

Here are what I think are some of the tricky bits of SIP9:

  • How does SIP9’s statement that “an IP is not precluded from providing information, including a fee estimate, within pre-appointment communications” fit with the rules’ requirement that the office-holder must give the information to creditors? (I know this is an old chestnut, but a serious one, which I note has not been adjusted in the published draft 2016 Rules.)
  • To what extent are we expected to continue to be “consistent” in using an old reporting style?
  • When and how should proposed S98 fees be disclosed? What about MVL fixed fees?
  • How far do we go in providing narrative? Does the bond premium really need to be explained? Are “a few lines of text” (per an RPB staff member’s online interview) really going to satisfy monitors (and be rules-compliant)?
  • How do you explain why a proposed fixed or % fee is “expected to produce a fair and reasonable reflection of the work” to be undertaken?
  • Are monitors expecting to see time costs breakdowns at all? What about charge-out rate sheets in progress reports?
  • If they are not expecting them right now, is it safe to ditch the ability to produce time costs breakdowns or might we need them for the next inevitable iteration of SIP9?
  • Do the Creditors’ Guides to Fees really work to “inform creditors and other interested parties of their rights under the insolvency legislation”?
  • What are the RPBs expecting as regards providing “an indication of the likely return to creditors where it is practical to do so”?

Where are the answers?

The absence of “official” answers puts pressure on all of us to come up with our own. We’ve heard noises to the effect that some RPB monitors will go gentle on IPs as the SIP beds in.  However, I think that’s a cop-out.  An enormous amount of time and effort is expended in setting up systems and procedures and training staff in what is required.  It’s not good enough to learn only at a monitoring visit how we’re expected to apply the SIP, leading to the need to invest further time and effort in changing things.

I think that the fact that the SIP hasn’t been in force for 3 months yet and already it has been the subject of an R3 webinar, an ICAEW webinar, countless blog posts and insolvency queries demonstrates just how we’re all struggling to get to grips with the issues dealt with so unsatisfactorily by the fees rules and the SIP.

Nevertheless, we have to manage as best we can. If you’re keen to absorb yet more information about SIP9, for the Compliance Alliance I shall be recording a webinar providing my thoughts on the questions above (including some thoughts from RPB staff who have responded to my queries) as well as taking a practical look at how to apply the SIP’s principles and standards.  If you would like to sign up to the webinar (which will be available in a week’s time), please email info@thecompliancealliance.co.uk*.

SIP16: two for the price of one

In the same webinar, I’ll also be reviewing the practical application of the latest revision of SIP16 – a far less troublesome SIP, I think, but perhaps just as risky.

* Our webinars are available to all Compliance Alliance webinar subscribers (£250+VAT for firm-wide access to all our webinars for one year).  If you would like to sign up, please email info@thecompliancealliance.co.uk.


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SIP9 – the easy bits

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There’s no doubt that the October Rules and the revised SIP9 generated many questions. However, in this blog (first published on The Compliance Alliance), I summarise the known impacts of the new SIP9 for those who want to double-check that they have the basics right.

Scope

Have you remembered that the scope of the new SIP9 reaches wider than simply cases affected by the October Rules? It also affects:

  • Pre-October 2015 appointments;
  • Case types not affected by the October Rules, i.e. CVAs, IVAs, Receiverships and MVLs; and
  • Pre-appointment fees (where these are paid from the estate), e.g. SoA/S98 fees and VA drafting fees;
  • But it does not apply to Scottish or NI appointments, which continue to be subject to the “old” SIP9.

Key disclosure

I think that paragraph 9 of SIP9 is key. Whenever you are “providing information about payments, fees and expenses to those with a financial interest in the level of payments from an insolvent estate”, you should address the following:

Prospective disclosure:

  • What work will be done
  • Why it is necessary
  • How much it will cost (both fees and expenses)
  • “Whether it is anticipated that the work will provide a financial benefit to creditors and if so what anticipated benefit (or if the work provides no direct financial benefit, but is required by statute)”

Retrospective disclosure:

  • What work has been done
  • Why it was necessary
  • How much it has cost (both fees and expenses)
  • “Whether the work has provided a financial benefit to creditors and if so what benefit (or if the work provided no direct financial benefit, but is required by statute)”

The information given should be transparent, useful and proportionate to the circumstances of the case (which makes a rigid template approach difficult and dangerous), but also consistent throughout the life of the case. Therefore, whilst you might have made wholesale changes to requests/reports for new cases, you have probably designed a half-way house for older cases.  Although the new SIP9 avoids pretty-much all reference to numerical information, if you have already provided tables for a case on the lines of the old SIP9, it seems that you cannot drop them for future reports.  However, you should review the narrative elements of pre-December 2015 case reports to make sure that they meet the new disclosure requirements.

As mentioned above, these narrative requirements also apply to fees/costs that are new to the SIP9 scope and that are not affected by the October Rules. Therefore, have you checked off your documentation relating to MVL, SoA/S98, and VA drafting/Nominees’/Supervisors’ fees?

Fixed or percentage fees

Have you ensured that, whenever you are seeking approval for fees on a fixed or percentage basis, you have included some kind of prompt/explanation as to “why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken” (paragraph 10)?

Also with SIP9 paragraph 25 in mind, have you made sure that this explanation is covered when you are hoping to get approval for the following (which are often sought on a fixed/% basis) where they are to be drawn from the estate:

  • SoA/S98 fees;
  • Nominees’ fees;
  • Supervisors’ fees; and
  • MVL fees?

SoA/S98 fees

As you can see above, the new SIP9 seems to affect SoA/S98 fees quite substantially. I believe it has been rare to see pre-S98 circulars disclose much at all about these fees.  Personally, I find it difficult to see how the principles of SIP9 can be met without disclosing in the pre-S98 circular the quantum of the proposed SoA/S98 fee, if the IP is hoping to get this approved for payment from the estate at the S98 meeting.  However, I do not think that SIP9 is at all clear on this point, so I’ll put this one in the “known unknown” category.

Numerical information

As mentioned above, the new SIP9 has distanced itself from a formulaic numbers-say-it-all approach in favour of case-tailored narrative. However, the SIP does require some numerical information, not all of which I think flows naturally.

Are your systems set up so that, for cases where (October Rules) fees estimates have been provided, the progress reports disclose:

  • “the actual hours and average rate (or rates) of the costs charged for each part… for comparison purposes” (paragraph 13); and
  • “when reporting the amount of remuneration charged [i.e. time costs incurred] or expenses incurred… figures for both the period being reported upon and on a cumulative basis” (paragraph 17)?

Having now looked at some fee estimates, I have to say that I really do not think that the average rate for each work category adds anything at all – although I can see that an overall average rate has some value – so why the JIC felt that this was so vital that it had to be prescribed, I do not know! But I do know that it has added expense to some IPs in getting their time recording systems set up to produce these numbers.

The second requirement adds further complication. The 2010 Rules require progress reports to disclose expenses incurred (whether or not paid) in the period and SIP7 requires expenses paid in the period and cumulative, but now SIP9 requires also expenses incurred on a cumulative basis: that’s four different numbers.  So much for transparency!

Back to the beginning

The new SIP9 has introduced some subtle changes as regards disclosure of parties’ rights.

Information to creditors about how to access information on their rights has been moved to earlier in the process: no longer should this occur in the first communication following appointment, but simply “within the first communication with them” (and in each subsequent report).  Therefore, have you checked that this is covered in the pre-S98 circular?  But have you also kept it as standard in any post-S98 template, just in case you take an appointment without having been the IP advising member for the S98 meeting?

Personally, I’ve been struggling to work out how to meet the requirement above for MVLs: does there exist an “official” sensible explanation of creditors’ rights in an MVL?  The Creditors’ Guide to Liquidators’ Fees doesn’t really do the job, but I am not convinced that the RPBs expect IPs to draft something themselves, do they..?  Perhaps this is another “known unknown”.

Whilst we’re on the subject of Creditors’ Guides… I think that many IPs assumed that, as the new SIP9 applies to old and new cases, the new Guides also apply to both old and new cases.  However, if we remember that the purpose behind directing creditors to the Guide is to inform them of “their rights under insolvency legislation”, then it is evident that the pre-April 2010 Guides are still relevant to pre-April 2010 cases, as new rights were introduced in April 2010.  It is regrettable, however, that all the old Guides set out the requirements of the old SIP9 – and I would suggest that this might render them no longer “suitable information” – but as regards a creditor’s statutory rights, they’re generally reasonable.

Therefore, do your circulars/reports direct creditors to the Guide appropriate to the case type and appointment date? If you display the Guides on your own website, do you have Guides covering the full range of appointment dates?  The R3 website only goes back to 1 November 2011, but the ICAEW website, http://goo.gl/kjZlJC, (for example) has Guides going way back.

Heavy hints

The new SIP9 includes several items that fall short of being prescriptive, but the language indicates to me that monitors will still be looking out for them. These include:

  • Providing “an indication of the likely return to creditors” when seeking approval of the fee basis “where it is practical to do so”;
  • Dividing narrative explanations into the six categories listed in paragraph 12… whilst making sure that not every case follows exactly the same categories (we have to demonstrate that we’ve considered each case’s specific circumstances); and
  • Using “blended rates” for fees estimates.

And don’t forget…

Some old SIP9 requirements have survived the revision process. Items that sometimes get overlooked include:

  • Disclosure of “any business or personal relationships with parties responsible for approving his or her remuneration or who provide services to the office holder in respect of the insolvency appointment where the relationship could give rise to a conflict of interest”;
  • Explanation of why any sub-contractors are being used to do work that could otherwise be done by the IP/staff; and
  • An existing SIP7 requirement: disclosure of any pre-appointment costs paid, detailing the amount paid, name of the payor, their relationship to the estate and the nature of the payment.

Simple?

I get the feeling that the RPBs have been inundated with queries over the practical application of the October Rules and the revised SIP9, many originating from compliance consultants (including The Compliance Alliance). I haven’t raised these queries here; there is no real point, as there are few reliable answers at present.

In many respects, I doubt that we will get straight answers, at least not for some time to come. A recent response from one of my RPB contacts was heavily caveated with the observation that it was only her personal understanding and that the RPB’s stance would be formed by its committees over time.  Therefore, please bear with your compliance consultants.  You might hear us saying that we don’t know how your authorising body or its monitors view a certain matter and you may find that our recommendations change over time, as we try to remain alert to the shifting sands of interpretation around the Rules and SIP.  We will do our best to highlight the issues as we see them, whether they are clear breaches or whether they fall into the currently numerous known unknowns.


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SIP9 – Reading Between the Lines

Peru573 colourfix

How are we coping in this (new) SIP9 vacuum? Well, nature abhors a vacuum and it seems to me that we’re all plugging the gap in our own ways.

One IP told me that he had incurred time costs of c.£4,000 producing his first fees estimate and I heard another IP say that he was not going to seek fees approval on any case until the new SIP9 is in force. Having raised some questions about the RPBs’ recent announcement on SIP9, I was told that I was reading too much into it, but what do they expect given the dearth of guidance?

We have learnt that the new SIP9 will not contain a suggested format. IPs seem almost unanimous in their belief that this is counter-productive (not to mention costly!).  We are led to believe that it’s what the major creditors want, but the comments I have heard and seen from creditors are far from clear: they seem to want simultaneously more information but shorter reports, more prescription (even more legislation?  Give me strength!) but also a bespoke approach!  It will be interesting to read R3’s promised guidance.

I am sympathetic to the IP who is not even going to propose fees resolutions until he sees the new SIP9. Alternatively, we could gamble on what the final SIP9 will look like or we could just concentrate on making fees estimates rules-compliant for now and live with the prospect of having to revisit systems in November.  Both approaches are unattractive and make a mockery of the Insolvency Service’s Impact Assessment that estimated it would take each IP only 1 hour to become rules-ready!

So what are we expected to do now in applying the new rules?

The Consultation Draft SIP9

The draft rules were laid before Parliament on 3 March 2015. The draft SIP9 consultation was issued 5 months later.  It is perhaps not surprising therefore that, 2 ½ months further on, we’re still waiting for a SIP9.

Why does it take so long to finalise SIPs?  Having sat around the JIC table, I think I know why.  But it’s just not acceptable, is it?  This is especially so in view of the fact that the consultation draft SIP9 threatened to introduce new standards that would involve fundamental changes to time-recording systems and reporting formats.

I will save further breath on saying any more about the consultation draft, but if you are curious about what I had to say about it, you can see my consultation response here: SIP9 consult response and my mark-up of the draft SIP here: SIP9 markup.

Whilst I don’t have any idea how the final SIP9 will compare with the consultation draft, I do wonder how we are to read the R3’s recently-released Creditors’ Guides to Fees.

New Creditors’ Guides to Fees

R3’s new Creditors’ Guides to Fees were released on its website on 1 October without fanfare. At first glance, it is easy to assume that nothing has changed (I made that mistake and, as a result, asked R3 to return the old Guides to their page and date the Guides clearly, which R3 very swiftly did – thank you).

However, a closer look at the new Guides reveals that, not only do they incorporate the new rules of course, but they include much of the draft SIP9.  I am sure that the Guides will attract few (if any!) readers, but isn’t it a nonsense that the Guides are intended to explain to creditors what IPs do, but at present they describe standards that are not even enshrined in the statute or SIPs?!

The Guides include a number of new “should”s that appeared in the draft SIP9 but that IPs are probably not following completely at present. For example, the Guides repeat the draft SIP9’s list of “key issues of concern”, about which office holders should explain “in a way which facilitates clarity of understanding”:

  • the work the office holder anticipates will be done, and why that work is necessary;
  • the anticipated cost of that work, including any expenses expected to be incurred in connection with it;
  • whether it is anticipated that the work will provide a financial benefit to creditors, and if so what benefit (or if the work provided no direct financial benefit, but was required by statute);
  • the work actually done and why that work was necessary;
  • the actual costs of the work, including any expenses incurred in connection with it, as against any estimate provided; and
  • whether the work has provided a financial benefit to creditors, and if so what benefit (or if the work provided no direct financial benefit, but was required by statute).

Other “should”s appearing in the Guides include:

  • Where it is practical to do so, the office holder should provide an indication of the likely return to creditors when seeking approval for the basis of his remuneration.
  • When approval for a fixed amount or a percentage basis is sought, the office holder should explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken.

Fortunately, the Guides do not repeat the draft SIP9 in all aspects.  For example, they do not repeat para 10 of the draft SIP9, which recommended new divisions of work: Statutory Compliance; Asset Realisation; Distribution and Investigation.  They also omit draft SIP9 para 11’s references to the use of blended rates.  I suspect these paras have been omitted precisely because they were not “should”s in the draft SIP9 (although the language used in the draft suggests a stick is waving in the shadows).

Thus, the Guides give the creditors the impression that IPs are working in compliance with the draft SIP9’s standards, but what message have we received from the RPBs?

The RPBs’ Announcement

On 30 September, the IPA emailed its members on “SIP9 Transitional Arrangements” and the ICAEW made the same announcement publicly on 9 October (http://goo.gl/MrExtE).  I assume that the other RPBs/IS conveyed the same message to their members/IPs.

The key message was that, until the new SIP9 is issued (est. on or before 1 November) and/or it becomes effective (est. 1 December), the “principles” of the current SIP9 should be applied “as these remain ostensibly unchanged in the new SIP”.

However, I have some questions on the announcement:

  • “Insolvency Practitioners should apply the principles of the current SIP” – does this mean that IPs will not be taken to task if they do not apply the Key Compliance Standards of the current SIP? Some might argue: if IPs were complying with the letter of SIP9 prior to 1 October, why would they take the time to deviate from the SIP9 detail now? My answer would be: because fixing systems to comply with the new rules is disruptive enough, so much has needed to change. Therefore, if we could remove some of the detail of the old SIP9 – a lot of which doesn’t sit well in our apparent new world of narratives good, numbers bad – life could be so much easier.
  • “The existing SIP9 will be withdrawn” – does this mean that the new SIP9 will apply to new and old cases? If so, this is even more reason to try to avoid right now maintaining (and for some IPs, changing) systems to ensure that the letter of the current SIP9 is met.
  • “IPs should refer to the new Rules and also to Dear IPs 65 and 68… should they need to issue an estimate of their fees in advance of the implementation of the new SIP” – who needs to issue a fees estimate? Does this mean that IPs are doing the right thing, if they refrain from seeking fee approval at all in this hiatus period? Are the RPBs telling IPs for example to hold S98s, get the jobs in, but wait until December before proposing postal resolutions? This would seem to run contrary to the draft “Explanatory Note” that accompanied the consultation draft SIP9, which stated that fees requests should be considered “at the earliest opportunity”… but then of course that was only draft.

Dear IPs

To be fair, I think the Insolvency Service has done a reasonable job with Dear IPs 65 and 68.

Yes, of course, we all knew they would seek to “clarify” the rules’ reference to the “liquidator” providing fees-related information and have stated: “The use of the word ‘liquidator’ is not intended to preclude an insolvency practitioner from providing this information ahead of a s98 meeting at which s/he is subsequently appointed”… but from what I have heard, it seems that this is convincing very few IPs.

Also, whilst I can see what the Service is getting at, I do feel a little nervous about using the ‘unused’ part of an Administrator’s fees estimate to enable the subsequently-appointed Para 83 CVL Liquidator to draw fees. I think it is wonderfully pragmatic of the Insolvency Service and the rules seem to allow it, but I just wonder what the regulators would say if they saw it.  I don’t fancy being the first one to debate the subject with a monitor.

I also wish the Service would take greater care when referring to “fees”, because sometimes I think they mean “time costs” (or “remuneration charged”, as the rules put it, although this phrase is behind some of the confusion, I think). For example, Dear IP 68 states “as work cannot stop on a case, there may be instances where an office-holder exceeds the fees estimate before approval is sought/obtained”.  Err… I don’t think the Service exactly means this, but rather that the office holder may incur time costs in excess of the fees estimate, don’t you think?

But the Dear IPs have stuck pretty-much to the rules – which is to be expected and for which I am thankful – so, if IPs are hoping to read more about how to put the rules into practice, the Dear IPs probably will leave them wanting.

A Pig’s Ear

In summary, we are currently navigating our way through:

  • The Insolvency Rules 2015, which are not without flaws (see my previous posts, http://goo.gl/9mrWl4 and http://goo.gl/inIYEd);
  • Dear IPs 65 and 68;
  • The existing SIP9, which was drafted a world ago when the focus was on explaining what work you had done, not what work you anticipate doing;
  • The RPBs’ announcement, which seems to advise a business-as-usual approach despite the new rules being so different;
  • New Creditors’ Guides to Fees that include some requirements of the draft SIP9, which have not yet made their way into a publicly-available final SIP; and
  • If you feel like gambling, the consultation draft SIP9 and Explanatory Note.

I understand that some delegates to last week’s R3 SPG Forum were hoping for much more guidance on the new rules, but I am struggling to see what could possibly have been said. R3 has promised additional guidance, but understandably they want to wait to check that this is compatible with the final SIP9.

Personally, I have tried to help spread some knowledge by presenting a free-access webinar for the ICAEW on the detail of the new rules (http://goo.gl/93nDb0) and presenting at other ICAEW and R3 events in an attempt to highlight some practical steps.  I have also recorded a webinar for the Compliance Alliance on the practicalities and written much of this down for my clients.  I’m sure that other compliance consultants have been doing much the same, but we all have been working with the suspicion that, once we see the final SIP9, we may have to have a rethink.  I would also not be surprised if monitors’ “recommendations” evolve over time and we see a further revised SIP9 a year or so down the line.

So much for greater transparency!


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October Fees Rules FAQs: more Qs than As

1205 Cape Cross (2)

Earlier this year, each of the three R3 SPG Technical Reviews was opened by John Cullen’s* fantastic presentation on the October fees rules and the draft revised SIP9.

The presentation generated many questions from delegates and a few controversial answers, which I’ve been bursting to recount here. Regrettably, work demands – and, tomorrow, my holiday – have frustrated my attempts to get blogging.

Thus, I’m being a bit cheeky, setting out here the questions… and leaving the answers for another day! I will try to get back here in a couple of weeks.

  • When can/should a CVL Liquidator seek approval for his fees: (i) prior to being appointed by the shareholders; (ii) after the general meeting but before the S98 meeting (via a Centrebind); or (iii) after the S98 meeting?
  • Would it be sufficient to provide a fees estimate to attendees of the S98 meeting? How else can an IP who takes the appointment from the floor of the S98 meeting deal with a fees resolution?
  • What level of breakdown is needed to comply with the new rules’ requirement to provide the (time cost) fees estimate broken down by “each part of the work”? For example, is “asset realisation” sufficient, or does it need to be broken down into book debt collection, sale of business/assets, etc.?
  • Given that the new rules require the (time cost) fees estimate to be broken down by “each part of the work”, does the IP need to revert to creditors if the time costs are exceeded for one part of the work, but the total estimate is not exceeded?
  • Can a (time cost) fee estimate provide a range of likely costs or does it need to be a single figure? If the latter, how should IPs estimate, for example the costs of realising the interest in a bankrupt’s property, at an early stage of the case?
  • What consequences does the expenses estimate have for the future administration of the case?
  • Can an IP stop working on a case if creditors vote against an exceeding of the fees estimate?

The Draft Revised SIP9

My swift read-through of the draft revised SIP9 has prompted a few more questions in my mind:

  • The draft revised SIP9 suggests time cost categories different from those of older SIP9s. How is this going to interact with firms’ time-recording systems and the administration of pre-October cases?
  • If an IP were to change his time-recording system in the future, would he risk falling foul of SIP9’s requirement that he “should use a consistent format throughout the life of the case”?
  • How will the SIP9’s blended rates work in practice?
  • The draft new SIP9 is not amended as regards pre-appointment costs. Given that there had been suggestions in the past that this section may apply only to pre-administration costs, where does this leave treatment of pre-CVL and pre-VA costs?
  • The draft new SIP9 is not amended as regards payments to associates, but continues to state that these should be approved “in the same manner as an office-holder’s remuneration or category 2 disbursements”. Does this mean that, where payments to associates are to be based on time costs, the estimate acts effectively as a cap so that the office-holder would need to seek creditors’ approval for any excess? As statute does not strictly require such approval to be sought, would an office-holder’s time costs incurred in reverting to creditors be justified? If an associate’s costs were treated instead as a category 2 disbursement, would this avoid the estimate acting as a cap?

 

* John Cullen is the ACCA’s representative on the JIC and an IP and partner of Menzies.

 

 

 

 


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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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The Kempson Review of IP Fees – a case of Aussie Rules?

5436 Sydney

Whilst this atypical British weather may have brought out the Aussie in many of us, as we settle down to sipping a stubby over the barbie, Professor Kempson seems to be gazing at the Southern Cross a little more completely.

Kempson’s report to the Insolvency Service was tagged quite unceremoniously to the foot of the page, http://www.bis.gov.uk/insolvency/news/news-stories/2013/Jul/transparency-and-trust, which headines Mr Cables’ Transparency & Trust Paper. Her report even had to follow the uninspiring terms of reference of the pre-pack review and so here I will follow the antipodean theme and blog about the bottom item of that press release first.

I’ll also start from the back of Kempson’s report and summarise her recommendations, uncontaminated by any personal opinion (for the moment):

• Consideration of the potential for limited competitive tendering (section 6.1.1)
• A radical revision or replacement of SIP9 (section 6.1.2)
• Consideration of the Australian approach of providing a costs estimate at the outset of the case with an agreed cap on fees (section 6.1.2)
• The creation and adoption of a Code on the lines of the Insolvency Practitioners Association of Australia Code of Professional Practice (section 6.1.2)
• Some contextual information from an independent body to help creditors assess the reasonableness of the remuneration and disbursements (section 6.1.2)
• Greater oversight exercised by the Crown creditors, HMRC, RPS and PPF, working together (section 6.1.3)
• Consideration of Austria’s model of creditor protection associations acting on creditors’ committees (section 6.1.3)
• Reconsideration of the circumstances in which creditors’ meetings need not be held in Administrations (section 6.1.3)
• Exploration of non-time cost bases or a mixture of bases for fees (section 6.1.4)
• Increasing the debt threshold for bankruptcy petitions (section 6.1.5)
• Extending S273 to creditors’ petitions (section 6.1.5)
• Provision of information (e.g. Insolvency Service booklet) to debtors regarding the likely costs of bankruptcy (section 6.1.5)
• Provision of generic information (e.g. Insolvency Service booklet) to directors subject to personal guarantees as well as case-specific information, e.g. by treating them on a par with creditors (section 6.1.5)
• A single regulator, perhaps the Financial Conduct Authority, for IPs (section 6.1.6)
• A simple low-cost mediation and adjudication service for disputes about low-level fees, perhaps by means of the Financial Ombudsman Service (section 6.1.7)
• Alternatively, some form of independent oversight of fees, such as that used in Scotland via court reporters and the AiB (section 6.1.8)

Charge-out rates – a surprisingly positive outcome!

Given the “how much?!” reaction often resulting from a disclosure of charge-out rates, I was ready to wince at this section, but actually I think the insolvency profession comes out of it fairly well.

The report details the charge-out rates gathered via the IP survey (which was responded to by 253 IPs):

Partner/Director: average £366; range £212-£800
Manager: average £253; range £100-460
Other senior staff: average £182; range £75-445
Assistants/support: average £103; range £25-260

Encouragingly, Kempson reports that these charge-out levels “are not, however, unusual in the accountancy and legal professions to which most IPs belong” (section 3.1). From my experience, I’d also suggest that the firms that charge the top end for partners/directors usually charge junior staff at the lower end and vice versa, i.e. I doubt that any firm charges £260 for juniors and £800 for partners/directors.

Professor Kempson also acknowledges that these “headline rates” are not always charged because IPs normally agree lower rates in order to sit on banks’ panels and, in other cases, the time costs are not recovered in full due to lack of realisations. Setting aside panel cases, Kempson suggests that fees were below headline rates “in about a half of cases, including: the great majority of compulsory liquidations, about two thirds of administrations; half of creditors’ voluntary liquidations and a third of personal bankruptcy cases” (section 3.2). Putting those two observations together, is it arguable, therefore, that IPs provide a far better value for money service than others in the accountancy and legal professions?

Panel Discounts – not so great

The report states that, at appointment stage, secured creditors negotiate discounts of between 10% and 40% on IPs’ headline rates and that some banks may achieve a further discount by entertaining tenders. “The implicit sanction underpinning all negotiations was to remove a firm from the panel. None of the banks interviewed could remember a firm choosing to leave their panel because the appointments they received were un-remunerative. From this they surmised that (individual cases aside) work was being done on a lower profit margin rather than a loss” (section 4.1.1).

Kempson does not suggest it, but I wonder if some might conclude that, notwithstanding the comments made above about charge-out rates, this indicates that IPs’ headline rates could drop by 10-40% for all cases. Personally, I do wonder if banks’ pressuring for discounts from panel firms could be un-remunerative in some cases, but that firms feel locked in to the process, unable to feed hungry mouths from the infrequent non-panel work, and perhaps there is an element of cross-subsidising going on. If Kempson had asked the question, not whether firms chose to leave a panel, but whether any chose not to re-tender when the panel was up for renewal, I wonder if she would have received a different answer.

Seedy Market?

To illustrate the apparent clout of bank panels, the report describes a service “that is marketed to IPs, offering to buy out the debts of secured creditors, thereby ensuring that an IP retains an appointment and giving them greater control over the fees that they can charge” (section 4.1.1).

Is it just me or is there something ethically questionable about an IP seeking to secure his/her appointment in this manner? Presumably someone is losing out and I’m not talking about the estate just by reason of the possibly higher charge-out rates that may have not been discounted to the degree that the bank would have managed with a panel IP. Presumably there’s an upside for the newly-introduced secured creditor? How do their interest/arrangement/termination charges compare to the original lender’s? Is the insolvent estate being hit with an increased liability from this direction? And why… because an IP wanted to secure the appointment..?

Is the problem simply creditor apathy?

Reading Kempson’s report did give me an insight – a more expansive one than I’ve read anywhere else – into an unsecured creditor’s predicament. They don’t come across insolvencies very often, so have little understanding of what is involved in the different insolvency processes (so maybe I shouldn’t get twitchy over the phrase “problems when administrations fail and a liquidation ensues”!). How can they judge whether hourly rates or the time charged are reasonable? They receive enormous progress reports that give them so much useless information (I’m pleased that one IP’s comment made it to print: “… For example saying that the prescribed part doesn’t apply. Well, if it doesn’t apply, what’s the point in confusing everybody in mentioning it?” (section 4.2.3)) and they struggle to extract from reports a clear picture of what’s gone on. Many believe that they’re a small fry in a big pond of creditors, so they’re sceptical that their vote will swing anything, and they have no contact with other creditors, so feel no solidarity. Personally, I used to think that creditors’ lack of engagement was an inevitable decision not to throw good money after bad, but this report has reminded me that their position is a consequence of far more obstacles than that.

Progress Reports – what progress?

The report majored on the apparent failure of many progress reports to inform creditors. Comments from contributors include: “Unfortunately the nature of the fee-approval regime can lead to compliance-driven reports, generated from templates by junior-level staff, which primarily focus on ensuring that all of the requirements of the statute and regulation are addressed in a somewhat tick-box-like manner. This very often means that the key argument is omitted or lost in the volume, which in turn make it difficult for us to make the objective assessment that is required of us” and from the author herself: “there were reports that clearly followed the requirements of the regulations and practice notes (including SIP9 relating to fees) slavishly and often had large amounts of text copied verbatim from previous reports. Consequently, they seemed formulaic and not a genuine attempt to communicate to creditors what they might want to know, including how the case was progressing and what work had been done, with what result and at what cost” (section 4.2.3).

To what was the unhelpful structure of progress reports attributed? Kempson highlighted the 2010 Rule changes (hear hear!) but she also mentions that IPs “criticised SIP9 as being too prescriptive”. I find this personally frustrating, because long ago I was persuaded of the value – and appropriateness – of principles-based SIPs. During my time attending meetings of the Joint Insolvency Committee and helping SIPs struggle through the creation, revision, consultation, and adoption process, I longed to see SIPs emerge as clearly-defined documents promoting laudable principles, respecting IPs to exercise their professional skills and judgment to do their job and not leaving IPs at the mercy of risk-averse box-tickers. I would be one of the first to acknowledge that even the most recent SIPs have not met this ideal of mine, but SIP9?! Personally, I feel that, particularly considering its sensitive and complex subject matter – fees – it is one of the least prescriptive SIPs we have. I believe that a fundamental problem with SIP9, however, is the Appendix: so many people – some IPs, compliance people, and RPB monitors – so frequently forget that it is a “Suggested Format”. Most of us create these pointless reports that churn out time cost matrices with little explanation or thought, produce pages of soporific script explaining the tasks of junior administrators… because we think that’s what SIP9 requires of us and because we think that this is what we’ll be strung up for the next time the inspector calls. And well it might be, but why not produce progress reports that meet the key principle of SIP9 – 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 [and so that creditors are] able to understand whether the remuneration charged is reasonable in the circumstances of the case” (SIP9 paragraph 14)? And if an RPB monitor or compliance person points out that you’ve not met an element of the Appendix, ask them in what way they feel that you’ve breached SIP9. Alternatively, let’s do it the Kempson way: leave the Insolvency Service to come up with a Code on how to do it!

I do wonder, however, how much it would cost to craft the perfect progress report. The comment above highlighted that reports might be produced by junior staff working to a template, but isn’t that to be expected? Whilst my personal opinion is that reports are much better produced as a free text story told by someone with all-round knowledge of the case (that’s how I used to produce them in “my day”), I recognise the desire to sausage-machine as much of the work as possible and this is the best chance of keeping costs down, which is what creditors want, right? Therefore, apart from removing some of the (statute or SIP-inspired) rubbish in reports, I am not sure that the tide can be moved successfully to more reader-friendly and useful reporting.

Inconsistent monitoring?

The report states: “During 2012, visits made by RPBs identified 12.0 compliance issues relating to fees per 100 IPs. But there was a very wide variation between RPBs indeed; ranging from 0 to 44 instances per 100 IPs. Allowing for the differences in the numbers of IPs regulated by different RPBs, this suggests that there is a big variation in the rigour with which RPBs assess compliance, since it is implausible that there is that level of variation in the actual compliance of the firms they regulate” (section 4.5). I also find this quite implausible, but, having dealt with most of the RPB monitors and having attended their regular meetings to discuss monitoring issues in an effort to achieve consistency, I do struggle with Kempson’s explanation for the variation.

Although I can offer no alternative explanation, I would point to the results on SIP9 monitoring disclosed in the Insolvency Service’s 2009 Regulatory Report, which presented quite a different picture. In that year, the RPBs/IS reported an average of 10.6 SIP9 breaches per 100 IPs – interestingly close to Kempson’s 2012 figure of 12.0, particularly considering SIP9 breaches are not exactly equivalent to compliance issues relating to fees. However, the variation was a lot less – from 1.3 to 18 breaches per 100 IPs (and the next lowest-“ranking” RPB recorded 8.1). Of course, I have ignored the one RPB that recorded no SIP9 breaches in 2009, but that was probably only because that RPB had conducted no monitoring visits that year (and neither did it in 2012). Kempson similarly excluded that RPB from her calculations, didn’t she..?

Somewhat predictably, Kempson draws the conclusion (in section 6.1.6) that there is a case for fewer regulators, perhaps even one. She suggests setting a minimum threshold of the number of IPs that a body must regulate (which might at least lose the RPB that reports one monitoring visit only every three years… how can that even work for the RPB, I ask myself). In drawing a comparison with Australia, she suggests the sole RPB could be the Financial Conduct Authority – hmm…

Voluntary Arrangements: the exception?

“We have seen that the existing controls work well for secured creditors involved in larger corporate insolvencies. But they do not work as intended for unsecured creditors involved in corporate insolvencies, and this is particularly the case for small unsecured creditors with limited or no prior experience of insolvency. The exception to this is successful company voluntary arrangements” (section 5). Why does Kempson believe that the controls work in CVAs? She seems to put some weight to the fact that the requisite majority is 75% for CVAs, but she also acknowledges that unsecured creditors are incentivised to participate where there is the expectation of a dividend. If she truly believes the situation is different for CVAs – although I saw no real evidence for this in the report – then wouldn’t there be value in examining why that is? If it is down to the fact that creditors are anticipating a dividend, then there’s nothing much IPs can do to improve the situation across cases in general. But perhaps there are other reasons for it: I suspect that IPs charge up far fewer hours administering CVAs given the relative absence of statutory provisions controlling the process. I also suspect that CVA progress reports are more punchy, as they are not so bogged down by the Rules.

But I don’t think anyone would argue with Kempson’s observation that IVAs are a completely different kettle of fish and that certain creditors have acted aggressively to restrict fees in IVAs to the extent that, as IPs told Kempson, they “frequently found this work unremunerative” (section 4.2.3).

Disadvantages of Time Costs

I found this paragraph interesting: “several authoritative contributors said that, when challenged either by creditors or in the courts, IPs seldom provide an explanation of their hourly rates by reference to objective criteria, such [as] details of the overheads included and the amount they account for, and the proportion of time worked by an IP that is chargeable to cases. Instead they generally justify their fees by claiming that they are the ‘market rate’ for IPs and other professionals. Reference is invariably made to the fact that the case concerned was complex, involved a high level of risk and that the level of claims against the estate was high. More than one of the people commenting on this said that the complexity of cases was over-stated and they were rarely told that a case was a fairly standard one, but that there were things that could have been done better or more efficiently or the realisations ought to have been higher so perhaps a reduction in fees was appropriate. They believed that, by adopting this approach, IPs undermined the confidence others have in them” (section 5.2.1). It’s a shame, however, that no mention has been made of the instances – and I know that they do occur – of IPs who unilaterally accept to write-off some of their time costs so that they can pay a dividend on a case.

But this quote hints at the key disadvantage, I think, of time costs: there is a risk that it rewards inefficiency.

Kempson first suggests moving to a percentage basis as a presumed method of setting remuneration, although she acknowledges that this wouldn’t help creditors as they would still face the difficulty on knowing what a reasonable percentage looked like. She then suggests a “more promising approach” is the rarely-used mixed bases for fees that were introduced by the 2010 Rules (section 6.1.4). She states that this should be “explored further, for example fixed fees for statutory duties; a percentage of realisations for asset realisations (with a statutory sliding scale as described above); perhaps retaining time cost for investigations”. Whilst I agree that different fee bases certainly do have the potential to deliver better outcomes – I believe that it can incentivise IPs to work efficiently and effectively whilst ensuring that they still get paid for doing the necessary work that doesn’t generate realisations – it does make me wonder: if creditors already feel confused..!

Lessons from Down Under?

Kempson is clearly a fan of the Australian regime. She recommends the scrapping or radical revision of SIP9 in favour of something akin to the IPAA’s Code of Professional Practice (http://www.ipaa.com.au/docs/about-us-documents/copp-2nd-ed-18-1-11.pdf?sfvrsn=2). At first glance (I confess I have done no more than that), it doesn’t look to have much more content than SIP9, but it does seem more explanatory, more non-IP-friendly, and the fact that Kempson clearly rates it over SIP9 suggests to me that, at the very least, perhaps we could produce something like it that is targeted at the unsecured creditor audience.

She also refers to a Remuneration Request Approval Report template sheet (accessible from: http://www.ipaa.com.au/about-us/ipa-publications/code-of-professional-practice), which she acknowledges “is more detailed than SIP9” (section 6.1.2) – she’s not kidding! To me, it looks just like the SIP9 Appendix with more detailed breakdowns of every key time category, probably something akin to the information IPs provide on a >£50,000 case.

Finally, she refers to a “helpful information sheet” provided by the Australian regulator (ASIC) (http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Approving_fees_guide_for_creditors.pdf/$file/Approving_fees_guide_for_creditors.pdf), which looks much like R3’s Creditors’ Guides to Fees, although again the content does perhaps come over more readable.

Thus, whilst I can see some value in revisiting the UK documents (or producing different ones) so that they are more useful to non-IPs (although will anyone read them?), I am not sure that I see much in the argument that moving to an Aussie Code will change radically how IPs report fees matters. I am also dismayed at Kempson’s suggestion that “a detailed Code of this kind would be very difficult to compile by committee and would require a single body, almost certainly the Insolvency Service in consultation with the insolvency profession, to do it” (section 6.1.2). Wasn’t the Service behind the 2010 Rules on the content of progress reports..?

After singing Australia’s praises, she admits: “even with the additional information disclosure described above, creditor engagement remains a problem in Australia” (section 6.1.3) – hmm… so what exactly is the value of the Australian way..?

Other ideas for creditor engagement

Kempson recommends consideration of the Austrian model of creditor protection associations (section 6.1.3), which is a wild one and not a quick fix – there must be an easier way? I was interested to note that, even though creditors are paid to sit on committees in Germany, committees are only formed on 15-20% of cases – so paying creditors doesn’t work either…

The report also seems to swing in the opposite direction to the Red Tape Challenge in suggesting that the criteria for avoiding creditors’ meetings in Administrations should be reconsidered. Kempson highlights the situation where the secured creditor is paid in full yet no creditors’ meeting is held either because there are insufficient funds to pay a dividend or because the Administrator did not anticipate there would be sufficient funds at the Proposals stage. As I mentioned in an earlier post (http://wp.me/p2FU2Z-3p), in my view these Rules just do not work – something for the Insolvency Rules Committee…

However, raising these circumstances makes me think: whilst endeavours to improve creditor engagement are admirable, could we not all agree that there are some cases that are just not worth anyone getting excited about? There must be so many cases with negligible assets that barely cover the Category 1 costs plus a bit for the IP for discharging his/her statutory duties – is it really sensible to try to drag creditors kicking and screaming to show an interest in fixing, monitoring and reviewing the IP’s fees in such a case? Whatever measures are introduced, could they not restrict application to such low-value cases?

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The fact that the release of this report seems to have made fewer ripples than the Government’s announcement of its plan to conduct the fees review makes me wonder if anyone is really listening..? However, I’m sure we all know what will happen when the next high profile case hits the headlines, when the tabloids report the apparent eye-watering sums paid to the IPs and the corresponding meagre p in the £ return to creditors. Then there will be a revived call for fees to be curbed somehow.

In the meantime, we await the Government’s response to Professor Kempson’s report, expected “later this year”.