Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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The revised SIP3.1 (part 2): will it improve debtors’ experiences?

This is my second post on the changes introduced by the revised SIP3.1.  In this post, I examine how the SIP affects the IVA journey through the Nominee to Supervisor and on to closure.  I end with a quick summary of all the key document changes required by the revised SIP.

As mentioned in part 1, please bear in mind that these posts focus on the main changes.  Particularly depending on your own templates and procedures, the revisions may affect you in other ways.  This is no substitute for scrutinising the SIP for yourself.

The topics covered in this blog post are:

  • Elevating the need to communicate with affected third parties
  • Pre-IVA investigations relaxed?
  • Signposting creditors
  • Thirteen items added or changed on the Proposal wishlist
  • Additional steps for modifications
  • Six additions or changes to the Supervisor’s duties
  • Will all this help improve IVA standards and, importantly, the debtor’s experience?
  • Finally, a quick summary of document templates affected by the new SIP

Dealing with third parties

The SIP contains a couple of new requirements about how we should be dealing with third parties:

  • IPs need to maintain records of “considerations of the impact of the IVA on any third parties, including any joint creditors, guarantors or co-owners of property” at all stages of the IVA (para 15b)
  • IPs need procedures to ensure that “consent is obtained, where appropriate, from any third-party individuals whose income is to be shown as included in the income and expenditure statement or who have an interest in any assets included in the proposal” (para 16f)

In my experience, it has been rare (maybe too rare) for only one person in a couple to propose an IVA, but in those circumstances there is a need to communicate directly with the other party where they have interests in assets or the household income or they share liabilities.

The SIP also includes that “any third party contributor’s identity [should be] checked and verified and all evidence is kept on the file” (para 18f) – this was previously required by the RPBs, albeit only appearing in their AML “guidance”.  The SIP extends this requirement also to verifying the debtor’s identity, but as this is clearly required by the MLR17, I am not quite sure why it has been considered necessary for a SIP.

A relaxed requirement?

It is very unusual for a SIP to be revised to ease requirements.  This SIP3.1 appears to have done that as regards exploring the debtor’s assets, liabilities, income and expenditure:

  • The old SIP3.1 required “proportionate investigations into and verification of” these items
  • The new SIP3.1 merely requires “proportionate enquiries” to be undertaken and evidenced on the file (para 18f)

Duties to creditors

An IP’s procedures are required to ensure that:

  • “where creditors might need assistance in understanding the consequences of an IVA, the insolvency practitioner signposts sources of help” (para 18g)

While it might be useful to add to your initial letter to creditors something to achieve this, this paragraph actually appears under the heading, “Preparing for an IVA”, i.e. before issuing the Proposal, so it might be difficult to put safeguards into place to ensure this is met, as any pre-Proposal exchanges with creditors will be pretty bespoke.

Anyway, where would you send such creditors?  Who other than a solicitor would be well-placed to assist a creditor in understanding the consequences of an IVA?

Finally, the Proposal!

By the time we get to the SIP’s Proposal section, I think we all realise that the concept of SIPs being principles-based and not prescriptive has gone out of the window.

Here is a list of the main additions to the Proposal wishlist (para 21):

  • “the alternative options considered both outside and within formal insolvency procedures, with specific reasons for not adopting them”
    • This seems odd for an IVA Proposal – you wouldn’t put in a contract why the parties have decided not to contract with competitors – but hey ho.
  • “where relevant, information to support any profit and cash projections, subject to any commercial sensitivity”
  • “an explanation of the role and powers of the supervisor”
    • … in addition to “the functions of the supervisor” (R8.3k)..?
  • “details of any discussions which have taken place with key creditors”
  • “where it is proposed that certain creditors are to be treated differently, an explanation as to which creditors are affected, how and why, in a manner which aims to be clear and useful”
  • “an explanation of how debts are to be valued for voting purposes, in particular where the creditors include long-term or contingent liabilities”
    • More SIP3.2 spill-overs (sigh!)
  • “whether the source [of any referral of the debtor] undertook the regulated activity of debt counselling, and if so whether the source is FCA authorised or exempt in relation to debt counselling…”
    • As mentioned earlier, this seems to require IPs to have an in-depth knowledge of the FCA’s authorisation regime and regulations including its distinction between advice and information.  The PERG section of the FCA’s handbook has much to say on this topic.
  • “… and details of any prior relationship between the source and the debtor or the insolvency practitioner”
    • It seems odd that this was not extended to encompass the referrer’s relationship with the firm.
  • where any payment has been, or is proposed to be, made to the referrer, an explanation of “how it represents value for the work/services provided to the insolvency practitioner”
  • “details of any direct or indirect payments made, or to be made, to any third parties or associates in connection with the proposed IVA, together with a description of the goods or services provided and the reasons for all payments”
    • This is pretty-much the old SIP’s words but in a different order.  I think this is now clearer in requiring disclosure of payments from sources other than the IVA estate (e.g. from the IP’s firm), although I think it could be difficult to enforce.
  • “an explanation of how debts that are proposed to be compromised will be treated should the IVA fail”
  • “the circumstances in which the IVA might conclude or fail, including what might happen to the debtor in such circumstances”
    • I’m assuming they only mean what might happen to the debtor if the IVA fails, not if it concludes (successfully).  But even this is asking a lot, isn’t it?
  • “any specifically identifiable risks of failure applicable to the IVA”

If any of these new (or any other) items on the Proposal wishlist are “not detailed in full”, the SIP requires “adequate explanations” to be provided (para 21).  I am not sure how one measures what might be an adequate explanation!

As with the Initial Advice wishlist, although many of these may already be covered in your Proposal template, I think you would do well to double-check that the template hits the mark in all aspects.

In addition, the SIP states that, “if the IVA Protocol has been used to form the basis of an IVA proposal, any deviations from the Protocol should be explained in writing to the debtor and their creditors” (para 20), although this need not form part of the Proposal itself.

Handling modifications

The SIP has changed in respect of the Nominee’s duties on receiving creditors’ modifications (para 22):

  • when the Nominee seeks the debtor’s consent to any modifications, their explanation should “include the preparation of revised comparative outcome statements showing the effects of the modifications if agreement to them is a reasonable prospect and will change the outcome”
  • “where any conflicting modifications are proposed, the prevailing adaptations, i.e. those agreed by debtor and supported by a 75% majority of creditors, are identified and recorded by the nominee”
    • I thought I understood what was meant by “prevailing adaptations”, but the “i.e.” threw me.  The “i.e.” just means the mods agreed by debtors and creditors need to be recorded.  But “prevailing adaptations” where there are conflicting mods means much more, doesn’t it?  Doesn’t it mean that, if one creditor caps fees at £3,000 and another caps them at £2,000, and both mods are agreed by debtor/creditors, then the “prevailing adaptation” is that the fees are capped at £2,000?  Of course, that’s a straightforward clash of mods. There could be many complex conflicts presented by agreed mods and the “prevailing adaptations” could depend on one’s priorities, but I don’t think the SIP makes clear what is required.
  • “the debtor’s consent to agreed modifications is recorded and in the absence of the debtor’s consent, the IVA cannot proceed in a modified form”
    • The wording here is slightly changed from the previous SIP.  The change is rather subtle, but I think it means that the debtor’s agreement must be recorded by the start of the IVA – otherwise it cannot proceed – rather than staff contacting the debtor after the creditors’ decision has been made in order to record the debtor’s agreement.

Finally, the IVA!

The SIP contains a few more additions for Supervisors (para 23):

  • Supervisors should “obtain the debtor’s written consent to any variations to the original terms of the IVA proposal put forward by creditors”
    • This is odd: how many variations are “put forward by creditors”??
  • Reports must provide full disclosure of the IVA costs “including the cost of any work carried out by third parties and associates of the supervisor or their firm”
    • The revision removes the requirement to disclose also “any sources of income of the insolvency practitioner or the practice in relation to the case”.  But it should be remembered that, if the IP/firm/associate receives any referral fees or commission during the IVA, the Code of Ethics requires this to be paid into the estate and disclosed to creditors in any event.
  • Any increase in costs over previously reported estimates should be “explained and” reported at the next available opportunity “and in any event no later than six months after the end of the IVA”
    • Given that R8.31 requires a report within 28 days of any full implementation or termination of the IVA, I don’t understand the 6-month deadline here.  The only scenario I can think of is where the IP/firm did not realise that the IVA had expired due to the effluxion of time and so missed this statutory requirement, but does it help to add a SIP requirement seemingly allowing 6 months?
  • “Any completion certificate should be issued as soon as reasonably practicable and no later than six months after the final payment is made by the debtor, unless another requirement of the proposal makes this impossible”
  • “The effect of completion or failure should be reported to the debtor and their creditors”
  • “When the IVA concludes or fails, the supervisor should ensure that they act in accordance with the terms and conditions of the proposal”
    • Isn’t this like stating that an office holder needs to comply with the Act and Rules?  Then again, given that the IVA Standing Committee and the Insolvency Service published expectations during the pandemic that Supervisors would not act in accordance with IVA Proposals’ terms, maybe it did need saying!

Will the new SIP improve the delivery standards of IVAs?

My overriding feeling is that the RPBs have seen a number of practices that they don’t like and they have sought to outlaw them by means of this SIP.  The only problem is that, if you don’t know what the bad practices are, it can be difficult to discern exactly how the RPBs expect you to implement the changes. 

When I asked one RPB staff member to explain some elements of the SIP, their explanations often were: what we don’t want to see is […]  I haven’t repeated them here, as they are only one person’s point of view and I suspect that other RPB monitors will measure compliance success or failure differently in the future.  I’m not sure it would be appropriate to publish a list of bad practices and, having had to roll with the RPBs’ FAQs on the last revision of SIP9, I definitely don’t want to suggest that the RPBs follow up with additional guidance on how to implement SIP3.1.  But it doesn’t stop me feeling that the SIP has left plenty of room for goalposts to move in the future.

What about the debtor?

Finally, I think we should spare a thought for the person at the centre of IVAs: the debtor.  While I accept that there are poor practices out there, I am not persuaded that they will be eliminated by requiring IPs to throw yet more information to debtors. 

I am surprised that many of the known poor practices were not capable of being addressed with reference to the principles of the old SIP3.1 and the Code of Ethics.  And I am not convinced that the new SIP will silence those who believe that pre-IVA advice would be better regulated by the FCA.  I suspect this debate will run and run.

A list for compliance managers

To summarise my two blog posts, here’s a short list of documents that needed to be amended – or at the very least double-checked to ensure that you were ahead of the curve – in light of the revised SIP:

  • Initial meeting script/record
  • Initial advice letter / engagement letter
  • Internal docs to record SIP3.1 Assessments (both pre and post-approval of IVA)
  • Internal docs and processes to explore advice given by any referrer and their authority for giving the advice
  • Letters to third party contributors and other third parties affected
  • Letters to non-IVA partners where household income & expenditures are to be disclosed
  • Vulnerability checklists
  • Proposal doc
  • Nominee report (depending on the extent that the report explains the roles and the extent of investigations)
  • Letters to creditors (redefining the adviser’s role and signposting sources of help)
  • Communications with the debtor about proposed modifications
  • Progress reports
  • Final reports and any covering letters explaining the effects of the end of the IVA
  • Checklists (of course!)


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IVAs: survival of trusts and breach processes – are they successfully addressed by the R3 or Protocol Standard Terms?

With the inaudible release of R3’s revised Standard Terms & Conditions (“STC”) for IVAs and the revised IVA Protocol effective from 1 March 2013 (albeit that the STC have been out since July 2012), I thought it was timely to express my personal views on the STCs and particularly on areas where I feel they are limited and therefore where the Proposals should take over.

R3’s revised STC are located at: http://www.r3.org.uk/media/documents/technical_library/IVA%20Standard%20Terms/IVA_standard_terms_version_3_web_version.pdf

The IVA Protocol and STC can be found at: http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/policychange/foum2007/plenarymeeting.htm

Bill Burch has done a great job of examining R3’s revised STC and has blogged on all the changes from the last version: http://complianceoncall.blogspot.co.uk/2013/02/hot-news-revised-r3-standard-terms-for.html. Over the past year, I had heard rumours of a revision being under way and I now regret not lobbying R3 for some more extensive changes. Thus, whilst it could be said that I only have myself to blame, it won’t stop me whinging about the fact that the issues that I’ve always had with the R3 STC remain unchanged in the current version. I have to say, however, that the two main issues I have are not unique to R3’s STC – in my view, the Protocol’s STC are equally, albeit differently, deficient – and, of course, they can be overcome by careful additions to the IVA Proposal itself, which takes precedence whether R3’s or the Protocol’s STC are used.

Trust Assets

R3’s STC state (paragraph 28(3)) that the trusts (also defined by the STC) survive the IVA’s termination and the assets shall be got in and realised by the Supervisor and any proceeds applied and distributed in accordance with the terms of the Arrangement. The Protocol STC are silent on whether the trusts (defined similarly to the R3 STC) survive, so (unless the IVA Proposal itself covers this), presumably in accordance with NT Gallagher, they usually do.

Does an IP really want to remain responsible for realising assets once an IVA has failed? Wouldn’t it be better to leave it to a subsequently-appointed Trustee in Bankruptcy? Perhaps an example of what might happen might help demonstrate the issues…

An IVA is based on five years contribution from income plus equity release from the debtor’s home in the final year. In year one, the IVA fails through non-payment of monthly contributions. What responsibilities does the (former) Supervisor have to deal with the debtor’s home? I believe it all depends on whether the house is described in the Proposal as an excluded or included asset. If the house is not an excluded asset, then the IP can find that he/she is responsible for realising any equity in the property, which now may be all the debtor’s interest in the property, not the 85% envisaged by the Protocol, and I doubt that the IP can assume that he/she can wait a few years before realising the interest, as per the original Proposal.

If funds related to property equity are included in an IVA, it usually seems that the property (or at least the debtor’s interest in it) is described as an included asset – and the Protocol’s equity clause seems to lead to this conclusion. Would it not be better for such IVA Proposals to define the property/interest as an excluded asset and simply provide that a sum equal to (rather than “representing”) 85% of the interest will be contributed to the Arrangement in Year 5? That way, at least the IP does not find he has to realise the property/interest as a trustee (with a little “t”), which could be more troublesome than if he handled it under the statutory framework as a Trustee in Bankruptcy. Then again, no bond… no annual reports… no S283A..? It could be quite liberating!

The absence of a post-termination trust provision in the Protocol creates another difficulty for IPs acting as trustees of an NT Gallagher trust. As the R3/authorising bodies’ guidance on Paymex explained, the Protocol STC do not provide for any fees to be paid under a closed IVA trust (whereas R3’s STC do), so, unless the Proposal itself addresses this, the IP acting as a trustee on termination of an IVA must seek creditors’ approval to his/her fees for so acting and may only deduct such fees from the dividend payable to consenting creditors.

Thus, I feel it is important for IPs to ensure that they do not rely solely on the STC to deal with any trusts, but ensure that Proposals themselves are worded satisfactorily.

Breach Process

Both R3 and the Protocol provide for the Supervisor to serve notice on a debtor who fails to meet his/her obligations under the Arrangement and allows some time (R3 STC allows one to two months; the Protocol allows one to three months) for the debtor to remedy the breach.

As Bill Burch has identified, the R3 terms (paragraph 71(1)) now appear to accommodate a scenario where the Supervisor has already petitioned for the debtor’s bankruptcy before he/she serves notice of breach, however it seems that the terms do not provide for the Supervisor to present a petition under any circumstance other than after the creditors have so resolved after the notice of breach process has been followed. There is a provision at paragraph 15(2), which seems to give the Supervisor power to act on directions given by “the majority or the most material of creditors”, although it would be an odd circumstance if an IP used this to move swiftly to a bankruptcy petition.

The Protocol’s STC seem a little more practical to me; at least they provide for the Supervisor to terminate the Arrangement if requested by the debtor (paragraph 9(6)). Thus, if the debtor simply wants to walk away from the ongoing commitments of the IVA, there is a swift way of bringing it to a conclusion. Without this clause, i.e. as per R3’s STC, it seems to me that, even if the debtor has no intention of remedying the breach, the Supervisor has to go through the rigmarole of serving notice of breach, waiting a month, then calling a creditors’ meeting to reach agreement as to what to do next. And what happens if the creditors’ meeting is inquorate? Under R3’s terms, the Supervisor does not appear to be authorised to terminate the Arrangement; and under the Protocol STC, I also feel it is tricky for the Supervisor, as under paragraph 9(5), the Supervisor can issue a certificate of termination or seek creditors’ views, so again I am not sure what options are left for the Supervisor on an inquorate meeting.

Minor flaws in the R3 STC

Bill has picked up on many of the STC typos and minor flaws, such as references to filings at Court, which are now only required for Interim Order IVAs following the 2010 Rules. He has also spotted – and I will repeat here for emphasis – that R3’s STC (paragraph 13(2)) seek to address the issue of the powers of Joint Supervisors, despite the fact that the 2010 Rules changed R5.25(1) so that a resolution must now be taken on this matter, i.e. a separate resolution from approval of the Proposal itself.

I also noted that R3’s STC have not been updated to reflect the 2005 Rules, which changed Rule 11.13 regarding the calculation of a dividend on a debt payable at a future time. I guess there is nothing wrong with IVAs using the pre-2005 formula, but I would have thought it would make sense to follow the bankruptcy standard.

I note that R3 has changed the majority required for variations – understandably from an excess of three-quarters to simply three-quarters or more (paragraph 65(2)) – but, I ask myself, why not have a simple majority for variations? And why add in for variations the R5.23(4) condition regarding associates’ votes? Why not follow the Protocol’s process of a simple majority to pass variations? 08/04/13 EDIT: Please note that there is an apparently widely-held view that the Protocol STCs provide for a 75% majority for the approval of variations – see blog post http://wp.me/p2FU2Z-2K.

A final techy flaw: both R3 (paragraph 71(2)) and the Protocol STC (paragraph 9(2) and (4)) continue to reference the old-style Supervisor reports on the progress and efficacy of the Arrangement, per the old R5.31, which has now been replaced by R5.31A.

Minor flaws in the IVA Protocol STC

The minor issues I have with the Protocol STC appear to have been created by the addition of terms over the years, resulting in some inconsistent treatments.

Paragraph 8(8) states that creditors must be informed within 3 months of the Supervisor agreeing a payment break with the debtor. Why the urgency, given that paragraph 9(2) states that creditors need only be told of the generation of more than 3 months’ arrears of contributions, which I would think is of more concern to creditors, in the next progress report?

Paragraph 10(9) states that the Supervisor may call a creditors’ meeting to consider what action should be taken when he/she fails to reach an agreement with the debtor regarding the treatment of “additional income”. That paragraph states that “any such creditors meeting should be convened within 30 days of the Supervisor’s review of your annual financial circumstances”, however paragraph 8(5) states that the debtor must report additional income to the Supervisor when it arises. This means that, if the Supervisor wants to call a creditors’ meeting regarding additional income arising outside of the Supervisor’s annual review, he/she may have a long time to wait!

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Despite these issues, I echo Bill’s sentiment: to err is human… although between us all we might get a little closer to perfection.