Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Ethics hits the headlines again: should we be worried?

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The big story of last week was the disciplinary sanction ordered to an EY IP for breaches of the Ethics Code.  But I think this is just one more straw on the camel’s back.  Every new criticism of apparent poor ethical standards that is added to the pile increases the risk of a regulatory reaction that would be counter-productive to the effective and ethical work of the majority.

 

Journalistic fog

Plenty has been said about the “noise” around pre-packs.  Therefore, I was not entirely surprised – but I was disappointed and frustrated – to read that the latest sanction had been twisted to fit one journalist’s evident attempt to keep shouting: “It was the classic cosy insolvency I wrote about last month: a company calls in insolvency advisers who conduct an ‘independent business review’, take the job of administrator and act on the sale as well.  On Wind Hellas, the creditors could not see how Ernst & Young could take both appointments without compromising their integrity. Six-and-a-half years later, the professional body has at last agreed with them.” (http://goo.gl/aIY9rU)

Actually, a look at the ICAEW notice (https://goo.gl/H7jUov) suggests that they did nothing of the sort.  The relationship that got the IP into hot water related to the fact that an associated company, Ernst & Young Societe Anonyme, had carried on audit related work during the three years before the IP took the appointment as Joint Administrator of the company.

It is unfortunate that a failure to join the ethical dots between a potential insolvency appointment and the firm’s audit-related connection with the company has been used to pick at the pre-pack wound that we might have hoped was on the way to being healed.

 

Speed of complaints-handling

Is the journalist’s reference to 6½ years another distortion of the facts?  I was surprised to read an article in the Telegraph from February 2011 (http://goo.gl/8902YO).  Apparently, the ICAEW’s investigation manager wrote to the IP way back then, saying that “the threat to Ms Mills’ objectivity ‘should have caused you to decline, or resign, from that appointment’”.  Given that that conclusion had been drawn back in 2011, it does seem odd that it took a further four years for the ICAEW to issue the reprimand (plus a fine of £250,000 to the firm and £15,000 to the IP).  Perhaps the recouping of £95,000 of costs is some indication of why it took four years to conclude.

I found it a little surprising to read in the Insolvency Service’s monitoring report in June 2015 (https://goo.gl/Lm5vdU) that the Service considers the that ICAEW operates a “strong control environment” for handling complaints, although it did refer to some “relatively isolated and historical incidents” as regards delays in complaint-processing (well, they would be historic, wouldn’t they?). In addition, in its 2014 annual review (https://goo.gl/MZHeHK), the Service reported that two of the other RPBs evidenced “significant delays” in the progression of three complaints referred to the Service.

Although I do understand the complexities and the need for due process, I do worry that the regulators risk looking impotent if they are not seen to deal swiftly with complaints.  I also know that not a few IPs are frustrated and saddened by the length of time it takes for complaints to be closed, whilst in the meantime they live under a Damocles Sword.

 

Ethics Code under review

In each of the Insolvency Service’s annual reviews for the last three years (maybe longer, I didn’t care to check), the Service has highlighted ethical issues – and conflicts of interest in particular – as one of its focal points for the future.  In its latest review, it mentions participating in “a JIC working group that has been formed to consider amendments to the Code”.

Ethical issues still feature heavily in the complaints statistics… although they have fallen from 35% of all complaints in 2013 to 21% in 2014 (SIP3 and communication breakdown/failure accounted for the largest proportions at 27% apiece).  Almost one third of the 2014 ethics-based complaints related to conflicts of interest.

The Service still continues to receive high profile complaints of this nature: its review refers to the Comet complaint, which appears to be as much about the “potential conflict of interest” in relation to the pre-administration advice to the company and connected parties and the subsequent appointment as it has to do with apparent insufficient redundancy consultation.

I suspect that the question of how much pre-appointment work is too much will be one of the debates for the JIC working group.  Personally, I think that the current Ethics Code raises sufficient questions probing the significance of prior relationships to help IPs work this out for themselves… but this does require IPs to step away and reflect dispassionately on the facts as well as try to put themselves in the shoes of “a reasonable and informed third party, having knowledge of all relevant information” to discern whether they would conclude the threat to objectivity to be acceptable.

It is evident that there exists a swell of opinion outside the profession that any pre-appointment work is too much.  Thus, at the very least, perhaps more can be done to help people understand the necessary work that an IP does prior to a formal appointment and how this work takes full account of the future office-holder’s responsibilities and concerns.  Are Administrators’ Proposals doing this part of the job justice?

 

Criticisms of Disciplinary Sanctions

Taking centre stage in the Insolvency Service’s 2014 review are the Service’s plans “to ensure that the sanctions applied where misconduct is identified are consistent and sufficient, not only to deal with that misconduct, but also to provide reassurance to the wider public”.

Regrettably, the body of the review does not elaborate on this subject except to explain the plan to “attempt to create a common panel [of reviewers for complaints] across all of the authorising bodies”.  I am sure the Service is pleased to be able to line up for next year’s review that, with the departure of the Law Society/SRA from IP-licensing, the Complaints Gateway will cover all but one appointment-taking IP across the whole of the UK.

But these are just cosmetic changes, aren’t they?  Has there been any real progress in improving consistency across the RPBs?  It is perhaps too early to judge: the Common Sanctions Guidance and all that went with it were rolled out only in June 2013.  Over 2014, there were only 19 sanctions (excluding warnings and cautions) and seven have been published on the .gov.uk website (https://goo.gl/F3PaHj) this year.

A closer look at 2014’s sanctions hints at what might be behind the Service’s comment: 15 of the 19 sanctions were delivered by the IPA; and 20 of the 24 warnings/cautions were from the IPA too.  To license 34% of all appointment-taking IPs but to be responsible for over 80% of all sanctions: something has got to be wrong somewhere, hasn’t it?

The ICAEW has aired its own opinion on the Common Sanctions Guidance: its response to the Insolvency Service’s recommendation from its monitoring visit that the ICAEW “should ensure that sanctions relating to insolvency matters are applied in line with the Common Sanctions Guidelines” was to state amongst other things that the Guidance should be subject to a further review (cheeky?!).

 

Other Rumbles of Discontent

All this “noise” reminded me of the House of Commons’ (then) BIS Select Committee inquiry into insolvency that received oral evidence in March 2015 (http://goo.gl/CCmfQp).  There were some telling questions regarding the risks of conflicts of interest arising from pre-appointment work, although most of them were directed at Julian Healy, NARA’s chief executive officer.  Interestingly, the Select Committee also appeared alarmed to learn that not all fixed charge receivers are Registered Property Receivers under the RICS/IPA scheme.  Although it seems contrary to the de-regulation agenda, I would not be surprised to see some future pressure for mandatory regulation of all fixed charge receivers.

The source of potential conflicts that concerned the Select Committee was the seconding of IPs and staff to banks.  I thought that the witnesses side-stepped the issue quite adeptly by saying in effect, of course the IP/receiver who takes the appointment would never be the same IP/receiver who was sitting in the bank’s offices; that would be clearly unacceptable!  It was a shame that the Committee seemed to accept this simple explanation.  But then perhaps, when it comes to secondments, the primary issue is more about the ethical risk of exchanging consideration for insolvency appointments, rather than the risk that a seconded IP/staff member would influence events on a particular case to their firm’s advantage.

Bob Pinder, ICAEW, told the Committee: “It used to be quite prevalent that there were secondments, but he [a Big Four partner] was saying that that is becoming less so these days because of the perception of conflict… There is a stepping away from secondments generally”, so I wonder whether there might not be so much resistance now if the JIC were to look more closely at the subject of secondments when reconsidering the Ethics Code.

The FCA’s review of RBS’ Global Restructuring Group, which was prompted by the Tomlinson report (and which clearly was behind much of the Committee’s excitement), is expected to be released this summer (http://goo.gl/l96vtl).  When it does, I can see us reeling from a new/revived set of criticisms – one more straw for the camel’s back.

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A Collection of Two Halves – Part 1: New Cases

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It’s been a while since I blogged on case law, so I’ve divided my pile into two posts. In this one, I summarise some decisions that I’ve not seen covered widely elsewhere:

Re Coniston Hotel – an Administration challenge, which may have stoked Tomlinson’s embers, fails to ignite.
Holgate v Reid – more Administrators’ actions are challenged: dispute over a Para 52(1)(b) statement.
Shaw v Webb – post-petition dispositions persuade the court to choose winding-up over Administration.
Thomas v Edmondson – can an IPO be granted after a short IPA is completed?
Barnes v The Eastenders Group – Supreme Court decides CPS must pay Receiver after failed restraint order.

West Registrar case hits a wall

Re Coniston Hotel (Kent) LLP (In Liquidation) (8 April 2014) ([2014] EWHC 1100 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1100.html
The long-running claims of the members of the LLP that the Administrators, RBS, and property agents, had conspired to defraud came to a head in this application brought by the former Administrators in which they sought the striking-out of the members’ proceedings.

The judge’s summary of the members’ claims leaves the reader in little doubt as to what the punchline might be: “The Members’ criticisms are not about professional negligence by the Administrators or by the valuers whom they instructed or by the agents whom they instructed to sell the Hotel, nor are there criticisms about the mode of sale, nor the handling and outcome of the negotiations for the sale. Instead the Members have pleaded a very different kind of challenge to the sale… [They] say that the marketing process was a sham. They do not identify the respects in which it was a sham, but they say it was a sham. They say it was a pretence and they say that it was pursuant to a conspiracy to defraud… All the conspirators knew, so it is alleged, that the Hotel was worth £7 million. It is quite clear that the Bank’s duty and the Administrators’ duty would have been to get the open market value for the Hotel and to achieve the market value. However, so it is alleged, the Bank was not prepared to see the Hotel sold for its full value and the debt owed to the Bank paid. What the Bank wanted instead was that the Hotel should be sold at around 50 per cent of its true value and not sold in the open market to a fortunate purchaser, but sold to an associated company of the Bank, West Register Limited. In order to carry this fraud to fruition, it was necessary to have Knight Frank place a value on the Hotel, which was about 50 per cent of what Knight Frank fully appreciated was the true value, about 50 per cent of £7 million. Armed with that fraudulent valuation from Knight Frank, the conspirators would then pretend to market the hotel, there would be a sham marketing process and the Hotel would be sold to the predetermined purchaser, West Register. I suppose one can see what was in it for West Register. They would acquire something at half its true value. It is less obvious what was in it for the Bank, because their debt, which exceeded the sale price that came about, would not be paid in full, but, perhaps, the Bank would be content that its associate had profited in that way. It is difficult to see what Knight Frank’s motive for this very serious act of dishonesty and wrongdoing would have been. It is submitted to me that they had motive enough: they wanted to please the Bank. It is also difficult to see what the Administrators’ motive would have been for participation in this fraud. This fraud is of the gravest and most serious character. However, it is submitted to me that I should see the force of the point, that the Administrators simply wanted to please the Bank” (paragraph 28).

Nevertheless Morgan J acknowledged that “it is a strong thing for a judge to strike out a case or give summary judgment, particularly in a case where there is an allegation of serious wrongdoing” (paragraph 33) and he also noted “a most disturbing report” (paragraph 25) written by Lawrence Tomlinson, by which he was “sufficiently disturbed… to give the Members a chance to take legal advice as to whether they had a properly pleadable case at an undervalue” (paragraph 50).

In relation to the allegation that the marketing was a sham, the judge stated that it was “utterly fanciful. It is an allegation put forward by someone (the Members) who simply refuse to face up to the reality of what has happened here” (paragraph 43). In dealing with the allegations that the prospective Administrators’ communications with the Bank were improper, the judge noted that the letter of instruction was “really very clear indeed” as regards the relationships between the parties and there was a “complete lack of material to indicate that [the IPs] were guilty of this very serious fraud”. In view of this, Morgan J also had strong words for counsel for the members: “his professional duty was to decline to plead the allegation which he did plead, alternatively, to withdraw from the case” (paragraph 49).

Consequently, the judge dismissed the conspiracy to defraud or, alternatively, the undervalue claim, along with the members’ Para 75 claim, which was quickly dismissed on the basis that the members did not have a pecuniary interest in the relief sought.

(UPDATE: the judgment on the appeals was given on 13/10/2015 ([2015] EWCA Civ 1001).  The involvement of West Registrar made Lady Justice Arden “scrutinise what happened with scepticism, but at the end of the day it is impossible for the appellants to get round the evidence as to the way the respondents marketed the hotel”.  The appeals were dismissed.)

Another challenge of Administrators’ actions

Holgate & Holgate v Reid & Dawson (20 February 2013) ([2013] EWHC 4630 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4630.html
This is a fairly old judgment, but it has only recently been published on BAILII.

The Holgates are creditors and members of a company over which Joint Administrators were appointed by the QFCH. The Administrators included a Para 52(1)(b) statement in their Proposals. Mr Holgate requisitioned a creditors’ meeting, but then withdrew his request, having received the Administrators’ request for an indemnity to cover the costs of convening a meeting, estimated at £21,900. Shortly thereafter, the Administrators issued notice that the Proposals were deemed to have been approved.

Some time later, the Holgates applied to court under Para 74 to order the Administrators not to sell the company’s business and assets as they planned; to revoke the deemed approval of the Proposals and the basis of the Administrators’ fees as fixed under R2.106(5A); and to require a Para 51 creditors’ meeting to be held. The Holgates submitted that the company could, and should, be rescued as a going concern by means of a CVA and thus the Administrators should not have made a Para 52(1)(b) statement. They also submitted that there had been a fundamental change of circumstances since the Administrators’ Proposals, because since then the FSA had announced that the major banks had agreed to provide redress on mis-sold interest rate hedging products and that such redress may well negate the bank’s claim against the company. The Administrators countered that the business had been trading at a loss both before and after Administration and that, whilst they had instructed solicitors to investigate the mis-selling claim, they were not in funds to pursue it. They were also keen to conclude the business sale for fear that it would otherwise fall away.

The Holgates failed to persuade Hodge HHJ that the Administrators’ evidence that the company could not be traded profitably was wrong. Thus the judge concluded that, on the evidence, it could not be said that the Administrators did not genuinely hold the opinion that the company had insufficient property to enable a distribution to be made to unsecured creditors other than out of the prescribed part and therefore they acted properly in dispensing with a creditors’ meeting by reason of the Para 52(1)(b) statement in their Proposals.

The judge found that the costs within the estimate of £21,900 in relation to a requisitioned meeting “may well have proved exaggerated; but I am not satisfied that they were deliberately exaggerated by the administrators with a view to deterring Mr Holgate from pursuing his requisition of a meeting. In my judgment, the administrators were acting cautiously in looking at a worst case scenario for the costs” (paragraph 38) and, in any event, the creditors’ meeting could have resolved that these costs be paid from the estate.

Hodge HHJ also considered the Holgates’ application in relation to Para 74(6)(c), i.e. that no order may be made if it would impede or prevent the implementation of proposals approved more than 28 days earlier. The judge felt that this applied as much to deemed approved proposals and that, as the Holgates were asking the court to resist the business sale, which was “the whole tenor of the proposals” (paragraph 44), he should dismiss the application. As an alternative, he was also not inclined to exercise the court’s discretion, as he felt that Mr Holgate had acted unreasonably in not pursuing the requisition for an initial creditors’ meeting and he pointed out that Mr Holgate had the right even then, under Para 56, to requisition a meeting given the apparent level of his claim as creditor.

As regards the suggestion that the FSA announcement supported a change in circumstances that might persuade the court to make a direction under Para 68, Hodge HHJ did not agree: “the existence of the FSA review merely relates to the means by which the mis-selling claim may be pursued. It is not clear whether it applies in the present case, or will secure sufficient satisfaction for the company even if it does. In any event, because I am not satisfied that the rescue of the company as a going concern is a viable proposition, it does not seem to me that there is any proper basis for the court to give any directions under paragraph 68 with regard to the holding by the administrators of a meeting of creditors” (paragraph 51).

Despite a consenting winding-up petitioner, the court declines to make an administration order and instead appoints a provisional liquidator

Shaw v Webb & Ors (10 April 2014) ([2014] EWHC 1132 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1132.html
HHJ Simon Barker QC acknowledged that, “on paper the criteria or preconditions for making an administration order, which are set out at paragraph 11 of Schedule B1, are made out: (a) there is no question but that [the company] is unable to pay its debts, and (b) the evidence of Mr Webb points to it being reasonably likely that the purpose of administration (in this case a better result for the creditors than would be likely on liquidation) will be achieved if an administration order is made” (paragraph 18). In addition, neither the petitioning creditor nor the QFCH opposed the making of an administration order. Therefore, why did the judge decline to make the administration order, but instead appointed Mr Webb as provisional liquidator, allowing the winding-up petition to proceed?

The judge felt that the payment of £115,000 that occurred post-petition “cries out for satisfactory explanation and justification” (paragraph 23); he felt similarly concerning the purchase of the company’s sole share post-petition; and he wondered whether there were other dispositions that may be unjustifiable, expressing surprise that the bank statements for the post-petition period were not in evidence (another item to add to the administration order application shopping list?)

Consequently, in view of the fact that the making of an administration order would neutralise the effect of S127 in relation to post-winding up petition dispositions, Simon Barker HHJ felt that it was appropriate to call the winding-up petition on for hearing. A winding-up order has since been granted.

Can an Income Payments Order be made after a short Income Payments Agreement is completed?

Thomas & O’Reilly v Edmondson (12 May 2014) ([2014] EWHC 1494 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1494.html

A bankrupt had entered into an Income Payments Agreement (“IPA”) with the Official Receiver, which effectively gave the OR the benefit of the bankrupt’s NT tax code up to the end of the tax year in which the debtor had been made bankrupt.

Later, Joint Trustees were appointed and, after failing to agree a further IPA with the debtor, they applied for an IPO in the amount of £10,000 per month for three years from the date of the IPO. The District Judge concluded that the Trustees were not entitled to an IPO on the basis that there had already been an IPA. The Trustees appealed.

Mrs Justice Aplin considered at length the effect of the introduction of S310A by means of the Enterprise Act 2002: were the intentions to limit the period of income payments to a maximum of three years and to provide that either an IPA is agreed or an IPO is sought?

The judge’s conclusion was that the court remains entitled to grant an IPO notwithstanding the previous IPA. She said: “It seems to me that the plain and ordinary meaning of section 310 is clear and that there is no reason to go beyond it. Furthermore, had the legislature intended that jurisdiction be limited in the way which is suggested, it seems to me that it would have said so at the time of the express amendments made by sections 259 and 260 of the Enterprise Act 2002” (paragraph 25).

As regards the issue of whether the combined maximum of income payments is three years, the judge said: “It seems to me that even if the Respondent is correct and it was Parliament’s intention that a bankrupt should not be required to pay part of his income to his trustee in bankruptcy for more than 3 years, the potential for an anomaly if there is jurisdiction to make an Income Payments Order despite an Income Payments Agreement having already been entered into is met by the existence of the discretion of the judge when exercising the jurisdiction whether to make the subsequent order and if so, the length of the order in question” (paragraph 28)… so I guess it remains to be seen whether the Trustees will be granted a full 3-year IPO on top of the 5-month IPA.

The Supreme Court upholds a Receiver’s right to be paid notwithstanding a quashed restraint order

Barnes v The Eastenders Group & Anor (8 May 2014) ([2014] UKSC 26)

http://www.bailii.org/uk/cases/UKSC/2014/26.html
I summarised the lead up to this Supreme Court appeal in an earlier post (http://wp.me/p2FU2Z-1H). Briefly, a Receiver was appointed over third party assets along with the CPS’ application for a POCA restraint order, which subsequently was set aside. The outcome of earlier court decisions was that the Receiver was not permitted to draw his fees and costs from the third party assets on the basis that the party’s right to peaceful enjoyment of its possessions under Article 1 of Protocol 1 of the European Convention of Human Rights (“A1P1”) took precedence, but also there was no basis under the POCA or the Human Rights Act 1998 for the CPS to be required to pay the Receiver’s fees and costs. The Receiver appealed to the Supreme Court.

In a unanimous judgment, the Supreme Court supported the previous decision that, as in this case there was no reasonable cause to regard the third party’s assets as the defendant’s at the time of the order, it would be a disproportionate interference with the third party’s A1P1 rights for the Receiver’s fees to be drawn from that party’s assets.

However, the judges felt that to leave the Receiver without a remedy would be to substitute one injustice for another and violate the Receiver’s A1P1 rights: “a receiver who accepts appointment by a court is entitled to know that the terms of his appointment will not be changed retrospectively. Moreover it is an ordinary part of receivership law that a receiver has a lien for his proper remuneration and expenses over the receivership property. To take away that right without compensating him would violate the receiver’s rights under A1P1” (paragraph 96). However, Lord Toulson agreed that there was no power in the POCA to order the CPS to pay the Receiver’s fees and costs.

The judge considered that the solution lay in the concept of unjust enrichment. The IP had agreed to act as Receiver on the basis that his agreement with the CPS provided for him to be paid from the defendant’s assets over which he would be entitled to a lien. The enrichment arose from the CPS’ perception that there would be a benefit to the public in the party’s assets being removed from its control and placed in the hands of the Receiver whilst its investigations were proceeding, but it was unjust enrichment as there was a total failure of consideration in relation to the Receiver’s rights over the assets, which was fundamental to the basis on which he was to act. Thus, the Receiver was entitled to look to the CPS for payment of his fees and costs.

Lord Toulson had some “lessons for the future” for the CPS. He noted that in the Court of Appeal judgment, the judge had “deplored the fact that the original application was made at short notice to a judge who was in the middle of conducting a heavy trial with only a limited time available for considering it” (paragraph 118) and stressed that, in view of the fact that such serious applications are made ex parte, the CPS had a special burden of candour and, because of the potential to cause serious harm, a material failure to observe the duty of candour could be regarded as serious misconduct.


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Tomlinson: IPs caught in the cross-fire

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Banks have become the 21st century pariahs. It seems that they can do nothing right and they cannot afford to do anything wrong. Lawrence Tomlinson may have banks, and RBS in particular, sighted in his cross-hairs, but is there much in his report that should concern the IP regulators or may herald changes for IPs?

Tomlinson’s published report can be found at: http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf.

The IP’s role: pre-appointment

A large part of the report raises issues regarding companies’ routes into the RBS’ Global Restructuring Group and how, once there, companies find it almost impossible to escape it alive. IPs become wrapped into this argument via Tomlinson’s observations over the opaque nature of the Independent Business Review process: the bank selects the IP and usually only the bank sees the report. When you add to this the fact that the cost of the IBR is passed to the company, I can see how this may rankle, although I am not sure that this makes the whole process flawed.

Tomlinson raises the issue of conflict of interest: he states that “it is easy to see how these reports may be used to protect the bank’s interests at the expense of the business. Much of the high value work received by these firms comes from the banks so it is naturally in their interest to protect the bank’s financial position”. Inevitably, the work of the IBR IP is fraught – can they really act independently? But who really is expecting them to do so? The IP’s client is the bank, not the company, so, at a time when the bank’s and the company’s interests cease to be aligned, it would seem to me to be foolish to assume that the IP introduced by the bank is not advising first and foremost the bank on how to protect its interests. If the company wants its own advice, then it should instruct its own IP. Of course some do, although Tomlinson fails to mention the barriers to some companies and their instructed IPs working to find a solution acceptable to the bank.

The appointment of administrators

Tomlinson writes that there are many occasions when the IBR IP later is appointed administrator. This seems to be a general comment rather than RBS-targeted, which might have been difficult to make stack up, as I understand that it is RBS’ policy not to appoint the IBR IP as administrator, is it not?

It is also not clear whether the cases involving directors who feel mistreated by the banks are the same cases in which the IBR IP later became the administrator. I think this is important because, on its own, an IBR IP becoming administrator is not an heinous act. On the other hand, if we take one of Tomlinson’s worst case scenarios, where a business was only considered insolvent because of a property revaluation, the directors were frozen out of any opportunity to offer solutions, and they protested that the IBR leading to the bank’s decision to appoint an administrator was flawed, then one might expect the IP to decline the appointment.

The Insolvency Code of Ethics states: “Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an Insolvency Practitioner to accept an insolvency appointment as an administrator or administrative receiver, the Insolvency Practitioner should satisfy himself that the company, acting by its board of directors, does not object to him taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the Insolvency Practitioner, he should consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles.” If an IP still decides to accept the appointment amidst protestations, clearly he should be prepared to encounter a complaint and perhaps worse.

Tomlinson makes the point that “once an administrator has been appointed, the directors lose their right to legal redress”. Whilst directors lose their management powers and the administrator acquires the power to bring any legal proceedings on behalf of the company – and I should point out that I’m not a solicitor – there is precedent for directors to take some actions, e.g. challenging the validity of the administrator’s appointment, as demonstrated in Closegate (http://wp.me/p2FU2Z-4I). Challenges may also be made to court by shareholders (or creditors) (Paragraph 74 of Schedule B1 of the Insolvency Act 1986) and courts can order the removal of administrators (Paragraph 88). Of course, these measures cost money and probably will not reverse any damage done.

The IP’s role: post-appointment

More to the point, I think, is the risk of conflict of interest for bank panel IPs generally. Tomlinson puts it this way: “The relationship between the bank, IPs, valuers and receivers should undergo careful analysis. The interdependency of these businesses on banks for generating custom establishes a natural loyalty and bend towards the interests of the banks. Often the bank recommends or instructs the IP directly, so their preferential treatment is critical to their clientele. Maintaining independence and a fair hand for all parties involved appears extremely difficult.”

We’ve seen this argument play out in the pre-pack arena: if directors are in control of appointing an IP as administrator, how can creditors be confident that the IP, on appointment, will be acting with due regard for their interests? Similarly, how can other stakeholders be confident that an IP will not be persuaded by this “natural loyalty” towards the bank controlling their appointment to act contrary to his duties as administrator? In a number of cases, I would suggest that it is academic: if the bank is the only party with any real interest – or it shares that with the unsecured creditors looking to a prescribed part – then any bias towards the bank will achieve the same result as if there were none… although this may overlook the first objective of an administration, which is to rescue the company as a going concern.

Tomlinson is right: maintaining the IP’s balance here is extremely difficult, although I would be inclined to take receivers out of the equation, as there is no real change of “hat” for IPs in those cases. Until now, we have depended on the professionalism of the parties and the legal and regulatory processes to wield a stick towards any who stray, but I guess that we live in an age when that is no longer seen as adequate.

Tomlinson highlights another risk of conflict of interest in relation to selling assets: “RBS is in a particularly precarious position given its West Registrar commercial portfolio under which it can make huge profits from the cheap purchase of assets from ‘distressed’ businesses… Others have stated that they believe their property was purposefully undervalued in order for the business to be distressed, enabling West Registrar to buy assets at a discount price.” This is a new one on me and I’m not aware of any other bank being in a similarly “precarious position”. Although I would have thought that there would be little criticism levelled against IPs selling to West Registrar where it represents the best deal – and Tomlinson does not appear to be suggesting transactions at an undervalue by administrators – as we all know, there is a risk of getting caught up in allegations of stitch-ups wherever there is a connected party sale, whether that involves a director’s purchase in a pre-pack or a party connected to an appointing creditor.

The Repercussions

The most IP-relevant solution suggested by Tomlinson is:

“It is also important that the wider potential conflicts of interest between the banks, IBRs, valuers, administrators, insolvency practitioners and receivers are given careful consideration. Where these conflicts occur, it does so at the expense of the business. If collusion did not happen between these parties and their relationships were more transparent, then better fairness between the parties could be ensured. This requires further investigation and consideration by the Government to ensure that the law is being upheld and these conflicts do not impact on the businesses ability to operate.”

As mentioned previously, the Insolvency Code of Ethics covers specifically the scenario of an IP carrying out an IBR then contemplating an insolvency appointment. Personally, I think it does this rather well – it addresses not only how to view an objection by the directors, but also how the IP has acted prior to the insolvency appointment, how he has interacted with the company, whether he made clear who his client was etc. However, there is no ultimate ban on the IP accepting the appointment; as with most ethical issues, it is left to the IP to consider whether the threats can be managed or they render his appointment inappropriate. I would not be surprised if, down the line, there were a call for there to be a ban that an IBR IP could not be appointed as administrator. If it were a legislative measure, we could have fun and games defining such items as what constitutes IBR work and for how long a subsequent appointment would be prohibited, but it could be done.

But would it have the desired effect? It would certainly increase the costs of some administrations, as the built-up knowledge and in many respects positive relationships of the IBR IP would be lost to the administrator. It might also have limited effect, as the “natural loyalty” could persist in any IP who has the prospect of more than one bank appointment, be it a case on which he carried out an IBR or a case on which he’d had no prior connection. I believe it is a natural tendency in all professions and trades to protect one’s clients and work sources and I do not believe it is something that can be avoided entirely.

As with pre-packs, I would prefer the solution to involve those who feel mistreated doing something about it, calling to account anyone who acted contrary to their duties, ethical or otherwise. As with pre-packs, however, the devil is in establishing a clear understanding of what is and what is not acceptable behaviour, rather than simply trusting a gut feeling. Tomlinson has aired a few relevant issues, but also some irrelevant ones, I think, which unfortunately cloud the picture.

But is anyone listening? The FT reported yesterday (http://www.ft.com/cms/s/0/550c5360-5c31-11e3-931e-00144feabdc0.html#ixzz2mVVnGjFz) that George Osborne has washed his hands of the report, although Mr Cable seems more convinced that there are genuine problems. However, whatever the conclusions of the FCA’s skilled person’s review, I am sure that insolvency regulators already are contemplating their next step. Some will see the Tomlinson report as an opportunity to renew calls for the end to bank panels of IPs. With a revision of the Insolvency Code of Ethics moving up the agenda of the Joint Insolvency Committee, I can see the ethics of the move from pre-appointment work to a subsequent appointment again being the subject of debate.

(01/02/14 UPDATE: BBC4’s File on Four programme, “Design by Default?”, can be accessed at http://www.bbc.co.uk/iplayer/episode/b03q8z4f/File_on_4_Default_by_Design/)