Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Regulatory Hot Topics: (1) the SIPs

4017 Uluru

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

SIP2 – Investigations by Office Holders in Administrations and Insolvent Liquidations

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

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

Other recommendations include:

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

SIP3.1 & SIP3.2 – IVAs & CVAs

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

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

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

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

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

  • “The advantages and disadvantages of each available option”

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

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

  • “Any potential delays and complications”

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

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

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

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

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

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

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

An Addendum: SIP3.3 – Trust Deeds

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

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

  • The stages and roles in the process

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

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

  • The options available

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

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

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

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

  • Additional requirements

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

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

 

SIP9 – Payments to Insolvency Office Holders and their Associates

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

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

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

Other SIP9 reminders include:

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

 

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


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New SIPs 3 – are you ready?

5313 Sydney

As the new SIPs 3 come into effect in less than two weeks’ time, I’m guessing that few of you will be interested in reading my “yes, but what exactly does that mean?!” observations below. If VAs/Trust Deeds are your thing, you will have got going on bringing practices into line with the new SIPs (and you really won’t want to read any alternative interpretations). But it’s not all gripes; I have actually tried to include some points that may be of use!

SIP3.1 (IVAs) and SIP3.2 (CVAs)

Assuming that your practices already comply with (old) SIP3 and statute, what do you need to know to bring them in line with the new SIPs? I’m afraid I don’t think it’s about easy fixes. The new SIPs are so different from the 2007 SIP3 that I would recommend trying to take a fresh and objective look at the way VAs are conducted in the round in order to apply the new SIP principles and requirements.

The revised SIPs put great emphasis on there being “procedures in place to ensure…”, so it is not simply a case of getting standard templates compliant. In my view, the key seems to be more about making sure that tasks and considerations are prompted and carried out, not just marked “N/A” (or perhaps even “done”) on a checklist completed 6 months after the event. However, the vast majority of the steps required are not rocket-science and are probably being carried out already, so if any major changes are required, they will probably involve regularising processes and evidencing the steps taken.

Having said that, some obvious easy fixes may include:

• Ensure that letters to shareholders and creditors giving notice of the meetings explain the stages and roles associated with a VA (i.e. initial advice, assisting in preparing the proposal, acting as nominee, and acting as supervisor) – per the SIPs’ first principle.

• Ensure that initial advice includes explaining “the rights of challenge to the VA and the potential consequences of those challenges”.

• If you’re confident that there are systems in place to keep alert to signs that a meeting with an individual debtor is merited, SIP3.1 allows you to lighten up on SIP3’s requirement to meet with every “trading individual” (although a meeting needs to be offered in every case).

• Check that standard Proposals templates (and procedures/documents used in drafting Proposals) include all the items listed. Although the new SIPs are not as fulsome as the old SIP3, there are some curly additions, such as “the background and financial history of the directors, where relevant”.

• Ensure that post-approval circulars make clear the “final form of the accepted VA” where a proposal is modified, which to me suggests more than simply listing the approved modifications.

• Ensure that supervisors’ reports disclose fully the VA costs and “any other sources of income of the insolvency practitioner or the practice in relation to the case” (remembering that the Ethics Code prohibits referral fees or commissions benefitting the IP/firm as opposed to the estate) and any increases in costs, if these have increased beyond previously-reported estimates. Whilst the old SIP3 already requires disclosure of increases in the supervisor’s fees, “costs” of course are wider in scope and could include solicitors, agents etc.

Other fixes may not be so easy…

Huh? No. 1

For CVAs, “the initial meeting with the directors should always be face to face”.

But what is the initial meeting; is it the first meeting? What if progression towards a solution is an iterative process? And who are the directors? Does this mean that all the directors need to be present, even if someone is out of the country? And why face to face? Is this so that you can skype but a non-visible telephone conference won’t do; where’s the sense in that?

Yes, I know I’m being picky. Trying to look at this sensibly, presumably IPs are expected to ensure that the directors discuss face-to-face the information to enable them to decide on whether to propose a CVA and what that might look like. I could see that this discussion might occur after a period of information-gathering, so it may not actually be the very first meeting with the director/s. In addition, inevitably there will be occasions when it is difficult to meet physically with all the directors, so this might require some judgment on IPs’ parts as to whether the non-attendance “face-to-face” of a particular director falls foul of the need to meet with “the directors”.

Huh? No. 2

When preparing for a VA, the IP should have procedures in place to ensure that the directors/debtor have had, or receive, appropriate advice. “This should be confirmed in writing, if the insolvency practitioner or their firm has not done so before.” (This is repeated later in SIP3.1 where an IP first gets involved at the nominee stage, i.e. where someone else has helped to prepare the IVA Proposal.)

But what is “this” that should be confirmed in writing? Is it the appropriate advice itself or is it the fact that appropriate advice has been given? I assume this means that, if someone else has been involved in getting the directors/debtor to the point of deciding on a VA before introducing them to the IP, the IP needs to be satisfied that they have been properly advised previously and confirm in writing the advice behind the decision – not merely “I understand that you have received appropriate advice from X and consequently have decided to propose a VA” – but I could be wrong…

Huh? No. 3

In assessing the VA as a solution, the SIPs require IPs to obtain a variety of information, including: “the measures taken by the directors (debtor) or others to avoid recurrence of the company’s (their) financial difficulties, if any”.

Does the “if any” refer to financial difficulties or measures taken? Would there be any occasion to propose a VA where there are no financial difficulties (even if any current difficulties to pay debts had arisen from historic, now settled, events)? Consequently, I would have thought the SIPs refer to learning of any measures taken to avoid recurrence, rather than any financial difficulties, but that does not seem to be the case, as the SIPs state later that Proposals should contain information on “any other attempts that have been made to solve their financial difficulties, if there are any such difficulties”.

Huh? No. 4

The SIPs require procedures to ensure that the proposer’s consent is sought to any modifications put forward by creditors. The SIPs state that, where a modification is adopted, in the absence of consent (from the proposer and, if appropriate, the creditors), the VA “cannot proceed”. The proposer’s consent must be recorded.

Why seek the proposer’s consent to any modification, including those that will be voted out by the majority, especially if they run contrary to the wishes of the majority? I guess that this is only fair to the creditors, but it could be confusing especially to debtors faced with a whole host of potentially conflicting and futile modifications. And what would happen if a minority creditor, say, wanted the supervisor’s fees to be reduced below that required by the majority, and the proposer consented to the reduction? Where does that leave things?

And why state that a CVA cannot proceed in the absence of the proposer’s consent? As far as I am aware, the directors’ consent to modifications is not a statutory requirement (but obviously in certain circumstances this may be essential for the successful implementation of the CVA). I also wonder if, technically, an administrator or liquidator needs to consent to modifications to their Proposals…

How should a director’s/debtor’s consent be “recorded”? Will a telephone conversation note, or even merely minutes signed by the Chairman, suffice? Where ever possible, I would recommend continuing with the now-commonplace procedure of getting the proposer to sign contemporaneously a copy of the adopted modifications, but I do wonder whether the new SIPs are suggesting that a less robust record may suffice.

SIP3.3 (Trust Deeds)

I am in no position to pass comment on the technicalities of this new SIP – I did voice some “huh?”s whilst reading it, but I will resist the urge to put my foot in it!

Overall, I am heartened to see the lightening-up on much of the prescription and consequent rigidity of SIP3A. Personally, I do think the RPBs could have gone further, however, as there still seems to me to be a fair amount of unnecessary statutory, SIP9 and Ethics Code references. There also seems to be some particularly fruitless statements: my personal favourite is “Where the decision is to grant a Trust Deed and seek its protection, the insolvency practitioner will take the necessary steps” – duh!


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Still not the Eurosail Judgment

0937 Antelope

Even if you’ve been living in a cave for the past few weeks, you will not have escaped the flood of comprehensive legal updates on Eurosail. Consequently, I’m not even going to attempt to cover the case here.

Instead, something completely different: I thought I would convey my thoughts on the recent SIP re-drafts, now that the consultations are over.

SIP3A (Scotland)

I feel ill-equipped to comment on this SIP, so I am sure that my peripheral thoughts stack up poorly against those of you who deal with Trust Deeds on a daily basis.

Having seen the substantial tone change of the draft SIP3 (E&W), i.e. the stripping-out of a vast amount of prescription from the current SIP3, I felt that this new draft SIP3A stood in stark contrast, containing much of the existing prescription and even adding to it in some areas. I sense that a fairly large proportion of insolvency professionals prefer prescription to principles – as I mention below, personally I don’t place myself in that crowd – but I do wonder whether even those people would feel that this SIP3A draft has the balance wrong.

I had to chuckle at the SIP consultation response form mentioning that “matters being addressed in the PTD Regulations will not be included in SIP3A”; I counted at least 13 paragraphs that pretty-much simply repeat a statutory requirement. For example, what exactly is the point of including in a SIP: “Trustees should comply with the procedures for bringing the Protected Trust Deed to a close as detailed in the Regulations”?!

I understand that I was not alone in questioning the SIP’s directions regarding face-to-face meetings. Put into an historical context, I am not surprised to see this draft SIP3A require visits to the business premises in all cases where the debtor is carrying on a business. E&W followed a 2-stage process to drop physical meetings for IVAs: the current SIP3 (E&W) requires meetings in person for trading individuals, but – thankfully, in my opinion – the re-draft SIP3 has left this to the IP’s judgment. However, do PTD Trustees need to take the same incremental steps? Can we not focus on what is the purpose of a physical meeting? Are all debtors in business so untrustworthy and difficult to read that the IP/staff have to check out every story for themselves?

There seem to have been some unhelpful cut-and-pastes from the AiB Guidance, resulting in some contradictions and some matters, which I feel are not fit for a SIP (e.g. the purely procedural requirement to advise the AiB of the debtor’s date of birth). There seems to be a contradiction in that para 6.9 requires the IP to “quantify the equity in each property as accurately as possible before the debtor signs the Trust Deed”, but para 6.13 sets a deadline of the presentation of the Trust Deed to creditors. This para also prescribes how the equity should be assessed, but it seems to me that desk-tops and drive-bys might meet para 6.13 but not the (excessive?) accuracy criterion set out in para 6.9. And what if the equity is clearly hopelessly negative? Does the IP really have to go to the expense of quantifying it as accurately as possible before the Trust Deed is signed?

I have never been keen on SIP3A covering fees issues that I feel should be placed in SIP9. This historical mismatch has led to a fees process for PTDs that, to my mind, has never mirrored that for other insolvency processes as per SIP9. This issue is repeated in this draft. For example, SIP3A para 8.4 refers to payments to associated parties as defined in statute, whereas for some time now SIP9 has wrapped up, not only payments to statutorily-defined associates, but also payments “that could reasonably be perceived as presenting a threat to the office-holder’s objectivity by virtue of a professional or personal relationship” (para 25). SIP3A’s overlap, but not quite, of this SIP9 point is less than helpful: Trustees might be lulled into a false sense of security in feeling that they are complying with SIP3A whilst overlooking a breach of SIP9.

I also feel that it is a shame that this draft repeats the current SIP3A words: “all fees must be properly approved in the course of the Trust Deed and in advance of being paid” (para 8.6). I know what the drafter is getting at, but how is it that fees that are properly set out in a Trust Deed, which has subsequently achieved protected status, are not already “properly approved”? And why do Trustees have to go through an additional step in the process that is not required for any other insolvency process per SIP9?

SIP3 (IVAs)

I understand that some have taken issue with the draft SIP’s perceived more onerous tone. I can see that repeated use of words like “be satisfied”, “ensure”, “demonstrate”, and “assessment” seem more onerous than the current heavily-prescriptive SIP3, but, speaking from my perspective as formerly working within a regulator, I am not sure if it is intended to mean much more in practice. If IPs are not already recording what they do, how they do it, and what conclusions they come to, I would have thought they were at risk of criticism by their authorising body. In addition, many of the requirements relate to having “procedures in place” to achieve an objective, which is how I think it should be – IPs should be free to use their own methods applied to their own circumstances; I believe that it is the outcome that should be defined, not the process – but I do accept that this means more thinking-time for IPs and perhaps more uncertainty as to whether they have the processes right so that they’re not doing too little or too much.

Overall, I think that the draft SIP focuses attention where it is needed; it highlights the softer skills needed by an IP that draw on ethical principles rather than statutory requirements.

I also welcome the reduced prescription. Although I suspect that many IPs will not change their standards as regards, for example, content of Nominees’ reports and Proposals, at least they may find that they are picked up less frequently than in the past where a document has failed to tick a particular SIP3 box… provided, of course, that they meet the principle of providing clear and accurate information to enable debtors and creditors to make informed decisions.

There are a few areas where I feel that more careful drafting is needed. For example, there seems to be a difference in expectations as regards the advice received by a debtor depending on who gives the advice. Paragraph 11 d states that, if an IP is giving the advice, “the debtor is provided with an explanation of all the options available, and the advantages and disadvantages of each, so that the solution best suited to the debtor’s circumstances can be identified and is understood by the debtor”. However, the level of satisfaction required by an IP who becomes involved with a debtor at a later stage is simply that he/she “has had, or receives, the appropriate advice in relation to an IVA” (paragraphs 12 a and 13 a). It would seem to me that “appropriate advice in relation to an IVA” may be interpreted as being far more limited than that described in paragraph 11 d.

Although I applaud the move to freeing IPs to exercise their professional judgment as to how to meet the principles and objectives, I confess that there are a few current SIP3 items that I am sad to see go. And having griped about SIP3A’s interference with fees issues, I feel doubly embarrassed to admit that I quite like the current SIP3’s treatment of disclosure of payments to referrers, which is narrowed in scope in the draft new SIP3 (e.g. under the new draft, a referring DMC’s fees (whether the DMC is independent of the IP/firm or not) for handling the debtor’s previous DMP need not be disclosed). I also like the current SIP3’s requirement to disclose information in reports if the original fees estimate will be exceeded (para 8.2) and the current SIP3’s direction on treatment of proxies where modifications have been proposed (paras 7.8 and 7.9). But I accept that, as a supporter of the principles-based SIP, I should be prepared to let these go.

Talking of principles v prescription…

SIP16

Before the draft revised SIP16 had been released, I had been encouraged by the Insolvency Service’s statement dated 12 March 2013, reporting the Government’s announcement of a review of pre-packs, which stated: “Strengthened measures are being introduce (sic) to improve the quality of the information insolvency practitioners are required to provide on pre-pack deals” (http://www.bis.gov.uk/insolvency/news/news-stories/2013/Mar/PrePackStatement). I was therefore most disappointed to read a re-draft SIP16 adding 14 new items of information for disclosure – would this really improve the quality of information or simply the quantity?

For example, would the addition of “a statement confirming that the transaction enables the statutory purpose of the administration to be achieved and that the price achieved was the best reasonably obtainable in the circumstances” really improve the quality? And what exactly is meant by “best price”? Does that take account of, say, the avoidance of some hefty liabilities on achieving a going-concern sale or the security of getting paid consideration up-front rather than substantially deferred from a less than reliable source or the avoidance of large costs of disposal and risk of depressed future realisations?

There also seems to be a mismatch between the explicit purpose of the disclosure – justification of why a pre-pack was undertaken, to demonstrate that the administrator has acted with due regard for creditors’ interests – and the bullet-point list. For example, how exactly does disclosure of the fact that the business/assets have been acquired from an IP within the previous 24 months (“or longer if the administrator deems that relevant to creditors’ understanding”!) support that objective? Such an acquisition may raise questions regarding the way the business was managed prior to the sale or it might even raise some suspicions of a serial pre-packer at work (wherever that gets you), but I think it contributes little, if anything, to the justification of the pre-pack sale itself.

I understand that there has been some dissatisfaction at the introduction of a 7 calendar day timescale (counting from when?) for disclosure. Personally, I think that it is damaging to the profession if creditors are not made aware of a sale for some time, but I would have preferred for there to be a relaxation of the detailed disclosure requirements so that initial notification, even if it is not complete in all respects (surely much of the detail can be provided later?), is pretty immediate. There may be all kinds of practical difficulties in getting a complete SIP16 disclosure out swiftly, particularly with the proposed additions, and I think it would be an own-goal if this meant that some IPs relied on the “unless it is impractical to do so” words to delay issuing the disclosure until they were sure that their SIP16 disclosure was perfect in all respects. Fortunately, I feel that IPs generally are cognisant of the criticisms/suspicions levelled at the profession when it comes to pre-packs and most will pretty-much clear their desks to ensure that a complete SIP16 disclosure gets out on time.

Finally, returning to my point about unnecessarily repeating statute in SIPs: it is a shame that the drafters have not taken the opportunity to remove the words: “the administrator should hold the initial creditors’ meeting as soon as practicable after appointment”, which apart from omitting the word “reasonably” (is that intended?) is an exact repetition of Paragraph 51(2) of Schedule B1 of the IA86.

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I could go on, but I’m sure I’ve bored you all already. I am certain that many of you will have come up with many more thoughts on the drafts – after all, that is the purpose of sending them out for consultation – I do hope that you have conveyed them to your RPB so that the resultant SIPs can be well-crafted, practical, unambiguous documents that support the high ethical standards of the profession.


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Legislative changes on the horizon: PTDs, TUPE, and gift vouchers

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Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:

• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors

AiB’s proposed changes to PTDs and DAS

28/02/2013: The AiB published some welcome (by me, anyway) fine-tuning to her developing “vision of a Financial Health Service” (http://www.aib.gov.uk/news/releases/2013/02/bankruptcy-law-reform-update).

She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.

The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).

So what now does she propose to introduce? Some new significant items for PTDs:

• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.

The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.

BIS TUPE Consultation

17/01/2013: The BIS consultation on proposed changes to the Transfer of Undertaking (Protection of Employment) Regulations 2006 was issued and closes on 11 April 2013 (https://www.gov.uk/government/consultations/transfer-of-undertakings-protection-of-employment-regulations-tupe-2006-consultation-on-proposed-changes – a 72-page document that takes some reading!).

Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.

The proposals do include some elements that may be more useful:

• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).

Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.

Gift Voucher Creditors

15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.

MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:

“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.

(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”

As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.

To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)

There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).

(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS.  R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN.  This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)

 

Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…


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Scottish Government’s Response to the Consultation on Bankruptcy Law Reform Defies Logic

I appreciate that I am a bit behind the times here – the Scottish Government’s response was published on 1 November 2012: http://www.aib.gov.uk/publications/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform.  I won’t summarise it here, as it is a fairly brief document, which is well worth reading.  However, I could not resist commenting on some of the plans.

Fundamental Changes to Trust Deeds

It seems to me that, at present, one strength of the Trust Deed is its flexibility: with the assistance of an IP, a debtor can consider what he/she can afford and what he/she is prepared to put forward to creditors, effectively in exchange for avoiding bankruptcy.  I appreciate that, to some extent, Trust Deeds – and creditors’/creditor agents’ reviewing of them – have become standardised so that in effect we now have a “consumer” Trust Deed, which anticipates a pretty standard level of contribution over a standard three-year period, delivering a fairly standard dividend to creditors.  However, I think it should be remembered that this is not what the legislation (currently) provides and the beauty of it is that debtors can formulate a Trust Deed to fit their particular circumstances.  Not all debtors fit the “standard consumer” model.

However, the SG is now looking to “standardise the period over which an individual makes the assessed contribution in bankruptcy and protected trust deeds, to be equivalent to a minimum of 48 monthly payments”.  The response also states: “There is a strong case for setting a minimum dividend at which Trust Deeds are eligible to become protected. We recognise that there are differing views among interested parties and believe that there is a legitimate debate to be had on the level of any minimum dividend. Our view is that the level would be most appropriately set between/around 30-50p in the £.  We will engage constructively with interested groups over the coming weeks to agree on an appropriate level.”

Why take a flexible tool and impose such restrictions on its use?  And how do these conclusions stack up with the consultation responses?

One of the conclusions described in the report on the consultation responses was: “There should not be a fixed term for completion of a protected trust deed” (page 5) – 71 respondees were opposed to a fixed term and only 29 were in favour.  Perhaps the argument is that, in setting a minimum of 48 monthly payments, the SG is not setting a fixed term!

What exactly is the “strong case” for setting a minimum dividend?  The report on consultation responses observed that “in recent years some creditors have taken a greater interest in PTDs and have actively rejected the protection of trust deeds which propose a dividend of less than 10p in the £” (page 31) – so that means that the Trust Deed framework is working, doesn’t it?  In introducing a minimum dividend at which Trust Deeds become eligible for protection, isn’t the SG taking the power away from creditors to decide what they are prepared to accept?  And how does evidence of creditors rejecting Trust Deeds anticipating 10p in the £ lead to a conclusion that the minimum dividend should be 30-50p?

The report on consultation responses quotes two responses from credit unions in support of 50p in the £ and I have already described how I personally feel about these in my earlier blog post (https://insolvencyoracle.com/2012/09/13/the-aibscottish-governments-report-on-responses-to-the-bankruptcy-law-reform-consultation/).

In my mind, it is simply not logical to put a minimum dividend on a Trust Deed.  The dividend level is simply a measure of net assets/income over total liabilities; it is not a measure of what a debtor can afford to pay and neither is it a reflection of how appropriate the proposal is.  Take two people: one can raise net assets/income of £12,000 and has liabilities totalling £40,000; the other can raise net assets/income of £13,000 and has liabilities totalling £45,000.  Where is the logic in allowing the first person to acquire a Protected Trust Deed, as the dividend will be 30p in the £, but denying the second, as the dividend would be 29p in the £?

What is wrong with a Trust Deed that offers a return of 29p in the £, if the likely outcome of bankruptcy is no improvement?  I remember an IP telling me that she had arranged an Individual Voluntary Arrangement for a 1990s Lloyd’s Names individual, which proposed a return of only a fraction of 1p in the £, but it still represented the best deal for creditors and it involved some reasonable assets/income.  Surely that is the key of voluntary processes, such as IVAs and Trust Deeds – they can offer a better deal for both debtor and creditors, when compared with the alternative of bankruptcy.  They should not be restricted by the need to meet a minimum dividend, which fails to recognise the individual circumstances of the debtor.

So will the introduction of a minimum dividend lead to many more people choosing bankruptcy?  I wonder.  It seems to me that many people will do almost anything to avoid bankruptcy, even when from a purely financial perspective it is obviously the best option for them.  If they are prohibited from seeking a PTD, I wonder whether they would rather take the option of a long-term DAS or informal debt management plan or simply struggle on in no man’s land.  In introducing a minimum dividend for PTDs, it seems to me that the misery for thousands will be extended for many years.

Protected Trust Deed “Guidance”

The SG appears to be seeking to introduce a further fundamental change to the PTD process, but via “Guidance”: “New Protected Trust Deed Guidance will also be introduced, to encourage best practice to be adopted in all cases.  The Guidance will include a revised structure for trustee fees consisting of an up-front fee for setting up the trust deed and a percentage fee based on the amount of funds ingathered from the debtor’s estate.”

I believe that it is correct to avoid prescribing the basis on which Trustees should be paid via legislation, but I do wonder how the SG/AiB expects its Guidance will persuade IPs to re-structure fees to be on this fixed sum and percentage basis.  What pressure will it bring to bear on IPs who do not follow this approach that it calls “best practice”?  Will the AiB, as is stated in the paragraph preceding this, “take a more proactive role, where necessary compelling trustees to act by using their powers of direction”?  But the Guidance is just guidance, isn’t it?

Creditor applications for Bankruptcy

The SG response states that the Bankruptcy Bill will look to develop “the bankruptcy process to facilitate the ability for non-contentious creditor applications to come to AiB rather than a petition to the court for an individual’s bankruptcy”.  This plan appears most odd to me, particularly in view of the report on the consultation responses.

In the report’s summary, one of the conclusions of the consultation responses was: “creditors should continue to petition the court for an individual’s bankruptcy” (page 6), which appears unequivocal to me.  The response statistics also bear out this conclusion – there were more responses opposed to the proposal that creditor applications be submitted to the AiB than there were responses in favour and this remained the case even when the proposal was restricted to “non-contentious” creditor applications.  So what is the argument for proceeding with this plan?

Fortunately, Westminster has decided not to take forward the idea that creditor petitions for bankruptcy and company windings-up in England might avoid the courts.  It took that decision having consulted on the proposal and having received the clear message back that the majority were opposed.  It is strange that Holyrood has decided to take the opposite view on having received a similar reaction to a similar consultation question.

 

Of course, I have only commented on the plans that appear to me to be most significantly flawed – there are many more planned changes, including some that make perfect sense and are welcome.  However, some leave me asking the question: why?  What ills are these changes seeking to remedy?  Are they going to be an improvement over what we already have, which seems to me to work reasonably well on the whole?  And what kind of world will we live in when it all becomes a reality?