Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Companies House: life down the rabbit-hole

Sorry, I don’t have a picture of a rabbit, so this sweet pocket gopher from my recent Mexico trip will have to do

I expect that we all have a story to tell about a peculiar rejection or two from Companies House, including where the reasons for the rejection don’t appear to derive from the Rules.  Just the other day, R3 told us that Co House is rejecting Declarations of Solvency that don’t have the company name on page 2.  Weird.

Here are a couple of progress report filing rejections that have had me scratching my head.

Scenario 1: When the Office Holder Changes

Imagine a firm where an IP takes appointments as a sole office holder.  The IP decides to leave the firm, so a block transfer order is sought to transfer all their cases to another IP in the firm.  The cases continue to be administered by the same case teams, using the same cashbooks and time recording system.  All that has happened is that the office holder has changed.  What do you think the next progress report on these cases should look like?

Companies House’s view is that, while the progress report timeline does not change, the incoming office holder can only issue a report for their period in office.

For example, take a CVL with a liquidation date of 02/04/2023:

  • Departing liquidator filed a report ending 01/04/2024
  • Block transfer order dated 02/02/2025
  • Companies House expects the new liquidator to submit a report covering the period from 02/02/2025 to 01/04/2025
  • This would lead to a gap in the reporting from 02/04/2024 to 01/02/2025
  • The new liquidator’s R&P would also show the opening position as at 02/02/2025, 10 months after the old liquidator’s R&P’s closing position.  The chances are high that the two would not correspond.

Does this seem sensible?  Shouldn’t the record at Companies House be an uninterrupted sequence of reports showing the progress of the liquidation?

Doesn’t the liquidator’s report under R18.7(4) plug the gap?

True, R18.7(4) does require an incoming CVL liquidator to deliver as soon as reasonably practicable a notice to members and creditors “of any matters about which the succeeding liquidator thinks the members or creditors should be informed”.  Similar provisions apply to the other usual case types.

However, this will not plug the reporting gap:

  • The rule refers to a “notice”, which suggests to me that it is intended to fall far short of a progress report.  For example, there is no indication that it would include an R&P.
  • There is no requirement or facility to file this notice at Companies House.

What do the Rules say about the incoming liquidator’s reporting duty?

Not much.

R18.7(2) sets the scene:

  • “The liquidator’s progress reports… must cover the periods of (a) 12 months starting on the date the liquidator is appointed; and (b) each subsequent period of 12 months”.

However, R18.7(3) states that “the periods for which progress reports are required under paragraph (2) are unaffected by any change in liquidator”.  In other words, the incoming liquidator does not re-read R18.7(2) as applying to them. 

But it seems to me that R18.7(2) must continue to apply in relation to the first liquidator.  For example, imagine that the CVL began on 02/04/2024.  This was the date of the first liquidator’s appointment, so R18.7(2)(a) applies to determine the date that the first progress report is due: 01/04/2025.

As R18.7(2)(a) must be read in this scenario as applying to the first liquidator, it cannot be used to support the view that this means that the second liquidator’s progress report cannot cover the period before the second liquidator’s appointment.

S192 and Rs18 describe that progress reports should detail how the liquidation has proceeded during the review period.  I do not read anything in them that prohibits a liquidator from detailing what occurred prior to their appointment where this forms part of the 12-month reporting period.

But what about hostile transfers?

If the succeeding liquidator took the appointment in hostile circumstances, e.g. where the previous liquidator had misapplied (aka stole) the company’s funds and did not hand over sufficient information for the successor to see clearly what had occurred, it might be difficult for the successor to issue an accurate progress report for the whole 12-month period.  The new liquidator might prefer to report solely on what the estate looked like when they took on the appointment.

I am not sure that that would be in the spirit of the Act/Rules, but of course they were not written to accommodate the scenario of a bent liquidator; they were written to make liquidations work in the hands of compliant professionals.

So what do we do?

I suggest that, fundamentally, the Act/Rules envisage the full term of an insolvency process to be documented at Companies House by means of sequential annual (or, in ADMs, 6-monthly) reports.  But, as I write this, Companies House remains of the view that a successor liquidator’s progress report cannot cover any of the period before their appointment.

I have sent to Companies House the reasons for my contrary view and I am waiting for their response.

Scenario 2: hoisted by my own petard!

Not long after I sent my email to Companies House, another client complained to me that Companies House had rejected their progress report because they required it to cover a full 12-month period, but this included several months, not only where they were not in office, but also where the company didn’t even exist.

Ah, yes, well, when I said that a liquidator should be able to file a report for a period prior to appointment, I wasn’t thinking about this scenario…

The Flipside: When a Company is Restored

Imagine this CVL:

  • CVL commenced on 05/03/2020
  • Liquidator filed progress report to 04/03/2021
  • Liquidator sent final account to Companies House on 01/12/2021
  • Company was dissolved on 01/03/2022
  • Later, a new asset was discovered, so an application was made to have the company restored and the liquidator re-appointed.  This was granted on 10/10/2024
  • Liquidator submitted a progress report for filing for the period from 10/10/2024 to 04/03/2025
  • Companies House rejected the report, as they require a progress report for each 12-month period from 05/03/2020

Hmm…

It seems that Companies House requires the following progress reports:

  • From 05/03/2021 to 04/03/2022 – most of this period is already covered by the filed final account and in 12/2021 the liquidator vacated office and was released
  • From 05/03/2022 to 04/03/2023 and from 05/03/2023 to 04/03/2024 – the company was dissolved for the whole of this period
  • From 05/03/2024 to 04/03/2025 – the company was only restored on 10/10/2024

What do the Rules say about the re-appointed liquidator’s reporting duty?

Well, I did say that the Rules seem to suggest that an uninterrupted sequence of progress reports should be filed, didn’t I?  So this does indicate that progress reports should be filed for the full period of a restored company’s non-existence, even though this seems nonsensical.

But is this the only interpretation..?

R18.7(5) states:

  • “A progress report is not required for any period which ends after… the date to which a final account is made up under section 106 and is delivered by the liquidator to members and creditors”

So if a CVL has come to an end in the usual way and a final account has been delivered and filed, it could be argued that R18.7(5) means that no progress reports are required on its restoration.  Restoration simply returns the company to the register as if the dissolution did not happen.  It does not eliminate the pre-dissolution delivery and filing of the final account.

So what do we do?

I appreciate, however, that this argument is not helpful.  A re-appointed liquidator ought to be able to file progress reports for their second term in office and, if Companies House will only accept them where there is no gap in the reporting sequence, then so be it.

An alternative would be to ask the court, not only to restore the company and re-appoint the liquidator, but also to dispense with the statutory requirement to file progress reports for the period up to restoration.  I recommend that anyone looking to have such a company restored should discuss this with the instructed solicitors.

Capricious Companies House

I remember that, when we were all first grappling with the 2016 Rules, I’d had a few exchanges with Companies House staff where our interpretations differed.  Then we seemed to enter a honeymoon period during which Companies House staff generally took IPs’ filings at face value, not questioning the detail.  Of course, that approach had its own downsides leading to the filing of some flawed or illegible documents.

We now seem to have entered a new period where Companies House staff are scrutinising filings and rejecting documents for a variety of reasons.  Most of these rejections are entirely justified and work well to ensure that companies’ registers are maintained to high standards.  However, the reasons for some rejections appear questionable, contradictory, or to result in perverse outcomes.

The value of collaboration

What is worse, there is no easy way to communicate Companies House’s requirements to us all.  We only learn by our individual experiences, which I suspect is just as frustrating to Companies House staff tasked with “educating” IPs individually.  It is rare for an issue, such as the DoS issue I started this article with, to hit the headlines.

I wonder if there could be some kind of centralised communication with the Companies House insolvency team.  This might help us to learn lessons from others’ mistakes, as well as perhaps establishing logical and practical approaches to filings where the Rules alone do not provide the answer.


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CVLs: inefficient and ineffective?

In December, the Insolvency Service published a research paper on CVLs.  It involved the analysis of c.2,000 2017 CVLs to explore the efficiency and effectiveness of the CVL process.

Because the researchers considered that efficiency and effectiveness are generally measured in terms of swift distributions to creditors, the conclusion was that CVLs seem neither efficient nor effective.  They say: “A process that takes an average of 2 years to complete and an average recovery of 0% to the majority of creditors, is arguably, not efficient”.

But is that fair?  Does that overlook other benefits of the process?  Isn’t it unrealistic to expect most CVLs to generate a return to creditors?

The paper is at https://www.gov.uk/government/publications/creditors-voluntary-liquidation-cvl-research-report-for-the-insolvency-service.

In Summary

The main points arising from the research paper include:

  • The median average CVL took 2 years to complete
  • Fees incurred were, on median average, 163% of asset realisations
  • IPs received a median average of liquidators’ fees of 21% of asset realisations or 14% of time costs incurred
  • 86% of cases (excluding 6% of the total that were not yet closed) did not pay a distribution/dividend to any creditors
  • 54% of D-reports were sifted in, of which 19% were targeted by the Insolvency Service for investigation, of which 49% – or 5% of all cases – led to a disqualification

In this article, I look at some of the reasons for questioning the robustness of these conclusions and some of my own suggestions as to why CVLs don’t appear to be performing well.

Why Conduct the Research in the First Place?

The 2016 Rules were said to have been produced “with the overall aim being to provide better outcomes from insolvency and increased returns to creditors”.  The review of the 2016 Rules led to a commitment to examine CVLs, which are by far the most commonly used insolvency process.

However, the paper describes some other “concerns” about CVLs:

  • Allegedly, pre-CVL fees are often paid pre-appt by the company or by another party and “the informal arrangements around pre-appointment fees are not fully transparent and subject to less control by creditors” than in ADMs
    • Firstly, why should creditors control another party’s payment of fees?  Secondly, who says that pre-ADM fees are never paid pre-appt without creditors’ approval?  I picked four Nov-24 ADMs at random and the Proposals on one case disclosed a pre-appt payment.
    • Later on, the paper says: “pre-appointment fees are an area of some concern to creditors as they have no control over them”.  This is just not true: in many cases, the liquidator must ask creditors to approve them under R6.7.
  • Allegedly, IPs appear to be the major beneficiaries of the CVL process
    • Hearteningly, the paper recognises that “a careful balance needs to be struck as a certain level of IP remuneration may be needed to incentivise a good quality profession, which ultimately helps underpin confidence in the insolvency regime”.
  • Allegedly, there are “burial liquidations” where “an unholy trinity of company director, local accountant and so-called ‘friendly’ insolvency practitioner quietly liquidate a company on a voluntary basis with no questions asked as to how the director might have ripped value out of the company for his own benefit prior to the liquidation” (the Lord Agnew of Oulton DL)
    • I’m not going to dignify that suggestion with a comment.
  • Allegedly, “CVL factories” operate in which costs have been driven down to such a level that it is questioned whether “full duties can be carried out”, particularly as regards investigations
    • This seems a sensible question to ask, although surely in a competitive market there will always be pressure on costs.  Isn’t that what the regulators are for, to say “this far and no further”?

That’s quite a to-do list!  While I agree it is important to answer such allegations, it is questionable whether this research, which generally explores only IP fees, time costs and distributions to creditors, could ever be expected to provide answers.

How long is the average CVL?

The analysis resulted in a median length of time a CVL is “open” of 712 days (2.0 years).  However:

  • The researchers viewed a CVL as closed at the date of dissolution.  Although I suppose this is technically correct, most people would view a CVL as closed when the liquidator vacates office, i.e. generally 3 months before dissolution.  Therefore, the median is more like 620 days (1.7 years).
  • I would also argue that the CVL is pretty-much done 8 weeks before this, when the liquidator issues notice that the company’s affairs are fully wound up (R6.28).  This would reduce the median to 564 days (c.1.5 years).
  • On the flipside, the original sample included 183 cases – 6% – that were not yet dissolved and thus were excluded from the analysis.  Had these been included, it would have shifted the median to a longer period.

If the government were interested in improving the efficiency of CVLs measured simply by their duration, why not cut the 3-months-to-dissolution and the 8-weeks-to-filing-final-report provisions?  After all, under the 1986 Rules, only 28 days’ notice was required for the final meeting and I don’t recall anyone claiming this wasn’t long enough.

I think that other inefficiencies in the current CVL process include:

  • Creditor apathy as regards fee approval resulting in liquidators convening more than one decision procedure to get approval and in some cases resorting to a court application for approval; and
  • Delays in establishing preferential pension claims.  22% of cases that had pref creditors (these pre-dated HMRC’s pref status) had a preferential distribution and I suspect that many of these cases took longer to close than should have been possible because of pension claim delays.  I do think, however, that this area has improved recently.

Flawed Assumptions about Fee Payments

The researchers allocated 450 cases (17%) in the category: no pre-appt fee paid.  However, their assumptions appear odd:

  • They state that, “if a pre-appointment fee had been paid, it would be disclosed in either the receipts and payments account or included in the narrative of the liquidator’s report”.  But would it?  If a pre-CVL fee had been paid pre-appt, then it would not necessarily have been disclosed in an annual or final report as it would not have been paid in the reporting period.
  • I struggle to imagine why an IP/firm would not charge a pre-appt fee unless they did not do the pre-CVL work and I do not expect this accounted for 17% of the cases.
  • They also state that “83% (2,267) have a pre-appointment fee that is not subject to any approval by the creditors”.  Is this really what they discovered?  This suggests that none ofthe cases where they identified that a pre-appt fee had been paid involved a liquidator seeking approval under R6.7, which cannot be right.

The researchers appear to have made the opposite assumption about disclosure of liquidators’ fees:

  • “A director or third party may have paid the agreed fee and so disclosure was not required”.  However, in this case disclosure would have been necessary because such payment would have been made in the review period and thus SIP7 would have required it to be disclosed.
  • The researchers suggest that the 34% pre-appt-fees-paid-but-no-liquidation-fees-paid cases “may indicate that the fees were paid by a third party or potentially paid upfront”.  This seems a peculiar assumption.  Surely a more likely scenario is that the asset realisations were insufficient to pay any liquidation fees, isn’t it?

What does a Liquidator do?

A significant assumption running through the paper is:

  • “The liquidator’s duty is to achieve the best possible outcome for all creditors”. 

Is this true?  If it were, then why do liquidators do D-reports and help the Insolvency Service with their investigations?  And why would liquidators deal with employee and pension claims via the RPS, as this work merely swaps out one creditor for another?

There are umpteen other tasks that chip away at maximising the return to creditors: Gazette notices; bonding; producing extremely detailed reports for creditors; seeking fee approval; seeking it a second time; maintaining files to the RPBs’ expectations as regards file notes, bank recs, case reviews… 

I am not saying that these items are unnecessary and to be fair the paper does acknowledge to some extent liquidators’ CDDA work, but I do wish that there was more recognition of the fact that all these tasks cost money and it is perhaps this that leads to the perception that the only real beneficiaries are the liquidators.  If the Insolvency Service is truly interested in enhancing creditor returns, then perhaps they could focus on reducing the regulatory burdens on liquidators.

Can Low Value CVLs Ever be made “Efficient”?

The paper includes:

  • “the fees of the process are more than the assets realised in the majority of cases therefore the process is arguably not efficient”

“Fees” are pre-appt fees plus post-appt time costs, so this is not a statement about how much IPs are actually getting paid.

I think that the main reason why fees are so much greater than realisations in most cases can be found in the finding that the median value of assets realised is £5,798.  Could the CVL process ever be stripped back to such an extent that cases like these would cover all their costs and perhaps even generate a return to any creditor? 

The dataset also included 369 cases (14%) where no assets were realised.  What would government prefer to be done with these cases?  Would they prefer the directors to have applied to strike off the company or for more time and expense to be spent on winding up the company through the court?  If there is an IP that is prepared to take on low value CVLs, seemingly at a loss (on the basis of time costs in any event), then is this something to be discouraged?

Average Creditor Recovery is Zero?

The paper’s executive summary illustrates the sad reality of most CVLs:

  • “The median recovery rate for all creditors was 0%”

However, it’s not all bad news.  The detail shows:

  • 24% of cases with a fixed charge creditor resulted in a distribution to that creditor
  • 22% of cases with prefs resulted in a distribution to those creditors
  • 20% of cases with a floating charge creditor resulted in a distribution to that creditor
  • 10% of cases with non-pref unsecured creditors resulted in a dividend to those creditors

The dataset pre-dates HMRC’s pref status, so I suspect that non-pref unsecured dividends are far less frequent now.

But is this really news to anyone?  Insolvent companies with more salvageable businesses likely will go into ADM.  From what I have seen, the typical CVL involves few, if any, tangible assets of any value, perhaps a smattering of book debts that are often aged or doubtful, and maybe an overdrawn DLA or other connected party claim that is due from someone on the brink of their own insolvency process.  Any creditor return is unlikely from a company of this kind of profile.  But I don’t think that this means that CVL is the wrong process.

So IPs are the Primary Beneficiaries then?

Apparently not.  The researchers found that the median amount paid to IPs (in relation to post-appt fees) as a percentage of assets realised was 21%.  The researchers suggest that this illustrates that the costs of the CVL process – agents, legal, insurance, advertising, bonding – take up the majority of realisations. 

However, as this analysis relates only to post-appt fees, I wonder if a significant proportion of the realisations in low-value cases was spent on paying pre-CVL fees.

The researchers also examined time costs incurred -v- fees drawn and found that the median recovery rate of fees paid as a percentage of time costs incurred was 14%.

In fact, this paints an overly rosy picture.  It is not clear how many mixed fee bases cases there were, but the researchers have included them in their dataset.  Those cases would have under-reported the total time costs potentially by a large margin.  I would have thought it sensible to remove those from the dataset and this would have dropped the recovery rate.

Reading Behind the Stats

The section, “Associations Between Quantitative Indicators of Efficiency”, was largely lost on me.  However, I did clock these statements:

  • “A longer duration for a case is moderately associated with higher returns to creditors”
    • That’s good.  I take that to mean that the lengthier cases are moderately likely to generate better outcomes to creditors.  Lengthier cases usually mean complex investigations or sticky pursuits of assets and claims.  It is heartening to read that this tends to generate something for creditors, rather than all the proceeds going to discharge the liquidators’ and solicitors’ fees.
  • “Higher costs are relatively strongly associated with lower returns to creditors”
    • Out of context, you might think that this means that the harder an IP works, the less there is for creditors.  But this is not what it means.
    • The paper explains that “cost” means pre-CVL fees plus post-appt time costs as a percentage of assets realised.  This statement therefore makes sense to me: a low value CVL will generally have higher “costs” as there is a basic fee/time-costs quantum to these cases that has little to do with the assets and these low value CVLs just don’t have enough assets to pay creditors anything.
  • “A longer duration for a case is associated with lower cost, but this association is weak”
    • Again, we need to keep in mind that “cost” factors in the value of realisations.  It is not uncommon for substantial asset cases to have a lower cost by this definition, because sometimes it costs almost as much to collect a £20,000 book debt as it does to collect a £2,000 one.
    • As I said, lengthier cases usually mean tougher assets to realise, but it’s often worthwhile taking the extra time.  This statement would appear to support that, although weakly: longer CVLs can result in realisations that are relatively high compared with the fee/time-costs incurred.

The Value of Investigations

The researchers do acknowledge that a key benefit of the CVL process is the disqualification of some directors.  5% of cases in the dataset led to a disqualification.  But 54% of cases were originally sifted in.  I know that the Insolvency Service is constantly working to tweak its rules engine, but it does appear that more could be done to reduce the number unnecessarily sifted in… or are worthy cases not proceeding satisfactorily..?

The researchers looked at the value of investigations from the creditors’ perspective.  Unfortunately, I think their definition of realisations from investigations was too narrow.  They identified only recoveries from transactions at an undervalue (1 case, i.e. 0%) and from preferences (13 cases, i.e. 0%).  It appears that “commercial settlements” in relation to general misfeasance claims were not distinguished.

I suspect that investigations leading to recoveries of overdrawn DLAs and unlawful dividends are far more common than TUVs and preferences.  I also suspect that on the whole these generate more bang for liquidators’ bucks.  I wonder what might be revealed if the researchers had compared recoveries to SoA EtoRs especially as regards DLAs.  I think this is where liquidators can prove their worth: even if sadly recoveries are insufficient to pay a dividend to creditors, do they not gain some satisfaction from learning that a director or other connected party has been forced to pay something back?

We also ought not to forget the 183 cases (6%) that were ongoing.  I expect that many of those involved liquidators continuing to pursue the fruits of their investigations.

Are Some Liquidators Short-cutting Investigations?

What about that allegation that some liquidators don’t do investigations justice either because they’re too cosy with the directors or accountants or because there isn’t enough incentive fees-wise?

The researchers tried to explore this in a few ways:

  • How much time was spent in investigations?
    • The researchers discovered that the median time spent on investigations (where the liquidators’ reports provided this level of detail) was 7 hours or 15% of the total time recorded.
    • I’m not sure this gets us very far, not least because this median calculation was based on cases including 50 that recorded no investigation time at all.  This surely indicates that not all investigation time is being clearly categorised in liquidators’ reports.
  • Is there a relationship between pre-CVL fees and sift-in rates?
    • Personally, I struggle with this as the researchers seem to assume that, if the liquidator’s report does not refer to the payment of any pre-CVL fees, then this means no such fee was paid.  As I mentioned above, I think this is wrong. 
    • In any event, the paper reports a “negligible positive relationship which is not statistically significant”.
  • Is there a relationship between the quantum of pre-CVL fees and investigation time costs?
    • In other words, I think, could it be that a large pre-CVL fee has an effect on (or at least a correlation with) how much investigations are done?
    • The paper reports a weak association, i.e. the higher the pre-CVL fee, the lower the investigation time… “as a % of total hours”.  That last bit is important: rather than suggest that a high pre-CVL fee influences the liquidator to do less investigations (and of course this would confuse an association with a cause-and-effect), it could be explained as high pre-CVL fee cases resulting in high time costs for tasks other than investigations.  High pre-CVL fees often suggest a more complicated SoA, i.e. more assets and perhaps more creditors, which could attract disproportionately more time costs.
  • Is there a relationship between total fees incurred and sift-in rates?
    • The researchers found a statistically significant result in that fewer cases with fees (i.e. pre-CVL fee plus post-appt time costs) <£10K were sifted in than would be expected if there were no association.
    • Does this support a suggestion that some liquidators are not doing enough work to identify misconduct?
    • Or is it simply that, if a liquidator’s SIP2/CDDA work comes up clean, then their time costs incurred (plus pre-CVL fee) are more often <£10K?  If a liquidator does identify misconduct, then it seems to me that they are more likely to incur time costs (plus pre-CVL fee) greater than £10K precisely because they are doing more investigation work, so doesn’t this just illustrate that cases with misconduct result in higher time costs?
  • Is there a relationship between total fees paid and sift-in rates?
    • The researchers found that the relationship between total fees paid and sift-in rates was not statistically significant.
    • I think the paper is saying that the sift-in rates are pretty-much the same whether an IP is paid less than or more than £10K.  Therefore, I take this to illustrate that liquidators are not short-cutting investigations on cases with few assets. 

Research Conclusions

Perhaps unsurprisingly, the paper concludes by describing potential areas for further research.

My personal view is that, while it is good to see researchers taking an interest in CVLs, some expectations about CVLs appear unrealistic, especially given the asset profile of the typical insolvent company, and there seems to be a lack of appreciation for the wider benefits of the process. 

My fear also is that the response to a cry of lack of transparency tends to be more requirements for IPs to provide more information to creditors.  But surely insolvency is already characterised by information overload, isn’t it?  If the consensus calls for greater creditor returns, then I suggest the focus needs to be on lifting some of the current regulatory burdens that make the process so costly.


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Hobson’s Choice

A recent court decision has left us with a Hobson’s choice: should we follow what appears to be a flawed decision or ignore it?

Why do I say that the decision appears flawed?  Can the apparent inconsistencies in the Act/Rules be explained away?  What should we do now?

The decision in question, Hobson & Coleman v OAS Realisations (2022) Limited ([2024] EWHC 1491 (Ch)), is available at https://www.bailii.org/ew/cases/EWHC/Ch/2024/1491.html.

The Decision

Firstly, it is worth pointing out that, although there were technically two sides to this application, both were represented by the Joint Administrators’ counsel and evidently they were hoping that the court would ratify their past actions.  Therefore, the judge heard no opposing arguments.

On the basis of legal advice, the Joint Administrators had moved a company in ADM to CVL under Para 83 of Schedule B1.  They had envisaged that there would be sufficient property only to pay a distribution to HMRC as a secondary preferential creditor and they believed that this met the Para 83(1)(b) criterion: “where the administrator of a company thinks… that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”.

The judge agreed, because in his view: (i) preferential creditors are unsecured creditors per S248; (ii) the context of Para 83(1)(b) did not require “unsecured creditors” to mean non-preferential unsecured creditors; and (iii) in any event the Administrators thought they would pay a dividend to unsecureds, which is the Para 83 test (i.e. it does not require administrators to reasonably think such a thing).

So we didn’t think this before?

No, we didn’t.  While of course prefs are unsecured – because they are not secured – since the start of Schedule B1, it was understood that the IS/RPBs took the view that “unsecured creditors” in Para 83(1)(b) did mean non-preferential unsecureds.

The RPBs’ past view

This led to many (even in my limited experience) occasions where IPs were challenged by the RPB for moving an ADM to CVL when it did not appear reasonable to have thought at the time of the move that there would be a non-preferential non-prescribed part dividend.  Those challenges led many of those IPs to seek legal advice, which sometimes assisted the IP to continue the CVL notwithstanding the alleged breach of Para 83 but sometimes resulted in IPs having to put their hands in their own pockets to ensure that there were sufficient funds for a non-pref non-prescribed part dividend.

Am I bitter at the pivot?

No, of course not (and I hasten to add that I was not the compliance reviewer referred to in the decision, although I probably would have made much the same observations).  I have had to roll with more material pivots than this, such as Brumark/Spectrum Plus and Paramount Airways.

I am strongly in favour of anything that eases seemingly unreasonable ADM restrictions.  I have never understood why a CVL should not be a possible exit route in any ADM where there are not compelling reasons for the ADM to continue.

But the problem is that the decision is problematic.

Why did we think that a CVL move was restricted to non-pref non-prescribed part dividends?

Probably because in other areas of the Act/Rules “unsecured creditors” surely does mean non-pref unsecureds.

The 2010 Rules

Changes to the 1986 Rules introduced in 2010 reinforced the perception that, where the Rules referred to unsecured creditors, they obviously meant non-pref unsecureds. 

For example, old R4.126(1E)(xii) required final CVL reports to state (my emphasis):

“the aggregate numbers of preferential and unsecured creditors set out separately” 

The phrase “preferential and unsecured creditors” appeared repeatedly in these 2010 amendments.

Of course, we no longer have those Rules, but others are still with us.

The Para 52(1)(b) nonsense

For example, Para 52(1)(b) says that an administrator need not seek a decision on their Proposals where the Proposals include a statement:

“that the administrator thinks… that the company has insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of section 176A(2)(a)”

If “unsecured creditors” here were to include prefs, then it would mean that you would not make a Para 52(1)(b) statement where you thought there would be a pref distribution.  But R18.18(4)(b) says that, where a Para 52(1)(b) statement has been made, fee approval (absent a committee) is sought as follows:

“if the administrator has made or intends to make a distribution to preferential creditors… (ii) a decision of the preferential creditors in a decision procedure”

So if Para 52(1)(b) were viewed through Hobson, then R18.18(4)(b) would never apply, would it?  Except, I suppose, if you didn’t think you’d make a pref distribution when you produced your Proposals but then you did when you came to ask for fee approval.  But that’s nonsense, isn’t it?

The same goes for R3.52(3), Para 78(2) and Para 98(3) regarding seeking approval for pre-ADM costs, an extension and discharge.  You would practically never seek approval from prefs under these provisions, because you would never have made a Para 52(1)(b) statement where you thought you’d be paying a pref distribution.

Is it possible for “unsecured creditors” to mean different things in different places?

Well, yes.  HHJ Matthews said as much when he considered the wording of S248: “So, unless the context otherwise requires, an ‘unsecured creditor’ is a creditor who does not hold “in respect of his debt a security over property of the company””.

This means we needs to consider the context, which could affect the meaning of unsecured creditors.

That’s pretty unsatisfactory, isn’t it?  You’d think that the person/group drafting both Para 52 and Para 83 could have settled on consistent language, wouldn’t you?  Alternatively, I’d have thought that Para 52 could be said to be part of the context of Para 83, which could lead to a view contrary to HHJ Matthews’.

Also, look again at the wording of Para 52(1)(b) and Para 83(1)(b).  They both use almost exactly the same phrase:

  • Para 52(1)(b): “to enable a distribution to be made to unsecured creditors other than by virtue of section 176A(2)(a)”
  • Para 83(1)(b): “a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”

Are we seriously living in a world where the distributions in these two paragraphs are measured in completely different ways?

An alternative view – that “unsecured creditors” in Para 52(1)(b) means the same as the Hobson view of Para 83(1)(b), so casting doubt on many many Proposals and their consequent fee approvals etc. – doesn’t bear thinking about!

There is another strong reason to question the robustness of the Hobson view.

The killer blow?

The Explanatory Notes to the Enterprise Act 2002, which introduced Schedule B1, include (paragraph 700, my emphasis):

“Paragraph 83 allows the administrator to end the administration and convert the proceedings into a voluntary winding-up. This will occur if the preferential and secured creditors have been paid all they are likely to receive (or such has been set aside for them), and there is money available for the unsecured creditors.”

That appears pretty cut-and-dried to me and shows that the drafter of the Explanatory Notes intended “unsecured creditors” in Para 83 to mean non-pref unsecureds. 

Had HHJ Matthews been aware of this Explanatory Note, I would be surprised if his decision would have been what it was.

Other reasons for concern

I think the above are more than enough reasons to distrust the decision.  However, I have other reasons, including: the policy objective behind the amendment to Para 83(1)(b) that coincided with a tenuously corresponding change to Para 65; and which creditors move into the frame of fee-approval following a move to CVL that appears unaligned with a policy that this should fall to the creditors with interest.

What are the RPBs’ views now?

I have heard from an RPB staff member that they (and some others) would not have significant concerns if an ADM were moved to CVL in similar circumstances to the Hobson case.  Their primary concerns are that IPs: (i) weigh up the costs of the options available to them, e.g. having regard to the cost of a court-ordered extension, and (ii) ensure that their reasons for moving to CVL (or not, where this may be an option) are fully documented for the file.

I think this is, not only a very sensible approach, but also in reality the only reasonable one for the RPBs to take in view of the decision.  Of course, this is only the view of individual RPB staff members.  It would be risky to take it as read that this would be shared by all RPB staff and regulatory committees.

Given the RPBs’ past activities in challenging ADM moves to CVL, I feel it would be extremely valuable if the RPBs – and/or perhaps the InsS in a Dear IP – were to publish something on these lines to give this approach some authority.  Such an approach need not have significant regard for any reasons for doubting the robustness of the Hobson decision – it is what it is.  But rather, such a statement would simply give IPs comfort that they could proceed in principle without fear that their RPB might challenge them on this point sometime in the future.

Where does this leave us?

Of the people that I’ve spoken to, many of the compliance managers are very nervous about the decision, whereas many of the IPs are more than happy to follow it.  They consider it is unlikely to be challenged – with which I agree, given that at least some of the RPB staff seem content for IPs to follow it – and they seem to share my view that blocking a move to CVL never did make practical sense.

Of course, there remains the risk that a judge on another day will take a contrary view.  However, given that the application of Para 83 depends on what the Administrator “thinks”, it seems unlikely to me that any future decision of this kind will render such Administrators’ thinking perverse.  Thus. I think it likely that any future decision would only have prospective effect.

So yes, on balance, I think it’s safe to follow this decision provided that the Administrator’s thinking is written down contemporaneously.  But of course, I am not a solicitor and we all get things wrong some of the time.

My thanks go to some of the R3 GTC members (whose views are not necessarily reflected here) and to the RPB staff member, who all have helped me explore these issues more deeply and finally to commit pen to paper.


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Stepping up Scrutiny of ERA Claims

There’s no doubt that the RPBs have stepped up scrutiny of RP14/15 forms in recent months.  In this blog post, I explore what the Acts and Dear IP actually require when it comes to “verifying” RP14/15 data and the measures you can take to protect yourself from RPB criticism that you’re not doing enough.

An important resource on this subject is Dear IP chapter 11, found at: https://www.gov.uk/guidance/dear-insolvency-practitioner/11-employment-issues

What does the legislation require?

The Employment Rights Act 1996 and the Pension Schemes Act 1993 use similar language.  They require you to notify the RPS of the amount of debt that “appears” to be owed (S187(1) ERA96 and S125(3) PSA93).

However, the RP14/15 forms use much stronger language.

What do the RP forms require?

The RP14 form requires the office holder to make certain declarations including:

  • “This form and any attachments have been completed, and the information given is correct, to the best of my knowledge”

Wow: “best” is a high bar, isn’t it?  It doesn’t allow room even for inadvertent errors. 

The RP15 form includes a similar declaration:

  • “The information given in this form is correct and complete to the best of my knowledge.
  • “I have examined the claim, including the RP15A spreadsheet and the actuarial certificate if applicable, in accordance with section 125 of The Pension Schemes Act 1993”

The above reference to “examined… in accordance with section 125” seems odd, given that S125 includes the far woollier “appears to be” wording, but hey ho.

The RP14 warning

The RP14 form includes a warning that I guess the RPS is hoping will make IPs stop and think:

  • “NOTE: This information is required under section 190 of the Employment Rights Act 1996.
  • “Any refusal or wilful neglect to provide any information required by the Secretary of State, and any false statement made knowingly or recklessly in response to this requirement, may amount to a criminal offence under that section.”

Personally, I question whether this threat has any teeth. My reading of S190 is that the criminal offence can only be committed by “the employer” who provides false information or by anyone who does not cooperate in producing documents and, while S190 states that a director or similar officer can be culpable for a body corporate’s failure, it still seems to me a bit of a stretch to squeeze an office holder into this section.

But of course I would not want to chance it and in any event we don’t need the threat of a criminal conviction to persuade us to be diligent in our work, do we?  If nothing else, we need to comply with the Insolvency Code of Ethics’ fundamental principle of professional competence and due care.

RPB sanctions

Breach of this fundamental principle tends to be the primary allegation on which RPB disciplinary sanctions are made in this area.  Over the past 6 months, three relevant RPB sanctions have been published:

  • IPA (Aug-23)
    • Failed to ensure that a complete and accurate RP15 was submitted
    • Fined £2,000
  • ICAEW (Oct-23)
    • Failed to inform RPS that the IP had not verified employee claims (and other unrelated failures)
    • Fined £5,000
  • IPA (Nov-23)
    • Failed to take sufficient steps to verify employees’ claims and to carry out independent verification of information provided by directors before submitting RP14As and failed to raise any concerns with the RPS as to the veracity of the employees’ claims
    • Fined £10,000

Why has this become such a hot topic?

Protecting against fraudulent claims

All the way back in October 2008, Dear IP warned us to be on the look-out for fraudulent claims (chapter 11 article 27).  More recently, in December 2020, a more in-depth Dear IP was issued (chapter 11 article 70) flagging up the warning signs for potential fraud.  This article is well worth another read.

Alarmingly, it appears that some companies have been operated perhaps solely for the purpose of extracting fraudulent payments from the RPS.  Even some legitimately trading companies may have ghost employees on their books.  But also fraud can be at the lower level, where individuals’ rates of pay or outstanding holiday entitlements are exaggerated.

Not all the warning signs noted in the Dear IP will be spotted from a company’s records.  But what work are IPs expected to do?

Where does the “verification” requirement come from?

As we have seen, the need to “verify” information does not appear in the legislation or on the RP forms.  Where does this idea come from?

It seems to derive from Dear IP chapter 11 article 27, which states:

  • “RPS assumes that the information on the RP14a has been verified from the employer’s records before it is sent to the RPS.”

Thus, if you receive information from any source other than the employer’s records, the assumption is that this information has been verified against the employer’s records.  In my experience, the RPBs seem to have converted this into a requirement, with the IPA taking the strictest line.  Where I have referred in this article to the RPBs, generally I mean the IPA.

Are you expected to verify all data?

Interestingly, Dear IP chapter 11 article 70 suggests not necessarily:

  • “Insolvency Practitioners are reminded that they should make an assessment on a case-by-case basis to decide what reasonable checks are necessary to verify information or identities before submitting the RP14/14A to the RPS.”

Of course, you would need to have documented this assessment for the file – and it is open to an RPB to challenge such an assessment as falling short of showing professional competence or due care – but this Dear IP does appear to allow an IP to decide that verification of alldata may not be reasonable in every case.

However, in my experience, the RPBs appear to be starting from a default that all data – that is, every piece of data for each employee on the RP14A/15A – need to be verified if at all possible.  After all, isn’t that the only way you are going to be able to declare that the data is “correct to the best of my knowledge”?

A variety of data sources

Ok, so the ultimate data source is the employer’s records.  But sometimes the records just aren’t sufficient, are they?  For example, holiday entitlement data can be sketchy and sometimes non-existent in the records and many employees have a better grip on what overtime or commission they’re owed.

Are there any other acceptable sources of information?

Is it ok to use data on a spreadsheet completed by the director/employee?

It is fairly common practice to provide a pro forma spreadsheet to a director or payroll person, usually pre-appointment, and ask them to complete it with all the employee data. 

This may seem a practical way to compile data from a variety of company records that the director/employee knows inside-out.  However, going by the RPBs’ recent activity, this triggers the Dear IP need for you to “verify” the data against the company’s records.  This pretty-much defeats the object of getting someone else to complete the spreadsheet for you, doesn’t it?

Is it ok to rely on information from pension providers?

Again, this is a fairly common practice, not least as the RP15 form expects the RP15A to be completed by the pension provider.  However, the RPBs are expecting the RP15A data to be verified against the employer’s records.

Is it ok to rely on RP14As/15As drafted by employment specialists?

It appears not.  Even where the specialist has been instructed by the office holder to act as their agent, the RPBs appear to be expecting all data on the forms to be verified against the employer’s records.  The argument is: how else can the IP sign off the form as correct to the best of their knowledge?

In my mind, this seems a step too far.  Surely the RPB doesn’t expect an IP personally to cross-check all the data on an RP14A/15A form against the company’s records where one of their staff have completed the form, do they?  But how is this different from their agent, an external specialist, completing the form?

I asked an Insolvency Service person this question.  They maintained that, in order for the IP to make the declaration, the IP must have some basis on which to form an opinion that the data is correct, so this would require some cross-checking.  However, they did at least agree that it need not be all data.

Is it ok to ask the employee direct or to draw information from the RP1?

I’m sure you can guess my answer: nope, not without verifying the information against the company’s records.

However, Dear IP (chapter 11 article 70) does provide a precedent for this:

  • “Where there is insufficient evidence in the records, IPs should not use the RP1 data to complete the RP14A entry without contacting RPS first to discuss. In the absence of that discussion RPS will assume that there is evidence in the records to substantiate the RP14A”

There’s the instruction: if you have no alternative, then contact the RPS first and discuss with them the last resort of relying on the RP1 data.

What if the company’s records conflict with what an employee says they are owed?

I have heard stories of, not only employees, but also RPS staff badgering IP staff to submit an amended RP14A so that an employee’s claim can be processed.  Of course, while there may be legitimate reasons for amending an RP14A where you are satisfied that the RP14A is wrong, what if you’re simply being told by the employee that the company’s records are wrong or incomplete?

With all the emphasis on preventing fraud and relying on the company’s records, I wonder what would happen if you just said no, you’re not prepared to amend the RP14A. 

S187(2) ERA96 and S125(5) PSA93 empower the RPS to make a payment without the office holder’s “statement”, so you should not be held hostage with the threat that an amended RP14A is the only way the employee is going to get paid.  You will have submitted the original RP14A to the best of your knowledge, having verified the information as far as possible against the company’s records, so why change your mind on the employee’s say-so?

But what if you just don’t have sufficient company records?

Well, as mentioned above, if you are drawing information from an RP1, Dear IP instructs you to discuss this first with the RPS.

In all other scenarios where you use data other than that drawn directly from the employer’s records, I recommend that you notify the RPS of this action when you submit the RP14/15. 

In my mind, if you use data from another reasonable source, it could still be what “appears” to be owed and it could be “correct to the best of your knowledge”, provided that you truly do not have in your possession any other more reliable knowledge, e.g. from company bank statements, that you haven’t checked against.  The RPB sanctions above also illustrate that notifying the RPS of the limitations of your verification work is an acceptable step.

How exactly should you verify data?

As with all things in insolvency administration these days, I think it comes down to having an established procedure and checklist to document the work done and decisions made.  Here is my 6-step process.

1. Document the information you obtained, i.e. each item of data required by the RP14A or RP15A.  It would also be wise to follow Dear IP chapter 11 article 81, which sets out the RPS’ approach to directors’ claims: as the office holder signing off an RP14, you need to satisfy yourself that a director’s claims as an employee are substantiated and so it would seem reasonable to apply the same rationale as the RPS and to document your decision in this regard

2. Document the source(s) of each part of the information, i.e. if it were not all in the company’s records, how did you plug each gap?

3. Check information against the bank statements, e.g. who was paid by the company, what were they paid and when were they – and the pension scheme – last paid?

4. Note whether the company records support each item of data and, if not, what you are relying on

5. Note the bases for calculating the weekly pay and holiday rates for employees with variable rates of pay (see e.g. Dear IP chapter 11 article 72) and how you have calculated holiday entitlements

6. Tell the RPS everything, in particular the extent of your verification work and the source(s) of information where the employer’s records were insufficient

At the Compliance Alliance, we have created a checklist covering these steps and we recommend that the completed checklist be sent to the RPS at the time of submission of an RP14/15 form.

Finally also you need to keep abreast of the legislation.  For example, Dear IP chapter 11 article 82 noted several 2023 SIs that may affect the definition of “wages” or “weekly pay” and other Regulations will affect holiday pay calculations (Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023).  Alternatively, instruct employment specialists to assist.  This can take much of the pain out of the process.

That’s a crazy amount of work?!  Are the RPBs aware of how this impacts on time costs?

I asked an Insolvency Service person this question.  They appreciated that substantial time could be required to carry out this verification work.  They maintained that the RPS has a duty to ensure that payments from the NI Fund are accurate and they are therefore looking to IPs to help by providing accurate RP14/15 data.

The common theme in all this is: how else can you declare that the information you have provided on an RP14/15 is correct to the best of your knowledge?

I recently presented a webinar on this topic to clients of the Compliance Alliance.  You and all your colleagues can get access to a recording of this webinar, along with access to all the recorded webinars in our library and c.10 future webinars, for £350 + VAT for one year.  For enquiries, please email info@thecompliancealliance.co.uk.


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Checking PSCs: is it Pretty Silly Compliance?

A lot later than I’d hoped, here’s an article on some of the changes in the Money Laundering Regs that took effect on 1 April 2023.  I’ve also covered some anomalies in the PSC regime when compared with AML Beneficial Owners that could trip up the unwary.

In brief, this article explores:

  • At what points are we now required to check the PSC register?
  • What records are we now required to keep?
  • Does the change to reporting only “material” PSC discrepancies now give us a reason for not reporting in many instances?
  • Do PSC discrepancy reports need to be repeated if the discrepancy has not been fixed?
  • Does an insolvency office holder become a PSC?
  • When a PSC is not the same as an AML beneficial owner: (i) when the shareholder is a UK-registered company
  • When a PSC is not the same as an AML beneficial owner: (ii) when the shareholder has died
  • When a PSC is not the same as an AML beneficial owner: (iii) when the person exercises “significant”, but not “ultimate”, control

The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 can be found at https://www.legislation.gov.uk/uksi/2022/860/contents/made

In this article, I refer to three useful pieces of Companies House guidance:

Reviewing PSCs as part of “ongoing monitoring”

When the MLR19 came out, several professional bodies queried the wording that appeared to suggest that a client’s PSCs were to be reviewed (and, if necessary, a PSC discrepancy report submitted) during the life of a business relationship.   It was felt that this put an unnecessary burden on AML-regulated businesses.  As a consequence and because it appeared that the MLR19 had gone further than had been originally planned, in 2020 the MLR17 were changed making it clear that a PSC review was required only when establishing the relationship at the start.

However, in 2021, HM Treasury consulted on the question: wouldn’t it be a good idea to review clients’ PSCs whenever ongoing monitoring is carried out during a relationship?

At that point of course, the fate was sealed.  So it came to pass: the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 reintroduced the need to review PSCs as part of ongoing monitoring.

How frequently should these reviews be carried out?

The MLR17 indicate that the primary purposes of “ongoing monitoring” are to examine whether a client’s activity is consistent with what the AML-regulated business expects it to be based on its knowledge and risk assessment and to ensure that the AML CDD measures remain up to date.

Neither the MLR17 nor the CCAB Guidance specify how frequently “ongoing monitoring” should be conducted.  As with most things AML, the MLR17 state that it needs to be done according to the assessed risk.  In a fairly recent ICAEW webinar directed at ICAEW members in general (c.1 hour into “Money Laundering Risks”, March 23), it was suggested that periodic routine ongoing monitoring might be done every year for high risk clients and every two or three years for low risk clients.

Of course, the mood music from the RPBs has been that insolvency is generally a high risk service, so IPs are unlikely to have any truly low risk clients when compared with accountants.  Therefore, in insolvencies, it seems to me sensible to tick the “ongoing monitoring” boxes at the time of each case review, but of course firms are free to establish policies setting out other timescales.

Do these reviews realistically achieve anything in insolvencies?

In almost all cases, I think not.  For example, you would not expect PSCs to change in a CVL.  The only cases where I can imagine a PSC ever changing are rescue Administrations or CVAs, but even then it would be very rare.  I guess potentially it could also happen in an MVL, although most shareholder-shifting occurs pre-liquidation.

I understand that part of the authorities’ concerns generally is that some fraudsters file director-appointment or PSC-registration documents on Companies House in order to build a false identity.  Although one would hope that directors would police their own company’s file at Companies House, AML-regulated businesses are also tasked with keeping the registers clean by means of these statutory PSC reviews and discrepancy reporting requirements.

But how likely is it that a fraudster is going to pick an insolvent company in order to build a false identity? 

Hopefully, the long-awaited Companies House reform measures via the Economic Crime and Corporate Transparency Bill, which is currently being considered by the House of Lords, will block the ability for fraudsters to abuse company files in this way in future.  But I suspect that this will not mean that the PSC requirements on professionals are lifted (sigh!).

HM Treasury micro-management: requirements on record-keeping

If the issue were just that we needed to check the PSC register at every ongoing monitoring point, I could just about live with that.  However, the amendments go further than this.  In a seemingly unprecedented demonstration of micro-management, we are now required to take a copy of the PSC register every time ongoing monitoring is carried out!

This is set out in new Regulation 30A(2A):

“When taking measures to fulfil the duties to carry out customer due diligence and ongoing monitoring of a business relationship.., a relevant person must also collect an excerpt of the register which contains full details of any information specified in paragraph (1A) which is held on the register at that time, or must establish from its inspection of the register that there is no such information held on the register at that time.”

But now we only need to report “material discrepancies”, right?

True, the regulators have highlighted this particular change as lessening the burden on us all.  But the small print suggests to me that little has changed in practice.

While the Regs have been changed so that only material discrepancies need to be reported, new Schedule 3AZA defines these as occurring where:

“… the discrepancy, by its nature, and having regard to all the circumstances, may reasonably be considered—

(a) to be linked to money laundering or terrorist financing; or

(b) to conceal details of the business of the customer.”

Companies House guidance on Reporting a Discrepancy points out that it is irrelevant whether there was an intention to conceal.

The Regs’ Schedule continues:

“Discrepancies listed in this paragraph are in the form of—

(a) a difference in name;

(b) an incorrect entry for nature of control;

(c) an incorrect entry for date of birth;

(d) an incorrect entry for nationality;

(e) an incorrect entry for correspondence address;

(f) a missing entry for a person of significant control or a registrable beneficial owner;

(g) an incorrect entry for the date the individual became a registrable person.”

In my experience, incorrect natures of control or entirely missing entries are the most obvious discrepancies, so these will continue to need to be reported. 

The Companies House guidance on Reporting a Discrepancy provides examples of discrepancies that would be considered “material” and it seems to me that only insignificant typos might not hit this threshold.  I guess, however, that we might also avoid reporting a discrepancy if someone is registered as a PSC when they are not one… although I wonder how the RPBs will view this.

What a faff!

What happens after a PSC discrepancy report is submitted?

Well, the Regs require Companies House to “take such action as [Companies House] considers appropriate to investigate and, if necessary, resolve the discrepancy in a timely manner” (MLR17 Reg 30A(5)).  In practice this appears to mean that they will email the insolvency office holder and ask them to amend the company’s register.  Personally, I cannot see that there is a positive duty on an insolvency office holder to fix the register and, in any event, the PSC discrepancy report is only submitted on the basis of the IP’s knowledge; in many cases, the true facts of the situation may be less than certain.

If the IP chooses not to amend the register, then the chances are that the discrepancy will remain.  I have seen that, in such cases, Companies House generally takes the view that they have taken the appropriate steps and so no more action is required.  Oh, the things we all do to comply with poorly thought-out legislation!

A welcome bit of pragmatism in the Companies House guidance

Of course, things tend to be different with a live client, such as those with accountants.  In those cases, when an accountant identifies a PSC discrepancy, it would be usual for them to get in touch with the client and encourage them to correct the discrepancy on the file.  Although this sometimes also happens pre-insolvency, in cases where the PSC discrepancy remains after the insolvency has begun, this gives rise to another issue when “ongoing monitoring” is carried out later.

Technically, the amended Regs don’t accommodate an uncorrected PSC discrepancy.  They would require you to submit a new PSC discrepancy report every time.

However, the Companies House guidance on Reporting a Discrepancy thankfully explains that they are not expecting a second discrepancy report if it has been reported previously.

Should the insolvency office holder be recorded as a PSC?

Interesting question, don’t you think?  Clearly, insolvency office holders exercise “significant influence or control”, so does this make them a PSC?  As their appointment doesn’t immediately affect the PSC register at Companies House, does this give rise to a material discrepancy to be reported during ongoing monitoring or a need to be registered as a PSC on appointment?

I strongly recommend the Companies House guidance on “Significant Influence or Control”.  It contains many nuggets helping to determine who might be a PSC.

It includes, at para 4.4, that anyone exercising a function under an enactment, e.g. “a Liquidator or receiver”, is not a PSC (provided that they only act in accordance with their statutory functions).

That’s one issue sorted, then.

When PSCs and Beneficial Owners differ

But there are other scenarios that can be confusing.  In most cases, identifying the PSCs is no different from identifying the beneficial owners for AML CDD purposes and this makes it relatively straightforward to spot any PSC discrepancies. 

But there are several situations in which the PSCs are not the same as the AML beneficial owners, so when staff are checking for PSC discrepancies it is valuable that they understand these anomalies.

When there is a UK-registered corporate shareholder

Sometimes, we come across the following scenario:

We’re probably all comfortable with the concept that the beneficial owners for AML CDD purposes are the two 50% shareholders at the top of the tree.  However, if the holding company is a UK-registered company, then the holding company is the one that should be registered as the operating company’s PSC.

There are other scenarios (i.e. not only UK-registered companies) where a 25%+ shareholder who is a legal entity should itself be registered as a PSC – see section 2.2. of the Companies House PSC guidance for companies.  But in other cases, the legal entity shareholder should not be registered as the PSC, but instead the individuals or entities up the shareholding tree need to be registered.

Where the shareholder has died

For AML CDD purposes, the MLR17 state (Reg 6(6)):

“In these Regulations, ‘beneficial owner’, in relation to an estate of a deceased person in the course of administration, means—

(a) in England and Wales and Northern Ireland, the executor, original or by representation, or administrator for the time being of a deceased person;

(b) in Scotland, the executor for the purposes of the Executors (Scotland) Act 1900”

However, the Companies House PSC guidance for companies states (para 7.7.1):

“In the unfortunate event that a PSC of your company is deceased, the PSC should remain on the PSC register until such time as their interest is formally transferred to its new owner. While an executor has fiduciary duties to the intended beneficiaries of the assets, the executor is are responsible for administering the estate according the wishes of the deceased. The deceased will therefore continue to be registrable until such time as the control passes to another person, such as an heir, who will exercise their influence and control over your company for themselves.”

In other words, for AML CDD purposes, the executor or administrator of a deceased person’s estate will be a beneficial owner, but for PSC purposes it will remain the deceased person.

The difference between “significant” and “ultimate” control

While we usually focus on the shareholders and directors when identifying the beneficial owners for AML CDD purposes, there is an additional woolly category (MLR17 Reg 5(1)(a)): those who “exercise ultimate control over the management” of the entity.

The PSC regime has a different measure.  As the name suggests, it is concerned with those who exercise significant, not ultimate, control.  I think that both the AML and PSC regimes require us to consider shadow directors, but other people may be a PSC but not a beneficial owner.

The Companies House guidance on “Significant Influence or Control” includes an interesting – and insolvency-relevant – example (para 4.10):

“Extra-ordinary functions of a person could result in them being considered to have significant influence or control:

A director who also owns important assets or has key relationships that are important to the running of the business (e.g. intellectual property rights), and uses this additional power to influence the outcome of decisions related to the running of the business of the company. This individual would not be able to rely on the excepted role of director to avoid being considered to exercise significant influence or control.”

This scenario – and indeed the existence of shadow directors – could make an IP’s life frustrating, I think.  Before appointment, you could identify someone exercising significant control in this way but who is not registered as a PSC at Companies House… so you submit a PSC discrepancy report.  Then, Companies House gets in touch with you after your appointment asking you to amend the register.  But at that point, the person no longer exercises significant control – ta daa!

Ok, I know, I would hope that the RPB would not take you to task for not submitting a PSC discrepancy report pre-appointment, but who knows?

The costs of compliance

IPs are well accustomed to investing time and effort in complying with what appear to be pointless requirements, so I’m sure that most will read this with a tired eye-rolling. 

Of course, all these additional duties need to be resourced and this costs firms – and therefore insolvent estates – more money.  However, it seems that the RPB/IS perceptions that some IPs charge excessive fees never change, regardless of the fact that year after year compliance duties increase.  This may only be another 10-minute task, but it all adds up, doesn’t it?


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The Economic Crime Levy – a disaster averted

Regulations introduced last year appeared to make insolvency office holders personally liable for the new economic crime levy due from insolvent businesses, whether incurred pre- or post-appointment.  Was this another example of HMRC looking to jump the queue over ordinary unsecured creditors?

Fortunately, R3 took up the baton and, eventually, amendment regulations were created to curtail these effects.  Phew!

The original regulations, the Economic Crime (Anti-Money Laundering) Levy Regulations 2022 (“the Regs”), can be found at: https://www.legislation.gov.uk/uksi/2022/269/contents/made

The Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023 (“the Amendment Regs”), are at: https://www.legislation.gov.uk/uksi/2023/369/contents/made

How does the levy work in general?

Don’t panic!  The charge is not levied on all businesses.  It is attracted only by businesses that carry out AML-regulated businesses… so banks, solicitors, accountants, art dealers, estate agents, casinos, insolvency practitioners…

IPs?! 

Honestly, there’s no need to panic… at least not this year.

Relating to the 2022/23 year, the levies are:

  • For small businesses (under £10.2m UK revenue): nil
  • For medium businesses (£10.2m – £36m): £10,000
  • For large businesses (£36m – £1bn): £36,000
  • For very large businesses (over £1bn): £250,000

The levy for the 2022/23 financial year becomes due on 30 September 2023.  The levy rates have been fixed by the Finance Act 2022, so it will be interesting to see if/when this changes in future and whether small businesses will be made to contribute.

What if the trader goes insolvent?

Regulation 15 of the Regs states:

  • (1) This regulation applies where a person liable to pay the levy—
  • (a) who is an individual—
  • (i) has died or become incapacitated; or
  • (ii) has become bankrupt; or
  • (b) is subject to winding-up, receivership, administration or an equivalent procedure.
  • (2) The person (“P”) who—
  • (a) in the case of an individual, carries on the regulated business on behalf of an individual who has died or become incapacitated; or
  • (b) acts as the liquidator, receiver or administrator in relation to the business of the person liable to pay the levy or acts in an equivalent capacity,
  • may be treated by the appropriate collection authority as the person liable to pay the levy and must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy.

And that was it!  There was nothing limiting the scope or slipping the levy into any insolvency order of priority: if the insolvent business couldn’t pay, then the levy could be charged to the office holder.

Disaster averted!

After I had realised the effect of this regulation (with the help of the R3 GTC chair), I raised it at an R3 General Technical Committee meeting and fortunately R3 – as well as, I think, the Insolvency Service (after all, Official Receivers could be liable too) – took up the issue with HMRC, as they are the “appropriate collection authority” in the majority of cases.

The Amendment Regs were made on 27 March 2023 and they insert the following:

  • (3) Any amount of levy which relates to UK revenue attributable to a period before the date when the winding-up, receivership, administration or other equivalent procedure takes effect is payable by the person subject to the winding-up, receivership, administration or an equivalent procedure, and not by the person treated as the person liable to pay the levy under paragraph (2).
  • (4) Any amount of levy which relates to UK revenue attributable to a period on or after the date when the winding-up, receivership, administration or other equivalent procedure takes effect is to be regarded as an expense of that winding-up, receivership, administration or equivalent procedure.

The effect of this amendment

In other words, if the levy relates to pre-appointment revenue, it will remain due and payable by the insolvent entity, i.e. it will be a normal unsecured claim.  It is only if the levy relates to post-appointment revenue that we will need to worry, because then it will be an expense.

The thought of trading-on an AML-regulated business probably sends shivers down most of our spines already.  Now, the attraction of an additional expense just adds another nail in the trading-on in insolvency coffin.

“Equivalent procedures”?

As you can see, the Regs specifically reach to liquidators, receivers, administrators and trustees in bankruptcy.  What about VA Nominees and Supervisors?  Personally, I can think of many arguments as to why a VA is not an equivalent procedure and moratorium monitors are even less likely to be caught, I think.  However, it may well be up to the courts to decide on those.

It’s not all good news: more work for office holders

Regulation 15 imposes more than a direct financial cost on insolvency office holders.  They also “must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy”.

This means that insolvency office holders will need to submit returns to HMRC (or the FCA or the Gambling Commission, depending on the type of business) for pre-appointment periods and probably also for the first post-appointment period to the end of the tax year unless the collection authorities introduce an end-of-trading return process.  I very much doubt that HMRC etc. will be able to accommodate office holders who want to submit returns offline – that will be interesting.

If there is no post-appointment trading and no prospect of an unsecured dividend, will office holders still be required to submit missing returns?  Let’s hope the collection authority doesn’t get all jobsworth over this requirement.

A new regime and a new registration process

Of course, we’ve only just got to the end of the first levy year and, although the Regs came into force on 1 April 2022, HMRC is not yet receiving registrations (see https://www.gov.uk/government/publications/prepare-for-the-economic-crime-levy/get-ready-for-the-economic-crime-levy#registering-for-the-ecl).  Therefore, office holders taking appointments of AML-regulated entities over the next few months may also need to do the work of registering the entity in the first place.

Is it all a conspiracy?

Actually, no, I don’t think HMRC tried to jump the queue by getting this levy some kind of super priority.  I think it was just poor drafting.  But, goodness, what poor drafting!

It goes to show that we all need to stay alert to new legislation: the more eyes on these things, the better.


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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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The revised SIP3.1: is longer better?

The new SIP3.1 has c.1,300 more words than the old SIP.  That means it’s around 72% longer than its predecessor.  Inevitably, the new SIP involves additional prescriptive requirements on IPs and delivery of yet more words to debtors and creditors. 

Will the changes improve the standards of advice and IVAs?  How can you make sure that you’ve taken account of all the changes introduced by the revised SIP?

The revised SIP3.1, effective for IVAs where the nominee was appointed on or after 1 March 2023, is available from https://www.r3.org.uk/technical-library/england-wales/sips/more/29119/page/1/sip-3-voluntary-arrangements/

In this blog post, I look at:

  • A change in the role of adviser
  • Must all advice be tailored to the debtor?
  • The need to give more information on rejected options
  • Eleven new items added to the initial advice
  • How much time should debtors be given to absorb advice?
  • Vulnerability makes an appearance
  • A greater emphasis on documented assessments
  • What is an “in-person” meeting?
  • Substantial changes to processes where a debtor has been referred, especially where any advice has previously been given

In the next post, I will be working through the rest of the SIP, including new duties on Nominees and Supervisors.

Please note that, while I have attempted to cover the main changes in the SIP, there are several others not covered in my blogs – I think my posts are long enough already!  Therefore, you will need to scrutinise the SIP yourself to ensure that you have addressed all the requirements.

If you’d like to absorb all this in another medium, you might want to try out Jo Harris’ webinars on the subject.  Drop a line to info@thecompliancealliance.com to learn more.

Initial Advice

For whom is the IP acting?

I had always believed that, before acting as nominee, the firm’s primary role was to provide advice to the debtor.  The firm’s engagement is with the debtor and, I thought, the regulators were concerned to ensure that firms acted in the interests of debtors – the old SIP3.1 did state that this was the role of the adviser.

Para 16a of the new SIP redefines the role of the firm in the advice stage to:

  • “providing advice that strikes a fair balance between the interests of the debtor and their creditors”

Doesn’t this conflict with how the FCA would expect firms to deliver debt counselling to consumers?  For example, if a debtor would be better-off financially going bankrupt and in reality there are no real downsides for them in going bankrupt, is it appropriate for an adviser to say: ah yes, but if you paid into an IVA for 5 years, this would be fairer to your creditors, wouldn’t it?

Generic -v- specific information

The SIP states that IPs “should minimise generic explanations and instead provide bespoke advice tailored to the debtor’s circumstances” (para 11) but also that IPs “should avoid using generic advantages and disadvantages and should use the details provided by the debtor to provide bespoke information tailored to the debtor’s circumstances” (para 17).

So: minimise or avoid?

Many pros and cons of the options available apply in all circumstances.  For example, DROs and bankruptcies cost the same for everyone; a DMP can never be guaranteed to freeze all interest and charges; and no IVA will take effect unless 75% or more of creditors by value approves it.  Does this make the information generic?  Or does it just mean that no specific tailoring is required?

Of course, several other pros and cons do depend on the debtor’s circumstances, e.g. whether or not their occupation could be affected, how their home will be handled, whether an option can or will realistically deal with their debts and over what likely period. 

I think that most firms’ procedures were already designed to deal with the big debtor-specific issues.  However, in the past when advisers followed a script that rattled through each option, those details were often generic, including wriggle words such as: some occupations can be affected by bankruptcy.  Also, when that advice was put down in writing, it tended to be yet more generic, largely relying on standard guide attachments detailing all options.

Now this will not do.  Telephone/meeting advice must be specifically tailored so that pros and cons that do not apply to the debtor are omitted and so that the debtor can make realistic comparisons of their options.  The “bespoke information tailored to the debtor’s circumstances” must also be confirmed in writing (para 17).

All “available” or “potential” options?

In some respects, the SIP’s requirement to cover the options has not changed.  It still says that debtors must be “provided with an explanation of all the options available, the advantages and disadvantages of each, and the likely cost of each” (para 16g).  In the past, this has been interpreted to mean, e.g., that if a DRO is not available to the debtor because they do not meet the criteria, then no more information on DROs needs to be provided to the debtor.

However, this seems no longer to be the case.  Paras 4 and 5 require explanations to cover “all potential debt relief solutions” and under “Preparing for an IVA” the SIP states that the debtor needs to have had appropriate advice “including other options which have been discussed and discounted” (para 18a).  “Discount” is a peculiar word to use, but these paras suggest to me that all potential options available to debtors in general should be covered with specific information about why an option may not be open to the debtor in question.

Something that I have seen work quite well but is by no means universal is where the initial advice gives an estimate of the time it would take to discharge all debts via a DMP.  This is bespoke advice and usually helps to illustrate why the debtor has chosen not to pursue a DMP.  I think it is also “comprehensible to the debtor”, which is another new requirement of SIP3.1 (para 10).

New items to add to initial advice scripts and letters

There are a host of other new items for initial advice scripts and letters scattered through several paragraphs in the SIP.  Here are the main changes in paras 10, 15, 16 and 18:

  • “whether the debtor will require additional specialist assistance, which will not be provided by the supervisor appointed, including the likely cost of that additional assistance, if known”
    • Although the footnote to this requirement refers to “for example, support for a vulnerable individual”, the “specialist assistance” reference appears to have originated from the SIP3.2 (CVAs) changes.  Therefore, I think it could include instructing agents or solicitors to deal with asset realisations (if this is envisaged for the IVA) or known legal issues.  It should also add transparency to any firm that outsources work or introduces unusual tasks as routine on IVAs.
  • “how [the likely duration of the IVA] might be affected by any provisions concerning the family home contained in the arrangement” 
  • “any circumstances which might affect the duration of the IVA and the potential impacts of any delays, complications or changes to the original IVA terms”
    • This is slightly different from the old SIP3.1, which only required the potential delays or complications to be explained, not their potential impacts on the IVA and particularly on its anticipated duration.
  • “the likely costs of implementation and how realisations will be applied to them”
  • that the debtor is required to provide “full, accurate and proper disclosure”
  • “explanations of any areas of concern about what the debtor has reported…” – another matter requiring special case-by-case attention – “… and of the consequences if the debtor fails to comply with their obligations”
  • “an assessment of the risk of failure”
    • Before the Proposal has even been drafted, IPs are expected to assess the risk of its failure?!  It would be fair to inform debtors that there is always a risk that creditors reject an IVA Proposal, but this would not be a failure of the IVA.  If a debtor cannot meet their core obligations, there is always the option of asking creditors to approve a variation.  Ok, there is a risk that creditors would reject the variation, but how do we assess this risk at this early stage of providing initial advice?  I suppose also that the IVA could fail if a debtor provided seriously misleading information or simply refused to cooperate, but again how are IPs supposed to assess the risk of this happening?  An RPB staff member suggested this was intended to encompass obvious changes in the debtor’s circumstances that would lead to inabilities to meet terms, e.g. looming retirement or a serious illness.  But if an IVA is considered an option for anyone, its terms surely will accommodate such events where reasonably expected and the terms should always provide for variations for unexpected events, shouldn’t they?
  • the debtor’s “right to challenge a creditors’ decision and to make a complaint via the Insolvency Complaints Gateway”
  • the SIP’s new definition of the role of the adviser – “providing advice that strikes a fair balance between the interests of the debtor and their creditors, in the context of identifying an appropriate and workable solution” to their difficulties – must be disclosed to debtors (and creditors)
  • explaining that the debtor is obliged to cooperate and provide full “and accurate” disclosure “throughout the initial process and the duration of the IVA”
  • ensuring that the debtor understands that the IVA “will involve a lengthy professional relationship with the supervisor”

While many of these may already have been covered in firms’ scripts and/or letters of advice, it is worth double-checking that those docs tick off every item including the new nuances suggested by the revised wording.  In some respects, this could be like approaching a JIEB question: there are specific trigger words that some (i.e. RPB monitors) would expect to see in your docs and, if they’re there, you get the tick.  I appreciate this is not how the RPBs want firms to approach compliance with the SIP, but, really, it is difficult to see how we can deliver the enormous prescriptive list of information in a practical, useful, way to debtors.

Providing “adequate time”

The SIP has a new principle, that debtors should be given:

  • “adequate time to think about the consequences and alternatives before an IVA proposal is drawn up” (para 4)

How much time is adequate?  Do we only learn that the time given was inadequate when someone complains that they didn’t have enough time?

Does the rest of the SIP explain application of this principle?  The only other SIP reference to time is that the explanations of options’ pros and cons etc. “should be confirmed to the debtor in writing no later than the date on which an IVA proposal is issued” (para 17).  Which IP is sending out IVA Proposals before advice letters?!

Although compliant with para 17, I would not expect that sending advice letters and IVA Proposals at the same time would meet para 4’s requirement for adequate time.  So we are no further forward in determining this.

It seems likely to me that most debtors, having decided to go with an IVA, just want to get on with it asap.  I accept that many debtors do not give as much attention to their options as they should, but you can only lead a horse to water, can’t you?

Most IVA engagement letters acknowledge consumers’ rights to a 14-day cooling-off period and provide that the debtor can instruct the firm to start work immediately.  If the debtor signs the engagement letter, does this act as confirmation that they have had adequate time?  If an engagement letter makes clear that this is what the debtor is confirming, then would this satisfy the RPBs?

Vulnerable debtors

A common criticism of the old SIP was that it did not include any duties in dealing with vulnerable debtors.  Personally, I did not see that it needed to, as this is implicit in the Ethics Code’s principles of professional behaviour, integrity, professional competence and due care.  But evidently this was not enough.

The new SIP now contains three references to vulnerability.  As explained earlier, support for vulnerable persons should be mentioned at the advice stage where additional specialist assistance will be required.  The second reference is in the context of meetings (see below).

The other mention of vulnerability appears in the “Assessment” section:

  • “whether the debtor is subject to any factors that make them vulnerable and, if so, any necessary adjustments and, subject to the debtor’s consent, an accurate record of the vulnerabilities disclosed”

Most volume providers will already have procedures and staff training in place to address debtors’ vulnerability needs and it is about time that all other firms take these measures too.  After all, IPs and their staff can encounter vulnerable people in situations other than IVAs.

SIP3.1 assessments

In my experience, this has always been an area that has been poorly documented.  The old SIP3.1 required procedures to ensure that assessments of a list of six factors are made “at each stage of the process”, i.e. at assessing the options available, preparing the IVA and implementing the IVA.  I rarely saw formal documentation of these assessments and on cases where the goalposts were moved e.g. where some horse-trading with a creditor was necessary, I rarely saw that the old SIP’s assessments, e.g. the viability of the evolving IVA when compared with other available options, had been carried out.

In addition to the vulnerability point above, the list of factors for these assessments has changed:

  • “whether the debtor is being sufficiently cooperative” has been removed
  • “whether the debtor is likely to be able to fulfil their obligations under the terms of the arrangement for its duration” has been added
  • the IVA’s prospect of being improved and implemented has changed to “successfully” implemented
  • “whether a breathing space… is needed or available” has been added to the same considerations for an interim order

The old SIP did not state explicitly that these assessments had to be documented.  The new SIP does.  It also suggests that such assessments may be “conducted by way of a” call, in which case a call recording or note of the call should be retained.

Meetings in the 21st century

The old SIP wasn’t broken as regards meeting the debtor, but it was certainly dated.  It required IPs to assess at each stage of the process whether a face-to-face meeting with the debtor was required.

“Face-to-face” has been replaced with “in-person meeting (whether a physical meeting or using conferencing technology)” (para 13).  Is “in-person” any different from “face-to-face”?  Online dictionaries appear to define them the same, i.e. the attendees must be physically present in the same place, not via the internet or telephone.

Ok, so it’s clear that the SIP uses in-person in a different way to common dictionaries and it doesn’t limit in-person to physical meetings, but what does it mean by “conferencing technology”?  A conference can be conducted by telephone, can’t it?  So, for the SIP’s purposes, does a telephone conference of just the adviser and the debtor constitute an “in-person meeting”?

Does it matter?

No, not really.  If an in-person meeting is assessed as required – for example, per SIP3.1, based on the debtor’s understanding and vulnerability – then obviously the IP/staff should request one.  If in-person excludes a telephone call but the IP/staff considers that a telephone call would be sufficient for their purposes, then this still complies with the SIP, as it merely means that the IP/staff have assessed that an in-person facetime etc. is not required.

What is important is that “all these meeting considerations and arrangements should be evidenced, documented and retained on the file”.  Therefore, it is something to add to the SIP3.1 assessments form.

Where someone else does the advising

Another historically contentious topic has been the diligence measures expected of IPs who are introduced to potential IVAs by other parties.  It seemed to me that two practices became prevalent: either the IP firm would develop relationships with introducers who they could trust to provide appropriate advice, basing that trust on direct involvement with the introducers’ processes and/or quality control measures of sample testing and mystery shopping; or the IP firm would treat the debtor as having received no advice previously, so they would start from scratch working through the SIP3.1 initial advice with the debtor. 

The new SIP makes the former approach troublesome and effectively eliminates the latter approach. 

Firstly, SIP3.1 requires IPs to “undertake sufficient due diligence on any referrer to identify whether they have advised the debtor” (para 12).  I wonder if it is considered sufficient simply to ask them.

Then, where a referrer has provided advice, para 12 requires that:

  • Contractual arrangements between the IP and the referrer “should extend to the insolvency practitioner maintaining access to all the referrer’s communications with the debtor, including call recordings or detailed written notes where calls were not recorded and transcripts of webchats or other communications were undertaken”
    • How many IPs enter into contractual arrangements with referrers?  Aren’t contracts normally with the firm?
  • “Any shortcomings in the advice… should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • This seems to require the referrer’s advice in every case to be reviewed by the IP/firm.  This is a tall order, isn’t it?  Firms are going to have to devote significant staff resources to reviewing advice given, as this could take as much time as it would to give the advice in the first place.

But can’t an IP simply ignore any advice given by the referrer and start from scratch?  This does not seem possible under the SIP, as the above are required “where advice was given by the referrer”.  It does not seem to matter if the IP chooses to rely on that advice as discharging their SIP3.1 advice duties or not.

It will be interesting to see how the referral market changes as firms start implementing the new SIP.

UPDATE 21/07/2023: Having had some exchanges with an IPA regulation staff member, I feel I should add to my comments above.  The IPA staff member explained that they do not expect the advice of the previous person to be examined every time.  Rather, the IP should have an awareness of the previous person’s advice-giving practices and policies (as well as having access to records of the advice given in any one case).  They expect IPs to have a proportionate approach to monitoring compliance and a procedure for flagging up any issues if concerns are identified.  This expectation seems to be a reactive, rather than proactive, approach to examining previous advice, e.g. taking steps if complaints are received or if communication with a debtor suggests a misunderstanding.  If flaws are identified, the remedy could be to start from scratch in providing appropriate advice, but if this becomes commonplace where a particular introducer’s advice is encountered, then the expectation is that the IP would consider whether they should discontinue receiving introductions from that source.

What about referrers’ FCA authorisations?

Over the years, the RPBs have grappled with the question of whose responsibility it is to police the FCA authorisations of IVA referrers.  The Protocol (Aug 2021) dealt with the issue unsatisfactorily, directing that IPs “should take steps to ensure” that all referrers (i.e. debt packagers and lead generators) should be FCA authorised, but it then went on to state that, if they were not authorised, the IP could simply give the advice themselves. 

To a degree, I sympathised with this approach.  After all, why should a consumer be turned away simply because they had the misfortune to encounter an unregulated introducer?

In its April 2021 members’ newsletter, the IPA published an article by the then-CEO stating:

  • “Insolvency marketing… Any introducer, or lead generator, firm that is employed by a member should be FCA regulated. The reason why we have taken this step is to respond to some evidential unscrupulous introducer activity, not compliant with how insolvency advice and solutions should work for the consumer.”

I made enquiries of IPA staff: did they truly mean this for all insolvency appointments (even corporate cases??) of IPA members and how did they enshrine this new requirement into their regulatory framework?  I learned that this was a standard on their “volume providers” only.

So I was not surprised to see some new measures in the revised SIP (para 12):

  • Where a referrer has provided advice, the IP should identify “whether [the referrers] are required to be authorised by the… FCA for debt counselling or are able to rely on an exclusion or exemption in relation to the debt advice”
    • Are we all clear on when an exclusion or when an exemption applies?  What about the difference between giving information and giving advice?  This isn’t just an internal assessment; the new SIP means that we need to know in order to draft the Proposal (see later)
  • “The referrer’s authorisation status should be evidenced, or details sufficiently documented and retained in each case”
  • “Any shortcomings in the advice, including in relation to the referrer’s authorisation, should be remedied by the insolvency practitioner giving appropriate advice themselves”
    • What does this mean practically where there are shortcomings in relation to the referrer’s authorisation?  Does it mean that whenever a referrer does not have the correct authorisation (or exclusion or exemption), the IP simply starts from scratch in providing advice?  This would make the need to review the advice pretty pointless, wouldn’t it?  …unless IPs are being expected to do something more, e.g. report the referrer for providing advice without authorisation?  Or should IPs do this in all cases anyway, irrespective of whether there were any shortcomings in the referrer’s advice?

There’s more

In my next post, I shall look at the other changes to the SIP, particularly those affecting the IVA Proposal and the Supervisor’s duties.


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The Rules’ complexities: get used to them!

In their report on the 2016 Rules’ review, the Insolvency Service all but acknowledges that some of the Rules leave IPs playing Twister, being forced into shapes that just won’t fit.  However, there are few admissions that things need to change.  Generally, all we can hope for is a review-on-the-review, which will consider further what, if anything, should change.

In this article, I cover:

  • The CVL process – top of the InsS’ list for change
  • The InsS maintains a general reluctance to fix fees
  • The new decision processes – successful or too complicated?
  • The InsS sees few problems with committees, dividends, the lack of prescribed forms, SoAs and personal data
  • But there are a handful of odds-and-sods that the InsS intends to change

The InsS report on their review can be found at https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

My personal consultation response is at https://insolvencyoracle.com/consultation-responses/

CVLs to change

One area that the InsS does appear committed to change is the CVL process.  In scope for consideration are:

  • The fact that the Rules only empower an office holder, not a director (or an IP acting on their instructions), to deliver documents by website
  • The fact that, although the Temporary Insolvency Practice Direction allows remote statutory declarations, a more permanent change to verifying Statements of Affairs would be beneficial
  • The fact that the Rules do not provide for the liquidation estate to pay any non-R6.7 pre-appointment expenses, e.g. the costs of seeking the shareholders’ resolution to wind up
  • Some respondents’ requests for more time to consider S100 decisions and SoAs

I find the last point a irritating: the new Rules’ S100 process for commencing CVLs is already more creditor-friendly than the IR86’s S98.  Now, the Statement of Affairs must be received by creditors at the latest the business day before the decision date, whereas under the IR86 the SoA only needed to be provided to the meeting.  Also, the new Rules’ 3-business-days-between-delivery-and-the-decision-date means that the notice period is usually one day longer than it was under the IR86. 

True, few CVLs need to happen quickly, but an extension in the period really must be accompanied by wider scope for the advising IP’s costs, as well as those of agents and solicitors, to be paid from the estate where the work is done with a view to the CVL.

 

A lacklustre response on fees

It was disappointing to read the InsS’ opening comment on the general subject of fees that:

“It is not certain that the rules on a necessarily moderately complex topic can be made clearer”. 

Pah!  You’re just not thinking hard enough, guys.

But at least we have some comfort that the InsS has “particularly noted concerns around rules 18.24 to 18.27 on changes to the bases of remuneration”, a topic on which I have blogged on several occasions, and they propose to review these fees rules “at a future date”.

While the InsS notes “concerns that the new Rules are not effective for small cases, including the absence of the ability of remuneration in a CVL to default to Schedule 11 scales”, they stated that “stakeholders”suggested “that reintroducing this measure… would make the process more complicated”.  Strange, I’m not sure why anyone would be against this measure.

They also stated that it might make “the process burdensome and more expensive rather than more efficient” if the rules were to provide different fee criteria for small cases, although the report does not make clear to what suggestion this was alluding. 

In my consultation response, I had suggested a de minimis statutory fee (after all, the OR has a set fee of £6,000) in recognition of the basic statutory and regulatory requirements of all CVLs, BKYs and WUCs.  This IP statutory fee either could be granted as automatic or, if the InsS weren’t comfortable in taking off all the reins, could be approved using the deemed consent process.  Personally, I was not suggesting different fee criteria for small cases, I was suggesting that this could be the standard for all cases, leaving the office holder to seek approval in the usual way for any fees above this de minimis level. 

I’m not entirely surprised that they’ve ignored such a suggestion from little me.  However, to suggest that there is no process by which the Rules could be changed to help IPs avoid the burden and expense of seeking the court’s approval where creditors refuse to engage in a decision procedure on fees is disappointingly defeatist and, I suspect, reflects a persistent lack of understanding of the difficulties encountered by many IPs.

Not even fees estimates to change

The report also noted that several respondents had made suggestions to simplify the fees estimate requirements.  The InsS gave several reasons why they felt there should be no changes, including:

  • the fees estimate provisions align with the statutory objective that regulators ensure that IPs provide high quality services at a fair and reasonable cost (hmm… does spending truck-loads of time creating a fees estimate pack really achieve this?);
  • “the level of fees charged by officeholders have often been a cause of complaint amongst creditors and sanctions by their regulators” (“often”?  Really??  The InsS Regulatory Report for 2021 reported that 5 out of 423 complaints were about fees and only one of the 53 regulatory sanctions listed was about the level of fees); and
  • “amending the Rules in the ways that have been suggested would have the effect that creditors would once again find it difficult to scrutinise and challenge remuneration due to a lack of timely information”. 

It’s a shame that the InsS appears to view the time that IPs spend in complying with the copious information requirements as time – and cost to the estate – well spent.

The case for physical meetings

Before the new Rules came into force, I think that many of us thought that removing the power to convene a physical meeting and replacing this with a variety of decision processes was unhelpful and an unnecessary complication.  Although the InsS report indicates that these views have persisted, personally I think that 5 years of experience with the new decision processes, as well as the pandemic lockdowns, has led many of us to think that maybe this new normal of decision-making isn’t so disastrous after all. 

But I do struggle to accept the report’s contention that “there is some suggestion that the new processes have not been detrimental to creditor engagement”, unless by “engagement” they simply mean “voting”.  It seems the InsS is arguing that correspondence and deemed consent decision processes “may encourage creditor engagement precisely because they reduce the need to spend time and money actively interacting with officeholders in cases of lesser interest”.  Hmm… this might explain why it seems that some creditors lodge objections to deemed consents and then fail to engage when the IP is forced thereafter to convene another decision procedure. 

I also had to smile at the InsS’ suggestion that the increased number of creditor complaints over the complexity of the decision processes may actually reflect creditors’ increased interest in engaging!

Decisions, decisions…

Fundamentally, the InsS report concludes that the new processes require no material changes.  In particular:

  • The InsS is happy with the 11.59pm cut-off time;
  • The InsS is happy that non-meeting votes cannot be changed (R15.31(8)); they state that, to provide otherwise “would require a framework to govern exactly how and when that could happen” (Would it really?  It’s not as if we have a framework for changing a vote submitted by proxy, do we?)
  • The InsS is happy that there is no ability to adjourn a non-meeting process; they consider that “naturally officeholders would not use a non-meeting process where there was any indication that an adjournment might be needed”
  • The InsS is happy that their Dear IP 76 encouragement for IPs to take a pragmatic approach as regards the statutory timescales for delivering documents to overseas creditors is sufficient
  • In response to some comments that office holders would value the discretion to convene a physical meeting, the InsS believes that at present “the restriction on physical meetings is operating correctly, this does not rule out future changes in this area”

But the InsS has indicated that a couple of suggestions are worthy of further consideration:

  • That creditors with small debts should not be required to prove their debt in order to vote
  • Fixing the apparent inconsistency in requiring meetings, but not non-meeting decision procedures, to be gazetted

Information overload

The InsS report does acknowledge that “information overload” as regards creditors’ circulars for decisions is “a core concern”.  However, they suggest that this is in part because some IPs “are still in the process of determining how best to use and present the new decision-making options”.  Charming!  But, InsS, you cannot escape the truth that the new Rules require an extraordinary amount of information – R15.8 alone covers a page and a half of my Sealy & Milman!

Surely we can cut out some of the gumpf, can’t we?  For example, some people raised the point that R15.8(3)(g) requires pre-appointment notices to include statements regarding opted-out creditors even though no such creditors would exist at that stage.  The InsS suggests the solution lies in adding yet further information in such notices if IPs “think that reproducing the literal wording of the rules could cause confusion”. 

This implied confirmation that IPs do need to provide such irrelevant statements in notices is frustrating, given that the court had previously expressed the view (in re Caversham Finance Limited [2022] EWHC 789 (Ch)) concerning the similarly irrelevant requirement of R15.8(3)(f) for notices to refer to creditors will small debts:

“I think that Parliament cannot have intended that redundant information should be included on the notice”. 

Well, the InsS has spoken: they do require such redundant information.

Are decisions like dominoes?

I love it when the InsS writes something that makes me go “ooh!” 

The report describes the scenario where a decision procedure was convened to address several decisions, but then “a physical meeting is requested in one of those decisions but not the others”.  Someone had suggested that the physical meeting be convened to cover all the original proposed decisions or that the Rules make clear that the request applies only to one. 

The InsS has responded that they consider that:

“the Rules are clear that each decision is treated separately for the purposes of requests for physical meetings”. 

While I can see this from Ss 246ZE(3) and 379ZA(3) – these refer to creditors requesting that “the decision be made by a creditors’ meeting” – I have not seen this being applied in practice. 

So this means that every time a creditor asks for a physical meeting, it seems the director/office-holder should ask them what decision(s) they want proposed at the meeting and, if there are any decisions that they don’t list, then these decisions should be allowed to proceed to the original decision date.  Interesting.

What about concurrent decision processes?

The report noted comments that the Rules are unclear as to whether a decision procedure can run concurrently with a S100 deemed consent process in order to seek approval of pre-CVL expenses or the basis of the liquidator’s fees. 

The InsS’ reaction to this issue is curious.  The report merely flags the “risk” that the decision procedure on fees would be ineffective where the creditors nominate a different liquidator to that resolved by the company (would it?  Why??). 

So… does this mean that the InsS doesn’t see any technical block to these concurrent processes?  Are we any clearer on this debate that has been running since 2017?

What about the reduced scope for resolutions at S100 meetings?

The report notes that the new Rules have excluded the IR86’s provision that S98 meetings may consider “any other resolution which the chairman thinks it right to allow for special reasons”, which was previously used as the justification for S98 meetings also considering the approval of pre-CVL fees.  Does this omission affect the ability for fees/expenses decisions to be made at S100 meetings?

The InsS’ response to this one is equally cryptic.  They appear to be saying that, as “rule 6.7 now includes expenses that were omitted from the Insolvency Rules 1986”, the “any other resolution” provision is no longer necessary. 

I don’t get it: R6.7 is no wider in scope than the old Rs 4.38 and 4.62, so there’s no remedied omission as far as I can see.  The problem is that the new Rules still lack an explicit provision that the initial S100 meeting may consider other resolutions, such as approval of the R6.7 expenses and indeed the basis of the liquidator’s fees.  At least it’s nice to have the InsS’ view that there is no problem, I suppose!

Committee complexities

The InsS report does not pass comment on whether respondents’ questioning “the value of continually requesting that creditors decide whether to create a committee” was a good point worth taking forward.

The report does suggest that the InsS won’t be taking forward issues around the establishment of a committee where there are more than 5 nominations.  The InsS considers that the decision in Re Polly Peck International Plc (In Administration) (No. 1), [1991] BCC 503, “remains relevant”.  This decision concluded that, “where more nominations are received than available seats on the committee, that a simple election should be held with those nominees who receive the greatest number of votes (by value) filling the vacancies”.  Ah yes, the simple election – simples! 

The more recent decision, Re Patisserie Holdings Plc (In Liquidation) ([2021] EWHC 3205 (Ch)), suggests that even where fewer than 5 nominations are received, those nominations will only be decisive where they have been made by the majority creditors.  Therefore, it seems to me that we are still left with a cumbersome committee-formation process stretching over two decision processes.

No going back on prescribed forms

The InsS is of the view that the decision to abolish prescribed forms was the correct one.  The report states that there does not appear “to be truly widespread difficulty” and they maintain that their impact assessment had accommodated the familiarisation cost appropriately. 

Although I think this unfairly plays down the impact on small businesses, I do think the boat has sailed on this debate.  I would have loved the InsS to have provided optional templates to support the prescribed content rules, but given that even the InsS’ own proof of debt form does not help creditors to meet all the Rules’ requirements, it is probably safer that they did not.

No easy fixes for dividends

An age-old bugbear is the hassle for all parties where a dividend payment is paltry.  It does the profession no favours when office holders are required to post out cheques for sums smaller than the postage stamp. 

I understand that the InsS did consider the pre-IR16 request to provide a statutory threshold for dividend payments below which they need not be paid.  But I’d heard that this had been considered unconstitutional, as every creditor has the right to the dividend no matter how small.  Instead, the InsS gave us the “small debts” provisions, which I think do the opposite and only increase the likelihood that office holders will be sending small payments to creditors who consider it is just not worth their trouble. 

This time around, it was suggested to the InsS that creditors be entitled to waive their dividend rights in favour of a charity or that this process could be automatic for payments below a certain amount.  The InsS rejected this suggestion, citing that it would simply add a different administrative burden onto office holders and creation of an automatic process would impair creditors’ rights to repayment.

The report does a good job of explaining why a NoID for an ADM must be sent to all creditors, not just those who have not proved as in other cases.  This is because the ADM NoID triggers the set-off provisions of R14.24, so all creditors need to know about it.  So no change there either.

Some respondents commented on the generally unnecessary duplication of requiring employees to submit proofs even though the IP receives information about their claims sent to the RPO.  This is an area that the InsS has noted for future consideration.

SoAs and personal data

I’m sure we remember the kerfuffle created by Dear IP chapter 13 article 97, which seems (or attempts) to grant IPs the discretion to breach the Rules requiring the circulation to creditors of personal data in Statements of Affairs.  Well, it seems that the InsS has already forgotten it.

As regards suggestions that the Rules might restrict the circulation of the personal details of employee and consumer creditors, the report states that the InsS is:

“satisfied that the current balance struck by the Rules remains an appropriate one” 

Oh!  So does that mean they will be recalling the Dear IP article?

Respondents also raised other concerns regarding the disclosure of personal details:

  • the requirement for non-employee/consumer creditors’ details to be filed at Companies House, so this would include personal addresses of self-employed creditors etc.
  • the need to disclose an insolvent individual’s residential address on all notices
  • the fact that, if the InsS is truly concerned with creditors being able to contact each other, then wouldn’t email addresses be more relevant?

The report states that “these issues will remain under consideration for amendment in future updates to the Rules”.

The opt-out process: who cares?

In my view, far too much space in the report was devoted to explaining the feedback of the creditor opt-out process, with the conclusion that the InsS “will give further thought to whether there should be any changes to, or removal of, these provisions”. 

I was not surprised to read that few creditors – “less than 1%” (personally, I would put it at less than 0.1%) – have opted out.  One respondent had a good point: don’t the opt-out provisions give the impression “that information provided by officeholders has no value or interest”?  Even the report referred to creditors opting out of “unwanted correspondence”.  Doesn’t this suggest something more fundamental, that in many respects the Rules are overkill and that communications could be made far more cost-effective?

Odds-and-sods to fix

The report acknowledged the following deficiencies in the Rules… or in some cases the InsS admitted merely the potential for confusion:

  • ALL: the court’s ruling in Manolete Partners plc v Hayward and Barrett Holdings Limited & Ors ([2021] EWHC 1481 (Ch)), which highlighted the limited scope of “insolvency applications” in R1.35 leading to additional costs – this issue has been singled out by the InsS as being one of the “most pressing” to resolve
  • ADM: the requirement for the notice of appointment of Administrators to state the date and time of their appointment – in view of the expansive comments by the courts on this topic, it is surprising the InsS only intends to “give further consideration to removing this requirement”
  • ADM/CVL/MVL/WUC: oddly, the report states that, as R18.3(1)(b) does not explicitly require a progress report to include details of the company (but just the bankrupt), this “gives the appearance of an error so may be confusing”.  However, R18.3(1)(a) states that reports need to identify “the proceedings”, which under R1.6 includes information identifying the company, so I don’t understand the problem.  In contrast with some of the items mentioned above, the InsS apparently thinks that this issue is of such significance that they “will look to rectify this in a future update to the Rules”.  Guys, where are your priorities?!
  • CVL: “The differing use of the word ‘between’ in rules 6.14(6)(a) and 15.4(b)” (i.e. in one case, the InsS believes it does not include the days either side of the “between”, but in the other case, I think they believe it does) – the InsS has set aside for further review whether the contexts make this inconsistency sufficiently clear
  • BKY: the fact that R10.87(3)(f) lists the contents of a notice being that the Trustee will vacate office once they have filed a final notice with the court, but the Act/Rules do not require the Trustee to file such a notice
  • BKY/WUC: the 5-day period in which to nominate a liquidator or trustee after the date of the OR’s notice – the InsS acknowledged that the short timescale has caused issues (indeed! Especially considering this seems to be the only Rules’ timescale that does not start on delivery of the notice, but rather on the date of the notice)
  • CVA/IVA: Rs 2.44(4) and 8.31(5) appear to have caused some confusion as they now state that a supervisor “must not” (previously: “shall not”) vacate office until the final filing requirements have been met
  • CVA: the fact that there is no provision to file at Companies House any notice of a change of supervisor – again, the InsS’ response is surprisingly non-committal; they will merely “consider whether this justifies creating an additional filing requirement for officeholders”
  • IVA: R8.24 was overlooked in the EU Exit changes and still reflects the wording required when the UK was part of the EU

So much to do, so little opportunity

This article demonstrates the Insolvency Service’s long to-do list.  And this is only the Rules’ review.  Last month, the InsS issued a call for evidence on the personal insolvency framework and they will have a fundamental role in the statutory debt repayment plan process expected to be rolled by the end of this year… and of course no doubt behind the scenes they are working on the response to the proposed single regulator consultation. 

With such high profile projects, when on earth are they going to find the time to get back to the Rules?!


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HMRC guidance note on S100 notices: what exactly does it mean?

I’m sure you have all seen the HMRC guidance note, “Deemed Consent Procedures”, but what does it actually mean?  I have asked HMRC and received some answers.

The guidance note can be found at: https://www.icaew.com/-/media/corporate/files/regulations/regulatory-news/april-2022-deemed-consent-procedures-update.ashx (amongst other places).

“Deemed Consent Procedures” only?

R3 notified members of the guidance note under the heading, “HMRC Insolvency Guidance – Deemed consent procedures”.  Similarly, the IPA piece read: “HMRC update: we draw your attention to an update from HMRC on deemed consent procedures” and the ICAEW news heading was “April 2022: Deemed consent procedures update”.  The emphasis on the deemed consent process in the R3/RPB emails was not surprising given the title of the HMRC note, but does this reflect HMRC’s message?

Firstly of course I think it can be assumed that HMRC was not writing about all deemed consent process notices, e.g. notices proposing to extend an administration.  The note’s contents make clear that it applies only to “initial notification of a CVL”, by which I assume they mean the pre-CVL S100 notice, not the initial notification after the CVL has begun.

But did HMRC intend the change to affect only S100 deemed consent notices?  Nowhere in the HMRC note was any mention made of virtual or physical meeting notices.

A changed email address?

The original Dear IP article (chapter 8 article 26) and corresponding R3/RPB bulletins that notified us of the HMRC request to email S100 notices gave an email address of notifications.hmrccvl@hmrc.gsi.gov.uk, whereas the latest guidance note gives a different address: hmrccvlnotifications@hmrc.gov.uk (and incorrectly states that this was the email address that was given in January 2018).

Has HMRC got the email address in its new guidance note wrong?  Or have they changed the email address?  At present, the old one works.

HMRC’s response

After a couple of attempts, HMRC responded to my queries as follows:

Our recent comms note should have reflected the same instruction as the Dear IP article, with the only difference being that we now want IPs to stop using the mailbox where there is a compliance interest (as defined in our recent comms note). HMRC would like all S100 notices to be delivered in the same manner and to a compliance caseworker or the mailbox where there is no active interest.

Thank you.  So we can ignore the misleading title of the HMRC guidance note: all S100 notices – for virtual or physical meetings and for deemed consent processes – should be emailed to their mailbox or, where there is a compliance matter, delivered to the HMRC caseworker.  I also gather from this response that the email address is the one described in the Dear IP article.

What is the practical effect of the change?

Ok, setting aside my gripes about the wording of the note, what change is HMRC looking for? 

With effect from 1 June 2022, as quoted above, on prospective CVLs where there is an HMRC compliance interest, HMRC would like the S100 notice to be sent to the compliance caseworker, not emailed to their mailbox.

This will mean some more diligence when preparing for a S100 to establish whether there is a compliance interest and, if so, to get the details of the HMRC caseworker. 

The HMRC note states that a compliance matter “could be an ongoing compliance check or other correspondence regarding determination of the amount of any of the company’s tax liabilities”.  The words “could be” suggest to me that this is not an all-encompassing definition, but it seems to me that you could use this wording as a prompt in any questionnaire to directors to supply details of the caseworker where such a matter exists.

What if you don’t get full information from the directors?  Surely, all you can do is ask.

Will there be an update to Dear IP?

At present, the original Jan-18 HMRC request remains in the online Dear IP bank, at https://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26.  I asked HMRC if they would please publish an update to this article (and/or withdraw this obsolete article) also via Dear IP, preferably making absolutely clear what HMRC now wishes.

What about a central bank for HMRC guidance notes?

While we’re on the subject, do you find it as frustrating as I do that there is no central bank for all these HMRC guidance notes?  I now have a folder dedicated to all these missives, which seem quite randomly produced on all sorts of subjects.  HMRC also appears to rely on the RPBs and R3 to notify members of new notes, who then often need to relay these to staff members to action. 

Wouldn’t it be better if there were a dedicated free-access web space for all these notes especially for future reference, much like Dear IP?