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Translating statutory AML requirements into meaningful, effective application

Insolvency Support Services Director Eileen Maclean is looking forward to delivering the first IPA Learning online module of 2022 next month.

The “How do you translate the statutory AML requirements into meaningful, effective application?” session will take place on 22 February 2022 from 12:30 until 14:00.

We will cover how:

  • The legal requirements of the Anti Money Laundering Regulations can be put into practice in your business.
  • To develop practical policies and procedures that you can implement in your practice, allowing you to meet your legal obligations in a manner that enhances your business and is not unduly time consuming.
  • To address emerging AML risks in practice.

Do you want to benefit your insolvency practice by implementing efficient procedures to meet AML legal requirements? Book here

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Debt solutions and the impact on executries

Debt, and the Scottish statutory solutions that exist to deal with individual overindebtedness, has the perpetual attention of the Scottish Government and the wider Scottish Parliament.

In 2018 the Scottish Parliament’s Economy, Energy & Fair Work Committee refused to approve legislation replacing the common financial statement with the standard financial statement as the statutory common financial tool (CFT) in Scottish legislation. In response, in December 2018 Jamie Hepburn MSP, the Minister for Business, Fair Work and Skills, established the Scottish Statutory Debt Solutions Discussion Forum.

The Forum enables stakeholders, including insolvency practitioners (IPs), creditors and the advice sector, supported by officers from the Accountant in Bankruptcy (AiB), to discuss current issues around Scotland’s statutory solutions for personal insolvency and debt management.

PTD consultation

Following its consideration of the CFT and because of concerns arising therefrom, the committee turned its attention to protected trust deeds (PTDs) at the end of November 2019, conducting a short, PTD-focused inquiry in January 2020.

In May 2020, the committee published its recommendations and the Scottish Government responded in October 2020. A three-stage approach to review, improve and/or change was agreed, starting with introductory round table discussions, which will lead ultimately to a full review of the purpose and functionality of Scottish debt solutions.

Stage 2 saw the establishment of three working groups, tasked with the specific remit of considering PTDs, bankruptcy and diligence. The Society and the Insolvency Practitioners Association (IPA) are represented on group 2, considering certain of the committee’s areas of concern regarding PTDs. The discussions are wide ranging, reflecting divergent points of view.

PTD Protocol

In direct response to the committee’s report on PTDs, the AiB, working with the IPA as the foremost regulator of IPs providing PTDs, developed and introduced a new PTD Protocol, introducing operational changes to immediately address some of the committee’s recommendations.

Intended to promote good practice, improve transparency and enable trustees to manage debtor and creditor expectations in a PTD, trustees signing up to the Protocol agree that wherever practicable:

  • an interim dividend should be paid to creditors 12 months after commencement, and quarterly thereafter;
  • should a trustee decide to withhold the debtor’s discharge from the PTD, the trustee must first obtain the AiB’s agreement; and
  • IPs may only accept trust deed referrals from FCA-approved lead generator firms.

To date, eight firms have signed up, but with a reach of more than 80% in terms of the volume of providers.

Death of a debtor subject to a PTD

The committee took evidence on one specific case in which the debtor had died leaving behind a number of ramifications of an extant PTD for their beneficiaries. Group 2 was asked to consider whether PTD arrangements strike the appropriate balance between creditors and family members when a debtor’s death occurs during a PTD.

If a debtor dies during their bankruptcy or PTD, there is no change in the statutory requirement for the trustee to deal with assets of the estate. The trustee is still required to deal with creditor claims ahead of recognising any rights and entitlements of beneficiaries, per s 129 of the Bankruptcy (Scotland) Act 2016. The principle that creditors get paid ahead of beneficiaries or partners is well established – the law recognises that debt is a responsibility and that wherever possible, creditors should be repaid ahead of any individual benefitting in a personal capacity, as a beneficiary. The group agreed that the repayment of debt to creditors ahead of beneficiaries from a deceased’s estate is well established in different areas of the law and unanimously agreed that no changes are required to this principle.

What should executors do?

Group 2 recommended that the Scottish Government publication What to do after a death in Scotland be amended to explain the process where a debtor dies while subject to a PTD or bankruptcy. Ideally that wording should make it clear that an executor should check the Register of Insolvencies and the Debt Arrangement Scheme (DAS) register, for details of both the deceased and the beneficiaries, to establish whether any party is subject to insolvency or a debt payment programme before any money is paid out from the estate, to ensure that funds are not released to any party without reference to the trustee. The group has also recommended incorporating this process into legislation to ensure that such a check by executors is mandatory. It would be considered good practice therefore in any executry that this process should be adopted on a voluntary basis from now on. 

Authors: Anne Hastie, Law Society of Scotland Administrative Justice Commitee member, and Eileen Maclean, director of Insolvency Support Services and Insolvency Practitioners Association Standards, Ethics and Regulatory Liaison Commitee member.

This article was first published in The Law Society of Scotland’s Journal.

Insolvency Support Services directors to speak on New Ethics Code at IPA 2020 Virtual Roadshows

Insolvency Support Services Directors Eileen Maclean and Alison Curry are speaking about the New Ethics Code at the IPA’s 2020 Virtual Roadshows.

For more information and to book your place, click here.

Insolvency profession’s views on the moratorium and restructuring provisions in the Corporate Insolvency and Governance Act 2020

Introduction

Following the introduction of the Corporate Insolvency and Governance Act 2020 (CIGA) on 26 June 2020, Insolvency Support Services undertook research on the insolvency profession’s views of the moratorium and restructuring provisions in the new legislation. This paper provides a summary of the results of our research. To download a copy, click here.

A total of 42 respondents participated in the research. They represent a cross-section of specialist insolvency practitioner (IP) firms as well as accountancy and law firms with insolvency and recovery practices, ranging from small to very large organisations, across the whole of the United Kingdom.

Executive Summary

Use of the Provisions

It is clear that, at the time of our survey, most respondents did not know if they were going to use either of the new rescue procedures (60% Moratorium, 54% Restructuring). Of those who are intending to use the moratorium (31%) and restructuring (20%) provisions, there is a clear difference in the size of company in relation to whom it would apply: Moratorium – large 15%, SME 38%, Any company 46%, compared to Restructuring – large 63%, SME 0%, Any company 38%.

Moratorium Provisions

Proponents of the moratorium agree or strongly agree that its main benefits are (in order): speed and ease of entry, the ability to extend, and the valuable breathing space it will give companies.

Of those not minded to use the moratorium, the main reasons cited are the costs of monitoring being disproportionate to the benefits, and that directors do not consult early enough to get the benefit of a moratorium. The latter is a long-standing complaint in insolvency and reflects the old adage that the sooner someone seeks assistance in relation to their business, the higher the chance of rescue. For the moratorium to be effective therefore, directors need to seek advice early.

The moratorium can only be overseen by an IP, so despite responses, it will be incumbent on us to use the moratorium provisions, or we risk losing the exclusivity of the role to other professionals. However, the cost is going to be an issue, as is the actual remit of the Monitor.

It seems likely that a majority of moratoriums will be extended past the original 20 business days (as anticipated by 66% of respondents). Intuitively this seems right: unless a company can get very quick confirmation from its creditors to it proposals, in whatever form they might take, the vast majority of respondents (88%) think that a second period of 20 business days will be required.

Restructuring Provisions

It is clear that most respondents see the new restructuring tool being used at the higher end of the market. Of the respondents who will not be using the new provisions, 91% stated that it is because their client base is predominantly SME companies and directors. Although the SME market is not precluded from making a court application in terms of the new Part 26A Companies Act provisions, the Insolvency Service shares the view that this is intended for the large company sector. That means only certain firms (advisory and legal) will be assisting companies in this work.

Those intending to use the provisions see the main benefits as the ability to bind dissenting creditors to the plan, and the ability to remove creditors with no economic interest in the company. It will be interesting to watch the market’s response, as well as that of the courts, to the impact these new provisions will have on lenders and suppliers going forward, once the implications are fully understood.

Research Findings: Moratorium Provisions

1. Will you be using the new moratorium provisions?

Three in five (60%) of respondents indicated that they do not know if they will be using the new moratorium provisions, while 31% said that they will be using them, and 10% stated that they will not.


% respondents (%s do not add up to 100% due to rounding)

 

2. To what extent do you agree that the new moratorium provisions are likely to bring the following benefits?

Those respondents who said that they will be using the new moratorium provisions mostly agreed that they bring several benefits, with all respondents agreeing that speed of entry into moratorium is an advantage of the new provisions. However, a small number of respondents did not agree that the provisions will provide ease of entry into moratorium, valuable initial breathing space or the ability to extend as circumstances require.


% respondents (%s do not all add up to 100% due to rounding)

 

3. For what size of company do you anticipate using the new moratorium provisions?

Just under half (46%) of the respondents who said that they will be using the new moratorium provisions anticipate using them for any size of company, while 15% expect to use them mainly for large companies and 38% mainly for SMEs.


% respondents (%s do not add up to 100% due to rounding)

 

4. Why will you not be using the new moratorium provisions?

Those respondents who said that they will not be using the new moratorium provisions cited several reasons, the main ones being the cost of monitoring being disproportionate to the benefits and not being consulted early enough by directors to get the benefit of a moratorium.


% respondents

 

5. Do you think that the initial period of 20 business days will be long enough?

Almost two thirds (66%) of respondents think that the initial period of 20 business days will not be long enough, while just under a quarter (24%) think it will be sufficient, and the remaining 10% do not know.


% respondents

 

6. Do you anticipate that an extension of a further 20 business days will happen in most cases?

The majority (88%) of respondents anticipate that an extension of a further 20 business days will happen in most cases. Only 5% do not expect an extension, and 7% do not know.


% respondents

Research Findings: Restructuring Provisions

7. Will you be using the new restructuring provisions?

Just over half (54%) of respondents indicated that they do not know if they will be using the new restructuring provisions, while 27% said that they will not be using them, and only 20% stated that they will.


% respondents (%s do not add up to 100% due to rounding)

 

8. To what extent do you agree that the new restructuring provisions are likely to bring the following benefits?

Those respondents who said that they will be using the new restructuring provisions mostly agreed that they bring several benefits. The ability to bind dissenting creditors to plan and to remove creditors with no economic interest in the company were seen as benefits by all respondents.

Most respondents also viewed voting thresholds, the ability of the court to sanction the plan not withstanding voting thresholds not being met and the wide scope of restructuring possible as benefits of the new restructuring provisions.

% respondents (%s do not all add up to 100% due to rounding)

 

9. For what size of company do you anticipate using the new restructuring provisions?

Just over three in five (63%) respondents who said that they will be using the new restructuring provisions anticipate using them mainly for large companies, while 38% expect to use them for any size of company and none anticipate using them mainly for SMEs.


% respondents (%s do not add up to 100% due to rounding)

 

10. Why will you not be using the new restructuring provisions?

Those respondents who said that they will not be using the new moratorium provisions cited several reasons, with their client base being predominantly SME companies and directors by far the main one.


% respondents

This article first appeared in the August 2020 edition of RECOVERY News online as well as the Autumn 2020 print edition of RECOVERY and is reproduced with the permission of R3 and GTI Media.

 

Contact Us

If you have any questions about this research or would like to discuss how Insolvency Support Services could support you and your firm in dealing with and using the new legislation, please do not hesitate to contact us.

As well as a recorded webinar, Corporate Insolvency and Governance Act 2020: An Introduction, already available to watch online at a time that is convenient to you, our Moratorium checklist is available now and the supporting document pack will be available in September. Please contact us at [email protected] for more information.

 

Monitor’s fees under the Corporate Insolvency and Governance Act

Alison Curry examines the detail around monitor’s fees in the new moratorium provisions.

The new moratorium process outlined in the Corporate Insolvency and Governance Act has now come into effect, bringing a very welcome 40 or more days’ breathing space for companies while they and their professional advisers consider their restructuring options.

Thanks to campaigning from the profession, in particular R3, the Act has seen some shift from the original proposals first outlined in 2017, not least that the monitors of these moratoria must be licensed insolvency practitioners. Had this not been the case, it could have seriously eroded the vital role that insolvency professionals play in corporate restructuring, and we should be grateful to all those who campaigned.

The perennial issue

We will be constructing document packs and checklists now that the legislation has come into force and rolling out our compliance support and training offering. But as with any new legislation, the devil is invariably in the detail, and some of the detail raises concern, particularly around the perennially thorny issue of IP fees.

The monitor must be an IP and the monitor is expressly stated to be an officer of the court. However, while SIP 9 currently applies to “all forms of proceedings under the Insolvency Act”, it expressly refers to the fees of an insolvency office holder, and a monitor may not fall into that category. SIP 9 could usefully be amended to clarify this ambiguity and the current consultation on the revision of this SIP would be an opportunity to do so.

But even if the monitor’s fees are to be subject to SIP 9, what of their fees for advising the company and forming their opinion, prior to their formal appointment as monitor? Here the position becomes less clear.

Entering the moratorium gives the company a payment holiday from most of its pre-moratorium debts, subject to some exceptions. A key exclusion for obvious reasons is the remuneration and expenses of the monitor. However, the provision goes on to state that “the monitor’s remuneration or expenses does not include remuneration in respect of anything done by a proposed monitor before the moratorium begins”; so it would seem that any pre-appointment charges in relation to formulating the very opinion that kickstarts the moratorium are potentially subject to the payment holiday. IPs will, therefore, need to ensure that their engagement letters are very clear about what exactly the monitor’s fees include.

There are then restrictions on the company in making payments during the moratorium period in respect of pre-moratorium debts which are subject to a holiday, to the greater of £5,000 or 1% of its debts, subject to the monitor giving their permission for higher amounts to be paid. Could this place IPs in a rather conflicted position in giving permission to discharge their own pre-appointment costs?

Super-priority

But what if the monitor’s fees aren’t paid at all? The newly inserted sections 174A and SchB1 para 64A give super-priority to moratorium debts (i.e. those incurred during the moratorium period) and pre-moratorium debts for which no payment holiday is granted (i.e. the monitor’s fees). This super-priority applies in any succeeding winding up or administration proceedings commenced in the 12 weeks following the end of the moratorium. Further, a new s4A provides that any proposal for or modification to a CVA under which both the moratorium debts and the pre-moratorium debts for which the company did not have a payment holiday are to be paid other than in full is prohibited. So, it seems that the monitor will be paid ahead of any subsequently appointed office holder and IPs will need to check that there is not a prior monitor ranking ahead of them when taking a new instruction.

It appears that the only parties capable of challenging the monitor’s fees are a subsequently appointed liquidator or administrator and that challenge involves an application to court, which could be costly, and assumes an alternative IP in the succeeding role. Additionally, while the moratorium is in force, only the directors can instigate the winding up of the company or seek to appoint an administrator, so they get to choose their IP if that rescue proves impossible.

So, what if the monitor, on the evidence now available to them, changes their view about the viability of the company and recommends that the directors take steps to place it into liquidation or administration? The newly revised Ethics Code contains enhanced provisions around the potential conflicts presented by sequential appointments, but by no means precludes them. Nor does the new legislation.

Therefore, might we see the birth of the post-moratorium pre-pack, once it has become evident that the business, rather than the company can be saved, thereby justifying a shift from moratorium into administration? In some cases, no doubt this would be entirely justified, but the lack of external oversight in respect of fees may create the potential for abuse (both actual and perceived).

An amendment to the bill proposing the insertion of a new paragraph 74A into Schedule B1, requiring the use of the pre-pack pool in all pre-pack scenarios was withdrawn at committee stage, so it would seem that the pre-pack will survive unscathed into the new era of moratoria.  Much will rest on the shoulders of IPs to use these new tools responsibly, and in the longer term, more will rest on the shoulders of regulators to ensure that they do so.

What are your views on the new moratorium and restructuring provisions?

Click here to take part in our short survey. It should take less than five minutes to complete. As well as receiving a summary of the findings, you will be entered into a prize draw for the chance to win a free ISS webinar and a £50 voucher to an online retail store. The survey will end on 24 June 2020. Please note that the survey will be temporarily unavailable from 8.00 am–8.00 pm on 3 July.

First published in the June 2020 edition of RECOVERY NEWS and reproduced with the permission of R3 and GTI Media.

Webinar – Corporate Insolvency and Governance Act 2020: An Introduction

In our One Hour Series webinar Technical Short: Corporate Insolvency and Governance Act 2020: An Introduction on 17 July we will summarise the changes and how they might be applied by the profession. Click here to book.

Insolvency in the time of coronavirus

Eileen Maclean outlines the challenges of COVID-19 for insolvency practitioners.

We are used to dealing with emergencies with no notice – we are IPs after all – but the speed of response demanded from the business community by the outbreak of coronavirus was unprecedented. Vast numbers of us now work from home and are finding new and innovative ways to manage our cases and deal with our clients and contacts. At the heart of the solution is IT – but IT cannot replace every aspect of an IP’s role. In this month’s article I consider some of the challenges for IPs in this time of coronavirus and how we can help you.

New appointments and AML risks

One of the first things we were asked was can we still take appointments where we have not met the directors in person? We think the answer is yes – but there are a couple of things to note. Firstly, you need to be aware of the AML risk since you are not meeting the directors in person. Adjust your AML policies and procedures accordingly and record this new channel and the risks it poses, if this is a new process for your business. If you are using an online verification tool, the risk is lessened, but make sure that you keep identification under review and check that you are not inadvertently enabling money laundering, the burial of some dubious pre-insolvency activity or giving advice without fully understanding the problems facing the business. Secondly, only if you or your agent must, and it is safe to do so having taken the necessary precautions in line with government advice, visit the premises, and make sure that they are subject to appropriate security measures, in line with your insurer’s requirements.

Advice to directors

The wrongful trading provisions may have been suspended for a period of three months as an eye-catching policy response to the difficulties of running a company in these unprecedented times, but directors are not completely off the hook. Misfeasance provisions in terms of section 212 remain firmly in place, and nothing alters your responsibility to quantify the director’s loan account, examine inter-company or related party transactions or transactions at undervalue or in preference. Your advice to directors at this time needs to reflect that. Unfit conduct is not going to go away, and you need to remind them your obligation to review and investigate will continue. We have a new checklist Investigations and CDDA and two supporting online sessions: Pre-appointment advice to directors and SIP2 and Investigations, which you can purchase separately or as a package with a discount.

Moratorium and other rescue provisions

At the time of writing, we have yet to see a draft of the UK government’s moratorium and rescue proposals although we expect them to build on the BEIS response to the Insolvency and Corporate Governance consultation. That contains proposals for a new moratorium to assist business rescue, the prohibition of termination clauses on the grounds of insolvency and a new restructuring process that will allow cross cram-down onto secured and/or unsecured creditors. As always, the devil will be in the detail, and the speed at which it is likely to be introduced. In the meantime the profession, supported by the courts, finds faster, inventive approaches to retail and high street casualties with a ‘light touch’ administration appointment in Debenhams.

Reputational risk

The sun will set in 2022 on the single regulator provisions introduced by SBEE Act 2015 following a review of the regulatory landscape. There is no indication at the moment what the government response to the formal consultation might have been pre-pandemic, but our approach in these dramatic times may well dictate whether we retain the privilege of self-regulation in the future.

The revised Insolvency Ethics Code was published at the start of the year and comes into effect on 1 May 2020. You can get to grips with the changes in our online session. Insolvency and IPs have not been far from the headlines in recent years, and we are headlining again now, big time. Our approach, our fees and our conduct are centre-stage of press, public and government scrutiny and one of our biggest challenges in these times is managing and protecting our collective professional reputation. The introduction of our new ethics code is uncannily well-timed.

COVID-19 our response

And therefore, to assist you in these times, we have prepared a free-to-view video: COVID-19: An Insolvency Practitioner’s Risk and Response. It covers dealing with employees – your and your cases’ workforce – risks and challenges presented by working from home, contributions management, protecting estate funds and assets, and meeting your statutory obligations.

Preferential status for HMRC

Following my February article on the return of preferential status for HMRC, due originally to commence on 6 April 2020, it is marginally gratifying to see the provision has been delayed until late 2020. We can’t predict at this stage HMRC’s overall exposure to lost revenue (but we know it will be a lot) or what their approach will be to collections (but we can guess) and in light of the widespread expected increase in numbers of insolvencies, whether they will be geared up to exercise their role as preferential creditor in a significantly higher number of insolvencies than a benign economic environment would produce (we can only hope).

Conclusion

We are always here to assist and protect your business. Please get in touch if we can help.

In the meantime, stay safe in these challenging times.

First published in the April 2020 edition of RECOVERY NEWS and reproduced with the permission of R3 and GTI Media.

The quality of IP reporting: a cause of creditor confusion?

Yvonne Joyce and Eileen Maclean provide an insight into insolvency practitioner reporting in corporate insolvency proceedings.

  • Insolvency reports, including statements of affairs, abstracts of receipts and payments (R&Ps), trading accounts, estimated outcome statements and the accompanying qualitative narrative, are a primary channel of communication between insolvency practitioners (IPs), creditors and shareholders. Insolvency reports provide creditors with information on how the IP has maximised value for the creditors and stewardship information on how the IP has managed scarce resources.
  • Statements of Insolvency Practice 7, 9 and 14 set out the principles under which this information should be presented, but the indirect findings of a large-scale empirical research project undertaken by academics at Glasgow University suggests that reporting in insolvency is not straightforward, despite the requirements of the relevant SIPs.
  • Yvonne Joyce and Eileen Maclean analyse the challenges this presents to the creditor body (the primary recipient of these reports) in terms of their ability to fully understand how the insolvency has been managed and to quantify the amounts paid out as dividends, and suggest room for improvement in practitioner reporting if the insolvency reports are to fulfil their important accountability and trust-building roles and comply with relevant SIPs.

Contemporary analysis of corporate reporting underlines the importance of robust communication between companies and a range of stakeholders. Corporate reports provide information on performance and stewardship information relating to the management of resources. Corporate reporting is therefore a key mechanism by which managers can account for their decisions and actions to different stakeholders. Corporate reports are also recognised as an important means of restoring trust among market participants (ICAS, 2018)<1>. The relevance of the above analyses to insolvency reporting ought to be clear. Insolvency reports, including statements of affairs, abstracts of receipts and payments (R&Ps), trading accounts, estimated outcome statements and the accompanying qualitative narrative, are a primary channel of communication between insolvency practitioners (IPs) and creditors and shareholders. Insolvency reports provide creditors with information on how the IP has maximised value for the creditors and stewardship information on how the IP has managed scarce resources.

Academic research has drawn attention to ‘information’ and ‘competence’ gaps between IPs and creditors (Joyce, 2019)<2>. An ‘information gap’ arises as a consequence of information asymmetry. IPs should be better informed than many creditors, having access to management and internal information systems. A ‘competence gap’ arises as a consequence of one party possessing expert knowledge of a situation compared with another. IPs are expected to have higher competence levels than many creditors on insolvency-related matters, being repeat players and professionally qualified. In this context, insolvency reports play an important role in mediating relationships between IPs and creditors, helping to build trust at a time of uncertainty (Joyce, 2019). However, their potential in this regard depends on the quality of information provided. According to SIP 7, insolvency reports should be clear, informative and presented in a manner that is transparent, consistent and useful to creditors.

The quality of information provided by IPs

Considering the above, the purpose of this article is to explore and debate the quality of information provision by IPs. It does so by summarising the indirect findings of a large-scale empirical research project undertaken by academics at Glasgow University<3>.

During the process of data gathering, it became apparent that reporting in insolvency was not straightforward, despite the requirements of relevant SIPs. This presents challenges to the creditor body (the primary recipient of these reports) in terms of their ability to fully understand how the insolvency has been managed and to help explain the monetary amounts paid out as dividends. These issues suggest room for improvement in practitioner reporting if the insolvency reports are to fulfil their important accountability and trust-building roles and comply with relevant SIPs.

Categorisation between fixed and floating charge assets

A key reporting issue identified was the allocation of realisations between different categories of assets and apportionment of costs. SIP 14 sets out best practice for receivers in cases where assets are subject to a floating charge. Despite the specific application to receivership, it is our view that the principles of SIP 14 ought to apply across all corporate insolvency proceedings, a point we return to later in this article.

In a significant number of cases, the format of R&P accounts is such that the categorisation between fixed and floating asset realisations and payments is unclear. Single headings are used, described only as ‘receipts’ or ‘asset realisations’ and ‘payments’ or ‘costs of realisation’, with a corresponding list of what the realisations and costs entail. Reporting in this way does not enable a straightforward and transparent view of how realisations relate to or have been apportioned between the different categories of assets and, furthermore, hinders an assessment of how costs have been allocated between fixed and floating charge asset realisations. Without a clear categorisation between fixed and floating charge assets, readers are often left to form ‘best guess’ allocations of realisations and costs. In the majority of cases, the narrative provided within the administrator’s reports is inadequate to form anything other than a ‘best guess’.

The level of dividends paid to preferential and unsecured creditors is a function of the funds realised from the disposal of assets subject to a floating charge net of the costs of realisation. SIP 14 reminds us that these returns are dependent not only on the correct categorisation of the assets but also on the appropriate allocation of costs incurred in effecting realisations. Data gathering revealed the difficulties in assessing the allocation of the administrator’s fees and expenses between fixed and floating asset realisations. There was usually no explanation of how administrator’s fees had been split and the SIP 9 data was of little help. In fact, SIP 9 data often supported time spent on ‘asset realisations’ (including property) but with no corresponding allocation of fees to fixed asset realisations on the R&P accounts. Greater transparency over allocation of significant cost items, such as office-holders’ fees and legal fees, is of paramount importance, given the knock-on effects on the calculation of a prescribed part.

Where these issues become most apparent is in cases where the secured creditor appears to be ‘overpaid’ from the net proceeds of their fixed charge assets. According to SIP 7, realisations of assets subject to charges should be shown, with the amounts accounted for to the charge holder shown separately as payments. However, in some cases, the net asset realisations less payments to the secured creditor was reported as a ‘negative’ figure. Reading between the lines, a reader must assume that an element of floating charge asset realisations has effectively been applied to the secured creditor’s debt. While the ‘end result’ may be correct, R&P accounts should be presented in a way that ‘makes sense’. In some of these cases, a prescribed part could have theoretically been calculated (or could have been higher) and a (higher) distribution made to unsecured creditors.

Reporting the statutory objective of administration

The Glasgow University project collected information on which statutory objective the administrator was pursuing, the formal exit route and the administration outcome. Preliminary analysis of these variables suggests that corporate rescue is rarely achieved (the majority of cases are asset sales and approximately half of the cases pursue statutory objective c)). This result is not new. Prior studies have revealed similar findings, suggesting that administration tends to be used as means of trying to rescue the ‘business’ rather than the legal entity (Joyce, 2014)<4>. However, what this project does find is that there is insufficient explanation of how the administrator has arrived at the chosen statutory objective. Beyond the restatement of statutory wording, there is rarely any relevant and useful information provided by the office-holder on why they deem the chosen objective to be most appropriate to the case in hand. Furthermore, given the tendency for asset sales, readers are often left wondering why administration was chosen over liquidation.

In several cases, a clear statement of which statutory objective is being pursued was not provided. It was observed that either the chosen statutory objective was not stated, following the ‘boiler plate’ descriptions of the three objectives, or the proposal stated that both objectives b) and c) were being pursued apparently at the same time. The research project, which tracks cases through to completion, also revealed some instances where the stated statutory objective appears inconsistent with the formal exit route or the reported administration outcome.

General reporting issues

A wide range of general reporting issues was observed and a flavour of some of these is briefly discussed here. In cases where the company in administration enters a CVL, a common occurrence was for the ‘closing balance’ on the final set of administrator’s accounts to differ from the ‘opening balance’ (or ‘funds transferred from administrator’) on the first set of liquidator’s accounts. One explanation for this is that the ‘closing date’ and the ‘opening date’ are not necessarily the same. However, in these instances, this effectively leads to a ‘missing period of account’. In cases where the closing date of the administrator’s final R&P is the same as the opening date of the liquidator’s first R&P, no explanation is given for what in some cases are substantial differences of value.

It was also quite common to find a ‘final balance’ on the administrator’s last R&P account. Sometimes this is noted as ‘bank balances’ or ‘VAT control accounts’, but there is no explanation of what this means or what will happen to these funds.

Inconsistencies from one progress report to another or even within the same report were also encountered. The filing of documents with Companies House was also confusing in a small number of cases. For example, the notice of move from administration to dissolution is filed after the notice of end of administration or after the notice of automatic end. A further issue is reporting under English rules for Scotland-registered companies.

Summary and policy recommendations

SIP 7 states that insolvency reports should be produced with the interests of the reader in mind. Earlier in this article, we noted the theoretical possibility of information and competence gaps between IPs and creditors. The above snapshot of reporting clearly highlights the difficulties facing the general body of creditors in understanding how the IP has taken care of, managed and realised the company’s assets. It also reveals the difficulties in understanding what factors have ultimately driven the value of creditor dividends. A concern is a lack of transparency and therefore understandability for creditors. Reports are not consistent across a case and a considerable amount of ‘toing and froing’ is required between reports. Unfortunately, even then, a ‘best guess’ is quite often the end result for the reader. Insolvency reports must be capable of providing a ‘stand-alone’ account of how the office-holder has fulfilled their statutory duties and provide creditors with a clear account of the office-holder’s stewardship activities. Greater care and attention ought to be directed towards the preparation of these reports and accounts. IPs, whose names ultimately appear on these documents, must be satisfied with their accuracy, consistency and understandability before they are sent to creditors and made available to the public.

The ambiguity surrounding the allocation of realisations and costs to fixed and floating charge assets was observed in a significant number of cases. From a creditor’s perspective, this ambiguity and lack of transparency makes it more difficult for them to understand why, in many cases, they are receiving very little or no dividend. The qualitative information contained within the reports should be consistent and helpful in explaining the financial position presented in R&Ps. This article and the wider research project that underpins it therefore support the revision of SIP 14 and the argument that SIP 14 should be best practice across all corporate insolvency proceedings.

Consideration may also be given towards improving the required content and format of the explanation and justification within the administrator’s proposal of the chosen statutory objective. Given the rare occurrence of statutory objective a) administrations, attention may be directed towards enhancing the explanations offered for why administration has been chosen rather than liquidation.

Finally, it may be worth considering whether a reconciliation ought to be provided by the liquidator between the closing balance per the administrator’s accounts and the opening balance per the first set of liquidation accounts.

 

<1>ICAS (2018). https://www.icas.com/__data/assets/pdf_file/0010/368461/VISION-STRAW-MAN-4-June-2018-FINAL-PDF.pdf

<2>Joyce, Y. (2019) Building Trust in Crisis Management: A Study of Insolvency Practitioners and the Role of Accounting Information and Processes, Contemporary Accounting Research, https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-3846.12577

<3>The researchers are Yvonne Joyce ([email protected]) and Betty Wu, from Glasgow University, Adam Smith Business School, Accounting and Finance. The final data set comprises the full population of Scottish registered companies entering administration during 2012-2013.

<4>Joyce, Y. (2014) Knowledge mandates in the state-profession dynamic: A study of the British insolvency profession. Accounting, Organizations and Society, 39 (8), pp. 590-614. https://www.sciencedirect.com/science/article/pii/S0361368214000555?via%3Dihub

 

Yvonne Joyce (BA Hons CA) is senior lecturer in accountancy at Glasgow University

Eileen Maclean (MA Hons MIPA MABRP MBA) is director of Insolvency Support Services Ltd

 

First published in the January 2020 edition of RECOVERY NEWS and reproduced with the permission of R3 and GTI Media.

Insolvency (Scotland) Rules: Statutory Declarations

An aim of the new Rules is to modernise the language of the statute. One of the terms that we wave goodbye to is affidavit, and in its place comes statutory declaration. The language might not be ancient Latin, but it’s still an old and well-established piece of statute that sits behind it, stemming as it does from the Statutory Declarations Act 1835.

A Statutory Declaration is a statement made in lieu of an oath and the Act contains a prescribed form of Statutory Declaration. A Statutory Declaration is included within the current standard form Notices of Appointment of Administrators and therefore a similar approach to the various documents which require a Statutory Declaration in terms of the New Rules seems reasonable. The following wording (amended to reflect the terminology used in the relevant Rule) can be inserted into the relevant document.

I [ ] do solemnly and sincerely declare that [the information provided in [this notice/this statement of affairs/statement of concurrence] is,] [these accounts are,] to the best of my knowledge and belief, [true][accurate and complete],

AND I make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions of the Statutory Declarations Act 1835.

Declared at _________________________________

Signed _____________________________________

This ______________ day of ___________________ 20

before me __________________________________

A Notary Public or Justice of the Peace

It appears that a solicitor in Scotland is not authorised to take oaths as per s18 of the 1835 Act, and therefore any statutory declaration should be signed in front of a notary public or justice of the peace. If any doubt as to your requirements, take independent legal advice.

How we can assist you

We’ve been examining in detail the new legal requirements and their practical implications. We can offer bespoke in-house training, Rules-compliant document packs and checklists, and compliance support.

For further information about how we can assist you in adjusting to the changes brought about by the new Rules, contact [email protected]

Insolvency (Scotland) Rules: Nomination Process

The new Rules will come into force on Saturday 6 April 2019. We will be keeping you posted where we can on interpretations and issues in the period of their introduction.

First up, we’ve walked through the nomination process to have a look at the timescales involved where an interim liquidator, appointed on 8 April 2019, seeks and obtains one nomination as liquidator, and goes back to the creditors for a decision by way of deemed consent. We have assumed that the interim liquidator in this example issues notices at the last possible occasion, and uses 2nd class post wherever possible. The table below outlines what we think that process looks like.

Event Date or deadline Statutory Reference Narrative
Winding Up Order (WUO)Monday 08/04/2019S138Must as soon as practicable seek nomination within 28 days beg within WUO.  Therefore 28 days in this example expires on Sunday 5 May. It’s possible that that RPBs may take view on an  IL always sending out at last possible time given s138 requires nominations as soon as practicable.  Can ignore Easter bank holidays, since requirement is 28 days (not business days) from WUO.
Last date for posting report and nomination request: using 2nd class post29/4/2019R1.38Deemed to have been delivered 4 business days after the date of sending.

 

Last date report and notice can be received by creditorsFriday 3/5/2019Report and nomination notice received by creditors on Friday (since Sunday  not a business day)
Nominations received from CreditorsMon 13/5/2019R5.22(5)Has to be received within 5 business days of the date of the notice issued requesting nominations (if they are sending it 2nd class, they would have to post it Tues 7th May latest (since Mon 6th May is a Bank Holiday) to ensure received by IL in time)
Decision date expiryMonday 3/6/2019R5.22(9)The decision date has to be no later than 21 days after the date of receiving nominations – nomination date 13/5/2019 + 21 days = Monday 3 June 2019 (can ignore bank holiday on 27 May since Rules refer to 21 days and not business days).
Therefore, latest date for issue of circular, giving a minimum of 14 days’ notice, to include 2 business days for 1st  class.  (note posting 2nd class here doesn’t give enough clear notice)Wed

15/5/2019 deemed to be delivered Fri  17/5/2019 at latest)

R5.22(10)Giving at least 14 days’ notice + 4 business days for 2nd class post not to include the date of delivery and the date of the decision. (Rule 1.3)  In effect, on the next business day following the expiry of the nomination period, using 2nd class post doesn’t allow 14 clear days’ notice of the decision to be issued – since Rule 1.3 defines clear days not to include the date of sending or the date of the event.  On this occasion, looks like you are going to have to use first class post.
Last date for creditors to exercise 10:10:10 objection and request a physical meetingFri 24/5/2019R8.8Creditors may within 5 business days from the date of delivery of the notice require a physical meeting to be held. The convenor then has 3 business days from the threshold for requests being received to send notice in accordance with the Rules, giving creditors 14 days’ notice of the meeting. That would have to take into account the bank holiday on Monday 27 May.
Latest date for decision (the backstop)Thu 6/6/2019R5.22 (7)where a decision is sought under r5.22(6) the decision date must be not more than 60 days from the date of the winding up order.

Most of you will have diary systems and prompts to assist you with the planning of your processes. However, this exercise demonstrates that you can’t leave everything to the last minute and issue by 2nd class post. You simply won’t meet your deadlines.

This is a good example of why putting everything on a website going forward will be advantageous, and understanding the implications of delivery (rather than sending).

How we can assist you

We’ve been examining in detail the new legal requirements and their practical implications. We can offer bespoke in-house training, Rules-compliant document packs and checklists, and compliance support.

For further information about how we can assist you in adjusting to the changes brought about by the new Rules, contact [email protected]

Common Ground: Insolvency (Scotland) Rules 2018

The new Scottish corporate insolvency rules will come into force on 6 April 2019. At the same time, the final suite of changes to Scottish specific elements of the Insolvency Act 1986 will be enforced with the commencement of the Public Services Reform (Insolvency) (Scotland) Order 2016.

Two sets of Rules

Due to a partially devolved corporate insolvency regime, Scotland’s new corporate rules are found in two pieces of secondary legislation: The Insolvency (Scotland) (Company Voluntary Arrangement and Administration) Rules 2018 and the Insolvency (Scotland) (Receivership and Winding up) Rules 2018 (“the new Scottish Rules”). Together, they will bring Scotland’s corporate insolvency regime broadly in line with England and Wales from 6 April 2019. But not entirely. Certain aspects of the Scottish procedures will remain distinct – for example accounting periods and remuneration approval processes. It is also worth noting that the new Rules in Scotland have no impact on personal insolvency, which continues to be subject to the Bankruptcy (Scotland) Act 2016.

Decisions, decisions…

Scottish IPs are now getting to grips with provisions familiar to our English cousins: the restriction on an officeholder’s ability to hold a physical meeting of creditors, and the move to decisions of creditors by deemed consent (where available) or by one of a number of prescribed decision procedures: correspondence, virtual meeting or electronic voting, with physical meetings available only where requested by the requisite number or value of creditors (the 10:10:10 rule).

The good news for practitioners dealing with Scottish appointments from 6 April 2019 is that a lot of creditors and stakeholders will be familiar with the decision-making process already. On the other hand, if the English experience is anything to go by, it won’t necessarily increase engagement and deemed consent will be the default process.

Consolidation or duplication?

One of the driving principles behind the new Rules North and South of the Border was to consolidate 32 years of amendments to statutory instruments since the existing Rules came into force in 1986. The new Scottish Rules contain impressive lists of revocations, but also a fair amount of duplication across both sets. Part 1 of each of the administration and liquidation Rules defines scope, times and documents. Decision making, proxies and corporate representation, the EU regulation, and block transfer of proceedings also enjoy commonality, but under different section numbers in each set of rules.

Those familiar with the 1986 Scottish Rules will know that currently the Administration rules rely heavily on the Liquidation Rules for their provisions. The new Administration Rules no longer do so, and the process is set out in detail in Part 3 of the new Rules. The process for a CVA is similarly detailed in Part 2. There is an extension, rather than contraction, of the Scottish Rules pertaining to Liquidation. Part 4 of the existing 1986 Rules applies to Court Liquidation, and then Schedules 1 and 2 set out how Part 4 applies to CVL and MVL (if at all, in the case of the latter procedure), but each of these liquidation processes now has a dedicated part in the new Scottish Rules.

CVL in Scotland

The CVL entry process will once again be common across the UK. Directors North and South of the border will seek a decision from creditors as to their preferred liquidator and gone will be the costly statutory advertising requirements and personal attendance at a section 98 meeting that, post-2017, survived in Scotland only. This provides a level playing field for all IPs, wherever they are located, and widens the choice of IP firm from a director’s perspective.

Court Liquidation

As you know, there are a lot of distinct Scottish terms – gratuitous alienation, for example! Here is another one: “guddle”, meaning muddled or messy. To use it in a sentence, one might say ‘the new court liquidation process to appoint a liquidator is a bit of a guddle’.

In their capacity as interim liquidator IPs will need to seek a nomination as liquidator from creditors, and if no nomination is provided, will revert to the relevant court to seek confirmation in office as liquidator. That’s the easy bit, which has not significantly changed from the 1986 provisions.

If, however, a nomination (or nominations plural) is received, the IP must go back to creditors with a decision-making procedure for appointment. If only one nomination is made (presumably for the interim liquidator to continue as liquidator), then a deemed consent procedure could be used. If two or more nominations are received, a decision by correspondence or virtual meeting is the next logical step, but the Rules are not explicit. Practitioners therefore need to give some thought to the situation and which procedure best suits. The standard appeals (10% in value to deemed consent) and the 10:10:10 Rule in relation to physical meeting requirements apply, so it could be possible, in a contentious liquidation, for deemed consent to lead to a decision procedure, but still end up in a physical meeting. The familiar (and comfortable) court liquidation process has been up-ended. Deep breath everyone!

Liquidation process

Where commonality does feature, it relates to the post- appointment liquidation process. Part 7 of the Liquidation Rules sets out how accounting periods, progress reports and final reports will apply in future, and from what date retrospectively. As a rule, the start date for progress reports in a CVL will be the date of the appointment of a liquidator and in a court liquidation it could be variously the date of the appointment of the provisional liquidator (if there is one) or the appointment of the interim liquidator in all other cases.

Relevant date for claims

Another surprise is the relevant date for claims moving from the date of the presentation of the petition in court liquidation to the date of the winding-up order. The definition of relevant date is unhooked from s129 and instead attached to the definitions in s247 of the Insolvency Act 1986. Given too that the appointment of a provisional liquidator is more prevalent in Scotland, IPs should think carefully about the consequences of their actions in the period of provisional appointment.

Remuneration and accounting periods

As those of you dealing with Scottish cases know, the process for obtaining approval for remuneration is distinct from England and Wales and invariably involves the court. The remuneration approval process will remain largely unaltered, which limits the impact of the decision-making procedures when compared to England and Wales.

A more welcome revision may be the changes to the operation of accounting periods that allow an IP to manage accounting periods, albeit with court or committee approval. The first two six-month accounting periods will remain, but thereafter a practitioner can defer a claim for remuneration without court or committee approval.

MVL in Scotland

So how does the MVL process fare in the new Rules shake-up? The good news is that the entry process remains unchanged North and South of the border. Statutory interest is now consistent – both in terms of amount and application, but will automatically apply in retrospect to MVLs open at 6 April 2019. IPs need to review cases now for outstanding creditor claims and ensure that where these, and the corresponding statutory interest burden, might be material, they are paid in full before 6 April. If that is not possible, then shareholders need to know the quantum of back-dated interest that’s going to impact on their capital return. You may also need to dust down some indemnities as well.

From 6 April 2019, the statutory rate of interest in corporate insolvency in Scotland will reduce from 15% to 8%, (in line with the judicial rate and the applicable rate in personal insolvency in Scotland) and applies in MVLs, which is not the case under the 1986 Rules. Schedule 2 of the 1986 Rules specifically doesn’t apply Rule 4.66 and 4.67 to MVLs. Scottish IPs contemplating an MVL immediately post 6 April 2019 need to be mindful that statutory interest will apply and deal with the payment of pre and post appointment corporation tax accordingly.

Administration

For the reasons set out already, the biggest change to the Administration Rules is their length. The 1986 Liquidation Rules, on which Scottish administrations relied, have been written out in full in the new Administration Rules – for example Creditors’ Committees and Claims. The Scottish Administration Rules are the closest to their English equivalents, but it is disappointing to see some of the glitches arising from the English provisions being imported directly into the Scottish Rules – specifically, listing the date and time of appointment in the proposals and notice documents. There are also duplicate, but conflicting, Rules on the order of priority. Watch out for more guidance on these areas in the coming months.

Key steps for your practice

Your geographical location, and your familiarity with the English Rules, will dictate how much preparation your practice requires for the introduction of the new Scottish Rules. You may already be familiar with the changes that the new Rules are bringing, or you might need training and guidance on their introduction and implementation.

You will need to amend your document packs to reflect new standard contents. You will also need to consider what form of decision procedure will be appropriate for the size and nature of the cases you administer and think about which platform best suits a virtual meeting provision. Consider too the benefits and opportunities presented by these changes in terms of cost saving to how you operate, particularly surrounding the use of websites as a principal form of communication with creditors.

For further information about how we may assist you in adjusting to these changes, contact: [email protected]

First published in the Spring 2019 edition of RECOVERY magazine and reproduced with the permission of R3 and GTI Media.