Burial jobs – Transparency v. Efficiency?

Alison Curry examines the differing approaches adopted north and south of the border to CVL closure and court involvement.

For over a decade, the buzzword across regulation has been ‘transparency’. The BBC’s complaints handling processes were recently accused of lacking it and the Insolvency Service has just consulted on whether those applying its regulatory objectives are sufficiently meeting it. We are told by the policy makers that the periodic reporting requirements placed on IPs are intended to ensure it.

But in the case of no or low-assets jobs, there is surely a balance to be struck between the ‘mahogany open-casket’ approach of providing chapter and verse to a disengaged creditor cohort and the benefits of an efficient ‘economy burial’; and it seems we may be striking that balance at a different point in Scotland than we are in England and Wales.

Comparable systems

Both in Scotland and in England and Wales, comparable systems for liquidator appointments by deemed consent in CVL now exist; SIP 6 reporting requirements are identical (and identically, largely optional) and annual reporting has replaced annual meetings. The debate around whether these measures promote creditor engagement is now well rehearsed and I shan’t reprise it here!

But where there is a marked difference (and one that I have no doubt my English colleagues will be as surprised at as I was to discover) is in the manner in which a Scottish CVL may be concluded without the need or cost of a final report to creditors.

This is perhaps an unintended consequence of historical national differences in the approach to corporate insolvency administration. As there is no Official Receiver in Scotland, s138 IA1986 requires a liquidator to be appointed by the court upon the making of a winding-up order (a clearly sensible provision to ensure there is always a liquidator in office). The provisions of s203 IA 1986, which allow the Official Receiver to be released from office without the need for a final report (or final meeting, as was), have a parallel provision in s204, which applies to the private practice liquidators of Scottish companies in compulsory winding-up proceedings. They may apply to court for early dissolution ‘if it appears to the liquidator that the realisable assets of the company are insufficient to cover the expenses of the winding up’ – ie without going through the final reporting process. How is this relevant to final reports in CVL cases, I hear you ask?

Well, under s112 IA86, a liquidator, creditor or contributory can apply to court to determine any question arising in the winding up of a company – be that an MVL, CVL or compulsory matter. The court, if satisfied that the required exercise of power will be just and beneficial, may make such order as it thinks just.

Court involvement shivers

Scottish practitioners are quite accustomed to levels of court involvement in their cases that would send a shiver down the spine of their English and Welsh counterparts. The court system is customarily involved in the remuneration approval process and routine applications are made at a level of costs and determined with a timeliness that does not have the same dissuasive impact that the spectre of approaching the English courts holds.

S112 provides the court a very broad discretion and one that forms the basis of routine applications in CVL cases in Scotland, including those for early dissolution under s204. By stark contrast, s112 appears to be little used in England and Wales. Reported cases appear to be few and far between, and typically involve cases of substantial potential value. For example, in Rubin v. Cohen & Crooks [2017] (a dispute between successive liquidators about the availability of funds to meet 1,796 separate statement of affairs fees), there were fees totalling £2.9m at stake. Another reported case concerned the disclosure of documents by an English liquidator to the USA trustee in the Bernard Maddoff case.

What the nature of these cases illustrates is that matters don’t often get as far as the courts in England & Wales unless there are some pretty big numbers involved. Curiously, it’s the polar opposite of the justification for making such an application in Scotland to apply s204 as an alternative to the delivery of a final report to creditors: that of costs and efficiency.

Swift cremation

The practice of applying for early dissolution under s204 in Scottish CVL cases must beg questions about consistency across the UK of the CVL process, if not its transparency. It is quite feasible that creditors will receive no substantive information in this scenario, as most of the SIP 6 information requirements are not mandatory and the s138 reporting requirements in the compulsory process do not apply to CVL cases. Depending on timing, a Scottish CVL matter can proceed to a swift and economic cremation, potentially without any form of report having been issued to creditors. Whether the court demands a report is entirely at the court’s discretion but is not normally required. Maybe, having spotted the ‘gap’, that might change?

Economically speaking, this could be viewed as a good idea. If efficiencies like these lead to reduced costs, surely that is a tick in the box for the regulatory objective of a competitive profession? It remains to be seen what approach the courts will be to such applications, particularly if no SIP 6 report was issued, or what regulatory expectations will evolve. But for now, at least, the balance in Scotland seems to be for efficiency over transparency.

Alison Curry is an insolvency practitioner, trainer and director at Insolvency Support Services Limited.

Insolvency (Scotland) Rules – 6 Months On

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