In our last article on this subject we indicated that we would be seeking to clarify a couple of further issues with the Insolvency Service. We are pleased to say that we have received a response and that further legislative changes are planned which will deal with the issues raised. The Insolvency Service indicate that they intend to implement the following changes as part of the further modernisation planned for 6 April 2010. However, at present these are only proposed changes and so are subject to Parliamentary scrutiny and approval.
1. We raised the issue that the approach taken to advertising general meetings of creditors in bankruptcies differs from that in liquidations and pointed out that in bankruptcies the rule changes introduced gives two levels of discretion; a discretion to give notice of the meeting by advertising as well as written notice and a requirement to gazette if you decide to exercise that discretion; and then, if you gazette, a further discretion to “advertise in such other manner as the convenor thinks fit.” The Insolvency Service indicate that the introduction of mandatory gazetting requirements was reflected generally in the April 2009 Rule changes, but that it has not yet been introduced in rule 6.81(4) for bankruptcies, and that as a result the gazetting requirements in liquidations now differ from those in bankruptcy. They indicate that they intend to introduce a similar mandatory provision into rule 6.81(4) to bring bankruptcy into line with the general policy for insolvency advertising.
2. We also pointed out that our interpretation of the insolvency legislation meant that a consequence of the April 2009 rule changes was to require the gazetting of annual meetings in CVLs for all cases commenced on or after 6 April 2009. The Insolvency Service confirmed that our interpretation was correct, but indicated that they intend to remove the requirement for annual meetings in CVLs. It will be interesting to see if the removal of the requirement to hold annual meetings has retrospective effect, i.e. it will apply to all cases, or if it will only apply to cases commenced on or after 6 April 2010, the planned date of the legislative change. If it is the latter, then this will mean that there will be 12 months of cases where it is necessary to gazette annual meeting, i.e. those commenced between 6 April 2009 and 5 April 2010, and we hope that the regulators will take a pragmatic approach to the enforcement of the legislative requirement in respect of such cases.
Friday, July 10, 2009
Friday, June 26, 2009
Winding up resolutions
Issues with winding up resolutions have come up twice this week and we thought that we’d share our thoughts with you in the light of the issues raised.
You should check both the nature and the wording of the winding up resolution that you are seeking and confirm that the same nature and wording are used in the notices that are then published in the Gazette.
Make sure that the resolution complies with the requirements of section 84(1)(b). It has to be a special resolution and it must include the wording “that the company be wound up voluntarily.” We have seen a variety of different resolution wordings in our travels and in the Gazette, and it is apparent that at least one version of one of the proprietary case management software systems still refers to an “extraordinary” resolution in its standard general meeting documents and Gazette notices.
You should check both the nature and the wording of the winding up resolution that you are seeking and confirm that the same nature and wording are used in the notices that are then published in the Gazette.
Make sure that the resolution complies with the requirements of section 84(1)(b). It has to be a special resolution and it must include the wording “that the company be wound up voluntarily.” We have seen a variety of different resolution wordings in our travels and in the Gazette, and it is apparent that at least one version of one of the proprietary case management software systems still refers to an “extraordinary” resolution in its standard general meeting documents and Gazette notices.
Fiddling while Rome burns?
Our last two Blog articles about pre-appointment fees in administrations and what costs should be deducted when calculating the net property have something in common, the Court not addressing issues that are key to IPs. However, we do not lay the blame at the doors of the Court. Their role is to interpret the legislation, not to draft new sections where the Insolvency Act is deficient. IPs have had to fudge both issues since the legislation was introduced when they are so important that they could do with greater certainty, not least to avoid arguments with their regulators over interpretation. We think that the Insolvency Service should consult and legislate on these points to eradicate any doubt.
Although the SIPs are being reviewed and may yet become more relevant and streamlined, the introduction of SIP 16 has increased the amount of work an administrator has to do pre-appointment and immediately on taking office. Without some clarity on how those costs can be recovered, we think that the increased disclosure, which is of dubious benefit to unsecured creditors anyway, will merely increase the cost and regulatory burden.
The Insolvency Service is in the middle of its review of the secondary legislation and consolidation of the legislation. The first tranche of the revision to the insolvency rules and regulations dealt with advertising on the stated expectation that cost savings will be passed on to creditors, an expectation that we have already suggested may be optimistic. We hope that further revisions will address issues such as these, which are important both for IPs and as key parts of a homogeneous insolvency regime.
Although the SIPs are being reviewed and may yet become more relevant and streamlined, the introduction of SIP 16 has increased the amount of work an administrator has to do pre-appointment and immediately on taking office. Without some clarity on how those costs can be recovered, we think that the increased disclosure, which is of dubious benefit to unsecured creditors anyway, will merely increase the cost and regulatory burden.
The Insolvency Service is in the middle of its review of the secondary legislation and consolidation of the legislation. The first tranche of the revision to the insolvency rules and regulations dealt with advertising on the stated expectation that cost savings will be passed on to creditors, an expectation that we have already suggested may be optimistic. We hope that further revisions will address issues such as these, which are important both for IPs and as key parts of a homogeneous insolvency regime.
Pre-appointment costs in Administrations
Another instance where the initial thoughts that the Court has finally pronounced on a key were dashed by a reading of the judgement was in Kayley Vending Ltd. The Court had made an Administration Order in a case involving a pre-pack sale at arm’s length and was then subsequently invited to make an order approving the administrator’s pre-appointment costs. It did so, but using its discretionary power under paragraph 13 of Schedule B1 rather than rule 2.67(1)(c), and so failed to provide any guidance for pre-appointment costs in out of Court appointments.
The Court did indicate that “it was appropriate in the exercise of this discretion to make the order sought where the court is satisfied that the balance of benefit arising from the incurring of pre-appointment costs is in favour of the creditors rather than (in a pre-pack case) the management as potential purchasers of the business.” Reading between the lines, be careful if you apply to Court for approval of your pre-appointment costs where it is a pre-pack back to the directors without proper exposure to the market. The Court did, however, seem to approve the approach set out in Dear IP, which may or may not be useful when arguing whether you are entitled to pre-appointment costs on a particular case with your regulator!
The other matter considered by the Court was what information it should consider when deciding whether or not to “endorse” a pre-pack by making an Administration Order. In doing so it endorsed SIP 16 by concluding that whilst the “... information may not be limited to the matters identified in SIP 16 ...”, in most cases just the information required by SIP 16, “... insofar as known or ascertainable at the date of application ...” would be sufficient.
The Court did indicate that “it was appropriate in the exercise of this discretion to make the order sought where the court is satisfied that the balance of benefit arising from the incurring of pre-appointment costs is in favour of the creditors rather than (in a pre-pack case) the management as potential purchasers of the business.” Reading between the lines, be careful if you apply to Court for approval of your pre-appointment costs where it is a pre-pack back to the directors without proper exposure to the market. The Court did, however, seem to approve the approach set out in Dear IP, which may or may not be useful when arguing whether you are entitled to pre-appointment costs on a particular case with your regulator!
The other matter considered by the Court was what information it should consider when deciding whether or not to “endorse” a pre-pack by making an Administration Order. In doing so it endorsed SIP 16 by concluding that whilst the “... information may not be limited to the matters identified in SIP 16 ...”, in most cases just the information required by SIP 16, “... insofar as known or ascertainable at the date of application ...” would be sufficient.
Prescribed part – the exercise of discretion
At first sight the case of International Sections Ltd appeared to be the one that all IP’s were waiting for – the one that set out what costs can be deducted when calculating the net property and hence the prescribed part available to unsecured creditors - but no, the Judge ducked the issue. Instead, he merely indicated that “the Liquidators have realised in the present case net property of £18,655.46” before deciding whether the costs of distributing the prescribed part of that net property would be disproportionate to the benefits.
It does not really come as a surprise that the court felt unable to grasp the nettle and give an indication of what costs it might be acceptable to deduct in calculating the company’s net property. After all, if Parliament did not see fit to define the parameters in the legislation, the Court is unlikely to want to do the legislature’s job. So we are left with an uncertain position where IPs are left to second guess the intention behind the legislation in a way that is only likely to be tested, at some cost, when a case arises that carries enough significance to make it worth pursuing as a test case. We have seen a legal opinion that indicates that all of the general costs of the administration, including the office holder’s costs, fees and charges, can be deducted before the net property is calculated, but Gareth and Bill cannot even agree on this within Compliance On Call and it would be a very brave IP that takes such a black and white approach without a clear indication from the Insolvency Service or the Courts.
Whilst the case therefore appears to have only limited application, since it related to an application to Court under section 176A(5), we think that given the similarity of wording with section 176A(3) the principles set out in that case should also be applied by an IP where the net property is below the statutory minimum of £10,000 and they have to decides whether to exercise their discretion and not distribute the prescribed part on the basis that the costs of distributing the prescribed part of that net property would be disproportionate to the benefits.
As a result, applying the principles of International Sections Ltd the IP should “look at the benefits to creditors as a body” and not be too ready to use their discretion just because the dividend would be small, and remembering that not applying the prescribed part provisions should be the exception, and not the rule.
It does not really come as a surprise that the court felt unable to grasp the nettle and give an indication of what costs it might be acceptable to deduct in calculating the company’s net property. After all, if Parliament did not see fit to define the parameters in the legislation, the Court is unlikely to want to do the legislature’s job. So we are left with an uncertain position where IPs are left to second guess the intention behind the legislation in a way that is only likely to be tested, at some cost, when a case arises that carries enough significance to make it worth pursuing as a test case. We have seen a legal opinion that indicates that all of the general costs of the administration, including the office holder’s costs, fees and charges, can be deducted before the net property is calculated, but Gareth and Bill cannot even agree on this within Compliance On Call and it would be a very brave IP that takes such a black and white approach without a clear indication from the Insolvency Service or the Courts.
Whilst the case therefore appears to have only limited application, since it related to an application to Court under section 176A(5), we think that given the similarity of wording with section 176A(3) the principles set out in that case should also be applied by an IP where the net property is below the statutory minimum of £10,000 and they have to decides whether to exercise their discretion and not distribute the prescribed part on the basis that the costs of distributing the prescribed part of that net property would be disproportionate to the benefits.
As a result, applying the principles of International Sections Ltd the IP should “look at the benefits to creditors as a body” and not be too ready to use their discretion just because the dividend would be small, and remembering that not applying the prescribed part provisions should be the exception, and not the rule.
Wednesday, April 29, 2009
It wasn't me, it was my partner had the pen.
In this final piece on hot disqualification topics I wanted to look quickly at the all too common situation whereby an individual who is already subject to disqualification, either through the impact of prior proceedings under the CDDA or by dint of a personal bankruptcy, continues to act in the management of a company.
They're not hard to spot these cases, and the alarm bells should be ringing the moment that you are contacted by an individual who clearly holds all the knowledge about the metal fabrication business you're dealing with, but for an unexplained reason isn't a registered director of the company, and has you writing to his wife at her hair salon, or his 86 year old father in New South Wales, to deal with the formalities.
Once you've asked the director why he isn't formally registered, it is a simple process to undertake your own enquiries using the Companies House database of disqualified directors and the Insolvency Service website. Alternatively give me, or one of my colleagues in the Investigation Directorate a call and we'll happily search our own internal databases.
Of course, acting in breach of a disqualification is a criminal act (not forgetting the fact that the individual has most likely been aided and abetted by the registered director(s)) and you should report any potential offence of this nature to the Conduct and Complaints Team at the Insolvency Service in accordance with your duty under Section 218(4) of the Insolvency Act 1986.
However, the Secretary of State will also run disqualification cases where the sole allegation relates to management of the company by a disqualified or bankrupt person – even in the absence of some misconduct linked to that involvement. Hence, in all cases where there is a person subject to restriction (as identified through your initial SIP 2 enquiries) acting in the management, if there is no leave of the court to act you should submit a D1 report.
Within that report evidentially it is a case that more, is definitely more, and the greater the breadth of the evidence available, the more likely you are to demonstrate misconduct. Keep the following points in mind:
1) Financial control is key - it isn't essential that the disqualified individual is a signatory on the bank account, but you should be able to show an element of control over who got paid, and when. Look in particular for cash withdrawals and ask who was then responsibile for disbursing that cash.
2) Look at all aspects of the business - production, finance, marketing, recruitment etc - and show involvement and control across the board for a solid allegation. Third party evidence is particularly relevant - who did suppliers, customers, banks, employees and other stakeholders think was controlling the company, and what did they base that perspective on?
3) Consider what the registered director's were doing - their inactivity will support an allegation that the disqualified individual was the controlling party.
4) Remember that for a criminal allegation, although the burden of proof is higher, it is only necessary to show that the individual acted in the management of the company. For disqualification purposes it must first be established that he/she can be shown to be a director, to meet the requirements of the CDDA.
5) Always check whether there has been an application for leave to act under Section 17 of the CDDA, and if leave was granted consider the conditions which would inevitably have been imposed by the Court and whether these have been adhered to.
Finally, once you've made an allegation of a disqualification breach make sure you keep track of the proceedings as if they are successful creditors should be considering recovery action against the individual concerned through the enforcement of personal liability under the provisions of Section 15 of the CDDA.
Similar considerations apply when you're considering an allegation that a director has breached Section 216 of the Insolvency Act 1986 and personal liability is again enforceable under the provisions of Section 217 of the Insolvency Act 1986.
Ultimately, it may be the partner who had the pen, but what we're all interested in is who was controlling the flow of the ink.
They're not hard to spot these cases, and the alarm bells should be ringing the moment that you are contacted by an individual who clearly holds all the knowledge about the metal fabrication business you're dealing with, but for an unexplained reason isn't a registered director of the company, and has you writing to his wife at her hair salon, or his 86 year old father in New South Wales, to deal with the formalities.
Once you've asked the director why he isn't formally registered, it is a simple process to undertake your own enquiries using the Companies House database of disqualified directors and the Insolvency Service website. Alternatively give me, or one of my colleagues in the Investigation Directorate a call and we'll happily search our own internal databases.
Of course, acting in breach of a disqualification is a criminal act (not forgetting the fact that the individual has most likely been aided and abetted by the registered director(s)) and you should report any potential offence of this nature to the Conduct and Complaints Team at the Insolvency Service in accordance with your duty under Section 218(4) of the Insolvency Act 1986.
However, the Secretary of State will also run disqualification cases where the sole allegation relates to management of the company by a disqualified or bankrupt person – even in the absence of some misconduct linked to that involvement. Hence, in all cases where there is a person subject to restriction (as identified through your initial SIP 2 enquiries) acting in the management, if there is no leave of the court to act you should submit a D1 report.
Within that report evidentially it is a case that more, is definitely more, and the greater the breadth of the evidence available, the more likely you are to demonstrate misconduct. Keep the following points in mind:
1) Financial control is key - it isn't essential that the disqualified individual is a signatory on the bank account, but you should be able to show an element of control over who got paid, and when. Look in particular for cash withdrawals and ask who was then responsibile for disbursing that cash.
2) Look at all aspects of the business - production, finance, marketing, recruitment etc - and show involvement and control across the board for a solid allegation. Third party evidence is particularly relevant - who did suppliers, customers, banks, employees and other stakeholders think was controlling the company, and what did they base that perspective on?
3) Consider what the registered director's were doing - their inactivity will support an allegation that the disqualified individual was the controlling party.
4) Remember that for a criminal allegation, although the burden of proof is higher, it is only necessary to show that the individual acted in the management of the company. For disqualification purposes it must first be established that he/she can be shown to be a director, to meet the requirements of the CDDA.
5) Always check whether there has been an application for leave to act under Section 17 of the CDDA, and if leave was granted consider the conditions which would inevitably have been imposed by the Court and whether these have been adhered to.
Finally, once you've made an allegation of a disqualification breach make sure you keep track of the proceedings as if they are successful creditors should be considering recovery action against the individual concerned through the enforcement of personal liability under the provisions of Section 15 of the CDDA.
Similar considerations apply when you're considering an allegation that a director has breached Section 216 of the Insolvency Act 1986 and personal liability is again enforceable under the provisions of Section 217 of the Insolvency Act 1986.
Ultimately, it may be the partner who had the pen, but what we're all interested in is who was controlling the flow of the ink.
Coronation Treat ....
..... or more commonly in the soap operas you are dealing with, Crown Detriment. In this fifth blog piece on disqualification issues I shall briefly lay out the requirements of a sound allegation centred upon a company's failure to make adequate payments in respect of it's tax liabilities.
There are several forms which such an allegation can take, but the first thing to bear in mind is that the mere existence of Crown debt, or retention of Crown monies, is not a sustainable allegation of misconduct on its own. The preferred allegation, as tried and tested through myriad cases, is framed in terms of the more specific “Trading to the detriment of HMRC”, with the focus being on the unique and particular maltreatment of the crown, an involuntary creditor.
For a strong allegation in these terms you should look to establish:
1) Detrimental treatment of the Crown (i.e. unpaid/overdue liabilities) for a period in excess of 12 months of trading.
2) Continued payments to other parties over the same period i.e. trade and expense liabilities decreasing or remaining stable in comparison. The allegation will also be strengthened if you are able to show continued benefit to the directors through remuneration payments, reduced loan accounts, payments to creditors holding personal guarantees and the like.
3) HMRC the largest creditor at liquidation, or at least having a significant, material liability in comparison to other classes of creditor. If the HMRC debt is based entirely, or primarily, on estimated assessments, you should also look to show that the debt level is realistic by reference to the other records available.
Basically it is a question of avoiding the urge to view the tax position in isolation, and instead considering it in the context of the trading of the company as a whole. Has this company gained a competitive advantage, and thereby a benefit to its directors, through repeatedly failing to pay over monies due to the Crown? Has the business effectively been financed through using tax monies as a source of working capital, enabling the company to continue to trade when it would otherwise have been cash flow insolvent? These are the types of questions you should ask.
Finally, consider whether there is any mitigation provided by dialogue with the tax authorities or (and we all know it happens far too often) abject negligence on their part. Time to pay agreements, if adhered to, will certainly mitigate the misconduct as they suggest a willingness and desire to set the problem straight, however, if your company has a record of repeated agreements being set up with no, or very few, payments being made then this merely illustrates a delaying tactic to prevent enforcement action being taken.
The nature of the business may also be significant here, as for a labour intensive operation HMRC may be the only significant creditor in any event, meaning that it is more pertinent to consider an allegation centred upon general trading whilst insolvent rather than specific detriment to one particular creditor.
As ever, keep the four M's in mind: Misconduct, Motivation, Materiality and Mitigation. The existence of a debt to HMRC is an open door enabling you to explore further, but it doesn't lead directly into the garden of disqualification, there are a few other darkened passages to be illuminated first.
There are several forms which such an allegation can take, but the first thing to bear in mind is that the mere existence of Crown debt, or retention of Crown monies, is not a sustainable allegation of misconduct on its own. The preferred allegation, as tried and tested through myriad cases, is framed in terms of the more specific “Trading to the detriment of HMRC”, with the focus being on the unique and particular maltreatment of the crown, an involuntary creditor.
For a strong allegation in these terms you should look to establish:
1) Detrimental treatment of the Crown (i.e. unpaid/overdue liabilities) for a period in excess of 12 months of trading.
2) Continued payments to other parties over the same period i.e. trade and expense liabilities decreasing or remaining stable in comparison. The allegation will also be strengthened if you are able to show continued benefit to the directors through remuneration payments, reduced loan accounts, payments to creditors holding personal guarantees and the like.
3) HMRC the largest creditor at liquidation, or at least having a significant, material liability in comparison to other classes of creditor. If the HMRC debt is based entirely, or primarily, on estimated assessments, you should also look to show that the debt level is realistic by reference to the other records available.
Basically it is a question of avoiding the urge to view the tax position in isolation, and instead considering it in the context of the trading of the company as a whole. Has this company gained a competitive advantage, and thereby a benefit to its directors, through repeatedly failing to pay over monies due to the Crown? Has the business effectively been financed through using tax monies as a source of working capital, enabling the company to continue to trade when it would otherwise have been cash flow insolvent? These are the types of questions you should ask.
Finally, consider whether there is any mitigation provided by dialogue with the tax authorities or (and we all know it happens far too often) abject negligence on their part. Time to pay agreements, if adhered to, will certainly mitigate the misconduct as they suggest a willingness and desire to set the problem straight, however, if your company has a record of repeated agreements being set up with no, or very few, payments being made then this merely illustrates a delaying tactic to prevent enforcement action being taken.
The nature of the business may also be significant here, as for a labour intensive operation HMRC may be the only significant creditor in any event, meaning that it is more pertinent to consider an allegation centred upon general trading whilst insolvent rather than specific detriment to one particular creditor.
As ever, keep the four M's in mind: Misconduct, Motivation, Materiality and Mitigation. The existence of a debt to HMRC is an open door enabling you to explore further, but it doesn't lead directly into the garden of disqualification, there are a few other darkened passages to be illuminated first.
Whose money is it anyway?
This fourth occasional blog piece on disqualification issues looks at transactions which occur in that final period of trading, when the company is clearly insolvent and heading for formal proceedings, and have the effect of removing funds which would otherwise be available for creditors, usually to the benefit of a connected/associated party.
In disqualification terms they can be grouped together as "Transactions to the detriment of creditors" and it is a relatively straightforward allegation to make once knowledge of insolvency has been demonstrated. Essentially, you’ll know these transactions as preferences, or transactions at an undervalue, as defined within sections 239 and 238 of the Insolvency Act 1986 respectively. However, in the world of disqualification proceedings the avoidance of that statutory definition enables the Secretary of State to focus upon the actuality of the transaction in terms of its reasonableness, when set against the backdrop of the company’s financial position, and the impact which it had upon both unpaid creditors and the beneficiary.
We've all heard the "its my company, its my money" attitude expressed by owner/directors to excuse the fact that they've cleaned out the company bank account to pay off the finance on their Audi TT - or whatever the latest fad status symbol is - but the simple fact in law supports a different perspective. Essentially, once the company is demonstrably insolvent the over-riding duty owed by directors is to the company's creditors, and protecting assets to minimise their loss and ensure that they are treated fairly. Of course, director's are still entitled to a fair level of remuneration whilst they continue to manage the company's affairs (although I have come across District Judges who would question the right to any payments whatsoever) but any additional benefit is an obvious no-no.
So what are we talking about? Some classic examples would include:
1) Repayment or reduction of a director's loan account either through the payment of cash or the transfer of assets.
2) Settlement of a debt subject to a personal guarantee while other creditors without that protection remain unpaid. Most commonly this could be the reduction of a bank overdraft, but in those circumstances you need to be able to show that the director made a conscious choice to do this, rather than it being achieved through the actions of the bank. The existence of a debenture which would entitle the bank to the benefit of assets will also impact upon any such allegation.
3) Increased remuneration either through direct payments or payments in respect of benefits, such as a pension scheme.
4) Settlement of an inter-company debt, or payments made to an associated/connected party to expunge or reduce an existent liability.
5) Use of company labour or assets for a personal benefit e.g. a building company being used to knock up an extension on a director's home.
6) Migration of book debts to a new venture through the issue of credit notes in the old comapny and re-issue of invoices in the new one's name.
The list is pretty much endless and all you are essentially looking for is a reduction in the value of assets which would otherwise have been available for creditors, with a corresponding benefit to the director(s), whether that be direct or indirect. If the sum involved is material in the context of the deficiency, and the transaction occurred late in the company’s trading, then there is a strong probability of unfitness being provable.
In many small companies the human instinct to look after family members will often prove irresistible, and whatever your moral opinion about the man in the street versus the faceless multi-national corporation, the failure to treat all creditors the same will almost certainly constitute misconduct.
In disqualification terms they can be grouped together as "Transactions to the detriment of creditors" and it is a relatively straightforward allegation to make once knowledge of insolvency has been demonstrated. Essentially, you’ll know these transactions as preferences, or transactions at an undervalue, as defined within sections 239 and 238 of the Insolvency Act 1986 respectively. However, in the world of disqualification proceedings the avoidance of that statutory definition enables the Secretary of State to focus upon the actuality of the transaction in terms of its reasonableness, when set against the backdrop of the company’s financial position, and the impact which it had upon both unpaid creditors and the beneficiary.
We've all heard the "its my company, its my money" attitude expressed by owner/directors to excuse the fact that they've cleaned out the company bank account to pay off the finance on their Audi TT - or whatever the latest fad status symbol is - but the simple fact in law supports a different perspective. Essentially, once the company is demonstrably insolvent the over-riding duty owed by directors is to the company's creditors, and protecting assets to minimise their loss and ensure that they are treated fairly. Of course, director's are still entitled to a fair level of remuneration whilst they continue to manage the company's affairs (although I have come across District Judges who would question the right to any payments whatsoever) but any additional benefit is an obvious no-no.
So what are we talking about? Some classic examples would include:
1) Repayment or reduction of a director's loan account either through the payment of cash or the transfer of assets.
2) Settlement of a debt subject to a personal guarantee while other creditors without that protection remain unpaid. Most commonly this could be the reduction of a bank overdraft, but in those circumstances you need to be able to show that the director made a conscious choice to do this, rather than it being achieved through the actions of the bank. The existence of a debenture which would entitle the bank to the benefit of assets will also impact upon any such allegation.
3) Increased remuneration either through direct payments or payments in respect of benefits, such as a pension scheme.
4) Settlement of an inter-company debt, or payments made to an associated/connected party to expunge or reduce an existent liability.
5) Use of company labour or assets for a personal benefit e.g. a building company being used to knock up an extension on a director's home.
6) Migration of book debts to a new venture through the issue of credit notes in the old comapny and re-issue of invoices in the new one's name.
The list is pretty much endless and all you are essentially looking for is a reduction in the value of assets which would otherwise have been available for creditors, with a corresponding benefit to the director(s), whether that be direct or indirect. If the sum involved is material in the context of the deficiency, and the transaction occurred late in the company’s trading, then there is a strong probability of unfitness being provable.
In many small companies the human instinct to look after family members will often prove irresistible, and whatever your moral opinion about the man in the street versus the faceless multi-national corporation, the failure to treat all creditors the same will almost certainly constitute misconduct.
Thursday, April 16, 2009
Advertising Blog 3 - sections 95 and 98 amended
Just a quick note, but rather than type up the detail, you should go to: http://www.opsi.gov.uk/si/si2009/uksi_20090864_en_1 where you will find the Legislative Reform Order that came into force on 6 April 2009 and allowed you to stop advertising for CVL meetings (whether new CVLs or conversions from MVLs).
This news was in the R3 technical bulletin released on 8 April, but other than that I have not seen much publicity about it, so a reminder may be appropriate.
This news was in the R3 technical bulletin released on 8 April, but other than that I have not seen much publicity about it, so a reminder may be appropriate.
Thursday, April 09, 2009
The new advertising regime – some further thoughts
Never before have we received so many phone calls or e-mails on something that affects IPs, not even SIP 16 generated this much comment or discussion.
We have so far found four areas where the Amendment Rules are either unclear, inconsistent, or give rise to unintended consequences. The first two are so new that we have not yet had an opportunity to raise them with The Insolvency Service:
1. The approach taken to advertising general meetings of creditors in bankruptcies differs from that in liquidations. In liquidations you are required to gazette all such meetings as a result of the changes made to rule 4.54(6). In bankruptcies though the changes of the wording to rule 6.81(4) bizarrely gives two levels of discretion; a discretion to give notice of the meeting by advertising as well as written notice and a requirement to gazette if you decide to exercise that discretion; and then, if you gazette, a further discretion to “advertise in such other manner as the convenor thinks fit.” We wonder if it was deliberate to have different approaches between bankruptcies and liquidation.
2. The requirement to hold an annual meeting of creditors in CVLs is set out section 105 of the Act, but in contrast to final meetings there are no specific rules dealing with notice requirements of annual meetings. As a result, rule 4.54 applies for notice of annual meetings, and following the revision to rule 4.54(6) you have to gazette such meetings. Presumably this is the law of unintended consequences at work, but luckily this won’t have any effect for 12 months since the amendment only applies to cases that commenced on or after 6 April 2008, and in the interim The Insolvency Service may give some clarification, or amend the rule.
The next two were in our recent update and have already been raised with the Insolvency Service:
3. Rule 11.2 has been amended so that the requirement to gazette the notice of intended dividend “shall not apply where the responsible insolvency practitioner has previously, by notice, invited creditors to prove their debts.” Whilst we believe that the use of the word “notice” indicates that the invitation can now be by way of a circular notice given the removal of the phrase “previously by public advertisement” used in the current rule 11.2(1A), and the use elsewhere in the Amendment Rules of the phrase “gazetted a notice” or even the word “gazetted” to denote the need to gazette, The Insolvency Service have indicated that their intention for the practical application of the rules is that they expect IPs to gazette the invitation to submit claims. Consequently, to avoid potential problems with your regulators we would recommend that you comply with the Service’s request and gazette your invitation to creditors to lodge claims, and that you do so on appointment in cases where you believe it likely that there will be a distribution to non-preferential unsecured creditors either by way of the prescribed part or otherwise.
4. There is a technical glitch in the amendment to rule 4.106(1) in that it only refers to gazetting for CVLs and MVLs after a meeting appointment by reference to section 109(1), but makes no reference to gazetting after a first meeting appointment in Compulsory winding up. This contrasts with the amendment to rule 6.124(1) which specifically requires gazetting in similar circumstances in bankruptcy. We have checked with the Insolvency Service and understand that they would like IPs to gazette in the same way for appointments made at meetings in compulsory liquidations, although the legislation is not likely to be amended until next year.
We intend to raise the first two points above when the dust has settled in a few weeks or so. We would also welcome receiving details of any other problems or inconsistencies you spot.
We are a little concerned that it has been so easy to find fault in what is supposed to be the first of a raft of consolidating legislation over the next couple of years. While we realise that drafting legislation to cover every eventuality is almost impossible and that such drafting is a thankless task at the best of times, we have to ask whether the same standard is to be expected from the other revisions. It may be possible for The Insolvency Service to cover a few inconsistencies by asking you to go beyond the legislation or read the legislation as they intended rather than the way it was written, but if there are similar problems with later consolidations, this will soon get out of hand. From your point of view, although it may be quite entertaining to see the regulators struggle to enforce what their regulator meant rather than what the legislation said, it creates another level of uncertainty that you will not need. For the regulators, they will find it almost impossible to take action against an IP for not gazetting notice of intended dividend for example. We cannot see the argument that The Insolvency Service wanted it done but the legislation, which they drafted, is uncertain is likely to carry much weight if it came to Judicial Review. From our point of view, it means that we have already had to spend several hours helping unravel the uncertainty. We appreciate though that you will each have spent far longer amending your systems and procedures and standard documents to reflect the changes, with the possibility of more changes to come when the various uncertainties are clarified, but don't forget to pass on the cost savings for not having to advertise to the creditors!
We have so far found four areas where the Amendment Rules are either unclear, inconsistent, or give rise to unintended consequences. The first two are so new that we have not yet had an opportunity to raise them with The Insolvency Service:
1. The approach taken to advertising general meetings of creditors in bankruptcies differs from that in liquidations. In liquidations you are required to gazette all such meetings as a result of the changes made to rule 4.54(6). In bankruptcies though the changes of the wording to rule 6.81(4) bizarrely gives two levels of discretion; a discretion to give notice of the meeting by advertising as well as written notice and a requirement to gazette if you decide to exercise that discretion; and then, if you gazette, a further discretion to “advertise in such other manner as the convenor thinks fit.” We wonder if it was deliberate to have different approaches between bankruptcies and liquidation.
2. The requirement to hold an annual meeting of creditors in CVLs is set out section 105 of the Act, but in contrast to final meetings there are no specific rules dealing with notice requirements of annual meetings. As a result, rule 4.54 applies for notice of annual meetings, and following the revision to rule 4.54(6) you have to gazette such meetings. Presumably this is the law of unintended consequences at work, but luckily this won’t have any effect for 12 months since the amendment only applies to cases that commenced on or after 6 April 2008, and in the interim The Insolvency Service may give some clarification, or amend the rule.
The next two were in our recent update and have already been raised with the Insolvency Service:
3. Rule 11.2 has been amended so that the requirement to gazette the notice of intended dividend “shall not apply where the responsible insolvency practitioner has previously, by notice, invited creditors to prove their debts.” Whilst we believe that the use of the word “notice” indicates that the invitation can now be by way of a circular notice given the removal of the phrase “previously by public advertisement” used in the current rule 11.2(1A), and the use elsewhere in the Amendment Rules of the phrase “gazetted a notice” or even the word “gazetted” to denote the need to gazette, The Insolvency Service have indicated that their intention for the practical application of the rules is that they expect IPs to gazette the invitation to submit claims. Consequently, to avoid potential problems with your regulators we would recommend that you comply with the Service’s request and gazette your invitation to creditors to lodge claims, and that you do so on appointment in cases where you believe it likely that there will be a distribution to non-preferential unsecured creditors either by way of the prescribed part or otherwise.
4. There is a technical glitch in the amendment to rule 4.106(1) in that it only refers to gazetting for CVLs and MVLs after a meeting appointment by reference to section 109(1), but makes no reference to gazetting after a first meeting appointment in Compulsory winding up. This contrasts with the amendment to rule 6.124(1) which specifically requires gazetting in similar circumstances in bankruptcy. We have checked with the Insolvency Service and understand that they would like IPs to gazette in the same way for appointments made at meetings in compulsory liquidations, although the legislation is not likely to be amended until next year.
We intend to raise the first two points above when the dust has settled in a few weeks or so. We would also welcome receiving details of any other problems or inconsistencies you spot.
We are a little concerned that it has been so easy to find fault in what is supposed to be the first of a raft of consolidating legislation over the next couple of years. While we realise that drafting legislation to cover every eventuality is almost impossible and that such drafting is a thankless task at the best of times, we have to ask whether the same standard is to be expected from the other revisions. It may be possible for The Insolvency Service to cover a few inconsistencies by asking you to go beyond the legislation or read the legislation as they intended rather than the way it was written, but if there are similar problems with later consolidations, this will soon get out of hand. From your point of view, although it may be quite entertaining to see the regulators struggle to enforce what their regulator meant rather than what the legislation said, it creates another level of uncertainty that you will not need. For the regulators, they will find it almost impossible to take action against an IP for not gazetting notice of intended dividend for example. We cannot see the argument that The Insolvency Service wanted it done but the legislation, which they drafted, is uncertain is likely to carry much weight if it came to Judicial Review. From our point of view, it means that we have already had to spend several hours helping unravel the uncertainty. We appreciate though that you will each have spent far longer amending your systems and procedures and standard documents to reflect the changes, with the possibility of more changes to come when the various uncertainties are clarified, but don't forget to pass on the cost savings for not having to advertise to the creditors!
Saturday, March 21, 2009
First thoughts on the new advertising regime
Removing the need to automatically advertise in insolvency cases in England and Wales and in some case types in Scotland is certainly a positive change that is to be welcomed, as is the removal of the need to file adverts in Court in bankruptcies and compulsory liquidations in England and Wales. The recent Dear IP also encourages IPs to be creative in the approach they take, and we can already visualise some of you booking media courses for when you appear in the television or radio advert telling creditors all about your most recent case.
It will be interesting to see if the RPBs/JIC issue any guidance in due course on when you should advertise. We do not think that such guidance will be necessary, and that Dear IP is sufficient, the key part being the phrase that discretion to advertise should be used “.. where clear benefits or a business need can be identified.” Since you will have to make a positive decision to advertise then you should develop a practice policy setting out when you will advertise on cases, and we can see the monitors checking for compliance with your policy. Our initial thoughts are that any policy should start with a statement of the assumption that an advertisement will not be placed unless a positive decision is made by a suitably senior person within the practice.
Dear IP is useful in identifying criteria for advertising in a case, and I suggest that your practice policy could also include:
significant numbers of customer deposits;
where the directors are not co-operating – e.g. hostile administrations where you have been appointed by a QFCH or creditor;
or where there are a lot of creditors where the directors have been unable to provide addresses.
The assumption is that when you need to advertise, you will place an advertisement in a local paper, but as Dear IP states, you should consider getting creative, although you should still keep a grip on reality, particularly from the cost perspective. For example, if you have an insolvency that traded in a sector where there is a trade magazine consider advertising in that instead, and certainly in the current climate local papers are interested in insolvencies affecting local communities, but it could be more time consuming and costly to the estate to arrange an interview with a local reporter or to prepare a press release.
This brings us neatly on to the stated policy aim of the legislative change of providing “ ... savings in the cost of administering insolvencies which are expected to be passed on to creditors by way of better returns.” We are not convinced by this. It is a nice concept, but not grounded in reality. The cost of each advert in the context of each appointment is hardly earth-shattering. Nor does the new approach take into account that many cases have minimal or no assets and that the insolvency administration is either funded by those assets and/or by funds provided by the directors personally, with little or no money left for creditors. The reduction in advertising costs will merely reduce the IP’s time write offs and help offset some of the cost of having to deal with all the other required compliance work on the case irrespective of the level of assets. For large cases then the advertising will represent only an insignificant percentage of total realisations and total costs, such that the impact of the costs savings by not advertising will be de minimis. There will only be a limited number of, for want of a better word, medium sized cases, where there is potential for the cost saving to be passed on to the creditors, but even then IPs may well take the view that they will merely reduce their time write offs in such cases to recoup some of the additional costs they have to bear for increased compliance costs in recent years, including the recent obligations imposed by SIP 16. It will be interesting to see how the RPBs monitor this issue.
Finally, a few words of caution. The legislation comes into force on 6 April, so technically you have to keep advertising until then. Even then, watch out for the pre-meeting adverts in CVLs and MVL/CVL conversions which require a different kind of legislative change and may not happen at the same time. However, now that the regulator of regulators and head of all things legislative in insolvency has come out publicly and said that change is on the way, it would be unfortunate if any regulator enforced the rules too strictly in the interim. Sadly for Scottish IPs, things are less simple and only the CVA and administration adverts will be affected, all others will stay for now and the proposed legislative fix for the CVL and MVL/CVL conversion meetings above will not apply to Scottish cases either. Even more sadly, for Northern Ireland IPs you seem to have been left out of the party all together for Northern Irish cases at the moment, but your time will come!
It will be interesting to see if the RPBs/JIC issue any guidance in due course on when you should advertise. We do not think that such guidance will be necessary, and that Dear IP is sufficient, the key part being the phrase that discretion to advertise should be used “.. where clear benefits or a business need can be identified.” Since you will have to make a positive decision to advertise then you should develop a practice policy setting out when you will advertise on cases, and we can see the monitors checking for compliance with your policy. Our initial thoughts are that any policy should start with a statement of the assumption that an advertisement will not be placed unless a positive decision is made by a suitably senior person within the practice.
Dear IP is useful in identifying criteria for advertising in a case, and I suggest that your practice policy could also include:
significant numbers of customer deposits;
where the directors are not co-operating – e.g. hostile administrations where you have been appointed by a QFCH or creditor;
or where there are a lot of creditors where the directors have been unable to provide addresses.
The assumption is that when you need to advertise, you will place an advertisement in a local paper, but as Dear IP states, you should consider getting creative, although you should still keep a grip on reality, particularly from the cost perspective. For example, if you have an insolvency that traded in a sector where there is a trade magazine consider advertising in that instead, and certainly in the current climate local papers are interested in insolvencies affecting local communities, but it could be more time consuming and costly to the estate to arrange an interview with a local reporter or to prepare a press release.
This brings us neatly on to the stated policy aim of the legislative change of providing “ ... savings in the cost of administering insolvencies which are expected to be passed on to creditors by way of better returns.” We are not convinced by this. It is a nice concept, but not grounded in reality. The cost of each advert in the context of each appointment is hardly earth-shattering. Nor does the new approach take into account that many cases have minimal or no assets and that the insolvency administration is either funded by those assets and/or by funds provided by the directors personally, with little or no money left for creditors. The reduction in advertising costs will merely reduce the IP’s time write offs and help offset some of the cost of having to deal with all the other required compliance work on the case irrespective of the level of assets. For large cases then the advertising will represent only an insignificant percentage of total realisations and total costs, such that the impact of the costs savings by not advertising will be de minimis. There will only be a limited number of, for want of a better word, medium sized cases, where there is potential for the cost saving to be passed on to the creditors, but even then IPs may well take the view that they will merely reduce their time write offs in such cases to recoup some of the additional costs they have to bear for increased compliance costs in recent years, including the recent obligations imposed by SIP 16. It will be interesting to see how the RPBs monitor this issue.
Finally, a few words of caution. The legislation comes into force on 6 April, so technically you have to keep advertising until then. Even then, watch out for the pre-meeting adverts in CVLs and MVL/CVL conversions which require a different kind of legislative change and may not happen at the same time. However, now that the regulator of regulators and head of all things legislative in insolvency has come out publicly and said that change is on the way, it would be unfortunate if any regulator enforced the rules too strictly in the interim. Sadly for Scottish IPs, things are less simple and only the CVA and administration adverts will be affected, all others will stay for now and the proposed legislative fix for the CVL and MVL/CVL conversion meetings above will not apply to Scottish cases either. Even more sadly, for Northern Ireland IPs you seem to have been left out of the party all together for Northern Irish cases at the moment, but your time will come!
Monday, February 16, 2009
Setting the records straight
With the recent-ish changes to the Money Laundering regulations, the game of hokey-cokey played with the requirement to hold on to employers’ liability insurance certificates and some brave pioneers moving into the realm of the paperless office, an area which we’re occasionally asked to advise on is that relating to the retention of various types of case papers.
So, leaving aside the thorny issue of the client’s accounting records, just how long do you need to clog up physical or cyber-space with the various components of your files, and exactly when can you look forward to dancing free and wild around a roaring fire of copy passports, painstakingly prepared time records and proud, purposeful IP records? The primary requirements are summarised below:
1. The IP record: Regulation 20 of the IP Regulations 1990 dictates that for cases commenced prior to 1 April 2005 you must keep the Regulation 17 IP record for a period of 10 years from the date of your release/discharge or (if later) the date on which any security or caution maintained in respect of that estate expired/ceased to have effect (essentially the date on which you notify your release to your bond provider).
For cases commenced on or after 1 April 2005, Regulation 13(5) of the IP Regulations 2005 dictates that both your IP record and your time records on the case are kept for a period of 6 years from the date of your release/discharge or (if later) the date on which you notify your release to your bond provider.
2. Specific penalty bond cover schedule/bordereau: For all case types you need to keep a copy of this document for 2 years after the date of release or discharge as office holder as per Schedule 2, paragraph 11(2) of the IP Regulations 2005 and regulation 14(2) of the IP Regulations 1990.
3. Money Laundering ID and associated records: Regulation 19 of the Money Laundering Regulations 2007 applies in respect of all appointments held as at 15 December 2007, and thereafter, and deals with the retention of records. This is a little more complex, but essentially under this provision you need to retain copies of identification records obtained (or the references to such evidence) and also the supporting records (originals or copies) of any business relationship or occasional transaction which is the subject to customer due diligence measures, or ongoing monitoring, for a period of five years.
The five year period begins with the date on which the occasional transaction is completed or the business relationship ends, which in most cases will mean the date of your release/discharge. However, if another party relies on your identification for Money Laundering purposes then you must retain copies of identification records for a period of five years from the date on which that person relies upon you.
There is no specific guidance on what constitutes the “supporting records” of the business relationship, and a risk averse approach would be to retain the case papers in their entirety, especially as this is a more general provision than that dictated by the Money Laundering Regulations 2003, which make specific reference to a record of transactions carried out – implying that the later regulation expects more than simply financial schedules.
The earlier provisions came into force on 1 March 2004 and, again, apply to all appointments held at that date. They contains similar provisions at Regulation 6, specifying a five year period for the retention of identification records (where obtained) but as noted above, specifically requiring a record containing details of all transactions carried out in the course of the relevant business.
In actuality, the five year limit imposed by the Money Laundering Regulations is more stringent that the current insolvency legislation when it comes to retention of records in respect of appointments in Members’ Voluntary Liquidations, Administrative Receiverships, Administrations and Voluntary Arrangements and this could present a significant change to any pre-existing destruction policy.
4. Financial Records: Regulations 13 and 27 of the Insolvency Regulations 1994 stipulate that financial records in compulsory liquidations, creditors’ voluntary liquidations and bankruptcies must be kept for a period of six years from the date that office is vacated, unless there is a successive liquidator/trustee to whom the records are passed. This includes a separate and distinct account of trading if the insolvent business is continued during the course of proceedings. As noted above, this provision does not extend to members’ voluntary liquidations, administrative receiverships, administrations or voluntary arrangements so the primary consideration in those cases is the impact of the Money Laundering Regulations.
5. General case papers: The insolvency legislation is similarly silent on the subject of how long general case papers ought to be retained, and this will be a matter of individual policy based upon your risk appetite. The starting point should flow from the fact that the statute of limitations is 6 years for actions on a contract, which is in line with the IP Regulations 2005 referred to above.
The Official Receiver, however, takes a more pragmatic approach which is best summarised as follows:
a) Cases with no investigation – later of 5 years from order or 2 years from completion of administration.
b) Protracted realisations – Annual review after 3 years if asset not realised.
c) Prosecution cases – the later of 7 years from completion or 6 months after the end of the sentence imposed.
d) Disqualification and bankruptcy restriction cases – the later of 7 years from the date of commencement of the disqualification/restriction or the end of the longest period of disqualification/restriction.
e) Public interest cases – subject to review in consultation with the National Archives with possible permanent retention. A public interest case may be one involving a long established company, famous/infamous individuals, prolonged media interest, novel or unusual circumstances, or one which may be the subject of future research.
Although the legislative provisions are clearly tighter for IP’s due to the separate requirement to maintain financial records, it is worth considering the retention of case papers for a longer period where you are aware that there is ongoing disqualification or prosecution action, particularly if those proceedings become protracted through the use of the appeal system.
One final point is to check your Professional Indemnity Insurance to ensure that there is no separate provision within that policy in respect of retention of files. Provided that it contains no hidden stipulations, then a policy of keeping all case files for 6 years from notification of release to the bond provider is the simplest and safest approach, setting up a separate system – either electronic or manual – to enable you to produce an IP Record for all cases still caught under the IP Regulations 1990 for which such information must be held for 10 years from release, and setting up a system prompt to ensure that you pick up on any odd cases where a third party relies upon your ID evidence and retain that evidence separately for a 5 year period thereafter.
So, leaving aside the thorny issue of the client’s accounting records, just how long do you need to clog up physical or cyber-space with the various components of your files, and exactly when can you look forward to dancing free and wild around a roaring fire of copy passports, painstakingly prepared time records and proud, purposeful IP records? The primary requirements are summarised below:
1. The IP record: Regulation 20 of the IP Regulations 1990 dictates that for cases commenced prior to 1 April 2005 you must keep the Regulation 17 IP record for a period of 10 years from the date of your release/discharge or (if later) the date on which any security or caution maintained in respect of that estate expired/ceased to have effect (essentially the date on which you notify your release to your bond provider).
For cases commenced on or after 1 April 2005, Regulation 13(5) of the IP Regulations 2005 dictates that both your IP record and your time records on the case are kept for a period of 6 years from the date of your release/discharge or (if later) the date on which you notify your release to your bond provider.
2. Specific penalty bond cover schedule/bordereau: For all case types you need to keep a copy of this document for 2 years after the date of release or discharge as office holder as per Schedule 2, paragraph 11(2) of the IP Regulations 2005 and regulation 14(2) of the IP Regulations 1990.
3. Money Laundering ID and associated records: Regulation 19 of the Money Laundering Regulations 2007 applies in respect of all appointments held as at 15 December 2007, and thereafter, and deals with the retention of records. This is a little more complex, but essentially under this provision you need to retain copies of identification records obtained (or the references to such evidence) and also the supporting records (originals or copies) of any business relationship or occasional transaction which is the subject to customer due diligence measures, or ongoing monitoring, for a period of five years.
The five year period begins with the date on which the occasional transaction is completed or the business relationship ends, which in most cases will mean the date of your release/discharge. However, if another party relies on your identification for Money Laundering purposes then you must retain copies of identification records for a period of five years from the date on which that person relies upon you.
There is no specific guidance on what constitutes the “supporting records” of the business relationship, and a risk averse approach would be to retain the case papers in their entirety, especially as this is a more general provision than that dictated by the Money Laundering Regulations 2003, which make specific reference to a record of transactions carried out – implying that the later regulation expects more than simply financial schedules.
The earlier provisions came into force on 1 March 2004 and, again, apply to all appointments held at that date. They contains similar provisions at Regulation 6, specifying a five year period for the retention of identification records (where obtained) but as noted above, specifically requiring a record containing details of all transactions carried out in the course of the relevant business.
In actuality, the five year limit imposed by the Money Laundering Regulations is more stringent that the current insolvency legislation when it comes to retention of records in respect of appointments in Members’ Voluntary Liquidations, Administrative Receiverships, Administrations and Voluntary Arrangements and this could present a significant change to any pre-existing destruction policy.
4. Financial Records: Regulations 13 and 27 of the Insolvency Regulations 1994 stipulate that financial records in compulsory liquidations, creditors’ voluntary liquidations and bankruptcies must be kept for a period of six years from the date that office is vacated, unless there is a successive liquidator/trustee to whom the records are passed. This includes a separate and distinct account of trading if the insolvent business is continued during the course of proceedings. As noted above, this provision does not extend to members’ voluntary liquidations, administrative receiverships, administrations or voluntary arrangements so the primary consideration in those cases is the impact of the Money Laundering Regulations.
5. General case papers: The insolvency legislation is similarly silent on the subject of how long general case papers ought to be retained, and this will be a matter of individual policy based upon your risk appetite. The starting point should flow from the fact that the statute of limitations is 6 years for actions on a contract, which is in line with the IP Regulations 2005 referred to above.
The Official Receiver, however, takes a more pragmatic approach which is best summarised as follows:
a) Cases with no investigation – later of 5 years from order or 2 years from completion of administration.
b) Protracted realisations – Annual review after 3 years if asset not realised.
c) Prosecution cases – the later of 7 years from completion or 6 months after the end of the sentence imposed.
d) Disqualification and bankruptcy restriction cases – the later of 7 years from the date of commencement of the disqualification/restriction or the end of the longest period of disqualification/restriction.
e) Public interest cases – subject to review in consultation with the National Archives with possible permanent retention. A public interest case may be one involving a long established company, famous/infamous individuals, prolonged media interest, novel or unusual circumstances, or one which may be the subject of future research.
Although the legislative provisions are clearly tighter for IP’s due to the separate requirement to maintain financial records, it is worth considering the retention of case papers for a longer period where you are aware that there is ongoing disqualification or prosecution action, particularly if those proceedings become protracted through the use of the appeal system.
One final point is to check your Professional Indemnity Insurance to ensure that there is no separate provision within that policy in respect of retention of files. Provided that it contains no hidden stipulations, then a policy of keeping all case files for 6 years from notification of release to the bond provider is the simplest and safest approach, setting up a separate system – either electronic or manual – to enable you to produce an IP Record for all cases still caught under the IP Regulations 1990 for which such information must be held for 10 years from release, and setting up a system prompt to ensure that you pick up on any odd cases where a third party relies upon your ID evidence and retain that evidence separately for a 5 year period thereafter.
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