Ohhh Kaaay! Here goes
for the article I have been putting off writing. As you will see from the title, we are boldly
going where nobody else has dared to go, and commenting on the whole PPI
mess. However, in a cowardly piece of
self-protection, I have to start out with a wide disclaimer that these are just
our thoughts and you’d be daft to rely on them.
Obviously you should seek your own advice that is specific to the
particular cases you are dealing with.
As we understand it, the current position is that the
regulators and R3 are trying to agree a combined notice about how PPI claims
should be treated. The main difficulties
arise in IVAs, so most of this article is about them. The senior counsel that the regulators have
instructed appear to disagree and we understand that further counsel’s opinion
is being sought. This article should be
seen a bit like our articles about Paymex, in that these are ideas that we can
put out earlier than the regulators because we are not constrained by the
framework that they have to work within.
We suspect that, because of the doubt about how PPI claims
should be treated, any “advice” issued by the regulators in due course is
likely to start by saying that you will have to treat each case on its own merits
and you should seek your own legal advice anyway. We don’t blame them, as it is a minefield and
we have had to include a similar disclaimer, but it does rather cast doubt on
how useful the advice is in the first place!
The points below are mainly drawn from past client queries,
but include some of our current thinking.
Please note that some of it is contradictory, as our opinion has changed
over time. The real purpose of this
article is to make you aware of some of the complexities, rather than to
provide technically correct advice. We
have suggested some pragmatic, broad-brush solutions that could be considered
at the end, but we are not convinced that anyone in the profession is really
going to pursue them.
1 Is PPI
an asset in bankruptcy? All of the
sources we can find agree that it is. That
means that the original right to the PPI is an asset, so it vests automatically
in the bankruptcy estate without any need for assignment or transfer. The trustee can claim it direct from the
financial institution, and the debtor is not entitled to it. It survives as an
asset in the bankruptcy even after the debtor’s discharge so that the debtor is
never in a position to recover it. The
biggest problem with this is likely to be bankrupts, and former bankrupts,
pursuing the PPI themselves, either with or without a claims company and the
trustee not finding out until too late and the money has been recovered and
spent by the bankrupt.
2 Is PPI
an asset in R3 terms IVAs? Probably! The
R3 standard terms for IVAs (V2, as that is the version that is likely to apply
to nearly all of the cases you are currently dealing with) include an all asset
clause that should catch it. Paragraph
26 says: “Property other than Excluded Assets belonging to or vested in the
Debtor at the date of commencement of the Arrangement which would form part of
the Debtor’s estate in a bankruptcy shall be subject to the Arrangement and be
an asset thereof.” There may be
conflicting terms in the proposals that could create doubt over that
interpretation, and the impact of modifications would also be a factor, but
under the original R3 terms you should be able to treat the PPI reclaims as
assets.
3 Is PPI
an asset under the IVA Protocol standard terms? Possibly, but possibly not! The
Protocol and the related standard terms don’t have a simple statement like the
R3 terms and instead our logic for including PPI comes from the interaction of
two definitions at the start of the Protocol standard terms: “excluded
assets” are those assets that are excluded from a debtor’s estate in
bankruptcy and any other assets identified in the proposal as being excluded
from the arrangement; and “after
acquired assets” means any asset, windfall or inheritance with a value
of more than £500, other than excluded assets that you acquire or receive
between the date the arrangement starts and the date it ends or is completed,
if this asset could have been an asset of the arrangement had it belonged to or
been vested in you at the start of the arrangement. We argue that unless the proposals
specifically exclude PPI it would be included. We consider that if there was a
term in the proposals purporting to exclude other assets at that time it could
only refer to known and disclosed assets, so that something unknown like PPI
could not have been specifically excluded.
Furthermore, we consider that if that opinion is wrong and it was
excluded, then the realised claim would be caught again by the definition of
after acquired assets. This is quite a
controversial point, as others are of the opinion that a specific proposal term
could exclude PPI if the proposals are worded to only include certain assets in
the arrangement and that if it has once been excluded, it cannot subsequently
be caught as an after-acquired asset or windfall because it is not
after-acquired.
4 If it is
not an asset and not a windfall, does that mean it is lost to the IVA? Possibly not.
We think you could use something like the logic used in the late-90’s in
Rod Kilvert’s pensions case. In that case ((Kilvert v Flackett) [1998] B.P.I.R
. 721), a pension lump sum that a trustee in bankruptcy could not otherwise
have claimed was available to be considered within the bankrupt’s income,
effectively allowing a lot of it to be claimed by the trustee as surplus income
(though not as much as he could have had if the whole lump sum had vested). If
PPI is neither an asset nor a windfall, then you may have to include the refund
in the debtor’s income and expenditure for the year and claim it as surplus,
which would probably allow him to keep some of it. The problem with this is that it would then
lead to a similar question as that seen in the recent case of Raithatha (as
Trustee in Bankruptcy of Michael Roy Williamson) v Williamson, where it was
decided that a bankrupt could be required to take his pension so that the
income would be available for the bankruptcy estate. We see a similar situation arising with PPI,
in that a debtor may have a claim but if it is not an asset and not a windfall,
they may want to defer claiming it until after the IVA is closed to avoid any
claim against it as income. Could a
supervisor force him to claim it to benefit creditors? We will not answer that one!!
5 If PPI
is an asset in an IVA, can the supervisor claim it direct? Possibly? Unlike the position in bankruptcy where
property is an asset and vests in the bankruptcy without assignment or
transfer, our feeling is that the concept of proposal and acceptance in an IVA could
imply an element of assignment. In other
words, the assets start out belonging to the debtor and he proposes to make
some (or all in the case of the R3 standard terms) available for
creditors. Only when the creditors
approve the arrangement, potentially with modifications, do the assets fall
into the arrangement and we don’t know if the court would agree with the idea
of them simply vesting on approval, or if they would require the debtor to take
some specific action to make them vest.
I suspect that there will be plenty of you reading this who will
disagree with that view, but we did say that this was a guide and not a
definitive set of rules.
6 If the
debtor has to claim PPI, who should pay any related fees? In our opinion the
costs of any recovery should be paid out of the realisation, with only the net
realisation being due into the arrangement.
Otherwise you could potentially have a situation where the debtor is
incurring new debt to a claims agency that they cannot repay if the financial
institution makes direct repayment into the IVA (or worse still, offsets the
reclaim against its own creditor balance, but see below for more on that).
7 Can PPI be
claimed in an IVA after closure if it was identified before the case was closed?
Probably yes. We keep hearing of debtors not receiving
their certificates of completion and cases not being closed because of
uncertainty around PPI. We think that
this is unfair and could be incorrect.
Both the R3 and Protocol standard terms include provision for the
supervisor to complete his administration after closure and we feel that it
should be possible to use those terms to release the debtor and close the IVA
to start the process of repairing the debtor’s record while still pursuing the
remaining PPI claim. If he has completed
his obligations, it seems unfair to keep the arrangement open and withhold his
completion certificate when there is nothing that he can do to progress
recoveries. However, the current delays may be caused by the fact that both the
Protocol and R3 standard terms state that completion certificate confirms the
Proposal has been fully implemented and the debtor is released from all debts
that are subject to the arrangement. The
question is whether releasing the debtor from all the debts subject to the
arrangement prevents a supervisor pursuing PPI and applying it to those
debts. It could be argued that there are
no longer any debts due to be paid to creditors because the issued certificate
acts as confirmation that the creditors have been paid in full and in line with
the Proposal and its terms. Our
argument, subject to the usual disclaimer, is that it should be possible to
release the debtor but retain the obligation to settle the debts in the
arrangement, in the same way that a bankruptcy estate continues after the
debtor is released from the debts.
Accordingly, it should be possible for a supervisor to pursue PPI and
apply it to the original IVA debts without affecting the end of the debtor’s
obligations under the IVA and allowing his completion certificate to be issued. That would become more certain if the right
to the PPI claim is definitely an asset or has clearly been assigned to the
supervisor.
8 Can PPI
be claimed in respect of closed cases where the IVA completed successfully? We think so.
If the PPI vests (see points about this above), then logically it
remains vested as it does in bankruptcy.
We think that could allow the former supervisor to use the standard
terms to revisit the case (without reopening the arrangement) and reclaim the
monies. The problem though is that it is likely to generate resentment amongst
debtors, with the resultant bad publicity for the profession. It would also mean persuading the financial
institutions against whom the claim is being made that they will be discharging
their obligations by paying the monies over to the former supervisor and not
the debtor. Fortunately they are likely
to be creditors of the arrangement in any event.
In most cases this
could result in additional realisations as trust monies, which could be
distributed in the same shares as the original IVA distributions, subject to
some agreement on fees. Hopefully the
profession could agree some sort of global agreement with the main creditor
voters to allow the supervisor a reasonable fee from the net realisation after
the costs of recovery. There would, of
course, be cases where the recovery might not be economical, and others where
the recovery results in a surplus being available to return money to the
debtor, requiring the debtor to have a say in the remuneration decision in
those cases, but we think that can be dealt with in the relatively small number
of affected cases.
9 Can PPI
be claimed in respect of IVAs closed by failure? Probably not, as many modifications over the
years have resulted in any trust being terminated on the failure or termination
of the arrangement. You really would
need to check each case on its own terms, but it is likely that the trust
terminates. If bankruptcy followed, then
the PPI is caught by the bankruptcy, even post-discharge, as above. In such circumstances there is no further
action required by the supervisor. If the debtor was not made bankrupt, they
could pursue the PPI claim and it will be up to creditors whether they now
petition to prevent this happening. There will be a small number of cases with
surviving trusts, but these will vary between those where only realised assets
are caught and those where any bound assets remain available. If the trust only binds realised assets then
this is effectively the same as the position for a terminating trust. If all assets are caught then the Supervisor
could probably use the standard terms to pursue the outstanding claims subject
to the agreement of fees as above.
10 Can those
repaying PPI offset it against their own balance first? There are arguments
kicking around on both sides, but no conclusions that we can see! I’m afraid
that you probably won’t get a clear conclusion from us either because our
opinion is just that, an opinion. We think that because IVAs are a collective
process then any sort of post approval preference, such as allowing the refund
to be offset against just that creditor’s liability in priority, has to be
wrong. However, that is just our opinion, even though we think it is the line
that we would encourage you to take with creditors. Your duty is to the body of
creditors as a whole and you should therefore oppose any attempt by one
creditor to gain special treatment. However,
many post-2007 arrangements were approved with a specific modification that
purports to allow creditors to offset PPI claims against their own debt first.
If IPs had resisted those modifications at the time this would not be a
problem. Our argument at the time, which nobody was brave enough to run with,
was that you could simply delete the modification. Our argument was that you were not rejecting
the modification because it was not a valid modification at all. This is
because it sought to circumvent the underlying parity principle of the IVA. Anyway, everyone ignored us, probably
correctly, so a lot of arrangements have offset as an approved term. Now that it has been incorporated in the
arrangement it makes it a lot more difficult to argue that a creditor cannot
use it. I would still try, pointing out
that the original term was contrary to the principles and therefore unfair. It
might help to mention going to the FSA and/or BBA under their Treating
Customers Fairly rules, to seek a formal ruling. I think that the bank would
back off faced with that. I have certainly heard of cases where the bank has
paid out when challenged on the validity of the modification.
11 Would you
be criticised by a regulator for not actively trawling through IVA files to
look at creditors where there might be a PPI claim to be made? Possibly. The regulators’ main attention at the moment
appears to be on untangling the legal implications, which is understandable if
you have managed to read this far. Once
they have an agreed legal position to start from, we think that they are first
likely to look at those cases where PPI claims are being made and the firm is
charging a fee, either through a related company taking commissions or by
increasing realisations so that they can draw more fees under existing
approvals. However, in time they may start to look at those IPs who have not
even checked. Your main duty is to the creditors and ignoring a potential realisation
is likely to attract criticism. Having said that, you could always put the
decision into the creditors hands by putting it forward as a variation (you’ll
need the debtor’s approval for the variation as well remember, just like any
modification or variation). You could propose a variation allowing you to
charge, say £100 for looking for a claim and a % of any realisation if a claim
was justified. You might have to use an MoJ licenced claims chaser, although you
may be able to get the debtor to put in the claim himself, avoiding the cost of
a third party claims firm but making the passage of cash a bit more risky (are
you sure the debtor would hand over the cash easily?). Alternatively, there are several claims
companies that would do the looking and claiming for you, generally for a flat
fee per case plus a (high)% of any realisation, paying you the surplus. If
unconnected to your firm, this would be a category 1 expense and therefore
would not require approval as a variation, so you could just do it and inform
the creditors in subsequent reports. Given
all of the potential alternatives, we think it is probably worth at least
exploring them, but document your reasoning to avoid criticism if the
regulators look at both those who are pursuing claims and those who are not.
12 Can you be
paid commissions by claims firms? The ethical code says “During an insolvency
appointment, accepting referral fees or commissions represents a
significant threat to objectivity. Such fees or commissions should not
therefore be accepted other than where to do so is for the benefit of the
insolvent estate”. It goes on to say “If
such fees or commissions are accepted they should only be accepted for the
benefit of the estate; not for the benefit of the Insolvency Practitioner or
the practice.” and “Further,
where such fees or commissions are accepted an Insolvency Practitioner should
consider making disclosure to creditors.”
Therefore, if a claims firm offers to pay a commission any such money
should be paid into the IVA. We are
aware of at least one claims firm that offers to repay 40% of any fees they
receive for identifying claims as a commission.
We would expect that any IP who accepted such an arrangement and
retained the money rather than paying it direct into the estate could expect to
receive the most extreme regulatory sanction.
13 What about
associated claims management firms?
Several IVA providers have associated claims management companies that
they may wish to instruct to deal with PPI claims. Any such instruction should be on normal
commercial terms and should represent value for money when compared to
unconnected alternative providers. SIP 9
says, “Where services are provided from within the practice or by a party with
whom the practice, or an individual within the practice, has a business or
personal relationship, an office holder should take particular care to ensure
that the best value and service is being provided. An office holder should also
have regard to relationships where the practice is held out to be part of a
national or international association.”.
Furthermore, you will need approval for any fees and the SIP also says,
“Payments that could reasonably be perceived as presenting a threat to the
office holder’s objectivity by virtue of a professional or personal
relationship should not be made unless approved in the same manner as an office
holder’s remuneration or category 2 disbursements.”. So, as well as making sure that the
instruction represents good value, you will either need a specific resolution
approving the fees, or you need to disclose details of the fee structure and
relationship in your category 2 disclosure so that your category 2 approval
covers it. We think it is probably best
to use a separate resolution in IVAs, as many creditors routinely reject
category 2 disbursements and you will need to differentiate this payment and
seek approval outside their normal policy.
14 If you get
PPI monies and interest is added gross, how do you account for income tax? We have not really got a clue, but when
discussing the issue with a client we came up with the following suggestions
that might be worth considering: 1) If
the debtor is on the self-assessment system, tell him the interest and tell him
to account for it, offering to reimburse the relevant tax element as an expense
of the arrangement when he provides you with a copy of the self-assessment
return and HMRC determination; 2) If the debtor is not self-employed, find out
the details for his tax office and employer’s reference number and any personal
PAYE reference number or NI Number, then contact the local tax office in
writing to explain this situation, disclose the interest received and your
calculation of the tax due, and ask for it to be dealt with between you and the
local tax office so that the debtor’s tax code and PAYE generally remain
unaffected; 3) Write to HMRC separately at national level, explaining the
situation, providing details of the interest and tax due and asking them to
waive it as de minimis (which will only work if it is low enough); and 4) deduct
basic rate tax and send it to HMRC, telling them and debtor about the details
of what you received and how you calculated the tax and telling the debtor that
they may be able to reclaim it if they are below the tax limits, as they could
for bank account interest deducted at source. If you suspect that they may be a higher rate
taxpayer explain that they may need to account to HMRC, probably through their
self-assessment return.
So what can be done about all of this?
We have started by shutting the stable door after the horse
has escaped, lived to a ripe old age and been converted to burgers, by changing
our standard proposals for use with both sets of standard terms so that they
now specifically catch PPI and set out how it can be recovered. No doubt further fine-tuning will be required
in due course as legal advice and case law filters through, but we have at
least tried to start doing something.
We think that some sort of industry-wide agreement is needed
on the treatment of PPI in IVAs, with some fairly sweeping and robust decisions
needed to unlock the growing number of arrangements that are being held up by
all of the uncertainty. We think that
something like the original protocol process, where stakeholders came together
and discussed a pragmatic solution is likely to be the way forward. Our proposals, which we would be happy for
the profession to use as a starting point, are as follows. Note that they include some hints as to the
sort of areas that the stakeholders will need to discuss, so the bits in
brackets with question marks are not typos.
We would hope that some sensible negotiation could arrive at a suitable
compromise (e.g. debtors agree to statutory interest in exchange for allowing
certificates of completion to be issued; and creditors agreeing not to offset
claims in return for potential statutory interest):
1 PPI claims to be treated as assets
of every arrangement. They remain bound by the arrangement notwithstanding any
closure or release except where payment in full (with statutory interest?) has
been achieved.
2 The cost of identifying and
recovering PPI claims are to be paid out of the realisation, so that the debtor
is not liable for unpaid costs and the IVA estate receives the net proceeds.
3 PPI
claims to be paid into arrangements and not offset.
4 Debtors to be issued with
completion certificates once they have completed their agreed payment
obligations under their original proposals, as approved and modified, with PPI
claims to be pursued afterwards if necessary under the arrangement trust.
5 Fees for identifying potential PPI
claims and pursuing the recovery of claims to be authorised at the IP’s
discretion as a category 1 disbursement up to set limits (say £100 per case for
identifying claims and 33% claims fee??).
6 IPs to be allowed to charge fees
on realisations in accordance with existing approval in open cases and on (say
15% of the net realisation??) across the board in closed cases.
7 All parties to acknowledge that
legal action or formal approval at a variation meeting in a specific IVA is
unlikely to be financially viable and therefore consent to this form of
“protocol” approach.
8 All parties agree that where the
circumstances of a particular case don’t suit the above arrangements, a
variation meeting of creditors can decide the way forward in that specific
case, whether the arrangement is still open or not.
We think, in our simplistic, unrealistic way,
that these small steps could free debtors up to get out of their IVAs and get
on with life, while allowing creditors to share fairly in the proceeds of PPI claim
and giving IPs a framework to resolve the issue without fear of legal or
regulatory challenge. Our fear is that
if something is not done soon, debtors will suffer and any potential benefit
could be wholly dissipated in costs.
