Wednesday, July 16, 2014

Reporting obligations - Dear IP issue 48 and Dear IP issue 61

As is our way from time to time we are stirring up trouble on a point that we feel unusually passionate about, mainly because we believe that the Insolvency Service is issuing Guidance in Dear IP 48 and Dear IP 61 about the legislation that is based on what they intended it to say, rather than what it actually says. While we accept that the Insolvency Service may wish our clients to follow their edicts in Dear IP, from a regulatory compliance perspective we are convinced that on this occasion they are encouraging IPs to act contrary to the requirements of the legislation. Our detailed argument is below and has been developed from our initial exchanges with the Insolvency Service, taking into account the views of others in the profession who, in our opinion, have the technical authority for us to defer to them. Ultimately, however, the article and views are ours, and while we thank the other contributors we won’t use their names to protect them from any resultant argument.

Dear IP 48 says that the interaction of sections 92 and 104A, and rule 4.49C means that if an IP leaves office within a year of the commencement of the liquidation, there is no requirement for an outgoing progress report. We initially thought that this was the case whether the IP was sole or joint liquidator. We still think that where there was a joint liquidator, and the outgoing IP was not replaced, so that one of the original office holders remains in office, the wording of Rule 4.49C(2) means that the remaining office holder should report at the anniversary of his appointment. As a result, then assuming that they were appointed at the same time as the outgoing office holder, that would mean that they will report on the period when the departed liquidator was also in office.  

However, we now think that Dear IP 48 may be wrong in respect of sole appointments. Since the legislation refers to the liquidation exceeding a year, it may not be correct to say that there is no requirement for an outgoing liquidator’s report in sole appointments. It could instead be argued that if the liquidation exceeds a year there is a requirement for the earlier liquidator to report, so that the subsequent liquidator reports one year from his appointment and there is no gap. The deciding factor in rule 4.49C does not appear to be whether the liquidator departs within a year, but whether the liquidation lasts for a year. The problem with this is that you may not know at the time whether the liquidation will continue for a year, so you could have a situation where an outgoing liquidator is asked to report some time after he has left office and when he is already outside the 2 months that the report has to be issued within under rule 4.49C(7). The alternative though, as suggested by Dear IP 48, is that the incoming liquidator would have to report for the whole of the liquidation, including a period when they were not actually in office and so had no knowledge of the case.

We then looked at Dear IP 61 and we have broken each scenario into its own numbered point for clarity, even though that means repeating some of our arguments. We apologise, but we do think that each scenario has its own challenges.

1) A sole liquidator leaves in less than a year and is replaced, potentially by an IP from another practice. Dear IP 61 says that in this situation “Once 12 months has passed the liquidator in office has a duty to report under section 104A and rule 4.49C (2) will then apply”. Section 104A says “If the winding-up…continues for more than one year, the liquidator must:- a) for each prescribed period produce a progress report…”. Rule 4.49C(2) prescribes the period and says “The prescribed period for which the liquidator must produce a progress report, except when the liquidator ceases to act (in which case paragraph (3) applies) and subject to paragraph (4), is the period of 1 year commencing on the date on which the liquidator is appointed and every subsequent year”. If “The liquidator” referred to in the rule is the incoming liquidator, then the “period of 1 year commencing on the date on which the liquidator is appointed” must refer to the date on which the incoming liquidator is appointed. This means that the reporting date moves from the anniversary of commencement, which would otherwise apply, and become a later date, potentially up to 23 months after commencement. In addition, because the incoming liquidator is only required to report for the period of a year, it would leave a period unreported unless the above point about Dear IP 48 being wrong is correct. The argument in Dear IP 61 appears to be that the reference to “the liquidator” is generic, applying to whoever is in office at the time, so that the reporting duty remains tied to the original liquidator’s appointment on the commencement date. Alternatively they may be suggesting that the reference to “the liquidator” in one part of the rule is somehow different in meaning to the reference to “the liquidator” in another part of the same rule. While we can understand the public policy imperative for wishing one of those interpretations to be correct, we consider that to be more than just “interpreting the legislation” and that by putting such a meaning on the wording, the Insolvency Service may be requiring IPs to act contrary to the legislation. Under the circumstances, given the lack of clarity in the legislation, we consider that the position should be fully disclosed in Dear IP, and the Insolvency Service should explain what it is doing to seek legislative changes in the interim, with clear instructions to the regulators on how any technical breach of the legislation is to be treated in the interim.  

2) A joint liquidator leaves in less than a year and is replaced. Dear IP 61 says, “Once 12 months has passed the remaining appointee(s) has a reporting requirement under Section 104A and must report for the first 12 month period as normal.”, but it does not deal with the reporting obligations of the replacement IP. Dear IP 48 from December 2010 said, “There should be not be two timelines in place for new and continuing appointees.”. It also says, “their activity will be rolled up into the first progress report under those sections by the new and/or continuing liquidators.” Again, regretfully, we have to present an opposing view. Section 104A says “If the winding-up…continues for more than one year, the liquidator must:- a) for each prescribed period produce a progress report…”. Rule 4.49C(2) prescribes the period and says “The prescribed period for which the liquidator must produce a progress report, except when the liquidator ceases to act (in which case paragraph (3) applies) and subject to paragraph (4), is the period of 1 year commencing on the date on which the liquidator is appointed and every subsequent year”. It is generally accepted that “the liquidator” applies to the plural, but in this situation that is clearly not appropriate because both liquidators have different appointment dates. The wording of the legislation requires each of the joint liquidators to report on the period of one year since their appointment, so that the continuing joint liquidator(s) report on the “normal” anniversary of commencement, but the incoming joint liquidator has to report on the anniversary of his appointment. Whilst Dear IP 48 talks about not having two reporting timelines, in our view that is a consequence of the wording of the legislation as it currently stands, notwithstanding what might have been the policy intention behind the legislation. As a side point we consider that in this scenario it would not matter if the incoming IP were from another firm, as they have no reporting duty prior to his appointment and the continuing liquidator will have reported on the prior period anyway. 

3) A joint liquidator leaves after 1 year and is replaced. Dear IP 48 from December 2010 says, “Where there are joint liquidators and one leaves office, the progress report drafted when they leave will be completed in the name of all appointees at that date and future progress reports would be twelve months after that, for all new and/or continuing office holders. There should be not be two timelines in place for new and continuing appointees.” Although this is an admirable practical solution, it is contrary to the wording of the legislation. Rule 4.49C(3) says “the prescribed period for which the liquidator must produce a progress report ends on the date of that liquidator's ceasing to act.” While it would normally be possible to interpret “the liquidator” in the plural, the subsequent use of “that liquidator ceasing to act” [our emphasis] in this context makes it clear that the legislation only requires the outgoing liquidator to report. Dear IP 48 proposed a practical solution that was contrary to the legislation. Our view is that the correct approach under the legislation, however undesirable, is for the outgoing IP alone to produce a progress report and the continuing and incoming liquidators to report in relation to their different reporting dates in accordance with rule 4.49C(2) and (3)(b) respectively. We sought advice on this and although the advice was that this point was correct, the person we asked was careful to point out that the Courts might well, if asked to rule on the point, choose to follow the Dear IP 48 interpretation to provide some common sense and clarity.

We are not just being objectionable and obstructive and we have thought how it might be possible to address these issues in the longer term. Our first suggestion is to amend the wording of sections 92A and 104A so that rule 4.49C(3) applies whenever one of the liquidators leaves, thus avoiding contravening rule 4.49C(2). We think that as there has been a material change in the administration of the liquidation, it is appropriate to issue a report, even where the change takes place within the first year of a liquidation. 

You could then adjust the wording of:
a) Rule 4.49C(3)(a) to refer to “the outgoing and/or any continuing” liquidator; and
b) Rule 4.49C(3)(b) to refer to “the replacement and/or any continuing” liquidator 

The impact of these changes would be to require a report from all office holders whenever someone leaves and reset the reporting schedule going forward to the day after the anniversary of the departure, providing both a lawful solution and the continuity that Companies House require and the creditors would clearly benefit from.

Removing the differentiation between incoming and outgoing liquidators is a concept that one of the people we consulted seems to agree with. He suggests that for joint appointees the term ‘liquidator’ must refer to one or more appointees. Section 231 of the Act clearly envisages joint appointees as a possibility but otherwise there is no reference in the Act to single or joint liquidators (except as regards remuneration). If that is right, there must be some question whether the resignation, removal or replacement of one of two or more liquidators constitutes a liquidator “ceasing to act”, as they would both/all have to cease for that to happen. The rule works much better on this interpretation,and differing reporting periods for joint appointees are eliminated, as is any potential reporting delay. 

If The Insolvency Service were to announce a clear unequivocal solution in Dear IP then if the issue came to Court that might be considered to be evidence of the proposed Parliamentary intention and the Court could be expected to hand down a decision consistent with that announcement. 

As a practical solution for the present, then in the absence of a clear statutory solution we would recommend that terms are included in any block transfer order to set out clearly the reporting obligations of the incoming and outgoing office holders for each case type being transferred.