Insolvency Compliance Reviews - Compliance On Call

Rebating SoS fees on VAT reclaims busted!

2012-01-05T16:18:00.002Z

Ah well, it was worth a try…

You may already have seen this, but if not the text below is taken from a message to IPs that was issued today. It appears that the Insolvency Service have found some legal advice that overturns their original internal memorandum and allows them to reject your claims to rebate Secretary of State fees on VAT reclaims. We are disappointed, as we think that this is just a dodge to avoid repaying money that they should not have had in the first place since they are getting fees on fees, but there is not much we can do against the might of the Service and their legal resources, although if you know a friendly insolvency lawyer who wants to mount a challenge on a pro bono basis…

Our view is that the Insolvency Service should not seek to recover Secretary of State fees that they have already rebated, but let us know if you come across instances where they are seeking to do so.

“The Secretary of State’s administration fee on VAT reclaims

There has been confusion surrounding the charging of the Secretary of State’s administration fee on VAT reclaims arising from transactions undertaken in the course of the bankruptcy or liquidation.

The Service has now received legal advice on the position, a summary of which is set out below.

The Secretary of State administration fee covers the performance of the Secretary of State’s general duties under insolvency legislation. It is chargeable in respect of ‘chargeable receipts’ which are defined in paragraph 1(1) schedule 2 of The Insolvency Proceedings (Fees) Order 2004 as being ‘those sums which are paid into the Insolvency Services Account after first deducting any amounts paid into the Insolvency Services Account which are subsequently paid out to secured creditors in respect of their securities or in carrying on the business of the company or bankrupt’. There is no reference to fees not being charged on VAT reclaims or mention of any other amount upon which the fee would not be charged.

Therefore on the basis of the wording of the Fees Order and the definition of chargeable receipts, the Secretary of State’s administration fee is payable on VAT reclaims.

Any outstanding requests to rebate the Secretary of State’s administration fee on VAT reclaims received from Insolvency Practitioners will not be actioned.

Any queries regarding the above should be directed to Helen Day, Estate Accounts and Insolvency Practitioner Services, 3rd Floor, Cannon House, 18 Priory Queensway
Birmingham, B4 6FP; telephone 0121 698 4072, e-mail helen.day@insolvency.gsi.gov.uk”

Section 262(3) and a never ending appeal period in IVAs

2011-12-14T12:22:00.000Z

Our thanks to Giles Frampton and Simon Knight for bringing this little nugget to our attention. Due to what the Insolvency Service have confirmed is a drafting error, there is no limit to the period in which a creditor could appeal the result of an IVA approval meeting if you have taken the non-interim order, non-court route. The way section 262(3) is worded is that it sets a deadline after which an application by a creditor cannot be made, that is “after the end of the period of 28 days beginning with the day on which the report of the creditors’ meeting was made under section 259”. The problem is that section 259 only applies to reports to court under the interim order route.

As you are aware, if you use the non-interim order, non-court route to enter an IVA, you never file a chairman’s report at court when the arrangement is approved. As a result, the effect of this drafting error is that the deadline can never occur, such that an application under section 262(3) can be made at any time after approval of the arrangement in non-interim order cases. The Insolvency Service considers that appeals are rare and this error is unlikely to have any impact before they can amend the legislation with the other changes currently proposed for October 2013.

If you consider that the problem is bigger than the Insolvency Service believe, then you could play safe and do all of your IVAs via the interim order route, but this would soon tie up a lot of court time and we are not sure that it is necessary in the vast majority of cases. We think that once the legislative error is pointed out the court would be fairly likely to take a robust view of any appeal brought outside 28 days of approval without good reason.

There is, however, a potentially more significant problem that arises from the same legislative lacuna. We are aware of at least one case where a judge was not prepared to annul a bankruptcy after an IVA had been approved. Section 261(3) says that an application for annulment may not be made “during the period specified in section 262(3)(a) during which the decision of the creditors’ meeting can be challenged…”. In the unreported case, the judge noted the problem with section 262(3) in non-court cases and said that under the circumstances he could not grant the annulment because the potential appeal period remained open.

We don’t know if this will be the court’s position in all cases, but what should you do to avoid finding out the hard way? We considered whether simply filing a copy of the chairman’s report voluntarily would suffice, but we feel that this would not be “a report of the creditors’ meeting under section 259”, and so would not qualify. It therefore appears that the only safe way to deal with this where the debtor is bankrupt, is to apply for an interim order and use the court route, just so that your report qualifies under section 259 and therefore starts the potential appeal period under section 262(3).

4 month claims cut off in protocol IVAs

2011-12-14T12:18:00.000Z

Protocol standard term 17.1 says: “The supervisor may allow for dividend purposes claims submitted by creditors as at the effective date. If any creditor does not make any claim in writing within 4 months after the effective date, then that creditor may not participate in any dividend payment, subject to paragraph 17.3 below”.

17.3 says: “Any creditor who makes a late claim will be entitled to participate (subject to the supervisor accepting that the creditor has a reasonable explanation as to why any delay occurred) and to receive their full share of dividends notwithstanding the fact that some distributions may have been made prior to the submission of the claim”.

We occasionally get asked how this should work in practice, or how other IPs approach these terms. As you’d expect, we see quite a wide spread: from those who enforce the terms strictly after just notifying the creditors in the initial meeting pack and disallow all claims received after the deadline; to those who don’t really enforce the deadline and continue to ask for claims some time after they could have excluded the creditor. The first approach is likely to create difficulties in your relations with the creditors, whilst the latter might end up prejudicing the debtor, particularly if the arrangement provides for a minimum dividend. As you’d expect, we think that the correct approach should be somewhere between the two extremes.

We recommend making the 4 month cut-off clear in the covering letter sent to creditors with the chairman’s report on the outcome of the meeting to approve the arrangement. We then suggest sending a reminder to anyone who has not claimed, say approximately a month before the deadline. Finally, we recommend sending a letter to anyone that you intend to exclude as soon as the deadline expires. If you have been through all of these steps and have evidence that you have taken all reasonable steps to get the creditor to claim, they are unlikely to be able to argue later that they had “a reasonable explanation for why any delay occurred”.

One of the more difficult areas is where a voting agent has only recently been instructed to deal with an old debt, or where an old debt has recently been purchased and the agent or new owner wants to claim out of time. Harsh though it may seem, if the original claim was properly pursued and no proof of debt was received, we don’t think that the fact that they subsequently bought the debt should change your original decision to exclude the debt.

What you are prepared to accept as reasonable varies from IP to IP, but you should be in a much stronger position if you have given the creditors every opportunity to claim within the time limit.

VAT Reclaims and SOS fees

2011-12-14T12:15:00.005Z

Our original Blog article explained thatin some circumstances where you pay VAT reclaims into the ISA, and the originalexpenses that the reclaims related to had been through the account and attractedSOS fees, the VAT reclaim should not attract SOS fees again. Where these have been deducted, EstatesAccount Directorate (EAD) may be prepared to refund them subject to youproviding evidence that the original expense was paid from funds that weresubject to a prior SOS fee.

We recently checked with EAD because we had been hearingworrying suggestions that they might be trying to wriggle out of refundingincorrectly drawn SOS fees. They haveconfirmed that although they are seeking advice on the subject, they are payingout any incorrectly drawn SOS fees where the IP provides the requiredevidence. There is, however, aproblem. When the Insolvency Servicemigrated to its new IT system it has created a huge problem for EAD in thatthey cannot currently pay back monies on receipts received before October2010. This problem has a wider impactthat takes in rebates due in annulment cases and similar scenarios and weunderstand that they are currently seeking a solution.

As with all things to do with IT, it seems best to wait a reasonable period to give EAD a chance to resolve the issue before getting too excited on this Blog. However, if the delay is causing you problems in specific circumstances we’d be happy to hear about it.

HMRC distraint – a clarification

2011-12-14T09:32:00.002Z

In our Blog posting on 8 October we advised you about an apparent change in HMRC policy towards distraint and indicated that where there was ongoing distraint action or threats of distraint action by HMRC you should take appropriate steps to preserve the company’s assets for the benefit of the creditors as a whole. We indicated that such action could include obtaining instructions from the Board of Directors to appoint agents to remove the company’s assets, but clearly such action would only be appropriate where there was a threat of distraint and not where distraint action was actually being taken. Removing assets where there is ongoing distraint action is likely to lead to legal action being taken against you by HMRC for pound breach or breach of walking possession. Where there is an ongoing distraint then trying to negotiate is about the only option available to you.

CVAs – are they actually VAT exempt? We need your help!

2011-12-09T21:41:00.000Z

You will recall that on 10 November HMRC issued an amended VAT notice 701/49 which indicated that CVAs qualify for exemption of VAT. Shortly after that R3 issued an urgent bulletin saying that CVAs and Trust Deeds were VAT exempt. We joined in and trumpeted the news from the roof tops as well, but is that actually correct?

We have now heard on the grapevine that the VAT notice, which only refers to IVAs and CVAs, may have been reissued without the agreement of all the relevant sections of HMRC and that the consensus of opinion within HMRC may now be that VAT should in fact continue to be charged on CVAs. Indeed the original VAT Brief (35/11 issued in September 2011) is still online and confirms that claims for refunds in respect of CVAs and PVAs will be rejected.

Similarly, although we have nothing in writing that we can rely on, we are seeing commentary on Trust Deed forums and blogs suggesting that because the debtor’s assets vest in the trustee when the deed is signed then trust deeds do not comprise “a single, composite, supply consisting of debt negotiation and payment transfers”. The feeling among some Scottish contacts is that an IP’s work on trust deeds may not be exempt supplies.

We are trying to get confirmation of the true position, but if you have any further knowledge about this please could you let us know? If you have any contacts within HMRC you can ask for clarification, please could you do so and let us know what you find out? We need clarification as soon as possible supported by enough evidence for IPs to be able to rely on it. Clearly, if there is doubt about the CVA-related content of notice 701/49 which has actually been published, then there has to be even more doubt around Trust Deeds, where nothing has yet been published formally by HMRC.

If you have submitted a request for a VAT reclaim to HMRC in either CVAs or Trust Deeds, could you let us know how the reclaim was treated?

Errors do happen!

2011-11-11T09:41:00.000Z

Despite checking and rechecking documents, errors do creep in! An eagle eyed client has spotted what we had failed to, that for some reason the secured liabilities section of our pro forma draft final report for liquidations shows the commencement date for qualifying floating charges as being 3 September 2003 rather than 15 September 2003. No, there has not been a retrospective change to the legislation as to when qualifying floating charges were introduced, it is just a typo. We will change the pro forma in the next update, but in the meantime remember to use 15 September 2003 as being the key date.

Paymex decision extended to CVAs and Trust Deeds!

2011-11-11T08:33:00.000Z

As you will have seen from their urgent bulletin, R3 have now received information from HMRC that services provided by IPs in connection with CVAs and Trust Deeds are also to be treated as VAT exempt, in exactly the same way as such services are in IVAs. The HMRC guidance is now that “The standard services of an Insolvency Practitioner during the administration of an IVA or a CVA are exempt as a single, composite, supply consisting of debt negotiation and payment transfers.”

This is just an initial heads up and we hope that in due course once the dust has settled the regulators and HMRC will issue some formal guidance in CVAs just as they did for IVAs. In the meantime we thought it might be helpful to provide our thoughts on the question “what should IPs do now?” Apart from anything else, this will give us something to use when responding to all of the emails and phone calls we anticipate receiving!

You should stop charging VAT on new cases and amend your engagement letters, proposal wording, covering letters and invoices to include a statement that fees for acting as nominee and supervisor in a CVA or as trustee in a Trust Deed is now being treated as VAT exempt by HMRC, but that you reserve the right to do so if the position subsequently changes.

Submit claims to HMRC for VAT going back 4 years from the date that you submit the claim for all open cases. At the same time, submit an account for the disallowable input tax arising from the partial exemption of your practice. HMRC are expected to deal with these in the same way that they did in IVAs and agree to pay the net claim. The reclaim monies received should be paid into the separate estates.

So far, so good, but what you do from there on is less certain. Should you be accounting for the gross sum reclaimed, i.e. the VAT element of your fees, or the net sum reclaimed after deducting disallowable input tax? Unlike IVAs, in CVAs there are no voting agents whose clients represent a significant % of creditors who can make a policy decision and effectively agree that remitting the net funds is acceptable. HMRC tend to be significant creditors in CVAs and we would hope that in due course the regulators will liaise with them and get their agreement, and also that of the Insolvency Service, that as a policy decision you can remit net. In the meantime though, our view is that the safest approach to take is to seek creditor approval to remitting net.

Once the money is in the estates, and subject to the above point about whether you have received it gross or net as supervisor, you should then deal with it in accordance with the arrangement terms. If your nominee’s or supervisor’s fee was approved “including VAT”, you may be able to reclaim the VAT on your fees from the estate. However if you have been allowed to account net and the estate only received 80% of the VAT reclaim after adjustment for disallowed input tax, you should only take 80% of the fee VAT.

We think that in the majority of CVAs, unlike IVAs, fees will have been quoted “excluding VAT”. This means that specific and separate fee approval is required. You cannot rely on your existing approval since you are effectively drawing fees on fees. So at the same time as seeking creditors approval to enable you to remit net you should seek a variation to the arrangement to authorise you to draw fees for dealing with the VAT reclaim. We would suggest that a fee expressed as a % of the reclaim received is an appropriate approach to take, as that way the creditors get some benefit. The fee that the main creditors agreed in IVAs was 15% subject to any existing fee cap in the approved arrangement.

For Trust Deeds it is to be hoped that the voting agents will take the same pragmatic approach as they did in IVAs, but if they do not, then you will also need to seek creditor approval as with CVAs. We suggest that anyone dealing with a significant number of Trust Deeds should contact TIX, Max Recovery and the other significant voting agents and seek to get a broad approval along the lines agreed for IVAs. As soon as we have news of the general approach by the main voters we will happily do an updated Blog article specifically for the Scots (not something I get to say often!).

Do not take any action at present as regards closed cases in CVAs and Trust Deeds since the position is not clear. This will need some guidance from the regulators, and probably Counsel’s opinion being sought as well. The position as regards closed cases is still unclear for IVAs, although we understand that R3 have now received Counsel’s opinion on the approach to take, but that the advice received has given rise to further questions, the answers to which are still awaited. By way of an update, Bill’s wild attempt to get the Insolvency Service to take the lead in a protocol-style, pragmatic approach fell on stony ground.

First it was IVAs, now it is CVAs and Trust Deeds, so are Administrations next? In particular, what about where an Administration precedes a CVA since that is a necessary precursor to, and it could be argued part of, debt negotiations on behalf of the company. For that matter, if there is an element of debt advice, negotiation and payment transfers then other case types could conceivably be caught. HMRC are reviewing the provisions at the moment and we would not be surprised to hear more in due course.

Finally, we should point out these are just our thoughts and they carry no formal weight. We have put them out to help you in your decision making and try to reduce the number of individual phone queries that we have to deal with on this subject, because we can issue this much faster than a regulator that has more formal procedures to go through before they can act. If in any doubt you should check with your regulator or seek formal legal advice.

Urgent – Companies House disagrees with regulators

2011-11-04T14:22:00.000Z

Every now and again we post something on the Blogand have to directly contact clients about it at the same time. This is one such occasion.

We have today heard from Companies House that they will not accept combined annual andfinal progress reports.

We had previously understood from the regulatorsthat if an IP was unable to issue the draft final report before an annualprogress report fell due and he therefore needed to produce both an annual reportand a draft final report, the regulators considered that it was possible toissue a combined annual and draft final report. We have spent some time coaching clients on how to achieve this and wehave commented on the matter on the Blog. We have become aware of the Registrar refusing some annual reports, butin the fog of rejections of all sorts of documents that seem to be coming outof Companies House recently, we have only today received a firm answer thatthey will not accept combined reports. Despite the regulators being happy with the concept, the Registrarrefuses to recognise them in law as they do not meet the regulations thatgovern the operation of their Register.

So, what should you do now? The easiest way to avoid the problem is toissue your draft final report early enough to avoid the problem. As long as it issued before the anniversarydate you won’t need to do an annual progress report at all.

If you have missed the anniversary date, ourofficial line has to be that you should file separate annual and final reportswith the Registrar to minimise the risk of getting them filed withoutrejection. However, we have seen so manyrejections of documents by the Registrar for numerous different reasons that wecannot be sure that even a separate annual progress report would be acceptedfirst time, so a more practical answer might be that you see what you can getfiled by trial and error. You may, forinstance, get a combined report filed as long as you send it in twice: onceheaded up as an annual report and referred to as such in any covering letterand in the accompanying R&P; and once headed up as the final report withthe dates and headings adjusted accordingly.

We will continue to try to get the InsolvencyService’s view and if they agree with the Registrar we will see if there is anychance of the legislation being amended to make the whole filing system easier,but we, like many of you, are getting thoroughly fed up with the wholeprocedure. Surely it would be better forthe Registrar to file whatever you send and the regulators and InsolvencyService deal with any deficiencies through the normal monitoring channels? The sort of points that the Registrar isgetting involved in do not have any impact on the integrity of the register andare largely at the end of a case when very few stakeholders are stillinterested. Wasting hours returning andre-working reports has to be contrary to public policy on better regulation.

Thisis the bottom line though…Companies House will not accept combinedreports…unless you know different!!

Companies House – more problems?

2011-11-04T09:18:00.000Z

We have just come across an instance where Companies House have rejected a Form 2.34B, notice of move from Administration to CVL, for a post 6 April 2010 appointment, because a progress report was not attached, even though there is no statutory requirement to file one! We are raising this with Companies House and we want to try and find out if it is a one off instance as a result of an over enthusiastic member of staff, or if it is common practice. It would be helpful if you could you let us know if you have had any Form 2.34Bs rejected for a similar reason in the past few months?

Resolutions by Correspondence and approval of remuneration

2011-11-04T09:15:00.002Z

For cases commenced on or after 6 April 2010 the liquidator or trustee can now seek a resolution by correspondence in liquidations and bankruptcies. The requirements to take advantage of this are set out at rules 4.63A and 6.88A, but it is subject to one significant exception. Where the Act requires the resolution to be passed at a meeting, then you cannot take the resolution by correspondence, but must convene a meeting instead.

The provisions relating to passing resolutions to fix the basis of the office holder’s remuneration are all contained in the rules, so does this mean that you can obtain approval of your remuneration by passing a resolution by correspondence rather than at a meeting?

Clearly you can in administrations because the legislation refers to the administrator convening a meeting of creditors by correspondence, not just to seeking resolutions by correspondence.

In bankruptcy and liquidations, with the exception of an MVL, the hierarchy of those responsible for fixing the basis of your remuneration is: the committee, if one is appointed; the creditors; and the Court. As a result, it is always appropriate to give the creditors the opportunity to appoint a committee before seeking a resolution from them fixing the basis of your remuneration. If you do not, then you are effectively disenfranchising them and over-riding the statutory hierarchy for remuneration approval. This is where there is a problem as the provisions dealing with the appointment of a committee, sections 101 (CVLs), 141 (compulsory liquidations) and 301 (bankruptcies), all refer to a meeting of creditors being held to pass a resolution establish a committee. Because these are sections in the Act, and not Rules, you cannot take a resolution by correspondence to appoint a committee.

You are required to give creditors notice of your appointment following appointment by the Court or the Secretary of State in bankruptcies and compulsory liquidations. At the same time you must either convene a meeting of creditors to appoint a committee, or inform creditors that you do not intend to do so, leaving it for them to requisition one. If you give notice that you are not convening a meeting to appoint a committee, but instead seek a resolution by correspondence to fix the basis of your remuneration that is effectively disenfranchising the creditors from having the opportunity to appoint a committee. As a result, we consider that you should not take such an approach and we have seen plenty of evidence over the years that the regulators take a dim view of obtaining fee resolutions without first seeking a committee.

We recommend that when giving creditors notice of your appointment you should convene a meeting of creditors for the purpose of appointing a committee at the same time. The notice convening the meeting should make it clear that the purpose of the meeting is to consider the appointment of a committee, failing which to seek a resolution fixing the basis of the office-holder’s remuneration. That approach then ensures there is no doubt that you have authority to draw your remuneration and it is not open to challenge by say a dissenting creditor, a monitor, or a successor IP.

In cases where you are appointed liquidator or trustee at a meeting of creditors, because the creditors have been given the opportunity to consider the appointment of a committee at the meeting appointing you, then there is no need to convene a further meeting to consider a resolution to appoint a committee. In those circumstances, you can seek a resolution fixing the basis of your remuneration by correspondence without first having to call a meeting.

This is not really an issue in CVLs as the section 98 meeting should always consider a resolution to appoint a committee first. If, for some reason a remuneration resolution is not sought at the section 98 meeting, or is not passed, then as long as a resolution to appoint a committee was considered at the meeting then you can merely seek a resolution from the creditors fixing the basis of your remuneration. Again, the remuneration resolution can be sought by correspondence.

Revised SIP 9

2011-10-08T11:40:00.004+01:00

As you are all aware a revised SIP 9 has just been released with an effective implementation date of 1 November 2011. We will be updating our reviewing checklists over the next few weeks and may well have further thoughts and guidance on its implementation, but our initial thoughts on the main changes, apart from the switch to a principles based approach, are:

• it only applies to England and Wales. (We have removed the incorrect reference to it applying to Scotland as well that was included in the initial Blog post. Despite our understanding that all future SIPs would apply equally to both England and Wales and Scotland this did not happen to SIP 9. There is a story behind that apparently, so watch this space ....);

• a copy of the SIP 9 Guidance Notes must be made available to creditors whenever a report is sent to them after the basis of remuneration has been approved – previously it was only necessary to make a copy available when seeking approval, although it was good practice to do so with all subsequent reports;

• placing an emphasis on transparency, disclosure and approval of payments to associates of the office holder or practice in connection with the appointment and needing to ensure that where services are provided by an associate of the office holder that the best value and service is being provided;

• placing an emphasis on transparency, disclosure and approval of payments to those with whom office holders have a professional or personal relationship where that could give rise to a conflict of interest, or where there is such a perception ;

• placing an emphasis on transparency and disclosure where office holders have a professional or personal relationship with those responsible for approving their remuneration and expense, where that could give rise to a conflict of interest, or where there is such a perception;

• a requirement to disclose the minimum time units used where remuneration is to be fixed on a time and rate basis and the expectation that these are 6 minute units is now specified;

• details of work this has, or is, to be contracted out in reports to creditors in all cases, which previously only applied where remuneration was to fixed on a % basis;

• emphasis placed on providing details of what has been achieved and how it was achieved in the report sent to creditors when seeking to fix the basis of remuneration;

• needing to disclose all changes in charge out rates when reporting to creditors, not just material changes ;

• mileage is categorised as a category 2 disbursement clearing up the uncertainty caused by an inconsistent approach between the regulators;

• approval of category 2 disbursements in one insolvency procedure can be relied upon in successive insolvency procedures, or where an office holder is replaced; and

• introducing a requirement for an office holder to provide a successor office holder with information.

The revised SIP will apply to all cases commenced on or after 1 November 2011, although IPs are encouraged to apply it to all cases. To ensure that you are only operating one system then we would suggest applying this version of SIP 9 to all of your cases, but do not forget to draw the attention of creditors to the correct version of the SIP 9 Guidance Notes depending on the age of the case, i.e. the April 2007 or the April 2010 versions.

Notices on exit from Administration

2011-10-08T11:40:00.001+01:00

This follows on from the last Article about exiting from Administration to CVL. The rules specifically require a copy of the exit notice from Administration to be filed in Court, but only in some exit routes do the rules specifically require a copy of the final progress report to be filed in Court, for example when exiting via dissolution or on automatic cessation at the end of the duration of the Administration. When exiting via CVL rule 2.117A(1) does not specifically state that a copy of the final progress report should be sent to Court, but it does require the administrator to send a copy of the final progress report “to all those who received notice of the administrator’s appointment”.

Bill and I had a disagreement over whether or not the wording used meant that a copy had to be sent to the Court and so sought the views of the Insolvency Service. In their opinion that phrase does not include the Court, such that a copy of the final progress report need not be sent to Court when exiting via CVL, which is somewhat bizarre. Whilst that is only their interpretation of the rule, I do not think that you would be criticised by a regulator for taking such an approach, unless or until the matter is considered by a Court which interprets the rule otherwise. So who does it extend to? It will always include the company itself since you have to them notice on your appointment, but otherwise it will depend on the circumstances of the case, and so may include a former supervisor under a CVA, a receiver or an administrative receiver. Remember to include your agents and others that you have notified in the course of the appointment, even though there was no statutory requirement to do so.

Administration to CVL – a reminder

2011-10-08T11:39:00.001+01:00

I am sure that you are all aware that exiting from Administration to CVL is now a two stage process for cases where the 2010 Rules apply:

• issuing a notice of move on Form 2.34B to the Registrar of Companies, the Court and the creditors; and
• once the notice has been registered, sending a final progress report to the Registrar or Companies, the creditors and all those who received notice of the appointment, such as the company.

The reason for issuing this reminder is that recently we have seen a Big 4 firm get it wrong, using the old procedure and issuing a final progress report with a notice of move to CVL! Whilst I am sure that you are all following the correct procedure, I just wanted to take this opportunity to remind you, and also to make the point that just because you see a Big 4 firm doing something, that does not necessarily make it right!

HMRC distraint – a change in policy?

2011-10-08T11:38:00.001+01:00

It has been brought to our attention that HMRC may have changed their policy on distraint action in CVLs where they are given notice of a general meeting at which a winding up resolution is to be sought.

Historically HMRC have been prepared to stop any distraint action that has not been completed when they receive notice of the general meeting at which a winding up resolution is to be sought, but it now appears that they may have changed their policy. We have recently heard of a case where they decided to continue distraint action that had started after being given notice of the winding up resolution. They appear to be relying on the decision in Re Modern Jet Support Centre Limited, which indicated that section 183, which stops creditors from completing any execution or distraint once they have been given notice of a winding up resolution, does not apply to HMRC.

If this is approach is adopted by HMRC across all cases, they may continue any distraint action that has started and also start distraint action where they have given the company notice of their intention to do so, even after being given notice of the winding up resolution.

As a result, when acting as advising member you should take steps to ensure that you obtain information from the instructing directors about any ongoing distraint action and threats of distraint action by HMRC so that you can take appropriate steps to preserve the company’s assets for the benefit of the creditors as a whole. Such action could include obtaining instructions from the Board of Directors to appoint agents to remove the company’s assets or using the Centrebind process.

Last date for submission of proofs and proxies - amendment

2011-09-29T09:05:00.001+01:00

There was a slight error in my Blog article on the last date for submission of proofs and proxies posted on 23 September. For section 98 meetings you have to set a last date for submission of both proofs and proxies, but that must, of course, be no earlier than 12.00 noon on the previous business day, and not later as the article said.

Initial reports in compulsory liquidations and bankruptcies

2011-09-23T16:39:00.002+01:00

We are aware that the monitors have regularly criticised IPs for not providing sufficient information in their reports when convening general meetings of creditors in compulsory liquidations and bankruptcies for the appointment of a committee/fixing the basis of remuneration.

The report should set out known assets, i.e. those disclosed to you by the OR or otherwise ascertained, and include a note of the strategy that you will be adopting to realise those assets. You should also include a summary of the known liabilities, identifying separately secured, preferential and unsecured creditors, although it is not necessary to enclose a list of the names and addresses of creditors. In compulsory liquidations you should also be looking to include an explanation about the prescribed part provisions, and then indicate how they will apply, or not as the case may be, to the company in question.

Since the purpose of the meeting is to fix the basis of your remuneration, assuming a committee is not appointed, you also need to provide the standard SIP 9 information – time spent, charge out value to date, receipts and payments account – and an explanation as to what you have done and achieved to justify the time spent to date. Do not forget to send a copy of the correct version of the SIP 9 Guidance Notes with the report, or ideally refer them to a web-site containing them, preferably your own, whilst indicating that you can send them a hard copy if they cannot access a copy. Enclosing a copy of your charge out rates also helps with transparency.

The receipts and payments account, any notes to the account and the report itself must, in combination, also comply with the requirements of SIP 7. In particular, you need to ensure that you provide creditors with details of expenses that have been incurred or accrued, which will include both your expenses and those of any agents or solicitors that you have instructed.

Finally, in compulsory liquidations you also need to comply with SIP 2 if the report is your first contact with the creditors, and invite them to provide information on any concerns they may have about the way in which the company's business has been conducted, and on any potential recoveries for the benefit of the estate.

A corollary to this is that the earlier you call the general meeting to appoint a committee/fix the basis of your fees, the less information you have to report to creditors and the less time costs you will have incurred and hence have to explain. As a result you should consider convening a meeting immediately upon appointment, combining it with your notice of appointment to creditors.

Last date for submission of proofs and proxies

2011-09-23T16:39:00.001+01:00

The April 2010 Rules made some subtle changes to the wording in the rules regarding what needs to be included in the notices convening meetings of creditors and also regarding eligibility to vote at meetings of creditors in CVLs, and we are finding that these can easily be overlooked.

The words “proof and” were inserted in rule 4.51(2), such that the notices convening the section 98 meeting, both those sent to creditors and gazetted, must now contain a last date and time by which a creditor must submit a proof to enable them to vote at the meeting, together with the existing requirement regarding lodging proxies. As with proxies, that last date and time for submission of a proof must be no later than 12.00 noon on the previous business day.

The requirement to include a last date and time for submission of proofs and proxies has also been extended to general meetings of creditors in CVLs by the insertion of a new rule 4.54(5). Previously it was only a requirement in compulsory liquidations. Again, both the notices sent to creditors and gazetted must now contain a last date and time by which a creditor must submit a proof and a proxy to enable them to vote at the meeting, which must be no later than12.00 noon on the previous business day.

The reason for these changes is made clear when you look at the revision made to rule 4.67(1), which has now been extended to apply to CVLs rather than just compulsory liquidations as previously. In order for a creditor to vote at a section 98 meeting or a general meeting of creditors they must now have lodged a proof of debt by the date and time stated in the notice, together with a proxy, unless of course they are attending the meeting in person.

Rule 4.68 gives the chairman discretion to allow a creditor to vote even if they do not lodge a proof by the date and time stated, but to do so they must be “satisfied that the failure was due to circumstances beyond the creditors’ control.” What this also means is that the practice we have occasionally seen of the chairman voting at a section 98 meeting as a creditor for their unpaid expenses in attending the meeting in order to ensure that there is a creditor voting at the meeting, whilst previously being a bit “iffy” is now definitely a non-runner.

As with all routine rule changes introduced by the 2010 Rules the transitional provisions mean that they only apply to cases that were commenced on or after 6 April 2010.

Companies House – a meaningful dialogue

2011-08-22T13:45:00.000+01:00

Following on from the article in the last edition of Dear IP we have had a very productive exchange of emails and phonecalls with Companies House on a couple of issues that we have previously written Blog Articles about.

First, there is the matter of what is required to be sent with final returns, something that was covered in our Blog Article posted on 28 July. The problem area is the requirement under rule 12A.47 to include details of the outcome of the final meetings. Clearly where the final meetings are inquorate then there is no outcome as no resolutions can be obtained. But what about where the meetings are quorate, how do you provide information about the outcome of the meetings to Companies House? Having spoken to them they have agreed that you can provide the information in one of three ways rather than just including it in the final report as was suggested in the Dear IP Article. You can provide it by including a note of the resolutions passed on the face of the Form 4.71 or 4.72 (this should be inserted after the phrase “that the same was done accordingly); by enclosing a copy of the minutes of the final meeting(s) (although you should note that the copy minutes themselves will be placed on the register rather than the information being extracted from them); or of course you can amend the final report to include a note of the resolutions passed at the final meeting(s).

Secondly, there is the matter of final reports being rejected because an annual progress report has not been provided in cases where the draft final report is issued before the anniversary date but the final return not submitted until after the anniversary date as covered in our Blog Article posted on 24 June 2011. The problem is that Companies House cannot tell when the draft final report has been issued and hence whether or not an annual progress report is due, so as a result they have been rejecting the final return and accompanying final report leaving it for you to have to resubmit them with an explanatory letter. Companies House have now agreed not to reject final returns submitted in such circumstances, although they may still write to you to query why have not submitted an annual progress report. However, to help Companies House and so avoid any unnecessary correspondence, it would be helpful if you include in the covering letter accompanying the final return a note to the effect that the draft final report was issued before the anniversary date such that an annual progress report is not required.

Do not forget of course that even if you issue the draft final report just a day after the anniversary date then you cannot take advantage of rule 4.49C(4) and you must prepare and file an annual progress report with Companies House even though the regulators do permit you to issue a combined annual progress report and draft final report in such circumstances.

VAT reclaims and SoS fees

2011-08-01T16:10:00.000+01:00

Please note that this is not related to the VAT on IVAs issue that is also a current hot topic on the blog. This is an update flowing on from our article on Friday July 15.

We have now received a response from the Insolvency Service after our Freedom of Information Act request and they have provided us with a copy of an internal Estates Account Directorate (EAD) memo on Secretary of State fees on VAT refunds dated February 2007. It is only fair to give credit where it is due and we thank the relevant people at the Insolvency Service for processing our request so promptly.

This memo confirms that Secretary of State fees should not be charged on VAT reclaims (see our earlier article to explain the italics) made by the office holder since that would mean “charging the original receipt twice.” The Insolvency Service has said nothing about this to IPs publicly despite having been aware of this issue since at least February 2007. The EAD memo goes on to say that “The onus is therefore on the IP to inform EAD if no Secretary of State fee is payable so EAD will charge the fee in the absence of any notification from the IP to the contrary.”

As indicated in our earlier article, we think that this is an approach to fees that would land an IP in hot water, but it is apparent from other feedback received in response to the earlier article that this is just another example of the gulf that sometimes exists between the reality of life as an IP and how the Insolvency Service perceives it. We would like to put the whole issue to bed as soon as possible and rather than banging on about how wrong we think that actions to date have been, we would like to focus on the solution.

If you have not already stopped having Secretary of State fees charged on VAT reclaims you should review all open cases and any closed cases where the sums involved might be worth the cost of reopening the appointment, which might include having companies restored. You should then submit claims to EAD requesting the refund of any incorrectly drawn Secretary of State fees, explaining that the monies concerned had already been subject to fees when the original realisations were paid into the estates.

In future, there is a very simple solution, in that any time you are submitting funds to the ISA there is a box to tick on the ISA paying in slip that indicates that fees should not be charged. You should tick that box and then explain to EAD should they contact you that the funds are VAT reclaims that should not attract fees. If the funds were not paid into the ISA using a paying in slip then you should send an explanatory letter.

It will not help to continue to bemoan the fact that the Insolvency Service could have issued something much earlier and certainly by February 2007 when they we aware of the potential problem in EAD. It is too late to rectify the omission, but we would welcome an article in a subsequent edition of Dear IP to inform IPs about the potential for refunds and the method for avoiding the incorrect fees being charged again via the simple tick box on the paying in slip.

CPD session 3 - SIPs 1, 2, 3 and 9

2011-07-29T16:56:00.000+01:00

More of Bill's video training. That white shirt really shows up the grey in his hair and the observant among you can have fun spotting the door bell that goes off in the background. As before, a transcript is available to clients by emailing Bill.

CPD session 2 - SIPs 1, 17 and 7

2011-07-29T16:49:00.001+01:00

Another grainy video with some important technical detail. Existing clients can ask Bill for a transcript via email.

Possible ramifications of the Paymex decision

2011-07-28T16:02:00.000+01:00

Having originally intended to expand on our article of 30 June before now, I have taken longer than I had hoped. Part of the reason is that each time we think of this we just see more problems and part of it was to give the regulators and HMRC time to respond. We have seen the recent agreed regulatory announcement and we had hoped that HMRC would comment in detail rather than just issuing a short business briefing, but we are answering so many queries about this that we have to put something on the Blog to ease the pressure.

I’ve set this out in a “Frequently Asked Questions” format, partly because they really are frequently asked questions and partly because it was the only way I could stop my head exploding with all the possible options! We’ve used a bit of poetic licence to include a couple of questions that we have not been asked, but we either think we should have been asked or we wanted to answer anyway. The bottom line though is that at present there are many more questions than definitive answers!

Are HMRC going to appeal? Guidance from HMRC here says “HMRC will not be appealing this decision and subject to the normal rules on input tax adjustment, capping and unjust enrichment, HMRC will pay claims for overpaid tax charged on the services of Insolvency Practitioners that fall within the findings of this Tribunal decision.” We had heard that HMRC would issue guidance by mid-August and we hoped that the above is not all that they would have to say on the subject, but the latest intelligence that we have received suggests that this business briefing will be the extent of their information to IPs on the subject. We understand R3 are pushing them for better and more detailed guidance.

Do we have to seek clearance from HMRC before we take action? Strictly there is no requirement, in that the Tribunal has made its decision and HMRC have not appealed, but given the complexity and current uncertainty we would recommend asking everyone you can, including HMRC. If nothing else the sheer weight of queries may force HMRC , the Insolvency Service and the regulators to develop some form of protocol for you to follow (see below).

What happens to disbursements? We are not VAT specialists, so check to be sure, but we understand that if IVAs are exempt then related disbursement recharges are too.

Does the decision apply to CVAs? From what we can understand of the judgement it was only initially applicable to consumer debt IVAs, but it appears that it will apply to trading IVAs. The Tribunal specifically stated that it was not commenting on whether other insolvency processes might be subject to the same interpretation. I have now read the judgement more than once and the more I read it the more I am convinced that a case could be made out along similar lines for CVAs and possibly even Administrations to be exempt as well. However, until someone takes it to Tribunal or HMRC say something in their guidance, we would not recommend that anybody assume that they are exempt.

What should we do on open cases going forward? We don’t think anybody has been brave enough to say it directly yet, but we think that you should stop charging VAT and reclaim any that you have paid to HMRC to date. We think that you should inform creditors what you are doing, probably in the next annual report. We think it would be prudent to retain any recovered funds and a provision for ongoing VAT until it is really clear that IVAs are exempt and any further advice from HMRC or the regulators has been published. Again we think you should inform creditors that you are doing so.

What should we do on closed cases? This is a lot more tricky. There is no simple statutory route to reopen IVAs. It could be argued that you could reclaim the funds and deal with them on a simple trust basis, but there are other considerations (see the materiality and ethical questions below). The court may feel that it has a general discretion to reopen cases as an equitable solution, but the Insolvency Service and Regulators might feel that there is an argument to deal with the issue as simple trustees to avoid clogging up the courts with applications. This is an area on which further guidance is required from HMRC, the Insolvency Service and Regulators, but in the meantime if you want to go down the trust route to reclaim monies then you should protect yourself by obtaining some legal advice.

What should happen to the funds? HMRC have made it clear that they will consider “unjust enrichment” before paying out any monies. In simple terms this would prevent you from claiming all of the money for your own benefit and in any event (see ethics below) we think that the regulators will consider that your duty of care extends to recovering the money for the individual estates and dealing within the terms of each arrangement. It therefore appears that it is necessary for each estate to receive the refunds that relate to it and those funds should then be dealt with in accordance with the arrangement terms. Please note, however, that we understand that Paymex obtained legal advice, that we have not seen, that may indicate that the funds are not due to the estates, so you should consider taking your own legal advice.

Is there an implied right to draw underpaid/undercharged/written off fees? This will depend on the terms of each arrangement. If outstanding fees stand in priority to other claims on the funds, then you may be able to draw them, but you should consider the impact of this on the “unjust enrichment” policy operated by HMRC.

Can I have the benefit of the VAT paid on nominee’s fees in open cases? Once the funds are returned to the estate you should look at the terms of the proposals and any modifications. We cannot comment on all of the available permutations, but the following discussion may illustrate the difficulty that you face even with the most straightforward modification. The most common modification we have seen is by TIX which amends the nominee’s fees to 5 x contributions, including VAT. In theory then, if the VAT comes back, you could claim it in respect of the nominee’s fees. However, there is an argument that when TIX proposed that modification, they anticipated VAT being deducted and would have approved less if they had known. We really hope that in view of the benefit the creditors will get from the refund relating to supervisor’s fees, and the fact that each practice will have to suffer the implications of being partially exempt (see below), they will not press this point and will allow IPs to keep the refunds, but we would recommend that you check with the creditor who proposed the modification before taking it. Such an agreement should be obtained from the creditor globally in respect of each standard modification rather than on a case by case basis.

Can I have the benefit of the VAT paid on supervisor’s fees in open cases? Again we can only deal with the most common modification, which is that the supervisor be paid 15% of further realisations after deducting the nominee’s fees, excluding VAT. This would result in the VAT being available to creditors. However, we would argue that whilst all the benefit of future VAT exempt fees should go to creditors, the creditors should be asked to approve an appropriate fee for dealing with the VAT reclaim and distribution to them similar to that which we suggest for closed cases below. This is not an attempt to gain more fees for IPs, but a simple recognition of the economic reality of reclaiming the refunds and processing additional distributions. Matters will, of course, be further complicated for those who have accepted conflicting modifications or are subject to overall fee caps that take a different approach to VAT in their wording. The only firm advice that we can give at this stage is that you should look carefully at the approved terms of each arrangement and treat any proposed departure as a variation requiring formal approval.

Can I have the benefit of the VAT reclaim in closed cases? This answer will, in part, depend on whether the case is being reopened or if it is being dealt with on a simple trust basis. In the former, the advice on open cases above would apply. If the cases are not reopened and the monies are dealt with in trust, we are sure that there is a legal precedent available that establishes your right to be paid for dealing with the trust funds, but that should be checked with a lawyer and even then you will have to be very careful. In our risk-averse world we would suggest obtaining approval from the former creditors to a specific fee on a case by case basis. This could, for example, be a lump sum per case or it could be a set percentage of the recovered funds.

If the case failed and the debtor was subsequently made bankrupt then will the money be a bankruptcy asset and payable to the Trustee? What if the debtor has been discharged from bankruptcy? This is so clearly one for the lawyers that we are not going to answer this with anything definitive, and the way to illustrate this is to challenge even the idea that the money will automatically be a bankruptcy asset. A lawyer would need to consider whether the money is a right to monies or newly crystallised asset due to the bankruptcy estate, in which case it would vest in the trustee, or whether it is money that is caught by any trust clause in the arrangement, in which case it would have to be dealt with under the trust clause and might be similar to the closed cases mentioned above. If it is decided that such monies are not caught by any trust clause, the lawyer would then need to decide whether it arises from a right that vested in the trustee and can therefore be claimed post-discharge or just an asset that arises at some date after the Tribunal decision and therefore is due to the trustee only if the debtor is not yet discharged. If it is a bankruptcy asset because it derives from a right of action that vested on appointment or because the bankrupt is not yet discharged, it would be the trustee’s duty to consider recovering it and he is likely to be able to use it just like any other bankruptcy estate asset, in settlement of his costs, fees and charges, so it could fall into the “unjust enrichment” exemption. I hope that shows just how complicated this could all get!

What ethical considerations are there? I’d like to take the easy way out and just say “lots”, but that is not very helpful, so here are a couple that we can see. First, there is the overall question of whether an IP is now liable for not treating arrangements as VAT exempt from the outset. Could it be argued that if Paymex are right, every IP should have been fighting this for years? I think that it is a bit extreme, to say the least, but I think that your ethical consideration should address this issue, even if it is subsequently evaluated as being bunkum. Secondly, is there now an ethical duty on every IP to recover the VAT and distribute it where appropriate, even on closed cases, notwithstanding the fact that it may cost the IP’s firm more then he can recover in fees for doing so and in many cases more than the total VAT refund? Because these are ethical questions, we cannot come up with firm answers and we really hope that HMRC, the Insolvency Service and the regulators will be able to devise some appropriate guidance.

Is materiality a factor? If the supply is exempt, then it would appear that materiality is not a consideration that you should take into account. All incorrectly paid VAT should be reclaimed and all estates should be revisited that fall within the 4 year maximum reclaim period, even if they are closed. As above though, this may be more difficult to achieve in practice. This is the sort of area that we think could be addressed by a protocol agreed between HMRC, The Insolvency Service, the regulators and other stakeholders.

What are the implications for the IP’s past VAT returns? If IVAs are exempt, then each practice that provides them is now at least partly exempt. This means that you have to follow HMRC’s rules in respect of partially exempt supply and your past VAT Returns will need to be adjusted for VAT that you have reclaimed on exempt supplies. In other words, while you may be required to reclaim VAT for the benefit of the IVA estates and may be due some of it in agreed fees, your whole firm may suffer a claim to repay HMRC in respect of expenses where you claimed the VAT back in full at a time when you were partially exempt (e.g. general office overheads etc.). We are not VAT experts, but we understand that there are HMRC rules which set out a de minimis amount of VAT below which threshold you do not need to apply the partial exemption rules. That is something that you would need to check with a VAT specialist or HMRC. We don’t know how the numbers pan out in the real world, but this suggests to us that if you are above the de minimis level then because you may have to share the refunds you receive with the creditors, you may actually end up paying more to HMRC in respect of your revised VAT status than you recover, even if the creditors agree to you having a fee for dealing with the refunds. We understand that there is a statutory duty to get your VAT returns right, which means resubmitting them if you find that they are incorrect, i.e. going back the 4 years maximum that you can submit a VAT reclaim for. Again, this is something that you should either check with HMRC about or take advice from a VAT specialist.

Can I employ agents to do the work for me and pay them out of the estate as a category 1 expense? The answer to this depends on whether the supervisor’s powers as set out in the proposal permit you to employ agents to assist you. If they do then you would have authority to employ agents, but you will need to be careful about the costs involved as the large creditor agents will expect to see some return to creditors from the VAT reclaims made. In addition, if it needs saying, the agents could only be employed to deal with estate monies and they could not charge for dealing with the counterclaim by HMRC resulting from your change in exemption status. We think that a more practical solution would be for the industry to agree a protocol that allows a simplified procedure to operate that would streamline the process and save you having to use agents in the first place.

Do we wish the case had never been brought? Oh Yes!!!

You mentioned a protocol; what did you mean? We think that this is such a mess that HMRC, The Insolvency Service, the regulators and representatives of creditors, specialist IVA providers and smaller non-specialist IPs should come up with an agreed protocol rather than having so many uncertainties that mean that every IP will need to be taking their own advice from lawyers and VAT specialists. We’d be happy to draft something up, but the last time we did that it turned into the Protocol IVA by the time everybody had got at it and that was never what we intended! The sort of things it could cover are: some form of cut-off point, possibly based on the amount of any refunds, whether a case is open or closed and even how many creditors are involved (recovering a few pounds for 10 creditors may not be worth it, but recovering the same amount for just TIX, KPMG and Max Recovery might be worth it); some agreement on nominee’s fees; some agreement on supervisors’ fees; some agreement on an appropriate flat fee or percentage in closed cases; whether closed cases are to be reopened or dealt with on trust; guidance on how everything is to be disclosed to creditors; and an undertaking from HMRC that if the Protocol is followed they will not seek to recover monies that they repay or which IPs do not deduct from now on in open or new cases. This would not be legally binding and anyone who did not adopt the protocol would be free to take their own advice and act accordingly, but there have been examples of such agreements in the past, such as when the Service and HMRC set up separate rotas to clear the PRU backlog. We think that it should even be possible to agree a no claim/no reclaim position with HMRC is respect of all closed cases; so that as long as an IP did not reclaim VAT on closed cases (which is, as above fraught with legal issues and may cost more than it could realise) HMRC would agree to waive any reclaim in respect of partially exempt supply prior to the Paymex decision date, effectively increasing the current de minimis threshold. We could say more, but we would rather test the water with you via feedback to our usual email address and with major voters and the Service before getting too involved.

Finally, a massive disclaimer. We are as confused as the rest of you and this is going to take time to settle down. In a perfect world we would be paid a small fortune by HMRC et al. to design a protocol and we’d have it out before the August holidays are over. In reality, nobody is likely to pay us enough to stick our necks out again and any such proposals would require endless consultation and the whole profession seems headed for a long period of uncertainty. Accordingly, please treat these questions and answers as our reasoned contribution to the debate and not as a statement of law or prescribed action. They are just suggestions. You should not rely on them. You should seek your own advice and even then, until this is all cleared up by the powers that be, we suggest that you ask every time and seek creditor approval for anything you do. Maybe the cost of replying to all of the queries will force a protocol-type solution in the end.

Proposed revision to SIPs 3 and 9

2011-07-28T13:58:00.000+01:00

The RPBs have recently announced that they plan to change a couple of specific points in SIPs 3 and 9 when the revised SIPs are issued, but that in the meantime IPs should comply with the planned changes rather than the current wording of the SIPs. We welcome this as a practical and innovative approach and encourage them to use it more widely. This approach means that uncontroversial changes to the SIPs can be introduced much more quickly rather than having to wait for a complete revision of a SIP, which can take many months to achieve. If only legislative problems could be addressed in such a pragmatic manner.

SIP 3

The RPBs have recognised that the Insolvency Service publication, “In debt? Dealing with your creditors” is a valid alternative to the R3 guide “Is an IVA right for me?” As a result, you can now provide either of the leaflets to the debtor in order to meet your obligations under SIP 3, even though the current wording of SIP 3 requires you to just provide the R3 guide to the debtor.

On a practical note, the OFT prefers the Insolvency Service document and it also covers all options whereas the R3 guide only compares bankruptcy and IVA. Despite the unfortunate inclusion of address details for CCCS, who operate an IVA provider in competition with many IPs, in the back of the booklet, we have been recommending the use of this booklet for some time. By issuing it before you interview the debtor and then using the options disclosed in it to provide some structure to your interview, we find that IPs are in a much better position to provide evidence that they have made the debtor aware of all the options available.

SIP 9

The RPBs have now taken a pragmatic approach to category 2 disbursements in CVLs that are converted from Administrations. The 2010 rules provide that where an Administration commenced on or after 6 April 2010 is converted to CVL, the fee approval in the Administration is valid in the CVL without the liquidator needing to obtain fresh approval from any committee, if there is one, or the creditors. On a strict interpretation of SIP 9 you would still need specific approval of category 2 disbursements to enable you to draw them in the CVL. The RPBs agree that this is an unnecessary regulatory burden given the recent legislative changes, and so have indicated that the statutory continuation of your fee approval also applies to your category 2 disbursement approval.

Companies House – filing final reports

2011-07-28T13:49:00.002+01:00

More in the continuing saga of problems with filing final returns in with the Registrar of Companies in CVLs and MVLs. Rules 12A.43, 12A.44 and 12A.47 set out the information that “the notification of a return or a report of a meeting” submitted to Companies House must specify. So what information has to be specified as part of the final return? It is information about the company and the IP (rules 12A.43 and 12A.44), together with information about the meeting itself (rule 12A.47). The required information about the meeting is: its purpose (including the section/rule under which it was convened), whether a quorum was present, the venue, the outcome, and the dates of the opening and closing of the liquidation.

The present Forms 4.71 and 4.72 include all the required information about the company and the IP, and also the first two bits of required information about the meeting. In addition, by sending a copy of the final report and a receipts and payments account prepared to the date of the final meeting (see the Blog Article entitled “Filing Final Progress Reports with the Registrar of Companies” dated 17 April) then you will comply with the final requirement, which just leaves the reporting on the outcome and the venue. To provide that information then you will either need to send a copy of the minutes of the final meetings or a covering letter containing the information with the return to the Registrar of Companies.

That then leads on to a problem with interpretation. The wording used in rule 12A.47 is “the notification of a return or a report of a meeting”. Unfortunately at least one member of staff (and it does seem to depend on who looks at your final return – which is another problem!) at the Registrar of Companies seem to be interpreting this to mean that all the information that is not in the return itself, i.e. the meeting outcome and venue, has got to be in the final report presented to the meeting. That is somewhat bizarre as the final report is a report of the liquidation that is presented to the meeting, and is not a record of the meeting itself. I would suggest taking the approach indicated in the previous paragraph, but would be grateful to hear from you if your final returns are rejected by the Registrar of Companies for doing so.

There is another issue, you are required by the rules to report on the outcome of the meeting, but all sections 106 and 94 require you to do is to present a copy of the final report to the meeting(s) and to give an explanation of it. As a result, the legislation does not require a you to seek any formal resolution(s) at the final meeting, although our advice has always been to seek a resolution for your release. We think a release resolution is required because you will automatically receive your release unless the creditors vote against it and so it is only right to give them the opportunity to do so. There is, however, no requirement to obtain a resolution approving the final report or the receipts and payments account.

This begs the question, what outcome do you report to the Registrar of Companies? If the meeting(s) is/are inquorate then I do not think that you need do anything more than record that fact on the Form 4.71 or 4.72 since there can be no outcome from an inquorate meeting, other than the liquidator obtaining their release by operation of statute. But if the meeting(s) is/are quorate, then what is the outcome? You will certainly have to comment on whether or not the creditors voted against your release, and if you are also seeking a resolution from creditors/members to approve your final report then that should also be reported.

This is all very unsatisfactory and cumbersome. It would be better if Form 4.71 and Form 4.72 covered all the requirements of the legislation rather than requiring IPs to either send in a copy of the minutes of the final meeting or prepare a specific letter each time including the required information!

Frontsouth (Witham) Ltd – a cautionary tale

2011-07-18T10:30:00.001+01:00

With much doffing of caps to the expertise of Frank Brumby of Isadore Goldman who first flagged this up at the SESCA Insolvency Conference, I want to bring to your attention the recent case of Re Frontsouth (Witham) Ltd [2011] EWHC 1668 (Ch). Without going into too much detail, this was an administration where the administrators had not followed the correct procedures to extend its duration and so were looking for the Court to sort out the problem by making an order to backdate their appointment 364 days using the Court’s general power to remedy defects in appointments under rule 7.55. The Court refused and then considered alternative methods of dealing with the problem.

The administrators themselves had arranged for the members to pass a resolution to remedy the defect, and the Court considered the effectiveness of such an approach. The short answer is that it did not work since the administrators were not validly in office and so could not convene the meeting, and the members themselves did not have the power to convene a general meeting of the company. This was because of the general rules of corporate governance whereby it is only the Board of directors who can resolve to convene a meeting of the company. The members themselves, even acting unanimously, cannot do so.

So what are the practical effects of this decision? These are two-fold, in respect of effecting the initial appointment as administrator and remedying defects in appointments.

In my article of 22 April following on from the decision in Re Minmar, I indicated that one solution to the issue of giving notice of intention to appoint to the company could be to have the appointment made by special resolution of the company. That is a valid solution, but in view of the Frontsouth judgement I want to take this opportunity to remind you of the process to follow, which is to hold a Board meeting at which a resolution is obtained to convene a meeting of the company to consider a special resolution to place the company into administration and to appoint an administrator, and then hold a meeting of the company to pass the resolution, ensuring that the meeting is properly held and the resolution validly passed. In other words, the procedure is akin to a CVL, but with a special resolution to place the company into administration and to appoint an administrator instead. The problem will come if there is either a dispute between the directors as in Minmar, or indeed between the members, in which case you should be taking legal advice on how best to effect the appointment. Indeed, you may consider that the whole process to effect an appointment by the company is too long winded and that it is quicker and easier to effect the appointment via a Board resolution and to just remember to give notice of intention to appoint to the company.

The main impact of the decision, however, will be in respect of trying to remedy defects in appointments in administrations since the Court confirmed that it cannot use rule 7.55 where the administrator has not been validly appointed and you will have to rely on the co-operation of the Board of directors to convene a meeting of the company to pass a resolution to fix the problem. As a result, if you find that you are not validly appointed as administrator then seek legal advice immediately.

More money for you and the creditors, but I may not be welcome at Bloomsbury Street for a while!

2011-07-15T13:25:00.000+01:00

We are pretty sure that a large number of insolvency estates have been overcharged Secretary of State fees. We think that you can apply to the Estate Accounts Directorate (EAD) for the incorrectly charged fees to be refunded to the estate and believe that somebody should be held to account for failing to come clean with IPs before now.

The confusion dates back to Dear IP in 1991(!) which stated that Secretary of State fees are due on VAT refunds. While this is quite correct for VAT refunds since they are new realisations and therefore should be treated as assets and attract fees, it is not true for many VAT reclaims. When you reclaim VAT on your fees and expenses, and those fees and expenses have been paid from realisations that had already been deposited in the ISA, Secretary of State fees have already been charged on the initial realisation such that the reclaim should not attract fees again, otherwise it is a case of fees being charged on fees. The difference is so crucial that I will keep using italics for emphasis.

IPs have been moaning about this “injustice” for years, and we have been niggling away at it for the past few months ever since a client said that he had managed to get the fees waived on his reclaims. We are now aware of at least one more client that has been avoiding the fees for some time by sending in a separate letter each time he deposits VAT reclaims. Whilst we have not been able to find any confirmation about the ability to waive fees on the Insolvency Service website or in any other EAD notices, we are now confident enough in your ability to get fees waived that we are prepared to post a Blog article about it.

I am well known for being a bit too enthusiastic on occasions, but I have a feeling that this could be a significant amount of money and I am also pretty sure that the EAD must know that they should not have been charging fees on VAT reclaims.

I think it must be worth your while to provide EAD with a list of every payment on every open case where the monies you paid into the ISA related to a VAT reclaim. You should ask them to reimburse each estate with the fees that they have incorrectly drawn and ask them to calculate and reimburse the interest lost to the estate as a result. I suspect though that they may feel that the request for interest is a little harsh, because they may not have been able to identify at the time whether the payment was a refund or a reclaim.

I am pretty sure that those of you who have a significant number of compulsory liquidations and bankruptcies should find that your estates gain a significant boost. While I look forward to basking in the reflected glow of your gratitude when the money starts to come in and I hope that some of you will remember for long enough to put us up for next year’s Insolvency and Rescue Awards, or possibly a small knighthood, I think that there is a more important point of principle to consider.

I am concerned that a public body that is responsible for IP regulation and is supposed to be acting in the best interests of creditors, has probably been aware for some time that it may have been overcharging fees as a result of its inability to distinguish VAT refunds from VAT reclaims and yet appears to have done nothing to alert IPs to the issue. This must have cost insolvent estates many thousands of pounds to the detriment of IPs and creditors alike. At the very least I think that they should have instructed you, via Dear IP or through the regulators, to make it clear when remitting VAT funds to the ISA to indicate whether they were reclaims or refunds. If they have done so, and I have simply missed it, then I am sure someone will tell me and I’ll have to eat some humble pie. Just to make sure I have today submitted a Freedom of Information Act request to the Estate Accounts Directorate to confirm the position and I will update the blog when I have the results.

In all honesty, although at least one client thinks I am expecting too much, I really think that the Insolvency Service had a duty to be pro-active. If they knew that the treatment should be different for VAT refunds and reclaims and the source of the payment was not clear, then I think they should either have asked you on receipt of the monies, or required you to provide that information when remitting the monies, explaining why it was important. If any IP charged fees that he was not entitled to on a similar scale he would no longer be an IP and would be very much poorer as a result of the punitive fines he would have had to pay. I am quite certain that his regulator would not have been impressed with the mitigation that he wasn’t really sure if he could have the fees or not and decided to take them until someone challenged him!

I don’t know how far back you could claim and whether it would be worth restoring and/or opening closed cases to deal with this. I will leave that to the lawyers among you. However, for example, if you drew fees and expenses of £15,000, so reclaimed VAT of £2,625 at the old VAT rate, you would have been charged over £400 that you could now reclaim. I have a feeling that many cases will involve much higher sums and if you are able to reclaim the improper fees for 6 years or more, I am pretty sure that there will be some significant amounts involved. Even if you can only reclaim in respect of the present fee regime and current appointments this could soon mount up, but there may be a chance that improper fees drawn under the old fee regime in respect of voluntary liquidations where funds were banked at the ISA could also be caught. A lawyer would be able to advise on when the liability to repay the fees and therefore any period of limitation arises. It may be that you can only go back a certain amount of time from today, or it may be that as today is the date that you became aware of it, you may be able to claim all relevant fees, irrespective of when they arose, as long as you submit your claim within a limited period.

Of course, none of this may be news to you and you may well have been getting EAD to rebate fees on VAT reclaims for years, in which we would be pleased to hear from you so that we can establish just how big this issue is for the profession as a whole. However, our experience from speaking to clients is that several did not know about the ability to rebate fees, and indeed I remember a well-known IP from a mid-tier firm standing up at a training event and reminding IPs to provide for Secretary of State fees on VAT reclaims when closing a compulsory liquidation or bankruptcy where they were VAT registered.

As you’d expect from a Blog article in my name, I have taken a fairly harsh view of the Service’s approach, in much the same way that we give our clients grief when they make errors if we find them during our visits. I accept that my comments may be controversial and I would be happy to receive your feedback, ideally by email. If you don’t have my address, please feel free to follow the link on our website. If my current Freedom of Information Act request or anyone at the Service can show that the difference was publicised and I have got my facts wrong, I accept that I may yet have to edit or retract this article, but we have conducted considerable research over a protracted period and it is issued in good faith based on the information that we have gathered to date.

Administration to CVL, filing Form 600 - an update

2011-07-07T16:20:00.001+01:00

Regular readers of the Blog may have noticed our article about filing Form 600, notice of appointment in ADM/CVL conversions (April 17). That article points out the position as we see it in law, but one of the DTI’s monitors has pointed out that Dear IP and the regulatory monitors have a different view. They say that where Form 2.34B has been filed the Registrar of Companies has confirmed that the form closes the administration and starts the CVL on the date that the form is registered, so they do not require you to file Form 600. We are also aware that Form 600s are being returned by Companies House in such circumstances.

You may understand our somewhat cautious approach to anything that departs from the legislation after the response we received to similar questions about drafting errors in the rules, most notably the requirement to file a chairman’s report in adjournments in non-court route IVAs (30 April 2010). Accordingly, while acknowledging the common sense approach being taken by the regulators and Companies House, we leave you to choose whether there is also some merit in filing Form 600, just to be safe.

VAT in IVAs – what to do if HMRC don’t appeal

2011-06-30T14:41:00.002+01:00

You should by now have seen that after the Paymex decision we reported a couple of weeks ago, R3 have now received information that an appeal by HMRC against the tribunal’s decision that VAT should not be charged on nominee’s and supervisor’s fees is unlikely. Unsurprisingly, this is causing all sorts of excitement for the regulators, and in due course there will be some formal regulatory reaction, but until then we thought it might be helpful to provide our thoughts on the question “what should IPs do now?”. Apart from anything else, this will give us something to use when responding to all of the emails and phone calls we have received today and will no doubt continue to receive!

We will produce a more detailed article next week exploring some of the implications as we see them, but until then we felt it was more important to establish a base-line for what you should do now. We suggest the following action as a temporary approach until the regulators can come up with some formal guidance:

• Put in protective claims that are near the 4 year limit, but do not push for the money yet.

• Stop charging VAT on new cases, but amend your engagement letters, proposal wording, covering letters and invoices to include a statement that you are not charging VAT at present because of the decision in a recent legal case, but that you reserve the right to do so if HMRC appeal the decision or the position subsequently changes.

• Temporarily “park” any pending closures until the position becomes clearer in the light of guidance from the regulators. Put a clear file note on the case file setting out why you have delayed closure. You can continue to clear up any loose ends and get them ready for closure, but don’t actually close them. They should be put on your diary for review every fortnight. This is only intended to be a very short term measure until the regulators can agree a final solution.

• If there is still no sign of any formal advice from the regulators in say about a month, then rather than keep the case open, potentially incurring additional cost and delaying dividends to creditors or closure for the debtor, take a commercial decision as to whether the likely benefit from the VAT refund, if it is due to the estate, is worth waiting for.

• In cases that cannot be closed because the VAT is material, you should push for the refund and treat it as estate funds. Whether you can then draw the monies as additional fees depends on the wording of the arrangement term (as modified) dealing with your fees. Even if the refund cannot be drawn as fees then it could still lead to an additional distribution being made which would, in most cases, give you a fee for processing it, but again that would depend on the terms of the arrangement. You could then close the case.

• In cases where the VAT is immaterial, you could close them and treat them in the same way that all of the historic closures for the last 4 years are dealt with, once the regulators have had a chance to meet up and agree what that action should be.

Hopefully, this will be really temporary advice and the regulators will come up with something before you have time to do anything significant.

Finally, somewhat cravenly, we should point out these are just our thoughts and they carry no formal weight. We have put them out to help you in your decision making, because we can issue this much faster than a regulator that has more formal procedures to go through before they can act. If in any doubt you should check with your regulator or seek formal legal advice.

Free CPD!! Bribery Act 2010

2011-06-27T17:10:00.000+01:00

The Bribery Act 2010 comes into force on 1 July 2011. For anyone that has not yet put their mind to it, here is a brief CPD session on its main provisions. It is designed to fit into a lunch break and Compliance On Call Silver Service and Gold Service clients have access to relevant additional documents. As our first attempt, the presentation is a little rough around the edges and I promise that will wear a "more prominent" shirt next time I sit in a brown chair to be recorded! If you would like details of how to become a Gold Service or Silver Service client, please visit our website.

Companies House – yet again!

2011-06-24T13:52:00.000+01:00

As you are all aware, rule 4.49C(4) states that the liquidator does not have to prepare an annual progress report for any period that ends after the they have sent a draft final report to the creditors. It is an eminently sensible rule that is designed to cut out unnecessary duplication of reporting when you are already closing a case when the anniversary comes around.

Despite the rule being clear and unequivocal we have become aware that Companies House are rejecting final reports sent to them in such circumstances because an annual progress report has not been lodged. Bill has already had a rant about the approach of Companies House generally (see Article dated 21 April) and this is another example of their lack of understanding.

If your final return is rejected in such circumstances then you should write back to them politely pointing out the provisions of rule 4.49C(4) and respectfully requesting that they proceed to file the said report. If they reject another of your final returns for the same reason you could consider making a formal complaint to them about their service so that eventually they become snowed under with such complaints. That is a slightly more reasonable approach than Bill’s frustrated suggestion that you should complain to your local MP so that the Insolvency Service has to reply to each query via the Minister!

SIP 1 – it does matter!

2011-06-20T14:05:00.000+01:00

SIP 1 is an introduction to the SIPs and sets out the purpose and principles of them. It reminds you that they should be read in conjunction with the fundamental principles as set out in the Insolvency Code of Ethics and be applied in accordance with the spirit of that Code. Taking a strict and literal interpretation of the SIPs may not be appropriate where doing so would be contrary to the fundamental principles.

It also reminds you that not only must you comply with the SIPs, but you must evidence your compliance with them. Make sure that you document your strategies and decision making processes as part of that evidence. Prepare appropriate file notes and ideally also prepare a case strategy note either prior to, or immediately after, appointment to identify the assets and how you intend to deal with them, and to set out any case specific issues or concerns and how you will deal with those.

Such evidence also helps protect you should you end up being challenged in Court, or if a complaint is made against you. For example, in IVAs record why you are using the particular entry route, interim order or non-interim order, in order to evidence compliance with SIP 3; and in CVLs record why you are selling the assets to a connected party in order to evidence compliance with SIP 13.

Hot topic - Important VAT Tribunal Decision on IVAs

2011-06-16T16:35:00.001+01:00

News just in, there has recently been an important VAT Tribunal Decision on the treatment of VAT in IVAs. In summary, the decision is that IVAs are to be treated as an exempt supply of financial services, such that VAT should not be charged on the nominee’s or supervisor’s fees etc. The full text of the judgement can be found here and further information can also be found on the web-site of Ruffles & Co, the solicitors acting for the IPs in this case. Please note that the preface to the decision is wrong where it credits Chinnery & Co with instructing Counsel for the taxpayer. Chinnery & Co have had absolutely no involvement with this case. Instructions were by Ruffles & Co only.

I understand though that HMRC have been given leave to appeal the decision, and that the current indication is that they are likely to do so. As a result, you need to be careful before jumping in and submitting a claim on your past invoices, and consider just submitting protective claim at this stage. You should also take you own advice from a VAT specialist on whether it is safe to stop charging VAT on your future invoices, or if it is better to pay it for now until the outcome of the appeal is known.

We will leave the thorny question of who should benefit from any VAT refunds received for a subsequent article, once HMRC has decided whether to appeal and the outcome of any such appeal is known.

VAT on bonds – an alternative view

2011-05-25T12:06:00.000+01:00

Many IPs are aware that Dear IP Chapter 4, Article 5 gives HMRC’s opinion that you should charge VAT on bonds when recharging the estate after you have first paid the premium out of your office account. This always seemed counter-intuitive given that the original supply did not attract VAT and raised the question of whether other supplies such as insurances should also attract VAT. HMRC’s arguments relied heavily on HMRC VAT Notice 700.

As a result of the Dear IP article, our advice to clients has, for some time, been that they should charge VAT on bonds and consider doing so on other recharged expenses unless they have some pretty weighty tax advice that contradicts HMRC’s view that they feel they can safely rely on.

We have recently noticed that the Law Society has given advice on the VAT treatment of disbursements to their members. This makes interesting reading and although we are not brave enough to say that you should use it as a reason to ignore Dear IP on this point, it certainly makes the argument less clear cut than HMRC suggest it is in the Dear IP article. The Law Society article can be found by clicking here.

An informative article on the subject by Paddy Behan of Behan and Co Ltd appears in ACCA’s In Practice Bulletin. This can be found here.

Both articles focus on the treatment of legal disbursements, but many of the arguments could apply to the treatment of bond premiums and other disbursements in insolvency proceedings. For now, we’ll stick to our existing advice and suggest you charge VAT on recharged bond premiums unless you have advice from a VAT specialist that carries enough weight to support you in any argument with your regulators or HMRC.

Annual Progress reports in CVLs post Administration

2011-05-10T08:58:00.000+01:00

Since the first anniversary of liquidations converted from Administrations on or after 6 April 2010 has recently passed we thought that it was an opportune time to remind you about the obligation to issue annual progress reports in such cases.

Where a CVL was converted from an Administration on or after 6 April 2010 then the 2010 Rules apply such that you have to issue an annual progress report, and there is no need to file section 192 returns or hold meetings of creditors or of the company. These rules apply irrespective of when the preceding Administration commenced.

The rules are different for compulsory liquidations, however, as the requirement under the 2010 Rules to issue annual progress reports only applies where the preceding Administration was commenced on or after 6 April 2010.

Assistance for R3

2011-05-10T08:57:00.000+01:00

R3 has regular dialogues with various organisations and interest groups that impact on the work of IPs with a view to influencing them. That includes regular meetings with Insolvency Service on all matters affecting IPs, including their relationship with the Official Receiver’s offices, and also with creditors and their agents as part of the IVA Protocol working group. In order to maximise their effectiveness in working on behalf of IPs R3 do, however, need specific examples of any issues or problems that IPs have encountered in their day to day work. In particular, R3 are looking for examples relating to IPs dealings with Official Receivers and also with creditors and their voting agents in respect of protocol IVAs. I would urge you to provide R3 with details of any specific problems you have encountered in order to help them in their work on your behalf.

OUR NEW WEB SITE

2011-05-07T08:45:00.001+01:00

Please excuse me shouting, but after over 5 years providing the best insolvency compliance service we can, we've finally produced our own website. We will keep this blog running for technical updates, but please have a look at the new website and tell everyone else in the insolvency profession about it. As you'll see, it takes a fresh approach, like the service we provide, but please visit by clicking here and let us have your comments if you have the time.

Giving notice of intention to appoint to the company – an important update

2011-04-22T10:13:00.002+01:00

In our post on 23 February 2011 we reminded you about the need to give notice of intention to appoint to the company in all administrations, irrespective of whether there is a floating chargeholder, where the appointment is being made by the directors, quoting an unreported case where the appointment of the administrator was upheld, but he was made personally liable for the costs of the action. We have just been made aware of a further case on this very issue which makes for some very scary reading. The Chancellor of the Companies Court found that because notice of intention to appoint had not been given to the company then the appointment of the administrator was invalid. Leave to appeal has been granted, but it is not clear at this stage whether or not an appeal will be made.

It is highly likely that this case will be reported, so watch out for more details on it, but in the meantime this case really brings home the need to either ensure that you give notice of intention to appoint to the company where the appointment is being made by the directors, or arrange for the appointment to be effected by a special resolution of the company.

Insolvency Rules update

2011-04-22T10:13:00.001+01:00

Last Wednesday (20 April) the Insolvency Service announced that after the recent consultation with stakeholders they were going ahead after all with drafting a complete new set of Insolvency Rules to replace the 1986 Rules and the myriad of subsequent amendments. The rules will not, however, come into force until October 2013 at the earliest.

The 12 month delay in the planned introduction of the new rules means that you have even longer to future proof your standard documents by removing all unnecessary legislative and rule references to help minimise the number of changes that you will need to make when these rules are introduced.

We have been taking this approach for some time in our standard documents, apart from checklists where the references have to be included, and those with access to our Bronze, Silver or Gold Services can see how the reference-free wording works in practice by looking at the standard documents on our Creditor Gateway portal.

HMRC mods in administrations – contrary to public policy?

2011-04-21T21:14:00.000+01:00

We have recently seen modifications proposed by HMRC in an administration that appear to conflict with either the law or public policy, depending on how they are interpreted. We have started to go through the appropriate channels to see if we can find a solution, but for now we want to find out how many IPs have seen this. The modification may be a one-off by an overzealous officer at HMRC or it may be a standard modification that they are using more widely and we’d appreciate it if you would let us know if you have seen it before.

The offending modification says:

"Pre appointment fees and expenses unpaid at the commencement of administration may only be paid to the extent permitted by Rule 2.67(c) IA 1986. The administrator if not already provided will provide creditors with a detailed account of such expenses paid from administration funds. Pre appointment fees and expenses not payable within R2.67(c) shall rank as an unsecured claim alongside other ordinary creditors.”

This modification is trying to refer to “costs of the application” – rule 2.67(1)(c) of IR 86. It approves them but goes on to say that the balance can only be taken as an unsecured claim.

If they are approving the fees that are not just “costs of the application”, then putting it in a different priority to 2.67(1)(h) is contrary to the legislation and would not be effective.

If they are not approving the fees that are not “costs of the application”, then they are right that you would only have an unsecured claim for them, but this creates an ethical problem. You would become a creditor in your own proceedings with the obvious self- review and other threats. An unscrupulous IP could, in an extreme case, front load his pre-appointment costs to give himself a significant proportion of the unsecured pot or prescribed part, so that he is certain of recovering the normal level of pre-appointment fees anyway. More to the point, however, in our opinion, is that the government signalled its intention for IPs to be able to draw pre-appointment costs by amending the legislation to develop an approval route and payment priority and HMRC are seeking to circumvent it, contrary to public policy.

While we continue to ask questions to get this issue resolved, please let us know how big the potential problem is. In the end it may be that HMRC need to talk to the Insolvency Service to decide whether the policy implication of the revised legislation is such that some or all of the modification needs to be varied or withdrawn.

Companies House forms – time for action?

2011-04-21T21:08:00.000+01:00

Since Gareth posted the two articles about the filing of Form 600 in liquidations that follow on from administrations and final progress reports in liquidations, we have received evidence of inconsistent treatment by Companies House in both situations. We have seen letters rejecting form 600 in ADM/CVL conversions, contrary to the law and the Insolvency Service’s view and we have seen examples of final receipts and payments accounts being accepted without accompanying progress reports which directly contradict letters that other IPs have received demanding (re-dated) progress reports before the receipts and payments account would be accepted for filing.

On a similar point of inconsistency, we have recently seen Companies House reject the notice of result of a meeting to approve an administrator’s proposals. Their reason for rejecting the filing was that there was no copy of the proposals attached. The proposals had already been sent to Companies House before the meeting as required by paragraph 49(4) and (5). The only time that there has to be a set of proposals attached to the result notice is when sending it to creditors who have not previously had a copy (rule 2.46(b)). Accordingly, someone appears to have misinterpreted the requirements.

It must be time for the Insolvency Service and Companies House to get together and agree a consistent approach. IPs have enough problems with the existing regulation without incurring additional cost dealing with uncertain treatment of routine paperwork.

As a simple solution, we recommend that representatives of Companies House and the Insolvency Service meet to agree the correct approach to these documents and disseminate their agreed approach via Dear IP and internal desk instructions at Companies House. That way, IPs will know what they should send in for filing and Companies House staff will have clear instructions to ensure that papers are accepted and filed in a consistent fashion. The benefits for creditors are twofold, in that those few who access the Companies House information will find consistent evidence and the costs of proceedings will be reduced because IPs will not have to re-work and re-submit forms.

A couple of mad ideas for the policy boys to consider

2011-04-21T21:06:00.000+01:00

Despite being on our Blog, this article should probably carry a health warning that it arises from Burch’s overexcited brain! I made the mistake recently of doing some thinking during my quiet moments, of which there are few. Two thoughts came to mind that might be worth further discussion/consideration within the profession.

Referrals

The Ethical Code prevents the payment of commissions for insolvency work but IPs are allowed to pay work to others, who may happen to be the referral source, for work done, as long as it is evidenced and shown to reduce work that the IP would otherwise have done. The most commonly disclosed example of this is when some of the nominee’s fee in an IVA is paid to a referral source that provided some of the initial fact find. In corporate cases, the approach tends to be to pay the referral source for work done in helping to prepare the SA, which is just as fully disclosed and transparent, or to provide the referral source with work on tax calculations or legal action during the appointment, which is less so. Every now and again rumours surface about other more inventive and less transparent payments being made, but these are rarely substantiated.

I just wonder whether, instead of continuing the circular argument about whether we should have a single regulator, there would not be some benefit in opening a discussion about whether the profession should now be allowed to pay properly disclosed commissions for referrals. I can see several dangers, such as a rise in marketing direct to distressed debtors and a potential bidding war as certain firms try to boost their turnover. However, I can also see that it would take away some of the finger pointing in the profession, as referral payments become more transparent and allegations of “back-handers” are dealt with. In time, I also suspect that the initial marketing flurry would die down and costs would level off as market forces arrive at a fair figure.

I know of one IP who suggested this some time ago and was vilified, but at the risk of getting a few backs up, I thought it was appropriate to raise the question again particularly as it is something that other professionals, such as solicitors can already do at present.

Disqualification

We often hear IPs complain that DU turns down too many cases. There is clearly a significant gap between what an IP thinks is misconduct and what DU can actually run with. This is often caused by IPs taking a scattergun approach to allegations of unfitness or providing insufficient evidence because of limited funds in the estate. However, there are also too many cases where good, if not perfect, allegations are turned down, apparently because they are not guaranteed to succeed or require more investigation than DU has resources to meet.

This led me to wonder whether the legislation could be amended to give IPs an opportunity to pursue disqualification proceedings direct in marginal cases. It should be possible for an IP, who has most information available, to make a reasoned decision with his legal advisors about the potential for a successful disqualification action. These would not necessarily be cases that meet the higher level “public interest” criteria, but would be cases where the creditors want something done and there is the potential for a costs or liability order to be recovered after successful proceedings. Those cases that meet the public interest criteria or cannot be funded from estate resources or a potential costs or liability order could still be referred to DU. However there is a lot to be said for releasing the decision in many cases from the tight requirements imposed by the public interest and allowing decisions to be made on the basis that conduct that most normal people consider unfit should not go unpunished.

There you go…cage rattled…neck stuck out…sorry!

Administration to CVL – part 2 – Gazetting and filing Form 600

2011-04-17T12:27:00.001+01:00

Just a quick reminder that once you are appointed liquidator following the registration of the notice of move from Administration to CVL you need to both gazette your appointment as liquidator and send notice of your appointment to the Registrar of Companies on a Form 600. Both these actions must be taken, even though the Registrar is clearly aware of your appointment, since the requirements to do so are contained in section 109 and this section has not been disapplied by paragraph 83(8) which governs the rules that apply on conversion to CVL.

Administration to CVL – part 1 – timing of notice and final progress report

2011-04-17T12:26:00.000+01:00

For cases commenced on or after 6 April 2010 I would remind you that the “new” rules introduced a two-stage process for conversion from Administration to CVL.

First, give notice of the move from Administration to CVL to the Registrar of Companies, the Court and the creditors. This is still done on Form 2.34B, which is downloadable from either the Registrar of Companies web-site.

Secondly, as soon as reasonably practicable after the notice of move has been registered by the Registrar of Companies, i.e. the Administration has come to an end and the liquidation commenced, the former Administrator must send a final progress report to the Registrar of Companies and to all those who received notice of the Administrator’s appointment, e.g. creditors, the company. The final progress report must cover the whole of the period of the Administration up to the date it has come to an end.

Since the report is issued in your capacity as former Administrator and relates to the Administration not the liquidation then it follows that you cannot charge any time costs incurred after the Administration has needed in preparing the final progress report in either the Administration or in the liquidation. In order to minimise your time cost write offs you should start preparing the final progress report as soon as you have sent the notice of move from Administration to CVL to the Registrar of Companies, if not before.

Date stamping proxies

2011-04-17T12:25:00.000+01:00

Since a proxy must be received by the date and time stated in the notice convening the meeting of creditors for it to be valid then it is important to evidence when a proxy was received in order to show whether or not it was valid. The easiest way to do this is by date stamping each proxy that is received, ideally on the reverse of the form. Where a proxy must be received by a specific time as well as a specific date, e.g. in a CVL where a proxy may be received up to noon on the business day before the meeting, then where a proxy is received on the last date for receipt the time of receipt should also be recorded as well as the date.

Filing final progress reports with the Registrar of Companies

2011-04-17T12:24:00.000+01:00

Bill and I have been having a debate about this and whether or not there is any need to file a copy of the final progress report with the Registrar of Companies in CVLs and MVLs since the wording of sections 106 and 94 were not amended by the 2010 Rules and a copy of the final report was not previously sent. Taking the strict interpretation arising from the unchanged legislation seemed illogical, as office holders would have been required to file progress reports during the appointment, but not at the end. We had asked the RPBs for their views, but before they could respond we heard the answer straight from the horse’s mouth as it were, the Registrar of Companies. Quite simply, the Registrar of Companies will not accept for filing final returns in CVLs and MVLs on Forms 4.72 and 4.71 unless they are accompanied by a copy of the final progress report in respect of cases commenced on or after 6 April 2010.

We are also aware that the Registrar of Companies has rejected final progress reports accompanying the final returns as they were the draft progress reports that were issued to creditors and so were not made up to the date of the final meetings. As a result, you will need to amend the draft final progress reports and ensure that a receipts and payments account to the date of the final meetings accompanies the final return.

Since section 172(8) in respect of compulsory liquidations only refers to lodging a return with the Registrar of Companies regarding the meeting of creditors held and any decisions made there does not appear to be any requirement to send a final progress report with Form 4.43, but the Registrar of Companies may still decide that there is! Again, there is a certain logic to filing a progress report at the end of the appointment if you have had to do so throughout it and we suggest that filing a copy of the progress report, if accepted by the Registrar, should be the default option. We will let you know if we hear what approach the Registrar and regulators are taking.

Final VAT refunds

2011-04-03T12:11:00.000+01:00

HMRC are still slow in processing VAT refunds. You should factor this in when closing CVLs, but if there is any doubt that the final VAT refund will be received before the date of the final meeting, you should request on the final VAT 426 that HMRC make the cheque payable to your practice, always assuming that the VAT refund will be used to pay the balance of your remuneration.

If the cheque is received once you have had your release, which will be once the final return has been lodged with the Registrar of Companies unless the creditors have objected to it, then you should not pay those monies into the estate account since you are no longer in office as liquidator and hence cannot operate a liquidation account. The refund should be cleared through a general clients account instead, before being paid to your practice as the balance of fees due.

Use web-sites

2011-04-03T12:10:00.000+01:00

Following on from our recent update that introduced the services offered by The Creditor Gateway, just a quick reminder that any requirement in the legislation to give, deliver, furnish or send a notice or other document or information to any person can be satisfied by the office holder making that notice, document or information available on a web-site. The key words here are “office holder”, such that giving notice of a section 98 meeting is not satisfied by placing the documentation on a web-site and sending a one page letter to the creditors to notify them of that since, unless it is a Centrebind, the IP is not in office. Written notice of the section 98 meeting, including all relevant information and documentation, must always be given to creditors, unless it is a Centrebind.

Index for our standard documents at The Creditor Gateway

2011-02-25T12:05:00.003Z

Earlier this year we saw a client using The Creditor Gateway (www.thecreditorgateway.co.uk). They provide a service where IPs can upload reports, proposals and other documents onto an internet portal. This allows the IP to issue a much shorter covering letter to creditors, saving on postage, printing, copying, staff time, etc. We were really impressed with how easy it was to get documents online and how reasonable the charges were, usually below the cost to the IP of the postage alone. We saw the potential in this, not just for you and your notices, but also for our core documents.

They are currently loading 45 of our core documents onto a portal and when it is complete we will circulate our visit clients (and any non-clients who have purchased access rights) with an access code allowing you to go onto the portal and collect copies of the documents you want. We would recommend that you try it out so that you see how good The Creditor Gateway is, even if you don’t actually want to download anything at the moment. Once on our page, there is a link in the bottom right hand corner that shows you their prices. We think you’ll be as impressed as we were.

The following is an index of the documents you will be able to download:

Engagement letters

1 ADM Engagement Letter v3
2 CVA Engagement Letter v3
3 CVL Engagement Letter v4
4 Engagement letter Terms and Conditions
5 IVA Engagement Letter v4
6 MVL Engagement Letter v2

Progress reports, Final progress reports and Pro-forma ADM proposals

7 ADM final progress report with new rules BB v3
8 ADM progress report with new rules BB v2
9 BKY annual report with new rules BB v1
10 BKY final report with new rules BB v2
11 CVL, MVL, CWU annual report with new rules BB v4
12 CVL, MVL, CWU final report with new rules BB v5
13 Pro-forma Administrator’s proposals – meeting of creditors convened v2010 rules
14 Pro-forma Administrator’s proposals – no meeting of creditors convened 2010 rules

Reviewing checklists for post 6 April 2010 cases

Please note that these are reviewing checklists, not case progression checklists or work programmes

15 ADM
16 ADM to CVL
17 ADR
18 BKY
19 CVA
20 CVL
21 CWU
22 IVA
23 MVL

Reviewing checklists for pre 6 April 2010 cases

Please note that these are reviewing checklists, not case progression checklists or work programmes

24 ADM (pre 4-10)
25 ADM (pre 4-10) to CVL
26 ADR (pre 4-10)
27 BKY (pre 4-10)
28 CVA (pre 4-10)
29 CVL (pre 4-10)
30 CWU (pre 4-10)
31 IVA (pre 4-10)
32 MVL (pre 4-10)

33 6 monthly case review sheet

34 Bond calculation sheet version 2010 (with formulae)

35 Case strategy note

36 CVL work programme and checklist

37 Ethics checklist – corporate appointments v2
38 Ethics checklist – personal appointments v3

39 Investigation checklist

40 Money laundering risk assessment – corporate appointments v7
41 Money laundering risk assessment – personal appointments v5

42 On appointment case review sheet

43 Pension scheme checklist

44 Practice fee recovery sheet long pro-forma 2010
45 Practice fee recovery sheet pro-forma

As with any of our documents, they are aids to you in doing your work, not a statement of law and you should not rely on them without satisfying yourself that you are happy with their content. Compliance On Call cannot accept any liability for loss or penalty suffered by anyone using the documents. Having said that, we've tried to make them as good as we can and we'd happily take feedback to improve them further, so if you spot a typo or similar, please let us know!

Engagement letters and making it clear where your duty lies

2011-02-23T16:51:00.000Z

We’ve recently seen a situation where an IP was able to put up a very vigorous defence when a director claimed to have been prejudiced by advice he was given pre-appointment, which was a timely reminder that you need to ensure that your engagement letters protect you and define the scope of your instructions.

The director, who was also a major shareholder, was a bit upset (!) to be told that he had to repay illegal dividends taken in the years leading up to the liquidation. He said that the IP should have warned him and advised him to avoid liquidation to protect him from having to repay the money. Thankfully, the IP, who knew nothing of the illegal dividends when first contacted by the director and did not even see summarised accounts until after the company had convened the CVL meetings, had a very clear statement in the engagement letter explaining that advice was being given to the company, not the directors in their personal capacity.

You should check that your engagement letters help to protect you and manage the directors’ expectations as well as covering the increasing raft of required content. As for those of you that still don’t have engagement letters for some or all of your case types…..

Voting representatives and proxies

2011-02-23T16:49:00.001Z

As you are aware, we occasionally have a rant about some of the more annoying areas of the insolvency profession. The latest issue to get under our skin is the failure of all of the major voting representatives to take account of the new rules in their proxy forms.

Many IPs have updated their systems and documentation so that when joint supervisors are appointed to voluntary arrangements, the required separate resolution is sought, allowing the supervisors to act jointly and severally. Unfortunately, their hard work and correctly drafted forms are wasted on the major voting representatives who use their own forms that they have not updated, so they don’t vote on the joint and several resolution.

Although we think that it shows a worrying lack of understanding of the regulatory pressures that IPs have to face for even the non-IP voters to take so long to update their forms, it is unforgivable for those voting representatives that are part of big accountancy firms to continue to issue out of date proxy forms. We would appeal to the main accounting firm voters to ensure that their proxy forms include approval of a joint and several resolution as standard. Maybe that would be enough to encourage even the non-accountant voting houses to get their forms up to date before the rules reach their first anniversary!

Giving notice of intention to appoint to the company

2011-02-23T16:46:00.000Z

For the past couple of years we have been informing clients about an unreported case decided by Chief Registrar Baister involving the requirement to give notice of intention to appoint to the company. The case decided that on a strict interpretation of the legislation, in order to properly effect the appointment of administrators it is necessary to issue a notice of intention to appoint to the company on Form 2.8B whenever the directors are making the appointment, not just where there is a qualifying floating chargeholder. The legislation is silent on how much notice has to be given to the company, so it is just necessary to serve the notice of intention on the company’s registered office. Where this has been changed to the practice address then it is a good idea to also send the notice to former registered office. If you do give notice of intention to appoint you should also use Form 2.9B to make the appointment since a notice of intention to appoint has been issued.

If you do not want to go through the process of issuing a notice of intention to appoint where there are no qualifying floating chargeholders, then arrange for the appointment to be effected by a special resolution of the company at a general meeting. This makes the company the appointor and a separate notice of intention to appoint would not be needed.

We understand that the Insolvency Service are aware of this issue and that it is one of those issues that is likely be fixed in the next round of legislative changes.

Insolvency Service policy changes

2011-02-23T16:42:00.000Z

The Insolvency Service has recently changed its policy for the approach that ORs should take to IPOs/IPAs and the matrimonial home in bankruptcy.

The OR is now instructed to take all surplus income when calculating the level of an IPO/IPA, with the exception of £10 per month per individual in the household. The minimum level of payment that the OR will now seek from the debtor has been reduced to £20 per month. This is a clear move away from an approach that favours the debtor to one that is more in the interests of the creditors. I do, however, question whether it is economic even for the OR to recover £20 per month under an IPO/IPA and clearly there will never be any return to creditors at that sort of level unless there are other assets.

IPs will need to take into account the change in policy, both when deciding on the level of monthly payment to recover when acting as trustee, and also when completing an outcome statement showing the comparison in bankruptcy as part of an IVA proposal. I do, however, think that it is valid that IPs should take into consideration their recovery costs when setting the level of the monthly payment and that there is no need to adhere to the minimum level that the OR is prepared to accept.

In contrast to the clearly more creditor friendly approach on IPOs/IPAs, a recent policy change on the matrimonial home could work to the advantage of the debtor. The OR will not now deal with the debtor’s property until 27 months have elapsed from the date of the bankruptcy order, even if it is in negative equity. The exception to this is that if an offer for the market value of the debtor’s equity is received, which for properties in negative equity will apparently mean an offer in excess of £1,000, then the OR will agree to a sale. Effectively the OR is speculating on the property market improving over the 27 months of the bankruptcy.

The OR’s policy may, however, cause problems for IPs. We may see solicitors acting for the debtor referring to the OR’s policy when the IP applies to Court for an order for possession. The Court may feel that possession should be delayed to match the treatment bankrupt’s get from the private sector to the approach of the ORs

Where IPs are acting as trustee then they should not speculate on the property market, and as required by the insolvency legislation should continue to administer bankruptcies without delay.

Fee caps

2011-02-23T16:39:00.000Z

We are noticing an increasing number of instances in bankruptcies and compulsory liquidations where voting agents are voting in favour of the remuneration resolution, but then capping the quantum of fees that can be drawn. Often there will be different caps from different voting agents. This raises a number of issues for IPs dealing with proxies in such cases.

We have heard the argument that chairman’s special proxies voting in favour of the original remuneration resolution could be used to outvote the caps. We do not think that this works, even if the proxy gives you discretion as chairman to vote as you see fit in respect of other resolutions proposed. You would clearly be exercising that discretion for your own benefit in respect of a resolution that has changed from the one disclosed to the creditor who gave you the discretion. If you wanted to vote out the cap then the safest approach to take is to adjourn the meeting and obtain specific voting instructions from those creditors.

Life is potentially more complicated if you are faced with two conflicting fee caps. However, I do not think that you would ever be criticised for applying the fee cap that is least beneficial to you. It would be similar to the treatment we already see adopted in IVAs where the higher cap is simply ignored. It is not rejected, but does not apply because the lower cap is enforced.

SIP 7 – dividend amounts

2011-02-23T16:35:00.000Z

We have recently heard that a monitor criticised an IP for not including sufficient information about dividends paid to creditors in the receipts and payments account issued to creditors. As a result, I would take this opportunity to remind you that SIP 7 requires receipts and payments accounts to contain details of not only the total amount distributed to the different classes of creditor, but also the date and rate of the dividend(s) paid.

The 2010 rules set out detailed requirements in respect of the contents of the receipts and payments account to accompany final progress reports in MVLs and CVLs. However, for annual progress reports in MVLs and CVLs, and all progress reports in administrations, compulsory liquidations and bankruptcies the 2010 Rules do not specify any required contents for the accompanying receipts and payments account. Even the new MVL and CVL disclosure does not require the date and rate of dividend to be disclosed.

We assume that SIP 7 applies in respect of cases commenced before 6 April 2010, but there has to be some doubt about its application to cases commenced on or after 6 April 2010. SIP 7 was issued back in 1998 and so for liquidations commenced after 6 April 2010 the legislators had the opportunity to take into account SIP 7 when revising the legislation. They chose not to, which suggests that it could be sufficient to just comply with the legislation when preparing annual and final progress reports in all case types, although that then gives rise to inconsistency in the information provided and you may prefer instead to ensure that you always fully comply with SIP 7.

SIP 7 is going to be reviewed as part of the Joint Insolvency Committee’s review of SIPs and hopefully that review will take into account the difference in the detailed presentational matters between annual and final progress reports and also case types in the legislation. We would hope that the principles based approach seen in recent SIPs is extended to the new SIP 7 so that it does not impose additional disclosure requirements where the recently revised legislation has not.

Company web-sites

2011-02-23T16:34:00.000Z

We are increasingly finding that IPs are over-looking company web-sites in liquidations and administrations and are failing to deal with them.

The company’s domain name (web-site address) is a potential asset that can be realised. You should check the registration certificate issued by the internet service provider (ISP) who hosts the web-site in order to make sure that the company actually owns its own web-site. If the directors are unable to provide the registration certificate you should search on www.who.is to ascertain the name of the owner. The realisable value of a web-site is something that you will need advice about from your agents, but the value is usually expressed as a multiple of the number of hits on the web-site. Clearly you will also need to ensure that you have reminded the directors about the provisions of section 216 where the purchasers are connected to the company in liquidation.

Until the domain name can be realised you should contact the ISP and either arrange for them to close down the web-site or to request that they place a notice on the web-site indicating that the company is in liquidation and setting out details of the office holder.

The interaction between annual and final progress reports

2011-02-23T16:32:00.000Z

Linked to the previous article about final reports, the rules state that unless you have actually issued a draft final report to creditors by the anniversary date then you must still issue an annual progress report even if the draft final progress report is issued within the 2 months you have to issue an annual progress report.

We understand, however, that the RPBs have agreed that it is possible to issue a combined annual and draft final progress as long as the report makes it clear that it is a combined report, includes all the information required by each report, and includes a receipts and payments account that shows the separate reporting periods.

Again, we would suggest using this sparingly and certainly only where the draft final progress report is issued within the 2 month window to issue the annual progress report.

Draft final progress reports under 2010 Rules

2011-02-23T16:28:00.000Z

We understand that the RPBs have recently agreed that the draft final progress reports issued prior to final meetings need not be the final progress report and can include future transactions that will take place prior to the final meetings. This is not what the rules appear to say, but we think that the construction of the rules has resulted in unintended consequences and we welcome the pragmatic approach being taken by the regulators.

One way to show such transactions is to have three columns in the receipts and payments account – the first showing transactions since the date of the last progress report (or commencement if an annual progress report has not been issued), the next showing anticipated future transactions to the date of the final meetings, and the third showing total transactions for the whole of the liquidation.

Another way that could be acceptable is to show the future transactions below the account or in a note.

The approach of anticipating future transactions should be used sparingly though, as you would need to issue a revised final report if the actual transactions were materially different from those that were anticipated. As a result, we would only recommend taking such an approach where you are almost able to close the case as at the anniversary date, want to avoid having to issue an annual progress report and only have a few remaining transactions to process that are certain (e.g. VAT refund for a known value, advertising costs that are on a standard rate).

Ideally, you should still be looking to have undertaken all transactions and reduce the estate account balance to £nil before issuing the final progress report, particularly in compulsory liquidations and bankruptcies where any future realisations will have to be paid into the ISA and as a result will attract fees. Taking such an approach also helps ensure that you do not inadvertently draw additional remuneration without making disclosure to creditors.

Electronic verification of identity

2011-02-23T16:24:00.000Z

The Money Laundering Regulations permit the electronic verification of the identity of individual or a company. Electronic verification is sufficient on its own to verify the identity of an individual, or indeed a company, when the insolvency case has been assessed as a “normal” risk case such that only normal customer due diligence needs be undertaken. Where the case has been assessed as a “high” risk then it can form part of the enhanced customer due diligence required.

You could consider using electronic verification either as an alternative to requesting evidence of identity in all “normal” risk cases, or as a fall back position should an individual whose identity you are seeking to verify does not provide the necessary documentation. Given how quick, easy and cheap electronic verification is then this is something that you should certainly consider.

There are a number of organisations that now offer electronic verification services, such as CallML, 192business or Equifax, but before deciding which one to use you need to ensure that they the information they provide is sufficiently reliable, comprehensive and accurate to enable it to be used as verification of identity, taking into account the following points:

• Does the system draw on multiple sources? A single source is not usually sufficient. A system which uses both negative and positive data sources is generally more robust than one that does not.

• Are the sources checked across a period of time? Systems that do not regularly update their data are generally prone to more inaccuracies than those that do.

• Are there control mechanisms to ensure the quality and reliability of data? Systems should have built-in checks that ensure the integrity of data and should ideally be transparent enough to show the results of these checks and their bearing on the integrity of data.

• Is the information accessible? Systems need to allow a business either to download and store the results of searches in appropriate electronic form, or to print off a hardcopy record containing all necessary details as to name of provider, source, date etc.

Pre-packs – timing of disclosure to creditors

2011-02-23T16:18:00.000Z

Clearly it is important to ensure that both appropriate and timely disclosure is made to the creditors about the pre-pack sale. Dear IP No. 42 indicated that SIP 16 disclosure should be made to creditors no more than 14 days after appointment, but that is only best practice guidance and does not override the legislation, which requires the administrator give notice of their appointment to creditors as soon as reasonably practicable (rule 2.27). As a result, if you are unable to make the full SIP 16 disclosure to creditors within no more than say a couple of business days of appointment, then you should comply with your statutory obligation and give notice of your appointment to creditors rather than wait until you are in a position to make SIP 16 disclosure. In your notice of appointment you should of course indicate that a pre-pack sale has taken place and that full information about that sale will be provided to creditors shortly.

This means that any delay in issuing your SIP 16 disclosure could result in increased costs, with the least organised practices issuing an initial notice to creditors, then SIP 16 disclosure and finally proposals. Much better, and far more likely to impress creditors and monitors, would be to start drafting proposals pre-appointment with SIP 16 disclosure included. This would highlight any gaps in the information and by getting those gaps filled in the run-up to your appointment you should be able to issue your proposals within days, allowing you to just issue the proposals without the separate notice of appointment and SIP 16 disclosure.

This would also have the advantage of getting your fees and pre-appointment costs approved earlier, improving cashflow. Because the proposals should be a statement of what you intend to do and not a statement of what you have already done, any gaps can usually be addressed by saying that you will investigate further. We have seen several clients take such an approach and issue proposals within the first few days of a pre-pack.

Provision of Services Regulations 2009

2011-02-23T16:17:00.000Z

Further to my Article of November 2010 on these regulations about the need to include reference to the territorial extent of your insolvency licence in your disclosure to creditors, i.e. including reference to being licensed “in the UK”, ACCA licensed IPs should note that its rulebook only allows two specific forms of wording:

“Licensed in the United Kingdom to act as an insolvency practitioner by the Association of Chartered Certified Accountants” or

“Insolvency Practitioner licensed in the United Kingdom by the Association of Chartered Certified Accountants”.

Clarification of July 2010 article on gazetting annual meetings of creditors in CVLs commenced on or after 6 April 2009

2011-02-04T08:56:00.001Z

Just to clarify my Blog Article of 30 July on this topic. The fix introduced by the Insolvency (Amendment) Rules 2010 was retrospective so that it applied to all CVLs that had commenced on or after 6 April 2009 and there is no need to gazette annual meetings in such cases. There is, however, a requirement to gazette any general meetings convened for such cases.

For cases commenced prior to 6 April 2009 then the Insolvency (Amendment) Rules 2009 do not apply at all, such that there is no requirement to gazette general or annual meetings in CVLs.

Reports to creditors

2010-12-13T14:15:00.001Z

Historically we have suggested to clients that it is a good idea to send creditors a brief report of the outcome of any general meeting of creditors held in compulsory liquidations and bankruptcies. We said this because the next statutory requirement to report to the creditors may not arise for a considerable time after the meeting. However, there is now a requirement under the 2010 Rules for annual progress reports to be issued to creditors in such cases commenced on or after 6 April 2010. Having discussed this with the ICAEW and IPA we would now advise you not to issue the extra report.

Outstanding remuneration in bankruptcies and compulsory liquidations

2010-12-13T14:14:00.002Z

Since in most bankruptcies and compulsory liquidations you will not achieve a 100% recovery of time costs when you are being remunerated on a time cost basis you will have a first charge any subsequent realisations made. Whilst in the vast majority of cases there will be no additional realisations by the OR acting as trustee or liquidator ex officio, just occasionally there will. To ensure that creditors are aware as to what happens in such situations, i.e. to ensure that you are being transparent, we would suggest that you include a standard phrase in your final reports to make it clear that if there are any further realisations then your outstanding remuneration would be paid first.

To help make sure that the OR does not overlook you should further realisations be made then you should also consider making reference to your outstanding remuneration in your letter accompanying the notice of the final meeting that you send to the OR.

Pensions Database

2010-12-13T14:14:00.001Z

As a follow up to my recent article do not forget to undertake a database search on the previous names of the company. Experience from clients has shown that directors will often forget to notify the pension authorities of the change of name of the company or the PPF will not update their database with the name change such that a search on the current name of the company will give a false negative result.

Chargeholder can participate in the prescribed part

2010-12-13T14:13:00.002Z

The recent decision in Re PAL SC Realisations (2007) Ltd means that a chargeholder who formally surrenders their security and hence becomes an unsecured creditor for the value of their debt can participate in any distribution of the prescribed part. Such action will be attractive to second and subsequent floating or fixed chargeholders in cases where there is an expected shortfall as against the first chargeholder in administrations and liquidations.

In cases where you are making a distribution of the prescribed part, then in order to ensure that you do not leave yourself open to a claim for negligence by a secured creditor to whom you have not made a distribution then you should formally give notice of intended dividend by way of a distribution of the prescribed part to secured as well as unsecured creditors to ensure that you are made aware of instances where the secured creditor has surrendered their security.

Pensions Regulator has super-priority

2010-12-13T14:13:00.001Z

The recent decision in Nortel Networks and Lehman Brothers means that any financial support directions issued by the Pension Protection Fund (PPF) once a company is in administration will rank as an expense of the administration, and not as a provable debt. The effect of this decision is to give the PPF super-priority as a creditor ranking above all other creditors. In all likelihood this case will go to appeal, and if that is unsuccessful then hopefully the Insolvency Service will provide a quick legislative fix, just as they did when the Paramount Airways decision on employee’s rights threatened the “old” administration regime.

However, until the decision is either overturned or a legislative fix is provided then its effect is to mean that the Administrator’s remuneration ranks behind the PPF’s financial support directions such that an Administration does not become an attractive proposition for an IP to recommend. Consequently it makes it imperative to check for the existence of a company pension and to ascertain its financial position prior to considering Administration as the best option and to take legal advice on how to proceed.

Provision of Services Regulations 2009

2010-11-29T14:07:00.000Z

In our September 2010 update we mentioned about the need to include reference to being licensed to act as an IP “in the UK”. I have now had chance to look at the Regulations in a bit more detail and in this article I am covering the other main additional disclosure requirement required by the Regulations, relating to professional indemnity insurance. For information about the various other disclosure requirements in the Regulations, either have a look at the explanatory leaflet prepared by Department for Business Innovation and Skills which can be found at www.bis.gov.uk/files/file53100.pdf, or at the information provided by your regulatory body. These disclosure requirements apply to all IPs.

The Regulations require that the information that has to be disclosed by a practice, including that relating to professional indemnity insurance, must be made available to those who wish to use your services, e.g. to the Board of Directors in Administrations, CVAs, MVLs and CVLs and to the debtor in IVAs, before the service is provided, and that information is considered to be made available if:

• it is provided on the practice’s own initiative – e.g. on business stationery or in brochures;

• it is made easily accessible at the place where the service is provided by the practice or the contract for the service is concluded – e.g. by way of a notice at the practice’s offices;

• it is made easily accessible electronically by the practice – e.g. by providing the exact address where the information can be found on the practice’s website; or

• it is provided in any document supplied by the practice in which a detailed description of the service to be provided is set out – e.g. in the engagement letter.

As regards professional indemnity insurance, the Regulations require that the name and address of your professional insurance provider, together with the territorial coverage of the cover provided must be made available. You can satisfy the disclosure requirements of the Regulations by, for example, having a copy of the insurance certificate on the wall of the reception area at your practice or including reference to it in your engagement letter. The following is some suggested wording for your engagement letter:

“In order to comply with the Provision of Services Regulations 2009, the practice’s professional indemnity insurance is provided by [name of insurer], of [contact address]. This professional indemnity insurance provides worldwide coverage[, excluding professional business carried out from an office in the United States of America or Canada, and any action for a claim bought in any court in the United States of America or Canada].”

The flood after the drought!

2010-11-29T11:48:00.001Z

We have finally found a day or two where we are not on visits or writing reports in order to prepare some Blog articles for your information.

Reporting of time costs in IVAs

2010-11-29T11:47:00.000Z

It is very rare for a supervisor’s remuneration to be approved on a time cost basis in IVAs nowadays. A fixed monthly/annual fee or a fee expressed as a % of realisations is very much the norm. Unfortunately though, even though the remuneration is not fixed on a time cost basis the IP Regulations 2005 require the supervisor to keep time records in all cases and supervisors must ensure that those Regulations are always complied with.

But what about reports to creditors in IVAs? Does time cost information still have to be provided in those in cases where supervisor’s remuneration has not been fixed on a time cost basis? Our view is that there is no SIP 9 requirement to do so in such cases, but just to be certain we asked the ICAEW and IPA for their views. We are glad to say that they have both confirmed that in IVAs where supervisor’s remuneration has been fixed on a basis other than a time cost basis, then details of the time spent and charge out value need not be provided to creditors in annual or final reports.

I would, however, remind you that for IVAs commenced on or after 6 April 2010 the new rule 5.66 applies. This rule requires a supervisor to provide time cost information to any debtor or creditor who requests it.

Extensions of time in Administrations

2010-11-29T11:46:00.002Z

Whilst this topic is being covered at almost every course that we are attending at the moment it is still worth repeating here. The Courts are becoming very frustrated with late applications for extensions of time in Administrations. In order to avoid the disastrous consequences of the Administration ending automatically before the date listed for your Court hearing for an application for an extension of time, the current advice from the Courts is to ensure that you make your application at least 4 weeks before the date the Administration is due to end automatically. Whilst you may consider the application urgent as you want your extension of time to avoid being in a nightmare situation, the Court will not if the only reason given is that you need the hearing to dig yourself out of a hole that could have been avoided by making an earlier application.

Disclosure of information about the Prescribed Part

2010-11-29T11:46:00.001Z

We understand that the monitors from at least one regulatory body are requiring the inclusion of explanatory information about the Prescribed Part provisions in the information provided to a section 98 meeting and in a rule 4.49 report even in cases where there is no indebtedness to the qualifying floating chargeholder. As a result, taking this one stage further to ensure that you always make disclosure we suggest that whenever there is a floating charge, including in cases where it is not a Qualifying Floating Charge, you always include some standard wording explaining what the Prescribed Part provisions before then going on to explain how those provisions apply to the specific case you are dealing with. That disclosure should be made in the director’s report in CVLs, say as part of the explanation of the contents of the statement of affairs, in the proposals in Administrations, and as part of the first report to creditors in compulsory liquidations.

The following is some suggested standard wording:

“There are provisions of the insolvency legislation that require a liquidator/an administrator to set aside a percentage of a company’s assets for the benefit of the unsecured creditors in cases where the company gave a “qualifying floating charge” over its assets to a lender on or after 15 September 2003. This is known as the “prescribed part of the net property.” A company’s net property is that left after paying the preferential creditors, but before paying the lender who holds a floating charge. A liquidator/an administrator has to set aside:

• 50% of the first £10,000 of the net property; and
• 20% of the remaining net property up to a maximum of £600,000.”

In cases where there is no QFC you should then go on to say “There is no qualifying floating charge in this case so the prescribed part provisions do not apply.”

In cases where there is a QFC you should go on to say “The estimated net property in this case is £XX and the prescribed part is currently estimated at £YY, but creditors should note that the costs and expenses of these proceedings will be deducted before the net property is calculated so that both the net property and any prescribed part is likely to be significantly lower.”

Pensions database

2010-11-29T11:45:00.000Z

The feedback we are receiving about the PPF’s section 120 pensions database is that it is not very sophisticated and only gives a positive result if there is an exact match on the database for the name of the company you entered in the search box. For example, it would not pick up a company registered on the database as “A B C Ltd” if you entered as your search criteria “ABC Ltd”. As a result, in order to maximise your chances of finding a pension on the database you should undertake searches on all the different permutations where you have initials, and or & in the name of the company. For example, if the company you are dealing with is called “AB & C Ltd” you should search on that name plus as “A B & C Ltd”, “A.B & C Ltd”, “AB and C Ltd” etc. In any event, even if you get a “no results found” response you should still check with the directors and accountants and look at the company’s financial statements and bank statements to identify any potential pension payments.

Issuing notices by 1st class post – its official!

2010-11-29T11:44:00.000Z

Well almost! Whilst we have not heard back from the Insolvency Service to confirm the comment in our September update that notices to convene meetings etc have to be issued by 1st class post or DX because the Civil Proceedings Rules on postal service apply, we did hear a representative of the Insolvency Service say at the recent SPG Forum that the intention is to amend the rules to permit 2nd class post to be used. Consequently we have concluded that our September update was correct. We await the legislative changes with interest, if indeed they will now happen at all given that the Insolvency Service seem to want the profession to tell them that further changes would not be welcomed at the moment.

Annual reports in post April 2010 IVAs

2010-11-29T11:43:00.000Z

Whilst it will still be another 5 months before you will have to prepare your first annual report for an IVA commenced under the new rules I still thought that this would be an opportune time to remind you about a change introduced by rule 5.31A(4). When reporting to creditors on the progress of the IVA for cases commenced on or after 6 April 2010 you now also have to report on the prospects for the full implementation of the arrangement. Before preparing an annual report you will need to check to see if the debtor is fully complying with their obligations under the arrangement, or if there will be a reduction in the anticipated level of dividend for creditors for any reason. If the debtor is not complying or there is a reduction in dividend then you will need to ensure that you comment accordingly. Where there will be a reduction in dividend then ideally you should provide creditors with a revised outcome statement.

Company Directors and IVAs

2010-11-29T11:41:00.000Z

A client has recently pointed out to us that Article 81 of the standard Table A Companies Act 1985 Articles of Association and Article 18 of the model Companies Act 2006 Articles require a director of a company to vacate office if they make “any arrangement or composition” with their creditors. As a result, if a director enters into an IVA then they will cease to be a director. This could potentially impact on their ability to be remunerated by the company and could also create problems in connection with their actions and duties in respect of the company, particularly if they were the sole director.

The fix for new IVAs involving directors is to check the Articles and if necessary get the members to pass a resolution deleting the offending clause. For existing IVAs where you have missed this requirement, the resolution should be retrospective, confirming that the debtor remained in post from the date of approval of the IVA and ratifying any actions he has taken in the period between approval of the IVA and passing the retrospective resolution.

Destruction of books and records – part two – compulsory liquidation and bankruptcy

2010-07-30T11:58:00.000+01:00

On the same theme as part 1 of this post, we have also recently seen resolutions relating to the destruction of accounting records being taken at the final meetings of creditors in bankruptcies and compulsory liquidations. Such resolutions are not appropriate and should not be sought as under the Insolvency Regulations 1994 the power to authorise the destruction of the debtor’s/company’s accounting records rests with the Official Receiver.

To obtain authority to destroy the records you first need to seek clearance from HMRC – the relevant Inspector of Taxes, VAT insolvency unit in Bootle, and the Inland Revenue’s claims handling unit at Longbenton – as part of your closing procedures prior to the final meetings and then send a completed BPDC (Books and Papers Destruction Form) to the OR. The form can be download from the Insolvency Service web-site.

New R3 Representative on the IVA Protocol Working Party

2010-07-30T11:57:00.002+01:00

Liz Pywowarczuk is now R3’s representative on the IVA Protocol Working Party. She used to work for a volume IVA provider and is now running her own practice that specialises in IVAs

Liz would like to raise at the Working Party meetings specific examples of problems IPs have found with the operation of the protocol in general, and with the voting and modifications by finance creditors in particular with a view to trying to get the finance creditors and their representatives to see sense when considering protocol compliant proposals. If you have examples of such problems please e-mail Liz at liz@liberta.uk.com.

Gazetting general meetings of creditors in liquidations commenced on or after 6 April 2009

2010-07-30T11:57:00.001+01:00

Just a reminder that where a case commenced on or after 6 April 2009 – i.e. the winding up resolution was passed on or after that date, the winding up petition was presented on or after that date or the administration that immediately preceded the CVL commenced on or after that date – rule 4.54 was amended to require the liquidator to gazette any general meeting of creditors they convene. The rule also gives the liquidator discretion to advertise in such manner as they think fit.

Linked to the above, where a CVL commenced on or after 6 April 2009 there is no need to gazette the annual meeting of creditors as this anomaly, which we pointed out to the Insolvency Service, was fixed by the Insolvency (Amendment) Rules 2010.

Destruction of books and records – part one - CVLs

2010-07-30T10:17:00.001+01:00

It is amazing how we won’t see a particular issue for months on end and then we suddenly see it on a number of visits in quick succession. We have recently seen a number of cases where resolutions were taken at final meetings authorising the liquidator to destroy the company’s accounting records. Such a resolution is unnecessary as the liquidator has the power to destroy them 12 months after dissolution under the Insolvency Regulations 1994, although you should as a matter of routine be seeking clearance from HMRC – the relevant Inspector of Taxes, VAT insolvency unit in Bootle, and the Inland Revenue’s claims handling unit at Longbenton – as part of your closing procedures prior to the final meetings.

Similarly, you should not be taking resolutions relating to the destruction of your own case records at the final meetings. The retention requirements for these are contained in the insolvency legislation, principally the Insolvency Practitioner Regulations, and since they cannot be changed by a resolution taken at the final meetings then a resolution should not be sought.

In both instances there is nothing to stop you from telling the creditors about the timescales for destruction in your final report, should you so wish, although there is no requirement to do so.

Recovering postage costs

2010-07-30T10:16:00.000+01:00

We have recently seen a number of IPs who have included postage as a category 2 disbursement in their practice fee recovery sheet. Just a reminder that as long as you are only recovering the actual postage costs incurred on a case – i.e. recording the number of letters issued and their cost – then postage is a category 1 expense that can be recovered without obtaining specific approval from the creditors.

Given the need to record information about the number of letters issued and postage costs, realistically it is only economic to recover postage when issuing circular documents to creditors. That way you can record the information about the numbers of letters and postage costs on the certificate of posting, which will also act as evidence as to whom the document was issued and the date of deemed service.

Companies House Monitor Service

2010-07-30T10:15:00.000+01:00

This useful service offered by Companies House has recently come to our attention. The Companies House Monitor Service works as part of their WebCHeck and Companies House Direct facility and enables you to ‘monitor’ when documents have been filed into Companies House. As soon as the documents are received and registered for companies that you have chosen to 'monitor' then you will receive an e mail. You then have the option to download the actual document.

Whilst there is a charge for this service, which is per company monitored, it is an easier solution in conversions from Administration to CVL than having to check Companies House daily to see when your notice of conversion has been registered and hence the CVL commences and you are appointed liquidator. It could also be used as a way of checking to ensure that the documents you have filed with Companies House have actually been received by them.

For more information visit www.companieshouse.gov.uk/infoAndGuide/monitor.shtml.

The rules are wrong but the regulators carry on regardless

2010-04-30T10:14:00.001+01:00

A bright member of staff at one of our clients has recently spotted an error in the new rules. Now, we know that drafting something that big was never going to be easy and we accept that errors will happen, but there has to be a system in place to deal with them. The reaction to this particular point, however, shows how ineffectual our current regulatory framework can be on occasions.

The error that was so cleverly spotted was that although non interim order IVAs no longer have to be filed at court, with notices now being sent just to creditors, rule 5.24(4) escaped the drafter’s attentions and that still requires that the report on an adjourned meeting of creditors to be filed at court.

We raised this with the Insolvency Service and suggested that if a legislative fix could not be put in place quickly, whether because of the election, Icelandic ash or other factors, then the regulators could agree to ignore any breach of the rule, given that it is patently incorrect, which has been acknowledged by the Service, and unworkable in practice.

After the Service met with the regulators, the response I received was that:
“Their collective view was that whilst practitioners should comply with the rule as it stands, a breach of it would normally be below the threshold for which disciplinary proceedings would be initiated.”

We consider this to be an entirely unsatisfactory response. If you tried to file the report at court when no other document had been filed on the case and no further document was ever to be filed on the case, the court would quite rightly return it saying that they did not have a clue what you were on about. It cannot, therefore, be right when the regulators know that the rule is wrong and is now on a list of rules to be “fixed” post-election, to treat failure to comply as a breach. We consider that the regulators should take a pragmatic approach in this specific instance and agree with the Service that failure to comply with it will not be treated as a breach given that the rule will be changed in the future, is of only minor import and is unworkable in practice.

There will always be errors in new legislation and we are not having a pop at the Insolvency Service who drafted it, but if any IPs have other examples of errors that they have spotted in the new rules, please feel free to let us know. We’d be happy to raise them with the Insolvency Service and the regulators and we will continue to push for a practical solution. It cannot be right for an IP to be in breach as a result of unworkable legislation.

Finding your way through the 2010 Rules and the Regulatory Reform Order

2010-03-28T17:30:00.003+01:00

Like you, we have been ploughing our way through the new rules and the contents of the regulatory reform order that are coming into force on 6 April 2010. They are a dense, almost impenetrable mass of detail, particularly the transitional provisions, but the good news is that you do not need to have systems in place to deal with all of them on day 1.

This article is only designed as a brief overview of the key provisions to enable you to prioritise your action in implementing the changes, and so it should not be taken as a detailed statement of the content of the Rules and regulatory reform order.

From a compliance perspective, the most important set of provisions for IPs are those relating to gazetting as they have effect from day 1. The Rules prescribe the contents of gazette notices, and you must ensure that you comply with those provisions in respect of all cases that commence on or after 6 April 2010. The detail is set out at Rules 12A.33 to 12A.37 and you should contact your advertising agents or the London Gazette for assistance to ensure that your gazette notices are compliant. The Rules also cover the contents of all other adverts, even though such advertising remains discretionary, not mandatory. The detail is set out at Rules 12A.38 to 12A.41. Additional content particular to each notice is specified in individual rules but most of it is fairly logical; for example, if advertising your appointment you have to say that you were appointed and when you were appointed and what the company did.

Some of the other provisions that you need to be aware of from commencement of the new Rules are:

• Fee basis – the ability to take fixed fees, and to mix and match fee bases throughout an assignment, subject to committee or creditor approval.

• Standardisation of the period of notice for meetings of creditors – it appears that all meetings now have to be convened on 14 days notice, apart from final meetings which are on 28 days notice.

• Powers of liquidator and trustee – making the power to compromise exercisable without sanction.

• Pre-appointment fees in Administrations – in addition to the disclosure prescribed by the rules being made in the proposals, a separate resolution approving pre-appointment fees must be taken at the paragraph 51 meeting if held, or approval obtained from those responsible for approving remuneration if a meeting is not held.

• IVAs – various detailed changes, including no longer having to file documents in Court when using the non-interim order route. We are still considering where this places them under the EC Regulations. We are concerned that they may no longer be a court process recognised under the regulations so could be challenged by proceedings in other jurisdictions. We would love to hear from anyone who has had the chance to obtain a definitive opinion.

• Joint supervisors in IVAs/CVAs – where two or more IPs are to be appointed supervisor, a separate resolution needs to be taken at the meetings of creditors, and of the company, dealing with the basis on which they are to act, i.e. whether they are to act jointly, or jointly and severally.

• Committees – various detailed changes in all case types.

• Disclaimer – removing the Court from the process in liquidations, although we understand that some firms of solicitors have already indicated that there are pitfalls with the revised approach.

• Annual meetings – we raised with the Insolvency Service the wording in the 2009 Rules that meant that for CVLs and MVLs commenced on or after 6 April 2009 the annual meeting would need to be gazetted. This glitch has been fixed in the 2010 Rules so that there will be no need to gazette annual meetings for such cases.

The big headline provisions from the Insolvency Service’s perspective are those relating to electronic delivery of information to creditors, remote attendance at meetings, and annual/final reporting and remuneration approval. However, these either need not, or actually do not have any immediate impact for IPs.

Whilst the electronic delivery of information and remote attendance at meetings could see some cost savings for IPs, they are optional and so need not be implemented on day 1, if at all. With some potentially complex IT matters to overcome, we suspect that website-based reports may not become the norm for some time. In addition, the need for positive consent from individual creditors before notices can be given electronically may even mean that a willing IP with appropriate systems at his disposal may not be able to take full advantage in the face of creditor apathy or hostility to the concept.

The annual/final reporting and remuneration approval provisions will not have effect until the first reports fall due which will be at the end of the first year of operation of the Rules, unless a case commenced on or after 6 April 2010 is closed in less than a year.

We are currently working to update our review checklists and will let clients know when they have been completed.

Various compliance issues

2009-12-05T18:07:00.002Z

We recently had a discussion with an ACCA monitor and he raised a couple of compliance issues that corresponded with what we are finding during our visits.

First, IPs not gazetting their appointment as liquidator, or not doing so within 14 days of their appointment following conversion from Administration to CVL. The easiest way to ensure this is that once Form 2.34B, the notice of conversion, has been sent to the Registrar of Companies check the web-site daily until it has been registered, which then acts as a prompt to give instructions to gazette the appointment as liquidator.

Secondly, delays in filing Form 2.31B, notice of extension of the Administration with the consent of creditors, in Court and with the Registrar of Companies. The legislation requires the IP to file the notice as soon as reasonably practicable after consent was obtained from creditors. It is clearly imperative that this is done without delay so that those searching Companies House are aware of the status of the company, particularly where consent is obtained only shortly before the automatic end of the Administration.

A couple of old chestnuts

2009-12-05T17:25:00.005Z

Those of you who have read ACCA's recent Insolvency Newsletter will have seen that a couple of old chestnuts have risen their ugly head again - mileage and VAT on bonds - and they merit comment.

Mileage:

Our understanding of the position is that the treatment of mileage being charged at approved Inland Revenue rates will be considered as part of the current review of SIP 9. We are aware that at least one regulator will not be changing their approach until the review of SIP 9 has been completed, and will continue to treat mileage charged at such rates as a category 1 disbursement.

SIP 9 will have to be changed given the changes to the remuneration regime being made by the rule changes in April 2010.

VAT on bonds:

Earlier this year Dear IP contained advice on the treatment of VAT on bonds, indicating that it should be charged as it is a disbursement being recharged to the case by an IP even though the IP themselves do not suffer VAT on the bond they pay. Given that this approach was based on advice from HM Revenue and Customs, and it is they who would check for the correct treatment of VAT during a compliance visit to your practice we recommend that you continue to follow that advice.

Trustee’s fees in annulments

2009-10-13T16:11:00.001+01:00

The recently decided case of Hunt v Yearwood-Grazette ([2009] EWHC B4 (Ch)) involved appeal against the Court’s determination of the trustee’s fees in an annulment case. The case report records that in response to the debtor’s request for details of his remuneration in January 2005 the trustee first indicated that costs should be no more than £2,100 including VAT, which appeared to have been based on the statutory scale. There was then a delay in the trustee providing precise information about the level of remuneration he was seeking, but in April 2006 he indicated that it was in the region of £10,000. The debtor took issue with this and ultimately the trustee applied to Court on various matters, but the principle issue for consideration was the quantum of his remuneration. The claim considered by the Court was for £19,611.75 comprising: £11,420.50 remuneration; £500 for closure; £891.37 trustee’s disbursements excluding legal fees; and £6,345.88 legal fees plus £454 legal disbursements. However, the Court only permitted the trustee to recover from the estate the sum of £2,100 in respect of remuneration and £1,296.43 in respect of expenses and disbursements. He also ordered the trustee personally to pay the debtor’s costs of the application, assessed at £4,840.75.

From reading the report of the judgement it contains some salutary warnings for IPs when dealing with debtors in such cases.

1. Ensure that you respond accurately to a request from the debtor as to the amount of remuneration you are seeking. Clearly a debtor will be more likely to take the matter to Court themselves, or complain to your regulator, if there is a significant increase in the amount that you are claiming as remuneration for no apparent reason.

2. In connection with the above, consider whether or not it would be cheaper and easier in the long run to “do a deal” with the debtor to avoid the matter being considered by the Court and possibly also your regulator, rather than seek to recover your remuneration in full.

3. Do not delay in responding to requests from the debtor for information about the level of your remuneration, particularly if it increases in the period between the first request being made and the final figure being given. Such a delay will clearly fail to impress the Court given that you are an officer of the Court in such circumstances, and will almost certainly lead to a complaint being found proved against you should one be made by the debtor.

4. The Court will apply the Practice Statement, “The Fixing and Approval of the Remuneration of Appointees 2004”. The judgement referred to the Court’s task as being “to balance all the various criteria, resolving any conflict between them arising in the particular case, in order to arrive at the proper level of remuneration. In doing so, it is settled law that the court has to reward the value and benefits of the services rendered rather than the cost of rendering such services. Thus, in fixing the remuneration, time spent is less relevant than value provided.” This is a timely reminder of the approach that the Court will take and it appears that in this case the Court concluded that there was little value provided by the trustee given the level of remuneration approved.

Updating and consolidating the secondary legislation

2009-09-21T09:44:00.001+01:00

The Insolvency Service is now making significant progress on its project to update and consolidate the secondary legislation. Having already amended the advertising rules, they are about to publish details of the new rules dealing with notices, meetings and Court filing among others. Although not likely to enter the statute books until April next year, the Insolvency Service has decided to publish a draft set of rules with the amendments incorporated and highlighted that will be available on their website. This is too late in the legislative process to be treated as consultation, but is a great way of helping us all to get ready for the changes when they come in. We have been known to have the odd “pop” at the Service and other regulators in the past, but this seems like a great idea and we look forward to getting into the detail.

For now, we’ve prepared a very brief summary setting out the main areas that are likely to be affected by the changes. Most of the changes appear logical and could even produce savings, although we do not share the Service’s opinion that it should all get back to creditors because we think that many of the relevant costs are already absorbed in write-offs that IPs suffer in most cases. Our biggest concern, and probably your own, is the proposed change in how remuneration is approved and reported. Change was bound to happen after the adverse publicity of the last two years, but we have not seen the detail yet. We will keep a close eye on the proposed changes and ensure that our clients’ systems are amended to account for them as soon as the rules change.

This is only an initial blog article on the topic and we hope to provide more detail when we receive it from the Service. The main areas are likely to be:

1. Electronic Communication

We expect the changes to allow IPs to communicate electronically with creditors, members and third parties by consent, although hard copies are likely to have to still be available on request.

2. Authentication

New authentication provisions are proposed, to replace the existing requirement that all insolvency documents must be physically signed.

3. Meetings

Meetings must generally be held at a physical venue under the current legislation. The changes should give you the option to allow attendance at a meeting by telephone or electronic means (e.g. via an internet chat room or video conference).

4. Internet use

You may be allowed to place reports and proposals on a website as an alternative to sending them to all creditors by post, although you will still be required to notify creditors about how to access them in a posted or e-mailed notice. Again, creditors will be able to request a hard copy of any document if they wish.

5. Statements of truth

We expect the changes to allow for documents that currently have to be affirmed by an affidavit to be verified by a statement of truth. Proceedings for contempt of court may be taken against any person who makes a false statement in a document verified by a statement of truth, so this should still be a reliable way of obtaining information.

6. Remuneration and Reporting

This is the change that causes us most concern and we will have to wait for the detail to see what further comment is appropriate. We expect the new rules to introduce more options for the basis of remuneration that creditors and members can fix, and also provide a system of more regular reporting to creditors. Creditors may be able to request fuller particulars and to challenge any amounts where they consider them excessive.

There will be a bonus to offset this, in that we expect the requirement for annual meetings in liquidations which have lasted for more than a year to be dropped. However, as we said in one of our earlier articles about the advertising changes, we must wait to see if the change to annual meetings will be retrospective in any way. It could either just cover the single year’s appointments (6 April 2009 to 6 April 2010) where you will have to gazette annual meetings, or it could be truly retrospective and do away with annual meetings in all liquidations that pre-date the legislation, so that all cases can be treated consistently after the new rules are introduced...but that may be too much to hope for.

7. Pre-appointment Administration Expenses

At last!! There will be specific rules allowing you to seek approval for pre-appointment work in administrations provided that the work has helped to achieve the objective of the administration. There will be a requirement for details of that work to be disclosed and approved within the administration proposals.

8. Standard Content for gazette notices and advertisements

Notice of insolvency events for the London Gazette (and any other form of advertisement that you see fit to use) will be required to follow a standard format. The Service thinks that this will not cost the estates any more and we go further, anticipating a reduced cost, as case management software providers should be able to produce notices within your standard packs and you will be able to take advantage of online instructions to cut out the time and cost incurred by using agents.

9. Reduction in Court Filings

Many of the requirements for documents to be filed with the court will be removed. In some cases documents will only be filed with the Registrar of Companies, where they will be more accessible to creditors

10. Disclosure in bankruptcy

The Rules will allow debtors facing bankruptcy who consider themselves at risk of violence to apply to the court for an order to limit disclosure of their address.

As we have already indicated, all of this is subject to confirmation and receipt of more details, but the initial brief appears positive and we await developments with interest.

New Companies House Forms

2009-09-15T12:41:00.000+01:00

Those of you whose practices are limited companies or LLPs will already have received a leaflet explaining about the next set of changes being introduced by the Companies Act 2009 with effect from 1 October 2009. In this article I want to draw your attention to the fact that new forms that are being introduced for filing documents with Companies House, and that those forms must be used for all documents filed after 1 October 2009. Any document filed using the old Companies Act 1985 forms after that date will be rejected by Companies House.

Only about 25 of the new forms affect IPs, and amongst the forms affected are: change of registered office (AD01); satisfaction of a mortgage or charge (MG02); notice of appointment of an administrative receiver, receiver or manager (LQ01); notice of ceasing to act as an administrative receiver, receiver or manager (LQ02); and similar documents for LLPs. A full list of the forms affected can be found at http://www.companieshouse.gov.uk/forms/formsAvailable.shtml#non_companies_act.

I understand that Turnkey will be incorporating the new forms into a release planned for the end of this month, and those of you using CCH or Insolv should contact your providers to make sure that they are also going to incorporate the new forms in their systems.

One other point to bear in mind is that Companies House intend to start charging for filing certain documents. The documents for which a charge will be made, or the level of those charges is not yet known, but details will appear on the page of their web-site given above in due course.

Consolidation of Insolvency Legislation

2009-09-08T11:59:00.002+01:00

As the Insolvency Service keep promising us, in addition to the planned legislative changes in the pipeline they are also going to consolidate the secondary legislation in 2011. This means that the period of change that the profession has been going through for the past few years is going to continue for a while yet. These constant changes cause difficulties in keeping staff trained and up to date and also in keeping standard documents accurate and current.

Ideally you should try and help minimise the number of changes that you will need to make to your standard documents when the proposed consolidation of insolvency legislation takes place in 2011. In order to do this we suggest that when you review and revise your standard documents between now and the consolidation, you remove all unnecessary legislative references making them as generic as possible whilst still meeting the statutory and SIP requirements. The vast majority of legislative references in documents are unnecessary, and only seem to have been included as a form of comfort for the IP since they mean little or nothing to the average creditor recipient. For each legislative, or indeed SIP reference in a standard document ask yourself whether it can be removed without leading to that document no longer being statutory or SIP compliant. You will be surprised how many references can be removed.

This approach also has the added benefit of making the documents more "user friendly" for the recipients and hence complying with the approach to reporting to creditors set out in the new Insolvency Code of Ethics.

Dividends and variations of terms in IVAs

2009-09-01T17:01:00.002+01:00

Creditors, particularly creditors’ agents, now require dividends to be paid at least quarterly in IVAs. However, the dividend terms in the current version of the R3 Standard Terms and Conditions are too cumbersome to permit the payment of frequent dividends. In particular they require the supervisor to issue a notice of intended dividend before declaring each dividend and to issue a notice of declaration of dividend when making the distribution. This is also costly for the supervisor when paying frequent dividends. Consequently, where IPs use the R3 Standard Terms and Conditions we are suggesting that they consider seeking a variation of the IVA with a view to replacing the dividend terms in the arrangement with those from the protocol standard terms. In order to keep costs down a variation is best sought by convening a meeting of creditors when sending the annual report to creditors.

That then brings me on the second point of this article, which is a reminder that to effectively vary an IVA, the requirements set out in the legislation relating to the approval of an arrangement must be satisfied. This means that it is both necessary to obtain the approval of the relevant percentages of creditors and the agreement of the debtor to the variation, prior to, or at the meeting to consider the variation. When you are initiating the variation this second part is easily over-looked. As with consents to modifications when seeking the approval of an arrangement at an initial meeting of creditors, ideally the consent to the variation by the debtor should be obtained in writing, but if that is not possible then a detailed file note recording the discussions held with the debtor should be kept.

The new Advertising Regime – some clarification

2009-07-10T09:40:00.002+01:00

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.

Winding up resolutions

2009-06-26T09:21:00.000+01:00

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.

Fiddling while Rome burns?

2009-06-26T09:16:00.000+01:00

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.

Pre-appointment costs in Administrations

2009-06-26T09:14:00.000+01:00

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.

Prescribed part – the exercise of discretion

2009-06-26T09:12:00.000+01:00

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 wasn't me, it was my partner had the pen.

2009-04-29T09:05:00.002+01:00

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.

Coronation Treat ....

2009-04-29T08:42:00.003+01:00

..... 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.

Whose money is it anyway?

2009-04-29T08:16:00.004+01:00

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.

Advertising Blog 3 - sections 95 and 98 amended

2009-04-16T21:02:00.003+01:00

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.