NCA - SARs reporter booklet November 2024 and SARs in Action issue 28

You can read the November 2024 issue of the NCA's SARs reporter booklet by clicking here, together with the recently issued SARs in Action Issue 28 by clicking here. These booklets contain some interesting information about the use to which SARs are put and if you disseminate them to staff you can use that as part of your wider AML training.

Really Big News

With just under 2 weeks to go until the sold-out R3 SPG Forum, we have some really significant news to share with you.  Some of you may already have heard rumours, or even had the heads-up from us, but this is the official announcement:

Gareth Limb is retiring on Friday, 28 March 2025!

Gareth’s large, old, and battered shoes will be filled by Katy Walker, a licensed insolvency practitioner who helped when we were first drafting our now famous document packs. Katy starts with us in January, but will attend SPG and the IPA Personal Insolvency Conference with us. Please come to our stand at SPG, or hunt us down somewhere near the coffee at the IPA conference, and say hello.

This is obviously going to be a huge change that we find very exciting, not least because our average age will plummet and Katy will bring some excellent practical experience from her time as a manager in a large firm and an IP in some of the biggest IVA volume providers. However, we will have more to say about Katy and her potential impact in the early part of next year. This notice is (nearly) all about Gareth.

Gareth first worked in insolvency when the Romans left Britain. He has held nearly every significant job in insolvency regulation and helped shape the profession as it is today. He ran what was IPCU at the Insolvency Service, directly regulating IPs and acting as Regulator of Regulators for the multitude of regulators that existed in the 1990’s. He moved to ACCA and ran their IP monitoring unit for 5 years, during which time he sat on the Joint Insolvency Committee. He joined Bill at Compliance On Call in early 2006 and hasn’t been able to relax since. As well as making sure that Bill didn’t get too enthusiastic, he sat on R3 Council and the SPG committee for ages. He has been a major driving force behind the best document packs in the country and he has given technical advice to so many IPs over the years that it is likely that nearly everyone in the profession has been touched in some way by his influence. Although our clients have benefited directly from interaction with him, Gareth has had a much wider influence on the whole insolvency profession for over 30 years. He has probably earned his retirement 10 times over just for putting up with Bill!

So, SPG will be the start of nearly 5 months celebrating Gareth’s career. If you will be there, or at the IPA Personal Insolvency Conference later in the month, we look forward to meeting up with you. If not, please get in touch to help celebrate anyway. Bill and Jenny, together with Katy in due course, will ensure that Compliance On Call moves from strength to strength and provides the same top drawer service that we have given for nearly 20 years. July 2025 marks 20 years from Bill’s first circular email announcing the arrival of then-sole-trader Compliance On Call. Although we will mark that milestone in due course, we want to spend the next few months celebrating Gareth, so please join us when you get a chance.

Giving notice to the FCA

We were at the R3 Northern Forum recently, talking to a couple of representatives of the FCA and they mentioned that they were seeing an increasing number of cases where the prospective officeholder had not given notice of the impending liquidation or administration to the FCA even though the company was FCA registered. Reading between the lines, I think that their patience is wearing thin and one option open to them would be to complain via the Complaints Gateway. That is something that IPs need to avoid happening. The Insolvency Service as the regulator of regulators within the insolvency profession is likely to respond badly to another regulator raising complaints, meaning that they will want to make sure that the RPBs treat such complaints seriously. As a result, we thought that it was an opportune time to remind you of the requirements to give notice to the FCA.

The FCA have issued some Guidance for IPs, and if you are dealing with an FCA regulated business this is something that you need to be familiar with. It can be found at FG21/4: Guidance for insolvency practitioners on how to approach regulated firms (fca.org.uk). The Guidance emphasises early contact with the FCA to discuss and consult on the proposed approach to dealing with the regulated business of the company or debtor. As regards the statutory requirements to notify the FCA prior to commencing the insolvency procedure, these are set out in part XXIV of the Financial Services and Markets Act 2000, but in summary are as follows:

• Administration – under section 362A the specific consent in writing of the FCA is required where the company or directors intend to appoint an Administrator in respect of a company or partnership: that is, or has been, an authorised person; is, or has been, an appointed representative; or is carrying on, or has carried on, a regulated activity without authorisation. Such consent from the FCA is a pre-requisite to being able to validly place the company or partnership into Administration. You certainly do not want to be in a position of having to explain in Court or to your regulator why you did not give the required notice.

  ·       CVA – under section 356 the FCA has a right to make representations at Court and creditor meetings in respect of a CVA proposed in respect of a company or partnership that is an authorised person. As a result, the nominee should give the FCA notice of the decision procedure to consider the proposal. 

  ·       CVL – under section 365 the FCA has a right to attend any decision procedure relating to the appointment of a liquidator where the company or partnership is an authorised person. As a result, notice of the section 100 decision procedure should be sent to the FCA. 

  ·       MVL – since creditors are not involved in the process to appoint a liquidator, where the company or partnership is an authorised person, the only requirement under section 365 is to send notice to the FCA once the company or partnership is in liquidation. That is, however, subject to the overarching comment about discussing and consulting on the proposed liquidation with the FCA. In practice, it is extremely unlikely that a company that is currently authorised will be entering into an MVL. 

  ·       IVA – under section 357 the FCA has a right to make representations at Court and creditor meetings in respect of a CVA proposed in respect of a debtor that is an authorised person. As a result, the nominee should give the FCA notice of the decision procedure to consider the proposal.

The FCA Guidance mentioned above also deals with how the FCA expects the IP to interact with them post-appointment. That includes sending them a copy of everything that the IP sends to the creditors and seeking their comments on draft progress reports prior to issuing them in Administrations and liquidations.

One other point we want to draw your attention to is the need to report the company, partnership or debtor to the FCA where you find that it is carrying on, or has carried on, a regulated activity without authorisation. While notice of the proposed insolvency procedure has to be given to the FCA in such circumstances where an Administration is proposed by the company or directors, there is no requirement to give notice to the FCA in such a situation where a VA or liquidation is proposed. Instead, there is simply a statutory requirement to notify the FCA post appointment. Having said that, if you become aware that the company, partnership or debtor is carrying on, or has carried on, a regulated activity without authorisation prior to being appointed Supervisor or liquidator, you should discuss the situation with the directors. You will want to raise this with the FCA given the comment in the FCA Guidance about discussing and consulting on the proposed insolvency procedure with the FCA, but obviously you cannot do so pre-appointment without the directors’ consent. If the directors will not give consent, you should consider whether it is appropriate to take the appointment and to what extent any other action might be appropriate given the AML implications of the company having undertaken such activities.
 
Finally, as our Work Programme indicates, you should always undertake a search of the FCA register of authorised persons (https://register.fca.org.uk/s/) as part of your pre-appointment KYC obligations in order to identify cases where there is likely to be FCA involvement.

NCA - SARs reporter booklet August 2024

You can read the August 2024 issue of the NCA's SARs reporter booklet by clicking here. These booklets contain some interesting information about the use to which SARs are put.

A fresh look at electronic filing - time to bite the bullet (if you have not done so already)?

We first looked at this area many years ago, when Docusoft and Virtual Cabinet were terms that few people were aware of and we had no idea what cloud computing was. In 2015, we published a more extensive article on our Blog, but that is now, perhaps unsurprisingly, out of date. Not only has the technology itself moved on, but attitudes to electronic filing, remote working, and new developments like virtual meetings and the burgeoning use of AI all combine to make this an area that we really have to revisit in some depth.

As before, we start by looking at the advantages and disadvantages of going paperless, remote working, virtual meetings, and AI (briefly, ‘cos its not really our thing!) in general and then talk about the approaches and packages that we have seen on our travels. At the end of the day, when you see the reps for the various software houses, they will do their own selling, but this is our spin from our experience at different practices who have been operating different systems over differing periods of time. 

Despite the almost universal use of electronic filing and signatures in the UK, you may still find that some overseas jurisdictions are more committed to paper than others and if ever you have a case with an international element to it you should take legal advice in the relevant locality before you destroy papers that you might need to pursue recoveries or that a prosecuting authority may wish to use.

Advantages

The software providers will explain the advantages, as they see them, in their sales pitches, but we thought it might help if we explain the advantages that we see, as we work with over 100 firms across England, Wales, and Northern Ireland. I suspect that they may well apply in Scotland, but we stopped trying to keep up with Scottish legislation in 2016, so we don’t have recent experience to draw upon.

Storage costs – depending on how you set it up and how soon you can be confident that it is working properly, there will probably be a period where you still keep the paper copies, but they can be saved in date/scanning order in archive boxes rather than by case, which would save on storage and time spent filing. Once you are happy that you have a fully working system with enough back-ups and checks, it should be possible to either destroy paper immediately it has been scanned, or only keep it for a short while in case a document has not been scanned properly. We used to suggest that you might keep copies for quite a while, but experience now suggests that it would not take long to be confident enough that you could destroy paper copies. Indeed, because electronic filing, emails, etc., are now so much more common than they were when we started commenting on this area, we find that most firms are able to go fully paperless in very short order. It seems that the majority of documents are now received and sent in electronic format, so scanning is used less, reducing the potential for errors. In addition, even if there is a scanning error, it is likely that you will be able to find another copy of the document, whether within a company’s books and records, your lawyers’ or agents’ files, etc.

Retrieval – Having electronic copies available should give you significant cost and efficiency savings, as files won’t have to be retrieved, papers found, copied, replaced in the file etc. We are now so familiar with using electronic communications and filing, even in practices that still maintain paper files, that we sometimes overlook the benefits. Electronic filing allows searches to find documents, and those searches are increasingly sophisticated so that they can not only find the document you wanted, but also suggest related documents or articles that may help. Taking our own work as an example, when we are asked a technical question that is similar to one we have responded to before, I can not only search for our prior responses, but also see legislation, guidance, and even related case law as part of the same search. Also, more than one person can access the document at once, which you cannot do with a paper file, and with Sharepoint you can collaborate in changing a document and save different versions as it develops without clogging up the file and making it unmanageable. 

Resilience – Although we still like the ease of flicking through a paper file (see disadvantages below), we have to admit that electronic files degrade a lot less. With back-ups and sensible security measures, an electronic file can easily be retained for many years, in contrast to some of the tatty, broken, and sometimes coffee-stained physical files we see. Even if you need a paper copy of something in 5 years' time, you can just print it and it will be as fresh as the day it was received or scanned.

Efficiency – As you get used to the system you should see efficiency savings. Many IPs found this as an unexpected side-effect of the Covid pandemic, when lockdowns and other restrictions led to much greater reliance on electronic filing and remote working. For example, whereas post used to be physically received, date stamped, circulated, re-circulated, filed, etc. in a paperless system you can set up more efficient systems. Emails can be received and filed almost instantaneously (but see Practical Tips below). Where physical documents are still received, you can scan documents on the date of receipt so that the scan date is your date stamp. Copies can be circulated electronically, or staff can be sent alerts to access the document, with audit trails built into most of the software that show who has accessed the document and when. Documents can be approved remotely, and even signed electronically. We would not encourage you to work during your holiday, as we think that a complete break is good for your well-being, but it does allow you to work more flexibly around travel, childcare, and other commitments. 

Control – in a good system you can set up the permissions to give you extra control over the process. One client's old system was that all post went to one of the IPs, but if they were not in, staff would grab a bit of urgent paperwork and it might never get back to them. Under the electronic packages, you can set up how documents will be distributed, so that you can decide which documents are copied to a manager or the IP. The IP can therefore be aware of what has come in but does not get in the way of people doing work and still does not lose control over the process.

Evidence – in a good system, nothing can be destroyed. In both of the more commonly seen packages we talk about below, if you want to delete a document, you have to give a reason for doing so and even then, it goes into a “deleted items” archive and the fact that it was deleted is still recorded on the case file. This means that you can evidence every stage of the decision-making process, even when you have made an error and corrected it. Other systems may do this as well, but we have seen the two main systems in action.

Time recording – with some packages you can link documents to your time recording system, so that when a document is accessed the time is logged (but see below).

Flexibility and remote working – the biggest advantage for us is that reviews can be undertaken remotely. We can now review files without darkening your doors, drinking your coffee, clogging up your meeting room, etc. Depending on which package you go with, you may be able to produce files that we can read without specialist software and one supplier, Virtual Cabinet, for example, allows documents to exported with a portable version if the software, making it easier to read in your normal filing categories. In contrast, Docusoft allows read-only remote audit access to files, so that we have the full Docusoft interface to interrogate files, including access to the audit screens that allow us to see the passage and approval system for each document. Even if you still want a physical visit, going paperless allows us to complete some of the work remotely, reducing the time we take up your office space and allowing more time on the visit for discussion. We find that clients are also taking advantage of electronic filing to allow more remote work and flexible hours for their staff. Some clients have remote staff in different time zones, while others use remote access and flexible attendance to retain staff that would otherwise, in the past, have left when they moved, say for family reasons. Even those clients that maintain “normal” physical office attendance and core hours find that electronic filing and remote access has improved efficiency around holidays, illness, and family emergencies. With IPS Cloud also available more widely, clients can access case information, approve documents, and clear diary lines, all while standing on a platform and awaiting a train to nowhere. More positively, it allows clients to be more flexible with office attendance and maintain a happy, balanced workforce.

Carbon footprint – We have not done the numbers, but it must be better to keep electronic copies than cut down rainforests to make files and burn them once you are done with the records.

GDPR – We hesitated before including this as an advantage, but if anything to do with GDPR can be an advantage, this may be it. It will be far easier to identify and list documents in connection with, say, a subject access request, if everything is searchable within an electronic filing system. You just need to be aware of the heightened risk that arises if a document is misfiled, so that you retain personal data in a file without the necessary “legitimate reason” or consent to process it in that location.

Reputation – While a few of us have been around long enough to prefer paper and “the old way of doing things”, anyone that does not keep up with current practice will soon find staff harder to attract and retain, while potential referral sources will start to look for more efficient and modern practices. At a time when open banking allows you to collect bank statements pre-appointment, and accounting packages like Sage and Xero allow instantaneous access to the latest financial information, you will be facing an uphill task attracting new cases if you insist that all documents are only sent by post or, worse still, fax! In contrast, a slick onboarding pack with a part-populated information gathering questionnaire, easy to use AML checks incorporating face recognition software, and documents exchanged electronically on a secure portal with electronically verified virtual signatures, will all promote the image of a modern, efficient practice. Your staff will develop a wide range of IT skills alongside their technical insolvency knowledge, increasing their job satisfaction and perception of self-worth and wellbeing. I sometimes forget that because I have to remember which app to use to pay my parking, my now-adult children are used to conducting large portions of their life online. As a result, they are far more likely to notice the absence of what they consider to be basic IT systems that seem like the stuff of magic and fairy dust to me.

Transparency and accuracy –We have included this an advantage, which we believe is correct for a well-run and conscientious practice. Those with something to hide, or significant control issues may have a different view, however. When we have full access to electronic files, we can see everything, which helps us to recommend improvements and correct poor practice. Even if your practice does not use us or one of our fellow compliance service providers, you will be able to take advantage of the increased transparency that an electronic system offers. You will be able to see at a glance when documents were sent, who had helped with any drafts or approvals, and you will be able to identify where blockages occur or where a small change in a process could result in a significant improvement. We have helped several clients avoid potentially significant defaults by making small changes to systems and timings. Most clients welcome the improvements that result. Unfortunately, we have also caught out a small number of, now ex-, clients purporting to have documents signed and issued before we had produced that version of the underlying template. IT systems are not perfect and can even appear to give false results, but when correctly used can be a great aid to improved workflows and transparent records. If you consider that level of transparency to be a disadvantage, you may have to address some more fundamental practice management issues before looking at investment in electronic filing.

Disadvantages

Most of these should not be an issue in a good system, but ask your potential providers about them and see what they say. We certainly see these as much less significant than they were in the early days. As practices modernise and employ more staff that have extensive experience of digital systems, the perceived disadvantages fall away or are outweighed by the flexibility and innovation that electronic filing brings:

Change – Always tricky to manage and could be as simple as someone forgetting do something that they used to do because they no longer have a piece of paper to put on top of their in-tray, or it could lead to more significant problems in getting staff trained on the new system and ensuring that they are able to use the software effectively when it is rolled out, so that errors are made and the filing is less effective, or even unreliable, for a period of time. The best systems that we have seen mirror the practice’s existing filing system and have in-boxes where tasks can be prioritised, with monitoring and review functions available to the IP so that you can spot any bottlenecks or problems before they become important. We also see systems used more effectively early in the change process if they use tools that staff are already familiar with, such as Microsoft Office/365, Adobe, Turnkey IPS, etc. The bottom line is that the less change is involved, the easier it is to manage the move to electronic filing, so make sure that your provider can provide a system that fits with your procedures, rather than you having to do everything in a new way.

Acceptability of electronic copies – You’d need to run this by a lawyer before you move to electronic filing, and if you take Scottish or Northern Irish cases you should check in each jurisdiction, in case the courts that you deal with have different approaches. We don’t know of anything that has to be a paper original, but there are probably some, or you may find that there are evidential hoops you have to jump through to get a scanned copy accepted (e.g. signing some sort of certification to confirm that the document is a true reproduction of the original). If the lawyer does say that some documents have to be kept in hard copy (e.g. title deeds – we don’t know, but they might be the sort of documents that you’d have to keep), you’d have to ensure that all staff are aware which documents must be kept. Those doing the scanning will be the first line and should spot documents and file hard copies, but other members of staff need to be aware so that they can double check that relevant documents have been retained. This is where a short period of retention between scanning and destroying is a good idea. It gives you a chance to undo any errors before they become final. 

Errors – This was more of an issue in our first article, because then people were generally scanning original documents into the filing system, so errors might result in a document being permanently lost. Nowadays, errors are less likely to be significant. If a document is misfiled, there is a reasonable chance that a search would find it. If a document is copied incorrectly and deleted, there is every chance that another copy will be available from the original sender, an agent, solicitor, or other third party. It may be a little inconvenient, but it is unlikely to have the catastrophic impact that might have been possible in the past. Even misfiles, which could be risky from a GDPR angle, are likely to be less significant because the advanced search function available in the main software packages allows documents to be traced and re-filed accurately.

Central scanning v individual scanning – another area that was more significant historically. Now, with a lot of correspondence being electronic, there is less documentation received in the post that needs scanning, but you need to decide whether to have everything scanned in one place, in which case you need systems to make sure that it is done promptly, even when the scanning administrator is on holiday, and that it is still filed by people who know what they are looking at. Alternatively, you could have everyone scanning their own documents, potentially at a higher cost, but with those who currently receive documents still getting them and being responsible for their own scanning and file allocation. 

Back-up – one for your IT guys but given how vital the records will be we would recommend multiple back-ups with overlaps and in several locations. Cloud back-up is likely to help with this, but whereas in the past the greatest risk might have come from physical destruction of a back-up, your IT systems will now need to have robust cyber-security.

Capital outlay – any decent system will not be cheap. The chances are that someone in the organisation will want to cut costs, potentially leading to other problems. One system we saw was based on a solution used outside the insolvency profession and kept automated time records linked to when documents were accessed that was designed only for internal monitoring, so they did not have to be as accurate as you need in insolvency, where poor time records could have significant regulatory impact. People could be recorded as working on 6 jobs at once if they had 6 open documents on their desk. The time system should only pick up the active document and should log out of any screens that are minimised or behind the active document. Linked to this, you could leave the system without logging off a document, so that the next time somebody else went into that document it would record their access as if it were the original user leaving the document. The bottom line is that if you are going to go paperless you may need to look at the long term and pay for something that is going to do the job properly.

Complexity – linked to the cost point, the paperless system will seem more complex until you get used to it and nearly all the people that we have seen using a paper system for any length of time now have their staff using two screens. This enables them to keep the search page on one screen and "launch" individual documents onto the second screen. At the relatively low extra cost of a second monitor, you gain a much better experience. It will probably still take some getting used to and you will inevitably have those who bemoan the good old days when they had paper in their hands.

Undecided

Artificial Intelligence – We think it is still too early to decide whether AI will develop enough, and in the right direction, to be a clear advantage. We don’t have great knowledge of AI yet and we have only seen small examples of its use. Our concern is that it does not currently appear to be accurate enough to rely on in a regulated environment, especially where systems have passed beyond using any original human data input and started to use internet searches and machine learning to expand. In time, AI may be more useful in generating reports and standard documents or automating some checklists and diary tasks. However, at present, we have heard of too many examples of rogue results, and some of the biggest IT firms have backed away from some of their earlier claims, so we feel that further testing and reliability assessments will be necessary before it can be safely integrated in documents that a regulator might review.

We are convinced that it will get better, and that when it develops, it will increasingly make the concerns in this article look ridiculous. It has taken us 9 years to re-write our original article about electronic filing. By the next update, e-filing may well be the norm and a new article may focus on further developments in IT/Human/Cyber interaction, largely written by a computer-generated virtual staff member using AI-developed drafting skills.

Automated email filing – From your perspective, automated email filing may seem like a significant cost saving and it would certainly be popular with your staff, but our experience as reviewers is less positive, unless steps are taken that may reduce the savings and make your staff question its benefit. Most automated filing systems allocate each message a standard file name, which is often based on the case name and reference number, some sort of identifier that it is an email, then some form of description, usually take from the “Subject Line”, but possible also including the sender and recipient. Therein lies the problem. Imagine what it is like for an external reviewer, which might be us or a regulator, but could even be someone in your own practice that is not familiar with the case trying to find something in a hurry. The first thing that we see may be a list of tens or more emails that all have the title “FT***/XYZ Manufacturing Services Ltd/email/incoming/Re: Lease on 64 Zoo Lane/ H Bucket/ internal staff reference”. In many cases, the visible file name in the list we see will only be the first few characters, so we may not be able to see the subject line. We may be able to find the most recent document in the string by sorting the documents in date order, if the copy we have been given allows that, but we will often find that emails only contain some of the string, or even that the most recent email has nothing to do with the case at all because someone has simply started a new conversation by hitting “reply all” on an old email without even changing the subject line.

The only way to address this effectively is to reduce some of the automation, at least until AI has developed enough to improve the filing system. Most automated systems will allow you to intervene and enter a personalised description instead of the default. Hopefully, the fact that it is an email, filed on a certain case will save you from having to use a lot of the automated name. A quick check before filing the document would make sure that it is the latest in the string and not a new reply added over an old version or, worse still, a completely new topic. How much you can adapt the name, and how difficult it is to do, will depend on the system that you use and, possibly, the set-up options that you agree with the software provider, but this is one area that we think could become more useful with a bit of planning prior to implementation.

Different packages

We mention below a few different packages that we have seen. There are others and the comments that we make are based on how we see them used, which may be unfair. A really good system could be used poorly and fail to impress us, while a patchy piece of software might look good enough to us if it is being used intelligently and the IP is getting the best out of it. We have given just the name by which we know their software and you will find them on an internet search, rather than their full branding, legal title or ultimate holding company name. Although we give a brief outline of what we have seen, they may currently offer different products, or their current version may be more highly developed, so you should look at their web sites and contact their reps for reliable up-to-date information.

Docusoft - This was the first software that really impressed us. This is the first software we saw that integrated with IPS and they now offer a really robust system that seems to be constantly innovating. We particularly like their web-hosting and secure portal options which allow smaller practices that don’t have advanced IT skills or a dedicated IT department to present a modern image and “customer” and “stakeholder” experience. As reviewers, we like the read-only access that we can have, whether on-site or working remotely, and the audit function that allows us to see the steps that a document has been through, including any changes, deletions, and approvals.

Virtual Cabinet - They flattered us several years ago by inviting us to look around their Cambridge HQ, see the software in action and meet some of their management and support team. Since then, they have established a foothold in UK insolvency and they offer an advanced system that integrates well with IPS and offers a range of additional tools. They have a useful function that allows a snapshot of the case file to be exported for review, together with a portable version of the software that mimics the interface that users see. It does not include the full search and audit system that is available on the full software, so it can be a little frustrating for us, as reviewers, but it is an immensely powerful tool for IPs and staff with access to the full system.

Invu - we have seen a couple of practices that use this. The first version that we saw, around 15 years ago, was very clunky and poorly used by the practice and I suspect that we did not see it at anything like its best. It has improved over time and we are more familiar with it, making it easier to use, so we would not run screaming from the room if you opted for it. 

In-house filing solution – This tends to be where an IP mimics their own filing system in folders on their IT system or a back-up storage area like OneDrive. While this will often result in clearly labelled documents in a folder layout that mimics the practice’s hard file system, it may lack some of the additional functionality that is available in the main software packages, especially the audit trail. We also tend to find that copies provided to us and the regulators for review lack any search function and may even have inaccurate document dates, which can increase the number of queries.

Other than that, it tends to be niche packages adapted for a particular IP, or bespoke ones designed by nearby software providers and they tend to be a bit more "original" in their approach. Apart from the fact that you would probably not get a chance to use them anyway, most of them are only used by one IP precisely because they would only work with that IP's system. 

We don’t get commissions or fees from any of the providers and we know that the performance of different providers can vary over time, but hopefully this will help you if you have not yet made the move to electronic filing.

Estate accounts – interest bearing? Or non-interest bearing?

A couple of years ago, when HMRC stopped requiring CT returns in CVLs unless there had been taxable income in the period, they went on to say that any previous local agreements in place regarding de minimis CT limits that need not be accounted for, or accepting receipts and payments accounts in lieu of CT600s, were a thing of the past. Subsequently, when HMRC announced its decision that closure clearance would no longer be given in MVLs, they again made it clear that they expected liquidators to submit CT600s and account for all CT due on the company’s post appointment taxable income. As a result, in cases where the company receives any post appointment taxable income you now need to submit a CT600 for each 12 month post appointment accounting period, together with a final one prior to closing the case covering the period since the last post appointment return, or your appointment, as appropriate. Conversely though, if the company has no post appointment taxable income, there is no requirement for the liquidator to submit a CT600 return.
 
The post appointment taxable income that a liquidator is most often going to come across in routine liquidations is bank interest. So the fact that the liquidator only has to submit a CT600 if the company receives any taxable income is a factor to consider when deciding whether to operate interest bearing or non-interest bearing estate accounts, or to open a deposit account where the current account is not interest-bearing. The last thing that you want to do is incur time costs in submitting a CT600 to account for a minimal amount of interest received where the costs of submitting it outweigh the benefit to creditors of the interest received. That certainly cannot be said to be in the interests of the creditors.
 
Time costs will also be incurred in making entries in the financial records for interest received and in reconciling an additional estate account if a separate deposit account needs to be opened. Each practice is different, so it is a matter of working out the point where the costs of processing bank interest and accounting for CT due on such interest are outweighed by the interest received on an estate account. That will depend on the interest rate paid by your bank, the amount held in the estate account and how long you anticipate holding the estate funds for. Keep that calculation as part of your central practice policies and then prepare a file note on each case, say as part of your case strategy note on appointment, to record how you are applying that practice policy to the case in question.
 
Not all banks seem to offer interest-bearing estate accounts, so if yours does not, and will not operate a separate interest-bearing deposit account, then it is time to find a different home for your estate monies in cases where the interest likely to be received on the case outweighs the costs of processing it.

Like London buses ...

… you wait for ages and then two useful Court decisions come along almost together! 

The long held view of the Insolvency Service is that once a creditor, always a creditor. In other words, it is the fact that an entity is a creditor of the company or debtor as at the commencement of the insolvency procedure that is important and determines their status throughout that insolvency procedure. This has generally not caused any problems for IPs, other than occasionally in the context of Administrations. If the Administrator is pursuing objective b) and has made a paragraph 52(1)(b) statement, i.e. that there will be no return to unsecured creditors other than by way of the prescribed part, then in the absence of a committee it falls to the secured creditors, together with the preferential creditors where there is likely to be a return to them, to approve remuneration, pre-administration expenses and an extension of the Administration. This will not normally cause a problem where the secured creditor is still owed money, but where they have been paid in full they have sometimes been reluctant to engage with the Administrator and give their approval to any of the decisions sought from them. 

In the context of an extension of the Administration, while only the deemed consent of the preferential creditors is required, the positive approval of all secured creditors is necessary. In the absence of any engagement that will mean making a Court application, with the resultant cost implications. That was then, but two recent decisions have given Administrators a helping hand when it comes to getting extensions agreed by the creditors. The first of those was the first instance decision of Pindar Scarborough Ltd which was decided in March 2024, but only came to wider attention earlier this month. You can read the judgement on the website of the solicitors who represented the Administrators by clicking here. While that Judgement was welcomed, it was seen as turning on its specific facts, including that a memorandum of satisfaction had been filed by the Administrator at Companies House, and was not seen as a precedent that could be applied in all cases where a secured creditor had been paid in full. Fortunately for the profession it was almost immediately followed by a second decision, this time of HHJ Paul Matthews sitting in the High Court in Boughey & Anor v Toogood International Transport and Agricultural Services Ltd [2024] EWHC 1425 (Ch). You can read the judgement by clicking here but the key section of it is:

27. “A secured creditor is one who is owed a debt that is secured. Any creditor whose debt has been paid off is ex hypothesi no longer a creditor, and therefore no longer a secured creditor. Nothing in the legislation suggests, let alone compels, the conclusion that the position is to be governed at the point of entry into the administration process. And, as it seems to me, that is as it should be. Only those who have an economic interest in the outcome should be concerned to make decisions about the continuance of the administration. There is no reason why a commercial organisation such as a bank that has been repaid in full should have to be bothered thereafter with making administration decisions that do not affect it. Why should it spend its time, unremunerated, in doing so? 

The Judge goes on to say:

28. […] If the Government wishes there to be a different result, then it must legislate more clearly than it has done, and moreover explain why those with economic interest in the outcome of an administration should nevertheless determine what happens. In the meantime, I hold that a secured creditor whose debt is paid off ceases to be a secured creditor for the purposes of Schedule B1 of the 1986 Act, and its consent is no longer needed for any decision requiring the consent of such a creditor. No prejudice can be or is caused to such a person by not obtaining its consent.” 

That is clear and unequivocal and can safely be relied on unless, or until, it is overturned by the Court of Appeal, or The Insolvency Service do decide to legislate. It will be interesting to see what they say, if anything, in the next edition of Dear IP. 

While the decision in Boughey relates only to approval in the case of an extension, logic suggests that it might also be extended to approval in respect of remuneration and pre-administration costs. However, we are not prepared to suggest that you go that far at present, since if it does not work your remuneration will not have been approved with all the resultant problems that would bring. Try and seek fee approval early on in the Administration while the secured creditor is still a creditor, but if that is not possible then unless there has been a judgement in the meantime applying Boughey to the approval of remuneration, or your solicitors are brave enough to say that you can apply the principles in Boughey to fee approval, your only alternative is to apply to Court for approval. If you have to resort to that, which is very unusual in Administrations, you could then ask the Court to apply Boughey in that situation in order to create a precedent.

Onerous passwords to open PODs

We have recently heard that there is a growing trend with certain creditors to submit proofs of debt and proxies for decisions, but in a password-protected format, requiring the IP to telephone to obtain the password. That is a pretty silly way to work for a number of reasons, so we have put this article on our Blog and we will refer to it on LinkedIn and X (formerly Twitter), in the hope that the numpties who thought it was a good idea will reconsider or find an alternative that does not have the potential to increase costs exponentially across the whole insolvency profession.

For a start, it simply is not necessary. The justification being used is “Data Protection” or “GDPR”, but that just does not apply here. The debtor, whether corporate or personal, is insolvent and their details are available on Companies House or the Individual Insolvency Register. The claimant/creditor will generally be a company, or at least the ones that are currently using password protected proofs of debt are companies. Therefore, the only personal data on the form either relates to the insolvency proceedings and is being submitted under a statutory requirement, so is outside the scope of GDPR, or it is the signature and name of the creditor’s agent. If the person signing multiple thousands of proofs of debt, electronically, on behalf of a range of corporate creditor clients, feels unable to consent to their name being shared with insolvency professional firms, then maybe they need to find a new role.

Second, if the individual that is signing the proof of debt form is concerned about their personal data, or the agent wants to attach documentation that may include personal data and is unable to get consent from the individuals at their client that may be affected, there has to be a better way than requiring an IP to phone and ask for it every time. Just this week we heard of a case where the creditor failed to answer after 10 minutes. That may not sound like much in one case, but some of these creditor agents submit thousands of proofs of debt per week. The costs of every IP making thousands of unanswered calls and then following up to finally obtain a password will run into millions of pounds. Given the nature of insolvency, a large amount of that money will not be recovered by the IP and, if it is, the creditors will suffer.

We think that there needs to be some debate across the profession. As yet, I am afraid that we don’t have the answers, but these are some of the questions that we think could be relevant:

1) Is there a real need to password proofs of debt at all?

2) Can an IP treat a proof of debt as undelivered if it is password protected?

3) If the answer to 1) is yes, and the answer to 2) is no, is there a cost-effective alternative?

4) Is there a way that proofs of debt and proxies can be submitted without the sort of data that would necessitate password protection?

One idea that might work would be to have one password for each IP firm, so that the claimant creditor can use it whenever they submit a proof to that firm. Alternatively, could passwords be delivered automatically using a text message or WhatsApp message, so that the IP does not have to phone the creditor?

We are not convinced that passwords are needed at all, but if they are required, someone needs to find a solution that won’t just increase costs. Of course, it would have been nice if they had thought about it first, rather than issuing password protected proofs and assuming that the additional work and cost would be somebody else’s problem.

On that happy note, have a lovely weekend!

MVLs, tax clearance, and arguably unnecessary insurance

We have had a couple of queries recently about HMRC, tax clearance, and as a result of the recent article in Recovery magazine, insurance. The fact that the article was written by someone who works for an insurance broker should tell you a lot. Our view is that this is just a marketing piece, trying to create new demand for an existing product in a sector that has not traditionally used it.

If you have taken sensible steps to confirm that there are no outstanding tax matters, then you should be happy to close the case. Clearance was never worth much on top of that and if you are happy that the directors, members, and accountants have been honest with you, you have checked with the company’s records, and everything seems to be above board, you should have no worries. Even if HMRC subsequently found something, they would restore the company and go after the members, as long as there was no suggestion that you were reckless or negligent. If you were reckless or negligent, I am not sure that tax insurance would cover you in any event.

There will always be exceptions, and you may want to keep details available if the product is still available in the right circumstances. However, by then the furore around clearance may have died down and they may have pulled the product due to lack of interest. I cannot see any way that you could justify using it regularly across your MVL cases, but the cynic in me thinks that it might be useful in the right sort of case. I can imagine a case where you are receiving all the right assurances, but you feel that something isn’t right. You could suggest getting insurance then and see what their reaction is. If they argue against it and show that they have made full disclosure and it isn’t needed, your hunch was probably wrong. If they agree to pay it, they may well be hiding something and you’d be better to walk away, as the insurance probably won’t help much if they are hiding something deliberately.

Because this is a developing area, it is always worth seeking out alternative views, so I have just signed up to Malcolm Niekirk’s coffee break webinar on Monday, 4 March. If you are interested, Malcolm can be contacted through Frettons. I’ve not put a link in this article, as it can generate a bit of spam, but if you google Malcolm or Frettons, you’ll be able to get a link to register.