Secret meetings are not appropriate!

The Insolvency Rules (Engl….No, wait! If you are reading our Blog, you know what we mean by New Rules, so we’ll call them that from now on. So; starting again.

The New Rules are supposed to reduce cost, which has failed spectacularly from what we are seeing already, and increase creditor engagement. We have our doubts about the latter, given that physical meetings have been done away with unless requisitioned, but we have now seen a more worrying suggestion.

Another firm in our line of work, asked some “reps from the Insolvency Service” whether, when convening a virtual meeting it would be ok to just tell people that there will be a virtual meeting and then only provide a phone number or email address to contact and ask for the access details and password for the meeting. The idea behind the suggestion is to make virtual meetings more manageable and provide a way of ensuring that only genuine creditors can get access to the meeting. The Insolvency Service reps said it was ok.

We think that such an approach is wholly wrong. Anyone thinking that after our last article we were going to start agreeing with the Service can relax. We are firmly back on the war path. In terms of the rules, the relevant requirement for notices in virtual meetings are dealt with in rule 15.5(a). That says that the notice must include “any necessary information as to how to access the virtual meeting including any telephone number, access code or password required;” We are sure that reading that to allow you to just tell creditors to get back in touch to find out how to join is plainly wrong.

In addition, if we park the technical argument for a moment, let’s just try a bit of common sense. If such an approach was allowed, would you, in the past, have sent out notices that said “I am convening a meeting, but I won’t tell you where it will be held unless you ask me?”. Of course not, but isn’t that what you would be doing with a virtual meeting? Secret meetings, now there’s a new approach to transparency!

Somewhere between the pure technical argument and the slightly hysterical common sense argument, we think that there is also a significant principle at stake that overrides the IP’s convenience. If we are trying to encourage creditor engagement, any extra steps in a process create barriers to engagement. For example, it is already known that if a firm runs a complaints system that requires a creditor to re-submit their complaint if they are not satisfied with the original decision, many complainants simply won’t bother. That is why many regulators want a single stream for complaints where information is escalated automatically. Similarly, it is known that many people don’t switch banks or utility suppliers because it is just too much hassle. If we start making creditors ask how to get into a meeting, we are creating barriers just to serve our own interest.

We have to make it clear that, reverting to our traditional combative view of almost anything said by the Insolvency Service, we consider that when you issue notices for a virtual meeting you have to include the access and password details in the notice, and that any requirement for the creditor to get back in touch to request access details is both technically and practically wrong. We are afraid that you will have to find another way of ensuring that only genuine creditors can get access to the meeting.

Shock agreement between Compliance On Call and the Insolvency Service!

We don’t use a headline like that often, but it seems that there a potential problem for nearly everyone’s IVA back-book has been narrowly averted. 

We heard about a training provider where the trainer thought that IVAs would have to be varied to apply the new rules, but that would have to happen before the new rules come in. Our initial reaction, obviously, was that the trainer must be wrong. Surely the Insolvency Service would not make legislation that could require a variation of every existing IVA?

So, we asked the Insolvency Service, making it clear that our view was that the standard terms of any arrangement could only apply within the statutory framework, so that if the rules were changed, they would automatically apply to any existing arrangements without the need for a variation. Their reaction was not initially, very encouraging and they said “As you know, the Act and the Rules (both the 1986 and the 2016 Rules) are largely silent on what happens after the proposal has been agreed. For this reason,… it may come down to what actual proposals and their terms and conditions say about how variations etc. will be dealt.”

They did go on to say that they were considering the matter further and we have now received their more detailed opinion and we are delighted to say that they agree with our view, or we agree with theirs if you prefer to see it that way.

The problem, essentially, is that the old legislation did not refer to variations, so they are generally dealt with by the arrangement terms. Those, naturally given the legislation at the time, refer to meetings. The new legislation does not generally allow physical meetings. The question therefore arises whether IVAs should be the only cases where physical meetings continue, and then only for variations, or should the New Rules apply to variations, as they do to the approval of the arrangement? Our view, which we did not run past a lawyer, but which the Service have since confirmed, is that because paragraph 19 of the Protocol Standard Terms referred to specific Old Rule numbers and those rules will have been revoked and replaced, then the New Rules take over those references. That would mean that variations would be by “decision procedure”, which is likely to be a virtual meeting. However, that interpretation is less convincing in cases approved under the R3 standard terms, because paragraph 81 of those terms dealing with variations makes no reference to the rules.

It therefore appears possible that cases approved under the R3 standard terms might have to be dealt with under the old rules, with at least the first meeting after 6 April 2017 being conducted by a physical meeting. Even that is not certain, because the terms refer to “a meeting of creditors”, which might also cover a virtual meeting or some other New Rules “decision procedure”. The Insolvency Service is keen that IPs should not feel restricted to physical meetings in such circumstances. If only physical meetings could be used, since some IVAs approved under the Old Rules may continue for 6 years, you could have a situation where old legislation is being used in 2023, which has to be inappropriate. The Insolvency Service considers that because the New Rules do not interfere in post-appointment matters such as this in IVAs, using any sort of creditors’ meeting to vary the terms would be acceptable. For once, we are delighted to agree with them.

So, to summarise, the potential problem that was rumoured to be an issue is something of a damp squib. It almost certainly does not impact on the vast majority of IVAs, and in the cases where it could apply, a meeting of creditors will be able to vary the terms to remove any doubt that virtual meetings can be used in future. Maybe this is the start of a new era of love and harmony between us and the Insolvency Service??

6 is the new 8, and 10, and 12

A new SIP has been released today ready for the commencement of The Insolvency (England & Wales) rules 2016 in just under a month’s time.  SIP 6, “Dealing with decision making in insolvency proceedings”, is the replacement for SIPs 8, 10 and 12, and you can read a copy by clicking here. The SIP is an interim version that will be consulted on and then amended as necessary for final release in December 2017.

The emphasis in the SIP is on the provision of information to creditors, both the additional information requested by those entitled to participate in decision procedures, and of more immediate interest to IPs, the information to be provided to creditors ahead of the decision date to appoint a liquidator in a CVL.  There is a list of information in the SIP, but it is not as lengthy as the list in SIP 8, nor is it prescriptive.  The SIP says that “An insolvency practitioner should seek to ensure that the information available in advance of a deemed consent or decision procedure for the purposes of appointing a liquidator facilitates the making of an informed decision by those that are entitled to participate.”  You can provide more, or less, information to creditors than that set out in the SIP, and the approach you take will depend on your assessment of the complexity of the case in question.  We would suggest providing the information set out in the SIP in “average” cases, increasing of reducing the amount provided as you see fit depending on whether you consider it to be a simple or more complex case.  To help protect yourself from criticism on a monitoring visit you could prepare a file note to justify where you have provided more, or less, information than is set out in the SIP.

This explanatory information about the company’s affairs should be delivered to creditors at the same time as the statement of affairs and, as with the statement of affairs, should be delivered to them by no later than the business day prior to the meeting. We think that the content of the disclosure and the timing for providing it are likely to be significant areas when the SIP is put out for consultation.  It seems likely that some creditors will want more information earlier, but as may be reluctant to recognise that there is additional cost in taking such an approach.

Linked to the above, while the concept of the IP being the “advising member” from SIP 8 has not been repeated, the IP “should take reasonable steps to ensure that: a) the convener is made fully aware of their duties and responsibilities; b) that the instructions to the insolvency practitioner to assist are adequately recorded.”  That will mean making sure that there is suitable wording in your engagement letter to cover this off.

The SIP also includes a requirement to send notice to all prospective participants in a decision procedure on the same business day.  Where you send the notice by 1^st class post or by email to all participants that should not be an issue, but where you use a mixture of methods of delivery you will need to ensure that you co-ordinate them.  The same requirement will also mean that UK creditors will get more notice than international creditors if you effect delivery by post. UK post is deemed served after 2 days for first class and 4 days for second class, but deemed service of international post is based on the Post Office’s normal international post delivery times.

The SIP also briefly deals with the issue surrounding identification of participants at virtual meetings.  In physical meetings you get participants to sign in, and if you have any doubt as to their identity and right to be at the meeting you can check it in person.  For virtual meetings that option may not be available.  The SIP rather helpfully says “when determining the authenticity of a prospective participant’s authority to participate in a decision procedure, the insolvency practitioner should exercise their reasonable professional judgement to facilitate the participation of those who appear to be properly entitled.”  In other words, it is up to you, but if you have suspicions about any of the participants then whatever decision you make about their participation, or lack of it, prepare a contemporaneous file note justifying the reasons for your decision.  That should then help protect you against any complaint as long as you have acted reasonably based on the facts available to you.

In respect of the decision procedure to appoint a liquidator in a CVL the SIP recognises that it is the directors who are the conveners of the decision procedure and hence are responsible for checking that participants are entitled to participate and in admitting creditors to vote at the virtual meeting.  The SIP requires the IP to inform the chair/convener that “… it may be appropriate for them to obtain independent assistance in determining the authenticity of a prospective participant’s authority or entitlement to participate and the amount for which they are permitted to do so, in the event these are called into question.”   As the prospective officeholder, you have a vested interest in the chair/convener deciding in a way that guarantees your appointment.  To avoid this ethical threat you should advise them to take legal advice, albeit that you could suggest a lawyer they could use.

As we mentioned at the start of the article, this is an interim version of the SIP and it is to be consulted on.  If you have any comments on it, or issues about how it works in practice, remember to participate in the consultation.  I am sure that we will be doing so, but the more comments on the SIP the regulators receive from IPs, the better as that provides a counterpoint for comments by creditors