Are some mid-tier firms getting greedy, or are they getting desperate?

We always knew that the New Rules were likely to change working practices in some areas of the profession, and issuing the statement of affairs and SIP 6 information early was a concern for many IPs who feared increased competition for appointments, leading to increased costs which are unlikely to be recovered in the majority of cases. We thought that the Insolvency Service probably wanted to see greater competition for appointments and whilst not complacent, we did think that professional ethics and some common sense would restrict challenges to the more worthwhile cases.

We are, unfortunately, starting to hear stories of some firms using the New Rules to disrupt appointments and, in some cases, make inappropriate statements in an attempt to secure proxies. This article will attempt to do three things, namely: expose the practices used by those firms; suggest ways that they can be opposed; and speculate on the reasons why hitherto respectable IP firms should be stooping that low.

The “guilty” parties and their methods

To date, every complaint that we have received about a firm objecting to an appointment, or requisitioning a physical meeting, and using it to buy time to influence other creditors to vote for a different IP, has been about a mid-tier firm. There have been four firms mentioned, but in the interests of staying in business, we won’t be naming names without some solid proof.

Before I explain their methods, however, I want to make it clear that we are not talking about the situation where an IP has been approached by a creditor to go after a job where they have concerns. Every creditor is entitled to seek answers to any concerns that they may have by the route that they prefer. If someone has a significant interest in the proceedings and wants their own choice of IP to take the appointment, that has always been appropriate. Traditionally, such cases often resulted in joint appointments, with duties shared according to the creditors’ main areas of concern.

What we are seeing happen since the New Rules were introduced is less clearly defensible. These are cases where mid-tier firms are using the small debts that they claim on behalf of corporate clients that they have agency agreements with, to obtain the statement of affairs and other information before a winding up resolution is passed. If the case looks to have any chance of assets, including those that the current IP thinks might be available to pay the costs of the statement of affairs and convening the decision procedure, they start ringing around to get enough votes to object to the appointment or requisition a physical meeting. That, in turn, allows them more time to ring around more creditors. The more careful firms word their calls to the creditors so that they just hint at the IP being “less independent” than they might be, while we have heard of some firms even falsely claiming that other creditors had “serious concerns” that only they could address, or alleging that confirming the members’ choice of IP might affect returns or insurance claims. In some cases, this can lead to a genuine challenge to the appointment of the members’ choice of liquidator, but in many cases this seems to add costs for no real benefit, as the mid-tier firm often fails to secure enough support to take the appointment and so just opts not to attend the meeting at the last minute.

How to deal with the poachers

There are a couple of ways that we think that you can deal with such underhand approaches. The first is to communicate very clearly with the creditors at the start of a potential appointment. Make it clear that although you obtained the nomination through your marketing efforts and introduction to the directors or members, you have a statutory duty to all creditors and you are closely regulated to ensure your independence. In the same way that it is sometimes necessary to warn directors and debtors about approaches from unregulated agents, you could warn creditors that they may be approached by firms offering unrealistic inducements or making inappropriate statements to obtain their proxy.

The second way to fight back is that when you hear of unfair statements being made by your fellow professionals, you should obtain evidence wherever possible and provide it to their regulatory body, with a formal complaint. Some of the statements that have allegedly been made by representatives of the main “offenders” could, if properly evidenced, indicate a lack of fitness and propriety that could have licensing implications for the IPs who knowingly benefit from the actions of those staff.

Why are the mid-tier bottom feeding?

When faced with clear evidence of bank panel firms rummaging among the corporate burials and trying to pick up zombies on the off chance that there might be a gold hidden among their rags, it does make you wonder why they are doing it. It must take significant resources to sift through the incoming statements of affairs and review the SIP 6 information for so many cases to identify possible candidates. Given that most will be clear burials with no assets, the profit in the small number of cases worth poaching has to be high enough to recoup that cost. With mid-tier firm staffing costs and overheads, any such appointments are likely to be just a contribution to turnover. Few will pay enough to make the sort of profit a firm of that size needs to make it worthwhile.

So, if they are not doing it for greed and profit, are they doing it out of desperation? Are they trying to hide the damage caused to their firms by falling insolvency numbers across the economy by taking these cases just for turnover, leading analysts to expect results in line with past years, and hiding the lack of profit, for now, in an irrecoverable WIP line? As far as we are aware, a £10,000 case which might just make a working profit for a small firm is unlikely to morph into a nice little earner for a mid-tier firm, with their higher cost base, which suggests that something may not be very well in the middle of the insolvency market.

And finally…

If regulators become aware, either through complaints, or during a monitoring visit, that a larger firm is increasing costs across the profession without good reason, on the off chance that the odd overturned rock may uncover a diamond, and possibly making misleading statements to secure proxies, we hope that they will be as brave as they are when criticising a smaller firm. If the rogues cannot be stopped effectively within the existing regulatory framework, it may be necessary to revisit the insolvency rules and adjust the objection criteria to prevent unnecessary and vexatious objections from worried firms who cannot generate their own work.

Statutory Interest on Corporation Tax in MVLs

Back in May we Blogged about a couple of issues with HMRC, including HMRC requiring statutory interest on Corporation Tax (CT) where it is paid after the normal due date, rather than just their normal late payment interest of 3%.  Following feedback from clients it is now clear that HMRC policy has in fact extended beyond that with significant implications for current and future MVLs.  HMRC now require the payment of statutory interest at 8% from the commencement of the liquidation on any CT due that falls due for payment after that date, even if the normal due date for payment of the tax is not until after the commencement of the liquidation, and payment is made before the normal due date.

HMRC are relying on a decision in one of the Lehman’s cases for this change in policy.  That case indicated that statutory interest was due on both future debts, and contingent debts, and since CT payable on a normal due date after the commencement of a liquidation is a future debt then statutory interest falls due.  While that judgement related to an Administration HMRC are arguing that in view of the similarity in wording in the legislation then it applies equally to liquidations.  The standard letter that they are sending to liquidators with the demand for statutory interest says:

 

“Our understanding of the correct treatment of statutory interest derives from the decision of David Richards J in Re Lehman Brothers International (Europe): Lomas v Burlington Loan Management Ltd.  In a supplemental decision he restates his conclusion that “interest under Rule 2.88 (statutory interest) is payable on future debts and on the amount admitted to proof in respect of contingent debts from the date on which the administration commenced”.
 
We appreciate that these decisions related to Administrations but given that the provisions set out in Rule 2.88 of the 1986 Rules were mirrored by Section 189 and Rule 4.93 and are repeated in the current Rule 14.23 (with Section 189 still applicable) they would appear equally applicable in a winding up.”

This is effectively a hidden tax on entrepreneurs since HMRC are receiving interest that would not be due other than for the decision to cease trading to permit the members to extract their capital from the company. R3 are aware of this change and are in contact with HMRC about it, but it is likely to require a Court decision in an MVL to make HMRC change their policy.

In respect of current cases you will have to factor in the payment of statutory interest on any CT due after the commencement of the liquidation, and also manage the shareholder’s expectations.  For future cases you will need to factor this in when it comes to planning the liquidation, making sure that any CT due in respect of the final period of trading is paid pre-liquidation rather than post liquidation in order to avoid having to pay statutory interest.  That could involve paying CT based on the calculation of the accountants preparing the CT return rather than waiting for HMRC to raise an assessment. 

Remember that if you do end up paying the CT in the liquidation earlier than the normal due date, you can then use rule 14.44 (debt payable at a future time) to get a refund from HMRC based on the formula in that rule.  In theory, you could apply that rule when paying the dividend in respect of CT to HMRC in the first place, but given that HMRC might not accept that it fully settles the outstanding liability then to avoid arguments pay first, then seek a refund.

Finally, we assume that statutory interest will also be payable on any other taxes that fall due for payment after the commencement of the liquidation, such as VAT, PAYE and NIC.