Closing the Insolvency Services Account (ISA) in Bankruptcies and Compulsory Liquidations.

We still sometimes see instances where there is either a debit or credit balance left in the ISA after the final report in a bankruptcy (BKY) or final account in a compulsory winding up (CWU) has been sent to creditors. This is largely due to the trustee or liquidator failing to account for (or over-accounting for) the quarterly banking charges payable on the ISA account.

Historically, regulations 28(3) (BKY) and 14(3) (CWU) of the Insolvency Regulations 1994 required the trustee or liquidator to send an account of their receipts and payments to the Secretary of State within 14 days of the final general meeting of creditors being held. This meant that there were always at least 13 weeks between the issuing of the final report and the holding of the final meeting of creditors. As the Estates Accounts Service (Now Estate Accounts and Scanning, “EAS”) would not close the ISA until the final receipts and payments account had been received, it is not surprising that adequate provision for the banking charges was not always made, especially when the 13 week period coincided with a quarter end. 

Happily, life is somewhat simpler now due to an amendment of the Insolvency Regulations in October 2017. Just in case you didn’t pick up on the changes, this blog sets out the new reporting requirements. The requirement is exactly the same for BKYs and CWUs albeit with different regulation, rule and section numbers. I have set out the detail for BKY first and then provided a summarised version with the CWU references.

Regulation 28(3) now says: “where a report has been sent pursuant to section 331(2A)(a), the trustee shall, within 14 days of sending the report, send to the Secretary of State an account of his receipts and payments as trustee which are not covered by any previous account so sent by him, or if no such account has been sent, an account of his receipts and payments in respect of the whole period of his office.” The amendment removes the reference to meetings and refers to a final account instead.

Regulation 14(3) now says much the same thing for CWU, referring to the account sent to creditors under section 146(3)(a) instead of the old wording that mentioned meetings. 

In both BKY and CWU, therefore, within 14 days of sending the final account to creditors you should email a copy of your final receipts and payments account to the EAS at CustomerServices.EAS@insolvency.gov.uk with a covering letter detailing the date on which you sent the final report to creditors and asking that they close the ISA and send you a final statement. For those using our document packs, the BKY letter to EAS is BKY1719, and the CWU letter is CWU1821.

Upon receipt of the receipts and payments account EAS will close the case financially on their system so that no further quarterly banking charges are applied. The new Regulations have the advantage of meaning that you do not need to calculate whether any quarterly banking fees fall due in the 8-week challenge period for creditors and retain funds to meet them. You do, however, need to be alive to any banking fees falling due around the time that you send the final account to creditors as they may be applied before you manage to email the final receipts and payments account to EAS. EAS will still require you to clear any debit balance arising from quarterly banking charges being applied prior to them receiving the final receipts and payments account. 

The other issue we sometimes see is that interest has been applied to the ISA account after the final report has been issued. As you will have stated in your notice to creditors that your administration of the estate is complete, you will not be able to deal with this additional interest. In order to prevent this happening, please remember to send an email to the EAS to ask that the ISA is taken off interest bearing status as an early step in your closing procedures and prior to completing your final receipts and payments account and final report. For those of you using our document packs the BKY letter to EAS is BKY1700 and the CWU letter to EAS is CWU1800.

Finally, don’t forget that under section 298(8A), once the 8 week notice period given to creditors and the debtor in respect of the final account has elapsed, a notice of final account has to be sent to the Court or Office of the Official Adjudicator (the OR’s office with responsibility for the case acting on their behalf), depending upon who made the Bankruptcy Order in BKYs. A copy of that notice also has to be sent to the Secretary of State (EAS acting on their behalf) and the OR who had responsibility of the case. In CWUs, rule 7.71(3) requires the liquidator to send to EAS and the OR a copy of the notice of final account sent to the Court and Registrar of Companies under section 146(4). That copy notice is again only sent by email, to the same email address used for the receipts and payments account. For those using our document packs the letter to accompany the notice is BKY1714 in cases where the Court made the Bankruptcy Order, and BKY1722 in cases where the Office of the Official Adjudicator made the Order. In CWUs it is CWU1814.

Can you be a CVL liquidator when you were the liquidator of the company’s MVL?

We understand that the ICAEW have recently taken a more robust view about the circumstances in which the liquidator of an MVL can take the appointment as liquidator of a subsequent CVL. Initially it seemed that their view was that the flipped appointment could only be taken if the MVL liquidator was able to conclude that the company will eventually be able to pay its debts in full, together with interest. Allison Broad has however helpfully clarified this point in her blog of 16 May 2019 which can be found here.

The difficulty all boils down to ICAEW’s interpretation of paragraph 85 of the Insolvency Code of ethics (the code) (ICAEW inserts the code in its regulations so that the paragraphs all start 400.x, such as 400.85 here, but we will use the original code paragraphs throughout this article) and, in particular, their interpretation of “a Significant Professional Relationship”(SPR). The code states that when an MVL liquidator wants to be liquidator of a successor CVL;

“Where there has been a Significant Professional Relationship, an Insolvency Practitioner may continue or accept an appointment (subject to creditors’ approval) only if he concludes that the company will eventually be able to pay its debts in full, together with interest.

However, the Insolvency Practitioner should consider whether there are any other circumstances that give rise to an unacceptable threat to compliance with the fundamental principles.”

Historically, SPR was interpreted as relating to the office holder’s relationship with the MVL stakeholders before the MVL appointment. So, if a practice had previously worked for the company doing, say, annual accounts or audit, the MVL office holder would not be able to take any subsequent CVL. However, if the MVL was the first contact with the practice, there would normally be no such difficulty and the MVL liquidator could normally stay in office for the CVL. We say, “normally”, because there may be other ethical threats that could prevent the successor appointment.

We all know that prior to accepting an appointment an IP must identify and consider any threats to the fundamental principles. The code identifies the fact that professional and personal relationships can lead to threats to the fundamental principle of objectivity and identifies at paragraphs 40 to 42 the types of relationship which the IP may encounter. Paragraph 44 provides details of the issues to consider when evaluating those relationships and whether or not the relationship can be considered significant to the conduct of the insolvency appointment.

There is, however, a carve out for MVLs and this is set out in Section H of the Code which applies its frameworks to specific situations. Part 1 deals with situations which do not relate to a previous or existing insolvency appointment and, citing the example of audit related work, states that: where the practice or an individual within the practice has carried out audit work for the company within the previous 3 years, a significant professional relationship will arise and the IP should therefore conclude that it is not appropriate to take the appointment. It then goes onto say that the restriction does not apply in MVLs provided that the insolvency practitioner can “satisfy himself that the directors’ declaration of solvency is likely to be substantiated by events”.

As stated above the profession has historically interpreted the reference in paragraph 85 to SPRs to be to only those which arose prior to the initial MVL appointment. The ICAEW is now of the opinion that simply the appointment as MVL liquidator may create a SPR which makes it much more difficult to accept the appointment in the CVL.

We are not convinced that ICAEW’s interpretation is correct. If it is, then the supervisor of an IVA could never become a trustee in bankruptcy, nor could an administrator become a liquidator. Furthermore, with the exception of an administrative or other receiver who has not been appointed by the court, the code specifically permits it (see paragraphs 83 and 84 of the code) on the proviso that the IP has considered “whether there are any circumstances that give rise to an unacceptable threat to compliance with the fundamental principles”.

Allison has already pointed out that the legislation clearly envisages the MVL liquidator becoming the CVL liquidator. In her blog, Allison makes a very valid point that much of the difficulty comes down to the documentation of the ethical considerations which have been undertaken prior to the appointment being flipped and states that many of the ethical reviews she has seen have concentrated solely on whether or not the company was previously an audit client. She states that whilst the legislation does allow the MVL liquidator to become the CVL liquidator it does not negate the necessity to consider the ethical issues. We agree with that and support her view that a full review should be carried out of the IP’s actions as MVL liquidator, and earlier when accepting the MVL appointment, to see if there was anything in the initial advice around the Declaration of Solvency, or subsequently in the administration of the MVL, that might preclude the MVL liquidator continuing in office in the CVL.

In conclusion then, we do not consider that an insolvency appointment in itself creates a significant professional relationship, as it will be governed by the act and the rules. In particular we do not believe that an MVL appointment creates a significant professional relationship so that taking an appointment as the liquidator of a subsequent CVL is automatically barred unless all creditors are paid in full.

A flipped appointment does however give rise to ethical threats both in the view of the IP’s pre-appointment advice to the directors (or the debtor in a personal insolvency appointment) and, in respect of matters that have transpired during the appointment. IPs should consider and document their consideration of any ethical risks to the fundamental principles, irrespective of the appointment type and whether or not the creditors will be paid in full. Where any threats are identified and the IP considers that they can still accept the appointment, then the IP’s should provide a full explanation as to why they are considered to be at an acceptable level and why the appointment can be taken. All threats should of course be disclosed to the creditors prior to the acceptance of the flipped appointment.

We note that Allison says that the ICAEW licensing committee is “taking an interest” in the issue. We hope that the licensing committee will take a pragmatic approach and allow past cases to be treated under the interpretation that applied when the flip decision was made, so that only new flips after, say, 1 June 2019 are expected to have been reviewed in that way. Existing cases could then be reviewed at the next annual review, if there is one, and creditors’ approval to the IP continuing as CVL liquidator can be sought if necessary.