Words used by The Calling and The Lightning Seeds amongst others, “Nothing’s changed, but nothing stays/seems the same” is a quote that carries some resonance for us at the moment. In a time when many clients, friends and relatives are adjusting to home-working, we are in the same place that we have always been. We work largely from home offices and we have been unconsciously operating something similar to social distancing since we first started trading as Compliance On Call in July 2005. We have always specialised in compliance support for UK Insolvency Practitioners and the current crisis does not change that. We will, however, like so many around the country, have to take careful steps to heed current advice and ensure that everyone stays safe. It is too soon to say exactly how things will pan out, but we are developing the beginnings of a plan and we have had time to think about some of the challenges facing IPs, so we wanted to share those thoughts, both with existing clients by email and across the wider profession by email and through our Blog. As a result, you may get to see this more than once, but given its length, we suggest only keeping and reading one copy.
Later in this article, we will talk more about our own plans for living in the new, different world, whether it is largely the same as before, apocalyptic, or post-apocalyptic. We will start, however, by looking at the current business and compliance landscape for IPs, considering both technical and wider implications of the crisis. Obviously, we reserve the right to change our views at will as the outbreak develops and government and industry advice changes, but we have picked on a few areas that we think are worth considering now.
A client raised this point with one of the regulators as we were drafting this article, so we shuffled a few paragraphs around to deal with it first, because it is so fundamental to what we do. The best answer we can give, based on all of the information to hand at the moment is “No…Yes…well, maybe…”. We’ll try to explain. The underlying insolvency legislation and the Statements of Insolvency Practice (SIPs) remain unchanged at present and are not affected by the state of emergency that has been declared. As compliance specialists, therefore, our instinct is to tell you to abide by the rules and resist pressure from the crisis. It is also unlikely that, no matter how many times you ask them, any of the regulators or The Insolvency Service is going to give you some blanket license to ignore the rules. However, being practical, taking a strict compliance line is clearly daft in the current climate. This whole problem is so fast-moving, and the guidance is changing so often, that it is difficult to keep up with the basic requirements, let alone take time to draft new laws and SIPs to take account of the changing reality. There will need to be some sensible use of reasonable judgement by IPs, the regulators and the Courts, and we have set out some situations that we have already thought of below. Although that appears to be saying that the crisis can override the law, it would be wrong to just throw away the book and make up your own rules. And so we come to, “well, maybe…”. In some situations, with detailed file notes to support the decision and after taking all of the circumstances into account, it may be appropriate to suspend some requirements, or work around them in a way that was not necessarily intended when the underlying legislation and guidance was written.
The most obvious problem to us, in all of the legislation, is that in several situations you are required to convene a physical meeting. We won’t try to set out every example in this article, no matter how much time you may have at home to read it, so we will focus on the appointment of a liquidator in a CVL and leave you to think laterally and extrapolate relevant elements for other situations where a physical meeting might be requisitioned. At present, you can either have your appointment confirmed by creditors at a virtual meeting, or by deemed consent and we have moaned in the past about predatory IPs that requisition a physical meeting, or object to a deemed consent decision, which has the same effect, just to buy time while they scramble round the creditors for enough votes to pinch the job. It may turn out that such practices will be too busy to do that for a while anyway, but what if they do? The clear advice at the moment is to avoid physical meetings, exercise discipline in social distancing and generally try to do anything that helps avoid putting people at risk. It would therefore be irresponsible for creditors to seek a physical meeting, but the law clearly requires you to call for one if it is requisitioned.
Our first suggestion, therefore, would be to try and reduce the likelihood of a physical meeting being requisitioned. Since the only alternative to a deemed consent decision is a physical meeting and since there are two ways for such a decision to be required (objection and requisition), we think that you should consider taking all such decisions by virtual meeting during the crisis. Virtual meetings are more flexible and only have to become physical if requisitioned under the 10, 10, 10 rule.
Our second suggestion is about how to deal with a request for a physical meeting. Hopefully, in the current climate, concerned creditors, ambulance chasers, and predatory IPs will refrain from convening physical meetings, but if you receive a request from the requisite number of creditors you would normally be required, under the rules, to convene the meeting within 3 business days of reaching the threshold level of requests, to be held within 14 days of doing so. While we cannot tell you to ignore the rules entirely, and we include some ideas below for how a non-physical physical meeting could work, we do think that the current crisis gives you a brief moment to try and avoid having to convene such a meeting. Whereas normally, in the world that existed a week ago, you would simply convene the meeting, we think that the current situation allows a little creativity. We suggest that you get in contact with the requisitioning creditor/creditors, ideally by email so that you have written evidence of your contact, thereby avoiding having to keep additional records and file notes. Explain to the creditor that in the light of the government guidance, physical meetings are not appropriate and invite them to withdraw their requisition, instead changing it to a request to adjourn the virtual meeting. Try to find out what their objection was to the original meeting and see if there is a solution that would allow it to go ahead, with or without an adjournment. Although that may not strictly comply with the requirements, we think that a well-evidenced and reasonable decision to be flexible would be unlikely to face regulatory criticism and should be acceptable if challenged subsequently in Court.
We usually find that, apart from where someone returns an objection in error, physical meetings are requisitioned for one of two reasons. Some are requisitioned to give an interested creditor or IP time to ring around the other creditors and generate support for an alternative appointment. Others are requisitioned because the creditor wants answers and believes that they will be more likely to get them if they can see the director and IP in person. The above suggestion to offer an adjournment may well be enough for the vote-hunters to try and grab the appointment and, although it may be commercially awkward, it would be best to give them the time to try in the current climate. For those seeking information, however, it may not be enough to simply adjourn a virtual meeting. They may want answers and you may find that asking them to put the queries in writing and ensuring that they get reasonably comprehensive responses without delay may help address their concerns. You may have to take more time explaining to them, and the director, why it is necessary, but it may be enough to help you avoid a physical meeting.
Our third suggestion deals with situations where either you decided to ignore our first suggestion and sought a deemed consent decision, which cannot be adjourned and leaves you no alternative but a physical meeting, or where you tried to be reasonable and ask the creditor to remove their objection or requisition but the creditor will not budge. If you have to hold a physical meeting, we think that you can comply with the technical requirements but make adjustments in the interests of public health and the current government guidance. To qualify as a physical meeting, there must be a venue, time and date where attendees can be physically present together. With suitable precautions around hand-washing, distancing, etc. it might be possible for a small meeting to be held at your offices, but you should make it clear to all creditors that although you have to comply with the rules and hold a physical meeting, it would be much safer from a public health aspect if everyone attended remotely. Effectively, you will be turning the physical meeting back into a virtual meeting for everyone except the requisitioning creditor, the IP, and the director. In some situations, the IP and the director may not even be there. What we suggest is that in such situations, you should contact the requisitioning creditor, the director, and any major creditors, and try to agree a way forward. For example, you could have the meeting at your offices if you can manage the health and distancing requirements, but if the director is self-isolating, you could conduct it in their physical absence. Alternatively, you could hold it at the creditor’s premises, if suitable, but again with the director attending remotely if appropriate. Clearly, that flies in the face of the section 99 requirement for the director to attend, but in the present circumstances, it is difficult to imagine a situation where it would be in the public interest to take action about it and we think that rule 12.64 would give the court room to validate an appointment made under such circumstances if challenged. Similarly, if you are not available, or cannot attend for safety reasons, we do not think that it would be in anyone’s interest to take legal or regulatory action if you took reasonable steps to complete your duties remotely.
We’ve all got our war stories about delays caused by HMRC, the RPS, Companies House, the Courts, etc. It is a pretty safe bet that for some time to come, things will get worse rather than better. That should not be taken as an excuse for you to avoid trying to do your work promptly, but we have to anticipate that some reasonable regulatory leeway will be granted. More extreme matters may require a Court ruling, with all the uncertainty that brings, but even in those cases, some detailed records about the reasons for any delay and the matters considered when addressing it will help to avoid regulatory action or an adverse legal ruling.
Let’s start with some common, but fairly easy examples. These are really just an extension of delays that we have seen in the past and the core principles of our advice remain largely unchanged. So, if you are liquidator of an MVL seeking HMRC closure clearance, our current advice that you should not close the liquidation without positive clearance remains. That may mean that you have to produce an annual report, but it is too risky to close the case without clearance. That situation may change if HMRC announce some sort of concession as a result of the crisis. It may even be possible to issue a skeleton report in situations where HMRC approval is the only outstanding matter, but it would probably be better to wait for some formal regulatory guidance before risking such an approach. In CVLs, on the other hand, if you are not already, you should include something in your notices giving HMRC a set period to object, failing which you will assume you have clearance. Unfortunately, the 21 days’ notice that has traditionally been used in most of the letters we see may not be considered reasonable in the current situation. We would therefore suggest that you offer HMRC a longer time (maybe 42 days?), but also set out why you think that is a reasonable time, in that it is twice as long as the previously accepted norm and you think that it allows them enough time to raise an objection if they have one. Using such an approach would hopefully reduce the number of cases where HMRC seeks to restore the company and pursue a matter but should also help to protect you from criticism in those few cases.
Another common example, but possibly a bit more tricky to resolve, is delay in getting matters heard at Court. The current situation will surely result in more cases being “heard” on paper or in virtual proceedings and while we don’t know any details yet, it is a pretty safe bet that there will be delays along the way. Thankfully, because of the Court’s discretion and past decisions, we can be fairly sure that orders will be made to rectify and mitigate any delay where possible. The main issue that most IPs will face is in planning for the few case where there appears to be no scope for discretion. The main examples relate to the expiry of voluntary arrangements (VAs) in the light of the decision in Strongmaster v Kaye and the discharge of Administrations (ADM) that have not been extended by the end of the first year. There was case law under the old insolvency rules which said that where an administrator had applied to Court for an extension, or where a notice had been sent to Companies House to convert an ADM to a CVL before the year end, but the hearing was not held, or the notice was not filed, until after the year end, the ADM was automatically extended to allow the extension or conversion to be effective. There has been no confirmation of that approach under the new rules, but it is not unreasonable to anticipate a similar outcome, especially given the extenuating circumstances at present. The situation in VAs is more tricky, as Courts will be required to follow Strongmaster unless it is replaced by a decision of a higher Court. We think that it is unlikely, especially in IVAs, that a case will arise where it is worth appealing it far enough to arrive at a binding replacement. Whatever you do will require an element of crystal ball gazing, but one would expect the court to be reasonably pragmatic given the exceptional circumstances. As compliance specialists, our advice would be to stay safe and seek any extensions long before the deadline starts to become an issue.
The third common delay we see is in filing documents at Companies House. Things had been improving recently, but that will clearly change for the foreseeable future. From your perspective the date of delivery of a document to Companies House will remain the same even if there are delays in filing documents. It will still be the date that Companies House receive the document in a format suitable for filing, but it is possible that virus-related staff shortages and changes to working patterns will result in more errors arising in documents that you send for filing and in delays at Companies House in spotting and returning any incorrect documents. In most cases, you will just have to annotate the reasons for the error, record the timeline for dealing with any returned documents to show that you did your best, and hope that the regulators make allowances for the unusual circumstances. The exception, as mentioned in the paragraph above, will be delays in filing notices about conversion from ADM to CVL, which may require a Court order to rectify them, if the court is prepared to follow past decisions under the old rules. All is not lost, even if the Court refuses to deem the ADM extended pending filing of the notice. Past decisions like Re G-Tech give the Court some room to create a fresh ADM that could then be converted to CVL, with any acts in the period since the first order expired confirmed as valid. The problem is likely to be that because decisions are delayed, more actions will have to be taken in the interim period, before you can obtain an order validating them.
That covers some of the delays seen with third parties, but what about delays that are your fault? There is a statutory regulatory objective to progress cases so that creditors get paid without delay and you have a duty under the ethical code to maintain professional standards, which would include doing work without unreasonable delay. Case progression has been a recurring theme in regulatory visits and presentations for many years, but we would expect the virus crisis to put case progression under pressure. As we said several hours ago, at the start of this article, we have been working remotely for some time and we are used to juggling some fairly complex logistics to meet our clients’ needs. However, for many of those reading this, extended periods of home-working will be a relatively new experience and there will be challenges in maintaining existing filing systems and case administration procedures. The most important single factor in avoiding criticism in such circumstances is to keep detailed file notes. You have to document the steps taken, any unavoidable delay, with reasons, and the action taken to mitigate any delay or change processes to adapt to the new reality and prevent recurrence. However, you have to be realistic. The regulators may forgive a little delay caused by having physical documents prepared at one member of staff’s house, with a signatory working somewhere else, but they will not allow you to stop paying dividends if you are short staffed or too busy taking enquiries from potential new clients.
There is a fair chance that debtors in IVAs and companies in CVAs may start to struggle with payments during these uncertain times. While many arrangements will have provisions for payment breaks, it is important that you check the applicable arrangement terms and comply with the agreed terms as far as possible. If an arrangement does not have scope for a payment break, or if it has been modified to require termination and failure after a set number of missed payments, you will need to be pro-active and get a variation proposed to allow some flexibility until the crisis is over.
Any such variation should, ideally, be proposed and administered in accordance with the terms agreed for each individual arrangement, but it is possible, especially in consumer debt IVAs approved under the IVA protocol, that creditors may consent to a mass variation. Any moves toward that may be led by the major voting creditors and their agents, or by the larger volume providers, but the principle should still apply to IPs that have even a few IVAs. Keep an eye out for further advice and messages from the lead voters, like TIX, IVA Watch, and even, possibly (but don’t hold your breath), HMRC. Part of the problem with even the mass IVA variation approach is that the cost of a variation will have to come out of the arrangement, and if distributions are being made monthly without any retained balance, many of the larger providers may take a cashflow hit at a very difficult time. Hopefully, the main voting agents and creditors will understand the problem and allow a fair variation fee for the work. We would also hope that any such variation could be sought using a skeleton report, rather than a full statute and SIP compliant document, so watch out for any indication from the regulators on that score.
If we had any say in the matter, which unfortunately we don’t, we would like to see a virus-related discretion clause added to all IVAs and CVAs as a mass variation, based on some simple terms. It would be great if the regulators would agree that no report was required, or that it could be cut down to just a statement of the current performance of the arrangement and the proposed variation. It would be equally useful if the main voting creditors would agree that the variation could be approved as long as any break was clearly connected to Covid-19 factors, any months missed were added to the end of the arrangement, and any variation fee is limited to, say £400 per case. To cap it all, if the Insolvency Service agreed that deemed consent could be used to approve the fee as long as it met the standard agreed, the whole process could be completed quickly and with the minimum of fuss. We accept that there would be some pretty major corners cut, in that the positive agreement of debtors and any minority creditors would not be required, the fee would be less than some want, but more than others think is fair, and deemed consent would be used to approve the fee, despite the legislation saying otherwise. However, in these times, appropriate measures should be taken to relieve the pressure on debtors in IVAs and CVAs and that would appear to be a pragmatic package of measures to achieve a flexible yet acceptable outcome, in the interests of all concerned.
Looking at the notices across social media, we are already seeing a wide range of approaches, with some interesting moral and ethical approaches being taken by some correspondents. While many people are taking a considered approach and recommending a period of reflection to consider the changing advice and possible options, others are being more brazenly opportunistic and selling their services by whipping up fear, or at least playing on the existing anxieties in various markets. While we don’t think that people can just wait and see what happens while their companies and jobs fail around them, we do think that the government’s stated intention to do “whatever it takes” to address the problems cause by the crisis means that you should avoid rash decisions. While the recent decision to put Laura Ashley into ADM may have been a long time in the planning, with Covid-19 related delays just acting as the final deciding factor, we would generally recommend that IPs take a cautious approach to new business in the current situation.
The first danger that we see is that an IP could easily take on too much work and find that they are then unable to recruit and retain enough quality staff to administer them. One of the most basic requirements under the ethical code is that an IP should not take on work if they do not have the resources to do it. That judgement has to be made at the time that the job is taken on, not six months into the appointment, when you expected to have been able to recruit new staff and find that you are floundering.
That is significant enough on its own, as a regulatory finding on ethical grounds could result in licence restriction or removal, but there is an even bigger risk over the horizon. To paraphrase an old saying, “act in haste, repent at leisure”. While it may be tempting to use traditional measures of solvency to recommend a formal solution when dealing with an enquiry at the moment, the pronouncements from the PM, Chancellor, senior bankers, and others suggest that a more measured approach might be safer. If the government is prepared to do “whatever it takes” it is possible that even the most pessimistic situation could have a sliver of hope. There is a real risk that if you recommend a formal solution without considering all of the possible options, including Boris Johnson as an unlikely and, frankly rather disturbing, fairy godmother, you might face a claim further down the line. If you allow a director to propose a CVL without challenging his reasoning for winding the company up, you may subsequently face a claim for negligence or even deliberate misconduct. On the other hand, if you consider all of the circumstances, including the possibility of some form of bail-out, the timing of any rescue, and the views of other stakeholders in the process, and a CVL is confirmed as the appropriate solution, then as long as that is all clearly documented and the director confirms their agreement, you may be reasonably safe. You may still be challenged at a later date, when the crisis is over and the director has conveniently forgotten how bad it was, possibly at the prompting of a claims company, but you will have evidence of the matters considered and the director’s informed view on file.
The risk is even greater in the volume IVA market, where the current uncertainty could make it very difficult to recommend a binding, long-term solution. While there will inevitably be clients who needed an IVA before the crisis and want to pursue that option, there will be others who are only now being tipped over the edge by the uncertainty and who may be better asking their creditors for an informal delay while the peak of the crisis passes. Again, the key to it all will be the quality of any advice and the evidence that surrounds it. If you have set out all of the options, including the possibility of some form of bail-out or economic turnaround and the client has clearly made an informed choice to go ahead regardless, you may be able to resist a subsequent challenge.
Unfortunately, there may be IPs or work introducers who are prepared to let their own commercial reasons override other considerations and either recklessly, or deliberately, overlook other factors and convert as many new leads as they can into formal appointments. We would expect that the Courts and the regulators would impose draconian penalties on anyone abusing their position of trust as a licensed IP and risking damage to the whole profession by such behaviour.
Everything that has gone before is based on what we know today, but we thought that we should try to get ahead of the game and look to the future, or the first few days of it at any rate. Before we look at cheerier news like a possible lockdown and the what impact three weeks at home with the family might have, let’s face the really grim possibility that you might need to rely on your alternate.
Everyone is required by their regulator to have an alternate, or continuity provider, that can step in if they are incapacitated for a long time, or worse. The IPA are checking with their members to make sure that their alternate records are up to date and the ICAEW has reminded their members to make sure that they have an alternate, so we wanted to remind you as well. If you already have an alternate, check that they are still appropriate and that they are happy to step in if necessary. If your business is bigger than it used to be, you should check that the alternate can handle the extra workload. We have seen firms that used to specialise in one area of insolvency that have broadened their caseload in response to changes in the market place and IPs at those firms should check that their alternates have the necessary qualifications and experience to handle the wider workload. Finally, at the risk of seeming really gloomy, you should consider whether your alternate is in a high-risk category. It might be appropriate to change alternates, or come to an agreement with a second alternate, in case the original IP is unable to step into the breach.
So, having dealt with incapacity and death, you may understand that our crystal ball was a bit dark when we tried to look at events for the next few weeks and possible developments. The current expectation from the Facebook rumour mill is that there will be an announcement by the weekend of a total lock-down taking force on Monday (23 March), with only food shopping and work-essential trips allowed. To be honest, we are not sure that is a whole lot different from the current position, as many people are taking sensible precautions already. However, there will be decision procedures, meetings, Court hearings, and other deadlines falling due during any period of lockdown, for which you will not have had time to plan. In those cases, no matter how hard you try, there will be statutory requirements that you cannot meet or notices that you cannot rectify. In many cases, the common-sense measures already suggested should deal with the main issues. Contact everyone that you can, ideally in writing, but if necessary by phone, supported by a detailed file note recording the participants, time, and date. Take whatever steps are possible to agree a solution that is appropriate in the circumstances and keep copious records and file notes to justify the approach if anyone is small-minded enough to challenge you after the dust has settled. Regulators are likely to be supportive of reasonable steps taken with clearly recorded justification, and we would not expect monitors to be too critical of arrangements made at a time of national emergency, when they are reviewed in subsequent regulatory visits, unless they are clearly inappropriate or unfair. There will inevitably be complaints from someone who got missed out, or feels disenfranchised, but we would hope that the regulators and courts would be robust in their support of a profession that is trying to do an impossible job with tools that are wholly inadequate.
If there is some form of total lockdown, we would advise all IPs to support it as fully as possible. It is in the national interest to beat the virus and give the country a chance to return to normal. In such circumstances, it might be better to plan an insolvency to happen after the lockdown, rather than to try and manipulate the terms of any lockdown to allow an earlier insolvency as “essential work”. These are uncertain times for everyone, but by supporting any action taken to combat the virus, we will be helping everyone to something like normality without further delay, and hopefully avoid even more draconian measures.
One thing that is already clear is that the current uncertainty is affecting different people in a variety of different ways. In the world beyond the insolvency profession, we are seeing panic buying at a local level and careless, confusing, or arguably racist, comments by senior statesmen at a national and international level. With advice changing daily and many people in businesses of all sizes facing weeks, and possibly months, of uncertainty, mental health is going to be an increasingly important issue. While we cannot ignore what is going on, we have to avoid aggravating those with existing anxiety or other mental health issues, and keep even those who currently appear to be resilient on an even keel. The longer that the uncertainty goes on for, the more likely that people will feel the strain, and we will find it difficult to make rational decisions if we start to lose our grip on what matters.
Some of us will, inevitably, end up falling ill, caring for loved ones, or even losing someone dear to us. With those extra pressures, it is important that we look out for each other. With that in mind, although we will be reaching out to our existing clients on a business basis and developing services that fit with their new arrangements, we will also be making ourselves more available for non-technical support. We will still only deal with technical queries for subscribing clients by email, but if anyone in the profession just needs to talk, we will try to be available. You can find our contact details on our website and in the footers of our emails, and if you cannot catch us straight away, please leave a message and we will try to get back to you. As you’ll have gathered, we don’t have a magic wand and we are as much in the dark as anyone else, but we’d be happy to talk shop, put the world to rights, and act as a sounding board for any ideas, if you feel that the pressure of working at home is getting the better of you.
To quote Sergeant Phil Esterhaus, of Hill Street Blues, “Let’s be careful out there!”
