Eventually, more than a year after BBLs and CBILs came into being, we have finally received some guidance on the treatment of any monies remaining in the company’s bank account when the company is to be placed into an insolvency procedure. R3, the association of Business Recovery Professionals, has today released a list of Frequently Asked Questions and responses compiled by British Business Bank, UK Finance, and the Insolvency Service. Unfortunately, that guidance is a hammer blow to unsecured creditors, particularly where companies have few, if any other assets. We have been pressing for such advice since last year, and we do not want to shoot R3 as they are merely the messenger in this case, but we think that one aspect of the advice is incorrect and is something that the Insolvency Service should have made clear much more quickly.
For anyone who has not read today’s notice, FAQ 10 says:
Scenario – Company A is insolvent and on the advice of an IP, the company should be placed into Creditors Voluntary Liquidation. There is cash at bank of c£10k to fund the costs of placing the company into liquidation. However, Bank B is still owed monies under a BBLS loan granted to the company. Bank B has a right to set-off in respect of the credit balance in the account.
Is it considered ethically wrong if the IP advises the director to transfer the credit balance to a designated client account in advance of the liquidation, which would defeat the bank’s ability to exercise set-off, to pay for the costs of the liquidation?
The answer to this question is not BBLS specific – if a borrower had an account with the Lender and it owed money to the lender – the same principles would apply to that as would apply to the BBLS. Furthermore, it would be considered to be ethically wrong for the IP to advise the director to transfer monies from a credit balance held with a bank to an alternative location to avoid the bank’s right to exercise set-off, even if this meant funds were then generally available in the liquidation.
The advice was issued in response to an earlier webinar on CBILs and it is contrary to the impression that was given at the webinar. It is also making one interpretation sound very clear-cut that is, in our opinion, not at all clear-cut. However, for the present, unless, or until, the advice changes, IPs should no longer instruct the directors to transfer funds to another bank account or to a clients’ account prior to liquidation. We also think that while the FAQs only provide an answer to one specific scenario, namely the transfer of funds to an IP’s clients’ account, an IP would still need to apply the principle it sets out to other scenarios.
As already mentioned, we do not think that the position is as clear-cut as the British Business Bank, UK Finance and The Insolvency Service suggest in situations where the bank do not hold any security. Where the bank holds security then we agree that it would not be appropriate to transfer the monies in the company’s bank account prior to appointment, or use them to pay any pre-appointment fees, since they are subject to the security held, but where a bank do not hold security then until the date of liquidation there is no enforceable right of set off unless the bank have actually demanded repayment from the company. The monies in the bank account are free assets for the company to use as it sees fit, and once the company is in liquidation the pari passu principle, which is fundamental to Insolvency in the UK, applies, as does the statutory order of priority. In fact, advising the directors to leave the monies in the bank account would lead to a breach of the pari passu principle and to the bank being preferred over the other creditors, since they would be paid ahead of their normal position in the statutory order of priority in an orderly winding up of the company.
The UK insolvency regime always ranks highly in the World Bank’s comparisons, and the pari passu principle is something that underpins that regime, but what we have here is a ditching of that principle for political expediency. We can only assume that The Insolvency Service have allowed the views of the British Business Bank and UK Finance to hold sway without fully thinking through the significant policy shift that it brings in and the impact on the insolvency regime and creditors as a whole, particularly when combined with the impact of crown preference. It is difficult to see how ordinary unsecured creditors will get anything for the foreseeable future in even more cases, and IPs will have to charge increased pre-appointment fees up-front, although they will need to be careful of the source of the payment of those fees. There is a cost of having a highly regulated insolvency regime and under the insolvency legislation that cost is paid by the creditors, given that the payment of those costs rank ahead of the creditors in the order of priority. The alternative to an orderly winding up via a CVL using the balance of the BBL monies will be the existence of yet more zombie companies with the directors gradually dissipating the BBL monies followed by either strike off, dissolution by Companies House as returns are not filed, or an increase in the number of winding up orders being made, always assuming that a creditor can be bothered to pay the necessary petition costs.
This response to the FAQ must, in our opinion be wrong, and we would encourage The Insolvency Service to reconsider the position and for R3 and the regulators to also push for a rethink. But for now, IPs will have to play safe, because an ethical breach of that magnitude could threaten their licence.
While we are convinced that the advice contravenes the pari passu principle and prefers the banks, to the detriment of the other unsecured creditors, we work with IPs and we have to consider the impact on their fees and their regulatory framework. As mentioned above, one impact of this might be for IPs to want to seek payment of more of their fees up-front, but the FAQ answer might make that difficult. For example, if they know that there are funds representing the balance of a BBL still in the company’s bank account, and the director, of their own volition, pays those monies to the IP to meet their pre-appointment fees, there is now some doubt over whether the IP could accept them, because the IP would know that the source of the funds is the company’s bank account and that those funds would otherwise be available for the bank to apply set-off. Similarly, if the IP knows that there are funds representing the balance of a BBL still in the company’s bank account, and the director then draws monies out into their personal bank account and uses them to meet their pre-appointment fees, the IP would have to be cautious about accepting them. If the ethical argument put forward in the FAQs were correct, the IP would know, or can reasonably be expected to know, that ultimately the source of the funds is the company’s bank account and that those funds would otherwise be available for the bank to apply set-off. By accepting the monies in these examples, there is a risk of a self-interest threat that could prevent the IP from being able to accept an appointment or act as liquidator.
There is a possibility that if a regulator receives a complaint about funds that were liable to set-off being transferred away from the bank contrary to the FAQs, but prior to this advice being promulgated, they could pursue the matter. If they do, then the counter-arguments about leaving the funds in situ being a preference and running counter to the pari passu principle will need to be deployed in the IP’s defence. It would also be worth highlighting the lack of any specific guidance being provided previously, either by the RPBs or The Insolvency Service, despite it being clear to them that companies were transferring monies to the IPs’ clients’ accounts prior to liquidation.
Finally,
to make it absolutely clear, our view is that the approach taken in FAQ 10 is
wrong and should be reversed. The pari passu principle must be preserved and
the UK’s insolvency regime cannot be undermined by the influence of commercial
lenders, to the detriment of unsecured creditors and, ultimately, the wider
economy.
