This
is a follow up to our original Blog post regarding FAQ 10, which you can read
by clicking here.
R3 worked quickly and got the RPBs together to discuss the original response to FAQ 10 and they then raised the issue with the Insolvency Service. A revised answer to FAQ10 was then issued on 9 September.
As a reminder that now 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.
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. Where the lender has a right of set-off, it may exercise that in respect of the BBL in the same way as it would for any other monies owed.
NOTE - Joint Statement from the ICAEW, IPA, ICAS and CAI "The RPBs have noted the revised response to the FAQ and expect IPs to comply with the insolvency Code of Ethics. IPs should continue to use their judgement as they would do in any other situation to consider threats to the fundamental principles based on the specific circumstances encountered and where threats are at an unacceptable level should consider whether any safeguards can be applied to reduce threats to an acceptable level. IPs should consider seeking independent advice where appropriate and ensure that appropriate documentation of their decisions and of any advice given is maintained in accordance with the Code of Ethics requirements."
So does that bring the matter to an end enabling IPs to forget about it? Can IPs carry on as before, asking the directors to remit to them the company’s bank balance where it is in credit and, potentially, drawing their pre-appointment fees from such monies? The short answer is probably yes. The longer answer though is that you will have an additional hoop to jump through before you can ask the directors to remit the monies to you, and certainly before you can them draw them as fees. It is also likely that you will be questioned about taking such an approach on a monitoring visit, or should a bank complain.
The answer to the FAQ makes it clear that where there are BBILs or CBILS, a bank has the same right of set off as it would if there were other borrowings. However, the difficulty comes with the note from the RPBs, which reminds IPs of the Code of Ethics and puts the onus on the IP to justify their decision to advise the directors to remit any bank balance to them ahead of placing the company into CVL or Administration. As a result, the IP is going to have to prepare a contemporaneous file note to record the reasons for giving such advice to the directors. When preparing the file note IPs will have to bear in mind that it will be reviewed should that case be selected on a monitoring visit, or if a complaint is made by a bank.
That file note should focus on the following points that we made in our original Blog Article as being a justification for such an approach, together with a couple of additional ones:
· The cash at bank is an asset of the company that it is free to do with as it sees fit. Indeed we are sure that there would be no objection if the company used the funds to pay the deposit and petition costs to allow the company to be wound up, just as the Insolvency Service does not have a problem with individuals incurring further debt to pay the statutory fees to present their own bankruptcy petition.
· The pari passu principle – all creditors should be treated equally. Leaving the funds in the company’s bank account will mean that automatic statutory set-off would apply once the company is placed into liquidation or Administration, such that the bank will be put in a better position than it would have been otherwise. It is arguable that by not advising the directors to remit the funds to them, the IP would have facilitated a preference taking place.
· Priority of costs – formal insolvency procedures cost money. Under the insolvency legislation those costs are met by the creditors from assets realised, not the company, or indeed the IP funding the procedure personally, although that might often seem to be the case. The statutory order of priority makes it clear that the costs of the liquidation or Administration have to be paid before funds can be distributed to the creditors.
· One additional point that ties this all together is the need for the IP, as a professional advisor, to take steps to protect and preserve the assets of the company.
· Another additional point is the need to consider any case specific issues that might apply in the case in question. For instance, has the company’s bank account already been frozen, or its operation been restricted by the bank?
The pari passu principle and the statutory priority of costs are important cornerstones of the UK’s insolvency system and should be inviolable. As a result, despite the RPBs reference to consideration of the Code of Ethics, that consideration has to be put into context, and that context is the wider insolvency regime.
We think that it is clear that the cases that the RPBs are particularly concerned about are those where the funds held in the company’s bank account are solely used to pay the costs of the liquidation or Administration. In those situations, they see the IP as having a self-interest threat in instructing the directors to remit the funds to them. The IP will have to apply the 3rd party test, i.e. what “a reasonable and informed 3rd party who weighs all the relevant facts and circumstances that the IP knows, or could reasonably, be expected to know, would be likely to conclude”. After applying that test the conclusion could possibly be that in giving such advice the IP is NOT complying with the fundamental principles. There is a clear self-interest threat in such cases. However, the alternatives to not remitting the funds to the IP and/or the directors not using the funds to pay the costs of the insolvency procedure, are either that the directors have to pay the costs personally, or the company is denied access to an insolvency procedure, something that is not in the interests of the creditors as a whole. Consequently, an IP should be able to conclude in their file note in the vast majority of cases that it is appropriate to advise the directors to remit the funds to them and/or use them to pay their fees pre-appointment. The IP will also have to identify the threat and evaluate the threat when completing their ethics checklist.
Finally, another area that is of concern to the RPBs is where the company’s borrowings are secured by a floating charge. In our original Blog Article we suggested that where a company had given floating charge security in respect of its borrowings an IP should not advise the directors to remit the bank balance to them. Having thought about it, we consider that the situation is less clear cut than where the company has not given any security. As a result, it is certainly harder for an IP to justify advising the directors to remit the bank balance to them, but there is no prohibition from doing so, as long as the approach can be justified in the case in question. That is the sort of situation where, as the RPB’s note to FAQ10 indicates, an IP is going to need advice.
