Possible ramifications of the Paymex decision

Having originally intended to expand on our article of 30 June before now, I have taken longer than I had hoped.  Part of the reason is that each time we think of this we just see more problems and part of it was to give the regulators and HMRC time to respond.  We have seen the recent agreed regulatory announcement and we had hoped that HMRC would comment in detail rather than just issuing a short business briefing, but we are answering so many queries about this that we have to put something on the Blog to ease the pressure.

I’ve set this out in a “Frequently Asked Questions” format, partly because they really are frequently asked questions and partly because it was the only way I could stop my head exploding with all the possible options!  We’ve used a bit of poetic licence to include a couple of questions that we have not been asked, but we either think we should have been asked or we wanted to answer anyway.  The bottom line though is that at present there are many more questions than definitive answers!

Are HMRC going to appeal?  Guidance from HMRC here   says “HMRC will not be appealing this decision and subject to the normal rules on input tax adjustment, capping and unjust enrichment, HMRC will pay claims for overpaid tax charged on the services of Insolvency Practitioners that fall within the findings of this Tribunal decision.”  We had heard that HMRC would issue guidance by mid-August and we hoped that the above is not all that they would have to say on the subject, but the latest intelligence that we have received suggests that this business briefing will be the extent of their information to IPs on the subject.  We understand  R3 are pushing them for better and more detailed guidance.

Do we have to seek clearance from HMRC before we take action?  Strictly there is no requirement, in that the Tribunal has made its decision and HMRC have not appealed, but given the complexity and current uncertainty we would recommend asking everyone you can, including HMRC.  If nothing else the sheer weight of queries may force HMRC , the Insolvency Service and the regulators to develop some form of protocol for you to follow (see below).

What happens to disbursements?  We are not VAT specialists, so check to be sure, but we understand that if IVAs are exempt then related disbursement recharges are too.

Does the decision apply to CVAs?  From what we can understand of the judgement it was only initially applicable to consumer debt IVAs, but it appears that it will apply to trading IVAs.  The Tribunal specifically stated that it was not commenting on whether other insolvency processes might be subject to the same interpretation.  I have now read the judgement more than once and the more I read it the more I am convinced that a case could be made out along similar lines for CVAs and possibly even Administrations to be exempt as well.  However, until someone takes it to Tribunal or HMRC say something in their guidance, we would not recommend that anybody assume that they are exempt.

What should we do on open cases going forward?  We don’t think anybody has been brave enough to say it directly yet, but we think that you should stop charging VAT and reclaim any that you have paid to HMRC to date.  We think that you should inform creditors what you are doing, probably in the next annual report.  We think it would be prudent to retain any recovered funds and a provision for ongoing VAT until it is really clear that IVAs are exempt and any further advice from HMRC or the regulators has been published.  Again we think you should inform creditors that you are doing so. 

What should we do on closed cases?  This is a lot more tricky.  There is no simple statutory route to reopen IVAs.  It could be argued that you could reclaim the funds and deal with them on a simple trust basis, but there are other considerations (see the materiality and ethical questions below).  The court may feel that it has a general discretion to reopen cases as an equitable solution, but the Insolvency Service and Regulators might feel that there is an argument to deal with the issue as simple trustees to avoid clogging up the courts with applications.  This is an area on which further guidance is required from HMRC, the Insolvency Service and Regulators, but in the meantime if you want to go down the trust route to reclaim monies then you should protect yourself by obtaining some legal advice.

What should happen to the funds?  HMRC have made it clear that they will consider “unjust enrichment” before paying out any monies.  In simple terms this would prevent you from claiming all of the money for your own benefit and in any event (see ethics below) we think that the regulators will consider that your duty of care extends to recovering the money for the individual estates and dealing within the terms of each arrangement.  It therefore appears that it is necessary for each estate to receive the refunds that relate to it and those funds should then be dealt with in accordance with the arrangement terms.  Please note, however, that we understand that Paymex obtained legal advice, that we have not seen, that may indicate that the funds are not due to the estates, so you should consider taking your own legal advice.

Is there an implied right to draw underpaid/undercharged/written off fees?  This will depend on the terms of each arrangement.  If outstanding fees stand in priority to other claims on the funds, then you may be able to draw them, but you should consider the impact of this on the “unjust enrichment” policy operated by HMRC.

Can I have the benefit of the VAT paid on nominee’s fees in open cases?  Once the funds are returned to the estate you should look at the terms of the proposals and any modifications.  We cannot comment on all of the available permutations, but the following discussion may illustrate the difficulty that you face even with the most straightforward modification.  The most common modification we have seen is by TIX which amends the nominee’s fees to 5 x contributions, including VAT.  In theory then, if the VAT comes back, you could claim it in respect of the nominee’s fees.  However, there is an argument that when TIX proposed that modification, they anticipated VAT being deducted and would have approved less if they had known.  We really hope that in view of the benefit the creditors will get from the refund relating to supervisor’s fees, and the fact that each practice will have to suffer the implications of being partially exempt (see below), they will not press this point and will allow IPs to keep the refunds, but we would recommend that you check with the creditor who proposed the modification before taking it.  Such an agreement should be obtained from the creditor globally in respect of each standard modification rather than on a case by case basis.

Can I have the benefit of the VAT paid on supervisor’s fees in open cases?  Again we can only deal with the most common modification, which is that the supervisor be paid 15% of further realisations after deducting the nominee’s fees, excluding VAT.  This would result in the VAT being available to creditors.  However, we would argue that whilst all the benefit of future VAT exempt fees should go to creditors, the creditors should be asked to approve an appropriate fee for dealing with the VAT reclaim and distribution to them similar to that which we suggest for closed cases below.  This is not an attempt to gain more fees for IPs, but a simple recognition of the economic reality of reclaiming the refunds and processing additional distributions.  Matters will, of course, be further complicated for those who have accepted conflicting modifications or are subject to overall fee caps that take a different approach to VAT in their wording.  The only firm advice that we can give at this stage is that you should look carefully at the approved terms of each arrangement and treat any proposed departure as a variation requiring formal approval.

Can I have the benefit of the VAT reclaim in closed cases?  This answer will, in part, depend on whether the case is being reopened or if it is being dealt with on a simple trust basis.  In the former, the advice on open cases above would apply.  If the cases are not reopened and the monies are dealt with in trust, we are sure that there is a legal precedent available that establishes your right to be paid for dealing with the trust funds, but that should be checked with a lawyer and even then you will have to be very careful.  In our risk-averse world we would suggest obtaining approval from the former creditors to a specific fee on a case by case basis.  This could, for example, be a lump sum per case or it could be a set percentage of the recovered funds.

If the case failed and the debtor was subsequently made bankrupt then will the money be a bankruptcy asset and payable to the Trustee? What if the debtor has been discharged from bankruptcy?  This is so clearly one for the lawyers that we are not going to answer this with anything definitive, and the way to illustrate this is to challenge even the idea that the money will automatically be a bankruptcy asset.  A lawyer would need to consider whether the money is a right to monies or newly crystallised asset due to the bankruptcy estate, in which case it would vest in the trustee, or whether it is money that is caught by any trust clause in the arrangement, in which case it would have to be dealt with under the trust clause and might be similar to the closed cases mentioned above.  If it is decided that such monies are not caught by any trust clause, the lawyer would then need to decide whether it arises from a right that vested in the trustee and can therefore be claimed post-discharge or just an asset that arises at some date after the Tribunal decision and therefore is due to the trustee only if the debtor is not yet discharged.  If it is a bankruptcy asset because it derives from a right of action that vested on appointment or because the bankrupt is not yet discharged, it would be the trustee’s duty to consider recovering it and he is likely to be able to use it just like any other bankruptcy estate asset, in settlement of his costs, fees and charges, so it could fall into the “unjust enrichment” exemption.  I hope that shows just how complicated this could all get!

What ethical considerations are there?  I’d like to take the easy way out and just say “lots”, but that is not very helpful, so here are a couple that we can see.  First, there is the overall question of whether an IP is now liable for not treating arrangements as VAT exempt from the outset. Could it be argued that if Paymex are right, every IP should have been fighting this for years?  I think that it is a bit extreme, to say the least, but I think that your ethical consideration should address this issue, even if it is subsequently evaluated as being bunkum.  Secondly, is there now an ethical duty on every IP to recover the VAT and distribute it where appropriate, even on closed cases, notwithstanding the fact that it may cost the IP’s firm more then he can recover in fees for doing so and in many cases more than the total VAT refund?  Because these are ethical questions, we cannot come up with firm answers and we really hope that HMRC, the Insolvency Service and the regulators will be able to devise some appropriate guidance. 

Is materiality a factor?  If the supply is exempt, then it would appear that materiality is not a consideration that you should take into account.  All incorrectly paid VAT should be reclaimed and all estates should be revisited that fall within the 4 year maximum reclaim period, even if they are closed.  As above though, this may be more difficult to achieve in practice. This is the sort of area that we think could be addressed by a protocol agreed between HMRC, The Insolvency Service, the regulators and other stakeholders. 

What are the implications for the IP’s past VAT returns?  If IVAs are exempt, then each practice that provides them is now at least partly exempt.  This means that you have to follow HMRC’s rules in respect of partially exempt supply and your past VAT Returns will need to be adjusted for VAT that you have reclaimed on exempt supplies.  In other words, while you may be required to reclaim VAT for the benefit of the IVA estates and may be due some of it in agreed fees, your whole firm may suffer a claim to repay HMRC in respect of expenses where you claimed the VAT back in full at a time when you were partially exempt (e.g. general office overheads etc.).  We are not VAT experts, but we understand that there are HMRC rules which set out a de minimis amount of VAT below which threshold you do not need to apply the partial exemption rules.  That is something that you would need to check with a VAT specialist or HMRC.  We don’t know how the numbers pan out in the real world, but this suggests to us that if you are above the de minimis level then because you may have to share the refunds you receive with the creditors, you may actually end up paying more to HMRC in respect of your revised VAT status than you recover, even if the creditors agree to you having a fee for dealing with the refunds.  We understand that there is a statutory duty to get your VAT returns right, which means resubmitting them if you find that they are incorrect, i.e. going back the 4 years maximum that you can submit a VAT reclaim for.  Again, this is something that you should either check with  HMRC about or take advice from a VAT specialist.

Can I employ agents to do the work for me and pay them out of the estate as a category 1 expense?  The answer to this depends on whether the supervisor’s powers as set out in the proposal permit you to employ agents to assist you.  If they do then you would have authority to employ agents, but you will need to be careful about the costs involved as the large creditor agents will expect to see some return to creditors from the VAT reclaims made. In addition, if it needs saying, the agents could only be employed to deal with estate monies and they could not charge for dealing with the counterclaim by HMRC resulting from your change in exemption status.   We think that a more practical solution would be for the industry to agree a protocol that allows a simplified procedure to operate that would streamline the process and save you having to use agents in the first place.

Do we wish the case had never been brought?  Oh Yes!!!

You mentioned a protocol; what did you mean?  We think that this is such a mess that HMRC, The Insolvency Service, the regulators and representatives of creditors, specialist IVA providers and smaller non-specialist IPs should come up with an agreed protocol rather than having so many uncertainties that mean that every IP will need to be taking their own advice from lawyers and VAT specialists.  We’d be happy to draft something up, but the last time we did that it turned into the Protocol IVA by the time everybody had got at it and that was never what we intended!  The sort of things it could cover are: some form of cut-off point, possibly based on the amount of any refunds, whether a case is open or closed and even how many creditors are involved (recovering a few pounds for 10 creditors may not be worth it, but recovering the same amount for just TIX, KPMG and Max Recovery might be worth it); some agreement on nominee’s fees; some agreement on supervisors’ fees; some agreement on an appropriate flat fee or percentage in closed cases; whether closed cases are to be reopened or dealt with on trust; guidance on how everything is to be disclosed to creditors; and an undertaking from HMRC that if the Protocol is followed they will not seek to recover monies that they repay or which IPs do not deduct from now on in open or new cases.  This would not be legally binding and anyone who did not adopt the protocol would be free to take their own advice and act accordingly, but there have been examples of such agreements in the past, such as when the Service and HMRC set up separate rotas to clear the PRU backlog.  We think that it should even be possible to agree a no claim/no reclaim position with HMRC is respect of all closed cases; so that as long as an IP did not reclaim VAT on closed cases (which is, as above fraught with legal issues and may cost more than it could realise) HMRC would agree to waive any reclaim in respect of partially exempt supply prior to the Paymex decision date, effectively increasing the current de minimis threshold.  We could say more, but we would rather test the water with you via feedback to our usual email address and with major voters and the Service before getting too involved.

Finally, a massive disclaimer.  We are as confused as the rest of you and this is going to take time to settle down.  In a perfect world we would be paid a small fortune by HMRC et al. to design a protocol and we’d have it out before the August holidays are over.   In reality, nobody is likely to pay us enough to stick our necks out again and any such proposals would require endless consultation and the whole profession seems headed for a long period of uncertainty.  Accordingly, please treat these questions and answers as our reasoned contribution to the debate and not as a statement of law or prescribed action.  They are just suggestions.  You should not rely on them.  You should seek your own advice and even then, until this is all cleared up by the powers that be, we suggest that you ask every time and seek creditor approval for anything you do.  Maybe the cost of replying to all of the queries will force a protocol-type solution in the end.

Proposed revision to SIPs 3 and 9

The RPBs have recently announced that they plan to change a couple of specific points in SIPs 3 and 9 when the revised SIPs are issued, but that in the meantime IPs should comply with the planned changes rather than the current wording of the SIPs. We welcome this as a practical and innovative approach and encourage them to use it more widely. This approach means that uncontroversial changes to the SIPs can be introduced much more quickly rather than having to wait for a complete revision of a SIP, which can take many months to achieve. If only legislative problems could be addressed in such a pragmatic manner.

SIP 3

The RPBs have recognised that the Insolvency Service publication, “In debt? Dealing with your creditors” is a valid alternative to the R3 guide “Is an IVA right for me?” As a result, you can now provide either of the leaflets to the debtor in order to meet your obligations under SIP 3, even though the current wording of SIP 3 requires you to just provide the R3 guide to the debtor.

On a practical note, the OFT prefers the Insolvency Service document and it also covers all options whereas the R3 guide only compares bankruptcy and IVA. Despite the unfortunate inclusion of address details for CCCS, who operate an IVA provider in competition with many IPs, in the back of the booklet, we have been recommending the use of this booklet for some time. By issuing it before you interview the debtor and then using the options disclosed in it to provide some structure to your interview, we find that IPs are in a much better position to provide evidence that they have made the debtor aware of all the options available.

SIP 9

The RPBs have now taken a pragmatic approach to category 2 disbursements in CVLs that are converted from Administrations. The 2010 rules provide that where an Administration commenced on or after 6 April 2010 is converted to CVL, the fee approval in the Administration is valid in the CVL without the liquidator needing to obtain fresh approval from any committee, if there is one, or the creditors. On a strict interpretation of SIP 9 you would still need specific approval of category 2 disbursements to enable you to draw them in the CVL. The RPBs agree that this is an unnecessary regulatory burden given the recent legislative changes, and so have indicated that the statutory continuation of your fee approval also applies to your category 2 disbursement approval.

Companies House – filing final reports

More in the continuing saga of problems with filing final returns in with the Registrar of Companies in CVLs and MVLs. Rules 12A.43, 12A.44 and 12A.47 set out the information that “the notification of a return or a report of a meeting” submitted to Companies House must specify. So what information has to be specified as part of the final return? It is information about the company and the IP (rules 12A.43 and 12A.44), together with information about the meeting itself (rule 12A.47). The required information about the meeting is: its purpose (including the section/rule under which it was convened), whether a quorum was present, the venue, the outcome, and the dates of the opening and closing of the liquidation.

The present Forms 4.71 and 4.72 include all the required information about the company and the IP, and also the first two bits of required information about the meeting. In addition, by sending a copy of the final report and a receipts and payments account prepared to the date of the final meeting (see the Blog Article entitled “Filing Final Progress Reports with the Registrar of Companies” dated 17 April) then you will comply with the final requirement, which just leaves the reporting on the outcome and the venue. To provide that information then you will either need to send a copy of the minutes of the final meetings or a covering letter containing the information with the return to the Registrar of Companies.

That then leads on to a problem with interpretation. The wording used in rule 12A.47 is “the notification of a return or a report of a meeting”. Unfortunately at least one member of staff (and it does seem to depend on who looks at your final return – which is another problem!) at the Registrar of Companies seem to be interpreting this to mean that all the information that is not in the return itself, i.e. the meeting outcome and venue, has got to be in the final report presented to the meeting. That is somewhat bizarre as the final report is a report of the liquidation that is presented to the meeting, and is not a record of the meeting itself. I would suggest taking the approach indicated in the previous paragraph, but would be grateful to hear from you if your final returns are rejected by the Registrar of Companies for doing so.

There is another issue, you are required by the rules to report on the outcome of the meeting, but all sections 106 and 94 require you to do is to present a copy of the final report to the meeting(s) and to give an explanation of it. As a result, the legislation does not require a you to seek any formal resolution(s) at the final meeting, although our advice has always been to seek a resolution for your release. We think a release resolution is required because you will automatically receive your release unless the creditors vote against it and so it is only right to give them the opportunity to do so. There is, however, no requirement to obtain a resolution approving the final report or the receipts and payments account.

This begs the question, what outcome do you report to the Registrar of Companies? If the meeting(s) is/are inquorate then I do not think that you need do anything more than record that fact on the Form 4.71 or 4.72 since there can be no outcome from an inquorate meeting, other than the liquidator obtaining their release by operation of statute. But if the meeting(s) is/are quorate, then what is the outcome? You will certainly have to comment on whether or not the creditors voted against your release, and if you are also seeking a resolution from creditors/members to approve your final report then that should also be reported.

This is all very unsatisfactory and cumbersome. It would be better if Form 4.71 and Form 4.72 covered all the requirements of the legislation rather than requiring IPs to either send in a copy of the minutes of the final meeting or prepare a specific letter each time including the required information!

Frontsouth (Witham) Ltd – a cautionary tale

With much doffing of caps to the expertise of Frank Brumby of Isadore Goldman who first flagged this up at the SESCA Insolvency Conference, I want to bring to your attention the recent case of Re Frontsouth (Witham) Ltd [2011] EWHC 1668 (Ch). Without going into too much detail, this was an administration where the administrators had not followed the correct procedures to extend its duration and so were looking for the Court to sort out the problem by making an order to backdate their appointment 364 days using the Court’s general power to remedy defects in appointments under rule 7.55. The Court refused and then considered alternative methods of dealing with the problem.

The administrators themselves had arranged for the members to pass a resolution to remedy the defect, and the Court considered the effectiveness of such an approach. The short answer is that it did not work since the administrators were not validly in office and so could not convene the meeting, and the members themselves did not have the power to convene a general meeting of the company. This was because of the general rules of corporate governance whereby it is only the Board of directors who can resolve to convene a meeting of the company. The members themselves, even acting unanimously, cannot do so.

So what are the practical effects of this decision? These are two-fold, in respect of effecting the initial appointment as administrator and remedying defects in appointments.

In my article of 22 April following on from the decision in Re Minmar, I indicated that one solution to the issue of giving notice of intention to appoint to the company could be to have the appointment made by special resolution of the company. That is a valid solution, but in view of the Frontsouth judgement I want to take this opportunity to remind you of the process to follow, which is to hold a Board meeting at which a resolution is obtained to convene a meeting of the company to consider a special resolution to place the company into administration and to appoint an administrator, and then hold a meeting of the company to pass the resolution, ensuring that the meeting is properly held and the resolution validly passed. In other words, the procedure is akin to a CVL, but with a special resolution to place the company into administration and to appoint an administrator instead. The problem will come if there is either a dispute between the directors as in Minmar, or indeed between the members, in which case you should be taking legal advice on how best to effect the appointment. Indeed, you may consider that the whole process to effect an appointment by the company is too long winded and that it is quicker and easier to effect the appointment via a Board resolution and to just remember to give notice of intention to appoint to the company.

The main impact of the decision, however, will be in respect of trying to remedy defects in appointments in administrations since the Court confirmed that it cannot use rule 7.55 where the administrator has not been validly appointed and you will have to rely on the co-operation of the Board of directors to convene a meeting of the company to pass a resolution to fix the problem. As a result, if you find that you are not validly appointed as administrator then seek legal advice immediately.

More money for you and the creditors, but I may not be welcome at Bloomsbury Street for a while!

We are pretty sure that a large number of insolvency estates have been overcharged Secretary of State fees.  We think that you can apply to the Estate Accounts Directorate (EAD) for the incorrectly charged fees to be refunded to the estate and believe that somebody should be held to account for failing to come clean with IPs before now.

The confusion dates back to Dear IP in 1991(!) which stated that Secretary of State fees are due on VAT refunds.  While this is quite correct for VAT refunds since they are new realisations and therefore should be treated as assets and attract fees, it is not true for many VAT reclaims.  When you reclaim VAT on your fees and expenses, and those fees and expenses have been paid from realisations that had already been deposited in the ISA, Secretary of State fees have already been charged on the initial realisation such that the reclaim should not attract fees again, otherwise it is a case of fees being charged on fees.  The difference is so crucial that I will keep using italics for emphasis.

IPs have been moaning about this “injustice” for years, and we have been niggling away at it for the past few months ever since a client said that he had managed to get the fees waived on his reclaims.  We are now aware of at least one more client that has been avoiding the fees for some time by sending in a separate letter each time he deposits VAT reclaims. Whilst we have not been able to find any confirmation about the ability to waive fees on the Insolvency Service website or in any other EAD notices, we are now confident enough in your ability to get fees waived that we are prepared to post a Blog article about it.

I am well known for being a bit too enthusiastic on occasions, but I have a feeling that this could be a significant amount of money and I am also pretty sure that the EAD must know that they should not have been charging fees on VAT reclaims. 

I think it must be worth your while to provide EAD with a list of every payment on every open case where the monies you paid into the ISA related to a VAT reclaim.  You should ask them to reimburse each estate with the fees that they have incorrectly drawn and ask them to calculate and reimburse the interest lost to the estate as a result. I suspect though that they may feel that the request for interest is a little harsh, because they may not have been able to identify at the time whether the payment was a refund or a reclaim.

I am pretty sure that those of you who have a significant number of compulsory liquidations and bankruptcies should find that your estates gain a significant boost.  While I look forward to basking in the reflected glow of your gratitude when the money starts to come in and I hope that some of you will remember for long enough to put us up for next year’s Insolvency and Rescue Awards, or possibly a small knighthood, I think that there is a more important point of principle to consider. 

I am concerned that a public body that is responsible for IP regulation and is supposed to be acting in the best interests of creditors, has probably been aware for some time that it may have been overcharging fees as a result of its inability to distinguish VAT refunds from VAT reclaims and yet appears to have done nothing to alert IPs to the issue. This must have cost insolvent estates many thousands of pounds to the detriment of IPs and creditors alike.  At the very least I think that they should have instructed you, via Dear IP or through the regulators, to make it clear when remitting VAT funds to the ISA to indicate whether they were reclaims or refunds. If they have done so, and I have simply missed it, then I am sure someone will tell me and I’ll have to eat some humble pie. Just to make sure I have today submitted a Freedom of Information Act request to the Estate Accounts Directorate to confirm the position and I will update the blog when I have the results.  

In all honesty, although at least one client thinks I am expecting too much, I really think that the Insolvency Service had a duty to be pro-active.  If they knew that the treatment should be different for VAT refunds and reclaims and the source of the payment was not clear, then I think they should either have asked you on receipt of the monies, or required you to provide that information when remitting the monies, explaining why it was important.  If any IP charged fees that he was not entitled to on a similar scale he would no longer be an IP and would be very much poorer as a result of the punitive fines he would have had to pay.  I am quite certain that his regulator would not have been impressed with the mitigation that he wasn’t really sure if he could have the fees or not and decided to take them until someone challenged him!

I don’t know how far back you could claim and whether it would be worth restoring and/or opening closed cases to deal with this.  I will leave that to the lawyers among you.  However, for example, if you drew fees and expenses of £15,000, so reclaimed VAT of £2,625 at the old VAT rate, you would have been charged over £400 that you could now reclaim.  I have a feeling that many cases will involve much higher sums and if you are able to reclaim the improper fees for 6 years or more, I am pretty sure that there will be some significant amounts involved.  Even if you can only reclaim in respect of the present fee regime and current appointments this could soon mount up, but there may be a chance that improper fees drawn under the old fee regime in respect of voluntary liquidations where funds were banked at the ISA could also be caught.  A lawyer would be able to advise on when the liability to repay the fees and therefore any period of limitation arises.  It may be that you can only go back a certain amount of time from today, or it may be that as today is the date that you became aware of it, you may be able to claim all relevant fees, irrespective of when they arose, as long as you submit your claim within a limited period.

Of course, none of this may be news to you and you may well have been getting EAD to rebate fees on VAT reclaims for years, in which we would be pleased to hear from you so that we can establish just how big this issue is for the profession as a whole.  However, our experience from speaking to clients is that several did not know about the ability to rebate fees, and indeed I remember a well-known IP from a mid-tier firm standing up at a training event and reminding IPs to provide for Secretary of State fees on VAT reclaims when closing a compulsory liquidation or bankruptcy where they were VAT registered. 

As you’d expect from a Blog article in my name, I have taken a fairly harsh view of the Service’s approach, in much the same way that we give our clients grief when they make errors if we find them during our visits.  I accept that my comments may be controversial and I would be happy to receive your feedback, ideally by email.  If you don’t have my address, please feel free to follow the link on our website.  If my current Freedom of Information Act request or anyone at the Service can show that the difference was publicised and I have got my facts wrong, I accept that I may yet have to edit or retract this article, but we have conducted considerable research over a protracted period and it is issued in good faith based on the information that we have gathered to date.

Administration to CVL, filing Form 600 - an update

Regular readers of the Blog may have noticed our article about filing Form 600, notice of appointment in ADM/CVL conversions (April 17). That article points out the position as we see it in law, but one of the DTI’s monitors has pointed out that Dear IP and the regulatory monitors have a different view. They say that where Form 2.34B has been filed the Registrar of Companies has confirmed that the form closes the administration and starts the CVL on the date that the form is registered, so they do not require you to file Form 600. We are also aware that Form 600s are being returned by Companies House in such circumstances.

You may understand our somewhat cautious approach to anything that departs from the legislation after the response we received to similar questions about drafting errors in the rules, most notably the requirement to file a chairman’s report in adjournments in non-court route IVAs (30 April 2010). Accordingly, while acknowledging the common sense approach being taken by the regulators and Companies House, we leave you to choose whether there is also some merit in filing Form 600, just to be safe.

VAT in IVAs – what to do if HMRC don’t appeal

You should by now have seen that after the Paymex decision we reported a couple of weeks ago, R3 have now received information that an appeal by HMRC against the tribunal’s decision that VAT should not be charged on nominee’s and supervisor’s fees is unlikely. Unsurprisingly, this is causing all sorts of excitement for the regulators, and in due course there will be some formal regulatory reaction, but until then we thought it might be helpful to provide our thoughts on the question “what should IPs do now?”. Apart from anything else, this will give us something to use when responding to all of the emails and phone calls we have received today and will no doubt continue to receive!

We will produce a more detailed article next week exploring some of the implications as we see them, but until then we felt it was more important to establish a base-line for what you should do now. We suggest the following action as a temporary approach until the regulators can come up with some formal guidance:

• Put in protective claims that are near the 4 year limit, but do not push for the money yet.

• Stop charging VAT on new cases, but amend your engagement letters, proposal wording, covering letters and invoices to include a statement that you are not charging VAT at present because of the decision in a recent legal case, but that you reserve the right to do so if HMRC appeal the decision or the position subsequently changes.

• Temporarily “park” any pending closures until the position becomes clearer in the light of guidance from the regulators. Put a clear file note on the case file setting out why you have delayed closure. You can continue to clear up any loose ends and get them ready for closure, but don’t actually close them. They should be put on your diary for review every fortnight. This is only intended to be a very short term measure until the regulators can agree a final solution.

• If there is still no sign of any formal advice from the regulators in say about a month, then rather than keep the case open, potentially incurring additional cost and delaying dividends to creditors or closure for the debtor, take a commercial decision as to whether the likely benefit from the VAT refund, if it is due to the estate, is worth waiting for.

• In cases that cannot be closed because the VAT is material, you should push for the refund and treat it as estate funds. Whether you can then draw the monies as additional fees depends on the wording of the arrangement term (as modified) dealing with your fees. Even if the refund cannot be drawn as fees then it could still lead to an additional distribution being made which would, in most cases, give you a fee for processing it, but again that would depend on the terms of the arrangement. You could then close the case.

• In cases where the VAT is immaterial, you could close them and treat them in the same way that all of the historic closures for the last 4 years are dealt with, once the regulators have had a chance to meet up and agree what that action should be.

Hopefully, this will be really temporary advice and the regulators will come up with something before you have time to do anything significant.

Finally, somewhat cravenly, we should point out these are just our thoughts and they carry no formal weight. We have put them out to help you in your decision making, because we can issue this much faster than a regulator that has more formal procedures to go through before they can act. If in any doubt you should check with your regulator or seek formal legal advice.

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Companies House – yet again!

As you are all aware, rule 4.49C(4) states that the liquidator does not have to prepare an annual progress report for any period that ends after the they have sent a draft final report to the creditors. It is an eminently sensible rule that is designed to cut out unnecessary duplication of reporting when you are already closing a case when the anniversary comes around.

Despite the rule being clear and unequivocal we have become aware that Companies House are rejecting final reports sent to them in such circumstances because an annual progress report has not been lodged. Bill has already had a rant about the approach of Companies House generally (see Article dated 21 April) and this is another example of their lack of understanding.

If your final return is rejected in such circumstances then you should write back to them politely pointing out the provisions of rule 4.49C(4) and respectfully requesting that they proceed to file the said report. If they reject another of your final returns for the same reason you could consider making a formal complaint to them about their service so that eventually they become snowed under with such complaints. That is a slightly more reasonable approach than Bill’s frustrated suggestion that you should complain to your local MP so that the Insolvency Service has to reply to each query via the Minister!

SIP 1 – it does matter!

SIP 1 is an introduction to the SIPs and sets out the purpose and principles of them. It reminds you that they should be read in conjunction with the fundamental principles as set out in the Insolvency Code of Ethics and be applied in accordance with the spirit of that Code. Taking a strict and literal interpretation of the SIPs may not be appropriate where doing so would be contrary to the fundamental principles.

It also reminds you that not only must you comply with the SIPs, but you must evidence your compliance with them. Make sure that you document your strategies and decision making processes as part of that evidence. Prepare appropriate file notes and ideally also prepare a case strategy note either prior to, or immediately after, appointment to identify the assets and how you intend to deal with them, and to set out any case specific issues or concerns and how you will deal with those.

Such evidence also helps protect you should you end up being challenged in Court, or if a complaint is made against you. For example, in IVAs record why you are using the particular entry route, interim order or non-interim order, in order to evidence compliance with SIP 3; and in CVLs record why you are selling the assets to a connected party in order to evidence compliance with SIP 13.

Hot topic - Important VAT Tribunal Decision on IVAs

News just in, there has recently been an important VAT Tribunal Decision on the treatment of VAT in IVAs. In summary, the decision is that IVAs are to be treated as an exempt supply of financial services, such that VAT should not be charged on the nominee’s or supervisor’s fees etc. The full text of the judgement can be found here and further information can also be found on the web-site of Ruffles & Co, the solicitors acting for the IPs in this case. Please note that the preface to the decision is wrong where it credits Chinnery & Co with instructing Counsel for the taxpayer. Chinnery & Co have had absolutely no involvement with this case. Instructions were by Ruffles & Co only.

I understand though that HMRC have been given leave to appeal the decision, and that the current indication is that they are likely to do so. As a result, you need to be careful before jumping in and submitting a claim on your past invoices, and consider just submitting protective claim at this stage. You should also take you own advice from a VAT specialist on whether it is safe to stop charging VAT on your future invoices, or if it is better to pay it for now until the outcome of the appeal is known.

We will leave the thorny question of who should benefit from any VAT refunds received for a subsequent article, once HMRC has decided whether to appeal and the outcome of any such appeal is known.

VAT on bonds – an alternative view

Many IPs are aware that Dear IP Chapter 4, Article 5 gives HMRC’s opinion that you should charge VAT on bonds when recharging the estate after you have first paid the premium out of your office account. This always seemed counter-intuitive given that the original supply did not attract VAT and raised the question of whether other supplies such as insurances should also attract VAT. HMRC’s arguments relied heavily on HMRC VAT Notice 700.

As a result of the Dear IP article, our advice to clients has, for some time, been that they should charge VAT on bonds and consider doing so on other recharged expenses unless they have some pretty weighty tax advice that contradicts HMRC’s view that they feel they can safely rely on.

We have recently noticed that the Law Society has given advice on the VAT treatment of disbursements to their members. This makes interesting reading and although we are not brave enough to say that you should use it as a reason to ignore Dear IP on this point, it certainly makes the argument less clear cut than HMRC suggest it is in the Dear IP article. The Law Society article can be found by clicking here.

An informative article on the subject by Paddy Behan of Behan and Co Ltd appears in ACCA’s In Practice Bulletin. This can be found here.

Both articles focus on the treatment of legal disbursements, but many of the arguments could apply to the treatment of bond premiums and other disbursements in insolvency proceedings. For now, we’ll stick to our existing advice and suggest you charge VAT on recharged bond premiums unless you have advice from a VAT specialist that carries enough weight to support you in any argument with your regulators or HMRC.

Annual Progress reports in CVLs post Administration

Since the first anniversary of liquidations converted from Administrations on or after 6 April 2010 has recently passed we thought that it was an opportune time to remind you about the obligation to issue annual progress reports in such cases.

Where a CVL was converted from an Administration on or after 6 April 2010 then the 2010 Rules apply such that you have to issue an annual progress report, and there is no need to file section 192 returns or hold meetings of creditors or of the company. These rules apply irrespective of when the preceding Administration commenced.

The rules are different for compulsory liquidations, however, as the requirement under the 2010 Rules to issue annual progress reports only applies where the preceding Administration was commenced on or after 6 April 2010.

Assistance for R3

R3 has regular dialogues with various organisations and interest groups that impact on the work of IPs with a view to influencing them. That includes regular meetings with Insolvency Service on all matters affecting IPs, including their relationship with the Official Receiver’s offices, and also with creditors and their agents as part of the IVA Protocol working group. In order to maximise their effectiveness in working on behalf of IPs R3 do, however, need specific examples of any issues or problems that IPs have encountered in their day to day work. In particular, R3 are looking for examples relating to IPs dealings with Official Receivers and also with creditors and their voting agents in respect of protocol IVAs. I would urge you to provide R3 with details of any specific problems you have encountered in order to help them in their work on your behalf.

OUR NEW WEB SITE

Please excuse me shouting, but after over 5 years providing the best insolvency compliance service we can, we've finally produced our own website. We will keep this blog running for technical updates, but please have a look at the new website and tell everyone else in the insolvency profession about it. As you'll see, it takes a fresh approach, like the service we provide, but please visit by clicking here and let us have your comments if you have the time.

Giving notice of intention to appoint to the company – an important update

In our post on 23 February 2011 we reminded you about the need to give notice of intention to appoint to the company in all administrations, irrespective of whether there is a floating chargeholder, where the appointment is being made by the directors, quoting an unreported case where the appointment of the administrator was upheld, but he was made personally liable for the costs of the action. We have just been made aware of a further case on this very issue which makes for some very scary reading. The Chancellor of the Companies Court found that because notice of intention to appoint had not been given to the company then the appointment of the administrator was invalid. Leave to appeal has been granted, but it is not clear at this stage whether or not an appeal will be made.

It is highly likely that this case will be reported, so watch out for more details on it, but in the meantime this case really brings home the need to either ensure that you give notice of intention to appoint to the company where the appointment is being made by the directors, or arrange for the appointment to be effected by a special resolution of the company.

Insolvency Rules update

Last Wednesday (20 April) the Insolvency Service announced that after the recent consultation with stakeholders they were going ahead after all with drafting a complete new set of Insolvency Rules to replace the 1986 Rules and the myriad of subsequent amendments. The rules will not, however, come into force until October 2013 at the earliest.

The 12 month delay in the planned introduction of the new rules means that you have even longer to future proof your standard documents by removing all unnecessary legislative and rule references to help minimise the number of changes that you will need to make when these rules are introduced.

We have been taking this approach for some time in our standard documents, apart from checklists where the references have to be included, and those with access to our Bronze, Silver or Gold Services can see how the reference-free wording works in practice by looking at the standard documents on our Creditor Gateway portal.

HMRC mods in administrations – contrary to public policy?

We have recently seen modifications proposed by HMRC in an administration that appear to conflict with either the law or public policy, depending on how they are interpreted. We have started to go through the appropriate channels to see if we can find a solution, but for now we want to find out how many IPs have seen this. The modification may be a one-off by an overzealous officer at HMRC or it may be a standard modification that they are using more widely and we’d appreciate it if you would let us know if you have seen it before.

The offending modification says:

"Pre appointment fees and expenses unpaid at the commencement of administration may only be paid to the extent permitted by Rule 2.67(c) IA 1986. The administrator if not already provided will provide creditors with a detailed account of such expenses paid from administration funds. Pre appointment fees and expenses not payable within R2.67(c) shall rank as an unsecured claim alongside other ordinary creditors.”

This modification is trying to refer to “costs of the application” – rule 2.67(1)(c) of IR 86. It approves them but goes on to say that the balance can only be taken as an unsecured claim.

If they are approving the fees that are not just “costs of the application”, then putting it in a different priority to 2.67(1)(h) is contrary to the legislation and would not be effective.

If they are not approving the fees that are not “costs of the application”, then they are right that you would only have an unsecured claim for them, but this creates an ethical problem. You would become a creditor in your own proceedings with the obvious self- review and other threats. An unscrupulous IP could, in an extreme case, front load his pre-appointment costs to give himself a significant proportion of the unsecured pot or prescribed part, so that he is certain of recovering the normal level of pre-appointment fees anyway. More to the point, however, in our opinion, is that the government signalled its intention for IPs to be able to draw pre-appointment costs by amending the legislation to develop an approval route and payment priority and HMRC are seeking to circumvent it, contrary to public policy.

While we continue to ask questions to get this issue resolved, please let us know how big the potential problem is. In the end it may be that HMRC need to talk to the Insolvency Service to decide whether the policy implication of the revised legislation is such that some or all of the modification needs to be varied or withdrawn.

Companies House forms – time for action?

Since Gareth posted the two articles about the filing of Form 600 in liquidations that follow on from administrations and final progress reports in liquidations, we have received evidence of inconsistent treatment by Companies House in both situations. We have seen letters rejecting form 600 in ADM/CVL conversions, contrary to the law and the Insolvency Service’s view and we have seen examples of final receipts and payments accounts being accepted without accompanying progress reports which directly contradict letters that other IPs have received demanding (re-dated) progress reports before the receipts and payments account would be accepted for filing.

On a similar point of inconsistency, we have recently seen Companies House reject the notice of result of a meeting to approve an administrator’s proposals. Their reason for rejecting the filing was that there was no copy of the proposals attached. The proposals had already been sent to Companies House before the meeting as required by paragraph 49(4) and (5). The only time that there has to be a set of proposals attached to the result notice is when sending it to creditors who have not previously had a copy (rule 2.46(b)). Accordingly, someone appears to have misinterpreted the requirements.

It must be time for the Insolvency Service and Companies House to get together and agree a consistent approach. IPs have enough problems with the existing regulation without incurring additional cost dealing with uncertain treatment of routine paperwork.

As a simple solution, we recommend that representatives of Companies House and the Insolvency Service meet to agree the correct approach to these documents and disseminate their agreed approach via Dear IP and internal desk instructions at Companies House. That way, IPs will know what they should send in for filing and Companies House staff will have clear instructions to ensure that papers are accepted and filed in a consistent fashion. The benefits for creditors are twofold, in that those few who access the Companies House information will find consistent evidence and the costs of proceedings will be reduced because IPs will not have to re-work and re-submit forms.

A couple of mad ideas for the policy boys to consider

Despite being on our Blog, this article should probably carry a health warning that it arises from Burch’s overexcited brain! I made the mistake recently of doing some thinking during my quiet moments, of which there are few. Two thoughts came to mind that might be worth further discussion/consideration within the profession.

Referrals

The Ethical Code prevents the payment of commissions for insolvency work but IPs are allowed to pay work to others, who may happen to be the referral source, for work done, as long as it is evidenced and shown to reduce work that the IP would otherwise have done. The most commonly disclosed example of this is when some of the nominee’s fee in an IVA is paid to a referral source that provided some of the initial fact find. In corporate cases, the approach tends to be to pay the referral source for work done in helping to prepare the SA, which is just as fully disclosed and transparent, or to provide the referral source with work on tax calculations or legal action during the appointment, which is less so. Every now and again rumours surface about other more inventive and less transparent payments being made, but these are rarely substantiated.

I just wonder whether, instead of continuing the circular argument about whether we should have a single regulator, there would not be some benefit in opening a discussion about whether the profession should now be allowed to pay properly disclosed commissions for referrals. I can see several dangers, such as a rise in marketing direct to distressed debtors and a potential bidding war as certain firms try to boost their turnover. However, I can also see that it would take away some of the finger pointing in the profession, as referral payments become more transparent and allegations of “back-handers” are dealt with. In time, I also suspect that the initial marketing flurry would die down and costs would level off as market forces arrive at a fair figure.

I know of one IP who suggested this some time ago and was vilified, but at the risk of getting a few backs up, I thought it was appropriate to raise the question again particularly as it is something that other professionals, such as solicitors can already do at present.

Disqualification

We often hear IPs complain that DU turns down too many cases. There is clearly a significant gap between what an IP thinks is misconduct and what DU can actually run with. This is often caused by IPs taking a scattergun approach to allegations of unfitness or providing insufficient evidence because of limited funds in the estate. However, there are also too many cases where good, if not perfect, allegations are turned down, apparently because they are not guaranteed to succeed or require more investigation than DU has resources to meet.

This led me to wonder whether the legislation could be amended to give IPs an opportunity to pursue disqualification proceedings direct in marginal cases. It should be possible for an IP, who has most information available, to make a reasoned decision with his legal advisors about the potential for a successful disqualification action. These would not necessarily be cases that meet the higher level “public interest” criteria, but would be cases where the creditors want something done and there is the potential for a costs or liability order to be recovered after successful proceedings. Those cases that meet the public interest criteria or cannot be funded from estate resources or a potential costs or liability order could still be referred to DU. However there is a lot to be said for releasing the decision in many cases from the tight requirements imposed by the public interest and allowing decisions to be made on the basis that conduct that most normal people consider unfit should not go unpunished.

There you go…cage rattled…neck stuck out…sorry!

Administration to CVL – part 2 – Gazetting and filing Form 600

Just a quick reminder that once you are appointed liquidator following the registration of the notice of move from Administration to CVL you need to both gazette your appointment as liquidator and send notice of your appointment to the Registrar of Companies on a Form 600. Both these actions must be taken, even though the Registrar is clearly aware of your appointment, since the requirements to do so are contained in section 109 and this section has not been disapplied by paragraph 83(8) which governs the rules that apply on conversion to CVL.

Administration to CVL – part 1 – timing of notice and final progress report

For cases commenced on or after 6 April 2010 I would remind you that the “new” rules introduced a two-stage process for conversion from Administration to CVL.

First, give notice of the move from Administration to CVL to the Registrar of Companies, the Court and the creditors. This is still done on Form 2.34B, which is downloadable from either the Registrar of Companies web-site.

Secondly, as soon as reasonably practicable after the notice of move has been registered by the Registrar of Companies, i.e. the Administration has come to an end and the liquidation commenced, the former Administrator must send a final progress report to the Registrar of Companies and to all those who received notice of the Administrator’s appointment, e.g. creditors, the company. The final progress report must cover the whole of the period of the Administration up to the date it has come to an end.

Since the report is issued in your capacity as former Administrator and relates to the Administration not the liquidation then it follows that you cannot charge any time costs incurred after the Administration has needed in preparing the final progress report in either the Administration or in the liquidation. In order to minimise your time cost write offs you should start preparing the final progress report as soon as you have sent the notice of move from Administration to CVL to the Registrar of Companies, if not before.

Date stamping proxies

Since a proxy must be received by the date and time stated in the notice convening the meeting of creditors for it to be valid then it is important to evidence when a proxy was received in order to show whether or not it was valid. The easiest way to do this is by date stamping each proxy that is received, ideally on the reverse of the form. Where a proxy must be received by a specific time as well as a specific date, e.g. in a CVL where a proxy may be received up to noon on the business day before the meeting, then where a proxy is received on the last date for receipt the time of receipt should also be recorded as well as the date.

Filing final progress reports with the Registrar of Companies

Bill and I have been having a debate about this and whether or not there is any need to file a copy of the final progress report with the Registrar of Companies in CVLs and MVLs since the wording of sections 106 and 94 were not amended by the 2010 Rules and a copy of the final report was not previously sent. Taking the strict interpretation arising from the unchanged legislation seemed illogical, as office holders would have been required to file progress reports during the appointment, but not at the end. We had asked the RPBs for their views, but before they could respond we heard the answer straight from the horse’s mouth as it were, the Registrar of Companies. Quite simply, the Registrar of Companies will not accept for filing final returns in CVLs and MVLs on Forms 4.72 and 4.71 unless they are accompanied by a copy of the final progress report in respect of cases commenced on or after 6 April 2010.

We are also aware that the Registrar of Companies has rejected final progress reports accompanying the final returns as they were the draft progress reports that were issued to creditors and so were not made up to the date of the final meetings. As a result, you will need to amend the draft final progress reports and ensure that a receipts and payments account to the date of the final meetings accompanies the final return.

Since section 172(8) in respect of compulsory liquidations only refers to lodging a return with the Registrar of Companies regarding the meeting of creditors held and any decisions made there does not appear to be any requirement to send a final progress report with Form 4.43, but the Registrar of Companies may still decide that there is! Again, there is a certain logic to filing a progress report at the end of the appointment if you have had to do so throughout it and we suggest that filing a copy of the progress report, if accepted by the Registrar, should be the default option. We will let you know if we hear what approach the Registrar and regulators are taking.

Final VAT refunds

HMRC are still slow in processing VAT refunds. You should factor this in when closing CVLs, but if there is any doubt that the final VAT refund will be received before the date of the final meeting, you should request on the final VAT 426 that HMRC make the cheque payable to your practice, always assuming that the VAT refund will be used to pay the balance of your remuneration.

If the cheque is received once you have had your release, which will be once the final return has been lodged with the Registrar of Companies unless the creditors have objected to it, then you should not pay those monies into the estate account since you are no longer in office as liquidator and hence cannot operate a liquidation account. The refund should be cleared through a general clients account instead, before being paid to your practice as the balance of fees due.

Use web-sites

Following on from our recent update that introduced the services offered by The Creditor Gateway, just a quick reminder that any requirement in the legislation to give, deliver, furnish or send a notice or other document or information to any person can be satisfied by the office holder making that notice, document or information available on a web-site. The key words here are “office holder”, such that giving notice of a section 98 meeting is not satisfied by placing the documentation on a web-site and sending a one page letter to the creditors to notify them of that since, unless it is a Centrebind, the IP is not in office. Written notice of the section 98 meeting, including all relevant information and documentation, must always be given to creditors, unless it is a Centrebind.

Index for our standard documents at The Creditor Gateway

Earlier this year we saw a client using The Creditor Gateway (www.thecreditorgateway.co.uk). They provide a service where IPs can upload reports, proposals and other documents onto an internet portal. This allows the IP to issue a much shorter covering letter to creditors, saving on postage, printing, copying, staff time, etc. We were really impressed with how easy it was to get documents online and how reasonable the charges were, usually below the cost to the IP of the postage alone. We saw the potential in this, not just for you and your notices, but also for our core documents.

They are currently loading 45 of our core documents onto a portal and when it is complete we will circulate our visit clients (and any non-clients who have purchased access rights) with an access code allowing you to go onto the portal and collect copies of the documents you want. We would recommend that you try it out so that you see how good The Creditor Gateway is, even if you don’t actually want to download anything at the moment. Once on our page, there is a link in the bottom right hand corner that shows you their prices. We think you’ll be as impressed as we were.

The following is an index of the documents you will be able to download:

Engagement letters

1 ADM Engagement Letter v3
2 CVA Engagement Letter v3
3 CVL Engagement Letter v4
4 Engagement letter Terms and Conditions
5 IVA Engagement Letter v4
6 MVL Engagement Letter v2

Progress reports, Final progress reports and Pro-forma ADM proposals

7 ADM final progress report with new rules BB v3
8 ADM progress report with new rules BB v2
9 BKY annual report with new rules BB v1
10 BKY final report with new rules BB v2
11 CVL, MVL, CWU annual report with new rules BB v4
12 CVL, MVL, CWU final report with new rules BB v5
13 Pro-forma Administrator’s proposals – meeting of creditors convened v2010 rules
14 Pro-forma Administrator’s proposals – no meeting of creditors convened 2010 rules

Reviewing checklists for post 6 April 2010 cases

Please note that these are reviewing checklists, not case progression checklists or work programmes

15 ADM
16 ADM to CVL
17 ADR
18 BKY
19 CVA
20 CVL
21 CWU
22 IVA
23 MVL

Reviewing checklists for pre 6 April 2010 cases

Please note that these are reviewing checklists, not case progression checklists or work programmes

24 ADM (pre 4-10)
25 ADM (pre 4-10) to CVL
26 ADR (pre 4-10)
27 BKY (pre 4-10)
28 CVA (pre 4-10)
29 CVL (pre 4-10)
30 CWU (pre 4-10)
31 IVA (pre 4-10)
32 MVL (pre 4-10)

33 6 monthly case review sheet

34 Bond calculation sheet version 2010 (with formulae)

35 Case strategy note

36 CVL work programme and checklist

37 Ethics checklist – corporate appointments v2
38 Ethics checklist – personal appointments v3

39 Investigation checklist

40 Money laundering risk assessment – corporate appointments v7
41 Money laundering risk assessment – personal appointments v5

42 On appointment case review sheet

43 Pension scheme checklist

44 Practice fee recovery sheet long pro-forma 2010
45 Practice fee recovery sheet pro-forma

As with any of our documents, they are aids to you in doing your work, not a statement of law and you should not rely on them without satisfying yourself that you are happy with their content. Compliance On Call cannot accept any liability for loss or penalty suffered by anyone using the documents. Having said that, we've tried to make them as good as we can and we'd happily take feedback to improve them further, so if you spot a typo or similar, please let us know!

Engagement letters and making it clear where your duty lies

We’ve recently seen a situation where an IP was able to put up a very vigorous defence when a director claimed to have been prejudiced by advice he was given pre-appointment, which was a timely reminder that you need to ensure that your engagement letters protect you and define the scope of your instructions.

The director, who was also a major shareholder, was a bit upset (!) to be told that he had to repay illegal dividends taken in the years leading up to the liquidation. He said that the IP should have warned him and advised him to avoid liquidation to protect him from having to repay the money. Thankfully, the IP, who knew nothing of the illegal dividends when first contacted by the director and did not even see summarised accounts until after the company had convened the CVL meetings, had a very clear statement in the engagement letter explaining that advice was being given to the company, not the directors in their personal capacity.

You should check that your engagement letters help to protect you and manage the directors’ expectations as well as covering the increasing raft of required content. As for those of you that still don’t have engagement letters for some or all of your case types…..

Voting representatives and proxies

As you are aware, we occasionally have a rant about some of the more annoying areas of the insolvency profession. The latest issue to get under our skin is the failure of all of the major voting representatives to take account of the new rules in their proxy forms.

Many IPs have updated their systems and documentation so that when joint supervisors are appointed to voluntary arrangements, the required separate resolution is sought, allowing the supervisors to act jointly and severally. Unfortunately, their hard work and correctly drafted forms are wasted on the major voting representatives who use their own forms that they have not updated, so they don’t vote on the joint and several resolution.

Although we think that it shows a worrying lack of understanding of the regulatory pressures that IPs have to face for even the non-IP voters to take so long to update their forms, it is unforgivable for those voting representatives that are part of big accountancy firms to continue to issue out of date proxy forms. We would appeal to the main accounting firm voters to ensure that their proxy forms include approval of a joint and several resolution as standard. Maybe that would be enough to encourage even the non-accountant voting houses to get their forms up to date before the rules reach their first anniversary!

Giving notice of intention to appoint to the company

For the past couple of years we have been informing clients about an unreported case decided by Chief Registrar Baister involving the requirement to give notice of intention to appoint to the company. The case decided that on a strict interpretation of the legislation, in order to properly effect the appointment of administrators it is necessary to issue a notice of intention to appoint to the company on Form 2.8B whenever the directors are making the appointment, not just where there is a qualifying floating chargeholder. The legislation is silent on how much notice has to be given to the company, so it is just necessary to serve the notice of intention on the company’s registered office. Where this has been changed to the practice address then it is a good idea to also send the notice to former registered office. If you do give notice of intention to appoint you should also use Form 2.9B to make the appointment since a notice of intention to appoint has been issued.

If you do not want to go through the process of issuing a notice of intention to appoint where there are no qualifying floating chargeholders, then arrange for the appointment to be effected by a special resolution of the company at a general meeting. This makes the company the appointor and a separate notice of intention to appoint would not be needed.

We understand that the Insolvency Service are aware of this issue and that it is one of those issues that is likely be fixed in the next round of legislative changes.

Insolvency Service policy changes

The Insolvency Service has recently changed its policy for the approach that ORs should take to IPOs/IPAs and the matrimonial home in bankruptcy.

The OR is now instructed to take all surplus income when calculating the level of an IPO/IPA, with the exception of £10 per month per individual in the household. The minimum level of payment that the OR will now seek from the debtor has been reduced to £20 per month. This is a clear move away from an approach that favours the debtor to one that is more in the interests of the creditors. I do, however, question whether it is economic even for the OR to recover £20 per month under an IPO/IPA and clearly there will never be any return to creditors at that sort of level unless there are other assets.

IPs will need to take into account the change in policy, both when deciding on the level of monthly payment to recover when acting as trustee, and also when completing an outcome statement showing the comparison in bankruptcy as part of an IVA proposal. I do, however, think that it is valid that IPs should take into consideration their recovery costs when setting the level of the monthly payment and that there is no need to adhere to the minimum level that the OR is prepared to accept.

In contrast to the clearly more creditor friendly approach on IPOs/IPAs, a recent policy change on the matrimonial home could work to the advantage of the debtor. The OR will not now deal with the debtor’s property until 27 months have elapsed from the date of the bankruptcy order, even if it is in negative equity. The exception to this is that if an offer for the market value of the debtor’s equity is received, which for properties in negative equity will apparently mean an offer in excess of £1,000, then the OR will agree to a sale. Effectively the OR is speculating on the property market improving over the 27 months of the bankruptcy.

The OR’s policy may, however, cause problems for IPs. We may see solicitors acting for the debtor referring to the OR’s policy when the IP applies to Court for an order for possession. The Court may feel that possession should be delayed to match the treatment bankrupt’s get from the private sector to the approach of the ORs

Where IPs are acting as trustee then they should not speculate on the property market, and as required by the insolvency legislation should continue to administer bankruptcies without delay.

Fee caps

We are noticing an increasing number of instances in bankruptcies and compulsory liquidations where voting agents are voting in favour of the remuneration resolution, but then capping the quantum of fees that can be drawn. Often there will be different caps from different voting agents. This raises a number of issues for IPs dealing with proxies in such cases.

We have heard the argument that chairman’s special proxies voting in favour of the original remuneration resolution could be used to outvote the caps. We do not think that this works, even if the proxy gives you discretion as chairman to vote as you see fit in respect of other resolutions proposed. You would clearly be exercising that discretion for your own benefit in respect of a resolution that has changed from the one disclosed to the creditor who gave you the discretion. If you wanted to vote out the cap then the safest approach to take is to adjourn the meeting and obtain specific voting instructions from those creditors.

Life is potentially more complicated if you are faced with two conflicting fee caps. However, I do not think that you would ever be criticised for applying the fee cap that is least beneficial to you. It would be similar to the treatment we already see adopted in IVAs where the higher cap is simply ignored. It is not rejected, but does not apply because the lower cap is enforced.

SIP 7 – dividend amounts

We have recently heard that a monitor criticised an IP for not including sufficient information about dividends paid to creditors in the receipts and payments account issued to creditors. As a result, I would take this opportunity to remind you that SIP 7 requires receipts and payments accounts to contain details of not only the total amount distributed to the different classes of creditor, but also the date and rate of the dividend(s) paid.

The 2010 rules set out detailed requirements in respect of the contents of the receipts and payments account to accompany final progress reports in MVLs and CVLs. However, for annual progress reports in MVLs and CVLs, and all progress reports in administrations, compulsory liquidations and bankruptcies the 2010 Rules do not specify any required contents for the accompanying receipts and payments account. Even the new MVL and CVL disclosure does not require the date and rate of dividend to be disclosed.

We assume that SIP 7 applies in respect of cases commenced before 6 April 2010, but there has to be some doubt about its application to cases commenced on or after 6 April 2010. SIP 7 was issued back in 1998 and so for liquidations commenced after 6 April 2010 the legislators had the opportunity to take into account SIP 7 when revising the legislation. They chose not to, which suggests that it could be sufficient to just comply with the legislation when preparing annual and final progress reports in all case types, although that then gives rise to inconsistency in the information provided and you may prefer instead to ensure that you always fully comply with SIP 7.

SIP 7 is going to be reviewed as part of the Joint Insolvency Committee’s review of SIPs and hopefully that review will take into account the difference in the detailed presentational matters between annual and final progress reports and also case types in the legislation. We would hope that the principles based approach seen in recent SIPs is extended to the new SIP 7 so that it does not impose additional disclosure requirements where the recently revised legislation has not.

Company web-sites

We are increasingly finding that IPs are over-looking company web-sites in liquidations and administrations and are failing to deal with them.

The company’s domain name (web-site address) is a potential asset that can be realised. You should check the registration certificate issued by the internet service provider (ISP) who hosts the web-site in order to make sure that the company actually owns its own web-site. If the directors are unable to provide the registration certificate you should search on www.who.is to ascertain the name of the owner. The realisable value of a web-site is something that you will need advice about from your agents, but the value is usually expressed as a multiple of the number of hits on the web-site. Clearly you will also need to ensure that you have reminded the directors about the provisions of section 216 where the purchasers are connected to the company in liquidation.

Until the domain name can be realised you should contact the ISP and either arrange for them to close down the web-site or to request that they place a notice on the web-site indicating that the company is in liquidation and setting out details of the office holder.

The interaction between annual and final progress reports

Linked to the previous article about final reports, the rules state that unless you have actually issued a draft final report to creditors by the anniversary date then you must still issue an annual progress report even if the draft final progress report is issued within the 2 months you have to issue an annual progress report.

We understand, however, that the RPBs have agreed that it is possible to issue a combined annual and draft final progress as long as the report makes it clear that it is a combined report, includes all the information required by each report, and includes a receipts and payments account that shows the separate reporting periods.

Again, we would suggest using this sparingly and certainly only where the draft final progress report is issued within the 2 month window to issue the annual progress report.

Draft final progress reports under 2010 Rules

We understand that the RPBs have recently agreed that the draft final progress reports issued prior to final meetings need not be the final progress report and can include future transactions that will take place prior to the final meetings. This is not what the rules appear to say, but we think that the construction of the rules has resulted in unintended consequences and we welcome the pragmatic approach being taken by the regulators.

One way to show such transactions is to have three columns in the receipts and payments account – the first showing transactions since the date of the last progress report (or commencement if an annual progress report has not been issued), the next showing anticipated future transactions to the date of the final meetings, and the third showing total transactions for the whole of the liquidation.

Another way that could be acceptable is to show the future transactions below the account or in a note.

The approach of anticipating future transactions should be used sparingly though, as you would need to issue a revised final report if the actual transactions were materially different from those that were anticipated. As a result, we would only recommend taking such an approach where you are almost able to close the case as at the anniversary date, want to avoid having to issue an annual progress report and only have a few remaining transactions to process that are certain (e.g. VAT refund for a known value, advertising costs that are on a standard rate).

Ideally, you should still be looking to have undertaken all transactions and reduce the estate account balance to £nil before issuing the final progress report, particularly in compulsory liquidations and bankruptcies where any future realisations will have to be paid into the ISA and as a result will attract fees. Taking such an approach also helps ensure that you do not inadvertently draw additional remuneration without making disclosure to creditors.

Electronic verification of identity

The Money Laundering Regulations permit the electronic verification of the identity of individual or a company. Electronic verification is sufficient on its own to verify the identity of an individual, or indeed a company, when the insolvency case has been assessed as a “normal” risk case such that only normal customer due diligence needs be undertaken. Where the case has been assessed as a “high” risk then it can form part of the enhanced customer due diligence required.

You could consider using electronic verification either as an alternative to requesting evidence of identity in all “normal” risk cases, or as a fall back position should an individual whose identity you are seeking to verify does not provide the necessary documentation. Given how quick, easy and cheap electronic verification is then this is something that you should certainly consider.

There are a number of organisations that now offer electronic verification services, such as CallML, 192business or Equifax, but before deciding which one to use you need to ensure that they the information they provide is sufficiently reliable, comprehensive and accurate to enable it to be used as verification of identity, taking into account the following points:

• Does the system draw on multiple sources? A single source is not usually sufficient. A system which uses both negative and positive data sources is generally more robust than one that does not.

• Are the sources checked across a period of time? Systems that do not regularly update their data are generally prone to more inaccuracies than those that do.

• Are there control mechanisms to ensure the quality and reliability of data? Systems should have built-in checks that ensure the integrity of data and should ideally be transparent enough to show the results of these checks and their bearing on the integrity of data.

• Is the information accessible? Systems need to allow a business either to download and store the results of searches in appropriate electronic form, or to print off a hardcopy record containing all necessary details as to name of provider, source, date etc.

Pre-packs – timing of disclosure to creditors

Clearly it is important to ensure that both appropriate and timely disclosure is made to the creditors about the pre-pack sale. Dear IP No. 42 indicated that SIP 16 disclosure should be made to creditors no more than 14 days after appointment, but that is only best practice guidance and does not override the legislation, which requires the administrator give notice of their appointment to creditors as soon as reasonably practicable (rule 2.27). As a result, if you are unable to make the full SIP 16 disclosure to creditors within no more than say a couple of business days of appointment, then you should comply with your statutory obligation and give notice of your appointment to creditors rather than wait until you are in a position to make SIP 16 disclosure. In your notice of appointment you should of course indicate that a pre-pack sale has taken place and that full information about that sale will be provided to creditors shortly.

This means that any delay in issuing your SIP 16 disclosure could result in increased costs, with the least organised practices issuing an initial notice to creditors, then SIP 16 disclosure and finally proposals. Much better, and far more likely to impress creditors and monitors, would be to start drafting proposals pre-appointment with SIP 16 disclosure included. This would highlight any gaps in the information and by getting those gaps filled in the run-up to your appointment you should be able to issue your proposals within days, allowing you to just issue the proposals without the separate notice of appointment and SIP 16 disclosure.

This would also have the advantage of getting your fees and pre-appointment costs approved earlier, improving cashflow. Because the proposals should be a statement of what you intend to do and not a statement of what you have already done, any gaps can usually be addressed by saying that you will investigate further. We have seen several clients take such an approach and issue proposals within the first few days of a pre-pack.

Provision of Services Regulations 2009

Further to my Article of November 2010 on these regulations about the need to include reference to the territorial extent of your insolvency licence in your disclosure to creditors, i.e. including reference to being licensed “in the UK”, ACCA licensed IPs should note that its rulebook only allows two specific forms of wording:

“Licensed in the United Kingdom to act as an insolvency practitioner by the Association of Chartered Certified Accountants” or

“Insolvency Practitioner licensed in the United Kingdom by the Association of Chartered Certified Accountants”.

Clarification of July 2010 article on gazetting annual meetings of creditors in CVLs commenced on or after 6 April 2009

Just to clarify my Blog Article of 30 July on this topic. The fix introduced by the Insolvency (Amendment) Rules 2010 was retrospective so that it applied to all CVLs that had commenced on or after 6 April 2009 and there is no need to gazette annual meetings in such cases. There is, however, a requirement to gazette any general meetings convened for such cases.

For cases commenced prior to 6 April 2009 then the Insolvency (Amendment) Rules 2009 do not apply at all, such that there is no requirement to gazette general or annual meetings in CVLs.