Training Mumbai staff in UK law

Just back from a training visit to Mumbai aimed at providing our contract staff with a deeper appreciation of insolvency law and practice.  I think it went pretty well – they are young and enthusiastic and seemed to quickly grasp the salient points, especially as we got into the practical implications.

We worked through a total of four modules over three days –

  • The IP in Law and in Practice – A two part, higher level review of the reasons why administrative staff are asked to do the things they do with sections on how IP work is governed and regulated – the effects of “trust” law –  the main duties of an IP – guiding principles for recording work – the AML regulations – the importance of care and clarity in communications and reports.
  • The Ethical Code – An introduction to the Code with practical examples of the kind of issues that junior staff should be alert to in the routine checks they are required to make, extending into the Rules on proxies, SIP 10 and SIP 13.
  • An introduction to Administrations – Why the process exists at all – legal objectives – pre-appointment considerations – pre-packs and SIP 16 – the speed and clarity of reporting required.
  • SIP 2 and preliminary investigations – A guide to the principles of SIP 2 and how to apply them, the use of deficiency accounts – the importance of budgets – the importance of starting investigations early (ideally before appointment).

The most satisfying feature is that I left the team with a greater sense of pride in the work they do and some understanding of why and how things that they do can have profound effects, good or bad, on the outcome of case work.

The Lost Art of the Deficiency Account

Is it just me that suspects that the purpose of the deficiency account has been forgotten in the teaching of CPI, CI and the JIEB? I write this after another visit where the managers had passed JIEB since (say) 2001.  I am all for modernizing the profession, but it seems to me that as a consequence of a time-poor, check-list driven culture, the Deficiency Account is only now produced in order to tick the SIP 8 requirement for one. Beyond that, the D/A’s I see are often poorly constructed, if not plain wrong, and are not used properly anymore.

While I hope that the collective examiners might take note of this observation (confirmed by my other colleagues, incidentally) let me remind my readers of the reason why a deficiency account should be the starting point in any preliminary investigation, be it in a Liquidation or an Administration.

The main function of a deficiency account is to provide an estimate of the trading losses incurred since the last accounts. As helpful as that can be, it gets a lot more interesting when one also has figures available for gross turnover in the period. Immediately, one is able to compare the apparent performance of the company in the final period, with its confirmed performance in previous years.  If the level of the deficiency predicted by the turnover is significantly less than the level suggested by the statement of affairs, the three most likely explanations are –

  1. A significant fall in gross profits (suggesting that trading has been badly managed in the final period, a useful plank in a case for wrongful trading).
  2.  A significant rise in “overheads” (which might relate to directors’ drawings being booked as remuneration rather than loans).
  3. A significant undisclosed disposal of assets at undervalue.

Of course, these indications will still have to be confirmed by detailed enquiries later on, but the virtue of a well-structured deficiency account is that half an hour’s work by a properly trained administrator will give the IP plenty of ammunition with which to cross-examine the directors’ history.  As such, it can be done in the pre-appointment period, when directors are still available for questioning, rather than waiting until three months down the line, when they can find plenty of way’s of avoiding the enquiry.

Hot issues from 2015


Here is a brief round-up of the main issues which came up with my visits in 2015.

Shorter visit times and (mostly) lower charges – it’s nice to start on a positive note – with two exceptions, caused by firms taking on new partners, visits this year were shorter and less expensive.  Also, the average number of queries raised was lower as was the number resolved straight away.

Although the advent of the new rules is likely to result in some increase in time, I hope to see this trend continue, reducing both the time and monetary costs to all my clients. Of course, this does have some implications for my own income, so any referrals to other firms will be gratefully appreciated!

Problems with Administrations (especially pre-packs) – I am sorry to say that the trend from last year has continued. The only comfort I can offer is that my fellow compliance consultants are all reporting the same kind of troubles. The main issues are these:–

Poor internal documentation of planning and decision making in the pre-appointment period. The tone of the new SIP 16 has shifted again and you must now be able to justify the decision to do an ADM, especially a pre-pack and most especially a pre-pack with connected parties.  Going forward, QAD will be looking very closely at the clarity and care taken in the decision making process, in line with both the new SIP1, SIP16 and Regulation 13.3.

  1. Procedural mistakes, especially around whether there is a prospect of a dividend, calculating the prescribed part and making the right election under paragraph 52. As a result, a number of IPs have had to redo the fee authorization process, because they didn’t get secured creditor approval.
  2. Failing to clearly set out what has been done pre-appointment and why. Both the old and the new SIP 16s place a great emphasis on justifying the costs and it is not enough to just enclose a SIP 9 style cost breakdown. Work on specific areas needs to be outlined, e.g. preparing and making the application, work on sales contracts, liaison with secured creditors, valuation and marketing work.
  3. However, clarity of reporting has actually, mostly improved. The main residual issues have arisen around over-reliance on templates – not deleting redundant comments or repeating information contained in previous reports.
  4. Finally, please remember that SIP 9 now applies to pre-appointment fee statements, as well. This means that some analysis and justification of time spent pre-appointment must be provided, especially where the time exceeds an initial estimate that you might have given to the Board.

Documentation of critical decisions (especially on investigations) – even before the changes to regulation 13.3, QAD had been pressing for better documentation of work in investigations.  With the new regulations in place, they are likely to be much more demanding going forward, so the absence of strategy notes and the like will be criticized.

Investigation work (especially construction and use of deficiency accounts) – or some reason, between last year and this, I have seen a number of incorrect deficiency accounts, two of which came close to causing a serious outright loss. On all those occasions, the manager responsible for preparing the account clearly did not understand the purpose of explaining the deficiency.

Pre-appointment AML and other checks – there continue to be issues around completion of AML and other pre-appointment due-diligence.  It seems that the problem largely stems from more junior staff not understanding what to do when a case is unusual or arrives from the courts.

SIP 3 and VA terms – not many of my clients have any continuing significant IVA work. While those that do regular IVA work seem to have absorbed the changes to SIP 3.1 and the new Consumer Credit requirements (cooling off periods, etc.) those that only do occasional VA work have had problems because of being out of practice.

File reviews, case management and progression – While the number of outright, serious failings in case progression has fallen (i.e. delays of over a year) I continue to see a lot of variable quality in setting and following up on tasks, particularly after the first 6 months has passed. With the new regulations, QAD will tend to be even hotter on this area than before.

One final note of encouragement; looking back over the ten years since I first started working as a reviewer at ICAEW, the standards of compliance have really improved. Except where there are new rules in force or they have become particularly complicated, as in ADMs, all of my clients deserve congratulations for the work they have all done.  But it begs a question – are we now reaching a stage where a general review should be taken (risk based) on just how much compliance work is actually needed?  The ICAEW rules actually do allow it, so why not? If you are keen to do such a review and want to discuss how, please call.

(Delayed) Preparations for the Consolidated Rules

The latest news is.. there is no news, but the rumours are that the new drafts won’t be ready in time to allow for implementation in October.

Yes, as you have probably already heard, the drafting process has become further drawn out and, as a consequence, we may not see the draft rules until well into April/May. Theoretically, this should mean that the implementation date will move from 1 October this year to 1 March 2017, but I am worried that the Insolvency Service are now so cowed by the cuts they have suffered that if the minister insists, then they will go ahead, regardless. It’s about the only reason that I am grateful for the referendum – in all that infighting, they might just forget us, for a while.

But, while that means that we won’t be able to start detailed preparations just yet, there remain a few important areas to look at in advance – get these things sorted and the task of taking in the new rules themselves should be a lot easier.

  1. Use of websites and portals to deliver creditor reports – it really does save on expense and there are a number of helpful and inexpensive sources of help available.
  2. Provisions for holding meetings remotely –while there are plenty of conference call systems out there, remember that you will need to find a secure method of identifying and recording creditors’ questions, comments and votes, especially in any case that might attract a challenge.
  3. Paperless systems – the latest offerings from companies like Virtual Cabinet and Invu are much better than they were a few years ago, and I believe that most firms will see positive cost savings from using them. But there are other products out there and it is worth shopping around. I have four tips –
  • Do divide the electronic records as you have done with paper files.
  • Make sure the system tracks and sorts your email traffic in real time. Some systems actually will prevent the email being sent unless it has been properly indexed to a file.
  • Make sure your server and broadband provisions are adequate. If you have more than one office and the broadband service is poor in some of them, you may be better advised to use small, local servers in those offices, to hold specific case records.
  • Get an IT consultant to work with you on choosing and implementing the system.

That’s all for now. Hopefully, we will get some further news, soon.

Strategies for casework (and fees)

One of the consequences of the imminent changes to the fees regime is to turn strategic planning from a nice idea into a practical necessity. First of all, the effective fee caps will mean that poor work execution will be even more costly than it was. Secondly, the RPBs will quickly penalise firms that aren’t able to demonstrate that their fee estimates are based upon a rational plan for the work.

Unfortunately, I don’t think many firms’ planning and review systems are fit to meet these new requirements successfully. The ones most at risk are those who have no standard planning documents at all, but even amongst those that have, most are still using “single issue” media – paper notes or word templates for both the planning and subsequent reviews, rather than flexible data systems like Excel where all information can be easily carried forward and updated as you go, in a single package.

For those of you who haven’t the time or inclination to work up your own such system I am, as always here to help; for those with the time, here are a few pointers –

  1. The initial strategy document should be in a standard form that includes all the usual case metrics – name, type, trade, introducer, principle contact – but also a summary of anticipated recoveries, investigation areas and close-review areas, such as trading, potential onerous property, tax investigations, etc.
  2. The initial strategy should also include a projected “budget” for the case. If designed in Excel, it can be linked to or be the basis of the estimated outcome statement that should be the backbone of any fees estimate, giving a projection of dividend prospects, if there are any.
  3. Crucially, you should be trying to complete the initial strategy in advance of appointment, at least to first draft stage. It can therefore provide a ready reminder to all staff involved in the case as to pre-appointment requirements (e.g. get the pre-appointment fees in, notify charge-holders, secure the books and records, complete pre-appointment due diligence, etc.) as well as what you expect to do post -appointment,  And you can also indicate the timings of critical elements of the work to be done, such as a review of accounts.
  4. The form should, as far as possible, be something that can be easily referred to in subsequent reviews, meaning that there is an available audit trail for all critical decisions in the case. This is where an excel based system will score heavily over paper or Word documents – figures from projections, initial and review comments can all be set up so as to feed into later documents.
  5. Put the strategy document wherever it can be easily accessed from the file – at the front of a paper file or in its own designated folder in a “paperless” system.

There are extra benefits to good strategic planning. These mainly revolve around that tricky business of delegating work to more junior members of staff. The test of a well-designed system will be the extent that it encourages your staff to take ownership of the case.  Try to get the administrator, rather than you or the manager, to fill in the strategy document perhaps in, or after a meeting with you. Once completed, either you or the manager can review, amend or add to it and then print off a copy for signature. From that moment forward, everyone in the team will be aware of all the things that need to be done and when. They will be that much more aware of the time available to spend on preliminary investigations, creditor claims and so on and they can directly populate their diary with key dates for specific tasks, well in advance of execution.  This shoud mean that more of the work is being done at lower charge-out rates, where the leverage to actual salaries should be greater, yielding better profits with (hopefully) less aggravation.

As you may gather, I am a real fan of this kind of system and have done work on two or three over the years and have developed a generic package that can be adapted to any practice.  To take things further or just have a chat about what’s possible, call or drop me an email.