Preparing for the new legislation

So, having completed the last of my compliance visits the week before Christmas, I have started working through the detail of the new Rules and the changes in the Act, in preparation for 1 April – two spreadsheets, three paper files, four sets of legislation and several hundred cups of coffee. By the end of next month, I expect to make available two things –

  • A rule by rule guide to the changes in the Insolvency (England & Wales) Rules 2016.
  • The first of a series of updated compliance checklists for each main case type and the new, common parts, which can be used as final checks to ensure that your documents and forms cover the most essential features of the rules.

More on those things in a later blog.

But there are some areas of the new processes that really need more explanation. ICAEW and others are running all sorts of webinars and I suspect they will be great, but being a little old fashioned, I intend to write a limited series of guidance papers on key areas of the new legislation.  The first titles are

  • CVLs and how to get appointed safely.
  • Decisions, decisions, decisions.
  • Progress and closing reports – what, why, when and where

In between, I expect to blog on a range of topics in an attempt to help you through the process.

Oh, and by the way,

Happy New Year


A note about R3’s guidance notes

You may have noticed (or maybe not) that R3 recently issued a Guidance Note titled “Approach to SIP 9 Reporting and Fee Estimates”. If not, you may be tempted to take a look.

I have now received a couple of queries which I thought might be good to share –

Q.  Does the guidance set a required (i.e. regulatory) standard?

A.  No.  It has been issued by R3 on its own and although I understand that the IPA may have endorsed it, I am pretty sure that ICAEW hasn’t and even if it had, SIP 9 remains the authority.

Q.  So, is it a good idea to read it?

A.  Yes, probably –at least if you are short of CPD ….

Q.  Okay, smarty-points aside, is there anything useful you would highlight?

A.  Sorry, yes.

  1. Transparency and proportionality are key – a small, straight-forward case, deserves a small straight-forward report. Even a big case doesn’t necessarily deserve a big report, but it does deserve clarity. So your question about anything put in the report should be – “will this make it clearer for the creditor?”
  2. Reports should major on narrative rather than figures.
  3. Detailed figures are helpful but are no substitute for the narrative. As I have suggested in my technical notes last year, summarise the key figures in the narrative (e.g. total recoveries, future expectations, costs expected, costs to date, dividend prospects, etc) and put the detailed figure work in the appendices.
  4. Reports should be focused on the work done in the period of the report and avoid repeating information already given.
  5. Don’t clutter up the narrative with endless detail about stuff you have or might do on a procedural basis. You can give guidance on generic duties in appendices (or even better, in policy type statements on your website/portal).
  6. Make distinctions in your estimates between work required by statute, work that gives a financial benefit and any other work that you will do, explaining why it is necessary/worth doing (but see below).
  7. Finally the guidance does make two useful, fresh observations; a) you can consider leaving out some details if they don’t add clarity, but have them ready to answer any follow up queries, and b) in justifying a proposal not to use time costs as a basis for fees, you can make reference to comparative market rates, without having to detail them, as such.

Q.  And anything you disagree with?

A.  Yes – the guidance says that reporting distinctions between work that produced value and work that didn’t is “paramount and of fundamental importance”. In my opinion, that language goes a lot farther than SIP 9 (paragraph 9) which says simply that distinctions of this kind will commonly be of concern to those who have a financial interest (and therefore should be addressed as necessary in the report). If you follow R3’s guidance, then every narrative about work done has to identify what was statutory, what was financially beneficial and what wasn’t – potentially very cumbersome.

By comparison, I think SIP 9 allows the IP to set out in his fee proposal what he is going to do and why (making the distinctions on benefit, if not already obvious) and later report on how he actually got on. Taking this approach, you only need to further report on such distinctions when things haven’t one according to plan (e.g. “We spent £5,600 on an extended investigation in the expectation of gathering evidence for a preference claim, but have been advised by Counsel that the evidence is insufficient to merit pursuit”).

I hope this helps.


More news about no news

Yes – you guessed it – the latest news about the timing of the new Rules is that there is no news, at least officially. But, there are a number of rumours that have reached my ears and together they go something like this –

  • Because of internal resourcing difficulties combined with an absence of parliamentary time, the Rules won’t come out for October 2016, but should be ready to “go live” in April 2017……
  • But because of the vote to leave the EC, those resources that had been promised for our Rules are likely to be diverted to the urgent review of EU affected law…. (and ours is a part of the department that deals with those rules most of all) so October 2017 is now the target date……
  • Except that we still won’t get the parliamentary time very easily because of the pressure to deal with whatever new legislation is required depending upon what we negotiate with the EU… so a side bet on October 2018 might be in order.

Somehow, somewhere, I remember reading that effective government depends upon retaining the respect of the nation…. Mmm.

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.

No consolidated rules in October?

A short note to say that the latest rumblings from the Insolvency Service are apparently that they “recognise” they they gave an undertaking to allow us 6 months preparation for the new Rules. Now that we are into May, the suggestion is that the October launch is now off.

Traditionally, this would mean a delay through to March 2017, but I am concerned that they have, occasionally done stuff at 1 December. So, we are not out of the woods, yet…


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.