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.