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The concerns surrounding Voluntary Arrangements are still with us and the IPC has had the opportunity to meet some of the bodies both within and without the profession to discuss concerns. The IPC is given to understand that the majority of proposals are fully satisfactory although we still do not have statistics to substantiate this or otherwise. This is particularly disappointing as the profession has, in the opinion of the IPC, had enough time to provide information as to the numbers of proposals made, details of failures and reasons coupled with IP performance tables.
Whilst Voluntary Arrangements have proved to be an effective way to settle over-indebtedness in a large number of cases, there is evidence that the process is still being used when other processes, including bankruptcy, are more appropriate. Creditors are often too demanding – the debtor has two choices – bankruptcy or an IVA, and as the returns from an IVA should be better than bankruptcy the debtor should receive some support from creditors.
That said, following the introduction of the Standard Conditions by R3, the paperwork required in producing an IVA has become cumbersome and unhelpful in the provision of a straightforward solution to many a debtor’s problems. It is expensive in compliance terms. Michael Green, a Research Fellow at the University of Wales was commissioned by the Insolvency Service to look at Voluntary Arrangements in 2002. His report has recently been produced, and he is advocating a simpler process to replace the current arrangement. He is now involved in further research into the performance of Debt Management Companies and the schemes that they operate. His brief also covers an investigation into the shortage of information on the performance of IVAs. (This issue was the subject of the IPC Recommendation in our 2002 Annual Report).
A voluntary arrangement proposal requires the agreement of 75% of the creditors by amount. As the major banks and finance houses provide most of consumer credit, they have the greatest influence in the agreement of the terms and dividend level expected from the debtors. Concern had been expressed to IPC by a number of IPs from smaller firms preparing IVA proposals that the conditions being applied were too demanding. We had useful discussions with KPMG and PWC who act for the majority of the credit providers.
Following meetings with both KPMG and PWC, the IPC had useful discussions with the Inland Revenue Voluntary Arrangement Service (VAS) which sees the majority of CVAs (as opposed to IVAs), is usually the largest creditor through VAT and PAYE.
As a result of these discussions, the IPC understands that some insolvency practitioners are in the habit of proposing voluntary arrangements that are not viable at the outset and indeed the VAS has stated that there are some IPs with whom they will not deal. This is not helpful for the debtor, the creditors or the profession as a whole. It is in the public interest that this practice is stopped and so the IPC has asked the VAS to advise the appropriate RPBs of the names of the IPs whose standards they regard as falling short of that required by the profession.
Forecasts of a large personal debt problem have been issued by a number of well-informed sources throughout 2003 but so far the problem has not yet surfaced. The IPC is concerned that the Insolvency Service and the profession may not be able to cope if interest rate rises combined with job losses cause an avalanche of insolvent consumers in 2004. Such a situation may well cause debtors to turn to debt management companies.
The new bankruptcy provisions that come into force in April 2004 will be attractive to some debtors as they could be discharged within 12 months.
We have been involved in consultations on Debt Arrangement and the Scottish legislation on personal bankruptcy for some time and note that IPs are not going to be involved in the statutory Scottish Debt Arrangement Scheme. It will be interesting to see how the DAS process works in practice so that comparisons can be made with the IVA process and the various debt management schemes already in existence.
Complaints Procedures
As an ongoing process of understanding exactly how the profession handles complaints, three members of the IPC visited the offices of the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in England & Wales (ICAEW) and the Insolvency Practitioners Association (IPA).
We were given access to actual files (over 200 in total) and had the opportunity to examine the process through to a conclusion. There are some differences in the actual processes of each RPB but generally speaking the systems and responses are satisfactory. There is evidence that improvements have been made to be more understanding of the complainants’ position, speed up the enquiries and produce more information to complainants throughout the investigation.
All three RPBs agreed that they can and will be making further improvements to this service.
It is fair to say that in many cases the complaint arises because the complainant does not understand the insolvency process. A speedy, understanding and reasoned explanation of the process will often satisfy the complainant. Where there is evidence of practitioners failing to undertake their duties to the high standard established, then the responses from the RPBs do have to be open and honest to the complainant and not seen as overprotective to their members. Also, it is extremely important that as full an explanation as possible is given where a complaint is not upheld.
In 2004 it is the intention of the IPC to extend its enquiries into the complaints process with other authorising bodies.
Conflicts on Interest – Networks
The IPC has been concerned since September 2002 about the existence and management of conflict of interest in large multi-disciplinary organisations. Our attention was drawn to an issue in Scotland, through contact with a Member of the Scottish Parliament. As a result the IPC has been in correspondence with the Law Society of Scotland on various aspects of this case. We believe the RPBs ought to be aware of such concerns and address their own ethical guidelines in this context to see if standards need to be changed.
The U S Sarbanes-Oxley Act bans accounting firms from supplying certain non-audit services to their SEC registrant audit clients. It is currently unclear what impact, if any, this might have on the choice of insolvency practitioner, particularly in larger, more complex cases.
Regulation
The IPC has previously expressed concern at the number of regulators. There are historical reasons for this and the present structure is not helpful in engendering effective pro-active regulation. That said, it does recognise that there are particular issues to be taken into account in respect of Scotland and Northern Ireland. For the present system to work effectively, there has to be close co-operation between the RPBs.
The arrangements whereby IPs are regulated by their various professional bodies or by a dedicated insolvency body, the IPA, have been accompanied by subsidiary arrangements through which these separate bodies have combined their resources when appropriate to build a common infrastructure for regulation. But there are signs that the momentum for co-operation is faltering, as for example with the impending termination of the joint monitoring arrangements between ICAEW and IPA. A development of this kind – whatever its particular origins – must cause anxiety if it points to inability on the part of a single body to provide a necessary resource on its own or a reduction in the ability of bodies to sustain a pooling of their resources. The IPC is aware that the ICAEW has offered to license insolvency practitioners who are not Chartered Accountants but are currently licensed by the Secretary of State (DTI) and they have also made approaches to some members of other RPBs who are in larger practices working along side ICAEW members. This is not making for easy relationships between some of the RPBs.
The move towards greater harmonisation that appeared to be taking place in 2002 seems to be breaking down, which cannot be good for the public interest and its perception of the insolvency profession.
It has been brought to our notice that there are two actuarial bodies in the UK, the Faculty in Scotland and the Institute in England, with a long history and considerable traditions, which have not always seen eye to eye over intellectual issues. They have now agreed to work together as one and have changed their disciplinary arrangements from January 2004 (with the consent of the Privy Council) to act as one, and any of the 7000 practitioners will be treated in the same way. The RPBs may do well to consider something along these lines for insolvency.
Monitoring
The IPC remains concerned at the standards and style employed by the Joint Insolvency Monitoring Unit, as it would appear that too much attention is being paid to minutiae than key performance matters and client satisfaction. The process appears to be too mechanical and box ticking. Overall performance, dividend achievement, cost reduction and value for money are key areas to support higher ethical and professional standards aligned to greater customer satisfaction.
We are now receiving complaints from IPs about the approach of JIMU inspectors who are only looking at the small issues and not looking at the bigger picture, in particular asset realisation and case progression. We have been provided with evidence of this and it suggests that the role and experience levels of inspectors may need to be reviewed.
The IPC regularly receives complaints from debtors at the costs of insolvency, which in many cases, quite frankly, appear to be excessive. This issue does not seem to be highlighted by JIMU.
Insolvency Practitioner Bonding
In cooperation with the Joint Insolvency Committee and R3, the IPC has supported a request that the Insolvency Service should review the existing arrangements for Insolvency Practitioner Bonding.
The main issue for the IPC is the cost of the insurance bonding for gross asset value when it may be possible that a reduced figure in line with net asset values could be accepted. This would reduce the costs to the insolvent estate and thereby provide more for the creditors. This request is still under consideration.
Fees and Disbursements
Complaints about fees charged by IPs account for the highest number of contacts received by the IPC over the website. The public at large do not always understand the work that the insolvency profession undertakes and the costs that arise in ensuring that the work is completed within the rules of insolvency. IPs need to exercise care in dealing with clients who, by the nature of their circumstances, are often very vulnerable and can be open to abuse by the less scrupulous members of the profession.
The question of transparency had been addressed to a great degree by the revision of Statement of Insolvency Practice 9 (SIP9), which sets out the way in which, costs and fees should be disclosed, and the IPC agreed to see how the changes made an effect during 2003. It is too early to give a decision on the effects of the revised SIP but it covers very fully the best practice concerning the provision of information to those responsible for the approval of remuneration. It also explains in detail the back-up information which should be kept by the office-holder, in addition to a note of the hours which he spends.
The question of ‘value for money’ is our main concern and this was clearly brought to the public arena with the judgement by Mr Justice Ferris in the investigation into the remuneration of the Provisional Liquidators of Independent Insurance Company Ltd.
The Council feels that, whilst full information must be available to enable the fees to be properly assessed, the office-holder should, prior to a taking any particular step in the course of the assignment, ask himself whether he is giving value for money in taking that step. It is worthwhile quoting the words of Mr Justice Ferris in the Maxwell case to demonstrate the point:
“In my judgment it is vital to recognise three things in this field. First, time spent represents a measure not of the value of the services rendered but of the cost of rendering it. Remuneration should be fixed so as to reward value, not so as to indemnify against cost. Secondly, time spent is only one of a number of relevant factors the others being, as I have said, those which find expression in Insolvency Rule (IR) 2.47 and similar rules. The giving of proper weight to these factors is an essential part of the process of assessing the value, as distinct from the cost, of what has been done. Thirdly, it follows from the first two points that, as the task is to assess value rather than cost, the tribunal which fixes the remuneration needs to be supplied with full information on all the factors which I have mentioned.
In essence, what the Council feels is that the office holder must assess before taking action whether that action is likely to add value to the estate. He/she should not just go forward blindly without assessing the consequences of their actions. It is appreciated that this is something of a subjective test but it might avoid a subsequent challenge if details of the decision-making process are recorded. As Mr Justice Ferris said in his Report on remuneration at paragraph 6.7, “Among other things it [the Provisional Liquidator Formula set out in IR 4.30(1)] will, we consider, encourage the office-holder to provide, in support of his claim for remuneration, a circumstantial account of what he has done and why it was necessary or advantageous for him to do it”.
In some ways, it is much easier to justify some course of action by showing the thought processes which occurred prior to the action being taken rather than to try to justify them with hindsight when the fees are being assessed months or years later. It is worth looking at the Third Appendix to the Ferris Report, particularly paragraphs [5] and [6], where he reiterates the view office-holders must exercise commercial judgment and not act regardless of cost.
This raises a further issue which has been brought to our attention, namely that there are occasions when IPs have sought legal advice (at additional cost to the estate) on issues whose determination is well within their own capability without recourse to legal advice. This does not benefit the creditors. The question of whether to incur such costs is, of course, a matter for the commercial judgment of the IP but it should be remembered that the sanction for incurring such costs unnecessarily or unreasonably is that the IP will be denied the right to pay them out of the estate and he will have to bear them himself. The point is demonstrated by the comments of Ferris J in the Maxwell case:
“Thirdly the test of whether office-holders have acted properly in undertaking particulartasks at a particular cost in expenses or time spent must be whether a reasonably prudent man, faced with the same circumstances in relation to his own affairs, would lay out or hazard his own money in doing what the office-holders have done.”
The IPC appreciates that it is likely to be difficult to establish hard and fast rules to cover these situations as they can present different levels of risk. However, it does feel that the RPBs could consider providing further guidelines.
The Insolvency Services - Protracted Realisations Unit
This section, formed around 5 years ago, handles the aged bankruptcy cases where the assets have not yet been realised. At the time of the bankruptcy the asset may well have had a negative equity. These cases are now being passed out to IPs to enable the assets to be realised. Many of the people affected are unaware (or have overlooked the fact) that the property continues to vest in the Official Receiver. Due to the passage of time, increased property values and the continuation of mortgage payments there may now be considerable equity. We are aware that there is a great deal of concern and distress amongst the discharged bankrupts and their families.
Whilst we appreciate that there is a duty to realise the maximum amount for the creditors there is evidence that IPs are handling these cases in different ways although still within the insolvency rules. In many cases, over 10 years have passed since the original bankruptcy and we feel that there should be sensitivity to each situation.
We understand that there are still over 8,000 cases still outstanding and the IPC would welcome some guidance from the Insolvency Service to the IPs being appointed.
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