Key Activities

During 2005 we followed up the recommendations we made in our Annual Report for 2004 on better IVA statistics, “best advice” and timely communication in our regular meetings with the Insolvency Service and the Joint Insolvency Committee (JIC) with the results reported above. In addition we responded to consultation documents from the IS on simplified Voluntary Arrangements (SIVAs) and on Debt Relief Orders (DROs). We summarise the IPC’s view on these and other key issues in the rest of this section. SIVAs The IS set up a working group in September 2004, consisting of representatives of the larger firms offering IVAs and/or debt management arrangements to personal debtors and of other stakeholders, including the major lenders, to consider how to create a simpler and less expensive form of IVA which would benefit both debtors and creditors. The IS published a consultation document in July 2005, inviting public comment on the following recommendations made by the working group:- v Simpler standardised terms and conditions and a standardised fee structure should apply to all IVAs covering debts up to £75,000. All SIVAs should offer the creditors a better return than bankruptcy, with debtors paying the maximum they could afford; v Where debts did not exceed £25/30,000 there would be no creditors’ vote on the IP’s proposal for an IVA. For cases between £25/30,000 but below £75,000 the proposal would require acceptance (without modifications) by a simple majority of creditors rather than the current 75%; and that v Debtors whose behaviour had been irresponsible, reckless or dishonest could be barred and creditors would retain the right of appeal to the courts. In our response we welcomed most of the Working Group’s proposals for a simplified IVA (which we had recommended as desirable in our Annual Report 2003), with three main provisos:- v We recommended that, in order adequately to protect creditors’ interests, all proposals for SIVAs should require a formal approval by a simple majority vote of creditors, not just those where debts exceeded £25/30,000; v A simple majority vote of creditors should also be required to approve a decision on whether or not bankruptcy proceedings should be instituted when a SIVA fails; and that v There should be adequate safeguards and monitoring to help ensure that IPs and the firms employing them comply with their duty to give best advice to the debtors. We understand that the IS is now considering the numerous responses to the consultation document it has received before it puts forward its own proposals for introducing SIVAs Debt Relief Orders In March 2005 the IPC also responded to a consultative document on “Relief for the Indebted – An Alternative to Bankruptcy” issued by the IS, which, in line with earlier proposals from the Department of Constitutional Affairs (DCA) recommended the creation of a non-court administered scheme of Debt Relief Orders (DROs) to deal with personal debtors whose income and assets are so low as to make it unrealistic for them to make any repayment of their debts. The proposal envisaged that individual debtors’ eligibility for a DRO would be initially assessed by money advice intermediaries, probably working in the voluntary sector, though the final decision would be taken by an Official Receiver. Our response recognised the case for a simplified form of debt relief for debtors with no (or virtually no) free income or assets. We, however, expressed two reservations about the proposals, both of which were shared by a number of other respondents. We were concerned, first, that the system might be vulnerable to fraud, unless the debtors’ claims to meet the eligibility criteria were properly checked. Second, we questioned whether the voluntary organisations would have adequate financial and other resources to carry out the necessary checking. The IS has now announced its intention to go ahead with the proposals, which will require new legislation. The IS stated that the legislation will contain appropriate and proportionate remedies to discourage misconduct by debtors. The IS is now in discussion with the relevant voluntary and other organisations in order to define the role of the intermediaries more precisely and to address the question of adequate funding. Joint Insolvency Committee Regulatory Forum The JIC organised a first Regulatory Forum in May, which brought together representatives of all the RPBs and of the IS as well as numerous IPs and other interested stakeholders, including the IPC. The Forum debated a number of current topics of interest, including industry intelligence, methods and frequency of monitoring and consistency in disciplinary procedures, which are discussed below. The IPC considers this was a useful initiative by the JIC and would encourage the JIC to turn the Forum into a regular event. Industry Intelligence The Regulatory Forum discussed the case for setting up a dedicated and independent telephone “hot-line” which potential “whistleblowers” working within the IP sector could call on a confidential basis. Following subsequent discussion in the JIC, the Insolvency Practitioners Association (IPA) has initiated a research project, the results of which will be shared with all the licensing bodies, to investigate how such a system could be established. The IPC welcomes this initiative. Although we share the view of the RPBs that the vast majority of IPs do an often difficult job conscientiously and well, a protected “whistleblowers” system could help the regulators in identifying the relatively rare cases of misconduct. Monitoring Following the closure of the Joint Insolvency Monitoring Unit at the end of 2004, the Institute of Chartered Accountants in England & Wales (ICAEW) and the IPA has established their own separate monitoring systems. All the RPBs’ monitors continue to exchange ideas and information directly through the regular reports to the JIC by the “Meeting of Monitors”. Two members of the IPC were invited to the July “Meeting of Monitors” and were pleased to observe that the monitors appear to work well together and that the meeting produced valuable exchanges of experiences. Informal co-operation of this kind is welcome and will hopefully continue. We nevertheless believe that a more systematic harmonisation of monitoring methods and benchmarks is desirable. We are concerned at the discrepancies between the RPBs in the frequency of their monitoring visits. We also believe that a gap of 6 years between visits is too long. Consistency in Disciplinary Procedures IPs from time to time express concerns about differences in the procedures and outcomes of RPBs’ disciplinary and complaints handling systems. Following discussions at the Regulatory Forum, the IS has asked the RPBs and other interested parties to supply any evidence of differences in the standards applied by the RPBs. The IPC’s view is that, since increasing numbers of members of the public come into contact with IPs, it would benefit the profession and the public if all the RPBs were to adopt common standards and procedures in the handling of complaints and disciplinary cases and preferably move to a single system with a common pool of tribunal members, including wholly independent lay members. The Insolvency Service’s Review of the Memorandum of Understanding and the Principles for Monitoring Towards the end of the year the IS consulted the RPBs and other interested parties on possible revisions to the Memorandum of Understanding, which is the basis for delegating the work of regulation to the RPBs, and to the Principles for Monitoring by the RPBs. We hope that this review will provide an opportunity to achieve greater harmonisation in both monitoring and disciplinary procedures. The IPC has been asked to join in the consultation process and welcomes the opportunity to express its views on these issues. The Leyland DAF Case – Payment of Liquidation Expenses out of Assets comprised in Floating Assets. The DTI has proposed to amend Section 175 of the Insolvency Act 1986 in order to reverse the effect of the House of Lords decision in Buchler v Talbot, re Leyland DAF (2004). In that case, the House of Lords held that the costs and expenses of a Liquidator in a winding – up are not recoverable out of the assets comprised in a floating charge until the secured debt has been paid in full. This decision reversed the position that had obtained for many years in England and Wales regarding the payment of expenses, and the DTI intention as expressed in new section 175 is now to return to the law which had so obtained. The IPC supports the DTI’s intention to deal with the matter in this way and also supports the efforts being made by the RPBs to reach satisfactory arrangements with the major lenders on how to deal with this matter until the amendment to Section 175 can be adopted. The Leyland DAF case brought the law in England and Wales into line with the position in Scotland but the Department of Trade and Industry’s intention is to cause the law to revert. It has been suggested that the Scottish Executive should take similar statutory action to permit Liquidators in Scotland to take their expenses before the holder of a floating charge is paid but implementing this change would necessitate a substantial change to Scots Law, not merely the reversal of a Court Judgment. The issue is currently being considered by the Scottish Executive following a period of consultation. Debt Management Companies The IPC has noted increasing discussion about whether debt management companies (DMCs), most of which hold consumer credit licenses granted by the Office of Fair Trading, should be subject to stronger “conduct of business regulation” or at least required to train their staff to meet agreed professional standards. We understand that the IPA has been discussing with some of the leading debt management companies and other advice and solution providers the scope for developing, alongside the existing statutory regulation of IPs, a consumer debtor-specific recognition/accreditation scheme (or schemes) for the training, examination, continuing professional development, oversight and regulation of those who advise on and administer the range of consumer debtor solutions. We welcome the IPA’s initiative in raising this. To the extent that the case for training the staff of DMCs relates to the fact that they are effectively giving advice to debtors, the case for formal training standards applies equally to the staff employed or supervised by IPs who specialise in dealing with personal debtors and to the money advice staff employed by the charitable and voluntary sector. Developments in Scotland There are a number of developments currently underway in Scotland. These are: v The advent of Debt Arrangement Schemes v The Bankruptcy and Diligence (Scotland) Bill v The Protected Trust Deeds (Scotland) Regulations Here follows a short summary in relation to each written from the perspective of the public interest on the need for equivalence of the effectiveness of regulatory and monitoring regimes as they apply to personal debt management. The advent of Debt Arrangement Schemes As indicated in the 2004 Annual Report, the Debt Arrangement Scheme (DAS) established by the Scottish Executive came into force on 30 November 2004 to provide a form of debt management rather than debt relief. It was envisaged that debt arrangement plans would be supervised by the voluntary sector with trained money advisers carrying out the work. Fund distributors are also appointed. To date, approximately 60 advisers have been appointed and approximately one hundred and fifty plans set up. Table 2 – The Growth of Protected Trust Deeds in Scotland The Bankruptcy and Diligence (Scotland) Bill It is intended that the provisions of the Bill will replace the existing regulatory powers contained in Schedule 5 of the Bankruptcy (Scotland) Act 1985. The Bill was introduced in the Scottish Parliament on 21 November 2005. The Protected Trust Deeds (Scotland) Regulations 2006 In January 2006 the Scottish Executive issued a Consultation Paper (with responses to be submitted by 14 April) containing a draft of regulations on the Reform of Protected Trust Deeds (PTDs) in Scotland. The Scottish Executive appears to be satisfied that, in principle, Protected Trust Deeds are a useful tool and have a place in a reformed and integrated system of debt management and debt relief. Concerns have however been expressed by the Scottish Executive about the way in which PTDs have been used since 1998. The following table demonstrates the very significant increase in the number of PTDs since 1998: The overall aim of these initiatives is, in all of which the Accountant in Bankruptcy (AiB) plays a role, in the words of the Scottish Executive “to provide a better integrated and more effective system of debt management and relief in Scotland.” Under the Scotland Act the power to legislate on insolvency and bankruptcy procedures is devolved to the Scottish Parliament, whereas the power to regulate IPs throughout the United Kingdom is reserved to the UK Parliament. These new developments illustrate some of the potential consequences of this division of responsibilities. Both the legislation introducing DASs and the role envisaged for the AiB in the Bankruptcy and Diligence (Scotland) Bill will lead to a substantial portion of work on personal insolvency procedures being moved away from IPs either to the public sector under the AiB or to the voluntary sector. While some aspects of the new Scottish legislation may fall outside a strict definition of the IPC’s remit, all of it is relevant as part of the wider context within which we work. There is in our view a public interest in relation to all statutory insolvency procedures that both creditors and debtors’ interests are adequately protected. In the case of debtors this includes an expectation that debtors are properly advised by those whoever supervises these procedures on the best course of action available to them. We emphasise that this does not mean that such procedures should necessarily be reserved for IPs. We hope to discuss this and other aspects of the changes in the Scottish legislation with the relevant Scottish authorities later this year.

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