Restructuring & Insolvency end of year review—life in 2015

Nick Hood: 2015 has been another depressing year for insolvency practitioners and restructuring professionals, with a further downward twist of the spiral of falling insolvency volumes and even fewer cases with any significant value of recoverable assets. Those stakeholders who traditionally have been instrumental in forcing struggling businesses to address their problems, such as the high street lenders and HMRC, have been even less proactive, turning it into a far less orderly market. One downside of leaving directors of businesses to reach out for specialist help has been a rise in disputes between members of management teams and among owners, especially with smaller SMEs, which delays decision-making at a key time and means that there are even fewer positive business rescue outcomes. But the good news is that without these pressures from creditors, more businesses are going the consensual workout route rather than taking the easy option of a formal insolvency. Insolvency practitioners have had to adapt their skill sets to deal with this change of emphasis.

How has the market changed over the past 12 months?

Nick Hood: IPs are faced with a level of disruption from legal and regulatory change not seen since the introduction of the Insolvency Act in 1986 and even more fundamental than the impact of the Enterprise Act 2000 in the early 2000s. Everywhere they turn, goalposts are being moved and the less sophisticated may not be quite sure where the goal line is any more. The traditional blank cheque/time cost fee basis is under fire and the mandatory pre-estimation of fees at the outset of cases is already proving a serious challenge. A raft of badly drafted and ill thought out legislative changes are causing confusion right across the market. Ultimately, 2015 has turned into the year when the chickens of gross over-charging by some major firms, and dubious exploitation of slack compliance requirements by smaller practices, have come home to roost, leading to these changes and to serious reputational damage for the insolvency and restructuring profession. Unsurprisingly, we are seeing firms falter, one even suffering the ironic embarrassment of going through a formal insolvency process and others seeking the shelter of merging with larger firms.

Legal developments and practical impact

Chris Laughton: The Insolvency (Amendment) Rules 2015, SI 2015/443 came into force on 1 October 2015, introducing a new fees regime for administrators, liquidators (in compulsory and creditors’ voluntary liquidations) and trustees in bankruptcy. The new regime is based on the principle that if any of the officeholder’s fees are to be paid on a time cost basis, a fees estimate is to be provided to those required to approve the officeholder’s fees and that estimate cannot be exceeded without further approval.

The fees regime is subject to a new Statement of Insolvency Practice (SIP) 9 which came into effect on 1 December 2015 and sets out, among other things, the explanatory approach to be taken by insolvency officeholders when providing information, to those who approve it, about their remuneration or proposed remuneration (SIPs are a series of guidance notes adopted by the insolvency regulators and issued to licensed insolvency practitioners with a view to maintaining standards by setting out required practice).

Together, this secondary legislation and accompanying regulatory statement have had a significant impact on insolvency practice, going far beyond fee approval mechanisms.

Mark Sands: There have been more legislative changes affecting insolvency cases than for many a year. Most have been sensible and welcome, reducing red tape or increasing options for making recoveries for creditors. The biggest change is yet to be bedded in – the requirement to budget for the costs of an insolvency appointment when seeking approval of the costs from the creditors.

There have also been a number of reported cases which have changed the way some cases are dealt with. In particular, as a result of ongoing appeals, two cases have left us with unhelpful uncertainty. Horton v Henry [2014] EWHC 4209 (Ch), [2014] All ER (D) 193 (Dec) should decide once and for all the extent to which, if at all, a trustee in bankruptcy can look to make realisations from a bankrupt’s pension funds—this issue affects many bankruptcies where the bankrupt was aged 55 or over around the time of the bankruptcy. Green v Wright [2015] EWHC 993 (Ch), [2015] All ER (D) 223 (May) looked at how claims for mis-sold payment protection insurance (PPI) are dealt with when an individual voluntary arrangement (IVA) is otherwise completed—this issue affects many thousands of consumer related IVAs. Both appeals are expected to be heard early in the new year—so there is already much to look forward to in 2016.

Chris Laughton: The new fees rules apply neither to existing cases (except where an administration becomes a creditors’ voluntary liquidation (CVL)), nor to voluntary arrangements, members’ voluntary (solvent) liquidations, the various other types of appointment a licensed insolvency practitioner might take, nor to advisory work. Where they do apply, however, the effect is far reaching—the practicalities are discussed below.

So far, the new regime has necessitated my studying and understanding the legislation and the guidance with a view to ensuring, with colleagues, that we implement it properly. The principal consequence has been educating staff about the regime and about the needs both to budget accurately and to control carefully the work done against the budget.

The effect can perhaps best be illustrated by describing the former and current insolvency regimes as a whole. The previous process was an interactive and exploratory exercise seeking to achieve the best result for creditors where the officeholder’s fees were approved in principle in advance, although they could be objected to after the event through an application to court. Now an insolvency will be conducted in pre-planned steps, the costs of which are approved in advance. This will limit the opportunity for exploration—a fundamental part of many insolvencies. Unforeseen developments will trigger additional work and therefore additional exercises to have the cost of that work approved.

Insolvency is frequently an exercise of discovery, realising assets and quantifying liabilities that were not known about at the start. Such a process works and is controlled well when skilled and licensed professionals, frequently acting as officers of the court, undertake their duties expertly and with integrity (as one would expect an effective regulatory regime would ensure). It works less well, and its costs are less effectively controlled, when the insolvency practitioner is driven to limit his ability to deal efficiently with unknown factors by cost caps, the exhaustion of which will introduce an additional cost burden.

Mark Sands: Most changes have had a positive benefit on our practice. For example, removing the need to seek sanction from the secretary of state for most insolvency litigation has had an immediate impact, reducing costs and recognising that IPs are well placed to bring their skills and experience to bear in deciding what actions to take to benefit creditors. Some changes will take time before we see the full benefits—for example, the option to sell certain rights of action which only an IP could previously have litigated. The litigation funding market has evolved over several years and is well placed to adapt to this new option. Where appropriate, this may enable a quicker and more certain return to creditors by selling a right of action rather than litigating it at great cost and uncertainty over what can sometimes be several years.

Chris Laughton: As SIP9 is relatively prescriptive about the categorisation of activities, it has made sense to revive the design of our tools for extracting remuneration details from our time recording system, and similarly to modify our budget templates. We have taken the opportunity slightly to change our time recording categories and to tighten our budget mentioning procedures.

Significantly, we have increased our focus on staff’s responsibility for their own time spend, while maintaining supervision and management systems that also exert budgetary control.

The practical steps involved in obtaining fee approval will change relatively little in administrations and bankruptcies, when fee approval is sought some time after being appointed. In CVLs, we anticipate seeking fee approval not at the first creditors’ meeting, but by written resolution with the report of that meeting, by which time we have at least had an opportunity to find out something beyond the directors’ statement of affairs and (sometimes brief) explanation of the circumstances of the liquidation.

The new regime does encourage creditor engagement, after a fashion, but clashes violently with the government’s proposals (in the forthcoming revision of the Insolvency Rules due in 2016) to do away with the officeholder’s ability to convene physical creditors meetings.

Mark Sands: The procedural changes have been addressed by making changes to our systems and processes. Those are kept under constant review as we work in an ever changing landscape. The introduction of the right to sell rights of actions plays to the strengths of IPs—we are commercially astute and well placed to consider all options and to come up with a strategy which provides the best outcome for creditors.

Providing a budget for creditors before the basis of our remuneration is agreed is not as big a change as some have suggested. We regularly engage with key stakeholders on all our cases—they want to know how much they are going to recover and when. In answering those key questions we already have to estimate the costs and to consider the best way of achieving the desired outcome—so this simply formalises what we have already been doing.

Chris Laughton: At the end of 2014 I predicted that:

• corporate insolvency numbers would decline—they have done so

• there would be legislative interference in the insolvency practitioner’s fees regime—there has been

• conflicts between employment law and the rescue culture would continue—criminal charges have been brought (unsuccessfully in one case at the time of writing) against directors and an insolvency practitioner failing to notify the secretary of state of proposed redundancies on form HR1

• I would have a busy year of challenging, different and interacting assignments—which has, so far, proved to be the case

In summary, it has not been the best year for the insolvency profession, but some of our practises have flourished.

Mark Sands: No. There remains uncertainty over the how the Jackson reforms will impact on insolvency litigation. The carve-out of insolvency litigation from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 continues but is due to be reviewed by the end of the year. R3 and the Insolvency Practitioners Association, as well as most IPs, are campaigning for the carve-out to be made permanent. The risk is that the review will end, rather than extend the carve-out, which would reduce the number of recovery actions taken, reduce the recovery of costs from delinquent directors and other parties who have been forced to return assets to creditors, and so result in lower returns to creditors.

*Stop Press: a recent announcement from the government on 17 December 2015 confirmed the insolvency carve-out will come to an end in April 2016.*

Costs budgeting has been introduced. How creditors engage with IPs armed with the additional information provided in costs budgets will be interesting to see. At times creditor engagement can be low. When the prospects of a recovery of their debts is low, it is understandable that many will want to limit the time they invest in the process. I hope that this reform acts as a catalyst for increased engagement and look forward to working with creditors, and other stakeholders, in 2016 to achieve the best outcomes for all concerned.

Clients and business developments

How has your business developed in 2015?

Frances Coulson: This has been an excellent year for our insolvency and restructuring team. We have grown our team and have had some notable successes, particularly in contentious cases and some good reported cases. We were praised in sector press in the summer for a model administration with good employee consultation and outcomes. I can’t believe the year is almost gone.

Frances Coulson: It has for us, albeit some of our case closures have been long standing cases paying out, and I think the word on the street is still that insolvency work remains patchy for many practitioners. It is also a year (and will be next) of much change, which causes uncertainty, and certainly the clients will be focused on fees as they get to grips with fee estimates and the raft of new legislation, rules and new focus on regulation. The increase in the bankruptcy petition limit will start to kick in and that does reduce some work.

How has the profile of your clients developed? Can you identify any trends in your clients or types of cases?

Frances Coulson: We have spread our client base working with more smaller practitioners and commercial entities, as well as our long term relationships.

I can see more competition coming in the fraud and antecedent work. Rather like the raft of conveyancers attending emergency insolvency courses post 2008, we can see new entrants to the fraud market where the traditional work is proving slow. I would say that our length and breadth of experience in that type of work, and our commercial approach would, I hope, protect us from that competition. There is a huge push for IPs to take litigation funding or assign their claims, and I can see a role for those things, especially where experts are needed. However, I believe that usually, experienced lawyers on a CFA can give a better return to creditors and so I hope there will be room for us too.

Interviewed by Lucy Trevelyan.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.