Response by the Insolvency Service
to written questions
I refer to Neil Caulfield's letter of 4 June concerning
this draft Order. I have copied the questions in that letter in
bold and our comments follow.
Q 1 Paragraph 8 of the Explanatory Document
says that the savings to be made as a result of the proposal "might
in some cases make the difference between the payment, or not,
of a dividend or in other cases increase the amount of the dividend."
Are there any available statistics on the number of "typical"
insolvency cases that would be tipped from non-payment into payment
were the total anticipated savings to be achieved ("typical"
insolvencies meaning insolvencies that represent, say, 50% of
cases around the mean value of insolvent estates)? If those figures
are not available, please provide a distribution chart showing
insolvent estate value against numbers of cases to indicate the
likely impact of the savings in the context of overall insolvency
numbers.
I regret that I am unable to prove the information
you have requested.
These changes are being brought forward on the assumption
that the reduction of costs is a desirable outcome in itself provided,
of course, that the pre-conditions are met. We have attempted
to address the question of how the savings would feed through
to the creditors whilst acknowledging that there will not in all
cases be a £ for £ benefit for the creditors. Whilst
we can appreciate your wish to have a more detailed analysis of
the direct effect on the creditors, I am afraid that the information
is simply not available.
Given the individual nature of the body of insolvency
cases and the fact that the Secretary of State does not have any
direct role in the conduct of certain types of cases[18],
there is no central record of the outcome of all cases created
for that purpose. Certain key information is placed on the public
record (for example at Companies House or with the court) but
the purpose of that is to enable someone with an interest in the
particular case to find information concerning it rather than
to provide a source of information about the generality of the
cases.
We are of the view, which we think must be right,
that the persons who must have information concerning a particular
case are the creditors and the insolvency legislation seeks to
do that. It is perhaps worth re-iterating at this point that parallel
changes are being made to the Insolvency Rules 1986, intended
to come into force on the same date as the LRO, which are intended
to provide better information to the creditors so as to enable
them to make an informed decision as to the reasonableness of
the costs and expenses charged by insolvency office-holders. The
power to approve these lies, we think, properly with the creditors
and is not generally subject to scrutiny of an external authority,
unless they are referred to the court for review.
There are generally no circumstances under the Insolvency
Act 1986 in which the Secretary of State is asked to agree remuneration.
That is a matter for the creditors or a committee of the creditors
and if they do not make a resolution then, depending on the proceedings,
the office holder can only claim the scale rate[19]
or have the matter considered by the court.
In voluntary arrangements, remuneration is entirely
a matter for the terms of the arrangements as proposed by the
debtor, individual or company, and approved by the creditors,
and is not subject to any external scrutiny.
It is possible to say in very broad terms that payment
of a dividend is more likely in a rescue (such as administration
or voluntary arrangement) than a terminal procedure (such as bankruptcy
or liquidation) but even within those broad categories the levels
of return to the creditors can vary.
You have suggested that we could provide estimates
for a "typical" insolvency case being based on a % of
cases around the mean value of insolvency estates. This is similarly
unworkable. "Assets" are not as clear cut as they might
appear as they can include:
Assets subject to a fixed charge
Assets subject to a floating charge
"Prescribed part"[20]
of floating charge assets
Potential fruits of action by the office holder
to boost the assets for the benefit of the creditors (e.g. the
recovery of money for the estate from a wrongful trading action
against the directors) which are unlikely to be listed by the
directors as assets
Furthermore, the final realisations will often vary
considerably from the book value or the realisable value estimated
at the commencement of the insolvency procedure.
I hope you will therefore appreciate that the collation
of this information is not straightforward, even if all office
holders in all cases are asked to provide it.
Q 2 Paragraph 55 of the Explanatory Document
refers to the requirement for obtaining court sanction causing
loss in value to insolvent estates in certain cases. In what proportion
of cases is that the case?
We do not have firm figures for this and have largely
relied on the views expressed by the insolvency specialists who
responded to the consultation.
Q 3 There are large differences between the
estimated savings figures given in the draft ED and those given
in the final ED, although the overall total is not dissimilar
(in fact some 20% larger). For instance, the savings anticipated
from allowing remote attendance at meetings to take place have
decreased from £1.4m to £0.4m and the savings anticipated
from use of websites from £3.5m to £0.6m, while the
savings anticipated from abolishing annual meetings have increased
from £3m to £5.2m. What is the reason for the differences?
What factual information changed between the draft and the final
version?
At the point at which you were provided with the
draft Explanatory Document (ED) in March, which included a summary
of the draft Impact Assessment(IA), there was still a good deal
of work to do to finalise the IA. There were a few reasons for
the changes thereafter which I have summarised for each proposal
below, but most significantly it is to recognise that insolvency
case numbers in 2010/11 are projected to be greater than they
would have been had these provisions been commenced during 2009/10.
You are correct to point out that in some cases the estimated
benefits have been down-sized, that is because in relation to
one or two of the proposals we considered some of the earlier
presumptions to have been over-optimistic and in one case failed
to take account of costs which needed to be offset.
Remote Attendance at Meetings
(£1.4m to £0.4m)
As work has progressed on this proposal, we have
taken the view that the previous estimates of the proportion of
cases in which insolvency office-holders would have the confidence
to allow attendance at meetings via non-physical means may be
lower than previously anticipated. This is perhaps the most novel
of the modernisation measures that are proposed and although,
anecdotally, we have been told by stakeholders that the change
is to be welcomed, in the first year following commencement the
estimated benefits have been adjusted to factor in a more cautious
view as to take-up (from 5%-10% to 2% of all meetings held).
This is expected to increase over time.
Use of Websites (£3.5m
to £0.6m)
The earlier draft IA made no provision for the cost
of maintaining websites. In finalising the IA a cost estimate
of £200 per case was factored into the cost/benefit calculation,
resulting in a cost of some £3.5m needing to be offset against
the gross benefit (which was itself uplifted on account of the
higher projected case numbers for 2010/11).
Affidavits (£0.1m-
no change)
The lack of any material change in this number, notwithstanding
that projected case numbers have been increased, is attributable
to the fact that we had miscalculated the number of affidavits
that were submitted in members' voluntary liquidations and the
estimated benefits relating thereto, causing the initial estimate
of benefits for this proposal to have been overstated by some
£57,000. However, the additional benefits that will result
as a consequence of the projected higher number of creditors'
voluntary liquidations in 2010/11 are now expected to broadly
equate to that earlier overstatement.
Annual Meetings (£3m
to £5.2m)
The estimated savings are based on projected case
numbers for 2010/2011, which are 16,000 compared with 9,000 in
the previous estimate.
Sanction (£1m to
£1.2m)
This increase is largely attributable to an increase
in the projected number of cases in 2010/11, although in finalising
the calculations some revision has been made as to the estimated
proportion of cases in which requests for sanction will be made
to creditors. These estimates are partially based upon information
provided by colleagues within the Insolvency Service who collate
data from our Official Receivers' offices.
Q 4 So far as remote attendance at meetings
is concerned, what precautions will apply in the event of a technological
breakdown in the means of remote communication to ensure that
meetings do not continue despite the potential loss of important
contributions to the meeting, and how will those precautions be
enforced? How is the concern of the Insolvency Managers Technical
Forum answered, that the validity of a meeting might be challenged
on the basis of inability of a particular creditor to achieve
technical access?
We have considered the point you have made and agree
that it will be necessary to make provision in the Rules to cover
this eventuality. We are discussing this with our lawyers.
Our current thinking is that we could give a discretion
to the chairman of the meeting whether to continue if he becomes
aware of the loss of a connection with a remote creditor and to
enable a creditor who considers that they have been disenfranchised
to requisition a further meeting (at a physical venue).
Q 5 Please clarify what residual rights of
meeting will apply if the requirement for an annual meeting is
indeed abolished. In particular, what residual right of challenge
will apply to allow the issue of insolvency practitioner fees
to be raised on a face-to-face basis? What other rights of feedback
in person will exist? Did the Insolvency Service consider allowing
annual meetings to take place on the initiative of 10% of creditors,
as with objection to remote attendance?
As the ED makes clear the provisions relating to
annual meetings do not give any "right" of challenge
the fees on a face to face basis. There is no provision either
in the Act or in the Rules for any business other than the laying
of the accounts and the intention of the existing provisions is
to do no more than to ensure that the information is received.
In practice we accept that if a creditor did wish
to challenge the information provided, he might well seek to use
the forum of the annual meeting to do so and we would expect the
liquidator to consider what the creditor/contributory says when
doing so, in the same way that we would expect them to consider
any other enquiry.
The changes proposed will in our view improve the
position of the creditors in that it will provide an explicit
route (via the Rules) for seeking further information concerning
receipts and payments. This is, we would contend, preferable to
the present position when such a route can only be inferred to
exist in connection with the summoning of the annual meetings.
Given that creditors rarely attend these annual meetings,
we did not consider that it would serve any useful purpose to
retain the right to requisition a meeting under sections 93 and
105, especially when a creditor can just as easily make contact
with the office holder.
Furthermore 10% of the creditors have an existing
general right to requisition a meeting under the Insolvency Act
1986 (under section 168 of the Insolvency Act 1986 applied to
voluntary liquidations by section 112 of the same Act) and that
is unaffected by the proposed LRO.
Q 6 Notwithstanding what is said in the ED,
what is the likelihood that savings will be passed on to creditors?
The Institute of Credit Management raised this, saying that "the
underlying premise of cost reduction and increased return to creditors
is flawed." Likewise, although it concluded by giving a cautions
welcome to the proposals, HMRC said that "the savings on
individual cases when divided amongst all creditors will be too
insignificant to benefit anyone other than the IP", adding
that costs might, however, be passed on. The £4.50 saving
envisaged in relation to non-filing in IVA cases is at such a
low level that it particularly risks being swallowed up by general
claims of increased practitioner expenses. How will that be avoided?
The figure of £4.50 is not, we would submit,
a good example as it is an estimate of the cost of a very short
amount of time in sending one piece of paper to the court and
itself makes up a very small part of the estimated benefits.
Our general contention is that there is no reason
why an insolvency practitioner being a member of a regulated profession
should seek to inflate costs as a device in order to absorb savings
as the result of something not done or done in a more cost effective
manner.
Q 7 Is it correct that there will be no obligation
to circulate the information currently laid at annual meetings
until such time as new Insolvency Rules are introduced, and that
in the meantime that information will need to be obtained from
Companies House, with a fee being payable for its provision? Has
the Insolvency Service considered negotiating a position or issuing
guidance whereby that information will in the interim be provided
free of charge?
The amended rules are intended to come into force
on the same date as the changes proposed in the draft Order so
we do not think this situation will arise. However, the fee for
obtaining documents from Companies House is generally no more
than £4.
You asked about the general right to requisition
a meeting, not directly linked to the annual meeting. There are
general provisions across the insolvency legislation to requisition
meetings in the various forms of insolvency procedures.
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