Insolvency practitioners will need to be familiar with three new Statements of Insolvency Practice which were introduced with effect from 1 April 2021.
SIP 3.2 (CVAs) makes changes to the provision of information and transparency. There are also new categories of information to be included in the proposal and practitioners will need to be aware of these when dealing with all proposals where the appointment is made on or after 1 April 2021. The categories include details of discussions with key creditors, full details of the amounts paid or to be paid to the nominee, supervisor or their firms and the reasons for these payments and the circumstances in which the CVA may fail and what will happen to the company and remaining assets in those circumstances.
SIP 7 (presentation of financial information) introduces a new definition of associate which is also used in the new SIP 9. The definition is no longer limited to the Insolvency Act definition and now requires consideration of the substance or likely perception of any association between the office holder, their firm, or an individual within the insolvency practitioner’s firm and the recipient of a payment. Where a reasonably informed party might consider there would be an association, payments should be treated as if they are being made to an associate.
We anticipate that the new SIP 9 (Payments to insolvency office holders and their associates) will present the greatest challenge to office holders. SIP 9 no longer applies to MVLs (unless those paying the fees require such disclosure). However, as regards other appointments, any payment that could reasonably be perceived as presenting a threat to the office holder’s objectivity or independence by virtue of a professional or personal relationship, including to an associate, should not be made from the estate unless disclosed and approved in the same manner as an office holder’s remuneration or category 2 expenses. In addition, payments should not be approved by any party with whom the office holder has a professional or personal relationship which gives rise to a conflict of interest.
The extension of the definition of associate without any clear guidance is likely to cause confusion. An FAQ document has been issued by the RPBs and can be found here. However, some of the answers given in that document are, at best, ambiguous. Specific questions are posed as regards whether certain relationships are professional or personal and give rise to a conflict yet, save for stating that a lawyer with whom the IP engages regularly is unlikely to fall into the associate category where working on an arm’s length basis,
the RPBs have avoided providing direct answers and have instead stated that only the office holder will be able to determine the position. This does not assist office holders and appears to add yet a further layer of complexity (and cost) to their role.
Whereas the previous SIP 9 made a distinction between expenses (payments which are not office holder’s remuneration or a distribution to creditors) and disbursements (expenses met by and reimbursed to an office holder), with the latter falling into two categories, category 1 (to independent third parties) and category 2 (not to an independent third party), the new SIP 9 refers only to expenses and provides that expenses include disbursements. Category 1 and 2 disbursements are now therefore category 1 and 2 expenses.
At first glance this change may appear insignificant. However, the impact of it is that a direct payment to an associate will be classified as a category 2 expense (there no longer being standalone expenses). As well as any such payment requiring approval, it is likely that standard reports and templates used by office holders will require updating to reflect the change.
There are some other subtle but potentially significant changes.
The previous SIP 9 provided that the recovery of basic overheads was not permissible. The new SIP 9 prohibits the recovery of any overheads other than those absorbed in the charge out rates.
Only payments that are directly attributable to the estate are permitted. This would appear to prohibit any rough calculation for items such as stationery, printing and photocopying.
There now appears to be an obligation to provide an indication of the likely return to creditors in every case when seeking fee approval, not only where it is practical to do so (as was previously the case).
In terms of transitional matters, the FAQs state that sums paid before 1 April 2021 that were properly approved under the previous SIP do not need to be repaid but that existing approvals need to be reviewed to ensure they are compliant with the new SIP 9. If any service would not be a category 2 expense by reason of being provided by an associate then further approval would be required before any such costs are drawn – unless the costs of doing so would be disproportionate. Any such costs incurred after 1 April 2021 will require approval.
We envisage that a number of insolvency practitioners may fall foul of the new SIP 9 and it remains to be seen what action the regulators will take as a result and whether additional clear guidance will be provided.
