Tony Murphy, partner at insolvency practitioners Harrisons – Business Recovery and Insolvency Specialists, wonders if the quest of transparency is driving change for its own sake.
There’s little doubt that transparency is de-rigeur. From media to politics and industry to insolvency, the need for this illusive clarity in all that we do has taken centre stage. It’s the watchword on everyone’s lips, but we seem to be scrambling to achieve it without necessarily thinking through the consequences – or indeed casualties – along the way.
In the world of insolvency, the need for transparency is driving the industry to seek ways to remove both Red Tape and the burden of regulation – a task made all the more challenging by the need to reconcile two apparently irreconcilable objectives.
Insolvency practitioners have acquired wide ranging powers over the years and a corresponding responsibility to implement regulation to keep things on the straight and narrow. In fact, the level of regulation has accumulated to such an extent that it sometimes feels as if the industry is marooned on an island surrounded by the rising waters of a river in full flood, awash with rules and directives swirling in conflicting and sometimes contrary eddies around our ankles.
The good news is that the Regulator has recognised our plight and is set to take action. The question is: will it be effective?
Introducing a consistent approach to voting, who can (and perhaps more importantly, who can’t) attend meetings, prove claims or have voting rights is an obvious ‘quick hit’. But what about the more fundamental issues – like the automatic 12-month end to an administration, for example? It’s difficult to see where this arbitrary time frame has come from, or to identify a rational, commercial reason – or legal imperative – for enforcing it.
And then, of course, there’s the issue of fees. Always a touchy subject, but the latest proposal to limit insolvency practitioners’ fee basis to a percentage arrangement where there is no committee or charge-holder is proving more emotive and contentious than most. And rightly so.
A study of returns to creditors over a range of cases has deduced that under the current fee structure, there is no regular oversight on costs. But the study has failed to recognise that for bank appointments, firms are currently charging at an agreed ‘Panel Rate’ – which is well below the full recovery charge – on the basis that there will be further work for them in the future.
Meanwhile, at the other end of the spectrum, committees, on the whole, are formed only for larger cases where there are more assets and greater scope to recover them using statutory powers. Surely one would expect to see higher recovery fee in such situations?
And somewhere in the middle, neither of these situations exists. So how is it possible to levy a realistic fixed percentage fee even for these straightforward cases? How can we strike a balance between an inflated value that ensures costs are definitely covered (and likely to deliver super profits to the IP – surely a no-no) and a price-cutting war?
Delivering any service on price alone is madness and a ‘one size fits all’ approach to fee structuring across our industry is fraught with danger. It will inevitably lead to cost cutting and the temptation in some quarters to process each job as quickly and as cheaply as possible. Of course, there’s nothing wrong with this – provided the creditors need nothing further going forward (additional recoveries or challenging errant directors, perhaps?), but how effective is that going to be in the long run?
There’s much to be said for the old adage that you only get what you pay for. So if there’s water pouring though your roof, who are you going to hire to fix the problem – the cheapest jobbing builder in the phone book or an experienced professional with the tools to plug the leak?
Of course, if transparency is the aim, then change is inevitable– but surely we need to pick our targets carefully so that it is seen to be effective and worthwhile, not just implemented for the sake of it.
Following the introduction of Commercial Rent Arrears Recovery (CRAR) earlier this month, DLA Piper restructuring associate Noelle Petty examines what the changes will mean for insolvency practitioners
The threat of a landlord levying distress over goods owned by a tenant in financial difficulty has caused concern for insolvency practitioners seeking to provide business rescue solutions. It has often been one of the reasons for seeking the protection of a moratorium. However, ever since the courts have interpreted a walking-possession agreement to grant security rights to a landlord, sometimes even a moratorium has proved to be always too late to preserve the tenant’s assets for the benefit of the company’s general body of creditors.
On 6th April this year, distress for rent was replaced with commercial rent arrears recovery (CRAR).
Distress for rent has been replaced entirely by CRAR under which landlords of commercial premises still have a right to recover rent arrears by seizing goods, but the categories of goods that may be seized has been limited and the right may only be exercised after following a more cumbersome procedure.
Key differences between distress and CRAR
The most significant change, from a business rescue perspective, is the introduction of a notice period which now requires a landlord to give its tenant at least seven clear days’ notice (which excludes weekends and bank holidays) before the landlord’s enforcement agent attends the premises to exercise CRAR.
Legislation from 1737 provided that where tenants “fraudulently or clandestinely” removed goods from the premises to prevent them being distrained upon, landlords were entitled to seize the goods from wherever they had been re-located and, as a penalty, recover double the value of the goods removed.
The new CRAR regime eliminates this remedy. Now, if the landlord fears that the goods will be removed upon the tenant receiving notice of the proposed CRAR, he can apply to court for permission to give less than seven days’ notice. Similarly, to recover goods from premises other than those demised, the landlord will now need to apply to court for a warrant entitling his enforcement agent to do so.
Other key changes include:
• Premises – Landlords used to be able to levy distress at premises which comprised a mixture of residential and commercial use. CRAR may only be exercised over goods at “commercial premises” or over vehicles belonging to the tenant on the public highway.
• Lease – Distress required a relationship of landlord and tenant to exist without the need for a written lease. For CRAR to apply, a tenancy must be evidenced in writing.
• Level of arrears – Previously, there was no minimum level of arrears that was required in order to levy distress. Now, at least seven days’ rent must be outstanding.
• Type of arrears – The CRAR procedure restricts the recovery of arrears to “basic rent” only (which includes interest and VAT), unlike the old distress regime which enabled landlords to recover any sums due under the lease that were defined as “rent” (e.g. service charge, insurance payments and rates); Time – Under the old regime, landlords/bailiffs could enter the leased premises on any day except Sunday and at any time between sunrise and sunset. Regulations now provide for CRAR to be exercised between 6am and 9pm on any day of the week or, where they fall outside the permitted hours, during the tenant’s business hours; Sale of goods – Under CRAR, goods seized by an enforcement agent must be sold at a public auction after giving the tenant at least seven clear days’ notice, whereas under the old regime seized goods could be sold by any method preferred by the landlord after five days of seizure.
• Who can seize? – CRAR can only be carried out by an authorised “enforcement agent” which term now replaces “certificated bailiffs”. Landlords will therefore no longer be able to levy distress themselves. An enforcement agent cannot use force to enter premises or to gain access to a vehicle for the first time, without first obtaining a warrant permitting him to do so.
• Whose goods? – CRAR can only be exercised over goods in which the tenant has an interest. This appears to reinforce the position arrived at by case law in relation to distress, namely that the equitable interest of a debenture holder under an uncrystallised floating charge will not prevent the goods in question being subject to CRAR. A landlord is no longer able to seize any goods found on the premises. Consequently goods owned by a third party should not now be taken in exercise of CRAR. However his enforcement agent is entitled to seize goods co-owned by the debtor and another party. In such circumstances the co-owner will be entitled to receive an inventory of the goods seized.
• Keeping goods on the premises – Walking possession agreements have been replaced by “controlled goods agreements”. By signing the agreement, the tenant is permitted to keep the goods in his possession but undertakes not to remove or dispose of them nor to permit anyone else to do so before the debt is paid.
• Undertenants – most insolvency practitioners were familiar with the rights of a landlord under the Law of Distress Amendment Act 1906 to serve a notice on any sub-tenants, requiring them to pay rent directly to the landlord. Those rights have been replaced by similar ones under section 81 of the Tribunals Courts and Enforcement Act 2007, although the recipient sub-tenant now has 14 clear days from service of the notice before he is obliged to start making payments directly to the landlord.
What does this mean for landlords, tenants and insolvency practitioners?
Although the new CRAR regime still enables a landlord to seize a tenant’s goods, the seven day notice period will give a potentially insolvent tenant an important breathing space in which to seek professional advice. It remains to be seen whether the courts will interpret the landlord’s rights under a controlled goods agreement as akin to security rights and thus capable of elevating a landlord from the position of unsecured creditor to one whose claim takes priority (up to the value of the goods seized) over debenture holders, preferential creditors and unsecured creditors.
However, the question is likely to be of less relevance provided tenants seek urgent advice and where appropriate, use the breathing space to obtain a moratorium or to pass a winding-up resolution (landlords rarely bothered to distrain following notice of liquidation).
It appears that even though the administration moratorium provisions of the Insolvency Act have not been amended expressly to apply to CRAR, it will fall within the current description of “legal process (including legal proceedings, execution, distress and diligence)” so that the landlord will not be able to exercise CRAR or proceed to complete CRAR once notice of intention to appoint has been filed or an administrator has been appointed without permission of the court or, once appointed, the administrator.
The changes introduced by CRAR potentially promote better opportunities for solvent tenants to reach constructive agreements in relation to arrears without the potential interruption to their business imposed by the levying of distress. However, the requirement for landlords to give notice before exercising CRAR is likely to result in greater losses on their tenants’ insolvency.
Given the additional hoops that landlords must now jump through in order to seize tenants’ goods, it seems likely that they will seek additional security from tenants at the outset of the lease e.g. rent deposits and guarantees.
From a business rescue perspective, it is to be hoped that the receipt of notice of impending CRAR will encourage financially distressed tenants who have not already done so to seek urgent advice, at a time when alternatives to liquidation or bankruptcy might still be possible.
Squire Sanders restructuring and insolvency partner, Paul Muscutt, runs through what IPs and administrators need to know when dealing with invoice discount agreements.
Restructuring and insolvency partner
Yes and no. Invoice discounting provides finance and eases a business’ cashflow by enabling its invoices to be paid immediately as soon as the business notifies them to the discounter. Where invoice discounting differs from other forms of finance is that the invoice discounter is not lending anything to the business. Rather, they are purchasing the receivable from the business and therefore, own the receivable outright.
It is possible to buy specific debts only (known as a facultative facility) or to buy all the debts (known as a whole turnover facility). You would need to check the facility agreement to determine exactly which debts have been purchased, as even with a whole turnover facility some debts may be excluded or may not be capable of being assigned to the discounter.
Most discounting agreements will provide for such debts (often termed “non-vesting debts”) to be held by the business on trust for the discounter. Further, as all debts are usually paid into a trust / blocked account in favour of the discounter and most discounters take fixed charged over non-vesting debts, such debts are likely to be subject to a fixed charge in favour of the discounter.
Yes. Often the insolvency of the business will be an event of default under the terms of the discounting agreement, entitling the discounter to do a number of things including charging additional fees. The fees (often mistakenly referred to as termination fees) are designed to compensate the discounter for the additional risk and management time it will incur following the insolvency of its client in seeking to recover the debts.
Fees will commonly range from 2% to 10% of the assigned sales ledger. A discounter will not always seek to enforce all the fees it is entitled to and most reputable discounters will be prepared to negotiate with the administrators to ensure challenges are avoided and its reputation (and that of the discounting industry) is preserved. If you consider the charges are excessive, unreasonable or irregular and you cannot reach agreement with the discounter, legal advice should be sought.
No. The debenture secures the company’s obligations to the discounter by providing security over all other assets and the undertaking of the business. The debts that have been assigned to the discounter cannot be secured by the debenture since such debts are no longer the property of the company. The discounter cannot take security over its own property. As to debts which have not been validly assigned (non-vesting: other debts) see below.
In addition to purchasing the debts of the business, the discounter also purchases ‘related rights’ to ensure it has the ability to collect the debt in should it cease to have the cooperation of the business. Related rights can include the right to step in and complete any WIP in order to collect in the related debt. You should check the terms of the agreement to determine whether WIP vests in the discounter as a related right.
The comments above regarding WIP may apply to stock, especially where such stock has been allocated to a particular customer order. Where stock has been returned by a customer, such stock will often form part of a related right vested in the discounter enabling the discounter to sell the stock and apply the proceeds in satisfaction of the debt [relating to that stock].
Most discounting agreements are drafted to ensure all debts under its agreement are assigned at the earliest opportunity. This is usually upon the creation of the debt being the point at which the debtor incurs a monetary obligation to the discounter’s client. An obligation to pay money in most commercial situations arises prior to an invoice being issued. The invoice prescribes when that obligation is payable.
It is not uncommon for invoice discounting to compliment more traditional types of financing such as overdraft and loan facilities.
If all assets of the business are secured to a prior lender, then in order to purchase any debts of that business free from such security interests, the discounter should have obtained a waiver or release from the prior secured lender. Prior to any distribution and in the course of the insolvency, the existence and terms of such waivers and any deeds of priority should be examined and advice sought where necessary.
Whether the business has been sold or is being traded by the administrators, the discounter may require the assistance of the buyer or the administrators to collect in the debts. Sometimes a commission is paid to the collecting party and will be documented in a debt collection agreement. Where the buyer of the business is assisting in collecting the debts, the discounter will be keen to ensure all payments by any common debtors (i.e. debtors of both the buyer and the discounter) will be applied in payment of the discounter’s debts first.
If collection of the discounter’s debts will be improved by the business continuing to trade, the discounter may agree to continue funding but on amended terms. Care should be taken by the administrators to ensure they have sufficient comfort that adequate funds will be advanced free from any ability of the discounter to set off pre-insolvency liabilities. It is common for a new ledger to be opened post-administration and the pre and post insolvency ledgers are combined and set off at the end of the trading period.
There has been some debate on this issue but the safest assumption to make is that, unless the invoice discounting agreement is terminated (note most agreements will never automatically terminate on insolvency), the debts created by the business will continue automatically to vest in the discounter. Notice provisions are likely to apply to any termination by the company.
As the debts belong to the discounter, any sale will need to be effected by the discounter. Normally this will be achieved by way of a deed of assignment from the discounter to the buyer. Alternatively, the discounter can be made a party to the SPA for the sole purpose of transferring the debts to the buyer.
No. There is no equity of redemption entitling the company to have the debts re-assigned to it if it pays all sums owing to the discounter. The only interest the company has is the right to be paid for its debts under the terms of the agreement, which is subject to the discounter’s rights to apply certain charges, discount and set-off claims which may reduce the sum to be paid to the company. In certain circumstances (i.e. fraud) the sum “due” to the business can be a negative balance, which is why a discounter will take security (including guarantees) to secure the company’s obligations under the discounting agreement.
This relief is only available to the supplier of the goods or services the subject of the invoice but the terms of the discounting agreement may provide for any such sums recovered to be held on trust for the discounter. The discounter will need to re-assign the relevant debt to the company first to enable it to qualify for the relief.
One would expect most discounting agreements to be limited to trade debts, but you should check the agreement carefully as some have wider scopes than others and may extend to other types of receivables such as insurance claims or refunds, intercompany loans, compensation claims, tax refunds etc. These latter types of receivables, if not caught by the discounting agreement, are likely to be caught by the discounter’s floating charge security in any event.
Insolvency Today managing editor Fred Crawley offers his view on proposals for insolvency regulatory and fee reform
Managing editor, Insolvency Today
At the time of writing, the six week consultation period following Jenny Willott’s proposals for regulatory and fee reform in the insolvency sector has just closed, with a response to feedback expected imminently.
As such, it’s an inconvenient time to be writing an editor’s letter, given that nothing has materially changed since my last column about the subject in late February.
Nevertheless, maybe now is a good time to take a controversial stance and say that – with regard to fee reform at least – there are good odds that even were the reforms enacted exactly as proposed, actual market impact would be less dramatic than expected.
While there is cynicism over the exact political motivations behind the fee reform proposals (I think the argument that they are addressed more at enhancing the public perception of the profession than the fortunes of creditors is credible), their message is fairly simple.
IP fees, the proposals suggest, are not deliberately inflated, but are structured in a way that has allowed inefficiencies to persist in their generation, with the end result being unsecured creditors left in a weak position. The proposed remedy is to limit or remove time- and rate-based charging, favouring instead upfront fixed fees and fees based on a percentage of realisations.
The natural anxiety in response to this is that IPs will not be able to recover costs in situations where creditors tie them to rigid fee structures without regard for case complexity.
Fair enough. But isn’t it already the case that banks can push back fairly heavily on fees, going so far as to reduce hourly charge rates, and that IPs will regularly accept this because they want to keep getting work from the creditors in question?
While the reform proposals open the possibility of this trend extending from panel work to the rest of the market, they don’t create a new problem as such.
To look at things another way, what’s to say that a more understanding approach to IP’s costs couldn’t persist even were the reforms to be passed?
To my understanding at least, there’s nothing in the proposals that stops IPs from returning to creditors in situations where things become more complicated than they first appeared, and where further costly investigation is required to achieve a result, in order to negotiate further remuneration.
In a profession characterised by flexibility, and where successful outcomes are dictated by the ability of practitioners and creditors to have adult conversations about compromise, it seems reasonable to suggest that fee reform may not be too worrying a prospect after all.
This content will appear in the March/April issue of Insolvency Today.
What the graphic shows: The number of administration appointments won by the top 10 performing firms during the month ending 31 March 2014 across England & Wales as listed in The London Gazette.
BDO stormed to the top of the chart in March, displacing Begbies Traynor, winning over twice as many administration appointments during the month than it did in February. The firm was appointed to 22 administrations during March, the bulk of which comprised of the Mimosa Healthcare and Forestdale Hotel groups. 20 of 22 administrations BDO was appointed to originated in the Midlands and East Anglia region.
Begbies Traynor collected 17 administrations appointments throughout the month, equalling its total from February. The firm has now been appointed to 49 administrations in the first quarter of 2014. The administration of Welsh construction group Macob Limited accounted for eight of the firm’s cases, with others from the manufacturing and property sectors.
Leonard Curtis was the other firm to record double figures in March, with 14 administration appointments, primarily from the North of England. Duff & Phelps and FRP Advisory were appointed to eight and seven administrations respectively.
Both Deloitte and PwC collected four administrations during March, although the other ‘Big Four’ firms did not fare so well – KPMG were appointed to just one case, while EY didn’t collect any during the month.
What the graphic shows: The percentage increase and decrease in case numbers by firm month-on-month between February and March 2014, and the percentage increase and decrease in case numbers by firm year-on-year between March 2013 and March 2014.
March 2014 was a successful month for upper mid-tier firms such as BDO and Duff & Phelps, recording respective 175% and 166.7% increases in month-on-month administration caseloads. The increase for BDO is particularly notable considering the firm had already collected eight cases the previous month. However, Baker Tilly did not fare as well, seeing administration caseloads drop 66.7% month-on-month, as did Mazars and Wilson Field, which saw year-on-year appointments drop 83.3% and 88.9% respectively.
Year-on-year, Resolve Partners and Zolfo Cooper both recorded a 500% increase in administration caseloads, while Begbies Traynor and Refresh Recovery saw 325% and 300% increases respectively.
KPMG experienced a difficult month for administrations, collecting just one appointment, compared to five the month previously (a 80% decrease) and 21 in March 2013 (a 95.2% drop).
What the graphic shows: Administrative appointments per market sector in England and Wales during the month ending 31 March 2014 as listed in The London Gazette.
Administrations stayed mainly flat between February and March 2014, increasing from 168 to 173 in total. The construction industry continued to see a high number of administrations as large-profile firms entered insolvency, such as Atlas Building Limited, Cathedral Works Organisations (Chichester) Ltd and the Macob Limited group of companies. There were also increases in the financial, hospitality & leisure and health & social care sectors, largely due to groups of companies entering administration. The legal sector saw just one company in administration during March, as the predicted surge in insolvencies has yet to materialise.
The services sector saw a 60% increase in administrations month-on-month, with a large spike in the professional services sector, as well as increases in the plumbing, heating & electrical, printing and recruitment service sectors.
What the graphic shows: The percentage of all admiration cases landed by each insolvency practitioner during the month ending 31 March 2014. The “Rank” column shows the IP’s annual ranking by number of cases in 2013.
What the graphic shows: The busiest regions for administration appointments in England and Wales during the month ending 31 March 2014 as listed in The London Gazette.
What the graphic shows: The split of administration appointments and receiverships between the clearing banks for the month ending 31 March 2014, based on floating charges register at Companies House.
Barclays appeared as a chargeholder on 23 cases in March. Lloyds collected 18 cases, while both RBS and HSBC had eight. NatWest provided six cases, and Santander had five.
What the graphic shows: The number of appointments taken by insolvency practices by different banks for the month ending 31 March 2014, based on where those clearing banks held floating charges registered at Companies House.