Robin Henry, partner with the Financial Disputes team at Collyer Bristow, offers a warning for insolvency practitioners dealing with the mis-selling of interest rate hedging products
The fall-out from the mis-selling of interest rate hedging products (IRHPs) rumbles on with the outcome of the Crestsign Ltd v. RBS case being made public at the end of September. This latest development offers no comfort for insolvency practitioners, who must remain alert to the potential impact such claims might have on the value of assets held by the companies they represent.
Firstly, it’s important to establish if there’s a potential claim to be made. When the Financial Conduct Authority (FCA) reviewed the selling practices surrounding IRHPs, it concluded that over 90% may have been mis-sold by the banks concerned, although the FCA only took into consideration the transactions of ‘unsophisticated investors’. If, like Crestsign, your client is what the FCA considers a ‘sophisticated’ investor, you will not be able to claim under the FCA review scheme. Instead, any claim would be reliant on establishing a breach of common law duties by the bank(s) concerned. As Crestsign have discovered to their cost, this can be an altogether trickier scenario.
The judgment in Crestsign v. RBS found in favour of the bank, and decided that RBS had no duty to advise in this case because the bank’s contractual disclaimer clauses stated that it was not providing advice. The Court confirmed that the bank did provide negligent advice but the ‘basis clauses’ – so called because they set out the basis of the contract on which the parties are agreed – protected the bank from liability. A different decision might have been reached if the basis clauses had been worded differently, or if it can be proved that the bank had been clearly aware that it was actually giving advice.
Further, the judgment also decided that although the statutory Conduct of Business Sourcebook (COBS) rules did not give rise to equal common law duties, there was a similar common law duty not to provide misleading information.
In the Crestsign case, it was concluded that the bank did not do this, but that doesn’t alter the fact that in different circumstances, the outcome may have been different. The duty not to provide misleading information is wider than a duty simply not to make a mis-statement and there is still potential for that duty to become even further-reaching in the future – all of which only goes to prove that the law in this area is still in development and the Crestsign judgement is not a bar to future claims being made.
The issues in Crestsign vs RBS are likely to be revisited in other cases, but the message to insolvency practitioners is clear: tread carefully. Be prepared to acknowledge that the potential for making a claim against IRHP mis-selling could perhaps realise valuable assets for creditors or might be subject to insolvency set off. But on the other hand, it’s important to weigh up whether or not legal action is a viable proposition.
After all, the only thing that can be said about the Crestsign vs RBS case is that it proves the outcome is anything but a foregone conclusion.
Tony Murphy, partner at Harrisons – Business Recovery and Insolvency Specialists, writes in defence of the employer as statistics relating to the number of applications to Employment Tribunals show a substantial fall following the introduction of fees for claimants
Insolvency practitioners up and down the country will already know that for many small-to-medium sized businesses, the prospect of having to participate in an Employment Tribunal has always been a grim possibility.
Not only do they have to consider the potential financial cost of the Tribunal, but also the practical disruption it will inevitably cause as they prepare for and attend the hearing. What with senior staff sweating over Witness Statements and worrying about the possibility of having to attend court, Tribunals exert considerable pressure and stress that can easily distract from the important issues of keeping a business in business. The temptation has been to cave in and just get out the cheque book to buy the problem off.
It’s certainly fair to say that tribunals are perceived by many employers as being weighted in favour of the employee and, rightly or wrongly, the odds have always been deemed to have been hopelessly stacked against him or her. This cannot be right and there has to be more balance in the process, both actual and perceived.
In reality, an entire industry has evolved to help employees with their claims – the legitimate, the debatable and the downright dodgy. So, has this become too skewed in favour of the claimant and are we in danger of entering the American model of Litigation Paradise?
Since lawyers’ costs are currently based on Conditional Fee Agreements, employers are finding themselves having to stump up for their ex-employee’s (inflated) costs as well as their own. These can be significant and can push a business to the brink of extinction. And even if successful in defending the claim, the employer can still only recover a token sum of the legal fees incurred along the way, so it’s hardly surprising that many have historically simply thrown in the towel and coughed up rather than fight their corner: this was simply seen as an unpleasant, but unavoidable, part of the price of doing business.
But at last it seems possible that a more equitable arrangement is stealing its way into the system – even if it is arguably still too little to really deter a mischievous claimant; last summer a new fee structure for claimants was introduced requiring employees to pay a minimum deposit of £250 in order to begin proceedings at an Employment Tribunal.
The unions were understandably horrified, claiming that the move would deny workers access to justice and make it difficult to make genuine claims against bad employers. They do have a point and statistics relating to the number of applications being made to Tribunals since last July would seem to verify this, with almost 5,000 fewer claims for issues such as unfair dismissal and discrimination being lodged in the nine months since the introduction of fees on 29 July 2013.
Between January and March this year, claims have fallen a massive 59% and Justice Minister Shailesh Vara has been quoted as saying: “It is not fair for the tax payer to foot the entire £74m bill for people to escalate workplace disputes to a tribunal. And it is not unreasonable to expect people who can afford to do so to make a contribution. As for those who cannot afford to pay, fee waivers are available.”
Wise and measured words on a sensitive issue.
I am sure there are many employers who will agree wholeheartedly with the Minister’s sentiments, sensing an overdue shift in the balance of the scales of justice. For sure, there needs to be equilibrium between the rights of employers and those of the employee and perhaps this is coming to the fore in the light of last year’s legislation. If the unions don’t agree, then I believe they should consider setting up a ‘fighting fund’ for their members to sponsor claims. Such a move would surely allow valid applications to proceed and potentially weed out any spurious ones along the way.
The unions have a real opportunity to help both employer and employee; they have the experience to judge what a valid claim is and can use a bit of common sense when needed to avoid the Tribunal altogether– just as the government’s fees initiative appears to be doing. This has to be a change for the good.
As for those of us in the business of managing insolvency issues, it will be good to have the full attention of management teams at this critical time rather than losing them to the distractions of unnecessary tribunals when they should be focussing on the bigger picture.
While these changes will not necessarily resolve all inevitable conflicts in the workplace, they do – in some small way – rebalance the scales.
Vernon Dennis, head of the corporate recovery & reconstruction practice at law firm HowardKennedyFsi, asks what effect the extension of Section 233 of the Insolvency Act to cover a wider range of creditors may have on suppliers of IT, telecoms and utilities services
Head of corporate recovery & reconstruction
The Government’s consultation process into proposed amendments to Section 233 of the Insolvency Act 1986, which regulates the conduct of suppliers of essential services in regards to an insolvent customer, closed on 8 October. But while we might think that closed the discussion, it seems – to paraphrase the old idiom – the corpulent chanteuse is yet to descant.
A survey undertaken in August 2013 by R3 concluded that, on average, 46% of IT suppliers, 26% of telecoms suppliers and 14% of utility suppliers withdrew supplies from companies that sought to trade during an insolvency process. A higher proportion still sought to demand ‘ransom’ payments, or renegotiate higher tariffs or more restricted terms. This was said to imperil business rescue.
In tackling this problem and responding to both the huge changes to the utilities sector since 1986, and the almost universal dependence of companies upon IT services, The Enterprise and Regulatory Reform Act 2013 (ERR Act) has been enacted, allowing the Secretary of State for Business, Innovation and Skills to amend Section 233 by statutory instrument.
Section 233 currently only applies to narrowly defined statutory undertakers and similar bodies who have an obligation to provide services to the public – specifically suppliers of gas, electricity, water and public telephone communications.
Where a company goes into an insolvency process, such suppliers may not make it a condition of future supply that outstanding charges arising prior to the commencement of the insolvency process are paid. The supplier is, however, entitled to seek a personal guarantee from the insolvency office holder.
The consultation sought comment on the following proposals:
1. To extend the application of Section 233 to any supplier of utility or telecom services (not just statutory undertakers) in order to cover intermediate providers or so called on-sellers. It is not intended to apply to supplies made for wholesale purposes.
2. To provide that the legislation applies to suppliers and on-sellers of IT goods and services; comment has been sought on the type of IT goods and services which should be covered.
3. To render void any contractual provision that provides a supplier the right to terminate a contract of supply, and /or changes the terms and conditions of supply in the event of the customer entering administration or voluntary arrangement.
As this will impose an effective obligation to supply on existing terms, without an ability to demand payment of any arrears, a number of safeguards have been proposed, including (a) the ability to seek a personal guarantee from the insolvency office holder within 14 days from the onset of the insolvency process; (b) the ability to withdraw supply after 28 days if supply charges are unpaid, and© the ability of the supplier to apply to court for permission to terminate the contract if they believe that the continuing obligation to supply will cause undue hardship.
It is hoped that the proposed changes will save jobs and maximise creditor value – which will in turn contribute to economic growth. Intervention will however have an undoubted impact on suppliers. In the past the suppliers of IT goods and services have enjoyed an ability to extract payment from an insolvent business in preference to other creditors merely by virtue of the importance of such service provision. These suppliers will clearly need to consider the terms upon which they supply and not simply rely on their economic power.
By rendering void termination clauses on the event of insolvency, one may find that suppliers seek to terminate at an early time and will be tougher on customers. The big question is – will suppliers increase the cost of supply to compensate for their loss of rights?
Demands to pay upfront disputed tax in relation to avoidance schemes deemed ‘aggressive’ by HMRC could tip some people into bankruptcy, and insolvency practitioners should prepare, says Fiona Hotston Moore, forensic partner at Ensors
|Fiona Hotston Moore
Contrary to popular perception, the majority of people facing unwelcome demands under the Finance Act are not rock stars, hedge fund royalty, or others easily able to absorb a huge and unexpected financial blow.
Most of the 33,000 individuals and 10,000 companies due to receive ‘accelerated payment notices’ from HMRC over the next 20 months, often to pay backdated amounts, will be well-paid professionals who took advantage of what they were advised were legitimate investment schemes. The notices are expected to be issued at the rate of 2,500 a month from the end of the year.
Many will not be in a position to pay the disputed amount, especially sums that will be often significant multiples of annual salaries.
There is much that could be said about the principle behind accelerated payments. The idea of effectively being ‘guilty’ until proven ‘innocent’ has disconcerted both the legal and accounting professions. It reverses the historic practice whereby a challenge to HMRC was resolved by a tribunal before money was passed over from the taxpayer. But we have now reached the stage of practicalities.
Taxpayers can normally negotiate terms with HMRC for large demands, but not easily this time. The legislation enshrines little sympathy from a government hoping to claw back about £7bn by moving the goal posts on more than 1,200 avoidance schemes, some of which were entered into up to a decade previously. Those at risk include film partnerships and contractor loan schemes.
HMRC has made it clear that only in limited circumstances will it consider payment by instalments. The general requirement will be for the money, millions of pounds in some cases, to be paid within 90 days. This short three month window means an almost immediate liquidation of assets on demand.
This lack of flexibility, even forbearance, means that insolvency practitioners will find themselves drawn into what will be, for many taxpayers, a demand too far.
Insolvency practitioners have an opportunity at this point; they can help to negotiate funding options, try for time to pay the demand, and crucially give advice about how to protect business and personal assets. However, some people will still have to consider insolvency proceedings.
Those facing financial collapse from an advance payment pose a delicate challenge for insolvency practitioners, who will need to consider the potential that although a liability may crystallise due to an ‘accelerated payment notice’, the scheme may survive its court challenge. The upfront tax would then be repayable to the taxpayer.
Independent tax advice will, of course, be crucial in weighing up the options for individuals. These may include trying to reach a settlement with HMRC rather than risk a tribunal hearing that could be lost. It may also be possible to challenge the legitimacy of the accelerated payment notice itself.
Companies also face serious problems from the use of tax schemes. Many will have invested some years ago and assumed the tax relief was a given. It is not, as there may be latent liabilities.
Many companies face the need to provide for substantial tax liabilities, and this unexpected provision may impact adversely on their banking covenants.
In addition, corporate advisers will need to consider the impact on historic dividends, as well whether the directors have an exposure. All of this may be too much for some companies to survive.
Insolvency practitioners face being drawn into tax avoidance, an area they may not have thought of before as being relevant. It is time to start thinking differently.
What the graphic shows: The number of administration appointments won by the top performing firms during the month ending 31 August 2014 across England & Wales as listed in The London Gazette.
Duff & Phelps topped the chart for the firms that won the most administration appointments during August with 12 – the only company to reach double figures in the month. As the overall administration levels fell to 108 in August, there were only 10 firms that were appointed to more than three cases. Duff & Phelps were appointed to administrations from across England and a number of various market sectors.
FRP Advisory collected nine appointments during the month, significantly less than in July (17), despite only Duff & Phelps collecting more. Begbies Traynor, Leonard Curtis and Wilson Field were all appointed to seven administrations, while Insolve Plus benefited from the Wellman Group entering administration as the firm was appointed to six cases during the month – two less than the ‘Big Four’ firms combined.
The total number of companies entering administration fell by 25% between July and August, with the majority of market sectors experiencing falling levels month-on-month. Compared to the same month last year, August 2014 saw a 30% drop in administration levels (August 2013: 155).
There were decreases in almost all sectors between July and August, with the largest in the retail (67%), hospitality and leisure (65%), construction (64%) and food, drink and catering (57%) sectors.
Apart from the services sector, the manufacturing sector saw the most administrations during August with 15, although this was still a 35% decrease on the previous month. The services sector saw a marginal increase of 7.5% between July and August, most notably from the plumbing, heating and electrical subsector as the Wellman Group of companies entered administration.
One legal firm entered administration during August, the first from the sector to do so since May.