Revised Statement of Insolvency Practice 14: the Cinderella SIP?

Anyone looking at the current SIP 14 would be forgiven for thinking that they’d stepped back in time. SIP 14 was last updated in 1999 and reads like SIPs used to read before the move to the principles and key compliance standards format adopted by the Joint Insolvency Committee (JIC) for all SIPs. SIP 14 repeats statutory provisions and “reminds” insolvency practitioners about various matters. It is old school.

SIP 14 had not been forgotten. JIC prioritises its work when reviewing SIPs, focussing on where it is believed there is a need for change. That could be because there has been a change in the law – think fee estimates and SIP 9, or SIP 16 and the introduction of the evaluator as a statutory function. Alternatively, the insolvency landscape could have changed, for example now SIP 3.1 recognises that the volume IVA sector is the predominant sector when it comes to IVAs and the standard is tailored to be applicable to the working practices of that sector.

Until now, SIP 14 never quite made it to the top of the JIC’s to-do list.

Jurisdictional differences

That SIP 14 did not go the way of SIP 4 or SIP 8 and be withdrawn, reflects in part that there are different legislative arrangements for insolvency between England and Wales, Scotland, and Northern Ireland.

Northern Ireland introduced its legislative equivalent of s 72(A) of the Insolvency Act 1986 (prohibition of appointment of administrative receiver), Art 59(A) of the Insolvency (Northern Ireland) Order 1989, a little later: it was 27 March 2006 for Art 59(A) compared to 15 September 2003 for s 72(A). Plus, historically, companies in Northern Ireland have not tended to change their banking arrangements that frequently. These factors combined means that in Northern Ireland there have been more floating charges where an administrative receiver could be validly appointed.

As there remained a need for SIP 14 in Northern Ireland, to maintain consistency across the jurisdictions, JIC kept SIP 14, periodically reviewing whether the SIP continued to be needed or required changing.

Modernisation

Previously, those reviews concluded that no changes were necessary. But at its most recent review of SIP 14, the JIC decided that the SIP should be updated to reflect the most recent legislative changes to the status of preferential creditors but also to clarify that the requirements of the SIP apply to all types of insolvency appointment, not just receiverships.

When the JIC reviews a statement of insolvency practice, a working group is set up. These typically comprise a mix of JIC members and other specialists in the subject being discussed.

The working group for SIP 14 was comprised of insolvency professionals, representatives of the recognised professional bodies, a leading academic, and HMRC.

The working group’s conclusions, as referenced in the consultation documents, were that SIP 14 should be updated to:

• Recognise the reappearance of a more extensive range of preferential creditors, with the re-designation of certain HMRC claims with secondary preferential status in 2020.
• Clarify that the requirements of SIP 14 should be applied to all types of insolvency proceedings.
• Produce a single SIP applicable in all jurisdictions rather than having different versions for each jurisdiction.

SIP 14 has also been substantially rewritten to adopt the principles and key compliance standards format used in the other SIPs. The legislative references have also been stripped out, in common with other SIPs. That this is a substantial (but necessary) re-write is obvious when you look at the marked-up version of the SIP included within the consultation documents.

Beyond receivership

Given the limited opportunities available to appoint an administrative receiver since 2003 in England and Wales, and also Scotland (ie, single figures for administrative receivership appointments in England and Wales annually since 2016 according to the Insolvency Service’s published statistics), it’s unsurprising that ICAEW’s reviewers have not seen many problems with compliance with SIP 14 as regards the SIP’s current primary focus, administrative receiverships.

Issues do arise and are challenged by the reviewers in relation to the apportionment of costs in other insolvency proceedings.

For example, we have seen some instances of costs being charged inappropriately against floating charge realisations where they were incurred to protect or enhance the value of a property which benefitted the secured lender, effectively benefitting the fixed charge holder to the ultimate detriment of the unsecured creditors.

Documentation explaining the rationale behind the apportionment of costs may also be lacking. In addition, if receipts and payments accounts do not comply with SIP 7, creditors may not be able to identify that they have been disadvantaged. Paragraph 1.2 of the current version of SIP 14 states:

“Whilst this statement does not specifically address the treatment of preferential claims in liquidations, members acting as liquidators (or in any other relevant capacity) should have due regard to the principles which it contains.”

But that is not the most explicit means of making sure that costs are apportioned appropriately. That’s why the proposed reframing of SIP 14 to apply to all insolvency proceedings will be helpful. That’s not to say that currently, insolvency practitioners have a “get out of jail free” card when it comes to the inappropriate apportionment of costs. The fundamental principle of professional competence and due care in the Insolvency Code of Ethics apply, which can form the basis for regulatory or disciplinary action.

ICAEW’s reviewers have also seen some cases where assets were wrongly classified as the insolvency practitioner had relied solely on the wording in the debenture and had not considered the extent of the secured creditor’s control over the assets. As the world has moved on, in the last couple of years we’ve seen the need for judicial interpretation regarding the categorisation of more unusual types of asset class in the Avanti and UK Cloud cases.

Clarity

Leaving aside the issues of costs apportionment and the categorisation of assets, the consultation also asks questions which are borderline philosophical in the context of the SIPs.

Cast your mind – or at least your browser – back to the current version of SIP 14. Because of the age of the current published version, office holders are addressed as “members”. Members’ attention is drawn to various matters, and they are reminded about other things. Putting aside the drafting conventions used in the past, it’s obvious that SIP 14 is directly aimed at insolvency practitioners. The same is obviously true of all the SIPs – SIP 1 states that SIPs set principles and key compliance standards with which insolvency practitioners are required to comply. But given the format of the current version of SIP 14, it is arguably one of the more opaque SIPs from the perspective of someone outside the insolvency profession.

The SIP 14 consultation questionnaire acknowledges that the primary audience for a SIP is insolvency practitioners and their staff, but goes on to ask:

• Should any additional content be added to the SIP for the benefit of other stakeholders? And, if so, what? (Q2)
• Do you consider that including information for other stakeholders, such as para 6 regarding types of charges and crystallisation, is worthwhile? (Q3)

These questions in themselves raise some thought-provoking further questions about the purpose and nature of the SIPs. SIPs are publicly available documents. They are published on all the RPBs’ websites, on the R3 website, and linked from the Insolvency Service’s website. They’re not exactly hidden, though someone not necessarily familiar with insolvency would need to know where to look. If a stakeholder in the insolvency process does access the relevant SIP, is it helpful to include some basic information to assist them in their understanding of the situation and the requirements imposed on insolvency practitioners? Or does it risk obscuring the messages aimed at the primary users of the SIPs, ie, insolvency practitioners themselves?

SIP 14 may not necessarily be the best example here, because the stakeholders involved are often fairly diverse. At one end of the spectrum there is HMRC (insolvency’s most frequent flyer) and secured creditors who are most often sophisticated creditors and often professionally advised financial institutions. You’d doubt that either of these participants would need additional pointers from a SIP. But at the other end of the SIP 14 spectrum, there are former employees, who may be involved in the only interaction they will ever have in an insolvency process in their working lifetimes. The consultation draft of the SIP already directs insolvency practitioners to assist employees and the first question in the consultation asks if further guidance is required regarding the level of assistance insolvency practitioners should provide to preferential creditors, particularly employees, when they are submitting their claims? If assistance is being provided, is further explanation necessary in the SIP itself, or is it perhaps patronising to assume that some limited further information would be helpful.

Is it better to cite guidance and explanation elsewhere and keep the focus of the SIPs squarely on what an insolvency practitioner is required to do? There’s precedent elsewhere in other SIPs: both SIPs 7 and 9 refer to insolvency practitioners providing access to a suitable explanatory note (generally one of R3’s creditors’ guides) and para 14 of SIP 3.2 states that where creditors may need assistance in understanding the consequences of a CVA, the insolvency practitioner should consider signposting sources of help.

When the JIC working group reconvenes to review the consultation responses, it will be interesting to see how the insolvency profession has responded to these questions about the content of the SIP. And what the wider creditor community’s view will be.

Final thought

The SIP 14 consultation may appear on first reading to be a routine refresh of a document that had ceased to have any real relevance in the current insolvency market. But there is potential for the consultation process on SIP 14 to provoke a debate about the nature and purpose of the SIPs more generally. If insolvency practitioners want to be part of that debate, they are encouraged to respond to the consultation.