Guidance for the new SIP 3.2, SIP 7 and SIP 9; warning for the new SIP 9.

Introduction

The Joint Insolvency Committee has introduced three new SIPs, a new SIP 3.2 (CVAs), SIP 7 (the presentation of financial information in insolvency proceedings) and SIP 9 (payments to insolvency office holders and their associates from an estate). The new SIP 3.2 will apply to all cases where the nominee is appointed on or after 1 April 2021, the new SIP 7 and SIP 9 will apply to all cases from 1 April 2021.

This article gives information about key changes to the new SIPs. What appears to be a major change in SIP 9 is negated by the requirements of SIP 3.2 and SIP 7. This, and changes to the layout of the SIPs means that it is necessary to read all the new SIPs to be certain that all changes have been correctly identified.

The new SIP 3.2, SIP 7 and SIP 9 are all available on the websites of the ICAEW and IPA:-

https://www.icaew.com/regulation/insolvency/sips-regulations-and-guidance/statements-of-insolvency-practice/statements-of-insolvency-practice-sips-england

https://insolvency-practitioners.org.uk/regulation-and-guidance/england-wales/

Fairness and transparency

The new SIP 3.2 and SIP 7 both now include the statement that ‘the particular nature of an insolvency office holder’s position renders transparency and fairness of primary importance in all their dealings’. This important principle has been included in SIP 9 for some years and consideration of many of the changes to all three SIPs suggests that they are in an effort to give specific requirements of what is considered fair and transparent.

The inclusion of the principle of fairness and transparency in all new SIPs emphasises that mere compliance with the specific detail of the SIPs is not sufficient, office holding insolvency practitioners must also ‘think outside the box’ and apply the principles of the SIPs.


SIP 3.2, Company voluntary arrangements

The new SIP 3.2 includes consideration of the need for additional specialist assistance and the likely cost of this, and any potential delays or complications and the likely duration of the CVA, when providing information to directors of the company at each stage of the CVA. For cases where the nominee is appointed on to after 1 April 2020 the officeholder must also have procedures in place to ensure that the proposal is considered objectively.

The main change in SIP 3.2 concerns the content of the proposal. There were previously six categories of information to be included in the proposal and the new SIP 3.2 now has 18, including:-

  • Any additional specialist assistance that may be required by the company, the reason why this may be necessary and the cost of it
  • An explanation of the role and powers of the supervisor
  • Details of any discussions that have taken place with key creditors
  • Where it is proposed that certain creditors are to be treated differently, and explanation as to which creditors are affected
  • An explanation of how debts are to be valued for voting purposes in particular where the creditors include long term or contingent liabilities
  • Disclosure of the estimated costs of the CVA
  • Full details of amounts paid or to be paid to the nominee, supervisor or their firms in connection with the CVA and the reason for these payments
  • An explanation of how debts to be compromised will be treated such the CVA fail
  • The circumstances in which the CVA may fail and what should happen to the company and remaining assets should the CVA fail

These changes indicate that the increasing experience of CVAs as flexible and powerful insolvency procedures has also shown gaps in the previous requirements for proposals.


SIP 7, presentation of financial information in insolvency proceedings

The new SIP 7 introduces a different definition of associate that is also used in the new SIP 9. For the purposes of these SIPs associate is not just limited to the definition given in S435 Insolvency Act 1986 (IA1986) as it will also include anyone whom a reasonable and informed person might consider would be an associate. It may be very difficult for an insolvency practitioner to assess who might be included as an associate using this definition as it is very subjective. File notes giving the reason for decisions are particularly important where there is the potential for disagreements about interpretation.

The new SIP 7 concerns the presentation of financial information so for the purposes of the new SIP 7 the perceived association would be between the recipient of a payment from the estate and the insolvency practitioner, their firm or an employee. It is important to remember that this new definition of associate is in addition to the definition of associate in S435 IA1986.

Payments to associates other than from the estate are to be disclosed as a note to receipts and payments accounts in the same way as payments to the officeholder other than out of the estate are to be disclosed as a note to receipts and payments accounts.

The new SIP 7 requires reconciliations to be carried out of bank accounts, case records and to any amounts due to the office holder. This is a new requirement and is not limited to straightforward reconciliations between the cash book and bank statements. It is suggested that these reconciliations should support the accuracy of financial information presented to creditors and other interested parties.

The office holder should confirm in any report that these reconciliations have been carried out and it is likely that future RPB monitoring visits will include checking that these reconciliations have been carried out and documented on file.


SIP 9, Payments to insolvency office holders and their associates from an estate

The first big change to SIP 9 is in its name. SIP 9 is now only concerned with payments made to office holders and their associates from an estate. This may seem to suggest that after 1 April 2021 it will no longer be necessary to disclose pre appointment remuneration where this has been paid other than from the estate, for example. This would be a surprising change in the context of fairness and transparency as information about pre appointment remuneration may help creditors to identify an associate.

The new SIP 3.2 still requires details of the amounts and source of any payments made to the nominee, supervisor or their firms to be included in the proposal and for full disclosure to be made in reports of the costs of the CVA and any other sources of income of the insolvency practitioner .

The new SIP 7 still requires any amounts paid to the office holder, their associates or firm other than out of the estate to be disclosed as a note to receipts and payments accounts. This would include disclosure of pre appointment remuneration where this has been paid other than from the estate.

The new SIP 3.2 and SIP 7 still require disclosure of amounts paid to insolvency practitioners including those not paid from the estate so full disclosure should still be made of these payments after 1 April 2021 even though this is no longer a requirement under the new SIP 9. It is suggested that the principle of fairness and transparency is followed if there is any doubt.

The new SIP 9 also uses the new and expanded definition of associate that is used in the new SIP 7. An associate is not just limited to the definition given in S435 IA1986 as it will also include anyone whom a reasonable and informed person might consider would be an associate.

For the purposes of the new SIP 9 the perceived association would again be between the recipient of a payment from the estate and the insolvency practitioner, their firm or an employee in the same way as it would be for SIP 7. It is important to remember that this new definition of associate is in addition to the definition of associate in S435 IA1986 and to keep file notes of any decisions made regarding the definition of associates.

Associates are effectively treated in the same way as office holding insolvency practitioners in the new SIP 9. Payments to associates from an estate should be fair and reasonable reflections of the work undertaken. Category 2 disbursements, now called category 2 expenses, also include payments to associates, meaning that from 1 April 2021 a payment can only be made to an associate if this has been approved by creditors, whether this is from the estate or by the office holder as a disbursement. Payments that might be perceived as being a threat to the office holder’s objectivity or independence should also be disclosed and approved by creditors in the same way as Category 2 disbursements/expenses.

This means that after 1 April 2021 the process for the internal approval of payments from an insolvency estate should include consideration of whether the recipient is an associate or whether the payment might be seen as a threat to the office holder’s objectivity. It is suggested that this process should take place sufficiently early for the approval of creditors for a payment to be requested, should this be necessary.


Insolvency and anti money laundering compliance

RMCSC carries out high quality, independent insolvency compliance reviews either for insolvency practitioners themselves or for onward submission to the ICAEW, along with anti money laundering Reg 21 audits. Please contact Caroline Clark on 07854 967976 or caroline.clark@rmcsc.co.uk for more information.