INS1109 - Insolvency and Insolvency Practitioners

Guarantees of costs

Insolvency Act provisions

The Insolvency Act 1986 provides for an insolvency practitioner (IP) to investigate and initiate legal proceedings when a director deliberately liquidates a company to avoid paying tax and in other situations.

For example

fraudulent (S213 IA1986) or wrongful trading (S214 IA1986)
assets disposed of as gifts or at undervalue (S238 & S423 IA1986)
unfair preference to another creditor (S239 IA1986)
breach of fiduciary duties for misfeasance (S212 IA1986).

Similar situations apply to voluntary arrangements (VAs) and bankruptcies (S366 IA1986).

Need for guarantees

However when an IP does not have sufficient funds to commence proceedings the IP may seek a guarantee that creditors will meet any costs. In suitable cases EIS Worthing and Edinburgh guarantee and pay out costs to IPs. EIS also guarantees costs in

bankruptcy (England and Wales) or sequestration (Scotland) cases to enable the IP to pursue recoveries
VA cases to enable supervisors to petition for bankruptcy/sequestration in the event of failure.

It is essential that

inappropriate cases are not funded
a potentially good return is not risked by the failure to provide funds
funds recovered from IPs are accounted for (not Scotland).

There is a special budget for EIS for guarantees and payments with accounting and reporting arrangements for each case.

Request received

When an insolvency practitioner (IP) seeks a guarantee of costs the Officer in Charge should send a report by first class post providing the information below together with the file or papers to EIS.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)

Report to EIS (Worthing or Edinburgh)

This should include all the information below.

Amount of guarantee requested and purpose

Precisely how much HMRC is being asked to fund. EIS will not fund any costs already incurred by the IP, or in excess of any limit set, or for purposes which have not been agreed.

Possibility of any further requests

The nature of the action likely to be taken by the IP and whether it is expected to be complex, protracted and defended.

An estimate of the maximum costs, whether other creditors would be prepared to contribute to the funding and if so whether contributions are likely to be pro-rata to their claims in the insolvency.

Amount of HMRC’s claim

The full extent of HMRC debt both preferential, (INS1123) and non-preferential together with unpaid settlement debt. Whether the claim includes doubtful amounts which could disappear, for example on appeal or on grounds of equitable liability.

Funds available for recovery

Details including the value of any assets to be targeted by the IP in any recovery action. For example, if there are claims against specific properties, associated companies, directors or other third parties. (EIS is unlikely to fund costly proceedings by the IP against parties who cannot repay.)

Key points and issues

Any information which will provide the key to EIS understanding of the background of the case or issues which need to be considered.

A key issue would include when the IP considers that there are criminal offences including those under the Insolvency Act 1986. When the case is within the limits at EM0371 and a series of phoenix companies is involved it should be submitted to Insolvency Compliance & Securities (ICS). In these circumstances EIS expect a prior reference to SCO (EIS should be advised of the submission).

Reason for litigation

The commercial and compliance reasons for EIS to guarantee costs and whether there are any other HMRC issues or cases which need to be considered.

Prospects of recovery

A realistic assessment of recovery prospects including the cost yield ratio. The strength or weakness of the claims to be pursued together with any information on the offences the IP will investigate. Also any evidence provided by the IP, counsel or any other party to support the proposed action.

Whether the Commissioners are the petitioning creditor.

This factor should be especially considered in Northern Ireland cases where we have given an undertaking to the Crown Solicitor to advise him of those cases where we do not propose to pursue the action.

Appeals

Any appeals from IPs concerning decisions to fund should be forwarded, via line management to the Senior Officer who will arrange for an independent review.

Additional factors to be considered

In complex cases it may be necessary for EIS to refer the case to the Solicitors Office for their advice as to the suitability for litigation. EIS will consult branch precedents and/or Process & Strategy, where appropriate, before reference to the Solicitors Office.

Conditional fee arrangements

Definition

Conditional Fee Arrangements are commonly referred to as “no win no fee,” which means that legal representatives will only charge a fee if there is a successful outcome to the litigation.

However there are inherent problems with this system as the defendant’s costs could be awarded and the legal representatives can charge up to double their normal fees if successful.

This change in legal practice could have an adverse effect on litigation cases, which the Department agrees to fund.

If a caseworker receives a request for funding under this scheme the case should be forwarded through the line manager to EIS. A test case will then be referred to the Solicitors Office for advice.

Once a test case has been prepared and a ruling made this section will be updated.

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