In December, the Insolvency Service published a research paper on CVLs. It involved the analysis of c.2,000 2017 CVLs to explore the efficiency and effectiveness of the CVL process.<\/p>\n\n\n\n
Because the researchers considered that efficiency and effectiveness are generally measured in terms of swift distributions to creditors, the conclusion was that CVLs seem neither efficient nor effective. They say: \u201cA process that takes an average of 2 years to complete and an average recovery of 0% to the majority of creditors, is arguably, not efficient\u201d.<\/p>\n\n\n\n
But is that fair? Does that overlook other benefits of the process? Isn\u2019t it unrealistic to expect most CVLs to generate a return to creditors?<\/p>\n\n\n\n
The paper is at https:\/\/www.gov.uk\/government\/publications\/creditors-voluntary-liquidation-cvl-research-report-for-the-insolvency-service<\/a>.<\/p>\n\n\n\n In Summary<\/u><\/strong><\/p>\n\n\n\n The main points arising from the research paper include:<\/p>\n\n\n\n In this article, I look at some of the reasons for questioning the robustness of these conclusions and some of my own suggestions as to why CVLs don\u2019t appear to be performing well.<\/p>\n\n\n\n Why Conduct the Research in the First Place?<\/u><\/strong><\/p>\n\n\n\n The 2016 Rules were said to have been produced \u201cwith the overall aim being to provide better outcomes from insolvency and increased returns to creditors\u201d. The review of the 2016 Rules led to a commitment to examine CVLs, which are by far the most commonly used insolvency process.<\/p>\n\n\n\n However, the paper describes some other \u201cconcerns\u201d about CVLs:<\/p>\n\n\n\n That\u2019s quite a to-do list! While I agree it is important to answer such allegations, it is questionable whether this research, which generally explores only IP fees, time costs and distributions to creditors, could ever be expected to provide answers.<\/p>\n\n\n\n How long is the average CVL?<\/u><\/strong><\/p>\n\n\n\n The analysis resulted in a median length of time a CVL is \u201copen\u201d of 712 days (2.0 years). However:<\/p>\n\n\n\n If the government were interested in improving the efficiency of CVLs measured simply by their duration, why not cut the 3-months-to-dissolution and the 8-weeks-to-filing-final-report provisions? After all, under the 1986 Rules, only 28 days\u2019 notice was required for the final meeting and I don\u2019t recall anyone claiming this wasn\u2019t long enough.<\/p>\n\n\n\n I think that other inefficiencies in the current CVL process include:<\/p>\n\n\n\n Flawed Assumptions about Fee Payments<\/u><\/strong><\/p>\n\n\n\n The researchers allocated 450 cases (17%) in the category: no pre-appt fee paid.\u00a0 However, their assumptions appear odd:<\/p>\n\n\n\n The researchers appear to have made the opposite assumption about disclosure of liquidators\u2019 fees:<\/p>\n\n\n\n What does a Liquidator do?<\/em><\/u><\/strong><\/p>\n\n\n\n A significant assumption running through the paper is:<\/p>\n\n\n\n Is this true? If it were, then why do liquidators do D-reports and help the Insolvency Service with their investigations? And why would liquidators deal with employee and pension claims via the RPS, as this work merely swaps out one creditor for another?<\/p>\n\n\n\n There are umpteen other tasks that chip away at maximising the return to creditors: Gazette notices; bonding; producing extremely detailed reports for creditors; seeking fee approval; seeking it a second time; maintaining files to the RPBs\u2019 expectations as regards file notes, bank recs, case reviews\u2026 <\/p>\n\n\n\n I am not saying that these items are unnecessary and to be fair the paper does acknowledge to some extent liquidators\u2019 CDDA work, but I do wish that there was more recognition of the fact that all these tasks cost money and it is perhaps this<\/em> that leads to the perception that the only real beneficiaries are the liquidators. If the Insolvency Service is truly interested in enhancing creditor returns, then perhaps they could focus on reducing the regulatory burdens on liquidators.<\/p>\n\n\n\n Can Low Value CVLs Ever <\/em>be made \u201cEfficient\u201d?<\/u><\/strong><\/p>\n\n\n\n The paper includes:<\/p>\n\n\n\n “Fees” are pre-appt fees plus post-appt time costs, so this is not a statement about how much IPs are actually getting paid. <\/p>\n\n\n\n I think that the main reason why fees are so much greater than realisations in most cases can be found in the finding that the median value of assets realised is \u00a35,798.\u00a0 Could the CVL process ever be stripped back to such an extent that cases like these would cover all their costs and perhaps even generate a return to any creditor?\u00a0<\/p>\n\n\n\n The dataset also included 369 cases (14%) where no assets were realised. What would government prefer to be done with these cases? Would they prefer the directors to have applied to strike off the company or for more time and expense to be spent on winding up the company through the court? If there is an IP that is prepared to take on low value CVLs, seemingly at a loss (on the basis of time costs in any event), then is this something to be discouraged?<\/p>\n\n\n\n Average Creditor Recovery is Zero?<\/u><\/strong><\/p>\n\n\n\n The paper\u2019s executive summary illustrates the sad reality of most CVLs:<\/p>\n\n\n\n However, it\u2019s not all bad news. The detail shows:<\/p>\n\n\n\n The dataset pre-dates HMRC\u2019s pref status, so I suspect that non-pref unsecured dividends are far less frequent now.<\/p>\n\n\n\n But is this really news to anyone? Insolvent companies with more salvageable businesses likely will go into ADM. From what I have seen, the typical CVL involves few, if any, tangible assets of any value, perhaps a smattering of book debts that are often aged or doubtful, and maybe an overdrawn DLA or other connected party claim that is due from someone on the brink of their own insolvency process. Any creditor return is unlikely from a company of this kind of profile. But I don\u2019t think that this means that CVL is the wrong process.<\/p>\n\n\n\n So IPs are <\/em>the Primary Beneficiaries then?<\/u><\/strong><\/p>\n\n\n\n Apparently not. The researchers found that the median amount paid to IPs (in relation to post-appt fees) as a percentage of assets realised was 21%. The researchers suggest that this illustrates that the costs of the CVL process \u2013 agents, legal, insurance, advertising, bonding \u2013 take up the majority of realisations. <\/p>\n\n\n\n However, as this analysis relates only to post-appt fees, I wonder if a significant proportion of the realisations in low-value cases was spent on paying pre-CVL fees.<\/p>\n\n\n\n The researchers also examined time costs incurred -v- fees drawn and found that the median recovery rate of fees paid as a percentage of time costs incurred was 14%.<\/p>\n\n\n\n In fact, this paints an overly rosy picture. It is not clear how many mixed fee bases cases there were, but the researchers have included them in their dataset. Those cases would have under-reported the total time costs potentially by a large margin. I would have thought it sensible to remove those from the dataset and this would have dropped the recovery rate.<\/p>\n\n\n\n Reading Behind the Stats<\/u><\/strong><\/p>\n\n\n\n The section, \u201cAssociations Between Quantitative Indicators of Efficiency\u201d, was largely lost on me. However, I did clock these statements:<\/p>\n\n\n\n The Value of Investigations<\/u><\/strong><\/p>\n\n\n\n The researchers do acknowledge that a key benefit of the CVL process is the disqualification of some directors. 5% of cases in the dataset led to a disqualification. But 54% of cases were originally sifted in. I know that the Insolvency Service is constantly working to tweak its rules engine, but it does appear that more could be done to reduce the number unnecessarily sifted in\u2026 or are worthy cases not proceeding satisfactorily..?<\/p>\n\n\n\n The researchers looked at the value of investigations from the creditors\u2019 perspective. Unfortunately, I think their definition of realisations from investigations was too narrow. They identified only recoveries from transactions at an undervalue (1 case, i.e. 0%) and from preferences (13 cases, i.e. 0%). It appears that \u201ccommercial settlements\u201d in relation to general misfeasance claims were not distinguished.<\/p>\n\n\n\n I suspect that investigations leading to recoveries of overdrawn DLAs and unlawful dividends are far more common than TUVs and preferences. I also suspect that on the whole these generate more bang for liquidators\u2019 bucks. I wonder what might be revealed if the researchers had compared recoveries to SoA EtoRs especially as regards DLAs. I think this is where liquidators can prove their worth: even if sadly recoveries are insufficient to pay a dividend to creditors, do they not gain some satisfaction from learning that a director or other connected party has been forced to pay something back?<\/p>\n\n\n\n We also ought not to forget the 183 cases (6%) that were ongoing. I expect that many of those involved liquidators continuing to pursue the fruits of their investigations.<\/p>\n\n\n\n Are Some Liquidators Short-cutting Investigations?<\/u><\/strong><\/p>\n\n\n\n What about that allegation that some liquidators don\u2019t do investigations justice either because they\u2019re too cosy with the directors or accountants or because there isn\u2019t enough incentive fees-wise?<\/p>\n\n\n\n The researchers tried to explore this in a few ways:<\/p>\n\n\n\n Research Conclusions<\/u><\/strong><\/p>\n\n\n\n Perhaps unsurprisingly, the paper concludes by describing potential areas for further research.<\/p>\n\n\n\n My personal view is that, while it is good to see researchers taking an interest in CVLs, some expectations about CVLs appear unrealistic, especially given the asset profile of the typical insolvent company, and there seems to be a lack of appreciation for the wider benefits of the process. <\/p>\n\n\n\n My fear also is that the response to a cry of lack of transparency tends to be more requirements for IPs to provide more information to creditors. But surely insolvency is already characterised by information overload, isn\u2019t it? If the consensus calls for greater creditor returns, then I suggest the focus needs to be on lifting some of the current regulatory burdens that make the process so costly.<\/p>\n","protected":false},"excerpt":{"rendered":" In December, the Insolvency Service published a research paper on CVLs. It involved the analysis of c.2,000 2017 CVLs to explore the efficiency and effectiveness of the CVL process. Because the researchers considered that efficiency and effectiveness are generally measured … Continue reading \n
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