An overview of committees and working with them

On Monday 13th November, Malcolm Niekirk held one of his popular Coffee Break Briefing Webinars.

In the webinar, Malcolm looked at Committees. He looked at working with committees, issues that committees deal with, how they are set up and  how members are elected.

This is the summary from the presentation. If you’d like to watch it back, you can do so below. If not, read on for a summary.

Quick Links

This is a rather long article, I've provided some quick links below to help you navigate easier:

• What are committees used for?
• Potential procedural issues and issues around setting up a committee
• How are committee members elected?

What are they for? Remuneration!

This is probably commonly considered to be the main purpose for having a committee.

This article does not discuss remuneration in any great detail. I'm sure the basics are well understood. When you've got a committee, it’s the committee that sets the basis for your remuneration. 

If the committee is either not in being, or, if it fails to set the basis for your remuneration, you then move on, usually to the creditors.  And then beyond that, either to the court or on to scale rates, depending upon the insolvency procedure.

What are they there for? Other issues.

The creditors’ committee is there for other issues too.

Some specific statutory functions of a committee:

• Restoring directors’ powers in a CVL
• Sanctioning a s110 reconstruction in a CVL*
• Sanctioning calls by a liquidator on shareholders in a CVL
• Receiving notice of a disposal of assets to a connected party in a CVL
• Receiving notice (in a compulsory liquidation or bankruptcy) of:
  • Disposal of assets to a connected party
  • Appointment of a solicitor
• Sanctioning or ratifying a distribution in specie in a bankruptcy (s326).
• Sanctioning use of an arbitration clause in an unadopted pre-bankruptcy contract (s349A).
• Applying to court for a new administrator (when an administrator, appointed by administration order, has resigned) (§91 of schedule B1).
• Releasing a former administrator (most, but not all cases) (§98 of schedule B1).
• Involvement in setting terms when a trustee sells the bankrupt’s property on deferred payment terms (§3 of schedule 5).

*In a s110 CVL, the sanction needed for the reconstruction has to come from the committee rather than the shareholders (as would be the case in a s110 MVL).

General statutory functions of committees

There are two general statutory functions that all committees have got.

• Either to assist the office holder.
• Or to do whatever may be agreed with the office holder.

Of course, in voluntary arrangements, there is no statutory committee.  If there is a committee, its establishment, composition and powers will be set by the terms of the proposal, as approved.

The R3 Standard Conditions for IVAs give the supervisor the power to consult a committee and ask it either for advice or to make a decision.  The supervisor may follow the advice or decision that the committee has made but does not have to.

Most voluntary arrangements contain a committee-powers clause similar to that.

Uses for the committee outside its statutory functions

There are four main uses for a committee (other than the statutory function of setting your remuneration).

The first three of them are much the same as the three purposes for holding any meeting in business.  All four of them are:

• Use the committee as your ‘client’ (decisive).

Put decisions to the committee and ask it to decide what direction you should follow, on a particular point of difficulty.

• Use them as a sounding-board (consultative).

Tell the committee what you are thinking of doing, hear their opinions and then decide what you’re going to do in light of what they want – without actually giving them the final decision.

• Share information with them (informative).

Inform them of what’s going on.You’ll have already decided what you’re going to do – you might even have done it already – what they say won’t change your mind.

• Use them to CYA (regulatory).

Consulting creditors and taking their views into account is a useful thing to do (or to be seen to have done).The committee is often a convenient way of doing this. Remember to note on the file that you’ve listened to their thoughts.

Issues around setting up committees

Timing issues

Consider whether you would find it useful to have a committee.  Do you want to try and encourage the creditors to form a committee?

What is the best way of getting your remuneration fixed?

Is it easier done through a committee, or better put to all creditors?

Are there case-specific issues on which you might like to consult a committee?

There may be specific issues around the case that you're dealing with, where having a committee to consult could be really useful.

For example, cases with high stakes litigation – would the committee rather you pay them a dividend within the next six months or so – or develop the case for court instead?   Would they rather you held on to the funds in the estate and use them try to get a better recovery?

How representative will the committee be?

If the committee:

• Represents the majority of creditors by value; and
• Are on side

You should be able to assume that you will get passed any formal resolution you need from the general body of creditors.

Is the committee “established” yet?

Under the Insolvency Rules, the committee is not “established” (and it does not come into effective being) until after you have sent the notice of its membership to Companies House (or the court, or official receiver).

Until you've done that, the committee cannot make a decision.  So, that means that you could set up a committee at a first virtual meeting of creditors and still the committee doesn't yet have the power to set your remuneration.

For now, that power remains with the body of creditors.

That might be convenient, or it may be inconvenient. If it's convenient, you then put your fee resolution in front of the creditors and get them to vote on it.

If it's inconvenient, you might want to hold an informal meeting of the committee and discuss the issues around your remuneration until you've got agreement with the committ

You'll then perhaps circulate a short minute, just to record what was agreed informally.

You then ask them to pass a formal resolution along those lines, as soon as they are formally established.

Procedural issues

Some procedural issues around setting up a committee.

1. How you word the resolution to establish a committee

Follow the statutory wording, and invite the creditors to decide whether a committee should be established, if sufficient creditors are willing to be members.

Following that wording means that even if they pass the resolution, there is still no committee unless, and until, you've got at least three creditors willing to be members.

2. When you circulate the resolution, you should also ask for nominations for membership. 

There is no set form for that. There are not even any specific rules on what it should say. The invitation to form a committee is sometimes informally worded. I don't recommend that. 

The statutory requirements are these: whenever you ask creditors to make a decision about anything, you must either:

• Get deemed consent (in those cases where you can use it), or
• Follow a decision procedure.

I suggest you might normally put the resolution to creditors, by deemed consent.  In most cases it will then be approved by default.  But it will take effect to create a committee if, and only if, at least three creditors then put themselves forward.

Here is a link to a specimen deemed consent notice for this.

How are committee members elected?

As you know, you need 3, 4, or 5 members for a committee.  Not less than 3, nor more than 5.

When do you need an election?

• When more than 5 are validly nominated:
  • Remember that in a solvent compulsory liquidation(!) the committee can be more than 5.  It must be 3, 4 or 5 creditors and it can also be 0, 1, 2 or 3 contributories (r17.5).  And similarly, in a CVL, the members can appoint up to 5 additional members.  Those additional members can then be vetoed by those appointed by the creditors.  Litigation may result.

• When 3, 4 or 5 are validly nominated – and it’s really heated?
  • Perhaps conduct it all at a (virtual) meeting?

So you would need an election if:

• There are more than 5 creditors validly nominated to the committee.
• You've got enough (but not too many) nominated to the committee and it's a really contentious decision for the creditors.

So how do you run a contested election?

Suggestion 1… At a (virtual) meeting:

• take the nominations from the five largest creditors
• propose that they are appointed
• ask for that to be passed on a show of hands.
• (if there are objections, put it to a vote)

(the resolution could be “that the [named] five largest creditors be appointed to the committee”).

Suggestion 2… By remote voting (or at a VM):

• Follow the ‘contested trustee’ procedure (r10.70).  It’s not automatically applicable, but it’s a convenient model to follow.  It saves you the need to design something complicated from scratch.
• It uses successive rounds of voting.
• After each the last-placed candidate drops out.  
• (Or (a similar procedure)
  • Use a single transferrable vote (STF).
  • But plan it carefully – and explain it carefully – there are a number of different ways to count the result with a STF.)

Suggestion 3…The office-holder picks 5:

• Use deemed consent to try to appoint the 5 you choose.
• If creditors don’t like it, they can block your choice.
• You’ll then have to put it to a decision procedure.

(Be prepared to justify your choice to creditors and regulators.)

Remember this:

• The creditor is the member of the committee.
• When the creditor is an organisation, they will probably appoint a representative to attend meetings.
• (They will have to if a body corporate.)
• That representative is not the member; the creditor is.

Make sure that nomination forms make that clear.

Working with the committee

Balancing the committee

If you're going to be working with this committee, and they are going to be useful, it makes sense to try to make sure that they are representative of the creditors as a whole so far as possible.

Seek to get members who are drawn across the range of interests. For example:

• HMRC
• A trade supplier
• The landlord
• An employee
• A director

Seek also to get members who represent a significant part of the total.

Conflicts of interests

The Insolvency Rules legislate for dealings between the office holder and a committee member.  Broadly speaking, that is allowed.

You can sell assets to members of the committee, but you have to make sure that:

• The sale is disclosed to the committee, and approved by them, in advance; and
• The transaction is at full value; or
• The sale is disclosed to the court, and approved by it, in advance; or
• The sale is approved by the court after the event, if urgent, or completing a prior contract.

The interested party is barred from voting on it.

What about cases where there are potential claims against a committee member:

• These are not expressly regulated by IR’16.
• You may have to exclude the member from the relevant part of the meeting.
• You may think about setting up an informal committee?

Other potential conflicts of interest:

• Bankruptcies – with ‘family’ creditors
  • Again, these are not expressly regulated by IR’16.
  • It is sensible to assume that the family creditor is reporting back to the bankrupt.
  • You may have to exclude the member from the relevant part of the meeting.
  • Consider setting up an informal committee?

Again, this is a case where setting up an informal committee might be quite useful.

Informal Committees

They:

• Can be incredibly useful.
• Are like a committee – but expressly agreed not to be a statutory committee.
• May have fewer than three members, or more than five.
• Are unable to take statutory decisions.
• Ideally, they should be in some way representative:
  • Because they contain the majority of the (unconnected) creditors?
  • Because the members are funding or otherwise assisting the office-holder?
• Consider disclosing to the creditors generally:
  • Its existence (and composition)?
  • Its minutes (perhaps redacted)?

That brings me to the end of the article. I hope you had a really good break over Christmas, and I look forward to seeing you all again in this New Year, So thank you and goodbye.

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