Applicants for judicial office are facing aggressive questioning about their attitudes to race, an approach which has in some cases caused offence, the Gazette has learned. One white male barrister was asked if he was ‘racist’ as an opening question, while another was quizzed about why he lived in an area with so few people from ethnic minority groups. The questions were posed in separate judicial competitions, and the Gazette understands that other applicants have faced similar questions. Both barristers, one of whom was successful in his application, are understood to have found the questioning unnecessary and offensive, although neither made an official complaint to the Judicial Appointments Commission (JAC), which is responsible for the selection process. A JAC spokesman said: ‘We have a statutory duty of confidentiality and do not comment publicly on individual applications.’ However, he said interviews for judicial appointment were recorded so that any complaints could be investigated if a candidate felt they had not been treated fairly. ‘If a candidate complains to us, we investigate and respond to them directly. Anyone who is not satisfied may refer the complaint to Sir John Brigstocke, the independent Judicial Appointments and Conduct Ombudsman,’ he said. The spokesman said the selection process had been externally ‘equality proofed’ to ensure it did not favour any group, and members of the interview panels were trained to interview objectively. ‘All candidates are judged against the same five qualities and abilities. One of these is “an ability to deal fairly”, but race is not mentioned,’ he said.
The Human Rights Act 1998 is ‘a vital part of the foundation of our fight against terrorism’, the president of the Supreme Court has declared in an outspoken defence of the act. Setting out a series of recent cases in which government anti-terrorism measures have been ruled unlawful by the House of Lords or Supreme Court, Lord Phillips of Worth Matravers noted that the Human Rights Act and the judges who apply it have been attacked by the media. In a speech last week, the former lord chief justice said that senior judges were criticised by Charles Clarke when he was home secretary, because, in Clarke’s words, ‘the judiciary bear not the slightest responsibility for protecting the public and sometimes seem utterly unaware of the implications of their decisions for our society’. Defending the judges, Phillips told an audience at Gresham College that ‘Charles Clarke failed to appreciate that it is the duty of the judiciary to apply the laws that have been enacted by parliament. It was parliament that decreed that judges should apply the Human Rights Convention.’ Phillips added: ‘The enactment of the Human Rights Act by the previous administration was an outstanding contribution to the upholding of the rule of law in this country and one for which it deserves great credit.’ Phillips said that if immigrants were not fairly treated in the UK, ‘their consequent resentment will inevitably result in the growth of those who, actively or passively, are prepared to support terrorists’. He added: ‘The Human Rights Act is not merely their safeguard. It is a vital part of the foundation of our fight against terrorism.’
Obiter thinks it is high time we revived our celebration of loyal legal PAs. Step forward Sharon Charters, who has clocked up 35 years at Stephensons in Bolton. Sharon joined what was then Berry’s Solicitors as an office junior straight from school, before becoming PA to Andrew Mountain, her current boss, in 1984. Berry’s was acquired by Stephensons in 2006. Mountain, the firm’s care partner, said: ‘Sharon is our longest-serving member of staff and she is an asset to the family team here in Bolton, and indeed the firm. We work very closely with children’s guardians and local authority legal teams, all of whom appreciate her work and comment on how she is long-suffering!’ Songbird Sharon (pictured, right, with Stephensons’ chairwoman Ann Harrison) can often be found singing karaoke at the Cattle Market pub on a Saturday night.
The government has launched a strategy to end the culture of privilege that sees former independent school pupils dominating the top jobs in the judiciary and boardroom to the exclusion of people from less affluent backgrounds, it emerged today. Launching the new strategy Opening Doors, Breaking Barriers, the government said that a ‘stark fact’ of social mobility was that only 7% of the UK population attended independent schools, and yet this section of the population accounted for 70% of all high court judges and 54% of all FTSE 100 chief executives. The BBC website further reports that 68% of top barristers also came from this privileged 7% of the country’s population. Other statistics cited by the government include: just one in five young people from the poorest families achieve five good GCSEs compared to three quarters from richer families; and only a quarter of working class boys go on to get middle class jobs. The new strategy aims to end this inequality by ensuring that everyone has a fair opportunity to fulfil their potential, regardless of the circumstances of their birth, the government said. Unfairness will be tackled at every stage of life, from school through to adulthood, it asserted. City firm Allen & Overy is the first law firm to sign up to the strategy’s new ‘business compact’, under which it has agreed to offer internships to young people from deprived backgrounds. It joins accountancy firms KPMG and PricewaterhouseCoopers. Deputy prime minister Nick Clegg said: ‘A fair society is an open society where everybody is free to flourish and where birth is never destiny. In Britain today, life chances are narrowed for too many by the circumstances of their birth: the home they’re born into, the neighbourhood they grow up in or the jobs their parents do. Patterns of inequality are imprinted from one generation to the next. ‘A recent report by the Sutton Trust estimated that the economic benefits of improving social mobility could be worth £140 billion a year by 2050. This is not only a question of fairness – opening up opportunities is in the interests of the economy and of the country.’ For the first time, the strategy includes a set of key indicators for defining how social mobility is measured so that it can be seen where measures are having the most impact and where the approach needs adjustment. The strategy, Opening Doors, Breaking Barriers – A strategy for Social Mobility, can be read here.
More than 1,400 solicitors have volunteered to write wills for free in aid of charity next month. They have signed up to take part in Will Aid’s ‘Make a Will Month’, where members of the public make a donation to charity in return for getting their will drawn up. Last year’s campaign, which saw 1,100 lawyers take part, raised more than £1.5m for various good causes. This year, public interest has multiplied and there is now a pressing need for more solicitors to join up to meet demand, particularly in London and south-east England. Solicitors can find out more at the Will Aid site or by calling 01460 271178. Fraudsters are increasingly targeting the estates of the deceased for valuable internet-hosted assets such as online bank accounts, private client lawyers have warned. Solicitors believe the trend reflects the way probate work has ‘changed beyond all recognition’. For the first time, people are trying to help the executors of their estates by giving details in their wills of passwords, pin numbers and other digital access codes. Wills, however, become documents of public record when they go to probate, allowing fraudsters to read and exploit what should be confidential information. The ‘low-tech solution’ is to advise clients to leave a note of online codes in a sealed envelope, which the firm keeps with the will, according to Jeremy Groeger-Wilson, head of wills and estates at Kent firm Clarkson Wright & Jakes. Law Society wills and equity committee chair Richard Roberts commented: ‘We advise clients to protect passwords in the same way that we have always protected burglar alarm codes and the keys to safes and strong rooms. Make sure the executors know where to find them, usually in a side letter lodged with the solicitors.’ Law Society private client section chair Patricia Wass agreed, saying that digital codes should be entered on to a ‘constantly updated asset log kept in a sealed envelope’. Private client section executive committee member Helen Clarke said: ‘As information technology becomes increasingly embedded in every aspect of our lives, we need to revise codes of practice and industry protocols around rights of access to a deceased person’s online life and assets.’ Groeger-Wilson added: ‘Probate work has changed beyond recognition. As the internet generation shuffles off this mortal coil, we are seeing executors coming to our offices with a laptop computer rather than a suitcase full of bank statements.’ The problem of online estates fraud was highlighted in a recent survey of 2,000 adults by Goldsmiths University Creative and Social Technology Centre, which suggested that the UK population owns around £2.3bn of internet-hosted assets. It also found that around 11% of those surveyed have included online passwords in their wills.
Wearing two hats Businesses entering pre-packaged administrations (‘pre-packs’) have been grabbing headlines. Retailers Habitat UK, Alexon Group and Jane Norman are but a few high-profile examples. But there are examples in the legal sector too. Assets of top 50 law firm Halliwells were purchased by Hill Dickinson, HBJ Gateley Wareing and Barlow Lyde & Gilbert as part of a pre-pack deal in 2010. A pre-pack involves the sale of an insolvent company’s business and assets that is agreed in principle before the company goes into administration. The sale is then carried out immediately after the administrator is appointed. This form of insolvency procedure is credited by proponents with maintaining business activity and jobs in a very difficult trading environment. However, the government, backed by some creditors, has worries about pre-packs: what is called ‘phoenixing’ or sales to ‘connected’ parties, typically to the existing management or owners of the insolvent company – minus the debts. Last year, 72% of pre-pack sales were to individuals and companies associated with the failed company, according to data compiled by the Insolvency Service (IS), part of the Department for Business, Innovation and Skills (BIS). In March, following a government consultation, minister Edward Davey announced a string of proposals for tightening controls on pre-pack sales to connected parties. The aim, Davey argued, was not to ‘outlaw’ pre-packs, but to make sure they were done ‘fairly and reasonably’. He said: ‘I want to make sure that creditors have a fair chance to have their voice heard.’ In June the IS published draft regulations on pre-packs that were to be implemented via amendments to the Insolvency Rules 1986. However they pleased no one, not even the creditors, so they were withdrawn. Richard Wolff, head of corporate and insolvency at Manchester solicitors JMW, says: ‘So many people on both sides of the divide thought the rules were so wide of the mark that it’s almost back to the drawing board.’ The amended rules were originally expected to be implemented in October but now this ‘will not be before April 2012’, an IS spokesperson told the Gazette. The government is still considering responses and IS hopes to publish new draft regulations at the beginning of next year. Despite criticism of the government’s proposals, ministers are tapping into real concerns among unsecured creditors. Richard Barnett, head of legal at Euler Hermes, the UK’s biggest credit insurer, argues: ‘The system at the moment puts unsecured creditors at a massive disadvantage. The owners of the business who mismanaged it and put it into a difficult position in the first place, come out well from this process because they get the profitable part of their business sold back to them free of debt. The secured creditors normally get paid 100% and the unsecured creditors receive absolutely nothing, which seems to us fundamentally unfair.’ The notice mechanism proposal is supported by Euler Hermes, whose clients are small to medium-sized unsecured trade creditors supplying goods and services typically on 90-day credit terms. But the credit insurer would like to see a longer notice period, in order to allow unsecured creditors time to examine sale proposals, seek advice and take any action. Barnett says: ‘While confidential discussions are going on between the IP, secured creditors and the owners of the distressed company, there is no warning to our clients [the unsecured trade creditors] who will go on extending credit with no idea that a pre-pack is around the corner.’ Euler Hermes also wants changes regarding what it sees as a conflict of interest in the role of IPs under pre-pack. Currently the IP acts as both an adviser to the directors of the company and the secured creditors before the pre-pack is implemented, and then as the administrator who effects the sale. Barnett points out that unsecured creditors are excluded from the confidential discussions leading to a pre-pack and can only object to the sale after the deal is done. ‘It’s a fairly long and expensive process to challenge retrospectively the act of the IP and that virtually never happens,’ he says. ‘We think there is a clear conflict in the way IPs are allowed to wear two hats. There should be a ban on the same IP acting as both the adviser to the distressed company prior to the pre-pack and acting as the administrator to implement it.’ The idea is that a second IP would be a better guarantor and that the interests of all creditors are considered. However, Julie Palmer, a partner at insolvency specialist Begbies Traynor, argues that this is impractical. ‘These are often extremely urgent situations. To take additional time to have somebody else come in would delay the process and seriously hamper the ability to save a lot of these businesses and many jobs.’ But unsecured creditors do not buy the argument that pre-packs are good for employment either. ‘You save jobs at the company that is subject to the pre-pack but the knock-on effect on the companies in the supply chain may mean that you lose jobs in those companies as a result of insolvencies through loss of their receivables,’ argues Barnett. If it ain’t broke, don’t fix it Keeping creditors sweet – SIP 16 Statement of Insolvency Practice (SIP) 16 was introduced in January 2009 to allay concerns about the perceived lack of transparency of pre-packs. It requires IPs to make detailed written disclosures to creditors where there is a pre-pack sale. This includes an explanation and justification of why a pre-pack was undertaken and what alternatives were considered by the IP. The IS has been monitoring the operation of SIP 16. In 2010 compliance increased to 75%, from 62% in 2009. Of 136 cases found not to be compliant (out of 538 companies reviewed), 13 were referred by the IS to one of seven IP regulatory bodies (RPBs). Simmons & Simmons’ Alan Gar argues that SIP 16 is working: ‘Cases of non-compliance are dropping,’ he says. ‘The great majority of IPs are substantively complying with SIP 16 and only a very small number of cases are serious enough to merit a referral to the regulatory body.’ Also, sales to connected parties have declined from 79% in 2009 to 72% in 2010 and Gar sees a ‘correlation’ between this fall and the introduction of SIP 16. Creditors are more cautious about SIP 16. Euler Hermes’ Richard Barnett says there are two main problems with it. First, SIP 16 is an ‘after-the-event’ disclosure: ‘It is very difficult for trade creditors to take any sort of action once the dust is settled.’Barnett also questions why only 13 of the 136 non-compliant cases resulted in disciplinary referrals. ‘So we query whether SIP 16 is being enforced strongly enough by the IS.’ Barnett would like to see the disclosure requirements in SIP 16 given statutory force, with penalties for non-compliance. That proposal was in the government consultation, but did not make it into the draft rules. Three days’ notice By far the most controversial provision in the draft rules – and one that the government is understood to be wedded to – was the requirement that IPs give three business days’ notice to all creditors of the terms of any proposed sales to a connected party where there has been no open marketing of the assets. Davey said that the notice would allow creditors ‘to express concerns… or to make a higher offer for the assets, and in cases where the circumstances justify it, apply to the court for injunctive relief’. In fact, the notice proposals were something of a surprise, as they were not in the original consultation. ‘It appears to be something of a sound-bite fix, but for us it is the worst of all worlds,’ says Coulson. Three business days may not be enough time for creditors to object. At the same time, says Coulson, it is probably long enough to ‘derail a rescue’. Especially if you consider that a notice period of three business days means a week, because it excludes the posting day of receipt and any weekend, she notes. During this period suppliers could threaten to object to the proposed pre-pack and act unreasonably by varying terms, for example by increasing the costs of materials, supplies or services, reducing returns to creditors. And a week is long enough ‘for your key employees to worry and disappear or be poached’, adds Coulson. Alan Gar, a partner at Simmons & Simmons’ London corporate recovery and restructuring practice, points to the example of law firms, where value is strongly tied up with their people. He says: ‘The moment people learn about a pre-pack they become uncertain and concerned and would just leave. You would lose much of the value that you were looking to preserve. A pre-pack is all about speed because speed helps retain value. My concern with putting in three days for creditors to stop the sale going ahead is that you would take away the very reason why pre-packs work.’ He adds: ‘I think we would have seen a different result with Halliwells if we had seen such a three-day advert.’ Creditors argue that disclosure means they get a better deal. But Elizabeth Taylor, a partner in the insolvency team at Darbys Solicitors, says: ‘There is this presumption on the part of creditors that there is some stitch-up and that, by giving notice, somehow there is going to be a higher price paid for the assets. Nine times out 10, a pre-pack is all about preserving the goodwill. If you suddenly start advertising to the world that the business is bust, that there is going to be a pre-pack, potentially it’s likely to result in there being no offers for the business and the goodwill being lost.’ Even with a notice period, unsecured creditors may struggle to challenge in court the administrator’s decision. ‘We have seen time and again judges say that they are not accountants or insolvency practitioners and that they cannot give a commercial judgment,’ Gar says. Put forward in the name of fairness, this proposal also potentially makes the pre-pack administration process even less fair, some argue. Normally some creditors are left out in the cold in an insolvency and these will predominantly be the unsecured creditors, who by law get paid last, after the administrators, employees and secured creditors, in that order. Chris Mallon, president of the Insolvency Lawyers Association (ILA), says: ‘You would have to give notice to people who are completely out of the money and will never have an economic interest in the company [under administration]. You would give them a voice, a negotiating lever in a situation where in other circumstances they would not have it.’ But JMW’s Wolff comments: ‘It is all very good to say we’ve got to give all the creditors a say but if that includes creditors who are so far down the pecking order that they may not get any returns, then is it right that they destroy value for the secured creditors who have got a legitimate expectation?’ The other problem with the three-day notice provision is that it appears to ignore the reality that existing management is often part of a business’s successful exit from administration. ‘Once a company goes into administration, the only people who are prepared to buy it – particularly at the smaller end of the market – are the directors and they are the people who are best placed to run it because they know the business,’ says Mallon. ‘They are prepared to put new money in and take the risk again themselves.’ Paul Gilks, partner and head of the corporate department at London-based Glovers notes that banks have to be behind any pre-pack and their support is nearly always conditional on the owner-directors of the insolvent business injecting fresh cash. ‘That is why pre-packs are good. They force re-investment where businesses have some chance of recovering,’ he says. There is currently no legislation on pre-packs, although there is case law (Re T&D Industries Plc and Re Transbus International Ltd) which shows that a sale can be agreed in advance of the administration. Ruth Jordan, an insolvency barrister at Serle Court, says: ‘That is possibly the reason why the government is bringing in these rules, because pre-packs were developed by insolvency practitioners in their roles as administrators.’ Jordan explains that pre-packs have been on the increase since the Enterprise Act 2002 came into force in 2003. The act permits an administrator to be appointed, by a creditor, company or director, without a court application and hearing. But along with their growth has come criticism. Jordan says: ‘Before the Enterprise Act, even if you could arrange the sale of a company while it was going into administration you were always going to go to court anyway to decide whether it was appropriate to put the company into administration. But, from 2003, there was the perception that backroom deals could be done.’ However, she adds: ‘These [draft] rules have gone too far because they are trying to deal with a perception of unfairness and there is still a question mark over whether there is evidence of actual abuse.’ Frances Coulson, president of R3, the insolvency trade association, agrees: ‘I think that pre-packs get a bad press because creditors don’t like seeing the same directors carrying on running the same business as if nothing happened.’ She believes this is an ‘emotional reaction’. Coulson points to research conducted by Dr Sandra Frisby of the University of Nottingham in 2010. This shows that secured creditors, typically banks, recover an average of 35% of debts in pre-packs, compared with 33% in a straightforward business sale, that is, a ‘going concern’ sale of the business negotiated and arranged after the start of the insolvency procedure. Returns to unsecured creditors, which typically feel most hard done by pre-packs, are also slightly higher – an average of 5% in a pre-pack compared with 4% in a business sale. Dr Frisby also found that pre-packs are good for preserving jobs. In 92% of pre-packs all employees were transferred to the new company, compared with 65% in a business sale. The other two key provisions in the draft rules were for administrators to file a disclosure similar to the Statement of Insolvency Practice (SIP) 16 (see box) at Companies House and to confirm in their ‘consent to act’ document that any pre-agreed sale price represents the ‘best value’ for creditors. The first requirement appears uncontroversial. But there are concerns among IPs that disclosing the sale price at such an early stage in the process would make negotiations with interested parties difficult. Begbies Traynor’s Palmer says: ‘By disclosing the proposed sale price at that point I would be giving my hand away. I would be saying “I think this is what this business is worth” during confidential discussions with interested parties.’ For Glover’s Gilks the government’s proposals, including the three-day notice period, do not appear ‘onerous’. Legislation would give pre-packs ‘statutory credibility’, says Gilks, adding: ‘It might bring pre-packs out of the shadows and into everyday normal restructuring transactions.’ But R3’s Coulson maintains that ‘in this dreadful economic climate with no signs of getting better it is the worst time really to tie practitioners’ hands behind their backs and prevent them from having this useful tool in their toolbox.’ Coulson argues that detractors need to recognise that pre-pack is just ‘one stage in the story’. It is one of the possible outcomes in the administration process – which has a statutory period of 12 months – including the liquidation of the company and possible legal action against directors by creditors. ‘Of course people just see that instant snapshot and they react badly to it,’ she says. The changes might also lead to unintended consequences. Begbies Traynor’s Palmer says: ‘I think the impact would be less successful rescues. Worryingly, I think it would open the door to unlicensed and unregulated advisers to go in and advise companies on how it might be better for them just to do a company sale without going through a proper insolvency procedure.’ She adds: ‘At least the insolvency procedure does flush out any wrongdoing on the part of the directors.’ IPs are required to report to the IS if they believe a company director has behaved in a dishonest or blameworthy way, thereby making the company’s financial distress worse. This can lead to disqualification proceedings. Besides, in its focus on pre-packs, the government might actually be overlooking other causes of disgruntlement among creditors. According to R3, which represents over 97% of the UK’s IPs, the number of cases of alleged misconduct by directors reported by R3 members to the IS increased from 3,394 in 2003/4 to 7,030 in 2009/10. But the proportion of these cases investigated by the IS has halved, from 40% in 2003/4 to 20% in 2009/10. This suggests there might be a growing problem of misconduct among company directors that is not being adequately addressed. Says Palmer: ‘The IS is undergoing cuts and we need to ensure that [it is] properly funded.’ As the government mulls its next moves over pre-packs, trading conditions for companies are deteriorating further. The stakes are high. Many stakeholders clearly feel that it’s a case of ‘it ain’t broke don’t fix it’ – and of pursuing a more holistic strategy to tackle creditors’ concerns. Out of court, out of sight Marialuisa Taddia is a freelance journalist
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