“We’re coming across issues with statements of affairs and deficiency accounts more frequently during our monitoring visits,” says Victoria Alexandrou, Insolvency Manager at ICAEW.
“Our reviewers are regularly seeing IPs not collecting enough information from directors to support the figures included in the statement of affairs, using incorrect or outdated information, or making assumptions rather than conducting further enquires.”
During a recent ICAEW Insolvency Community webinar, Gareth Limb from Compliance On Call, which provides case reviews and technical support to IPs, went back to basics and offered some useful tips and reminders.
“Sometimes it’s a good idea to remind yourself about the building blocks of your work,” he says. “These can often get overlooked amidst the running of a practice and dealing with the increasing complexities of the profession.”
Obtain records
“The famous quote that ‘by failing to prepare, you are preparing to fail’ is very appropriate here,” says Gareth. “Preparation, in the form of information gathering and collating supporting evidence, together with the questioning of statements by the directors, is what enables you to complete an accurate statement of affairs.”
Ultimately, the directors are responsible for the statement of affairs. “But just as most directors need help in preparing a company’s accounts, which is also their responsibility, they also need assistance in preparing a statement of affairs,” says Gareth.
The starting point for IPs will invariably be discussions with the directors and the completion of a questionnaire. “However, these discussions and a questionnaire are just the beginning,” stresses Gareth. “You cannot simply rely on that information alone.”
Gareth recommended IPs obtain the company’s accounting records pre-appointment.
“You should certainly be looking to obtain the accounting records pre-appointment while the directors are cooperating with you,” he says. “Apart from helping you with the preparation of the statement of affairs, it will also often save you time and money post appointment.
“It is very rare that companies will solely operate electronically,” he adds, “so don’t forget to get hold of physical records, purchase invoices, sales invoices and other documents that support the accounting entries.”
He also recommends obtaining copies of bank statements pre-appointment. Using the open banking system, directors can request the company’s bank to send you electronic copies of the statements. A number of providers offer this service to IPs.
Check accuracy and support your findings
“Once you’ve received information about the assets and liabilities from the director, you cannot just take what they tell you at face value,” emphasises Gareth.
“You need to check it to ensure the statement of affairs is as accurate as possible so creditors can make a reasoned decision as required by paragraph 1 of Statement of Insolvency Practice 6 (SIP 6).
“The expectation of monitors is that you will obtain documentary evidence in support of each entry for a creditor, whether from the company accounting records, creditor correspondence provided to you by the director or through some other source,” he says.
If you can’t obtain such evidence, you need to prepare a short file note to explain the reasons why. “This helps to show the omission is not for want of trying and is not deliberate,” he explains.
Gareth also recommends avoiding the use of round sum amounts in statements of affairs. “We often see these, even in respect of amounts owed to the company’s bank, but particularly with respect to a Director’s Loan Account (DLA),” he says.
“But round sum amounts can be indicative that insufficient verification work has been undertaken by the IP and are an easy target for a monitor,” he warns. “So, make sure they become the exception by obtaining evidence in support of each creditor.”
You should also conduct a quick sense check of creditors’ information against the last full set of accounts. “Don’t rely on the abridged accounts as filed at Companies House,” says Gareth.
Proportionate verification
The statement of affairs must also include information about all known categories of assets owned by the company.
There are no hard-and-fast rules about whether the assets need to be professionally valued; it depends on the nature of the assets. Gareth explains more about when to get valuations and how to deal with them in the webinar.
Both the book value of the assets and the estimated realisable value need to be included in the statement of affairs.
“Use the last accounts as a starting point but don’t forget to ask the directors and interrogate electronic account records about any assets bought or sold since,” says Gareth.
Where there are assets shown in the last accounts that are not in statement of affairs, then provide a narrative explanation in the SIP 6 report, after undertaking appropriate verification work over what happened to the asset.
“Verification should be proportionate to the value of the asset,” says Gareth. “Use your professional judgement, depending on the valuation and importance of any asset in the context of the case.”
One of the most problematic areas when preparing a statement of affairs is a DLA. Verification of the amount owed is required regardless of whether the director is a creditor or a debtor, and again this should be proportionate.
During the webinar, Gareth offers further tips on dealing with DLAs in this context.
Preparing the contents
The contents of the statement of affairs are prescribed by legislation. “But since the 2016 rules, there has been no prescribed statement of affairs form,” notes Gareth. “So, it's a matter of making sure you use a suitable proforma.
“The front sheet should include the company number, as well as the company name and the statement of truth for the director to sign,” he says. “And don’t forget that the wording for this changed back in 2020.”
The first page of the statement of affairs is a summary of assets. “You need to split the assets between fixed, floating and uncharged assets,” says Gareth. “Don't include leased assets where the company never acquires an interest, but don't forget to include hire purchase (HP) assets as fixed charged assets.”
Next comes a summary of liabilities. “Remember to split preferential creditors between preferential and secondary preferential, and don't forget to include in brackets the number of employees who have preferential claims,” says Gareth. “This is something we often see omitted.
“Also, make sure you analyse the unsecured creditors into suitable categories,” he adds. “That will depend on the split of creditors in a particular case, but you should certainly always show employees and consumer deposit creditors separately.”
Supporting schedules
In the supporting schedules, for each creditor you must include their name, the amount they are owed and their postal address.
“Rule 6.4 (2) specifically requires a postal address be included,” notes Gareth. “So, you cannot use an email address. If you do, or if you simply leave the postal address blank, the likelihood is that the statement of affairs will be rejected by Companies House as being non-compliant.”
If you do not have a specific postal address for a creditor, then you should use a postal address that is care of your practice.
If you exercise your judgement to omit the actual address of a creditor, usually that of an employee, director or shareholder, and use an address such as care of your practice, Gareth advises,
“Prepare a file note to record and justify your decision not to include the creditor's address to show that it was done deliberately, not because you do not know what the legislation says.”
Remember that if the director or a member of an LLP is a creditor, then you can use their Companies House service address in the statement of affairs.
“Do not forget to include on the schedule of creditors details of any security held, including date given and value,” says Gareth. “And, in particular, do not forget HP creditors.”
Where there are employees and/or consumer creditors, they need to be included in separate schedules to comply with rule 6.4 (4).
“If you do not have any such creditors, then simply do not prepare any schedules,” he says. “Don't include blank schedules when circulating the statement of affairs to creditors, which we sometimes see.”
For the schedule of shareholders, the same issues apply regarding postal addresses. And don't forget to make it clear where there are different classes of share.
The webinar includes discussion of how data protection legislation applies to the statement of affairs and offers some tips on how to avoid any potential issues.
Getting sign off
Once you’ve gathered all the information to produce a compliant statement of affairs, the next step is signing it off.
“I’d suggest preparing a draft for the directors to consider and getting them to sign a document to confirm that, while you’ve assisted them in preparing the statement, they are responsible for the accuracy of information it contains,” says Gareth.
Then get the statement signed by some, or all, of the directors. “It’s sufficient for just one director to sign a statement of affairs, regardless of the number of directors, although you can request that more than one director signs,” he explains.
In our next article, we’ll move on to look at constructing a compliant deficiency account. Gareth will highlight some of the common pitfalls identified during monitoring visits and offer some hints on how to avoid them.
