In Focus

Insolvency Update

There’s been a lot happening in the past few weeks, so here is a helpful summary:

Pending the Court of Appeal hearing in Horton v Henry, the Insolvency Service has revised its guidance and is now saying that Official Receivers should follow the Horton v Henry first instance decision – in other words, they should ignore a bankrupt’s pension for the purposes of assessing income payment orders/undertakings.

At the last moment, the Government extended the exemption of insolvency proceedings from LASPO which means that, for the time being, office holders can continue to instruct solicitors to bring claims under conditional fee arrangements on the basis of being entitled to recover the success uplift (on the legal costs) and ATE premium from the defendant.

Insolvency Act 1986 (Amendment) Order 2015

This increases the bankruptcy debt level from £750 to £5,000 from 1 October 2015 – which means that statutory demands served from around August 2015 will need to demand payment of a sum of at least £5,000 in order to justify the issue of a bankruptcy petition after 1 October.  The debt level for winding up petitions remains £750.

Insolvency (Amendment) Rules 2015

These rules were introduced at the last minute in March, before the prorogation of Parliament, as a result of the work done by R3 to stop the Government implementing fixed fees for insolvencies.  In relation to insolvencies (administration, liquidation & bankruptcy) commencing after 1 October 2015, office holders will have to give advance fee estimates. The estimates are either for the whole case or to particular milestones. The estimates operate as a fee cap and can only be exceeded with the consent of the creditors or Court, but IPs are allowed to exceed the estimate before getting this approval (i.e. the regime will not be as draconian as cost budgeting for solicitors). Progress reports will have to contain updated fee estimates explaining any increase.

Insolvency (Protection of Essential Supplies) Order 2015

This does what it says on the tin! It applies to administrations and CVAs, commencing 1 October 2015, and prevents suppliers from refusing to supply certain essential services or from making ransom demands.

Deregulation Act 2015

This is a massive Act which has a section that relates to insolvency.  The 3 points of particular interest are:

  1. In administrations, the requirement to serve a Notice of Intention to Appoint on prescribed persons is to be abolished. So if there isn’t a Qualifying Floating Charge Holder, no notice is required. This will prevent directors using (abusing!) such notices to gain the benefit of the moratorium to block the presentation of a winding up petition;

  2. Abolition of the automatic requirement for bankrupts to provide a statement of affairs – though they can be required by the OR to provide one within 21 days; and

  3. In directors disqualification, giving the Secretary of State direct powers of investigation, by amending section 7(4) CDDA to enable them to demand information from third parties, a power which is long overdue.

Small Business, Enterprise & Employment Act 2015

Like the Deregulation Act, this Act is wide ranging and has particular sections that deal with company law, directors’ disqualification, and insolvency. Many of the changes are far reaching, and most will require secondary legislation and commencement orders before they are effective.

Certain provisions come into effect from 26 May 2015, the most noteworthy of which are:

  1. The requirement for liquidators and trustees in bankruptcy to seek sanction to exercise the powers in Schedules 4 or 5 of the Insolvency Act is abolished. This abolition applies to existing liquidations & bankruptcies. In particular, office holders no longer need to obtain sanction to issue various types of claim (wrongful trading, preference, TUV etc) which is a strange development since the Jackson report recommended that the sanction regime be strengthened and linked to costs budgeting;

  2. Administrations can now be extended with the consent of creditors for up to one year rather than six months;

  3. If the only funds to be distributed to unsecured creditors are the prescribed part of realisations from floating charge assets, then it is no longer necessary for Administrators to convert the administration into a CVL for the purposes of distributing those funds. The Administrators can distribute them;

  4. Fast track voluntary arrangements have been abolished; and

  5. The general duties of directors under the Companies Act 2006 are expressly applied to shadow directors (though it remains unclear whether section 212 can be used to bring a misfeasance action against a shadow director) and the definition of shadow director is clarified.

The Act contains a prohibition on corporate directors which is expected to come into effect in October 2015. At the moment the Government is consulting on exceptions to this prohibition. Once the prohibition is implemented, existing corporate directors will no longer be considered to be directors.  This change is in the interests of corporate transparency and to help prevent money laundering etc, but should also prevent individuals from hiding behind corporate directors in order to avoid actions by liquidators for misfeasance and to avoid directors’ disqualification.

From January 2016, companies will be required to maintain a register of those with significant control, though the obligation to file this information at Companies House will not come into effect until three months later.  At the same time, companies will be given the option to keep their information (e.g. list of shareholders) at Companies House rather than maintaining their own records. Of course, what starts as a voluntary regime may in due course turn into a compulsory one!

It is also expected that the changes to the regulation of Insolvency Practitioners will come into effect from October 2015.

Sometime on or after April 2016, the other insolvency provisions will come into effect. Implementation is likely to coincide with the implementation of the new Insolvency Rules (the Insolvency Service has just circulated an updated working draft of the new Rules which, for example, contain the provisions that would enable debtors’ bankruptcy petitions to be filed electronically). Provisions of the Act which are particularly noteworthy are:

  1. Enabling Administrators to take wrongful trading and fraudulent trading claims (currently only Liquidators can make these claims);

  2. Enabling office holders to assign statutory claims which currently only the office holder can bring (e.g. preference, TUV, wrongful trading claims etc) and making it clear that the fruits of those actions cannot be covered by any floating charge granted to a secured creditor;

  3. Abolishing creditors meetings as the primary method of decision making, with decisions being deemed to be made unless 10%+ of creditors object;

  4. Upon the making of a bankruptcy order, the Official Receiver will become the first trustee in bankruptcy rather than receiver and manager of the bankruptcy estate;

  5. Creditors with small claims (likely to be £1000 or less) will not have to submit a proof of debt but can still receive a dividend;

  6. Creditors can opt out of receiving notices etc;

  7. If the measures arising from the Graham review into pre-packaged administrations don’t work, then measures to control insolvency sales to parties connected with the insolvent company; and

  8. The period (from the date of the company’s insolvency) in which the Insolvency Service can take directors’ disqualification proceedings will be increased from 2 years to 3 years. This will not have retrospective effect; and

  9. When targeting a director for disqualification, the Insolvency Service will be empowered to seek compensation from the director (either by way of a Court order or an undertaking by the director to pay compensation) where it is considered the director’s misconduct has caused loss to one or more creditors. The compensation is payable to the Insolvency Service but is then apparently payable to the office holder, as a contribution to the assets of the insolvent company for the benefit of the creditors specified in the order/undertaking.

Of the above, items 2 and 9 (assignment of statutory claims and compensation orders) are problematic in a variety of different ways and one wonders if they will ever come into force.

Revised working draft of Insolvency Rules 2015

This has just been published and the draft Rules remain a work in progress. It is anticipated that they will come into effect in April 2016 and completely replace the Insolvency Rules 1986.

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