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Insolvency Legislation Changes

30th March 2015

On 26 March 2015, the Small Business Enterprise and Employment Act 2015 (the “Act”) received Royal Assent. A number of important changes to insolvency legislation will come into force in May 2015. Generally speaking, the changes are mostly procedural in nature, designed to streamline the formal insolvency process and to improve its effectiveness in rescuing businesses whilst generating returns for creditors.

Here is a brief summary of the relevant provisions which will be effective on 26 May 2015:

Procedural changes

  • Liquidators and Trustees in Bankruptcy no longer require prior sanction of either the court or creditors to exercise any/all powers contained in Schedules 4 and 5 of the Insolvency Act 1986 (namely (i) the powers of a liquidator in a winding up and (ii) the powers of a trustee in bankruptcy)
  • ‘Small Debt’ will be a defined term in future amendments of Insolvency Act 1986 so that creditors owed a ‘small debt’ no longer have to submit a proof of debt in order to participate in a distribution.
  • Creditors will be able to consent to extend the term of an administration for up to 12 months (increased from six months).
  • Administrators will now permitted to distribute the Prescribed Part (as defined in the Insolvency Act 1986, being the ring-fenced fund which has to be used to pay a dividend to unsecured creditors) without first obtaining a court order. As a result, administrators will be prohibited from moving a company into Creditors’ Voluntary Liquidation if the only funds available for unsecured creditors are those comprised in the prescribed part.
  • Previously, if a voluntary liquidation continued for more than one year, the liquidator had to produce a progress report for each period of one year from the date of appointment. From May 2015, it will be necessary to issue a progress report in a voluntary liquidation even if the liquidator changes in the first year.
  • The 28 day period for challenging an Individual Voluntary Arrangement (IVA) will run from the date of the meeting called to consider the proposal (rather than the date of the chairman’s report).
  • Fast track IVAs (FTIVAs) were introduced by the Enterprise Act 2002 from 1 April 2004 and allowed an undischarged bankrupt to enter a voluntary arrangement in order to have their bankruptcy annulled. Due to the very small number of FTIVAs actually used since 2002, they will be abolished from 26 May 2015. This change will not affect any FTIVAs approved prior to that date and so there will be a period of time in which FTIVAs will continue. The abolition will not prevent undischarged bankrupts from seeking to enter into a voluntary arrangement with their creditors – they will not have to propose an arrangement which complies with the rules for IVAs and involve an insolvency practitioner in the usual way.

Regulatory changes

  • The Act contains an enabling provision which allows for the introduction of new regulations to deal with administration sales to connected persons which are conducted without the prior consent of creditors. This enabling provision will expire at the end of five years beginning on 26 May 2015. We will keep a close eye on any developments and will update you as and when.

The changes introduced by the Act will apply to all formal insolvency proceedings, on-going as well as new insolvencies from the effective date for the relevant provisions, which in the case of the above, is 26 May 2015.  In addition to the above changes, further provisions are anticipated to come into force on 1 April 2016. These include new powers allowing administrators to pursue claims which previously only liquidators could pursue, and for administrators and liquidators to assign a variety of further claims under existing insolvency legislation. We will be producing a further note on these changes as we approach 1 April 2016.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice in relation to any of the above, please contact Simon Walton on 020 7955 1455.

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