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Insolvency Legislation Changes – Update

24th March 2016

In March 2015, we reported on the Small Business Enterprise and Employment Act 2015 (the “Act”) and the important changes to insolvency legislation.  Before becoming effective, a number of the provisions required secondary legislation, some further changes became effective in October 2015 whilst other provisions will come into force on 1 April 2016. A brief summary of these changes are:

Procedural changes

  • Meetings of creditors/contributories will be abolished as the default means of decision-making (save for meetings specifically required under insolvency legislation). Meetings will only be called if a prescribed portion of creditors/contributories demand it. A deemed consent procedure will be used instead, whereby decisions will be deemed made unless more than 10% by value of the creditors/ contributories as a whole object to the proposed decision.
  • Creditors can opt out of receiving notices that office holders are required to send out. 
  • The Official Receiver will automatically become the Trustee in Bankruptcy whenever a bankruptcy order is made.

Directors’ disqualification changes

  • Liquidators, administrative receivers and administrators will be required in every case to submit a report on the conduct of all persons who were directors either at the date of insolvency or anytime during the previous three years.
  • The Secretary of State will now have three years to apply for a disqualification order.
  • When considering a disqualification application, the court will be able to take into account the conduct of a director in relation to an insolvent overseas company.
  • It will be possible for disqualification orders to be made against individuals who influence the conduct of a disqualified director. The requisite amount of influence is set out in further detail in the Act.
  • The Secretary of State will have the power to apply to court for a compensation order against a person who is subject to a disqualification order or disqualification undertaking where their conduct has caused loss to one or more creditors of a company of which that person has been a director.

Regulatory changes

  • The Act provides for a greater number of recognised professional bodies to regulate insolvency practitioners. Recognised Professional Bodies will be required to comply with a new set of statutory principles backed up by sanctions for non-compliance.
  • The Secretary of State will be entitled to take direct action against insolvency practitioners who fail to meet professional standards.
  • The Secretary of State will have the power to make regulations that create a single regulatory body for the profession, but this power will expire seven years after this provision coming into force. Whether or not the Secretary of State will do so, therefore, remains to be seen.

Litigation changes

Of particular importance are the changes, set out below, which will give insolvency practitioners greater powers to try and secure funds for creditors and payments of fees and expenses.

  • Administrators will have the power to bring wrongful and fraudulent trading claims (in addition to liquidators).
  • Administrators and liquidators will have the power to assign the following types of claim: preference, transactions at undervalue, wrongful trading, fraudulent trading and extortionate credit transaction. 
  • The proceeds from any claim for preference, transaction at undervalue, wrongful trading, fraudulent trading or extortionate credit transaction (or from the assignment of any of them) will not be available to meet the claims of the holder of a floating charge.

These changes present enhanced opportunities for (i) administrators to bring claims which they could not bring before and (ii) all insolvency practitioners to assign claims they cannot afford to pursue or do not have the appetite for, whilst still being able to secure a return for the creditors by obtaining the value of the assignment, either upfront or by way of a contingent benefit on completion of any legal case.

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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