Introduction

Important amendments and clarifications have been made to the Insolvency Act 1986 pursuant to the Small Business, Enterprise and Employment Act 2015 and the Deregulation Act 2015, both of which recently received royal assent. These changes are intended to create a more robust regulatory framework for the administration of insolvencies and increase flexibility for insolvency practitioners. Most of the changes made by the Small Business, Enterprise and Employment Act will be introduced by separate statutory instruments, but some became effective on May 26 2015.

Small Business, Enterprise and Employment Act

The main changes implemented by the Small Business, Enterprise and Employment Act are as follows:

  • Sections 120 and 121 – these sections remove the requirement for liquidators or trustees in bankruptcy to seek the approval of either the creditors or the court before exercising their powers pursuant to Sections 165 and 167 (liquidator's powers and duties) and Section 314 (powers of trustee in bankruptcy) of the Insolvency Act.
  • Section 127 – subject to the creditors' consent, administrators can now extend their term of office by up to one year (Paragraph 76(2)(b), Schedule B1 of the Insolvency Act). Previously, creditors could consent only to a six-month extension and court approval was needed for a longer extension. This amendment applies to all existing cases where no extension of appointment has been agreed previously.
  • Section 128 – administrators will no longer need the court's permission to distribute the prescribed part(1) to unsecured creditors (Paragraph 65(3), Schedule B1 of the Insolvency Act). However, there has been a consequential amendment to the effect that where the only distributions available to unsecured creditors comprise the prescribed part (Paragraph 83, Schedule B1 of the Insolvency Act), the company can no longer be moved into creditors' voluntary liquidation. This means that in these cases, administrators will need to distribute while in administration or incur the extra costs associated with a move to compulsory liquidation. Distributions of funds other than a prescribed part to unsecured creditors will still require court approval.
  • Section 129 – this section authorises secondary legislation either to prohibit the sale, hiring out or disposal of property by an administrator to connected persons(2) where the company is in administration, or to impose requirements or conditions on such actions (Paragraph 60A, Schedule B1 of the Insolvency Act). The government has until May 26 2020 to pass secondary legislation to give effect to these changes.
  • Sections 131 and 132 – creditors that are owed a small debt (initially expected to be a sum less than £1,000) by an insolvent entity will be exempt from having to submit a proof of claim setting out the basis for their claim in order to prove their debt in the insolvency (Paragraphs 13A, Schedules 8 (corporate insolvency) and 18A, Schedule 9 (bankruptcy), Insolvency Act), but will be treated as having done so for purposes of distributions out of the insolvent entity.
  • Section 136 – this section clarifies that progress reports must be issued in a voluntary liquidation, regardless of whether there is a change of liquidator in the first year.

The Small Business, Enterprise and Employment Act also makes various changes to the Company Directors Disqualification Act 1996, which will affect insolvency practitioners. Insolvency practitioners will now be required to report to the secretary of state on the conduct of all directors of insolvent companies (rather than those merely suspected of misconduct). In particular, they must report conduct which may assist the secretary of state in determining whether to make a disqualification order.

Deregulation Act

The Small Business, Enterprise and Employment Act is not the only recent addition to the statute book to have an impact on the Insolvency Act. Among other things, the Deregulation Act has also sought to remove some of the red tape surrounding insolvency practices. For example, it clarifies that directors are not required to give notice to the company and other prescribed persons of a proposed administration appointment where there is no qualifying floating charge holder. As of May 26 2015, it is now possible for a company or director to appoint an administrator over the company notwithstanding the filing of a winding-up petition against the company, provided that the company or its directors have already filed a notice of intention to appoint and commenced an interim moratorium.

Comment

Further provisions embodied in both the Small Business, Enterprise and Employment Act and the Deregulation Act will likely affect the Insolvency Act. However, it is anticipated these will be implemented by secondary legislation in the medium to long term. While the changes have generally been welcomed, there are some concerns around the prohibition in the Small Business, Enterprise and Employment Act on moving to creditors' voluntary liquidation where unsecured creditors are only receiving a distribution of the prescribed part, as it may cause difficulty for existing administrations that only retain sufficient assets for the prescribed part, yet still need to transition to liquidation (eg, to make use of a liquidator's power of disclaimer). As the route of converting to creditors' voluntary liquidation from administration is no longer available on such facts, administrators may have to consider various unattractive options, such as how or whether to fund the increased costs of a transition to compulsory liquidation or whether to trust the directors to place the company into creditors' voluntary liquidation. It will be interesting to see how these amendments affect insolvency practices in the United Kingdom and whether they succeed in making the process more streamlined and flexible for insolvency practitioners as intended.

For further information on this topic please contact Louise Verrill, Paul Durban, Joe Speakman or Henry Kikoyo at Brown Rudnick LLP by telephone (+44 20 7851 6000) or email (lverrill@brownrudnick.com, pdurban@brownrudnick.com, jspeakman@brownrudnick.com or hkikoyo@brownrudnick.com?). The Brown Rudnick LLP website can be accessed at www.brownrudnick.com.

Endnotes

(1) The 'prescribed part' is the part of the proceeds from realising assets covered by a floating charge which must be set aside and made available to satisfy unsecured debts. It is calculated as a percentage of the value of the company's property which is subject to a floating charge – that is, 50% of the first £10,000 of net floating charge realisations plus 20% of anything thereafter, subject to a cap of £600,000.

(2) For the purposes of the Insolvency Act, 'persons connected with the company' are directors, shadow directors, associates of such directors or shadow directors, and associates of the company (Section 249 of the Insolvency Act).

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