More important changes to the Insolvency Act 1986 (IA86) and other insolvency- related legislation come into force this week (1 October 2015) as a result of the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015).
We have updated our Implementation Timetable to reflect the changes.
Administrators now have the power to issue proceedings for wrongful or fraudulent trading
S117 SBEEA 2015 brings in line the powers of liquidators and administrators to bring such proceedings and inserts new s246ZA, s246ZB and s246ZC into the IA86.
The tests for wrongful and fraudulent trading in the two insolvency procedures are intended to be exactly the same. For wrongful trading actions, however, the administration must be an "insolvent administration". The wrongful trading provisions will only apply to a director, or shadow director, if the relevant company has entered insolvent administration and, at some time before the company entered administration, the director knew or ought to have concluded there was no reasonable prospect the company would avoid entering insolvent administration (or going into insolvent liquidation).
A company is in "insolvent administration" if it enters administration at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the administration. However, a qualifying floating charge holder (QFCH) may apply, out of court, to put a company into administration without it being insolvent. All the QFCH needs to prove is that its security is enforceable. This can be for non-payment or a host of other reasons, not necessarily the company's insolvent state. Technically therefore there could be instances where an administrator appointed by a QFCH could not bring such proceedings.
Corporate insolvency office holders may assign personal actions for the benefit of the estate
Until now, claims deriving from the office holder's appointment (such as those for wrongful trading, fraudulent trading, or preference or transactions at undervalue claims) were not capable of assignment to third parties. Liquidators and administrators will now be able to assign their rights to such a claim, or the proceeds, as s118 SBEEA 2015 inserts a new s246ZD into IA86.
All causes of action can now be treated by insolvency office holders as another asset of the company, which can be assigned to secure funding for the insolvency process or as another element of the realisation of the company's assets. The insolvency office holder would not need to go to the delay and expense of the litigation of the claims himself. He should, of course, have formed a sufficient view on the merits to get the best price he can upfront for the asset in the usual way. The possibility of specialist funds to buy these actions in bulk and administer them to realise value has already been mooted amongst the insolvency profession. A whole new area of practice is likely to spring up, not always subject to the same regulation and principles of conduct to which the original insolvency practitioner was subject.
Alternatively, it could give disgruntled creditors another way to impact the insolvency process by buying such claims, an offer which, in acting in accordance with his duties to improve realisations to creditors, an insolvency office holder might find it hard to refuse. However, the insolvency office holder should also consider carefully what the impact might be of future requests by the buyers of the claims for assistance or for access to the company's books and records. He will need to take particular care before releasing to the buyer any information or documents obtained by him from third parties using his special investigatory powers (as they are subject to certain implied duties and obligations and may also be required for other purposes).
Changes to directors' disqualification regime
The majority of the new amendments to the Company Directors Disqualification Act 1986 (CDDA 1986) come into force on 1 October. (ss104-106 and ss108-111 of SBEEA 2015).
The Secretary of State will now have three years, instead of two, to apply for a disqualification order against a director of an insolvent company.
There are two new grounds for bringing disqualification proceedings against directors: a) if they have been convicted of offences overseas in connection with the promotion, formation or management of a company overseas, and b) against those who are not directors but who exert requisite influence over a director who has been made the subject of a disqualification order or undertaking. What amounts to the requisite amount of influence is set out in the new s8ZA(2) CDDA 1986, and follows broadly the definition of a shadow director. A person does not exercise the requisite amount of control by reason only that the disqualified director acted on the person's advice in a professional capacity. The person will have exerted the requisite amount of influence if the conduct for which the director was disqualified was the result of the director acting in accordance with the person's directions or instructions. The Secretary of State may also seek a disqualification undertaking from such a person.
There is also a revised list of matters for the court to take into account when considering whether a person is unfit to be a director of a company, including previous business failure and a director's conduct overseas. Most importantly, the Secretary of State will be able to apply to court for a compensation order against a disqualified director where the misconduct has caused identifiable loss to creditors. A “compensation order” is an order requiring the person against whom it is made to pay an amount to the Secretary of State for the benefit of creditor(s) or a class of creditor(s) as a contribution to the assets of company. The Secretary of State can apply for the compensation order within two years of a disqualification order being made against a director.
Factors the court will need to take into account in determining the amount to be paid under a compensation order are the amount of the loss caused, the nature of the director’s conduct and whether the director has made any other financial contribution in recompense for the conduct.
Alternatively, the Secretary of State can accept a “compensation undertaking” for the same payment without going to court. It is not clear how, in the absence of an ongoing insolvency process or assistance from the office holder, the Secretary of State will distribute to creditors any amounts he recovers, particularly after the length of time which could have elapsed by the time a compensation order is made and enforced.
It is worth noting that the tests for culpable behaviour are similar to but different from the wrongful/fraudulent trading criteria. Arguably the new tests are easier to establish (though of course untested). The new provisions do not require “wrongful” or “fraudulent” activities, merely that a person subject to a disqualification order has caused loss to creditors. Therefore, would disqualification for failure to maintain proper books and records, if it can be proven to cause loss to creditors, justify a compensation order? These changes are likely to result in an increase in the cost of D&O insurance.
S107 SBEEA 2015, which provides that a liquidator, administrative receiver or administrator will have to submit a report on the conduct of a director in all cases, even if the relevant office holder does not consider the director unfit to hold office, will not be coming into force until next year when the Insolvency Service intends to activate its electronic reporting systems.
Changes to insolvency practitioner regulatory regime
The regulatory framework for insolvency practitioners is undergoing a substantial period of change. Recognised professional bodies (RPBs) will, going forward, authorise insolvency practitioners, not the Secretary of State, who will assume the role of regulator with power to impose directions and financial or other sanctions on RPBs or take direct actions against individuals. SBEEA 2015 introduces a new series of objectives for RPBs.
The Secretary of State will also be able to increase the number of RPBs or introduce a single regulator for the profession, if he thinks fit in due course. Insolvency practitioners have a transitional period until 30 September 2016 to make the change. Practitioners will apply directly to RPBs in future, which can grant full or partial authorisation for them to practise in either corporate or personal insolvency matters or both.
Confirmation that floating chargeholder does not get the benefit of any office holder action or assignment : The proceeds from any preference, transaction at an undervalue, wrongful or fraudulent trading claim (or assignment – see above) brought by an administrator or liquidator will not form part of the assets available to meet the claims of the holders of any floating charge security (unless displaced by a CVA or Companies Act 2006 reconstruction) (s119 SBEEA 2015 inserts new s176ZB into the IA86). Effective 1 October 2015.
Reduction of time it takes to strike off and dissolve a company from the public register: For voluntary strike-off, the time is reduced from three to four months to approximately two months; and for compulsory strike-off, from five to six months to around 3.5 months (s103 SBEEA amends Part 31 of the Companies Act 2006). Effective 10 October 2015.