It may be necessary to notify the Government and obtain clearance before appointing liquidators, administrative receivers, fixed charge receivers or trustees in bankruptcy where the insolvent entity or individual owns (or the receiver is appointed over) assets that fall within a sensitive area of the economy, under recent national security legislation.

As this will have significant timing implications for any appointment, Insolvency Practitioners and Receivers will need to consider the possible risks at an early stage in instructions.

Background

The National Security and Investment Act 2021 (the Act) created a new screening regime for transactions which might raise national security concerns in the UK. It came into effect on 4 January 2022, with retrospective effect from 12 November 2020. You can read more about the Act in our update here: National Security and Investment Act: an overview for insolvency practitioners - TLT LLP.

The Act contains a very limited insolvency exemption. This exemption means that there is no requirement to submit a notification where an administrator is appointed. However, any subsequent actions taken by the administrator including a sale of the business or assets can still trigger the regime.

The fact that insolvency sales may trigger obligations under national security legislation is unsurprising. What is more concerning is that it is becoming increasingly apparent, pending further clarification from BEIS, that advance notification and clearance may be required prior to the appointment of all insolvency officeholders (other than administrators).

Interpretation

There is no express requirement in the Act to submit a notification when any insolvency officeholder or receiver is appointed. In fact, apart from the provisions containing the exemption for administrators and creditors in certain foreign insolvency processes, insolvency proceedings are not referred to in the Act at all. To recap, the triggers of concern for IPs are: (i) obtaining voting control (in 25% increments) in, or policy control over, a “qualifying entity” and (ii) obtaining control over (i.e. the right to use or direct the use of) “qualifying assets”. A “qualifying entity” is one carrying on business in the UK or supplying goods or services into the UK, involved in any one or more of 17 “sensitive sectors” (described below). “Qualifying assets” are land, tangible property and intellectual property whose acquisition may raise national security concerns (regardless whether any of the 17 sensitive sectors are involved, although clearly there is more risk if they are).

The Act has, understandably, been drafted in such a way as to ensure that the national security net can be spread wide. Unfortunately, for our purposes, this means that without an explicit exemption it is arguable that the appointment of a liquidator, administrative receiver, fixed charge receiver or trustee in bankruptcy could fall within the regime as an event leading to a change in control of the underlying entity or assets. Note that for trustees in bankruptcy, entity control change can also be an issue if the individual owns a 25% or more shareholding in a “qualifying entity” where those shares vest in the trustee. The industry is awaiting further formal guidance from BEIS on this point, although it is by no means clear that any guidance issued will provide the reassurance that we are seeking.

Practical guidance

Insolvency Practitioners and Receivers should in the first instance confirm whether or not any of the activities or assets of the company or individual fall within one of the 17 sectors, or otherwise give rise to national security concerns (e.g. land near to an obviously sensitive site). Although the government is unlikely to have national security concerns about the insolvency officeholders themselves, the fact of the insolvency of the particular business or individual may in itself be of interest to the government from a national security perspective.

The Government has published guidance on the 17 sectors which can be found here: https://www.gov.uk/government/publications/national-security-and-investment-act-guidance-on-notifiable-acquisitions/national-security-and-investment-act-guidance-on-notifiable-acquisitions. Identifying whether or not an activity or asset falls within these may require a highly technical understanding of both the sectors and the business of the insolvent entity or individual. We acknowledge that it may be difficult to reach a conclusion in some cases, particularly where very little information is available and, in such cases, the co-operation of the board and relevant experts within the business will be critical.

If, having considered these points, you are of the view that the activity or assets of the entity do or may fall within the sectors (or that the appointment itself could constitute a national security risk despite not involving one of the sectors), then it would be prudent (unless and until further, clear, guidance is given by BEIS) to comply with the mandatory notification procedure set out in the Act. A standard notification form should be used. Failure to submit a notification where it is mandatory can have serious consequences, potentially including the automatic voiding of the appointment. We can assist you with the notification process if needed, and have experience of dealing with the Investment Security Unit both within the restructuring & insolvency team, and across the firm.

Where the mandatory notification procedure is triggered then it should, ideally, take place and clearance should be obtained before the appointment is made. There is no special procedure for expediting applications in a distressed or insolvency situation (save, we understand, in exceptional circumstances), and, at present, no separate individual or team deals with applications in these circumstances. Accordingly, although we understand it is likely clearance will be given in most cases within 30 working days, it is possible in complex situations that the process could take several months.

If an appointment has inadvertently taken place without complying with this procedure, it is possible to apply for retrospective validation of the appointment, which again we can assist with.

Next steps

We are aware that a number of industry bodies are feeding back to BEIS in their review of the Act. We have contributed to some of these reports. Guidance is awaited on various topics including the question of whether or not BEIS does expect a mandatory notification of all officeholder appointments (other than administration) in the sensitive sectors. However, given the wide scope of the legislation and the serious consequence of failing to comply, Insolvency Practitioner and Receivers should be considering the potential need for national security clearance prior to accepting any proposed appointment other than an appointment as administrator.

We will provide a further update once BEIS guidance has been published (or if there are any further developments).