Are more changes afoot for insolvency practitioners?

Restructuring & Insolvency analysis: Ian Defty, a director in the niche London insolvency firm of DDJ Insolvency Limited, discusses the likely implications of the Small Business, Enterprise and Employment Bill for licensed insolvency practitioners.

 What does the Bill seek to cover for insolvency professionals?

It is a sad fact that there is always a desire by the government to tinker with the insolvency profession. Recently that tinkering has led to the new Small Business, Enterprise and Employment Bill. In my view, the insolvency industry manages very well with the legislation that it is presented with, but unfortunately the government constantly feels it has to amend its own legislation at a whim.

The current Bill snuck in a number of new ideas, not limited to:

  • seeking to bring in powers for liquidators or administrators to assign causes of action
  • the abolition of the requirements to hold creditors meetings
  • the ability for creditors to be no longer required to prove for small debts
  • an amended definition for shadow directors

The majority of these matters were included in the Bill without any reference to stakeholders, in particular the insolvency industry.

The Bill does cover changes in the company directors' disqualification regime, and although comments were sought by government, they have been largely ignored.

I understand that the government accepts that 'the devil is in the detail' but it is not sufficient to say that when there are so many unknowns.

Does this meet the concerns of the majority of the respondents to the Trust and Transparency paper in your view?

The Trust and Transparency paper sought to provide just that for users. It is difficult to see how, for example, removing the ability of creditors to seek the appointment of their chosen officeholder can provide 'trust' to the creditor industries, yet alone those creditors who are individuals or small concerns.

 If not, what more do you think still needs to be done by the government to meet these concerns?

Between the insolvency industry and the courts it is fair to say that insolvency is working very well. The small tinkering brought in by this Bill will not make any changes for the better. The profession needs to be working more with its creditors, not seeking to disenfranchise them.

In reality, how likely do you think it is that the Secretary of State for Business Innovation and Skills will claim compensation from disqualified directors in the future?

This is an issue that is fraught with difficulties. For example, how will the compensation be assessed, especially if the disqualification is the result of an 'undertaking'? Surely any compensation award can only be assessed by a court, and so few disqualifications go to court that it is unlikely this will become an effective tool.

Further there appears to be no consideration of whether an officeholder is taking his or her own action against a miscreant director, and so is there a risk of 'double jeopardy'?

Also, if the Insolvency Service wishes to increase its yield, will they seek to take more matters to court in order to get more compensation orders? I think the fact is that it is a clause in the Bill which sounds more effective than it ever can be in practice.

A further issue is that the Bill is suggesting that any compensation can be paid to a 'creditor or creditors specified in the order' or a 'class of creditors so specified'. Therefore suggesting that the pari passu principle is broken.

Do you envisage any issues with the proposal to assign office holder claims?

There are huge issues over the proposal to assign office holder claims. At present any officeholders have regulatory powers for the compulsion of obtaining information from directors, bankrupts and others to assist in their enquiries. The Bill is silent on how any assignee could take such actions without the same powers that the legislation has given to insolvency officeholders.

Further there is a real risk that any assignment will not be in the best interest of the creditors if, for instance, the best offer for the purchase of a claim actually came from the potential respondent.

The background to this part of the Bill comes from the mistaken belief that officeholders do not bring these claims already, but this is wrong. Office holders often do bring these claims but what happens is they are not actually recorded anywhere because many of them settle out of court.

The government has, I'm sure, looked at decided cases/judgments on, for example wrongful trading matters, and found that they are few and far between, but this is because the vast majority of these matters are settled before trial, with a larger return going to creditors.

What do you think about the suggested changes to the administration process restricting the sales to connected persons?

In the government's own report by Theresa Graham she did not go anywhere near as far as the Bill is in suggesting that there should be a prohibition or restriction on sales in an administration to connected persons. It is often the case that the directors or those connected with the company and have some knowledge of the company or its business will offer a better price than others. The Bill is suggesting that notwithstanding that, we as officeholder should be taking a lesser offer because the best offer is coming from an unconnected party, and I repeat, contrary to what was in the Graham Report.

Do you think this further additional power surrounding the regulation of insolvency practitioners is necessary?

No. It is generally accepted that the insolvency industry is already one of the most heavily regulated industries, with an ultimate recourse to the courts. The industry has already had the 'Complaints Gateway' created in 2013 to further assist those who have an issue with an officeholder. There has been, and remains, an ongoing discussion about the merits of a single regulator. Hidden at the end of the 'insolvency' part of the Bill the government has dealt with this, bringing in the ability, if it sees fit, to appoint a single regulator.

Further reading

If you are a LexisPSL subscriber, click the link below for further information on the Small Business, Enterprise and Employment Bill  :

Press Release: Willott announces plan to clean up pre pack insolvency deals  (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Interviewed by Eleanor Stephens

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor


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