Could deregulation benefit insolvency practice?

The draft Deregulation Bill proposes a number of changes to insolvency practice, including the option to partially qualify in specialist area. Christopher Brockman at Guildhall Chambers believes many of the proposals could ease the work of insolvency practitioners.

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Policy Paper: Draft Deregulation Bill

The government’s Deregulation Bill, published on 1 July 2013, amends or repeals 182 different pieces of legislation affecting businesses, individuals and public bodies. Schedule 5 repeals certain obsolete sections of the Insolvency Act 1986.

What changes to corporate insolvency are proposed in the draft Bill?

The changes that most affect administrations are:

1. Winding up petition preceding administration

The new para 25A of the draft Bill clarifies that the prohibition on appointing an administrator when a winding-up petition has been presented and not yet disposed of applies only to a petition presented before an interim moratorium comes into effect.

2. Notice to prescribed persons

Paragraph 6 removes a requirement in IA 1986, Sch B1, para 26(2) to give notice of intention to appoint an administrator to persons who are not themselves entitled to appoint an administrative receiver or administrator.

At present a company or its directors intending to appoint an administrator must give notice of the intention to appoint to:

  1. anyone entitled to appoint an administrative receiver of the company
  2. any holder of a qualifying floating charge entitled to appoint an administrator, and
  3. other prescribed persons

The prescribed persons are set out in the Insolvency Rules 1986, SI 1986/1925, r 2.20 and include:

  1. the company (if the company is not intending to make the appointment)
  2. a landlord exercising distraint over the property of a company, and
  3. a supervisor of a company voluntary arrangement

Unlike those entitled to appoint a receiver or administrator, the prescribed persons cannot block the appointment of an administrator. This brings an end to the conflict between the decision in Hill v Stokes Plc[2010] EWHC 3726 (Ch)—where the court declared the appointment of administrators was not rendered invalid or ineffective by reason of the failure of directors to give a copy of the notice of intention to appoint to landlords who were distraining—and Minmar Ltd v Khalatschi [2011] EWHC 1159 (Ch), [2011] All ER (D) 99 (Oct) in which the Chancellor held (in an obiter passage) that administrators had not been validly appointed where notice of intention has not been given to the company.

3. Release of office holder

Currently IA 1986, Sch B1, para 98(2)(b) provides that an administrator obtains his release by a resolution of a creditors’ committee or by a resolution of the creditors. IA 1986, Sch B1, para 98(3) provides that, where an administrator makes a statement under IA 1986, Sch B1, para 52(1)(b) (company has insufficient property to make a distribution to unsecured creditors), a resolution requires the approval of every secured creditor and (where distributions to preferential creditors have been or may be made) the approval of at least 50% of the preferential creditors by value. This implies that a normal resolution of all the creditors is required plus a resolution of all of the secured creditors.

The proposed amendments made by para 7 distinguish para 52(1)(b) cases from non-para 52(1)(b) cases. Therefore, where the unsecured creditors have no interest in the administration (other than by virtue of the ‘prescribed part’), it will be clear that the unsecured creditors are not involved in the administrator’s release—the release only needs to be given by (all of) the secured creditors (together with at least 50% of the preferential creditors if relevant) and is effective from the time they decide. It will not be necessary for the secured creditors to hold a meeting.

The Bill inserts a new subsection into the s stating that, when a winding-up order is rescinded, the liquidator has their release with effect from the time the court may determine.

What changes to personal insolvency are proposed by the draft Bill?

1. Deeds of arrangement

Deeds of arrangement in respect of individuals are abolished. This belatedly implements a recommendation in the Cork Report and recognises that they have been replaced by individual voluntary arrangements (IVAs) and debt relief orders.

There is only one deed of arrangement still in existence, which was registered in 2004. This has its own saving provision. Deeds of arrangement are not necessarily binding on all creditors whereas IVAs are binding even where a creditor was unaware of the proposal at the time it was approved.

2. Statement of affairs

In all current bankruptcy cases a bankrupt is required to complete and lodge a statement of affairs with the Official Receiver, whether that is on a debtor’s or creditor’s petition. The amendments of IA 1986, s 288 provide that a statement of affairs is not required in a case where a creditor presented the petition unless requested by the official receiver. This mirrors the position where a company has been wound up by the court.

What is your overall impression of the proposals?

On the whole these are sensible amendments, largely clearing up points of practice. In addition, the Bill proposes to introduce a system whereby insolvency practitioners can chose to qualify in either or both personal or corporate insolvency alone. Those partially qualified will only be able to practice in their chosen specialist area.

Notice requirements

The requirement to give notice to these prescribed persons can lead to unnecessary delays in appointing an administrator. This is especially the case where there is no one else to whom notice of intention to appoint must be given, and so the requirement is being removed. The prescribed persons will in any event receive notice of the appointment when it is made.

Directors disqualification

There are also some proposed amendments to the Directors Disqualification regime, including the ability of the Secretary of State to require people to provide information to enable a decision to be made as to whether proceedings should be commenced. More amendments have been proposed in the recent Department of Business, Innovation and Skills Consultation: Transparency and trust—Enhancing the transparency of UK company ownership and increasing trust in UK business.

The removal of deeds of arrangement is really catching up with proposals that were made in 1984 and long overdue.

What are the next steps with the Bill?

There is no set deadline for the amendments to come into force. Most are stated to do so on a date to be appointed. A committee of MPs and peers will soon be appointed to begin scrutinising the draft bill which it is proposed will come in to effect during 2014.

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