Small Business, Enterprise and Employment Act 2015—restructuring and insolvency

Small Business, Enterprise and Employment Act 2015—restructuring and insolvency

What will the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) mean for restructuring and insolvency practitioners? Phillip Sykes, Baker Tilly’s London head of restructuring and recovery, and Mark Sands, personal insolvency expert and partner at Baker Tilly, consider the likely implications of the new legislation.

Original news

SBEEA 2015 is intended to ensure that the UK continues to be recognised as a trusted and fair place to do business and to open up new opportunities for small businesses to innovate and compete. It includes provisions to give small businesses greater access to finance sources, increase transparency around who owns and controls UK companies, require the payment practices of the UK’s largest companies to be reported and introduce new insolvency measures to prohibit and limit certain aspects of pre-pack sales if deemed necessary.

SBEEA 2015 will make changes allowing the Secretary of State to allow, prohibit or impose conditions on the sale of assets by an administrator to connected persons—what is the reason for this change and what do you think will be the likely impact?

Phillip Sykes: This is a reserve power that has been taken by government in connection with Teresa Graham’s report into pre-pack administrations (pre-packs) for the Department of Business, Innovation and Skills (BIS). The Graham report recommends the creation of an independent body called the Pre-Pack Pool, the establishment of which is now well under way. The intention is that where a connected party—usually one or more of the directors—want to buy back their business through a pre-pack, they will approach the pool for an independent review of the proposed deal prior to it being completed. The report to creditors on the administration in accordance with SIP 16 will confirm whether such an independent review was carried out and whether or not the pool sanctioned the deal.

While such a review is not mandatory, the report to creditors will be expected to disclose the reasons why the connected party decided not to approach the pool for sanction.

The pool is likely to come into action over the course of the summer and should impact positively on public and stakeholder perception of the legitimacy of pre-packs.

The intention is to promote transparency and reduce public concerns about this kind of transaction. The insolvency profession and BIS will be monitoring progress and, subject to that being satisfactory, BIS have said that they would not intend to legislate further. However, the reserve power to enable him to intervene remains available to the Secretary of State should it be needed.

What changes are being made to the position of creditors and why? What practical implications will they have?

Mark Sands: Currently, there is a requirement to hold physical meetings with creditors in most cases. The changes prohibit physical meetings except where creditors request them and also allow creditors to opt out of being sent paperwork regarding insolvencies. This is aimed to reduce unnecessary costs associated with meetings being held where, for example, no one turns up, as well as large amounts of paperwork being printed and sent that simply isn’t read. While in principle these changes will be welcomed, the balance will be in making sure creditors can still have meetings and paperwork if they want to.

The new rules provide that creditors representing at least 10% in number or value or 10 creditors in total (ie any one of these criteria) can require a meeting to be held so in most cases it should require only a relatively small number of creditors. Creditors will want reassurance, though, that they will be able to find out who the other creditors are—otherwise garnering the support of 10% of creditors would be a difficult task.

A major consideration is section 98 and paragraph 51 meetings. A section 98 meeting is the meeting of creditors immediately after the company is placed into creditors’ voluntary liquidation and at which the liquidator’s appointment is confirmed by the creditors. This is the time when creditors can:

  • ask questions of the directors, and
  • influence who is appointed as liquidator

A paragraph 51 meeting is the equivalent in administration proceedings where creditors discuss and vote on the administrator’s proposals.

The concern that we have is that fewer of these meetings will actually happen—potentially resulting in less creditor engagement and less scrutiny of directors’ conduct.

Company voluntary arrangement (CVA) and individual voluntary arrangement (IVA) meetings will continue to be held in all cases. These meetings are held to decide whether to approve the proposals put forward by a company (CVA) or individual (IVA) for a compromise arrangement with their creditors; the outcomes are binding on all creditors so it’s to be welcomed that these are still to be held physically. Having said which, there may be a case for the changes being introduced in due course for IVA meetings as many are usually not well attended by many creditors, if any at all, especially in cases when all debts are consumer debts (eg credit cards) and taxes.

What changes are being made to office-holder actions and what are the objectives behind these changes?

Mark Sands: SBEEA 2015 introduces changes that enable administrators to bring wrongful and fraudulent trading claims without a company first being placed into liquidation, and to allow liquidators and administrators to assign these and certain other claims.

The first of these changes is in part in connection with the extension of administrations to up to two years from the current 18 month time limit. This is a move to be welcomed as there are sometimes good reasons why a company cannot yet proceed into liquidation. I hope we will as a result see more actions being brought, and more quickly, for the benefit of the creditors.

As for the potential assignment of these claims, litigation is expensive and funding options are sometimes limited so BIS believes that the ability to assign such a claim will ensure that fewer actions are hindered by a lack of funds and this may lead to more certain and quicker returns to creditors. Time will tell and there are still uncertainties as to exposure for legal costs for administrators and liquidators where they assign office-holder actions as opposed to company actions.

Interviewed by Lucy Karsten.

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

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.