A guide to the insolvency aspects of the new Deregulation Act and Small Business, Enterprise and Employment Act

On 26 March 2015, the Deregulation Bill and the Small Business, Enterprise and Employment Bill received Royal Assent. These Acts make a number of important changes to the law affecting directors, insolvency law and regulation.

The changes affect (among other things) directors’ liabilities, the powers of administrators and the rights of creditors. While some changes are relevant to all those advising companies and directors, others are of interest principally to insolvency officeholders.

While some of the changes come into force next month, others will not apply until 2016. It is expected that this will tie in with the introduction of the new Insolvency Rules 2016.

Key Changes

There are a large number of “red tape” changes that come into effect from 26 May 2015, which address important issue such as the “Minmar” issue on out-of-court appointments. These can be found by clicking here.

However, the key changes will come into effect under the Small Business, Enterprise and Employment Act, at a date to be specified unless otherwise indicated.

Directors

• Directors will be at risk of compensation orders made by the court as part of disqualification proceedings, with the proceeds of such compensation being distributed as determined by the court and subject to further secondary legislation. The compensation order could relate to, or look to compensate individuals in relation to, the actions of the director that have given rise to the disqualification proceedings, which could include failure to pay tax. All advisers should be aware of this additional risk for directors of potentially insolvent companies.
• The period for bringing disqualification proceedings against directors is extended from two years to three. The conduct of the director in relation to any insolvent overseas company will also be taken in to account in future. Disqualification orders may be brought against parties who influence the conduct of a director who is disqualified, although this should not apply to professional advisors.
• From October 2015: the majority of corporate directorships will be abolished.

Officeholders

• Administrators will be given the same power as liquidators to bring wrongful trading and fraudulent trading claims.
• Office holders will be able to assign certain claims, including preferences, transactions at an undervalue, wrongful trading and fraudulent trading claims (as well as unfair preferences and gratuitous alienations in Scotland).
• The Secretary of State will be entitled to take direct action against an IP (including through the courts) who fails to meet professional standards. The Secretary of State will also have powers in relation to professional regulated bodies, including financially penalising regulated bodies that do not regulate appropriately.
• Creditor and contributories meetings will be abolished as the primary decision making method in insolvencies. Instead, the concept of deemed consent will be introduced whereby a decision will be deemed made unless more than 10% by value of creditors (or contributories, as appropriate) object. A meeting will only be called if 10% by value or number, or if 10 creditors request it. Meetings will not be abolished where they are specifically required by statute.

Comment

Many of the changes will be welcomed by professionals working in the insolvency industry, particularly those aimed at clarification, resolving anomalies and making the process more efficient and less time consuming. However, some of the changes will prove more controversial, such as allowing office holders to assign claims, which could potentially lead to an aggressive secondary market in pursuing questionable claims against directors. It is unclear how some of the changes coming into effect on 26 May will apply to existing cases where no transitional provisions have been introduced. For example, as it will not be possible to move from administration to CVL where the only distribution to unsecured creditors will be though the prescribed part, this may affect the administration exit strategy in a number of existing cases.

There is a fair degree of overlap between the two Acts and certainly the approach to reform in this context has not been as systematic and holistic as one might have hoped. While the scope of these new Acts is significant from an insolvency perspective, readers may question whether an opportunity has been missed to conduct a root and branch review of the Insolvency Act and ancillary legislation, particularly in the light of the new Insolvency Rules set to come into force next year. That review in itself has been somewhat stifled by the fact that there has been no thorough corresponding review of the Insolvency Act. Next year marks the Insolvency Act’s 30th year on the statute book and, while it has seen numerous amendments during that time, many will feel that an opportunity has been missed to ensure the Act remains cutting edge in the face of the ever-changing debt and restructuring landscape.