Friday, April 10, 2015

Small Business, Enterprise and Employment Act 2015 (“The SBEE”)

This is the first of a raft of legislative changes that will have a direct effect on IPs this year.  It is a piece of legislation designed to implement the matters identified as needing change under the Red Tape Challenge organised by the Department for Business Innovation and Skills (BIS).  As a result it covers a multitude of areas that fall under the control of BIS, of which insolvency is but one area. 

There are a number of changes affecting IPs from CDDA reporting obligations and compensation orders, to the regulation of the profession.  Many of the provisions require secondary legislation to give effect to them and so they do not yet have a commencement date.  However, there are a few provisions that are coming into force 2 months from the date of the SBEE, i.e. on 26 May 2015, and it is those that I will cover in this Blog.  One key point to remember about all the following provisions is that, at present, there are no transitional provisions, which is unusual.  Section 160 of the SBEE grants the Secretary of State (SoS) the power to make regulations for transitional provisions, but none have been made yet.  As a result, unless any regulations come out soon, the provisions will apply to all cases, regardless of whether they commenced before or after the changes come into force.  

Exercise of powers by the liquidator and trustee

The SBEE amends sections 165, 167, 169 and 314 of the Insolvency Act to permit the liquidator and trustee to exercise any of the powers in Schedules 4 and 5 respectively without the need to obtain sanction.  So, for example, in future you will not need to obtain sanction before issuing proceedings in the liquidation or bankruptcy, although you will still need to consider consulting with the creditors in liquidations in accordance with SIP 2.  You will also no longer need to take resolutions from the members in MVLs to authorise you to pay creditors in full.

Extension of Administrations

Paragraph 76(2)(b) of Schedule B1 is amended to permit the creditors to extend the Administration by a year rather than 6 months as is currently the case. The creditors can still only extend the Administration once, but if the additional year proves insufficient then you can still go back to the Court for a further extension.

Administrations: payments to unsecured creditors

This and the next provision are linked and are clearly designed to both reduce the number of Court applications for authority to pay creditors in the Administration, and to reduce the number of CVLs following on from Administrations when only a distribution of the prescribed part is being made to unsecured creditors, and hence save costs.

The Administrator now has the power to make a distribution of the prescribed part to unsecured creditors without needing to obtain Court sanction.

Administrations: exit to CVL

As a result of the Administrator being given the power to distribute to the prescribed part without Court sanction, the SBEE also modifies paragraph 83 of Schedule B1 to prohibit an exit to CVL where only a distribution of the prescribed part is being made.  In future you will only be able to exit an Administration to CVL if you think that you will be able to pay a dividend to unsecured creditors.  If you are only making a distribution of the prescribed part to unsecured creditors then you will have to do so whilst in office as Administrator and cannot exit via CVL.

Since this change is, subject to any transitional provisions that may be issued before 26 May, effective for all Administrations, even those where you were appointed prior to 26 May, you need to check that you have a suitable alternative exit route other than just exit by CVL in the proposals in all your open cases where you only intend to make a distribution of the prescribed part, e.g. to permit you to exit via dissolution.  If you have, then make the distribution of the prescribed part in the Administration and use that alternative exit route rather than CVL.

If you have not, then you will either have to exit to CVL before 26 May, which is when this provision comes into force, or potentially use paragraph 54 to revise the proposals to permit an alternative exit route, or apply to Court for an order ending the Administration under paragraph 79.  We are not sure that a paragraph 54 revision will actually be possible in many cases where a prescribed part distribution is being made given that in such cases a meeting of creditors will not have been held if a statement under paragraph 52(1)(b) has been made, and paragraph 54 only permits a revision of proposals where a meeting of creditors has been held under paragraph 51 to approve the proposals. 

If, however, a paragraph 51 meeting has been held, then since the legislation has subsequently been changed so that the distribution has to be made in the Administration such that exit via CVL impossible, then using the “next best” exit route provided for in the legislation must surely be possible.  You should not attract criticism if you exit in accordance with the new legislation, given that the goalposts were moved after you had issued your proposals and the whole point in moving them was to save costs.  It would only add to the costs if you have to revise proposals and/or apply to Court for an Order to exit from the Administration.  What you would do if you sought creditor approval for the revision of the proposals to permit you to exit other than by CVL and they voted against it?  Since the creditors cannot overrule statute, you would be forced to ignore their vote and comply with the legislation in any event and make the distribution of the prescribed part in the Administration. You would then have to apply to Court for an order under paragraph 79 to exit the Administration, but what do you think that the Court would say?  I would imagine that it would be something along the lines of, “Why have you incurred cost and expense and taken up Court time with the application?”  Added to which, who is paying for all this extra work required by the moved goalposts?  I am not sure that the floating chargeholder will want to, and it is not something that can be deducted from the prescribed part monies, so I guess it would fall to you as the office holder to fund it. 

Our advice has always been to include both a primary and a secondary exit route in Administrator’s proposals, with the secondary route to act as a fall-back if matters do not quite proceed as envisaged at the outset.  That advice continues to apply following this legislative change, with the only difference being that there will now be a reduction in the number of cases where exit via CVL will be included as the primary exit route.

Administrations: sales to connected parties

The SBEE gives the SoS the power to make regulations prohibiting connected party sales in Administration.  Whilst I have included this in the Blog since it comes into force from 26 May, it actually has no immediate effect and it will not have effect unless, or until, the regulations are actually made.  Effectively this is the stick available for the SoS to use to beat up the profession if the revised SIP16 and the pre-pack pool does not work as they want it to.  The only small crumb of comfort is that it contains a sunset clause whereby the SoS’s power automatically ends 5 years after commencement.

Attachment of floating charges on Administration (Scotland)

With apology to any readers dealing with Scottish Administrations, only a quick mention of this change.  The law surrounding company security and floating charges in Scotland is different from that in England and Wales, and this change is designed to make it clear that once a floating charge is “attached” to property of a company in Administration then it becomes a fixed charge over that property. 

Small debts

Again, this is the SBEE introducing a power to enable a proposed legislative change to come into force at a future time.  This time the SBEE gives a power to make rules to enable creditors who are only owed small debts not to have to submit proofs of debt in order to receive a dividend.  The Modernised Rules due to come into force in April 2016 will contain the necessary rules to give this proposed change legislative force.  In the meantime you will still need to continue to receive a proof of debt/claim from a creditor before you can pay them a dividend.

Time limit for challenging VAs

This is Bill’s claim to fame as he raised this issue with the Insolvency Service back in 2010 when the 2010 Rules first permitted out of Court IVAs.  Quite simply the SBEE addresses an anomaly introduced by the 2010 Rules whereby if an undischarged bankrupt obtained an IVA via the non-interim order out of Court procedure they could never get their discharge from bankruptcy as the appeal period within which creditors could challenge the IVA never expired.

Abolition of fast track IVAs

Enough said.

Voluntary winding-up: progress reports

The SBEE also attempts to fix the confusion over the reporting obligations that currently arises when a liquidator in a CVL or MVL leaves offices within the first year of the liquidation, and whilst it succeeds for sole appointment cases there are still uncertainties over joint appointments. 

Sections 92A and 104A are amended to delete reference to the liquidator’s reporting obligations being linked to the commencement of the liquidation, i.e. the sections will no longer say that a report is due if the liquidation continues for more than a year.  As a result it is left solely to rule 4.49C to deal with the liquidator’s reporting obligations.  As you are aware that rule provides that a liquidator has to report annually from the date of their appointment, until they cease to act, with any new liquidator then reporting from the date of their appointment in place of the outgoing liquidator.  In addition, where the liquidator in a CVL issues a draft final report before the anniversary date of their appointment then they need not prepare an annual progress report.  The changes introduced by the SBEE make it clear that where a sole liquidator is removed or replaced in the first year of a liquidation, whether as a result of a meeting of creditors or a Court Order, then the outgoing liquidator will have to prepare a progress report to the date they ceased to act, and their replacement will then prepare one to the first anniversary of their appointment, and not to the first anniversary of the liquidation.

While the SBEE fixes the confusion in sole appointments, it still leaves the position uncertain in joint appointments.  Does the departure of one liquidator trigger the requirement to issue a progress report?  Or do both liquidators have to leave office?  Hopefully that will be clarified in the Modernised Rules, we have certainly requested that it is, but in the meantime we will just have to rely on the guidance provided in Dear IP 48 which is a bit unsatisfactory. That says that when any liquidator leaves a report has to be issued in the names of all liquidators and any subsequent report by any continuing and/or replacement liquidators runs from the new date, not the old anniversary.

The effect of the SBEE is to add still further to the raft of changes made to the Insolvency Act 1986 and its Schedules.  Presumably, when the new rules have finally made an appearance, the Insolvency Service will be looking to modernise and consolidate the Act as their next major exercise.  I can’t wait!