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!
