Reed Smith Client Alerts

The Small Business, Enterprise and Employment Act (the Act) recently received Royal Assent. The Act introduces a number of new provisions across a wide range of issues, including regulatory reform, public sector procurement and companies. In relation to the insolvency and restructuring sector, there are a number of provisions which are likely to garner significant interest in the coming months.

1. Officeholder Claims The Insolvency Act 1986 (the IA 1986) currently only provides liquidators with the power to pursue a person for fraudulent and/or wrongful trading. The Act provides for these powers to be extended to administrators, allowing administrators to bring proceedings against a director for wrongful trading and anyone who was knowingly party to fraudulent trading by a company. The proposed new provisions mirror the existing wording of sections 213 and 214 of the IA 1986.

Interestingly, the Act also provides new powers to an office holder to assign to a third party the following causes of action (or the proceeds from them): (i) a claim to set aside a preference, (ii) a clam to challenge a transaction of an undervalue and (iii) a claim alleging wrongful and/or fraudulent trading. Furthermore, the Act inserts a new provision into the IA 1986 which provides that the proceeds of a claim or assignment of the causes of action mentioned above will not form part of the assets available to meet the claims of the holder of any floating charge security.

2. Insolvency Process and procedure

2.1 Communication with Creditors The Act introduces a number of changes to the manner in which office holders communicate with creditors (and/or contributories) by removing the requirements to hold physical meetings in every instance. When a company’s creditors (and/or contributories) are being asked to make a decision about any matter, the office holder can make use of the deemed consent procedure.

In order to make use of this procedure, the office holder must circulate a notice providing details about the matter, the proposed decision and an explanation of how to object to the proposed decision. If less than the appropriate number of relevant creditors (and/or contributories) objects to the proposed decision, then the creditors will be treated as having made the decision. The ‘appropriate number’ of relevant creditors and/or contributories is 10% in value of those creditors and/or contributories.

A decision can be made in this manner unless the IA 1986 requires, or the court orders, that the decision be made by qualifying decision procedure. It is envisaged that qualifying decision procedures will include virtual meeting, electronic voting or meeting by correspondence. The Act leaves it for the Insolvency Rules 1986 (the Rules) to introduce the alternative mechanisms that would fall under the ambit of a qualifying decision procedure.

The Act allows creditors with no further interest in the insolvency to opt out of receiving routine correspondence and reports from the office holder. This will not include correspondence with regard to payment of a dividend or where the court orders that correspondence is sent to all creditors.

2.2 Small debts The Act provides that creditors who are only owed a small amount will not need to submit a proof of debt in order to participate in the distribution of assets. Once again, the Act leaves it to the Rules to determine what constitutes a “small debt”.

2.3 Extension of administration The Act increases the period by which an administration can be extended by creditors consent from six months to one year.

2.4 Distribution of prescribed part and seeking sanction The Act amends paragraph 5(3) of Schedule B1 of the IA 1986 to allow an administrator to distribute the prescribed part without needing to seek the leave of the court to do so.

The Act also amends Schedule 4 of the IA 1986 to allow a liquidator to exercise the powers contained in this schedule without the need to seek sanction of the creditors or the court.

3. Sales to connected persons The Act proposes introducing a new paragraph 60A to Schedule B1 of the Act. The new section is an enabling provision which would allow the Secretary of State to provide for prohibiting requirements or conditions in relation to the selling, hiring out or otherwise disposing of property of a company in administration to a connected person. The aim of these provisions is to provide greater confidence to unsecured creditors that a sale by an administrator to a connected person represents the best outcome for them. The provisions are specifically designed to deal with any mischief that may arise or be thought to arise on a pre-pack sale. However, based on the recommendations of the Graham Review, the provisions target all sales out of administration to a connected party, rather than just pre-pack sales, to avoid sales being delayed in order to avoid the pre-pack legislation.

4. Directors disqualification The Act provides that an administrator, liquidator or administrative receiver must prepare a conduct report about the conduct of each person who was a director on the date of the insolvency of the company, or who had been a director of any time during the three-year period prior to the date of insolvency.

The Act also provides for extending the period in which the Secretary of State may seek a disqualification order against an unfit director of an insolvent company from two years to three years, beginning on the day the company became insolvent.

5. Regulation of the insolvency profession The Act introduces a number of new provisions for the regulation of the insolvency regime; namely the recognition of new recognised professional bodies that can authorise insolvency practitioners, as well as the power for the Secretary of State to apply to court for a direct sanctions order against an individual insolvency practitioner who fails to meet appropriate professional standards.

6. Conclusion The changes, in particular relating to the assignment of claims, are potentially wide ranging in perhaps unexpected ways. They will certainly increase the practical necessity for directors of financially distressed companies to take detailed legal advice with regards to their duties. We will continue to monitor developments in this area.

Client Alert 2015-082