Insolvency changes aimed at increasing creditor returns
David Menzies, ICAS Director of Insolvency, explains a number of upcoming insolvency changes and the implications for Insolvency Practitioners.
The Small Business Enterprise and Employment Act 2015 (SBEE) recently received Royal Assent and contains several provisions, which will have a significant impact on the way insolvency procedures are administered.
These four changes will come into effect on 26 May 2015:
- Extension to administration period by creditor consent increased to one year
- Ability to pay unsecured creditors from within the administration extended beyond prescribed part
- Additional trigger to crystallise floating charges in administration
- Liquidators' discretionary powers extended
SBEE is a wide-ranging Act covering diverse areas such as childcare, pubs, general business finance and employment, as well as provisions relating to insolvency, director disqualification and the regulation of companies. Many of the insolvency and company related provisions emanate from the Government's 'Trust and Transparency' agenda. The majority of the provisions will require commencement orders to be made but some of the amendments which will affect the Insolvency Act 1986 are timed to come into effect on 26 May 2015. No transitional provisions have been made and therefore the changes will take effect for existing insolvency appointments at 26 May 2015 as well as new appointments after that date.
Easing of burden in administration
A number of changes have been made to the administration regime, which are aimed at increasing efficiency and ultimately the return to creditors. With effect from 26 May 2015 it shall be possible to extend the administration period by up to 12 months (previously six months), with the consent of the creditors and without the need to apply to court. Given the majority of administrations currently complete within 24 months from commencement, it is envisaged that this amendment will drastically reduce the number of court applications required to extend the period of administration.
Administrators shall also now be able to make prescribed part distributions to unsecured creditors without having to apply to court for authority to do so. Court authority will still be required where an administrator wishes to make a distribution to unsecured creditors over and above the prescribed part from within the administration. Clarification has also been provided that exit from administration to creditor voluntary liquidation is only available where a distribution over and above the prescribed part is going to be made to creditors.
Amendments have also been made to the crystallisation of a floating charge in Scotland and hence when payment to the holder of a floating charge can be made. This rectifies the position where the floating charge would only crystallise if the administrator concluded that there were insufficient funds to make a payment to unsecured creditors other than the prescribed part and filed a notice with Companies House or where the company exited administration to CVL. A floating charge will also now crystallise when a court gives permission for a distribution to be made to creditors over and above the prescribed part.
The authority of liquidators to undertake certain tasks has also been substantially simplified. The distinction of powers which can be exercised with and without sanction generally and with and without sanction depending upon whether they are being carried out in a court winding up or a voluntary winding up have been removed. All powers listed in Schedule Four of the 1986 Act will become available to a liquidator without the need to obtain separate sanction.
England and Wales insolvency procedures
Minor amendments have been made in respect of IVAs and voluntary winding ups in England and Wales. The time limit to challenge a decision taken at a meeting of creditors in an IVA has been amended to 28 days where no interim order protecting the debtor from action prior to consideration of the proposal has been made. Fast Track Voluntary Arrangements are abolished.
Progress reports must be issued in voluntary winding ups if the liquidator changes within the first year of the liquidation and each anniversary thereafter. If there is no change of liquidator then the progress reports shall continue to be issued at the anniversary of the winding up.
Enabling legislative powers
Provisions to allow regulations relating to 'small claims' to be incorporated into Insolvency Rules (personal and corporate) are also introduced. At this time no regulations have been laid. The Insolvency Service has recently consulted on what would be an appropriate value for 'small claims' but has not yet issued a response. It is expected that these provisions may be enacted alongside the rules 'modernisation', which is likely to be introduced in 2016.
Although not strictly a change in procedures, it is perhaps worth noting that the reserve powers created to legislate against pre-pack administrations also take effect on 26 May, with a 'sunset' timescale of five years and therefore enabling legislation will require to be passed by Parliament before 26 May 2020 if these provisions are to have any practical effect.