Finding clarity for insolvency rules
If the Government’s proposed changes are not on the mark, what needs changing with the current insolvency regime in Scotland? Anthony Harrington continues his investigation.
For Donald McNaught, Partner and Head of Restructuring with Johnston Carmichael, there would be real merit in harmonising the rules for the two different insolvency regimes (corporate and personal insolvencies), though it would be difficult to achieve.
“In both cases, creditors are owed money but the rules and regulations governing the two processes are very different. This can be very confusing for creditors. Getting some consistency here, in the area of the setting of fees, for example, would be beneficial but I can see it being very hard to do,” he said.
What would make it even harder to do is the fact that personal insolvency is a devolved matter, being governed by the Scottish Government and the Accountant in Bankruptcy (AiB).
Donald continued: “If I were a creditor, it would make much more sense to me to be engaged in the same way, in both instances, with greater levels of consistency about how one reacts to the process."
There are instances in insolvency situations where meaningful consultation is not practically possible.
Eileen Blackburn, Head of Restructuring and Debt Advisory and Principal Partner in Edinburgh for French Duncan, said: “My biggest frustration with the law as it stands results from the tension between insolvency law and law in other areas, which causes problems for us as insolvency practitioners.”
She pointed out that the law governing collective redundancy requires employees to be consulted when large-scale redundancies are being made. Failure to consult results not only in compensation being payable to the employees but also, potentially, in criminal sanctions.
“There are instances in insolvency situations where meaningful consultation is not practically possible. There should be a recognition of this since it would be manifestly unfair to proceed against an IP on the grounds of failure to consult in such circumstances."
Similarly, licensed insolvency practitioners, who are members of a heavily regulated profession as it is, are unable to give advice to individuals in respect of consumer debts, unless there is an expectation they will be appointed in a formal insolvency of the person seeking advice.
Otherwise, the IP must hold an FCA licence in addition to an insolvency permit. This causes practical problems when advising, for example, company directors who may also have consumer-debt issues they wish to be advised on, and individuals who have multiple debts in different categories. It prevents IPs from being able to give holistic advice in some cases, according to Eileen.
Caroline Sumner, Technical Director of R3, argued that some not yet enacted proposals from the 2016 Insolvency Service consultation on potential reforms to corporate insolvency still have some merit.
“For example, we would support the introduction of a limited pre-insolvency moratorium and the launch of a new restructuring tool," she clarified. "Changes are needed to make the moratorium more appealing to creditors and to prevent its abuse, but the ideas behind the proposals are encouraging. The added transparency and scrutiny provided by these procedures should help improve corporate governance in insolvency situations.”
However, R3 is no fan of the new insolvency and corporate governance consultative document. Caroline commented: “This contains a number of proposals which R3 believes would have significant unintended consequences, risking harm to the UK’s enterprise culture."
The research reveals that the early termination of a CVA does not automatically mean failure.
R3, along with the ICAEW and the University of Wolverhampton and Aston University, has several proposals to improve company voluntary arrangements (CVAs). These include capping CVAs at three years, expanding the existing, limited pre-CVA moratorium from creditor enforcement action so it can be used by companies of all sizes and in advance of any insolvency procedure, and requiring public-sector creditors to explain why they won’t support a CVA.
“Recent research commissioned by R3 reviewed the progress of CVAs agreed in 2013, and found that 18.5% of those CVAs had been fully implemented, 16.5% are ongoing, and 65% had been terminated without achieving all of their objectives," Caroline explained. "While this might sound like a high termination rate, the research reveals that the early termination of a CVA does not automatically mean failure: terminated CVAs may return more money to creditors - the ultimate goal of any insolvency procedure - or otherwise be more beneficial for creditors than an administration or liquidation.”
R3 recognises that criticism aimed by stakeholders at pre-packs, and connected-party pre-packs in particular, is understandable, with some creditors and others feeling they have been left out of the loop. But it is up to the profession to build stakeholders’ trust and transparency in pre-packs.
Caroline also proposed it being made mandatory for a connected-party purchaser to make a referral to the pre-pack pool. She warned that many of the proposals for defined benefit pension reform detailed in the Government’s recent white paper, Protecting defined benefit pension schemes, will have an impact on the UK’s insolvency and restructuring landscape.
We’re pleased the Government has consulted on the procedure, but action to introduce it is needed sooner rather than later.
R3 recommends altering the criteria for a regulated apportionment arrangement, so that one can be agreed when there is “a real prospect of insolvency in the foreseeable future”, rather than the current requirement for there to be an “inevitable risk of insolvency within the next 12 months”.
Caroline said: “On personal insolvency, the idea of a ‘breathing space’, i.e. an opportunity for people to access the impartial, unpressured advice they need about their finances and the options they have for resolving their debts at a crucial time, free from creditor enforcement, is a good one.
“We were pleased to see the Government consult on a six-week breathing space at the start of the year, rather than the much longer scheme proposed by other organisations. We’re pleased the Government has consulted on the procedure, but action to introduce it is needed sooner rather than later.”
Time is of the essence
Barring a few exceptions, there has been little change in corporate insolvency legislation over the last 25 years. However, communications need to improve, and subcontractors in particular need protection with effective legislation, according to Derek Forsyth CA, Head of Business Restructuring and Insolvency with Campbell Dallas.
He said: “The insolvency sector needs to improve communication processes and adopt the latest technologies, thereby allowing smoother, quicker and more cost-effective communications with all the stakeholders involved in insolvency cases.
“Creditors’ meetings, for example, are rarely attended, partly due to the time spent travelling. In England, creditors can participate by telephone - for some reason Scotland does not offer this facility, and we should adopt it as soon as possible. Communication with creditors needs to become digital where possible, and in a more streamlined process than the current circular system.”
It would be beneficial to have some stricter form of legislation around tighter and effective payment terms.
Derek also pointed out that liquidations take far too long to conclude. “We need to speed up the liquidation process to expedite a dividend to cash-strapped creditors, or earlier confirmation that there will be no recovery.”
He highlighted that in cases where creditors suffer losses there is little protection for subcontractors in particular, and called for legislative change.
“In the construction sector, where we have considerable experience and where there have been a number of recent collapses, there is little protection for the subcontractors against late payment, with this category of creditors often being used as an additional banking facility, and to ease the cash flow of the main contractors.
“It would be beneficial to this sector to have some stricter form of legislation around tighter and effective payment terms.”
So, whatever the circumstances of a particular insolvency arena, we may be moving towards the day when more interested parties feel like ‘a winner’ - but it is clear there is juggling yet to do.