All aboard the new insolvency express

As someone who has been involved in the insolvency and restructuring industry for 30 years (that does sound scary), ?I don’t think I can remember a time where we have seen as much change as during the last ?12 months or so.

As we reach the 30th anniversary of the Insolvency Act 1986, the legislators have clearly decided it is time to dust the profession down and bring out a shiny new model for us to hop aboard and take a journey (for some) into the unknown.

But what do all these changes mean in practice, and is there any theme running through them? It is, unfortunately, impossible in an overview article such as this to pick up and analyse all the changes in detail, so let’s concentrate on those which potentially have the most significance.

Fee regime

In that regard, the new fee regime that commenced for insolvency practitioners on ?1 October 2015 has caused a great deal of debate throughout the profession. The bullet-point headlines on this piece of secondary legislation (The Insolvency (Amendment) Rules 2015) are that practitioners can no longer rely on an ‘open cheque book’ with regard to fees and disbursements. 

The changes in the 2015 rules aim to end ?the ‘uncertainty of unlimited hourly charges’, following a 2010 Office of Fair Trading review and a 2013 government review (the Kempson review), both of which highlighted creditor concerns that the current system could lead to excessive fees being charged. The government’s stated aim for the changes is to ensure that fees are fair and reasonable, and to provide increased transparency, while giving practitioners ‘the opportunity to demonstrate how their services provide value ?for money’.

The new regime only applies to insolvency practitioners acting as administrators, liquidators (other than in a members’ voluntary liquidation), and trustees in bankruptcy. It provides that such officeholders will have to supply fee estimates to creditors, giving details of the likely remuneration they will charge, and any expenses that are likely to be incurred in the case. These estimates must be provided before the basis of the officeholder’s remuneration is determined. 

The approval of the fee estimate will then, in essence, cap remuneration at that level, unless further approval is sought. Interestingly, although an estimate of expenses is required, there is no requirement for the expenses to be approved. In any insolvency case, the majority of expenses are often legal fees, of course.

Thus, at quite short notice, insolvency firms have had to get used to producing an accurate fee estimate at the outset of a case and to be aware that, unless they are prepared to work on fixed fees or a percentage of realisations, they cannot go beyond that estimate without seeking further approval.

It is interesting to see the different approaches of firms and the variety of costing matrixes adopted. Without doubt, one size does not ?fit all, and the new regime gives creditors an opportunity to drive matters to a much greater degree than in the past. But it also gives practitioners an opportunity to be innovative ?in their approach.

Pre-pack pool

Hot on the heels of these changes was the commencement of the operation of the Pre-Pack Pool in administration appointments from the beginning of November 2015.

It is important to remember that this is a voluntary referral code, although there are reserved powers in the Small Business, Enterprise and Employment Act 2015 for the referral process to be compulsory. The government has given itself a longstop date of 26 May 2020 for this to happen, so watch this space. 

The thrust of the operation of the pool is to try to give creditors more confidence in the pre-packaged administration process, by bringing in an independent person to express a view on the suitability or otherwise of the process.

The initial statistics coming out of the recognised professional bodies have been interesting. In the first couple of months, six cases were referred and all were deemed positive by the pool, with two ‘qualified’. However, the Institute of Chartered Accountants in England and Wales has stated that it has seen ten ‘connected party’ pre-packs and only one of those was referred to the pool, and the other major recognised professional body, the Insolvency Practitioners Association, reported seeing nine connected party cases in the initial two months or so, none of which were referred to the pool. A mixed message indeed.

Perhaps it is still too early to say exactly how these new (voluntary) reforms are working. Those of us who work in this area will continue to monitor it carefully.

CFA exemption

The area of investigation and insolvency recoveries has always been a mainstream ?activity in the insolvency profession and one ?that has, understandably, often been the remit ?of insolvency lawyers. Thus, as we travelled ?along the insolvency railroad, many of us were concerned that we were being effectively derailed by a very disappointing change, which again will occur at the beginning of April 2016. 

That is the loss to the insolvency profession of the conditional fee agreement (CFA) exemption from the Legal Aid, Sentencing and Punishment of Offenders Act 2012. Much has been written about this and the need to view insolvency litigation in a different light from normal civil litigation, but (to mix my transport theme) that ship has now sailed and will almost certainly not return to our harbour. 

It will be interesting to see if the approach of practitioners to ‘no win, no fee’ cases changes: it is hoped that innovation may be shown and there are already early signs that some new insurance-backed litigation products are coming onto the market. 

Of course, despite loose reporting in some quarters, this is not the end of CFA work, but an end to the increased percentage recoveries that were previously claimed and the ability to pass an adverse cost premium of the insurance policy to the (losing) defendant. 

My final important point on this subject is to recommend that all lawyers who work in this field read the recent case of Stevensdrake Ltd v Hunt [2016] EWHC 342 (Ch), which reviews the whole area of the liability of an insolvency practitioner in respect of a CFA. Much practical guidance can be gained from that case. 

This change must also be seen in the context of the widening of the ability of officeholders to take wrongful and fraudulent trading actions, whether they be an administrator or a liquidator, and the extra powers for officeholders to assign actions through the new sections 117 to 119 of the ?Small Business, Enterprise and Employment Act, and linked amendments to the Insolvency Act ?by section 2462D which came into force on ?1 October 2015. This should perhaps be considered in conjunction with the removal ?of the CFA exemption.

Will we see more activity in this arena? As with many of the recent changes, I believe that we will need to review matters after 12 months, but it must be a distinct possibility. If such actions promote greater and quicker returns for creditors then the process is to be encouraged. However, ?all practitioners will have to consider carefully whether the assignment of potential recoveries promotes any conflict of interest issues. 

Online debtor petition process

Whereas many of the recent changes have concentrated on corporate insolvency (and, ?as stated earlier, there are a number of other interesting areas which should be considered in a longer article, notably around the whole subject of directors and holding them to account), personal insolvency has not been immune to change.

Hot off the press is the new online debtor petition process, which commences on 6 April 2016. The relevant law is to be found at section 71 of the Enterprise and Regulatory Reform Act 2013. In essence, this process is creating a swifter and, ?it is hoped, more efficient way of dealing with debtor bankruptcy petitions than has existed to date, through utilising the court process. We will all now need to get used to an adjudicator. Amazingly, the new fee of £130 is a reduction on the old one ?of £180 – this must be the only legal fee to come down in recent years.

Will debtor petitions increase in popularity? Possibly, but with bankruptcy generally standing ?at the lowest figure since 1984, it will need quite a shift to get back to the numbers that were seen pre-recession. The new online process and the creation of the adjudicator post will certainly streamline matters, and it is hoped that there will be enough checks and balances to ensure that those who potentially had cases to answer on antecedent transactions and other issues will ?still be suitably investigated.

And finally, but saved for another day and another column, we still await the final draft of the new Insolvency Rules 2016. Now they really will mean we need to hop on the new insolvency express… Happy travelling!

Stephen Allinson is a consultant solicitor and licensed insolvency practitioner at Shoosmiths and a non-executive board member of the Insolvency Service @ShoosmithsLaw www.shoosmiths.co.uk