The times are a changin'

With new Insolvency Rules set to come into force in 2016, numerous changes to insolvency legislation stemming from the government’s 'Transparency and Trust' and 'Red Tape Challenge' agendas, and a recast of the EU Insolvency Regulation all on the horizon, the legislative landscape for insolvency specialists is changing dramatically – perhaps more so than at any point since the Enterprise Act 2002 came into force with the intention of boosting the ‘rescue culture’. Here we take you through the highlights and headlines on the agenda.

Essential supplier provisions

The government announced on 9 February 2015 that it will press ahead with the changes to the essential supplier provisions in sections 233 and
372 of the Insolvency Act 1986 (which give the officeholder the power to request that the supply
of an essential utility should continue in insolvency, and prevent the supplier insisting on payment of pre-insolvency debts as a pre-requisite), with those changes taking effect from 1 October 2015.

The present changes amend these provisions
to take account of the way business practices have changed since their introduction, extending the existing provisions to cover suppliers of information technology services (alongside the current gas, electricity, water, and telecoms) and additionally ensuring that on-sellers of such services are also caught (currently the provisions apply only to statutory undertakings and similar bodies).

The changes will also prohibit suppliers from relying on insolvency termination clauses and clauses which purport to require ‘ransom payments’ (such as for the ratcheting up of supply costs following an insolvency).

Cutting red tape

Stemming from the government’s ‘Red Tape Challenge’ agenda, the Deregulation Bill aims to reduce the burden of legislation for businesses
and individuals. The most controversial insolvency-focused change will insert a new section 390A
into the Insolvency Act 1986 to allow full or partial authorisation of insolvency practitioners. Once this comes into force, recognised professional bodies will be able to authorise insolvency practitioners to take only corporate appointments, only individual appointments, or all appointments, depending on their expertise (and, crucially, which exams they have passed). It is clear that insolvency practitioners are against this change. A letter issued by the Insolvency Service inviting views from stakeholders received over sixty responses – most vehemently opposed to the idea. Of course, depending on how the wind blows in May, and if the Bill is given royal assent, it will remain to be seen if this change is implemented. Other
changes include:

• Clarification that it’s possible to make an out-of-court administration appointment, despite the presentation of a winding-up petition after a notice of intention to appoint has been filed;
• Clarification that unsecured creditors are not involved in granting an administrator’s release where no distribution is to be made to them;
• Repeal of the Deeds of Arrangement Act 1914; and,
• An extension of the secretary of state and official receiver’s powers to request information regarding a director’s conduct with a view to disqualification proceedings.

This Bill had its final reading in the House of Lords
on 4 March 2015 and should find its way on to the statute books soon.

Hot on its heels comes the Small Business, Enterprise and Employment Bill with a similar remit to reduce bureaucracy. Changes proposed include:

• Giving administrators the power to bring wrongful or fraudulent trading claims, which will obviate the need for companies to be moved from administration to liquidation so that such claims can be brought;
• Giving insolvency practitioners powers to assign antecedent transaction claims – a move which could be crucial for insolvency practitioners if the temporary carve-out of insolvency litigation from the Jackson reforms contained in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 is indeed ended (although it has just been announced that a decision here has been deferred for now);
• Abolishing creditors meetings where an officeholder is seeking a decision about an issue arising, instead deeming proposals to be approved unless a requisite proportion of creditors request a meeting;
• Providing that all powers in liquidation and bankruptcy may in future be exercisable without formal sanction;
• Allowing administration extensions for up to 12 months with creditor consent; and
• Allowing distributions of the prescribed part by administrators without requiring the leave of the court.

This Bill is currently at report stage in the House of Lords, but a provisional sitting for the third reading has been scheduled for 17 March 2015, so it seems likely that this one will also sneak over the line before parliament is dissolved and pre-election purdah commences on 30 March 2015.

New Insolvency Rules

The draft revised Insolvency Rules were first published in September 2013 as part of the catchily titled Modernisation of the rules relating to insolvency law consultation, and it seems like slow progress has been made since. It is now intended that the draft Insolvency Rules 2016 will be provided to the Insolvency Rules Committee in the spring with a view to the final rules being laid in parliament in October 2015, to come into force from April 2016.

European dimension

A revision of Council Regulation (EC) 1346/2000 on Insolvency Proceedings has been on the cards for some time (the requirement that the regulation be reviewed and, if required, revised at regular intervals is inbuilt at the current article 46). Over the past two years, the three limbs of the European Union (the commission, the parliament, and the council) have been considering amendments to the regulation. Following divergent opinions on just how extensive the reform should be as between these three institutions, trialogue discussions took place in November and December 2014.

Those discussions have resulted in an agreed
draft of the recast regulation being announced. Subject to revision from legal linguists, it is anticipated that the recast regulation will be published in the Official Journal of the European Union (and therefore become effective) towards
the summer. The changes are numerous (evidenced by the fact that the recast regulation stands at 91 articles, in comparison to the previous 47 articles). Key changes include:

• ‘Forum shopping’: The regulation has long been criticised for promoting forum shopping, some of which has been attempted on spurious or abusive grounds. The recast regulation has as a specific objective the prevention of such abusive or fraudulent forum shopping. To this end, a definition of ‘centre of main interests’ has been incorporated into article 3, with a three-month look back period for companies and sole traders and a six-month look back period for other individuals. A revised definition of ‘establishment’ at article 2(1), for the purpose of secondary proceedings, also features a three-month look back period.
• Synthetic secondary proceedings: Another change to secondary proceedings is the new article 36, which provides a mechanism whereby the insolvency practitioner may give an undertaking in respect of assets located within a member state in which secondary proceedings could be opened, to the effect that he will distribute those assets in accordance with the domestic priority/distribution rules of the member state within which the assets are located. In many cases, this would obviate the need for secondary proceedings, creating overall cost savings in the insolvency.
• Group co-ordination proceedings: Following on from the understanding achieved in the Nortel case and essential in larger group restructurings, the new article 56ff encourages cooperation between officeholders appointed in different jurisdictions in respect of different group members. Where members of a group are in insolvency processes in different member states, each insolvency practitioner appointed in respect of a group member will also be able to request the opening of group co-ordination proceedings.
• Insolvency registers: The regulation will require all member states to which it applies to hold electronically searchable national insolvency registers. Ultimately, the intention is that each of these national insolvency registers will be linked to a centralised European database.

One crucial change that has not been included in the agreed version of the recast regulation is the inclusion of schemes of arrangement within its ambit – a proposal to draw them in having previously been put forward by the parliament.
In fact, the new recital 15 makes it clear that ‘proceedings that are based on general company law not designed exclusively for insolvency situations’ are not covered by the regulation.

The majority of changes will come into force
two years after publication. The requirement
for a national insolvency register will come
into force three years after publication, and the interconnection of those national registers in a European database will come into force four years from publication, which is still, regrettably, some way off.

It’s fairly clear from the above that, in the words of Bob Dylan, the times they are a changin’ in the world of insolvency. The changes are wide ranging, both in impact and in popularity. Over the next few months it will be particularly interesting to see whether (and, if so, how) the outcome of the general election in May affects any provisions not already in force by that date. SJ

Brett Israel, pictured, is a partner and Pippa Hill a senior associate in the restructuring and corporate recovery team at Wragge Lawrence Graham and Co

@WraggeLaw

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