UK: Assigning Your Rights Away – Changes To The Insolvency Act 1986

Last Updated: 18 April 2015
Article by Prav Reddy and Jessica Lorimer

The Small Business, Enterprise and Employment Act 2015 ("the Act"), which received Royal Assent on 26 March 2015, contains a number of changes and additions to the Insolvency Act 1986 ("IA 1986"). 

A summary of the changes, as they relate to insolvency proceedings, are highlighted below but for full details as to the newest additions to the IA 1986, please see s117 to s146 of the Act which can be located at:

http://services.parliament.uk/bills/2014-15/smallbusinessenterpriseandemployment.html

ASSIGNMENT OF CAUSES OF ACTION VESTED IN THE OFFICE-HOLDER

Section 246ZD IA 1986 provides for the ability of office-holders to assign the following rights of action:

  • Fraudulent trading (s213 IA 1986)
  • Wrongful trading (s213 IA 1986)
  • Transactions at an Undervalue (s238 IA 1986)
  • Preference actions (s239 IA 1986), and
  • Extortionate credit transactions (s244 IA 1986).

Prior to the Act, it was only permissible for office-holders to assign causes of action which vested in the company but not personal actions which vested in the office-holder. 

This change opens up the door for potential additional recoveries by office-holders in circumstances where a claim may have good prospects of success, but the estate may be without funds to pursue it.  In addition, s176ZA now specifically provides that any recoveries from the claims themselves (or pursuant to an assignment of such claims) will not be included in the assets available to meet the claims of floating chargeholders.

Section 246ZD IA 1986 will come into force once further secondary legislation has been passed.  There is no indication, at this stage, as to when this may be.

CLAIM FOR WRONGFUL TRADING AND FRAUDULENT TRADING BY ADMINISTRATORS

Pursuant to s246ZA and 246ZB of the IA 1986, an administrator may now bring a claim against a director for fraudulent or wrongful trading.
 
Prior to the Act, it was only liquidators who could bring such actions.  This lead to situations where a company could move from administration to dissolution, without the previous trading of the company being challenged.  Arguably there may now be a better chance of recoveries into the company's estate in circumstances where such claims could be commenced during the administration process, rather than waiting for the company to (potentially) enter liquidation.

The new provisions for fraudulent and wrongful trading in administrations mirror those relating to liquidations.

Further secondary legislation is required to bring s246ZA and 246ZB IA 1986 into force.  There is no indication, at this stage, as to when this may be.

OTHER CHANGES

CHANGES COMING INTO EFFECT ON 26 MAY 2015

  • Removal of the requirement for sanction before exercising certain powers in relation to liquidations (s165 and s167 IA 1986) and bankruptcy (s314 IA 1986).  This amendment gives liquidators and trustees the ability to exercise any of the powers in Schedule 4 (liquidations) and Schedule 5 (bankruptcy) without the need to obtain sanction.  In the case of liquidations, this provision applies to both compulsory and creditors' voluntary liquidations.  This provision brings liquidations and bankruptcies in line with administrations (where no sanction is currently required in cases where, had the company been in liquidation, sanction would have been required).
  • An administrator may now extend his term in office for up to a year (previously 6 months) by consent, without the need for a court application (paragraph 67(2)(b) of Schedule B1 to IA 1986).
  • There is no longer any requirement for a creditor who is owed a 'small debt' to have to prove in a corporate insolvency process or bankruptcy in order to participate in a distribution to creditors (paragraph 13A of Schedule 8 (corporate insolvency) and paragraph 18A of Schedule 9 (bankruptcy)).  It is understood that the intention is that creditors owed less than £1,000 will fall under this provision.  The section does not prevent a creditor from proving if he disagrees with the amount stated to be his claim in the Statement of Affairs.
  • Any challenge to the approval of an individual voluntary arrangement (on the basis of unfair prejudice or material irregularity) must now been brought within 28 days beginning on the day on which the creditors decided whether to approve the proposed voluntary arrangement or, where a report was required to be made to the court, the day on which the report was made (s262(3)(a) IA 1986).  It remains the case that where the creditor did not have notice of the meeting, the 28 day period will begin on which he became aware that the meeting had taken place (s262(3)(b)).
  • The Court's permission will not be required where an administrator is making a payment of the prescribed part only to unsecured creditors (paragraph 65(3) of Sch B1 to IA 1986).  A further amendment is made such that a company may not exit administration into company voluntary liquidation where the sole reason relied upon to justify such an exit is the distribution of the prescribed part under s176(2)(a) of IA 1986 (paragraph 83 of Sch B1).
  • Abolishment of fast track voluntary arrangements (removal of s263A to s263G of IA 1986): fast track voluntary arrangements not been well utilised since their introduction in April 2004 (in the last 4 years, just 4 have been approved) and therefore provision for the same has been removed.
  • Progress reports are required where a change of liquidator occurs in the first year (s92A and 104A IA 1986): clarification is given that a progress report is required where a liquidator changes in the first year of the liquidation (and on each anniversary thereafter).

CHANGES REQUIRING ADDITIONAL SECONDARY LEGISLATION BEFORE COMING INTO FORCE

Further provisions have been made in the Act for changes to the IA 1986 but with currently no indication as to when they will be brought into force. 

  • Abolishment of creditors' meetings as the primary method of decision making involving creditors: instead a decision will be deemed to have been approved unless 10% of more (by value or number) object (s246ZE to s246ZG IA 1986 (corporate) and s379ZA to 379ZC IA 1986 (individual)).
  • Ability of creditors to opt out of receiving certain notices including results of decision making processes, progress reports and receipts and payments accounts (s246C IA 1986 (corporate) and s379C IA 1986 (individual)).  Creditors who opt out will still receive notices of intended dividends and will be able to opt back in to receiving notices at any time. 
  • Appointment of the Official Receiver as the first Trustee in Bankruptcy (s291A IA 1986): the current provisions provide that when a court makes a bankruptcy order, the Official Receiver is appointed as receiver and manager only and is entrusted with protecting the estate and dealing with urgent realisations.  Under the new provisions, unless the Court orders otherwise, the Official Receiver will be appointed as Trustee.
  • Additional powers are granted to the Secretary of State to make regulations in respect of sales to connected parties: this power will enable the Secretary of State to prevent sales to connected parties, impose restrictions or require approval from the court, creditors or any other entity as he deems fit. 

DIRECTOR'S DISQUALIFICATION

  • A new 5A to the Company Directors' Disqualification Act 1986 ("CDDA 1986") has been inserted so that the Secretary of State may apply to the Court for a disqualification order where a director has been convicted of an offence overseas.  The relevant offences are those serious offices in connection with the promotion, formation or management of a company overseas.  The Secretary of State may accept from the individual a disqualification undertaking as an alternative.
  • Section 106 of the Act amends the CDDA 1986 to expand the matters set out in Sch 1 of CDDA 1986 which the court must have regard to when considering an application for disqualification of a director including: the extent to which the person was responsible for any material contravention by the company of any (domestic or foreign) legislation, the extent to which the person caused the company's insolvency; and the nature and extent of any loss or harm caused.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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