Insolvency game changers?

This is a reminder that new Regulations published by the Department of Business for Innovation and Skills made much of the Small Business, Enterprise and Employment Act 2015 effective from 1 October or throughout October.

This Act deals covers a multitude of important business relevant issues such as banning non assignment clauses in contracts to make it easier for businesses to obtain invoice finance; the simplification of the appointment of Company directors as well as 32 sections on the Pubs Code Adjudicator(!).

For insolvency geeks there’s something of game changer with regard to the proceedings Insolvency Practitioners can take against those involved in insolvent companies and how they can fund those proceedings.

The Insolvency Act 1986 (still going strong at 29 years of age but with a lot of upgrades) sets out several important claims which can be pursued against company directors:

• Misfeasance, i.e. breach of duty requiring the errant person to account to the company for money or property;
• Fraudulent trading (as the name suggests – carrying on business with an intention to defraud creditors or anyone else)
• Wrongful trading – often confused with fraudulent, but very different; when a director carries on trading when he/she knew or ought to have known that the company was insolvent and would end up in liquidation.

These claims up until now could only have been pursued once the company was in liquidation (as opposed to in Administration) and then only by the liquidator. Furthermore, the liquidator had no right to assign the claim to someone else who would take it forward where the liquidator couldn’t (because of lack of funds or indeed, concerns about the merits). Accordingly, there was a risk these claims would never get pursued and the miscreants let off the hook.

The Act now allows these claims to be pursued by an Administrator, which means that the company doesn’t have to enter an additional subsequent insolvency process (for which read costs and time savings) to pursue these actions and they can be pursued expeditiously whilst the Administrator is still doing other things requiring the company to remain in administration.

As well as the right to assign the claims above, the Act also allows the assignment of actions to recover transactions at an undervalue (e.g. director gifts property to a mate before company goes into administration or liquidation); preferences (e.g. director pays a creditor (or him/herself) ahead of other creditors to make sure that there’s no loss when administration/liquidation happens), and extortionate credit transactions (as its name suggests).

The ability to assign these claims is especially important where the right of insolvency practitioners to pursue litigation under conditional fee arrangements (i.e. the lawyers' fees are conditional on success) and recover the costs of that CFA (uplift and insurance premium) is under threat from procedural reform. So, we may see claims being assigned to creditors and specialist funders amongst others and at an earlier stage of the insolvency process as well by Administrators.