Insolvency Act: all change

Early next week a raft of new legislation comes into force that is meant to drag the laws surrounding insolvency kicking and screaming into the 21st century. But while a large chunk of the amendments to the Insolvency Act aim to take advantage of the technology now available to insolvency practitioners, there are major concerns over how the new processes will work, whether they are secure and whether everyone is ready for them.

When proposals for big changes to the Insolvency Act were first aired, they were designed to make the process more “creditor friendly” and streamlined for international companies, according to the Insolvency Service, which spearheaded the changes.

The final draft of the Insolvency (Amendment) Rules 2010 includes more than 500 changes to the legislation, and is the “most extensive” rewriting of the 1986 Act the Insolvency Service has proposed. The changes take effect on 6 April and the Service estimates it will result in annual savings to the cost of administering insolvencies of £42m.

Web worries

One of the key tranches in the drive towards cost savings, and becoming more environmentally friendly, is the go-ahead for remote meetings conducted over the internet and using emails instead of paper to conduct administrations.

An example of this is the change to the Legislative Reform Provisions, which now allows insolvency practitioners to hold creditor meetings online through webcasting or conference calls. It also makes provisions for the use of websites to communicate information to creditors.

“In jobs where money is a constraint, using the internet to run a creditors’ meeting could also save money, and using the web to communicate with creditors is undoubtedly more environmentally friendly – creditors reports tend to be very long and use a lot of paper,” says Mike Jervis, business recovery partner at PwC.

While these provisions can be a useful tool, he warns against the overuse of online facilities.

“In some circumstances, there can be no substitution for face-to-face contact with creditors – especially if they are employees, investors or customers who may have lost money.”

Jervis explains that PwC already uses the internet to keep stakeholders informed of previous cases. In the Lehman Brothers Europe and Keydata cases, for example, PwC used websites and webcasting to keep creditors in the loop, which would have previously been nearly impossible because the stakeholders were spread right across the country.

John Alexander, partner and head of corporate recovery and insolvency at CBW, says that the new provisions “may also allow creditors in this global market greater access to information and involvement in meetings – which would be a good thing”.

According to the Insolvency Service, the changes are aimed at reducing administrative burdens and to “permit” financial savings that can be passed onto the creditors.

It conducted a survey of insolvency practitioners, and others
in the profession, to examine their views on the practicalities of online services and their concerns towards moving more functions online.

More than 88% agreed or strongly agreed that online offerings would provide better real time information on each case, and a further 90% believed it would reduce the administration costs surrounding insolvency procedures.
But there were some significant worries that arose which could hold back many IPs from making use of the new provisions.

The greatest fear was over security. Some in the profession are gravely concerned the move online could increase the ease and likelihood of fraud.

Louise Brittain, partner in the reorganisation and practice division at Deloitte, believes that, although the move to electronic methods is a good one, the Insolvency Service must be careful the system “doesn’t get abused”, as the insolvency practitioner is less likely to meet people such as the creditor or debtor in person.

There were many other worries for the Service to contend with over the online switch. The survey found that a sixth of respondents believed there could be significant practicality issues.

“The difficulty here is in the provision of copy documents, and submission online would require them all to be scanned. This could be an onerous task,” says one IP.

There were also reservations over whether the new measures would integrate with existing software, with some commentators worried about the time needed to work with their IT departments to secure access through firewalls.

Alongside the provisions on online meetings is the ability to allow IPs to inform creditors of a company entering administration through email rather than post.

Neil Smyth, a partner in corporate recovery and reconstruction at international law firm Taylor Wessing, previously took the matter to court to apply for electronic use when dealing with the Farepak administration, which involved more than 150,000 creditors.

“If you could fire out an email it would be easier,” he says. However, Smyth claims the courts “resisted” as there were no rules in the original Act that took these obstacles into consideration.

“The courts have been pretty loathe to apply rules when legislation doesn’t back them up,” he adds.

Smyth is not entirely convinced this method can be used in all circumstances. He explains that, although email does make life easier, there is still a substantial part of the UK population that is not currently internet capable.

“In the Farepak administration there were a lot of people who didn’t have a bank account, so they didn’t have email that we were aware of,” he says.
“How does an IP work out who does and who doesn’t,” he adds.

Clean sheets

There are many other aspects to the changes put in place by the Insolvency Service, beyond its online amendments. One substantial change to the Act is centred on insolvency practitioner’s (IP) fees, a subject that has hit the headlines during the past year. As the fragile economy means the number of insolvencies continues to rise, so does the coverage of the money made out of failing businesses and debtors by IPs.

Amendments to the Act now incorporate greater transparency and agreements on fees prior to an insolvency process. Creditors will be able to obtain further information surrounding the expenses of an office holder, the IP or official receiver, and the ability to challenge them within eight weeks of a creditor report being published.

Although creditors can currently take IPs to court if they are unhappy about expenses and charges, until now there has been no legislation in place that set out their rights to challenge the fees.

The changes could also prove useful for IPs as it allows greater flexibility over how they administer their fees. They can choose either to take a percentage of money recovered; a fixed amount, time rates or a combination of the three.

“This was introduced to give IPs, in particular, more flexibility on determining with creditors how their fees are calculated… we wanted to provide more transparency for creditors and to justify the fees taken,” says an Insolvency Service spokesman.

Particular attention has been paid to pre-pack administration fees. Although it was always good practice to include the details of fees incurred by the IP before and after a pre-pack, it is now set out in legislation that a report to creditors following the administration must include how the expenses and charges were accrued.

“The administrator has to disclose more about the pre-appointment costs in his report as part of the drive to make pre-packs more transparent,” says Ian McDonald, head of restructuring at international law firm Mayer Brown.
“The insolvency profession has to be mindful as ever of their fees,” he adds.

However, McDonald explains the inclusion of this change in the Act should mean IPs will have a better chance of recovering their “proper fees”.

Other substantial alterations to the way the insolvency process will run in future include reducing the courts’ role in administrations for both corporate and personal insolvencies.

In order to do this, the role of Companies House in the insolvency process has been significantly increased. Office holders will now register many documents at Companies House that previously would have ended up in court filing cabinets.

According to a spokesman at the Insolvency Service, the courts originally wanted to reduce the volume of paper filed with them, which was taking up substantial resources. The courts requested the legislation be changed to allow many filing requirements to be completely removed from the Act.

Unfortunately, it transpired that the timing of crucial events in an insolvency centred around when certain documents were submitted.

“The filing triggers other events, so when one thing is filed the insolvency practitioner can move onto something else and not before,” he says.

He explains it was “difficult” to remove the submission in its entirety, not to mention that people like to have access to the information.

The Insolvency Service says that in some forms of insolvency there is no choice but to go to court, such as bankruptcy – although there will be an online option from 6 April this year.

In that respect the filing cannot be completely moved. However, company insolvency procedures which do not need a court sanction can move to Companies House filing to ease the court’s burden.

In this way, it is hoped life will be made easier for all those involved in the insolvency process and that the administration costs involved in uploading the documentation onto the Companies House website will be significantly lower than before.

“The burden is reduced by only having information at Companies House and it is easier for the public to gain access to documents,” says Mayer Brown’s McDonald. “The effort involved is halved in many cases, which is a good thing, as the cost comes down and, again, there is greater transparency.”

The biggest change to insolvency law in nearly quarter of a century will by no means mean a straightforward adjustment for IPs and creditors, and some concerns have been voiced, but hope remains that the platform is being laid for a more transparent and modern insolvency process.

WORDING FOR WOMEN

Alongside other significant changes coming into force - such as the abolishment of annual creditor meetings for voluntary winding up of companies and stopping creditor meetings from appointing the Official Receiver as liquidator – is an amendment that gives greater recognition to women in insolvency.

A “standard gender neutral drafting style” will now be used, but the word chairman will continue to be used in the Insolvency Act as many components that include it will remain unchanged. The Insolvency Service confirmed it will reconsider changing this to chairperson when they revisit rule changes in 2011.

MAIN CHANGES TO THE INSOLVENCY ACT 1986

* Electronic communication including websites and email

* Modernising creditor meetings through use of remote capabilities

* Remuneration and reporting.

* Pre-appointment administration costs

* Reducing the court filing and increasing the use of Companies House

* Incorporating gender neutrality into the legislation