As the season changes the world of insolvency will also experience a number of changes aimed at creating greater trust, transparency and accountability.
These attempts at modernising the insolvency regime include:
- the introduction of extended powers of director disqualification;
- the requirement for insolvency practitioners to provide upfront binding fee estimates; and
- the extension of ‘essential supplies’ to allow for the continuation of IT supply during the insolvency process.
Director Disqualification
Coming into effect on 1 October 2015 and contained within the Small Business, Enterprise and Employment Act 2015, these measures represent a substantial strengthening of the director disqualification regime. The true impact will not be immediately apparent but the emphasis on accountability is evident in many of the provisions, significantly the introduction of:
- director disqualification on the grounds of overseas convictions for company related offences, the scope of which is broad;
- disqualification of individuals who ‘influence’ the conduct of a disqualified director;
- an extension of the period to 3 years from the date of insolvency in which the director can be disqualified, previously this was only 2 years; and
- compensation orders forcing directors to pay creditors a sum equal to the loss caused by any misconduct.
In addition the courts can now look further into the conduct of any director subject to disqualification proceedings, allowing the use of information available to other regulators.
Taken together with the introduction of a register of people with significant control in January 2016 and the prohibition of corporate directors, these provisions provide a strong platform which will go some way to achieving the proposals outlined in the ‘Transparency and Trust’ process consultation back in 2013/2014.
Upfront Fee Estimates
Further attempts at transparency can be seen within the Insolvency (Amendment) Rules 2015. This Order places a requirement on Insolvency Practitioners to provide all known creditors with an upfront fee estimate, when intending to charge on a time spent basis.
The estimate is to be included in a written statement sent to all known creditors for approval. The Insolvency Practitioner must also provide the following information:
- the details of the work to be undertaken;
- the hourly rates chargeable against each area of work;
- any expenses likely to be incurred throughout the insolvency process (expenses do not require creditor approval);
- how much time is to be spent on each area of work;
- the likelihood of any changes to the fee estimate; and
- why such changes will be necessary.
It has been acknowledged that providing such detailed estimates for certain types of work is difficult, nonetheless the Order states the estimate must be definite and not detail a range of fees. It must also be noted that the requirement only applies to administrations, compulsory and creditors voluntary liquidations and bankruptcies.
The provisions do allow for some flexibility with estimates given up to a certain milestone permitted although each milestone estimate will require creditor’s approval.
Whilst the attempts at achieving greater transparency have been welcomed, it will be a matter of time before the changes can be lauded a success. Concerns have been raised in relation to the delays and extra costs incurred, as a result of further regulation, impacting on the level of returns to creditors.
Essential Supplies
In an effort to modernise the current insolvency process and assist both insolvent companies and Insolvency Practitioners, the definition of essential supplies (that is the supply of key services in order to continue trading) has been extended to include IT and electronic communications.
The Insolvency (Protection of Essential Supplies) Order 2015 now includes these supplies alongside gas, electricity, water and ‘public electronic communications services’ (i.e. telephone communications) as protected supplies. Subsequently suppliers, which now includes private suppliers such as landlords who provide onward supply, are prevented from immediately terminating contracts on the event of insolvency.
The broadening definition will include such things as WIFI, chip and pin, computer software and mobile networks to name a few. The change has been welcomed by businesses and Insolvency Practitioners alike and should go some way to help modern businesses hoping to trade out of financial difficulty, the ultimate aim of any Insolvency Practitioner.
Suppliers of IT and electronic services have not been left without safeguard though, the Order allows for suppliers to:
- request a guarantee of payment from the Insolvency Practitioner as a condition of supply;
- terminate the supply where the supplier remains unpaid for 28 days following the commencement of insolvency;
- seek permission of the court to terminate the supply in certain circumstances.
Nonetheless business and IT suppliers should review their contracts, as the Order will override any contractual rights to cancel contained within contracts entered into on or after 1 October 2015.
As you can see there is much to contemplate over the coming months. Should you have any questions do not hesitate to contact a member of our Business Recovery team. Richard Thomas based in Chester on 01244 354 and richard.thomas@dtmlegal.com or Kate Roberts in Liverpool on 0151 230 1216 and kate.roberts@dtmlegal.com.
