Changes to insolvency law – Autumn 2015 – how will this affect your clients?
There are changes to the insolvency legislation that come into force on 1 October 2015 as a result of provisions in the Small Business Enterprise and Employment Act 2015 and the Deregulation Act 2015. These may impact on your director clients as well as insolvency practitioners. The most significant provisions are:
- Administrators will be placed on an equal footing with Liquidators insofar as they will be permitted to bring proceedings against directors for wrongful trading and fraudulent trading.
- There is to be an extension to the Disqualification regime and the introduction of Compensation Orders.
- There will be new powers to enable assignment of claims arising in insolvency proceedings.
Let's explore these in more detail:
1. Extension of Administrators’ powers
Currently Liquidators have the power to bring actions against directors for wrongful trading and fraudulent trading, with the possibility of personal and/or criminal liability attaching to the director if found guilty. This is in addition to the power to pursue parties for recovery in the event of a preference or a transaction at undervalue. In future these actions will also be available to an Administrator in an Administration, thereby extending the potential risk faced by a director of a failed company.
2. Extension to the director’s disqualification regime and the introduction of Compensation Orders
Several changes are to be introduced to the directors’ disqualification regime. The period for applying for a Disqualification Order is being extended from two years to three. This is in conjunction with the procedural changes already in train to speed up the disqualification reporting process.
In addition to this increase the is to be a new power for the Court to make a Compensation Order against directors. Therefore, after 1 October 2015 the Secretary of State may apply to the Court for an order that a director shall pay compensation to a creditor or creditors who have suffered loss as a result of the misconduct leading to the disqualification.
As with the disqualification scheme a director may consent to an undertaking to pay compensation without the cost of a Court application.
It is easy to see that, possibly in line with the toughening up of the general HMRC approach to tax recovery, directors may now find themselves effectively personally liable for unpaid tax or VAT, despite the apparent shelter of limited liability status?
3. Power to assign claims
This new provision will allow an office holder in insolvency proceedings to assign claims deriving from those proceedings to third parties.
Being mindful that Administrators, as well as Liquidators, will now be permitted to bring proceedings against directors for wrongful trading and fraudulent trading, the sting in the tail is that these claims will now be deemed an “asset” in the insolvency and, therefore, be capable of being assigned to third parties.
These claims were previously only capable of being brought by the office holders themselves. In short, wrongful trading and fraudulent trading, as well as transactions at an undervalue and preferences, will all be treated as assets in the insolvency estate to be assigned and sold.
How McAlister & Co can help
As always, if you wish to discuss these issues in more detail please do not hesitate to give me a ring and I will meet with you (perhaps over a coffee), particularly to advise on any specific problem.
In addition, many of your clients may well avail themselves of Director and Officer Insurance. There is much legal opinion on the likely effect of these new provisions and the protection (or lack of it) afforded by such policies.
McAlister & Co are not able to specifically advise on such insurance issues, but where legal opinion is deemed appropriate we can recommend experienced commercial and insolvency solicitors off our extensive panel who will be able to assist.
