It is 13 days and counting until the Insolvency Service’s consultation on the extension of the IA86 provisions regarding essential supplies to insolvent businesses closes. R3 pretty much said it all in its autumn 2014 magazine (pages 8 and 9), so I shall be brief – honest!
The Insolvency Service’s consultation, impact assessment, and draft statutory instrument are at: http://goo.gl/N4Tg3c
Personal guarantees in IVAs and CVAs?
As I’m sure you know, the changes seek to wrap in to the existing S233 and S372 suppliers of a number of IT services and goods. Thus, these suppliers may not hold the IP to ransom in relation to their pre-appointment debts in order to agree to supply post-appointment… but they can seek a PG from the office holder, just as utility suppliers can do at present.
The draft statutory instrument also sets out restrictions on IT/utility suppliers’ powers to terminate pre-appointment contracts (or “do any other thing”, which the Service envisages would prevent actions such as increasing charges simply because of the administration or VA). A supplier would be entitled to terminate if, within 14 days of the commencement of the VA (or administration), the supplier has asked for a PG and one has not been provided within a further 14 days.
How likely is it that a Supervisor will agree to personally guarantee the payment of IT or utility supplies to a company or an individual in a VA?! Although I think that this is an entirely unrealistic prospect, VAs at present only work if the company/individual can reach agreements with their suppliers, so I don’t think the insolvent will be any worse off – and at least this might give them a 28 days breathing space in which to get things sorted. It is perhaps not surprising, therefore, that the impact assessment takes a cautious approach and puts no monetary benefit on the impact of this provision on companies/individuals trading whilst in VAs.
The draft SI lists aspects of what is described as “an insolvency-related term”, which ceases to have effect if a company enters administration or CVA (or an individual in business enters an IVA). One of these ineffective features of an insolvency-related term is:
- “the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect”
I guess that “insolvency”, i.e. being unable to pay one’s debts as and when they fall due, is an event that occurs before administration or VA, isn’t it? Given that this frequently appears in termination clauses, could this be a catch-all that avoids termination in all cases where an administration or VA results? Well, surely the problem with this is that, when insolvency first rears its head, who knows what the final outcome will be? What if a creditor, petitioning for a winding-up order, is tussling with a company hoping to be placed into administration? It seems that suppliers might be entitled to terminate, but only if the company does not end up in an administration or VA. A statutory provision that seeks to impact on a past event is no provision at all, is it?
So does the draft SI have anything else to say about the pre-Administration/VA periods, e.g. when a Notice of Intention to Appoint an Administrator has been issued or when a Nominee is acting? The Explanatory Note indicates that a termination clause would not have effect when a VA is proposed, but this is not what the draft SI says. It states that the insolvency-related term ceases to have effect if “a voluntary arrangement approved… takes effect”.
The impact assessment uses the expression, “the onset of insolvency”, which is something else again. It uses this expression to describe the starting point of the 14 days in which the supplier can ask for a PG. However, the draft SI states that this period begins with “the day the company entered administration or the voluntary arrangement took effect”.
Therefore, it would seem to me that, in more ways than one, the period during which a Nominee is acting or when a company is preparing to go into administration falls between the cracks of the draft SI that can only work, if at all, in hindsight: are supplies assured during this period?
£54 million more to unsecured creditors
The impact assessment calculates the benefits on the basis of R3’s August 2013 survey, which suggested that 7% of liquidations could be avoided. The Service has extrapolated this to mean that these liquidations instead may be tomorrow’s administrations… and, as the OFT 2011 corporate insolvency study indicated that on average unsecured creditors recovered 4% more in administrations than in liquidations, they conclude that this could result in an additional £54 million being returned to unsecured creditors.
Personally, I would have thought that the key insolvency shift that is likely to occur from these measures – especially given the Government’s appetite to act on Teresa Graham’s recommendations – is that some pre-packs may be replaced by post-appointment business sales, as IPs’ hands are freed up (if only a little) to continue to trade the business. I think it odd, therefore, that the impact assessment does not assume there would be any change in the proportion of administrations that will involve trading-on: the Service works on an assumption – both before and after the proposed changes – that 10% of administrations involve post-appointment trading-on.
Then again, didn’t Teresa Graham’s review conclude that pre-pack sold businesses are more likely to survive than post-appointment sold businesses? If this is so, is it a good or a bad thing that there could be fewer pre-packs and more post-appointment sales? That really does depend on one’s view of pre-packs. Still, as it seems inevitable now that the hurdles to pre-packs are going to be raised, I guess that we should welcome any lowering of the high jump bar for post-appointment trading.
Over 2,000 businesses could be saved each year
That was R3’s “Holding Rescue to Ransom” tagline. Is it realistic?
Personally, I think not. However, I don’t think I’m alone: the R3 article does remind us that its original campaign highlighted the need for all suppliers of essential services to be brought into the net, not just IT services. Therefore, it remains to be seen if these provisions will provide enough breathing space to enable insolvency office holders to help more businesses to survive.
(UPDATE 24/02/2015: for a summary of the outcome of this consultation, go to: http://wp.me/p2FU2Z-9w)