Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Keeping the lights on for insolvent businesses

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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.

Pre-Administration/VA events

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)

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2 thoughts on “Keeping the lights on for insolvent businesses

  1. Good day,
    I am not a person within your business, but unfortunately one that has fell foul of the Insolvency service.
    My comments are from myself and one that my business should never have been forced into insolvency, I was very and still am very passionate about my Business.
    My comments and questions are purely as an outsider.
    1. I am at a loss why the BIS Jenny Willott or Jo Swinson are so hell bent on a one track thinking of having to do more to punish errant directors, surely within your sphere there are more pressing things to worry about.
    2. Instead of the above why can’t the £750 threshold be raised to a minimum of £10k or even £15k to stop an aggressive creditor from forcing small businesses into a winding up situation, and not caring if they don’t get any money back.
    In my case I had 1 creditor of £5k, that forced my business into the court, even though 2 weeks on and the monies would be paid, refused to adjourn on the day and refused to help in my appeals. This was the only creditor I had. This is where all you IP’s should be looking.
    3. If a company gets wound up, it should be helped to escape liquidation, not by some underhand dealings that only rich companies can do, but by having more avenues that do not need hefty financial costs by solicitors and barristers, but a more helpful legal system.
    4. Judges should be trained specifically in insolvencies, and not just a rubber stamper, My judge on the day was an ex ‘grave digger’ I must say he knew his trade as he certainly buried my business. We are told this is the internet age and global economy, yet you get in court and these learned gentlemen blather on about ‘crusty’ versus ‘crusty’ back in 1933. Its about saving jobs and businesses.
    5. Why isn’t more done to stop businesses from getting into court. I see from earlier blogs, how so many more millions of pounds can be given back to creditors and how many thousands of businesses are saved. Lets save them before they need saving. Raise the £750 threshold this alone will stop creditors being clever, as I am sure the loss of £15k would make them think about coming to an agreement rather than forcing bankruptcy. As we all know as soon as a company is liquidated creditors get nothing.
    6. Banks close accounts as soon an order is spotted in the Gazette, whilst this may be a good or bad thing, I would have thought most assets have long gone, but in genuine case why cant banks be given a certain amount of flexibility to allow funds to clear a debt so the company can get back to trading, in my case I had £33k frozen, with a £5k debt, yet I had to find outside funds to clear all the costs and debt, had an amount of freedom been shown, I could have used these funds and not treated like a leper as if I was trying to rob some one.
    7.Can someone out there tell me why my small business with a £5 k debt and £60k in the bank, should sit in the OR’s hands for 11 months before being pushed out to one of you private IP’s, I will wait with baited breath.
    Me Finished

    • Thanks for your comments, Mr Leeder. I am sorry to read about your troubles.

      I think you have a valid point about the threshold for winding-up petitions. The Government is exploring the idea of raising the bankruptcy threshold, so I would have thought that there is an argument to be had about raising the winding-up threshold similarly. The OR’s performance is a strange one: plenty has been said about the reduction of resources in the Insolvency Service, but that does not really explain why stretched ORs would not pass work out to IPs more swiftly and frequently.

      I appreciate the debilitating effects of the advertising of a winding-up petition, but all is not necessarily lost at that moment. Most IPs are happy to share a first consultation free of charge and this may help open up directors’ minds to possible options even at this late stage.

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