The Insolvency Service - Business and Enterprise Committee Contents


Memorandum submitted by the Insolvency Practitioners Association (IPA)

1.  SUMMARY

  The IPA is of the view that The Insolvency Service has generally discharged its wide ranging insolvency functions efficiently and effectively, and has shown itself capable of managing the marked increases in bankruptcies in the last five years. However, with the likelihood of significant further increases in bankruptcies and also now in companies, it would be appropriate to look at a number of issues which need, or will soon need, to be addressed—

    —  Para 3.3: The Service should make more use of the Secretary of State's powers to appoint insolvency practitioners as trustees and liquidators to ensure that its official receivers continue to be able to deal with the essential protection of assets and the investigation of conduct of bankrupts and directors of failed companies.

    —  Para 3.5: It is important that The Service's investigation and enforcement activities are maintained, and not arbitrarily restricted by reductions in its budget.

    —  Para 4.3: Advice organisations and others providing debt advice should be required to provide debtors with information and appropriate advice across the range of statutory and non-statutory debt relief and repayment solutions, as is currently required of insolvency practitioners.

    —  Paras 4.4 and 4.5: Officials receivers, in the event that it is decided that they should accept petitions for bankruptcy, should establish whether debtors have received professional advice, particularly in cases where they file their petitions on-line.

    —  Paras 4.5, 4.6 and 4.7: Bankruptcy should be a last resort; and debtors who can pay should be directed to alternative solutions likely to have less impact on their credit rating and improve their access to financial markets, and enhance returns to creditors.

    —  Para 4.6: The Government should ensure that debtors are not being unreasonably denied access to debt relief and repayment procedures.

    —  Para 4.8: The Service should have responsibility for the proposed approval of debt management scheme providers to ensure coherence and consistency with the authorisation and regulation of insolvency practitioners and approval of debt relief order intermediaries, and with other debt repayment procedures.

    —  Paras 5.10 and 5.11: Transparency in pre-packaged administration sales of companies should not be overshadowed by particular interests' preferences for confidentiality.

    —  Para 6.6: If The Service is to continue to license insolvency practitioners, then it should have the full range of sanctions to deal with transgressions and misconduct.

    —  Para 6.7: The Service should take a more outward-looking role in assuring the integrity and robustness of the regulatory framework.

2.  ABOUT THE IPA

  The IPA is a membership body for those in insolvency practice, those engaged in insolvency related work and those with an interest in insolvency.

    —  It has some 1,700 individual and firm members and students.

    —  It is the second largest of the professional bodies recognised for the purpose of authorising and regulating insolvency practitioners (IPs) under the Insolvency Act 1986.

    —  As the only recognised body solely involved in insolvency, it has been at the forefront in developing professional and ethical standards; widening access to insolvency knowledge and understanding; and promoting the principles of better regulation.

    —  It introduced what has become the Joint Insolvency Examination which is the required qualification for IPs; and has developed an intermediate Certificate of Proficiency in Insolvency and Certificate of Proficiency in Personal Insolvency Examinations, primarily for those involved in case administration.

    —  It jointly administers a voluntary scheme for the registration and regulation of those specialising in fixed charge receiverships which fall outside the statutory framework.

    —  It has been instrumental in establishing the Debt Resolution Forum which will set, monitor and regulate standards for those involved in providing non-statutory debt solutions.

3.  INSOLVENCY SERVICE CASE LOADS

  3.1  The announcement of the Committee's scrutiny refers to "insolvencies increasing at an alarming rate and the appropriateness of looking at The Insolvency Service's efficiency". Such an increase has yet to be fully reflected in the latest published statistics to 30 September 2008. However, there remains a broad consensus amongst commentators, re-enforced by reports of more large, medium and small businesses facing falling sales and tighter provision of finance, along with some high profile companies entering into administration, that numbers of insolvencies will increase significantly over the coming months.

  3.2  The Service's financial regime gives it flexibility to deal with fluctuations in case administration workloads from one year to another by adjusting resources in line with cases and the fees that they generate. But it is acknowledged in the Corporate Plan 2008-11, published in April 2008, that the effort needed to be put into training and development of new staff to handle the expected increase in case numbers from 67,200 in 2007-08 to a then projected 74,200 in 2008-09 would mean that The Service would be stretched very hard to maintain its performance. The numbers of bankruptcies can expect to be affected when the provisions of the Tribunals Courts & Enforcement Act 2007 relating to debt relief orders are brought into operation in April 2009—it is estimated in the Corporate Plan that some 8,000 debtors who might otherwise have been expected to present their own petition for bankruptcy would qualify for a debt relief order on the basis that their liabilities do not exceed £15,000 and they have minimal assets and limited surplus income. But rising unemployment may result in debtors defaulting on individual voluntary arrangements (IVAs) and resorting to bankruptcy; and there could be fewer IVAs proposed as alternatives to bankruptcy without some changes to the approach to IVAs—see Personal Insolvency at paras 4.6 and 4.7.

  3.3  With the likely rise in insolvencies and the question about The Service's ability and capacity to recruit and train sufficient numbers of additional staff, the IPA considers that it should look again at the use it makes, and considers making more use, of the powers of the Secretary of State to appoint IPs as trustees and liquidators to ensure that the role of its official receivers and their staff in the essential protection of assets and the investigation of conduct is not adversely affected by the need to themselves also undertake the trustee and liquidator functions where there are assets—currently IPs are appointed in some 9% of bankruptcies and 21% of compulsory liquidations. Otherwise, there is a distinct risk that case administrations standards will fall and/or investigations will be curtailed, undermining the credibility of the framework for dealing with financial failure.

  3.4  Would the private sector be able to cope any better? While large and medium firms are heavily committed to some major failures, they are generally in a position to re-allocate resources from other departments whose workloads have historically reduced as the economy has shrunk. The number of smaller firms across the country would offer more flexibility to spread case work.

  3.5  There would be a further concern if, as a consequence of pressures on government spending, The Service's investigation and enforcement functions, which are funded by the Department of Business Enterprise & Regulatory Reform under a programme budget, were to be arbitrarily restricted by reductions in that budget: it might be reasonably predicted that if the number of insolvencies do rise, then there will be a need for an increase in investigation and enforcement—in actual numbers if not necessarily proportionately. It would be damaging to the integrity of the insolvency system if bankrupts and directors who had acted irresponsibly, recklessly or dishonestly in bringing about their own or their company's insolvency were to escape detailed scrutiny, and appropriate sanctions.

  3.6  The Committee should be aware that in December 2006 The Service had to announce that, as a result of the then Department of Trade & Industry having suffered some unforeseen demands on its budgets in 2006-07 and being required to cut expenditure on some of its activities, its enforcement budget had been reduced by 7.5%: in consequence it was unable to investigate as many cases as it had originally planned. It is understood that the budget was re-instated for 2007-08, but a shorter term impact seems to have been that The Service fell short of its target for increasing its enforcement outcomes in 2007-08.

4.  PERSONAL INSOLVENCY

  4.1  The Government, principally through The Insolvency Service and the Ministry of Justice, is taking forward proposals to provide individuals facing financial difficulties with a wider range of statutory debt relief and repayment solutions, alongside the many non-statutory solutions—see Appendix I.

  4.2  The concepts behind the statutory proposals are straightforward, depending very largely on the ability of debtors to pay (and their readiness to do so) and how much they owe—see Appendix II. Bankruptcy should be the last resort, essentially for those whose affairs should be investigated by the official receiver: other debtors should be channelled into one of the other relief/repayment solutions.

  4.3  From the perspective of most debtors however, the statutory and non-statutory options and the impact on them are likely to seem somewhat bewildering: independent, authoritative advice is essential. There is an existing requirement on IPs consulted by debtors to ensure that they receive information and appropriate advice across the range of statutory and non-statutory solutions; and to record the conclusions. While it appears from responses to surveys conducted for or by The Service in 2005 and 2007 that the majority of debtors who presented their own petition for bankruptcy had considered other solutions and sought advice, the extent of that consideration and the validity of the advice are unclear. The IPA considers that the requirement placed on IPs should also be extended to advice organisations and others providing debt advice. Such a requirement would be supported by the publication of a Debtor's Guide which is being finalised by a Standing Committee, chaired by The Service and including representatives of the insolvency profession and regulatory bodies, creditors, Citizens Advice and other advice organisations, the Office of Fair Trading and the Insolvency Practices Council which represents the public interest in insolvency profession standards: the Guide outlines the debt solutions available to debtors and identifies the criteria for them and their effect on debtors.

  4.4  In October 2007, The Service published a proposal under which debtors would file their petition for bankruptcy with its official receivers, rather than as now with the courts. The proposal would present an opportunity for The Service to take a more proactive and innovative role in steering debtors to the appropriate solution. For example:

    —  There already exists a provision by which, in relation to a debtor presenting his own petition and who has assets and/or income, the court can refer him to an IP with a view to proposing an IVA. The procedure has fallen into disuse in the hands of the court; and in consequence, debtors are being made bankrupt when a more appropriate solution might have been more fully considered.

    —  While in 2007-08 some 13,000 bankrupts (out of 62,000) were subject to agreements/orders to make payments out of their surplus income for periods of up to three years, only 13 attempted a post-bankruptcy fast track voluntary arrangement (FTVA) under the aegis of official receivers—something which would immediately lead to the annulment of their bankruptcy; should have less impact on their credit rating and improve their access to financial markets; and should enhance returns to creditors.

  4.5  The Service response to comments on the consultation, published in July 2008, suggests that it might see itself more as "a safety net" rather than a primary source of advice. That is probably right. But the IPA considers that official receivers should establish whether debtors petitioning for their own bankruptcy have had information about the options available to them and have received professional advice—particularly in cases where the debtor files his petition on-line; and in appropriate cases, refer debtors to an insolvency practitioner or to a recognised advice organisation for that advice and further consideration of the options, including an IVA.

  4.6  A debtor cannot be compelled to put forward a proposal for an IVA; nor can creditors be compelled to accept. That suggests:

    —  Consideration might be given to introducing a scheme with elements of the US Chapter13 procedure by which a debtor who has surplus income can only proceed under protection of the Bankruptcy Code through a repayment plan, usually for five years—around 40% of US Bankruptcy Code filings proceed under Chapter 13.

    —  Alternatively or additionally, the period of income payments orders/agreements entered into by bankrupts should be extended from three years to five years to align the procedure with (i) the proposed payment period for county court administration orders and (ii) the usual payment period for IVAs; and provide more incentive to "can pay" debtors to come to some arrangement with their creditors outside bankruptcy, and improve returns to creditors.

    —  It would be appropriate to revive the proposal contained in the recently withdrawn draft Legislative Reform Order by which a voluntary arrangement proposal could be approved by a simple majority in value of creditors (rather than as now, 75%), thereby reducing the risk of a minority creditor owed as little as 25% of the amount due to creditors who vote (and perhaps even a smaller percentage of the total amount owed) being able to defeat a proposal which would benefit the vast majority.

    —  Given the difficulties which debtors have encountered with creditors, particularly banks, putting forward unnecessary or inconsistent modifications to proposals for IVAs and imposing restrictive pre-conditions, the Government should ensure that debtors are not being unreasonably denied access to debt relief and repayment procedures.

  4.7  The IPA considers that to deliver its objective of supporting a fresh start for bankrupts by providing an accessible alternative to bankruptcy, The Service gives early attention to:

    —  removing unnecessary internal restrictions to FTVAs which seem largely to be matters of its administrative convenience rather than reflecting the interests of bankrupts and creditors;

    —  exploring mechanisms by which IPs with experience of handling more complex IVAs could be appointed as supervisors of FTVAs, or alternatively encouraging such bankrupts to proceed under a non-FTVA post-bankruptcy proposal with an IP; and

    —  pursuing the recommendation in the Enterprise Act Personal Insolvency Evaluation Report, published in November 2007, that it work with credit reference agencies and lenders to ensure that FTVAs and post-bankruptcy IVAs are appropriately reflected in lender policies, and are therefore more attractive to "can pay" debtors.

  4.8  It is noted that the Ministry of Justice has formulated proposals for approval of debt management scheme providers under powers in the Tribunals Courts & Enforcement Act 2007. So far as it is possible to establish, the intention is that scheme providers would be able to offer debt repayment plans which would mirror county court administration orders—that is, based wholly on income without any recourse to the debtor's assets; imposed on creditors with a limit on payments of five years, and therefore invariably involving write-off of part of their debts; and with fixed percentage fees—but would be administered by the private sector. It is unclear how the proposals sit alongside IVAs; or indeed, whether there is yet established a need for such schemes. While, as noted, the origins lie in the county court administration order procedure administered by the courts, the IPA submits that the proposals should be taken forward with The Service in the lead to ensure coherence and consistency with the requirements for authorisation and regulation of IPs and approval of intermediaries appointed to assist debtors submitting applications for debt relief orders; and with other debt repayment procedures for which it is responsible.

5.  COMPANY INSOLVENCY—ADMINISTRATION

  5.1  The administration procedure was introduced by the Insolvency Act 1986 to provide companies (and by addition in 1994, partnerships) facing financial difficulties with a breathing space to re-structure their business and funding.

  5.2  Amendments introduced by the Enterprise Act 2002, covering administrations and administrative receiverships and aimed at creating a fairer system for creditors generally, re-stated the administration objectives as first rescuing the company as a going concern; or if that was not reasonably practicable, achieving a better result for the company's creditors as a whole; or if that was not reasonably practicable, realising property to make a distribution to one or more secured or preferential creditors. At the same time, the requirement to apply to the court for an administrator was removed, thereby reducing the costs and delay involved in obtaining an appointment and making the procedure more accessible to smaller companies.

  5.3  Since the amendments made by the Enterprise Act 2002, the numbers of administrations (England & Wales) have increased significantly—from 643 in 2002 to 2,512 in 2007 and 2,804 in the first nine months of 2008, representing some 19% of company insolvencies.

  5.4  Research undertaken for The Insolvency Service and reproduced in its Enterprise Act 2002 Corporate Insolvency Provisions Evaluation Report, published in January 2008, shows that within a sample of administrations commenced in 2001-04, 41% resulted in the rescue of the whole or part of the company or a going concern sale of the whole or part of the business; while 56% resulted in the sale of the company's assets on a break-up basis (and 3% were ongoing at the time of the research)—reflecting, it would seem, the range of objectives for which administration was designed. What has to be recognised however is that there has been a very significant shift in the economic climate since those companies went into administration; and that would suggest that it would be appropriate to put in place procedures to more immediately track the outcomes of new administrations.

  5.5  It is also appropriate to make the point here that many company rescues are achieved without recourse to statutory procedures, involving re-structuring of share capital, re-financing of day to day operations and/or re-scheduling supply and delivery arrangements and debts. Indeed, it is likely that they exceed the number/value of formal rescues through administration (or company voluntary arrangements). Thus those companies, or certainly the larger ones, resorting to administration are frequently those where informal negotiations have been unsuccessful and they cannot (or should not) continue trading outside a formal insolvency mechanism; but where it is nevertheless worthwhile exploring further the possibility of securing a sale of all or part of the company or its business, rather than automatically resorting to liquidation and break-up sale. It might be added that the vast majority of companies which go into liquidation are not rescuable because of loss of market or of underlying unprofitability, and generally directors act too late to save them. Greater use of administration and publicity surrounding it might increase awareness and provide encouragement to directors to seek advice at an earlier stage when their company's business, or parts of it, might be capable of being turned round to solvency and profitability.

PRE-PACKAGED ADMINISTRATIONS

  5.6  There has been considerable discussion recently about the appropriateness and propriety of "pre-pack" administration whereby arrangements for the sale of the company or all or parts of its business are put in place immediately before the appointment of an administrator who then completes the sale on or shortly after his formal appointment. A "pre-pack" may offer the best chance for a business rescue, preserving goodwill and jobs and retaining key staff, maintaining profitable contracts and avoiding the worst effects of adverse publicity; or simply it may be that the company has run out of cash and cannot continue trading to wait on possible offers from third parties. But the "pre-pack" practice has attracted criticism where the sale is made to some or all of the directors even though, and particularly in the current economic climate and market conditions, they may be the only parties prepared to offer better than break-up value.

  5.7  The legislation contains a number of provisions to safeguard the interests of creditors—see Appendix III. But perhaps of at least as much importance is the provision of information about dealings with a company's business and assets, particularly where they involve the directors or connected or associated individuals or companies.

  5.8  The licensing bodies have recently adopted a mandatory Statement of Insolvency Practice on "pre-packs" (SIP16—November 2008). The SIP requires that IPs should keep a detailed record of the reasoning behind a decision to proceed to disposal of the company and its assets through a "pre-pack" sale; and that creditors are provided with a detailed explanation and justification of why a "pre-pack" sale was undertaken—see Appendix IV.

  5.9  Additionally, the new Code of Ethics, which came into force on 1 January 2009 and applies to all IPs, re-iterates their obligations to comply with principles of integrity; objectivity; professional competence and due care; and professional behaviour.

  5.10  The IPA itself has placed particular emphasis on transparency in additional guidance which it has given its licence holders on the Code provisions, and which it believes to be of fundamental importance: "It is imperative that all members ensure that, except where to do so would conflict with any legal or professional obligation, their acts, dealings and decision making processes are transparent, understandable and readily identifiable ... particularly ... where the assets and business of an insolvent company are sold shortly after appointment on pre-agreed terms... [and where] ... creditors at large are not given the opportunity to consider the sale of the business or assets before it takes place".

  5.11  The IPA was concerned that the need for transparency, not least in relation to "pre-packs", should not be overshadowed by any duty of confidentiality to the parties to the transaction. The additional guidance therefore makes clear the distinction between a member acting as adviser to a company or its directors, where the principle of confidentiality may arise; and acting as a statutory office holder, where a client/professional relationship will not arise. It believes that that does need to be re-enforced with the profession as a whole by the RPBs and by The Service.

RESCUING BUSINESSES—UK ADMINISTRATION V US CHAPTER 11

  5.12  There has been some discussion in the media and elsewhere whether the UK should move its administration procedure more towards the United States Chapter 11 for the purpose of rescuing businesses.

  5.13  UK administration is distinguishable from US Chapter 11 in one important aspect—in the UK an IP is appointed to take control of the company, the powers of the directors cease and it is for the IP to formulate the detailed proposals for the rescue of the company; whereas in the US the directors invariably remain in office whilst a plan is formulated and negotiated with the various creditor and stockholder groups for presentation to the court: indeed, the court may have to consider competing plans submitted by creditors.

  5.14  While the US process would seem to ensure the involvement of creditors and shareholders, frequently through committees separately of unsecured creditors, secured creditors, employees, bondholders and stockholders, that is inclined in larger cases to result in legal actions which may be complex, lengthy and costly and have to be borne from the assets which might otherwise be available for creditors generally; and, unless there is ready unanimity, means that Chapter 11 is impractical for many small and medium size companies.

  5.15  Chapter 11 also recognises the priority rights of those who fund the company's business under a re-organisation plan—something which may facilitate a continuation of the business, but which may be at the expense of the unsecured creditors.

  5.16  The most recent statistics show that there were 5,900 Chapter 11 filings in the US fiscal year 2007, representing some 20% of total business filings—comparable with the usage of the administration procedure here of 19%. It has not been possible to identify any recent research into outcomes; but a study by the Executive Office of the US Trustees some years ago suggested that re-organisation plans were confirmed in around 30% of filings. Without more recent data, it is not possible to say whether Chapter 11 does work and whether it or parts of it might, with advantage, be imported into UK legislation.

6.  REGULATION

  6.1  Licensing of insolvency practitioners (IPs) was introduced by the Insolvency Act 1986. IPs may be licensed by The Insolvency Service on behalf of the Secretary of State or by professional bodies recognised by the Secretary of State. There are seven such recognised professional bodies (RPBs), including the IPA which licenses 465 IPs (out of a total of 1,680).

  6.2  The statutory basis of recognition is that the body enforces rules for ensuring that its members who are licensed are fit and proper persons to act as IPs and meet acceptable requirements as to education and practical training and experience.

  6.3  Why have seven RPBs, together with The Service, regulating 1,680 IPs? That mirrors what was in place at the time in relation to auditors under the Companies Acts 1948 & 1976 which provided for authorisation by four accounting bodies or by the Secretary of State; and it reflected, and continues to reflect, the fact that many of those who are licensed as IPs also undertake other work which is subject to oversight and regulation by their professional body.

  6.4  How can consistency in the regulation of IPs be assured through eight regulators?

    —  The RPBs are subject to agreement entered into with The Service as a condition of recognition in the form of recently reviewed and updated Memorandum of Understanding and Principles of Monitoring which set out detailed provisions relating to granting licences, ethics and professional standards, monitoring and inspecting IPs, dealing with complaints and disciplinary matters.

    —  The RPBs, with The Service, agree common Statements of Insolvency Practice, a Code of Ethics and Insolvency Guidance Papers through their Joint Insolvency Committee.

    —  The Service requires annual reports from the RPBs in relation to monitoring and inspection and disciplinary action taken.

    —  The Service conducts its own inspections of RPBs' systems and procedures at least once every three years, and can call for information and documentation relating to individual IPs and individual cases at any time.

    —  The Service has carried out a detailed comparative study of disciplinary measures taken by the RPBs in relation to IPs' transgressions and misconduct, published in October 2006, and found them to be broadly consistent.

It should be added that no evidence has been submitted by critics of the framework of any adverse impact—for creditors or insolvents or others—arising from having eight regulators.

  6.5  Is there an incompatibility in The Service's role as regulator of regulators and in itself licensing IPs? The provision by which The Service has power to grant licences was originally envisaged to be limited to "grandfathering in" those individuals who had acted for some years as IPs but were not, and did not wish to become, members of one of the RPBs. It has continued to exercise the power in relation to new entrants to the insolvency profession who choose to be licensed by it. An advantage of it doing so might be said to be that it thereby has direct experience of IP procedures and practices and of their monitoring, inspection and regulation which it can bring to bear to more effect in discussions with the RPBs about standards. There is left at large a question raised in the context of Better Regulation Executive Review of The Service's Regulatory Performance as to whether The Service might press forward improvements in standards and expedition of implementation as regulator of regulators to the extent only that they suit it as regulator of IPs and how it goes about regulating them: the Review might elaborate on that (or dismiss it) when it is published.

  6.6  One other aspect which does give rise to concern is The Service's sanctions against the IPs which it licenses—limited to removal of the licence and only where the IP is found to be no longer be fit and proper. All the RPBs have a range of sanctions from warnings/reprimands through fines (with costs) to restrictions where an IP's transgressions fall short of making him no longer fit and proper; and have provisions for publishing their findings. Doubtless The Service is able to impose conditions and restrictions administratively; but none are published on an individual case basis or reported in its Annual Report. That there are differences between the RPBs and The Service may in practice be more a matter of perception than reality—except to the extent that its IPs are not liable to fines and costs, and publicity (although there is no evidence of regulatory arbitrage: that is, no evidence that IPs have sought to move to The Service to avoid the risk of fines and costs, and publicity). But at least a perception remains that IPs licensed by The Service are not as rigorously regulated; and that can undermine confidence in the regulatory framework and The Service's role in it. The IPA considers that if The Service is to retain its power to license IPs, then it should have the full range of sanctions to deal with, and to be seen to deal with, transgressions and misconduct.

  6.7  It is important that what goes on in relation to the regulation of IPs is not internalised and that regulators are seen to respond positively and quickly to emerging issues; otherwise, there may be misunderstanding, misconception and misapprehension about how regulation works, and whether regulation works. The IPA considers that The Service should take a more outward-looking role in assuring the integrity and robustness of the regulatory framework and its responsiveness, for example:

    —  provide fuller reports of the discharge of its functions as both regulator of regulators and as regulator of IPs—its Annual Reports are descriptive of activities but not of outcomes;

    —  look to further improve the working of regulation by discussions with the RPBs and with other stakeholders about its findings from RPB inspections and complaints referred to it;

    —  generally inform and provide a more transparent view of how regulation works, and demonstrate the coherence, consistency and effectiveness of the framework across the insolvency profession.

APPENDIX 1


APPENDIX 2


APPENDIX 3

COMPANY ADMINISTRATION: "PRE-PACK" LEGISLATIVE SAFEGUARDS

  1.  First, the administrator's powers include the power to sell or otherwise dispose of the property of the company by public auction or private auction or private contract; and where the circumstances warrant it, he may do so without the prior approval of the creditors. But he is required to do so "in the interests of the company's creditors as a whole" or otherwise avoid "unnecessary harm [to] the interests of the creditors of the company as a whole"

  2.  Secondly, an administrator is an officer of the court for the purpose of carrying out his functions; is bound by case law to act honourably and fairly; and is accountable to the court for the performance of his functions.

  3.  Thirdly, the company or its directors are required to give at least five business days' notice of the intention to appoint an administrator to the company's bank or other lender which holds what is termed a fixed and floating charge on the company's assets; and the bank or other lender, if not content with the administration to proceed under the control of the insolvency practitioner nominated by the company or its directors, can appoint an insolvency practitioner of its own choice or apply to the court to restrain proceeding with the administration if it is of the view that it is inappropriate or for an improper purpose.

  4.  Fourthly, the administrator is required as soon as reasonably practicable to advertise his appointment and send notice of his appointment to the company's creditors; to hold a meeting of creditors—unless the company has sufficient assets to pay its creditors in full, or it has insufficient assets to enable any payment to be made to unsecured creditors, or the objective is to realise property to make a distribution to one or more secured or preferential creditors; and where a meeting of creditors is required to be held, to obtain creditors' approval of his proposals—failing which the court may amongst other things end his appointment.

  5.  Finally, any creditor can apply to the court where it considers that the administrator has acted or is proposing to act so as unfairly to harm its interests; and the court may amongst other things regulate the administrator's exercise of his functions and/or require him to do or not do specified things and/or examine his conduct which may result in an order that he repay, restore or account for the company's assets and/or contribute to the company's assets by way of compensation for breach of duty or misfeasance.

  6.  SIP16 also picks up concerns where for example a supplier has delivered goods after the insolvency practitioner has been engaged by the company to review its financial position but before his formal appointment, and remains unpaid at the time the company enters administration. It makes it clear that insolvency practitioners have to be mindful of the potential liability attaching to those who are a party to a decision to cause the company to incur credit when they knew or should have known that there was no reason to believe that it would be repaid.

APPENDIX IV

COMPANY ADMINISTRATIONS—"PRE-PACKS"

EXTRACT FORM STATEMENT OF INSOLVENCY PRACTICE 16—NOVEMBER 2008

  The following information should be disclosed to creditors in all cases where there is a pre-packaged sale, as far as the administrator is aware after making appropriate enquiries:

    —  The source of the administrator's initial introduction.

    —  The extent of the administrator's involvement prior to appointment.

    —  Any marketing activities conducted by the company and/or the administrator.

    —  Any valuations obtained of the business or the underlying assets.

    —  The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes.

    —  Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration.

    —  Details of requests made to potential funders to fund working capital requirements.

    —  Whether efforts were made to consult with major creditors.

    —  The date of the transaction.

    —  Details of the assets involved and the nature of the transaction.

    —  The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration.

    —  If the sale is part of a wider transaction, a description of the other aspects of the transaction.

    —  The identity of the purchaser.

    —  Any connection between the purchaser and the directors, shareholders or secured creditors of the company.

    —  The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred.

    —  Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business.

    —  Any options, buy-back arrangements or similar conditions attached to the contract of sale.

  This information should be provided in all cases unless there are exceptional circumstances, and if this is the case, the reason why the information is not provided should be stated. If the sale is to a connected party it is unlikely that considerations of commercial confidentiality would outweigh the need for creditors to be provided with this information.

  Unless it is impracticable to do so, this information should be provided with the first notification to creditors. In any case where a pre-packaged sale has been undertaken, the administrator should hold the initial creditors' meeting as soon as possible after his appointment. Where no initial creditors' meeting is to be held and it is impracticable to provide the information in the first notification to creditors it should be provided in the statement of proposals of the administrator which should be sent as soon as practicable after his appointment.

December 2008





 
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