Small Business, Enterprise and Employment Bill

Written evidence submitted by the Institute of Chartered Accountants of Scotland (SB 81)

ICAS comments restricted to Parts 7, 9 and 10

1. Introduction

The Institute of Chartered Accountants of Scotland (ICAS) is the oldest professional body of accountants and represents around 20,000 members who advise and lead business across the UK and in almost 100 countries across the world. ICAS is a Recognised Professional Body (RPB) which regulates insolvency practitioners (IPs) who can take appointments throughout the UK and we have an in-depth knowledge and expertise of insolvency law and procedure.

2. Our Royal Charter requires ICAS to primarily act in the public interest. The Charter also requires ICAS to represent our members’ views and protect their interests. On the rare occasion that these are at odds with the public interest, the public interest is paramount.

Key Messages

3. ICAS recognises the objective of the Department of Business, Innovation & Skills to achieve increased corporate transparency and welcomes measures to make the insolvency process more efficient and increase returns to creditors. However some of the proposed measures appear to be at odds with some of the government’s stated objectives. For example the removal of the requirement to hold creditors’ meetings except in certain circumstances together with the presumption of deemed approval for the majority of resolutions is contrary to the government’s efforts to encourage increased creditor engagement in the insolvency process and may simply exacerbate current levels of creditor apathy.

4. A significant number of the insolvency related provisions will require amendments to secondary legislation. Receivership and liquidation are currently devolved to the Scottish Parliament. ICAS is supportive of a modern, coherent and relevant set of Insolvency (Scotland) Rules. This can only be achieved through adequate resource, expertise and parliamentary time being available otherwise creditors and IPs in Scotland will continue to be disadvantaged resulting in lower returns to creditors in Scottish insolvency processes. To further promote working in the public interest we would therefore encourage the UK and Scottish Governments to commit to working together to ensure that any changes are implemented simultaneously in all UK jurisdictions.

Detailed comments

5. Where no specific comment is made, we are broadly satisfied with the proposed amendments.

Part 7 – Companies: Transparency

6. Clause 76 – Requirement for all company directors to be natural persons

We are not convinced that there is a need to create an exception for LLPs and charities in relation to the proposal to abolish corporate directors.  We are not aware of any evidence to support this exemption.

Part 8 – Company filing requirements

7. Clause 91 – Reduction in notice periods etc. for striking off companies

While we support efficiencies to company filing requirements, our insolvency practitioner members have concerns over the reduction in the period for striking off. The reduction may have an unintended consequence of prejudicing creditors who have not been provided with the proper notice by directors attempting to strike off the company in an improper manner. In such cases there will be limited time to intervene and may incur costs associated with restoration after the event.

Part 9 – Directors’ Disqualification etc.

8. Clause 94 -Determining unfitness and disqualifications: matters to be taken into account

We support the amendments made within clause 94. In particular, the re-drafted Schedule 1 to the Company Directors Disqualification Act 1986 provides a more rounded expression of the factors which should be considered when evaluating unfitness.

9. Clause 95 – Reports of office-holders on conduct of directors of insolvent companies

We welcome the clarity to be provided within the Company Directors Disqualification Act 1986 relating to office-holder reports. We are however, concerned that the reduced timescale for submission of the conduct report, from 6 months to 3 months, provides an insufficient period of time for an office-holder to sufficiently evaluate conduct. The possibility to submit ‘new information’ received after three months from the date of insolvency will compensate to a degree for the reduction in time but we have significant reservations that ‘new information’ will be submitted more frequently than currently is the case and that as a result the Insolvency Service will require additional resources in order to properly evaluate the ‘new information’.

10. Clause 96 - Unfit directors of insolvent companies: extension of period for applying for disqualification order

We have reservations over the extension of the disqualification order application period from 2 years to 3 years. Our members report few instances where proceedings have not been able to be brought within the relevant timescale. Powers exist to allow the court to extend the period of time to raise proceedings. The extended period may also result in a delay in receipt of any compensatory awards against directors being proposed, which could also have a further negative effect on creditors. The fall in the number of director disqualification cases which are progressed by the Insolvency Service has been a concern raised by our Members. There is no evidence that these issues will be addressed by the introduction of the extension.

11. Clause 98 – Compensation orders and undertakings

The principal behind the new power for the court to make compensation awards for creditors is one which we would wholly support. If implemented in an appropriate manner we believe this provision would result in increased trust and confidence in UK business. We do however remain cautious regarding the detail and practical implications; this will require further consideration to avoid unintended consequences. For example, there may be practical issues to be resolved as office holders may require to remain in office until all distributions to creditors have been made and the process concluded. It is also unclear how any payment to the Secretary of State for the benefit of a class of creditor could efficiently be distributed other than via the office holder. The extension of the disqualification order application period to 3 years could aggravate the position, with the office-holder having to remain in office for longer periods of time. This could result in additional costs (as required to maintain a case open), which ultimately would be borne by creditors. We would welcome further clarity on how the provisions will be implemented, but for present purposes we wish to highlight the need for further consideration of the practical implications of the legislation.

12. Clause 101 – Bankruptcy: Scotland and Northern Ireland

ICAS welcomes the provisions in the Bill to clarify the issue surrounding sanctions imposed by Scottish Bankruptcy Restriction Orders/Bankruptcy Restriction Undertakings as they relate to director disqualifications. We note that there remain unresolved issues in respect of the scope of Scottish Bankruptcy Restriction Orders/ Bankruptcy Restriction Undertakings within other legislation in particular with respect to parliamentary disqualification under s.426A of the Insolvency Act 1986. We would encourage such anomalies to be addressed at the earliest opportunity.

Part 10 – Insolvency

13. Clause 105 – Power for administrator to bring claim for fraudulent or wrongful trading

As indicated in our response to the Discussion Paper on Trust and Transparency, members report that the level of proof required for a successful action in the courts for fraudulent or wrongful trading often prohibits office-holders from taking action. As a result very few actions are raised. Successful use of this provision is heavily linked to the existing exemption for insolvency to litigation funding. This exemption which is due to cease in April 2015 when the provisions contained in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) take effect, will curb the use of conditional fee agreements (CFAs) and ‘after the event’ insurance (ATE) commonly known as ‘no win, no fee’ agreements. Insolvency litigation is a vital tool for recovering money from directors who have committed fraud, been negligent, or wrongly taken money out of a business; money that is owed to creditors. While we welcome the extension of provisions to administrators, we believe that the effectiveness of this change will be limited without a coherent approach in relation to insolvency litigation funding.

14. Clause 106 – Power for liquidator or administrator to assign causes of action

Liquidators in Scotland already have the ability to assign their right to a claim and therefore the express provision and extension to other jurisdictions is appropriate and welcomed.

15. Clause 108 – Exercise of powers by liquidator: removal of need for sanction

We welcome the proposals to remove the current requirements for sanction which are an unnecessary burden on the efficient administration of liquidations.

16. Clause 110 – Abolition of requirements to hold meetings: company insolvency

Clause 112 – Ability for creditors to opt not to receive certain notices: company insolvency

We would query whether the introduction of a ‘deemed consent’ procedure, the abolition of requirements to hold meetings and ability of creditors to opt out of receiving information meet the Government’s objective to encourage greater creditor engagement in the insolvency process. We agree that greater creditor participation in insolvency processes is desirable. We have reservations that the measures included within the Bill will ultimately address the fundamental issue of creditor apathy. We would encourage other non-legislative measures to be implemented in order to address creditor apathy, such as the Government, its departments and agencies taking a more proactive engagement role in all insolvency processes.

17. We also note that the way these clauses are drafted is not particularly easy to understand. The use of a formula in s.246ZE does not provide clarity of understanding and is inconsistent with wording in the Act as a whole.

18. Clause 117 – Administration: sales to connected persons

ICAS welcomes the output of the Graham Report into pre-pack administrations and supports the policy objective of ensuring that pre-pack administrations are used appropriately and only when of benefit to creditors. The insolvency profession through the Joint Insolvency Committee (JIC) is addressing the recommendations of the Graham Report to ensure robust requirements for best practice are in place. ICAS is of the view that a legislative approach should only be pursued as a last resort once non-legislative options have been considered and a clear need demonstrated. In this instance it is our view that this has not been established and therefore we do not believe it is appropriate to enact this clause. If this clause is introduced, we believe that clearly established and measureable objectives, against which the advancements made voluntarily by the profession can be measured, should be established prior to this clause being commenced.

19. Clause 119 – Creditors not required to prove small debts: company insolvency

We would ask that visibility is provided in advance on the definition of "small debt" and what protection will be in place against multiple "small debts" from connected parties.

20. Clauses 125-134 – Regulatory Reform

ICAS supports the principle of introducing clear objectives for regulators to follow when discharging their statutory duties. As would be expected for high level principles, the objectives set out in the Bill are expressed through general wording. Therefore, we emphasise the importance of providing stakeholders with supporting guidance which provides unambiguous directions for how the objectives will be expected to operate in practice. Wording such as "fair treatment" and "fair and reasonable" will otherwise be too wide to be of practical use.

21. We accept the rationale for allowing the Secretary of State to provide directions to an RPB under certain circumstances. We are confident that our regulatory arrangements are sufficiently robust as to render the possibility of such a direction to ICAS as highly unlikely. We would, however, welcome further clarity on the future exercise of this new power. For example, while it may be appropriate for the Secretary of State to direct an RPB to investigate a particular issue with an insolvency practitioner, we do not think the direction should extend to the outcome of the investigation; that power must remain with the investigating body to ensure natural justice is preserved. As currently worded, it is unclear how the powers conferred by the legislation will be applied.

22. On our reading, Section 127 of the Bill indicates that an RPB would only be entitled to submit an appeal against a decision of the Secretary of State to impose a financial penalty. We would suggest that it would be fair, reasonable and consistent for the right of appeal to be extended to a decision to impose any order on an RPB, as such decisions may have the same impact as a financial penalty.

23. On a practical note, if the Secretary of State is likely to use the power to impose a financial penalty on an RPB, it would be best practice to produce guidelines to set out the approach which will be adopted when imposing a penalty. The RPBs will have a reasonable expectation that such penalties will be calculated in accordance with prescribed standards and will be calculated on a consistent basis. When responding to the pre-Bill consultation in March 2014, we noted that this introduction of a direct sanctioning power would raise a number of questions; particularly in regard to the process to be followed. As the process has not been fully enshrined in legislation we await clarification from the Insolvency Service.

24. Given the seriousness of a proposed order to terminate RPB status (Section 391L), we would welcome clarity on the process to be followed. We believe it is appropriate to allow RPBs to make oral representations on the decision, and ideally such rights should be enshrined in the legislation.

25. The power to introduce a single regulator for insolvency is perhaps the most significant aspect of the Bill for RPBs and insolvency practitioners. While accepting the attraction of a reduction in the number of regulators, ICAS has always maintained that the highest professional standards for insolvency practitioners can be preserved through the current arrangements, with any concerns over individual RPBs to be addressed through other measures introduced by the Bill.

26. The issue of a single regulator carries particular importance for the Scottish insolvency market. Given the distinct statutory framework for personal insolvency in Scotland, it seems to be in the best interests of all stakeholders that a distinct, local regulator remains in place.

November 2014

Prepared 13th November 2014