Is the Insolvency Act fit for purpose?

At our first annual Insolvency Conference, Insolvency Guru Malcolm Niekirk presented to 50+ insolvency professionals on whether the Insolvency Act is fit for purpose.

Malcolm then covered the topic for a second time, over a year later in September 2023, where he went into even more depth as part of a Coffee Break Briefing Webinar.

Frettens' first Insolvency Conference, June 2022

In this summary of the presentation, and webinar, Malcolm:

• Recaps on various areas of insolvency legislation
• Gives his personal rating on them
• Assesses whether the audience, and online voters in the webinar, agreed!

You can watch back the briefing below, or read on for a text summary...

Quick Links to the topics covered

• The Cork Report
• Wrongful Trading
• Directors Disqualification Orders
• Administrations
• Pre-packs
• Regulation of the profession
• The Insolvency Act 1986

What was the Cork Report?

The 1982 Cork Report was a five-year investigation into insolvency law and practice, which included a wide-ranging consultation with interested parties, and was headed by eminent individuals in the field.

The Cork Committee had 12 members and 15 co-opted members and consultants.  They worked with about 250 organisations and interested parties – 50 of which gave oral evidence.

The report was presented to Parliament in June 1982 and recommended some new insolvency procedures, changes to old ones & some less formal alternatives to them.  The Cork Report is the foundation on which the UK’s current insolvency legislation is built.

What did the Cork Report recommend?

Some of the big changes were:

• IVAs and CVA’s – new procedures.
• Administration orders – a new procedure.
• Insolvency licences – the creation of a new profession, regulated by law..

Cork recommended changes to:

• Bankruptcy.
• Liquidation.
• Disqualification rules.

Much of the Cork Report was implemented as part of the original Insolvency Act 1986, including the Company Directors Disqualification Act 1986 (CDDA) and the Insolvency Rules 1986.

What would I rate the Cork Report?

I would rate the Cork Report a 5/5.

It’s not perfect, but is pretty close. The consultation had wide terms of reference, most of which were implemented and have stood the test of time.  The committee members were experts in their field and consulted widely, among other experts.

What did the practitioners rate the report?

Broadly, the 6 tables of Insolvency Practitioners at the Insolvency Conference agreed with my score. Only one table disagreed, voting a 4/5.

Similarly, the mark for the Cork Report in our September 2023 webinar also skewed high; with 79% of respondents voting either 4/5 or 5/5.

I think it’s safe to say that the Cork Report was pretty effective and has continued to be so until this day.

Wrongful Trading and delinquent directors

The main ways for a liquidator to seek compensation are as follows:

• Companies Act misfeasance (perhaps using the s212 procedure).
• Fraudulent trading – s213 (rarely used, as it is difficult to prove).
• Wrongful trading – s214 (rarely successful, so rarely used).
• Undervalue transactions – s238.
• Preferences – s239.

What does wrongful trading include?

At some time, pre-liquidation, the director should have concluded that there was no reasonable prospect of avoiding liquidation.

The director has a defence if they took every step they should have taken to minimise the loss to creditors, from that time.

The director is assumed to have at least the minimum skills needed for their role.

What are the problems with wrongful trading?

IPs have to prove that:

1. Continuing to trade worsened the company’s finances.
2. The directors should have known that liquidation was inevitable.
3. But, if the IP gets the ‘trigger date’ wrong, they can’t try again with a later date.

Directors’ liability is several (not automatically joint and several), so you have to prove your case against each director, rather than the board.

Courts let directors breach s214 for a while before they become liable.

Wrongful trading - what did the Cork Report suggest?

The Cork Report suggested that, if:

• The company cannot pay its debts as they fall due;
• and it incurs further debts;
• without a reasonable prospect of paying them in full;

Then the directors are personally liable if they knew the company was trading wrongfully.

They can be excused if they acted honestly and reasonably.

What would I rate wrongful trading?

3/5.

Its far too difficult to use it to bring claims against directors, but the underlying concepts are good.

It means advisors know what to tell directors in the ‘twilight zone’ (where the fear of ‘fraudulent trading’ can lead them to be over-cautious).

What did the practitioners rate wrongful trading?

Mostly the same, but with a feeling that the score should be lower.

The webinar attendees also agreed, with 86% of respondents opting for 2/5 or 3/5.

Clearly there is strong dissatisfaction with the current law, perhaps some disagreement even that it’s useful as a guide for advice for directors.

Directors’ disqualification orders

They did exist before the Cork Report. The 1986 legislation made them more of a deterrent for unfit directors. 

As a result, a disqualification order, for between 2-15 years can be triggered on a first insolvency.

How many directors’ disqualifications are there?

There are about 1200 disqualifications every year, but this number has been lower over the last two years.

All disqualifications are now done in-house by the Insolvency Service.

37% of these DQs have been for unfair treatment of the Crown (preferring other creditors over HMRC).

17% have been for bounce back loans, Coronavirus Business Interruption Loan Scheme (CBILS) and furlough abuse.

What did the Cork Report recommend?

The Cork Report recommended also that liquidators should be able to apply for disqualification orders and that there should be no costs risk for reasonable applications brought in good faith.

Disqualification undertakings have been added since.

What would I rate DDOs?

 3/5.

Office holders should be given the power to bring disqualification claims (and perhaps creditors, with court permission).

And, disqualification claims should be funded better, perhaps from a modest annual bonding paid to Companies House by all directors.

What did the practitioners rate DDOs?

The practitioners had even stronger dissatisfaction here, with a broad consensus wanting a lower score. This opinion was shared with webinar attendees.

Clearly, there’s a consensus that quite radical reform is needed.

Administrations

Administration orders were new in the Insolvency Act 1986.

The Cork Report’s proposals for administration orders were similar to receivership and were started by an ‘Insolvency Application’ to court. Pending appointment, a ‘Protection Order’ could create a moratorium. Cork also suggested that protecting jobs should be a legitimate purpose of administration. 

Administration pre-2003

Administration orders between 1986-2003 required court appointment, which was expensive and slow.

The purposes were, survival of the company, CVA, (or Companies Act scheme) and better realisations than on a winding up.

Administration post-2003

For modern administrations, court appointments are rare (but sometimes useful) with most appointments being self-certified.

The purposes are largely unchanged, as:

• Rescue the company as a going concern.
• Get a better result for the creditors as a whole than on liquidation.
• Realise property for secured or preferential creditors.

What would I rate administrations?

4/5.

Improvements could be made in these areas:

• Protecting employment to be an additional purpose.
• Improving the appointment procedures and documents. 
• Better creditor involvement.

What did the practitioners rate administrations?

There were mixed views about this.

It seems the practitioners were broadly satisfied by administrations (particularly its statutory purpose), but perhaps collectively felt that my rating of 4/5 was a little generous.

As for the webinar attendees, 36% agreed with my score and the other 64% scored lower. 

Pre-packs and phoenixes

What is a phoenix company?

A phoenix company is when a bust company’s directors set up a new company. That new company then acquires the business of the bust company (often including the name).

This transaction is not always legitimate.

What is a pre-pack?

When a bust company goes into administration and the administrators immediately sell the business, without trading it. The transaction is often controversial. 

What is a phoenix pre-pack?

When a bust company’s directors set up a new company, the bust company goes into administration and the administrators immediately sell the business to the new company.

This transaction also is often controversial. (and had regulations introduced last April)

What would I rate pre-packs?

4/5.

Research shows that pre-packs are probably beneficial, and SIPs 13 & 16 give a strong and clear regulatory framework to be followed.

The recent ‘phoenix pre-pack regulations’ just brings in another person to ‘mark your work’, this adds cost, but might improve compliance with SIPs 13 & 16.

What would help?

• A new statutory purpose for administrations, to benefit employees.
• Better assessment of future viability.
• The new company being put under monitoring and reporting obligations.

What did the practitioners rate pre-packs?

Mixed views, but broadly satisfied, and a feeling that the suggested mark (4/5) is probably about right.

Webinar attendees were also mixed, but perhaps even moreso. 60% voted for 3/5, 18% chose 2/5 and another 18% chose 4/5. The remaining 5% opted for the lowest option, 1/5.

Regulation of the profession

Pre-1986 Insolvency Act, there was a poorly enforced ‘fit and proper person’ test.

The Cork Report recommended:

• Professional qualifications:
  • (Including an exam with at least an optional ‘insolvency’ paper).
  • But, a body like the Joint Insolvency Examination Board, ‘JIEB’ would be too complex and expensive).
• Disqualification from acting as an IP if:
  • Bankrupt or DQ.
  • Not independent.
• Member of an RPB.
• Annual licence.
• Bonding.

These days, licences are more varied with personal licences (more suitable for IVA specialist firms), corporate licences (more suitable for large insolvency practices) and combined licences.

What would I rate regulation of the profession?

4/5.

Licensing works well, but:

• JIEB has attracted well-founded criticism over the years.
• There are probably too many regulators
• No-one regulates the OR

What did the practitioners rate regulation of the profession?

Much lower. There was a broad consensus for a lower score.

There was a clear sense of dissatisfaction with the regulation of the profession and general agreement that it needs further reform.

However, webinar attendees were more mixed. 21% agreed with my score of 4/5, with 35% choosing 3/5 and 37% choosing 2/5. The remaining scores were split between polarising 1/5 and 5/5 ratings.

The Insolvency Act 1986

The Act is structured extremely poorly. Over 35 years many new parts, schedules and sections have been inserted – which makes the numbering system very idiosyncratic.

Notable omissions from the Insolvency Act

Most notably, the Insolvency Act does not itself include:

• LLPs
• Partnerships
• Special administrations
• Phoenix pre-pack regulation
• Crown preference
• Consumer debt procedures
• Deceased insolvents

And so much more. There are at least 10 more notable omissions.  They are covered elsewhere, but are not easily accessible.

Insolvency Act – redundant procedures

Also included in the act are some procedures which are essentially redundant, including:

• Old moratoriums (no longer relevant).
• New moratoriums, which may not be more successful.
• Administrative receivership (still permitted, for a very limited range of businesses):
  • There’s only been 4 since 2020.

Insolvency Act – the useful procedures

• CVAs:
  • Occasionally very useful – but the CVA itself often weakens a business.
• Administrations.
• Liquidations:
  • The Insolvency Rules, sensibly, treat liquidations as three procedures.
• DROs.
• IVAs:
  • Consumer (protocol) IVAs have developed differently from traders’ IVAs.
• Bankruptcy.

What would I rate the Insolvency Act?

1/5.

We desperately need a new Insolvency Act; and it needs to:

• Be numbered correctly.
• Introduce proper legislation for:
  • Partnerships.
  • Deceased debtors.
  • Odd companies.
  • Special administrations.
• Enact self-contained, consolidated consumer debt legislation.

What did the practitioners rate the Insolvency Act?

Some thought it unfair to mark it as low as 1/5, but many more  didn’t.

Delegates seem on balance to want a score even less generous than that.

Overall summary

I would sum up the views of the insolvency professionals at the conference in this way:

• The Cork Report – an excellent model for future reform of the insolvency legislation.
• Wrongful trading – conceptually useful, but in need of radical reform to turn it into a useful tool to benefit creditors in cases of serious mismanagement. 
• Directors’ disqualification – some simple reforms could greatly improve the deterrent effect of the existing rules.
• Administrations – a useful tool, but could be even more useful if they could be deployed to save jobs.
• Pre-packs – another useful tool.  The existing balance of legislation, and regulation permits the exercise of professional judgments.  It is probably about right.
• Regulation of the insolvency profession – in need of an overhaul, perhaps with a different way of examining entrants, and equivalent regulation of the official receiver.
• Insolvency Act 1986 – it is overdue for repeal and replacement, with a more comprehensive code.

Annual Insolvency Conference

The presentation, on which this article is based, was given by Malcolm Niekirk at Frettens’ first annual Insolvency Conference with 50+ practitioners in attendance; and went into much more detail.

To receive invites to our insolvency events, webinars and conferences please sign up to our insolvency email list here.