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On Tuesday 31 July 2001, the Government produced its White Paper for reforms of insolvency law - 'Insolvency - A Second Chance'. These reforms which incorporate both personal bankruptcy and corporate insolvency are proposed as part of the new Enterprise Bill, the cornerstone of the Government's economic reforms. The main basis for change in the personal bankruptcy regime are the reduction of the discharge period, the review of the relevance of statutory restrictions on undischarged bankrupts, and providing a tougher regime of restrictions on the dishonest bankrupt. The main reforms in corporate insolvency are to ensure a duty of care for all creditors and that all creditors are able to participate; restricting the right of the holders of a floating charge to appoint an administrative receiver; and streamlining the administrative procedure. For all insolvencies, an important part of the proposals will be the abolition of Crown preference. Personal Bankruptcy An over-riding feature of the proposals is that the automaticity of restrictions, prohibitions and disqualifications on bankrupts solely on the basis of the existence of the bankruptcy proceedings, is unfair. The proposals therefore seek to differentiate between the honest and above-board bankrupt as opposed to the irresponsible, reckless or otherwise culpable bankrupt. The distinction between bankrupts would be made on the basis of culpability. The reason for the bankrupts failure would be tested with an appropriately rigorous test where it is thought that it is in the interest of the public generally and the business community in particular. For the bankrupt who is deemed by the Official Receiver to be above-board, an automatic discharge within 12 months. For the unscrupulous bankrupt, a Bankruptcy Restriction Order, which can be imposed for between two and fifteen years. Automatic Discharge It is proposed that most bankrupts will get an automatic discharge and be released from all restrictions by 12 months from the date of the bankruptcy order. In some cases, it is proposed that the Official Receiver having conducted an enquiry into the affairs of the bankrupt, can file an even earlier discharge. For an earlier discharge, the Official Receiver will have to be satisfied that no inquiry or further investigation is necessary. The Official Receiver would then give notice to the creditors. At the end of the period, suggested at present to be 28 days, and barring unsettled objections, a certificate would be filed at court. The file date of the certificate would be the effective date of discharge. Bankruptcy Restriction Order Where the conduct of the bankrupt, both before and during his bankruptcy, are deemed by the court to be unfitting, a Bankruptcy Restriction Order (BRO) can be made. The BRO will be made on the application of the Secretary of State or if directed the Official Receiver. The new procedure is proposed to operate broadly along the same lines as the Company Directors' Disqualification Act 1986 (CDDA). It will also include any other relevant legislation in relation to directors whose conduct makes them unfit to be involved in the management of the affairs of limited companies. One main difference is that an application for a BRO will normally have to be made within 12 months of the bankruptcy order, in-line with the new default discharge period. This is as opposed to the two year window for the application for disqualification based on corporate insolvency. When making an order, the court will have regard for amongst other things a statutory but not exhaustive schedule of unfitted conduct. The relevant CDDA schedule would be modified for application to the BRO and a further list of misconduct would be included. Examples of misconduct might be:
The effect of a BRO will be that:
Income Payment Orders A key element of the bankruptcy system is the principle of "can pay, should pay". In line with this the Bill proposes to make bankrupts liable to make an affordable contribution from their income for up to three years from the date of the bankruptcy order. This is regardless of whether they are discharged or not. Transitional Arrangements Bankrupts who are undischarged, with more than 12 months to run when the new regime commences, will automatically be discharged 12 months from the coming into force of the new provisions. The transitional provisions will not apply to an individual subject to a criminal bankruptcy order and the second time bankrupt will be discharged automatically after 5 years. Enquiry and Investigation The automatic obligation to investigate every case is thought unnecessary and consequently the Bill proposes that the Official Receiver be able to exercise a discretionary power to investigate the conduct and affairs of any bankrupt. Continuing Provisions All bankrupts will continue to be discharged from most of their debts and from the provisions of the Insolvency Act 1986 relating to after-acquired property. Existing statutory provisions, which will also continue, are the obligations to cooperate with the Official Receiver both before and after discharge. In addition, discharge will not be a bar to subsequent civil or criminal action relating to concealment or failure to disclose assets, documents or other relevant information. The Bill also proposes to substantially reform the financial regime under which the Insolvency Service operates. Corporate Insolvency The principle of collective insolvency proceedings, in which all creditors participate, is the main thrust behind the reforms in corporate insolvency. The present framework for administrative receivership is diametrically opposed to this principle and as a result the White Paper proposes that it ceases to be a major insolvency procedure. It is proposed, in view of the latter recommendation, that the administration procedure be streamlined to protect the interests of the holders of a floating charge, to provide a better return to creditors as a whole, and to facilitate the construction of a rescue plan. The proposals allow for collective insolvency proceedings where the administrator will owe a duty of care to all creditors; where secured creditors have security; where unsecured creditors will have the opportunity to participate; and the process will be subject to the oversight and direction of the court. Secured Creditors The holders of a floating charge will be entitled to an administration order on petition to the court. Where the secured lender demonstrates that he holds a valid floating charge, that the company is in default and that money is due and owing, the proposals provide that there will be no requirement to submit a report under rule 2.2 of the Insolvency Rules 1986. The petition will be served on the company and on any other party presently entitled to be served, and notice of the presentation will be given to any party presently entitled to receive notice. The court will still have the power to abridge the period of notice specified for service. Where the secured lender needs to protect their interests in the case of urgency, a specific power will be introduced. The holder of a floating charge or other security comprising a significant part of the company's property, will be able to petition for an administration order without giving notice. Again, they will be no requirement to submit a report under rule 2.2 of the Insolvency Rules 1986. A 'without notice petition' hearing would empower the court to make an interim administration order under which an interim administrator would be appointed. A report would be filed within 14 days of his appointment as to whether an administration order should be made. The court, on hearing the administrator's opinion may make either an administration order, an order for winding-up or any other order as it thinks fit. Where the parties disagree as to whom should be appointed as administrator, the court shall have regard to the creditor/s who will be principally effected. To enable the realisation of the security of a holder of a floating charge, the Bill proposes to widen the purposes for which an administration order may be made to permit an order of this type to be made. At the same time, the court will take into account the possibility of preserving all or part of the company's business. No Veto The Bill proposes to remove the right of the holder of a floating charge to veto the making of an administration order on the initiation of the company. An exception to this would be where the charge was granted in connection with certain transactions in the capital market. The right to appoint an administrative receivership in this circumstance will continue and situations identified in Part VII of the Companies Act 1989 will fall outside of the scope of the proposals. Company Rescue A report under rule 2.2 of the Insolvency Rules 1986, would generally be required or its absence would need to be explained to the court. The administrator will now be required to submit a statement of his proposals to the creditors within a period reduced to 28 days. This will be subject to the court's power to extend the period. Winding-Up Where a company's business cannot be rescued, but there are or may be sufficient funds to enable a distribution to unsecured creditors, it is proposed that the administrator should have the power to apply to the court for the company to be wound-up and for his appointment as a liquidator. Abolition of Crown Preference Crown preference will be abolished in all insolvencies. Where there is no holder of a floating charge the benefit will be available for the unsecured creditors. Where there is a holder of a floating charge, which is created after the coming into force of the legislation, the benefit of the abolition of preferential status will go to the unsecured creditors. This will be achieved by a mechanism that ringfences a proportion of the funds generated by the floating charge. The claims against wages and holiday pay, within certain limits, by employees will retain preferential status as will the rights of those subrogated to them. |
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