Insolvency and Pre-Packs

Legislation on insolvency enacted in the Small Business, Enterprise and Employment Act 2015  affect directors of companies that become insolvent.

The Act added two new grounds for disqualifying a person from being a director of a UK company and broaden the range of review of the past conduct of a director and the 'harm done' as a result of an insolvency. In 2016 Parliament issued a research briefing on the operation of pre-packs and setting out the need to comply with best practice when undertaking pre-pack sales out of administration.

What will be particularly worrisome for directors, and which should be of particular concern to those – including non-executive directors – who do not take an active and inquiring role in the management of the company, is that the Secretary of State has enhanced powers to make directors personally responsible for losses suffered by creditors in appropriate circumstances.

The Government has also made it known that it will consider implementing further changes that will affect 'pre-pack' sales of insolvent companies if voluntary measures currently in place do not prove to be successful in curbing abuses.

What follows below is a snapshot of some of the more important ones.

• A new regime for the conduct of creditors' meetings is to be introduced, the practical effect of which will be that the proposals of the insolvency practitioner as regards the insolvent entity will be deemed to be accepted unless ten per cent of the creditors (by value) object. A formal meeting will not be held unless requested by at least ten per cent (by value or number) of the creditors.
• Administrators will be given the same powers as liquidators of companies to bring claims for wrongful or fraudulent trading.
• Directors of insolvent companies are at increased risk of having compensation orders made against them and face an extension to the period – from two years to three – within which an application to disqualify them from acting as directors can be brought. Compensation orders can also be brought against non-directors who advise a director who becomes disqualified.

In the 2018 Autumn Budget statement, the Government took the step of announcing the reintroduction of Crown Preference, meaning that debts die to the Crown (eg taxes) will take preference for payment over debts due to other unsecured creditors.

Insolvency practitioners who overstep the mark when arranging pre-packs (typically transferring assets for less than a value the creditors think is fair) can face sanctions from the courts, which seem to be taking an increasingly dim view of perceived sharp practice.