A quick end

Kerrie Lloyd-Dawson reports on insolvency reforms and the progress of the Enterprise Bill

The Government will shortly be announcing its conclusions following consultation on its proposals for the reform of insolvency and bankruptcy practice. This was set out in the white paper entitled 'Productivity and Enterprise – Insolvency: A Second Chance', published in July 2001. An update on the reform proposals was published on 14 January, giving indications of those developments intended to be taken forward into the Enterprise Bill.
The main proposals for company insolvency are the streamlining of the administrative procedure to make it quicker, more effective and more accessible, with a move away from administrative receivership, where control rests with a single secured creditor, to administration, which is a collective procedure and which takes account of the interests of all creditors. Small unsecured creditors will benefit from this, together with the proposals to abolish the Crown's preferential right to recover certain unpaid taxes ahead of other creditors.
Following consultation, it has been proposed that as well as being able to apply for administration through the courts, floating charge holders and companies should be able to take out-of-court routes to administration. This will allow the courts to focus on disputed cases and will remove the need to bring in a proposed interim administration procedure, which proved unpopular with the respondents in the consultation process.
It is proposed to replace the existing four statutory purposes of administration under Section 8(3) of the Insolvency Act 1986 with two better-defined objectives – namely, to maximise the chances of the business continuing to exist and, only if that is not possible, to bring about a better return for the company's creditors and members than would result from an immediate winding up of the company.
The majority of respondents agreed with the principle of corporate rescue, but several concerns were raised concerning the streamlining of administration. In particular, many responses from banks and legal firms expressed concern over the restriction of administrative receivership, which they felt had major benefits of speed, flexibility and control. It was felt that the new streamlined administration procedure would not be able to match those benefits.
In respect of individual bankruptcy, the Government wishes to encourage entrepreneurship and responsible risk-taking. The proposals for reform seek to strike a balance between a fairer deal for the responsible majority who suffer bankruptcy through no fault of their own with a more stringent regime against the minority, who are negligent, irresponsible, reckless or dishonest. The Government also wishes to reflect the relative increase in consumer bankruptcies, which have risen from 39 per cent in 1992 out of a total of 32,016 bankruptcies, to 53 per cent in 2000 out of a total in that year of 21,550.
The vast majority of bankrupts will get an automatic discharge and release from bankruptcy restrictions after 12 months, reduced from the current period of three years. The bankruptcy court will have the power to make a bankruptcy restriction order (BRO), which will continue the bankruptcy restrictions where the court decides that the bankrupt is culpable. The court will be able to make BROs lasting from 2-15 years and the procedure will be broadly similar to that operated under the Company Director's Disqualification Act 1986. The intention is to reduce the stigma and the restrictions currently involved with bankruptcy so that those who have failed in business at the first attempt through no fault of their own are not deterred from trying again.
The BRO received support from those involved in the consultation process, as it was seen as providing flexibility and protection for the public, creditors and wider business. However, the reduction in the period of bankruptcy caused some concern and it was felt that risk-taking by consumers was not something to be encouraged.
Director disqualification procedure
Provisions for the out-of-court determination of disqualification of company directors is one reform that has already taken effect following judicial comment on the desirability of such a procedure. On 2 April 2001 the Insolvency Act 2000 came into force, amending Section 1 of the Company Director's Disqualification Act 1986 to add a new procedure which allowed the Secretary of State for Trade and Industry to accept a disqualification undertaking from a director without the need for court proceedings. Prior to the amendment of the 1986 act, there was no provision for undertakings, either within or outside court proceedings. However, a practice had developed following the case of Carecraft Construction Co (1994) for the court to exercise its discretion in appropriate cases to make a disqualification order without a full hearing on the basis of an agreed statement of facts.
The procedure introduced by the 2000 act provides a discretion for the Secretary of State to accept an undertaking offered by a director faced with disqualification under Section 6 of the 1986 act if they are satisfied that the person offering the undertaking is or has been a director of a company that has at any time become insolvent, and that the conduct of that person as a director of that company makes them unfit to be concerned in the management of a company. The director can undertake not to be concerned in the management of a company for an agreed period of between two and 15 years. The Secretary of State can exercise his discretion to accept the undertaking if he considers it “expedient in the public interest” to do so. There is no provision requiring that a disqualification undertaking must be offered, or can only be accepted, on the basis of an agreed statement of facts.
The benefits of the new procedure are savings of time and costs to both parties, but the anticipated benefit of not having to provide an agreed statement of facts has been affected by the recent decision in Secretary of State for Trade and Industry v Vernon John Everleigh Davies & 4 Ors sub nom In The Matter of Blackspur Group plc (2001). The Court of Appeal agreed with the decision of Mr Justice Patten that the policy of the Secretary of State to require a statement of unfit conduct to be set out in a schedule forming part of the undertaking was lawful.
The director concerned in Blackspur had argued that, on the true construction of the statute, it was not open to the Secretary of State to take the view that it was inexpedient in the public interest to accept a disqualification undertaking without a schedule of unfit conduct attached.
The Court of Appeal concluded that there was no fetter, other than relevance, on the matters that the Secretary of State could take into account when considering whether it was expedient in the public interest to accept an undertaking. The court also noted that Parliament had been alive to the issue when drafting the legislation and had chosen not to exclude the requirement for such a statement.
It was also argued that Article 6 of the European Convention on Human Rights was infringed because the provision in Section 20(1) of the 1986 act, that any statement made in pursuance of a requirement imposed by the 2000 act “may be used in evidence against any person making… the statement”, meant that a person other than the Secretary of State could use the information in the statement in other proceedings, which would lead to a position where there was no equality of arms. The court rejected this argument on the basis that there was no requirement in the 1986 act as amended for the production of a statement of unfit conduct.
Finally, it was argued that the Secretary of State was acting irrationally in requiring a statement of unfit conduct because it could serve no useful purpose. The court considered that there was no irrationality in the Secretary of State, taking the view that statements of unfit conduct were likely to be useful for: providing the basis upon which the Secretary of State could make public the fact that a disqualification undertaking had been offered and accepted and the reasons why it had been offered and accepted; the public interest, in knowing what sort of conduct attracts a particular sanction; and as a starting point to consider applications under the 1986 act, either to release or vary the undertaking or to give specific permission for the person giving the undertaking to act as a director.
It remains to be seen whether the Secretary of State will in practice require a statement in every case, but it seems that directors should be aware that a statement may be requested if they offer to give a disqualification undertaking.
Kerrie Lloyd-Dawson is a legal editor at Lawtel


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