House of Commons - Explanatory Note
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Dissolution

661.     Paragraph 83 provides that if, after making payments to preferential and secured creditors, the administrator finds that that company has insufficient assets to make a distribution to its unsecured creditors, he or she may file notice with the Registrar of Companies and send a copy to each of the creditors. The company is considered dissolved after three months of the filing of the notice. However, it will be open to the court, on the application of the administrator or any other interested person, to defer the dissolution of the company; any such order should be filed with the Registrar of Companies.

Replacing administrator

662.     Paragraphs 86-98 provide for the removal or replacement of the administrator under the different routes into administration and provide for release and priority of the administrator's debts and liabilities.

General provisions

663.     Paragraphs 99 to 113 make general provisions relating to the appointment of joint and concurrent administrators in matters of penalties (paragraph 104), time-limits (paragraph 105) and interpretation (paragraph (109).

664.     Clause 239 and Schedule 17 contain minor and consequential amendments arising out of the changes to administration.

Clause 240: Special administration regimes

665.     This clause applies to companies for which special arrangements for the administration procedure have been made by applying Part II of the Insolvency Act 1986, with modifications. These special administration schemes are:

  • water companies under the Water Industry Act 1991;

  • companies to which railway administration orders apply (railway companies under the Railways Act 1993 and companies involved in the Channel Tunnel Rail Link);

  • air traffic control companies under the Transport Act 2000;

  • London Underground PPP companies under the Greater London Authority Act 1999; and

  • building societies as defined by the Building Societies Act 1986.

666.     The clause provides an automatic saving provision for Part II as it is presently applied and modified by the various enactments listed above to continue to apply to companies subject to these regimes.

667.     It also allows the Secretary of State (or HM Treasury in the case of building societies), by order, to amend the existing provisions in Part II (and to make consequential amendments of other enactments) as they are applied to the special regimes.

Clause 241 & Schedule 18: Prohibition of appointment of administrative receiver & Schedule 2A to Insolvency Act 1986

668.     This clause inserts a new Chapter IV after Chapter III of Part III of the Insolvency Act 1986. Schedule 18 introduces new Schedule 2A to the Insolvency Act 1986 (inserted after Schedule 2).

669.     Currently, a floating charge holder, whose security covers the whole or substantially the whole of the company's property, may enforce their contractual right to realise their security by appointing an AR (or receiver in Scotland). In order to restrict the use of administrative receivership, new section 72A of Chapter IV prohibits, subject to certain exceptions, the holder of a qualifying floating charge (as defined under paragraph 12 of Schedule B1) from appointing an AR (or receiver in Scotland). The section applies to any floating charge created on or after the date that it comes into force.

670.     However, there are cases where administrative receivership plays a crucial role. These exceptions to section 72A are set out in sections 72B-72F.

671.     Section 72B provides that an AR can be appointed in pursuance of an arrangement which is, or forms part of, a capital market arrangement (as defined by paragraph 1 of Schedule 2A of Insolvency Act 1986 - see clause 241 and Schedule 18), i.e.:

  • it involves security that has been granted to a person holding a capital market investment issued by a party to the arrangement; or

  • at least one party to the arrangement guarantees the performance of the obligations of another party; or

  • at least one party provides security in respect of the performance of the obligations of another party; or

  • the arrangement involves the issue of options, futures or contracts for differences.

672.     This only applies if the debt, or expected debt, is at least £50 million and involves the issue of capital market investments as defined by paragraphs 2 and 3 of new Schedule 2A to the Insolvency Act 1986 (see clause 241 and Schedule 16) (paragraph 1(1) of Schedule 18).

673.     Section 72C provides that an AR can be appointed in respect of the property of a project company of a public-private partnership (PPP) project with step-in rights:

  • a PPP project is one whose resources are provided partly by one or more public bodies and partly by one or more private bodies; or which is designed wholly or mainly to assist a public body in discharging a function.

  • a project has 'step-in rights' if the person who provides finance for the project has a conditional right that enables them to assume sole or principal contractual responsibility for carrying out all or part of the project.

674.     Section 72D provides that an AR can be appointed if the floating charge is granted over the property of a project company of a utility project with step-in rights.

675.     A utility project is a project designed for the purpose of a regulated business (e.g. a project that is concerned with a business carried out requiring a licence granted under section 8 Railways Act 1993, or a licence granted under section 7A Gas Act 1986). A full list of such regulated businesses is given in paragraph 10 of Schedule 18.

676.     Section 72E provides that an AR can be appointed in respect of an arrangement in relation to a project company of a finance project with step-in rights. This only applies if the project company incurs a debt of at least £50 million for the purposes of carrying out the project.

677.     Section 72F provides that an AR can be appointed by someone entitled to do so in connection with a market contract, and certain other financial commitments and securities defined under Part VII of the Companies Act 1989.

678.     Section 72G inserts what will be new Schedule 2A into the Insolvency Act 1986, after the existing Schedule 2. It also gives the Secretary of State the power to amend the new provisions in Chapter IV to Part III of the Act. Specifically, the Secretary of State may, by order:

  • insert additional exceptions to new section 72A;

  • provide that an exception already provided for shall cease to have effect;

  • amend section 72A in consequence of any new exception (or removal thereof);

  • amend any of the exceptions 72B-72F;

  • amend Schedule 2A.

Sanction of actions in relation to antecedent recoveries

679.     The Insolvency Act 1986 contains measures to enable liquidators and trustees in bankruptcy to take legal action to seek financial restitution for losses caused to the insolvent estate. The provisions providing for the actions in question are: sections 213 (fraudulent trading); 214 (wrongful trading); 238 (transactions at an undervalue - corporate); 239 (preferences - corporate); 339 (transactions at an undervalue - bankruptcy); 340 (preferences - bankruptcy) and 423 (transactions defrauding creditors). This will also apply to the relevant sections in Scottish liquidations.

Clauses 244 and 250: Liquidator's powers & Powers of trustee in bankruptcy

680.     These clauses provide that the liquidator (clause 244), or trustee in bankruptcy (clause 250) must have sanction (i.e. approval), usually of the creditors or the court, before taking such antecedent recovery action.

Clauses 242 and 243: Abolition of Crown Preference & Unsecured creditors

681.     The White Paper 'Productivity and Enterprise: Insolvency - A Second Chance' made a commitment to abolish the Crown's preferential status in insolvency, and to ensure that the benefit went to unsecured creditors for companies that have given floating-charges after the provision has come into force.

682.     As a preferential creditor, the Crown can currently claim its debts from an insolvent company or bankrupt estate ahead of secured creditors, who hold a floating charge, and unsecured creditors. The Crown's preferential debts are described in sections 386 and 387 of, and Schedule 6 to, the Insolvency Act 1986, and include arrears of PAYE, NIC, and VAT.

683.     The Bill will abolish the Crown's preferential status in certain areas:

  • debts due to the Inland Revenue for 12 months prior to the relevant date (category 1 of Schedule 6);

  • debts due to Customs and Excise for the 6 to 12 months prior to the relevant date (category 2 of Schedule 6);

  • social security contributions for the 12 months prior to the relevant date (category 3 of Schedule 6).

684.     The relevant date is defined by section 387 Insolvency Act 1986.

685.     Preferential status will be retained for:

  • contributions to occupational pension schemes (category 4);

  • remuneration of employees for the relevant period (category 5); and

  • levies on coal and steel production under the European Coal and Steel Community (ECSC) Treaty.

Clause 242: Abolition of Crown Preference

686.     Clause 242 subsection (1) removes paragraphs 1 and 2 (debts due to Inland Revenue), paragraphs 3-5C (debts due to Customs and Excise), and paragraphs 6 and 7 (social security contributions) from Schedule 6 to the Insolvency Act 1986, putting into effect the abolition of Crown preference.

Clause 243: Unsecured creditors

687.     This clause inserts a new section 176A (Share of assets for unsecured creditors) after section 176 Insolvency Act 1986. Section 176A provides for a percentage share of the company's assets to go to unsecured creditors, although the percentage will be set by Statutory Instrument (subsections (5)-(6)), and will be subject to consultation.

688.     Where a company has gone into liquidation, administration, provisional liquidation or receivership, the office-holder will make part of the company's net property available to unsecured creditors (i.e. after taking into account any preferential debts, any liability subject to a fixed charge and the costs of realising the company's property). However, it will not be necessary for the office-holder to distribute funds to unsecured creditors if they are less than the prescribed minimum, and he or she thinks that the cost of making a distribution would be disproportionate to the benefits.

Individuals

Clauses 245 and 257 & Schedules 19 and 23: Duration of bankruptcy & Minor and consequential amendments

689.     Currently, bankrupts are discharged from bankruptcy three years after the making of the bankruptcy order, although there are exceptions to this rule; for example: in cases where the court has made an order for summary administration; where the bankrupt does not comply with his or her obligations and the court suspends automatic discharge; and where the debtor has been an undischarged bankrupt within the previous fifteen years or remains subject to an existing criminal bankruptcy order. However, in general, the duration of the bankruptcy is the same for bankrupts regardless of culpability or the level of their assets or liabilities.

690.     Clause 245 replaces the existing section 279 Insolvency Act 1986 on duration of bankruptcy. It provides for bankrupts to be automatically discharged one year after the bankruptcy order was made, although if the Official Receiver files a notice stating that further investigation into the bankrupt's conduct or affairs is unnecessary, the period may be reduced. The ability to suspend discharge where the bankrupt fails to comply with an obligation remains (see new section 279 (3) and (4)). At present, where a bankruptcy order upon a debtor's own petition is made and, at the time of the petition for bankruptcy the level of debt is less than the small bankruptcies level, and in the preceding five years the debtor has not been bankrupt or entered into an individual voluntary arrangement, the court can issue a certificate of summary administration. One of the effects of the certificate of summary administration is to reduce the discharge period from three to two years.

691.     In order to reduce the discharge period to one year, it will be necessary to make amendments to current bankruptcy legislation, for example repealing those provisions in the Insolvency Act 1986 dealing with summary administration of a bankrupt's affairs. These amendments are made in Schedule 23 to the Bill, which is given effect by clause 257.

692.     As the discharge period is being altered, transitional provision needs to be made to deal with individuals who have already been made bankrupt on commencement but have not yet been discharged. This is done in Schedule 19. In this case, neither the existing nor the new section 279 Insolvency Act 1986 will apply. Instead, Schedule 19 provides that the date of discharge will be one year from the date of commencement of clause 245 or earlier if the three-year discharge period is due to end before that date.

693.     The position is different for those individuals who have been an undischarged bankrupt more than once in the previous fifteen years and who are still undischarged at the time clause 245 is commenced. In this case, the bankrupt is discharged five years from the date of commencement or earlier if an order under section 280(2) Insolvency Act 1986 is made or comes into effect. Section 280(2) allows the court to refuse to discharge, conditionally discharge or absolutely discharge a bankrupt on the application of the bankrupt. An application can be made any time after five years from the date of bankruptcy. Therefore, for example, a person made bankrupt for the second time one year before the date of commencement of clause 245 would be eligible to apply for discharge under section 280 four years after the commencement of that clause. If he or she makes an application and the court discharges him or her, he or she is discharged from that date. If he or she makes no such application, he or she is discharged automatically five years after clause 245 is commenced.

694.     Those persons made bankrupt under section 264(1)(d) (criminal bankruptcy) before commencement of clause 245 can only be discharged by order of the court under section 280 Insolvency Act 1986.

Clauses 246 and 251 & Schedules 20 and 21: Post-discharge restrictions & Repeal of certain bankruptcy offences

695.     The clauses reduce the discharge period for most bankrupts (clause 246) and remove some of the unnecessary restrictions that automatically apply as a result of bankruptcy (such as disqualification from holding certain offices (see further notes on clauses 253, 254, 255 and 256)).

696.     The regime also provides protection to the public and business community against the minority of bankrupts who abuse the system or whose conduct has been dishonest or otherwise culpable. The Bill introduces bankruptcy restrictions orders (BROs) that will have the effect of imposing restrictions on bankrupts whose conduct has been dishonest or otherwise culpable, or who fail to co-operate with the Official Receiver or trustee. These restrictions will run for a minimum period of two years and a maximum of fifteen years.

697.     These restrictions are currently only triggered only by the existence of a bankruptcy order (such as the obligation to declare your status as an undischarged bankrupt when obtaining credit of more than £250 (section 360(1) of the Insolvency Act 1986 and the Insolvency Proceedings (Monetary Limits) Order 1986). By amending the discharge period, these restrictions will fall away for non-culpable bankrupts after one year. Schedule 21 amends those provisions of the Insolvency Act 1986 that contain restrictions to add in references to BROs and interim BROs. These include section 31, which makes it an offence for a person to act as receiver or manager of a company's property if he or she is an undischarged bankrupt. Therefore, such restrictions will continue to apply to persons whose bankruptcy has been discharged but who are subject to a BRO.

698.     Schedule 20 inserts a new Schedule 4A into the Insolvency Act 1986 that sets out the details regarding BROs and bankruptcy restrictions undertakings (BRUs). BROs are made by the court on the application of the Secretary of State or the Official Receiver acting on the direction of the Secretary of State (paragraph 1 of new Schedule 4A).

699.     Under paragraphs 7-9 of new Schedule 4A any reference to a person against whom a BRO has been made includes a reference to a person who is the subject of a BRU (paragraph 8). This will allow the bankrupt to agree to be bound by such restrictions without the need for an application to court. The minimum and maximum duration of a BRU will be the same as a BRO.

700.     Paragraph 2 of Schedule 4A sets out the kinds of conduct to which the court will have particular regard in making a BRO. Failure to keep proper accounting records, and gambling and rash and hazardous speculation are types of conduct already covered by criminal offences in sections 361 and 362 Insolvency Act 1986. Clause 251 repeals those two offences. In future, matters that would have been dealt with under those two offences will, provided the misconduct is material having regard to the circumstances of the case, be dealt with under the new bankruptcy restrictions regime.

701.     Paragraph 3 provides that an application for a BRO must be made within one year of the making of the bankruptcy order. It also provides that proceedings may be brought outside this time scale but only with the permission of the court. The order will come into force when the order is made and will last until the date specified in the order, which will be a minimum of two years and a maximum of fifteen years (paragraph 4).

702.     It is unlikely in many cases that a substantive decision will be made by the court in relation to an application for a BRO before the defendant's discharge. Thus, there is likely to be a gap in time between the discharge of the bankrupt and the making of the BRO in those cases where a BRO is being sought. Paragraphs 5 and 6 make provision for the court to make an interim order that can be made when issuing proceedings. The court may make an interim BRO where the Official Receiver or Secretary of State has made out a prima facie case and the court is of the view that the misconduct is so serious that it is in the public interest to make such an order. The restrictions then apply on the making of the interim order, by virtue of paragraph 5(4).

703.     Paragraphs 10 and 11 set out the effects of annulment of the bankruptcy on any BRO. Where a bankruptcy order is annulled under section 282(1)(a) Insolvency Act 1986 on the grounds that it should never have been made, any BRO, either substantive or interim, that is in force will be annulled.

704.     A bankruptcy order annulled because an individual voluntary arrangement has been approved by the creditors (sections 261 and 263D of the Insolvency Act 1986), or because the bankruptcy debts and expenses have been paid in full, will not affect whether a BRO or interim order remains in force. Where an application has been made, then those proceedings can be continued notwithstanding the annulment of the bankruptcy. This permits the making of BROs against culpable bankrupts who have managed to have their bankruptcy order annulled solely because they are now able, for whatever reason, to pay off their debts either in full or partially to the satisfaction of their creditors. Where a BRU has been offered, the undertaking can be finalised notwithstanding any annulment under sections 261 and 263D Insolvency Act 1986.

705.     Paragraph 12 requires the Secretary of State to maintain a public register of BROs, interim BROs and BRUs. Paragraph 16 of Schedule 23 inserts a new paragraph 29A into Schedule 9 of the Insolvency Act 1986. This allows, amongst other things, Rules to be made about the inspection of the register.

706.     Schedule 21 deals with the effect of BROs, interim BROs and BRUs. It amends certain provisions that make particular conduct an offence while an undischarged bankrupt and extends them to cover individuals subject to BROs, interim BROs and BRUs (incorporated by virtue of paragraphs 5(4) and 8 of new Schedule 4A of the Insolvency Act 1986 respectively). The conduct includes:

  • acting as receiver or manager of a company's property on behalf of a debenture holder (section 31 Insolvency Act 1986);

  • obtaining credit above the prescribed limit without disclosing that you are the subject of a Bankruptcy Restrictions Order (section 360 Insolvency Act 1986);

  • trading in a name other than that under which a person was made bankrupt (section 360 Insolvency Act 1986);

  • disqualification from acting as an insolvency practitioner (section 390 Insolvency Act 1986); and

  • disqualification from acting as a company director (section 11(1) CDDA1986).

707.     Section 350(3) of the Insolvency Act 1986 limits the liability of a bankrupt for offences under Part VI of that Act to acts committed prior to his discharge. Paragraph 2 of Schedule 21 qualifies that provision so that a person subject to a BRO who commits an offence extended to BROs after discharge can still be prosecuted.

Clause 247: Investigation by official receiver

708.     Currently, under section 289 Insolvency Act 1986, there is a duty on the Official Receiver to investigate the conduct and affairs of every bankrupt and to make any report to the court that he or she thinks fit, except in summary cases when the Official Receiver will only investigate if he or she deems it necessary. This distinction is made on the basis that cases with relatively small unsecured liabilities (summary cases with unsecured liabilities of less than £20,000 - often consumer bankruptcies) do not require as extensive a use of the Official Receiver's resources as those involving large debts with greater losses to the creditors. However, there are cases where the bankrupt's debts are large (for example, where the liabilities of a limited company are guaranteed) in which no investigation is required or some small, yet complex, cases that require extensive investigation.

709.     Clause 247 inserts a new section 289 into the Insolvency Act 1986 that removes this automatic obligation to investigate every case and provides that the Official Receiver is only required to investigate the conduct and affairs of any bankrupt where he or she think it necessary). Subsections (3) and (4) of the new provision merely re-enact the old section 289(2).

Clauses 248 and 249: Income payments order & Income payments agreement

710.     The current income payments order regime is designed to ensure bankrupts make an affordable contribution towards their debt from their income for up to three years, but in most cases they cease on discharge (see section 31(6)). Against the background of a reduced period of bankruptcy for non-culpable bankrupts, income payments orders will now last for a term of up to three years from the date of the order, irrespective of discharge (see new section 310(6) inserted by clause 248).

711.     Income payments orders are made by the courts on the application of the trustee in bankruptcy. In practice these are not usually contested. Income payments orders can be varied on the application of the trustee or the bankrupt.

712.     In order to remove the need for court involvement in non-contentious cases, clause 249 introduces the concept of the income payments agreement by inserting a new Section 310A into the Insolvency Act 1986.

713.     Income payments agreements will provide a legally-binding written agreement between the bankrupt and the Official Receiver or trustee that requires the bankrupt (or a third party) to make specified payments to his trustee for a specified period. This will be enforceable as if it were an income payments order made by the court. Whilst in force, an income payments agreement may be varied on an application to the court by the bankrupt, trustee or the Official Receiver or by agreement between the parties. A court may not vary an income payments agreement to include a provision that could not be included in an income payments order and must grant a variation if it takes the view that the variation is necessary to enable the bankrupt to retain sufficient funds to meet the reasonable domestic needs of the bankrupt and his or her family.

714.     An income payments agreement must specify the period in which it is to have effect and that period can apply after a bankrupt is discharged but cannot extend to a date more than three years after the date of the income payments agreement.

715.     Paragraph 7 of Schedule 19 sets out the transitional provisions as they relate to income payments orders in existence at the time of commencement.

Clause 252 & Schedule 22: Individual voluntary arrangement

716.     Individual voluntary arrangements are an alternative to bankruptcy, without the same automatic restrictions, where the debtor comes to an arrangement with his or her creditors about the repayment of his or her debts. They generally provide a better return to creditors. Currently there are around 7,000 individual voluntary arrangements made each year, of which a very small minority are entered into after a bankruptcy order has been made.

717.     At present, a debtor can make a proposal for an individual voluntary arrangement (see Part VIII of the Insolvency Act 1986). Those proposals also put forward a person to supervise the implementation of that arrangement (the nominee - on approval of an arrangement the nominee becomes supervisor of the arrangement). A person is required to be qualified as an insolvency practitioner to act as the nominee or supervisor of an individual voluntary arrangement. In practice, the debtor sends the nominee a copy of the proposal and a statement of his or her affairs. He or she can then apply for an interim order that has the effect of staying any actions against him or her or his or her property (see sections 252-255 of the Insolvency Act 1986). The nominee reports to the court, stating whether a meeting of creditors should be called to consider the proposal. If a meeting is called and the creditors approve the individual voluntary arrangement, the interim order can be discharged and any bankruptcy order may be annulled. Modifications can be made to the proposal if the debtor so consents.

718.     In order to encourage greater use of individual voluntary arrangements, this clause makes two changes to the current individual voluntary arrangements regime.

719.     First, it enables Official Receivers to put proposals to creditors and act as supervisors for post-bankruptcy individual voluntary arrangements (see paragraph 3 of Schedule 22, which inserts a new Section 389A into the Insolvency Act 1986). This provides debtors and creditors with a choice of who should administer the arrangement: either a private sector insolvency practitioner or an Official Receiver. There is also an order-making power to extend the ability for the Official Receiver to act as nominee and supervisor to all cases (see paragraph 3 of Schedule 22, which inserts new section 389(B) into the Insolvency Act 1986).

720.     Second, this clause introduces a new fast-track scheme for post-bankruptcy individual voluntary arrangements where the Official Receiver is the proposed nominee (see paragraph 2 of Schedule 22, which inserts a new section 263A - 263G into the Insolvency Act 1986). Under this regime, the proposal will be agreed with the Official Receiver and filed with the Court. No meeting of the creditors will be called and it will not be possible to modify the proposal. The Official Receiver will send out the proposal to the creditors on a 'take it or leave it' basis and the creditors will either agree to or disagree with the proposal by correspondence. If the individual voluntary arrangement is approved, the Official Receiver will notify the court and the court can then annul the bankruptcy order. It is proposed that the majority required for approval will remain unchanged (the provision on majority is set out in Rule 5.18 of the Insolvency Rules 1986 (SI1986/1925)).

 
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Prepared: 26 March 2002