Forward Thinking on Insolvency Service
Simge Aslan and Asad Khan, PGR Students
This year’s Insolvency Service conference was themed ‘insolvency response in uncertain times’ with numerous submissions made by practitioners and academics. Of the submitted papers, eight were presented at the conference.
The day started with Dr. Katharina Möser’s presentation on the dynamics of the cost-of-living crisis focusing on desperation borrowing, the economic problem of the debt overhang, and the changing role of personal insolvency. Dr. Möser initially explored the causes of the cost-of-living crisis and its reflection on consumers. Inflation caused by supply constraints and covid related impacts were considered as the main causes. The vital observation made in this regard was that low-income households were disproportionately affected by the current crisis. High levels of financial stress leads households to desperation borrowing which causes an increased number of high-cost credit products such as credit cards. Desperation borrowing and debt overhang are of course undesirable but not resorting to borrowing may lead to worse outcomes.
Dr. Möser then focused on various economic theories and compared the ‘permanent income hypothesis’, the ‘life cycle model’, and the more recent and largely accepted ‘relative income model’. Following that, she referred to her conclusions on the reform of personal insolvency in England and Wales. The relative income model is more realistic for the current cost-of-living crisis but Dr. Möser questions its adequacy. The main submission of the research indicates that any reform of personal insolvency should be pragmatic and focus on the most likely user group of the insolvency system, in this case, low-income households.
Sessions 2 and 4 were papers presented by Professor Yvonne Joyce of the University of Glasgow. The first was co-authored by Dr. Betty Wu and the second was by Eileen Maclean. Both papers shared an empirical basis and were focused on Scottish administrations. Session 2 looked at the effect of insolvency practitioner firms’ costs and their prior relationship on direct insolvency costs while session 4 was a multi-case study database of reporting matters in IP reports to creditors. Both papers researched administrations from 2012-2013 and were designed to highlight empirical findings that could promote future normative analysis.
The key finding from session two was that the costs of an administration were negatively associated with the secured financial creditor’s dividends. Meaning that, if costs were high, returns to secured financial creditors, such as banks, were low, and vice versa. The paper found that most banks are under secured and tend to receive about 30% in returns on their debts. As such, it was said that banks are keen to keep costs low and regain their debts upon insolvency.
The research also found that the closer the relationship between the IP firm and the secured financial creditor, the lower the costs ended up being. Professor Joyce relied on interviews with practitioners which revealed that financial institutions strongly negotiate the expected costs of insolvency which can often lead to a discount. Further, IP firms know that they will be working with the creditors again so are willing to compromise to maintain relationships. A key statistic highlighted was that 88% of insolvency cases are handled by 13 firms that account for 92% of total IP fees. Further, the paper found that often fixed charge costs were loaded onto the costs of floating charge realizations to protect returns on the fixed charge.
For session four, Professor Joyce presented an empirical study that highlighted the discrepancies in reporting by Insolvency Practitioners. She found that in over 37% of IP reports, there were issues with balance sheets, data accuracy, and legibility. As the purpose of reports is to bridge the information gap between practitioners and creditors, the paper highlighted that there are several instances where the reporting is below par. Though she does not go into details, Professor Joyce commented on the potential use of external auditors and technology to ensure higher standards in reporting.
Ben Luxford, technical manager of R3, presented a paper co-authored with Stewart Perry of Fieldfisher LLP that discussed enabling the greater implementation of s.216 IA 1986 – the restriction on re-use of company names. Ben Luxford stayed true to his promise of sharing jokes if there were no questions asked and delivered a jolly, yet interesting, presentation. He talked about how the rise of phoenix companies means that the business passes on the Company B, but the debt remains with insolvent Company A. Given this practice, section 216 tries to prevent the re-use of company names to stop directors from forming new companies that are essentially trading under the same identity as the originally dissolved company. It was commented that directors may dissolve companies and create new ones under the same trading name to avoid tax payments and creditor liabilities.
Section 216 states a criminal liability of two years in prison with a fine. Section 217 on the other hand provides for civil liability where directors, shadow directors, and “front people” will be liable for the debts of the company. Ben found that there are very few prosecutions on s.216 as the directors may just need to remedy the name or can seek a court order for an exception.
Ben highlights that there is no easy way of checking whether a company’s trading name is being re-used as the registered name of a company can be different from the actual trading name. Further, s.216 only triggers if Company A goes into liquidation and the section does not engage with dissolutions. With there being more dissolutions than liquidations, the paper suggested that many breaches of s.216 may be going unnoticed.
This brings us to the main proposal of the paper, which is to improve the use of s.216 and efficiently prevent the re-use of prohibited company names. To this extent, Ben spoke about extending the remit to companies dissolved while being balance sheet insolvent, to increase awareness of creditors’ rights and the scope of s.216, as well as allowing the liquidator of Company B to bring claims against dissolved Company A.
Ben faced numerous questions on his proposals but answered them in his signature jolly and witty manner. Though there was not enough time to get into the details of the reforms, the paper talks about these proposals in depth, and Ben assured the room that the draft regulation will be available for parties to comment on very soon. We look forward to reading it.
After the lunch break, the second half of the conference started with the team from Clifford Chance, Melissa Coakley, Giles Allison, and Robert Davey presenting on a case that appeared to be close to their hearts; In the matter of Baglan Operations Limited [2022] EWHC 647 (Ch). The team gave a detailed account of the background, the facts of the case, and the judgment. The focus of the judgment was on the power of the official receiver (OR) to continue trading which is limited by statute for the purposes of beneficial winding up of the company. The main question was whether this power can be expanded for public interest purposes. Although the court dismissed the application, it also ordered the OR to continue trading to supply to two customers, Welsh Water and NPT. The presentation considered the practical consequences of this decision, particularly in terms of the conduct of liquidators. The team questioned whether the judgment achieved a just and equitable outcome. It was considered a noble attempt to balance the interests of creditors and the public, however, the team observed that the court had more sympathy for the environmental concerns. The presentation posed a number of questions for further inquiry, namely, whether there will be broader ramifications of this judgment and whether it will give other areas of law such as environmental law a power of impact over insolvency law.
The same session included a presentation by Dr John Tribe from the University of Liverpool on Communitarianism and the public interest in large corporate insolvencies: Future directions for value and potential in commonweal undertakings. Dr. Tribe discussed several previous cases where public interest was engaged in large corporate insolvencies, such as Carillion, Thomas Cook, MG Rover, Olympia & York. After providing a review of past literature, he suggested that forms of presumption or discretion can be introduced to deal with uncertainties.
Following that, our personal favourite presentation was from Professor Andrew Keay, University of Leeds and Professor Peter Walton, University of Wolverhampton. Their humorous approach achieved the very difficult task of keeping a post-lunch crowd engaged. They presented their upcoming paper titled ‘Dealing with large insolvent companies where the public interest intrudes: Some forward thinking’.
They referred to instances where compulsory liquidation was chosen for companies with public interest where administration could have seemed more likely, such as British Steel. The main aim of their paper is to question whether compulsory liquidation was the most appropriate route where the company’s business can impact public interest. They explored the leading purposes of liquidation and ordinary administration which do not include a public interest objective. They mentioned the notion of special administration where it is possible to follow creditor and public interest at the same time.
Baglan case was explored where an order was made that the OR can take public interest into account. However, the duo identified a number of problems. The first one is the slippery concept of public interest and how to define it. Second, they questioned how serious the effect of the business on the public interest should be before it is considered appropriate for an order to be made. Lastly, can the OR focus solely on public interest? Are the interest of the creditors to be overlooked?
Professors Keay and Walton inferred that special administration could operate similarly to the statutory companies of the 19th century. They called for more uniformity in the application of special administration; a standard form being made available for the court – if the court sees that public interest is engaged an order can be made where the purpose of special administration would be identified.
The last session of the day was a comparatively short one by Dr. Stephen Baister titled “a thing that has no value does not exist”. Dr. Baister’s paper was about the assignment provisions introduced in the Insolvency Act and his main argument was that any causes of action that an office holder can seek, should be assignable to third parties. Dr. Baister argued that such assignment would in fact help the IP conduct their job as assignment would enable delegation. Dr. Baister clarified that assignment would only be possible for causes of actions regarding recovery and not investigations. Dr. Baister goes over the various sections, such as s.216, s.217, s.423, and s.214A, which he argues could be assignable. He faced a few questions on his proposals but answered them coherently and ended the conference with an interesting paper calling for reforms.
Overall, the conference was well-organized and engaging. The papers presented spoke about a range of different topics, were both technical and academic, and left the audience with a lot to think about. Particularly, it will be interesting to see the academic response to the papers proposing reforms. Further, Professor Joyce’s papers provided a lot of data, and we are eager to see how scholars make use of the findings to support their arguments.
December 2022
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