Winter 2018 Credit Wise. In this issue

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1 Winter 2018 Credit Wise In this issue Section 216 of the Insolvency Act 1986 Re-use of a company name The new Insolvency Rules key changes for creditors The Company Directors Disqualification Act National Creditor Services Restructuring & Insolvency PRECISE. PROVEN. PERFORMANCE.

2 Welcome to Credit Wise Interpreting the range of recent economic and business indicators is about as easy and reliable as reading the tea leaves, and with the likely changes in interest rates, the year ahead could be bumpy. What did 2017 bring? New insolvency rules The changes to the insolvency rules came into force in early 2017 and have brought a new sense of optimism to the credit community. I have been pleasantly surprised with the amount of credit managers and teams who have since approached us to represent them at insolvency meetings. I put this down to an understanding of the rules and the right to be able to control the process. Increase in interest rates This year we saw the first interest rate hike for over 10 years. I suspect there will be more to come, unless we see more large failures that force the Bank of England to change its stance. Finally, Moore Stephens is very proud to have become the Chartered Institutes of Credit Management s corporate sponsor. In doing so, we will continue to give the highest care and service to the credit community through both our debt arm and our national creditor services team. We hope you enjoy this edition of Credit Wise. If you have any questions about any of the topics raised, please get in touch. Brendan Clarkson Head of National Creditor Services brendan.clarkson@moorestephens.com 2

3 Section 216 of the Insolvency Act 1986 Re-use of a company name When speaking with creditors, one of the more common grievances relates to the directors of liquidated companies effectively starting again with a similar trading name and style. Although there is not a specific rule that prevents directors running a company after an insolvency process, there are parts of the Insolvency Act that put certain restrictions in place, one being Section 216 (S216). S216 seeks to prevent the formation of phoenix companies, whereby a company is liquidated to avoid paying its creditors, only for a new company to rise out of the ashes and begin trading. Who does the section apply to? Any person who acted as a director or shadow director of the company, in the 12 month period prior to the company being placed into insolvent liquidation. A shadow director is somebody who is not formally appointed as a director, but whose guidance and advice is regularly acted on by the board. How is a prohibited name defined? Any name which the company was known by in the 12 month period prior to liquidation. This includes both registered and trading names. It also takes into account any name which is so similar as to suggest an association with the company. What does the section state? Except with leave of the court, any person as described above must not at any time, in the five year period following the date of liquidation: be a director of any company known by a prohibited name; or in any way, directly or indirectly, be concerned or take part in the promotion, formation of management of any such company; or in any way, directly or indirectly take part in the carrying on of a business under a prohibited name. What are the consequences of failing to comply? If a person acts in contravention of this section, they are labile to a fine, imprisonment or both. Furthermore, Section 217 states that the person may become personally liable for all debts incurred whilst involved with the management of the new company. Are there any exceptions? There are, of course, exceptions to the rule, which is why it can become less transparent for creditors when trying to ascertain any wrong doing. 1. If a company acquires the business of the insolvent company under the supervision of the appointed insolvency practitioner, it may use an otherwise prohibited name. All creditors must be written to advising of this and a notice placed in the London Gazette within 28 days of the acquisition. 2. If the directors have already set up another company with a similar name prior to the company s liquidation, they are given a grace period of up to 6 weeks to trade. The directors must apply to the court for permission to trade the other company under the prohibited name within 7 days of liquidation. 3. If the new company was established and traded under the potentially prohibited name for more than 12 months prior to the insolvent company entering liquidation, it is permitted to continue trading. Unfortunately, despite the strict guidance on this subject, some rogue directors are still able to slip through the net. If you are a creditor of a company and suspect any wrong doing, please get in touch with a member of our team who will be able to review the circumstances and provide advice accordingly. 3

4 The new Insolvency Rules key changes for creditors Why the change? The new rules came into force on 6 April 2017 to achieve the following: incorporate various changes in the law which are intended to reduce the burden of red tape; consolidate the existing rules into one single set of rules; modernise the rules by updating the structure and simplifying the language used. What has changed? Voting/meetings Physical meetings (explanatory timeline overleaf) S98 meetings of creditors have been replaced by the deemed consent procedure or virtual meeting. A physical meeting will only be convened if: 10% of creditors object to the decision of the appointment of the liquidator through the deemed consent procedure; or creditors requesting a physical meeting meet the 10:10:10 criteria. 10:10:10 criteria Creditors must total one of the following: 10% in value: claims combined must equate to at least 10% in value of the total creditors; 10% in number: the number of creditors must equate to at least 10% of the total number of creditors. 10 individuals: there must be at least ten individual creditors. Deemed consent If the above criteria is not met by 23:59 hours on the decision date, the liquidator s appointment is deemed approved. Virtual meetings A liquidator may convene a virtual meeting via an appropriate online platform rather than use the Deemed Consent procedure. Creditors meeting the 10:10:10 criteria may also request a physical meeting. Communications Creditors can opt out of communications creditors will still receive specific documents i.e. notices of intended dividends. Encouragement of communications creditors are deemed to have agreed to communications if they have communicated with the company by pre-insolvency. Increased use of websites creditors should be mindful of letters and s that advise future notices will be published on a website without any further alerts. Creditor claims Creditors with claims under 1,000 may be advised they are not required to submit a proof of debt. The amount will be deemed approved for dividend purposes. Where creditors receive such notices, they should inform the IP within the timeframe specified if they disagree with the amount shown. 4

5 Timeline for deemed consent/physical meeting Maximum of 14 days Shareholders meeting Resolution passed to wind the company up Notice delivered to creditors with details of the decision date Minimum of 3 business days Minimum of 1 business day Statement of affairs delivered to creditors Decision date hours the liquidators appointment is deemed approved Creditors may object (10%) or request that a physical meeting be held (10:10:10) Threshold is met Within 3 business days Meeting notice sent to creditors Minimum of 3 business days Meeting held no earlier than 3 business days after notice delivered 1 day Proof of debt must be lodged by 4pm on prior business day for the creditor to be entitled to vote Meeting date Proxy form can be lodged at any point prior to the meeting 5

6 The Company Directors Disqualification Act The Company Directors Disqualification Act came into force on 29 December It repealed and consolidated various disqualification provisions in both the Companies Act 1985 and the Insolvency Act 1985 and was introduced to prevent directors guilty of misconduct from taking part in the management of companies in future. The Act outlines the procedures used to investigate and disqualify a company director where there is sufficient evidence of misconduct. Section 2 of the act is used most frequently and relates to insolvent companies, with the majority of disqualifications being the result of investigations by The Insolvency Service. When a company is placed into liquidation, investigations into both the company and its directors affairs are undertaken to determine whether a disqualification process is appropriate. Depending on the severity of the misconduct and the greatness of supporting evidence, the director could be disqualified for up to 15 years. In October 2015, several amendments were made to the CDDA, including introducing the requirement of the court to consider a director s convictions for criminal offences in connection with the promotion, formation or management of an overseas company when deciding whether to disqualify them in the UK. In addition, the time period in which disqualification proceedings must be commenced has been increased from two years to three years. Whilst there is no finite list of conduct which may lead to disqualification, examples include: fraudulent behaviour; failure to submit annual accounts/returns to Companies House in a timely manner; wrongful trading (i.e. trading whilst insolvent); following conviction for criminal offences related to the promotion, formation, management or liquidation of a company. The disqualification of Craig Whyte, the ex-director of the former Rangers Football club plc in 2014, is an example. He was disqualified for the maximum tariff of 15 years for failing to act in accordance with his duties as a director to promote the interests of the company. Another is the former board members of collapsed charity, Kids Company, who are currently facing being disqualified for up to six years. These changes could be contributing to why the number of director disqualifications have remained stationary, despite the number of insolvent companies decreasing since In the last financial year, the Insolvency Service disqualified a total of 1,214 directors for misconduct compared to 1,208 the previous year, of which 12% and 10% were disqualifications of 10 or more years respectively. The Insolvency Service estimates it has prevented 92 million in losses through director disqualifications. As such, the Company Director s Disqualification Act will continue to be an important part in both insolvency proceedings and in UK company law as a whole. Source: The Insolvency Service 2016/17 report. 6

7 Brendan Clarkson T +44 (0) For more information please go to: Follow us on We believe the information in Credit Wise be correct at the time of going to press, but we cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein. Printed and published by Moore Stephens LLP, a member firm of Moore Stephens International Limited, a worldwide network of independent firms. Moore Stephens LLP is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Authorised and regulated by the Financial Conduct Authority for investment business. DPS39308 January 2018