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What the new insolvency rules mean for directors

From 6th April 2017, the rules surrounding insolvency in the UK have changed. In fact, this is the most significant amendment since the Insolvency Rules of 1986, with significant implications for directors of failing businesses.

So what are the key insolvency rule changes?

First, creditors’ meetings, which are often sparsely attended, are no longer required, unless specifically requested by 10% of creditors by value, 10% of creditors by total number or 10 individual creditors.

This is a positive step, as such meetings can be costly and time-consuming – not to mention pointless if only the directors and the insolvency practitioner turn up.

New insolvency rules - email communications

Secondly, email can increasingly be used for communication throughout the process, as well as online portals containing downloadable documents. This will significantly speed up the transmission of information to creditors, who will now be able to opt out of ongoing correspondence: if, for example, their debt is small and there is little or no chance of recovering any of it.

However, notices regarding dividend payments will continue to be sent, irrespective of whether they have opted out. In addition, the final meeting of the creditors – which formally concludes the process and releases the insolvency practitioner – has also been replaced by a simple email.

Meanwhile, creditors seeking less than £1000 need no longer submit proof of their claims to the practitioner; instead, their claims will be verified from the insolvent company’s accounts.

Finally, all the practitioner’s decisions will automatically be considered approved unless objections are received from at least 10% of creditors (again by either value or number).

So far, so good. But here’s the bad news.

The bad news for directors

Directors’ & Officers’ Insurance frequently provides cover against claims should insolvency occur. Until October 2015, these claims could only be initiated by insolvency practitioners and covered wrongful trading, undervalued transactions and preference claims.

However, practitioners can now assign these claims to third parties, including creditors. Whilst the creditor would need to take on all the costs of pursuing the claim, they would retain all the proceeds if successful, providing a strong incentive to take action.

Furthermore, since success fees and ATE premiums are no longer recoverable, insolvency practitioners may now consider it advantageous to assign such claims in return for an agreed fee.

As a result, directors may now face action where this would not previously have been the case. Groups of claimants and claims management companies, who are not bound to act in creditors’ best interests, can pursue directors in search of profit or even to settle personal scores.

On the plus side, fewer of these claims have been assigned than was initially predicted. Where claims are likely to succeed, most practitioners prefer to pursue them personally, though where there are insufficient funds in the insolvent estate to fund a claim assignment becomes much more likely.

It is, of course, entirely possible that claims management companies will see these new regulations as a loophole that can be exploited, but it is too early to reach a conclusion.

Facing financial problems? Talk to Cashsolv

If your business is heading into financial difficulties, you should talk to Cashsolv. We are specialists in insolvency and can help you reach the right conclusion for your business and your creditors. To learn more about our services, and how to avoid insolvency please visit our relevant pages.

Carl Faulds By Google+ |
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