Business Recovery and Insolvency Connect – MayMay 13, 2016
Government tightening of the Rules for Entrepreneurs Relief
Following the item in our February News regarding the proposed changes affecting distributions in solvent liquidations, the Finance (No.2) Bill 2016 which is bringing these provisions into effect had its second reading in the House of Commons on 11 April 2016. It has yet to reach Committee stage so may be delayed. The impact is however expected to be retrospective. The new TAAR (Targeted Anti-Avoidance Rule) potentially means that any distributions to shareholders in an MVL, (Members’ Voluntary Liquidation) could be considered an income distribution rather than a capital distribution thus attracting income tax up to 38.1%. We await HMRC guidance on how this change will be applied in practice.
Falling Scottish Insolvency levels
Personal insolvency applications have reached their lowest level for 14 years whilst there has been a slight increase in Corporate insolvencies.
The Accountant in Bankruptcy has released his official statistics for the fourth quarter of 2015-16. The figures show that personal bankruptcy, which includes Sequestration and Protected Trust Deeds, fell by over 13% from the same period last year. This means personal insolvency in Scotland is at its lowest level for fourteen years. Debt arrangement Scheme applications also fell in this period.
It is not clear why numbers are falling but it seems reasonable to assume that it is the impact of banks changing to more responsible lending criteria some years ago. People who had previously obtained loans, overdrafts and extended credit on cards beyond their ability to repay will mostly have already entered into a debt relief process by now. The reduced figures suggest it will largely be people unable to manage their debt, not because of overextending themselves, but because of some crisis like redundancy or illness reducing their income. If this is the case one would expect to see the numbers of cases levelling off in the future.
The number of companies becoming insolvent or entering into receivership was slightly higher in 2015/16 but only by 1.3% over the previous year. The main change was an increase of over 63% in solvent Members’ Voluntary Liquidations, which compensated for a significant drop in insolvencies, such as Administrations and Liquidations. This anomaly likely reflects companies deciding to wind up prior to the Targeted Anti-Avoidance Rule being introduced in April 2016. (see February newsletter for further details).
A full statement of Scottish insolvency statistics for the fourth quarter of 2015-16 is available http://www.aib.gov.uk/scottish-insolvency-statistics-2015-16-quarter-4-release
Director Conduct Reports to be lodged within 3 months
Insolvency Practitioners will be under greater time pressure to obtain company records and investigate a company and its trading and more particularly the directors’ conduct. From April this year the period of time to make the statutory report on director conduct has been halved to 3 months.
In addition, the statutory forms previously completed have been replaced with an on-line form. The structure of this form means Insolvency Practitioners no longer have to make the judgement if a director is un-fit as the information from the online form can be interrogated to highlight which cases should be considered for possible investigation by the Secretary of State.
Resurrection of closed personal cases due to PPI windfall.
In September 2014 the FCA requested that some 2.5 million payment protection insurance complaints (PPI) which had potentially been unfairly rejected or under compensated be reviewed. As a result, financial lenders are again paying out substantial compensation payments, many on claims which had previously been refused.
If the debt existed when someone entered into a debt relief program, then the potential for compensation also existed, thus is a contingent asset. Numerous personal insolvency cases have been closed in the belief that all compensation had been ingathered but now financial lenders are sending, often quite substantial payments to IPs. There has always been the option to re-open a sequestration to deal with assets which were discovered after the case had been closed however, until recently, it was believed there was no mechanism to re-open Trust Deeds in Scotland. It was considered unfair to creditors in Trust Deeds that they could not receive the benefit of successful PPI claims because the case was closed whilst the individual was receiving lump sum compensation for a debt that was never fully repaid. In 2015, a Trustee successfully sought the permission of the Court to re-open a Trust Deed in order to collect PPI proceeds and distribute them to creditors. While there is still some debate in Court, cases are being re-opened and Trustees are being reappointed. Insolvency Practitioners are now having to consider if the Court and administration costs involved in re-opening a case are justified, if it could lead to a potential distribution to creditors.
AiB’s consultations on personal insolvency
The Accountant in Bankruptcy launched consultations as part of ongoing reviews into both the Debt Arrangement Scheme (DAS) and Protected Trust Deed (PTD) legislation. These are largely to assess the impact of changes that were introduced to both processes in 2013.
Consolidation of Bankruptcy legislation
Current insolvency legislation is spread over several Acts. For over thirty years the main legislation has been the Bankruptcy (Scotland) Act 1985, and it’s many amended forms, but Insolvency Practitioners must also act under other legislation such as the Bankruptcy and Diligence etc. (Scotland) Act 2007, the Home Owner and Debtor Protection (Scotland) Act 2010, the Bankruptcy and Debt Advice (Scotland) Act 2014 and the Protected Trust Deeds (Scotland) Regulations 2013, to name but a few. A Bill for an Act to consolidate all the relevant legislation received Royal Assent on 28 April 2016. While certain sections have already come into effect, The Bankruptcy (Scotland) Act 2016 is likely to be fully implemented by 30 November 2016.