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SBEEA 2015 is part of a continuing narrative in the UK underpinning its reputation as a pre-eminent centre for law and business.  As with most legislation these days the direction is towards greater harmony with international bodies and laws.  As I awoke bleary eyed at my desk I realised that the Act is never going to trouble the best seller lists but as with other soporific reads the ‘devil is in the detail’.

Having had the best part of a year to digest the Act, coupled with both the prohibition of recoverable success fees and ATE premiums effective April 2016, the insolvency arena has much to contemplate and review in respect of working practices. This includes the ability of officer holders to assign an individual or portfolio of claims which may, as intended, improve the outcomes of unsecured creditors but also mean that administrators and their legal advisers now need to assess the appropriateness of such assignments.

 

The Act was introduced with a fanfare of worthy aims and introduces one or two practical tools to help office holders at the day to day level. An example of this is ‘deemed consent’ where decisions taken by the Administrator have the assumption of creditor approval and it is for the creditors to object if this is not the case.  By speeding up the decision-making and giving administrators more authority this should positively affect financial outcomes for the majority but not necessarily all creditors (particularly if you are the lone dissenting voice in a roomful of creditors).

 

As I understand it the Government is seeking greater transparency and within the Act there is quite a lot aimed at directors, particularly those whose conduct falls short when it comes to fitness and propriety. Directors need to be aware of the greater number of potential sanctions, especially those with a questionable track record even if the conduct under scrutiny occurred in a foreign jurisdiction.  Also, the Act allows the possibility of legal action against a person who has caused a director’s ‘unfitness’, culpable individuals could therefore include business advisors who are too close to the ‘smoking gun’ when things go wrong.

Officeholders, Insolvency Practitioners and their legal representatives will now potentially have to contend with more pressure from creditors who understand the increased scope of options to recover monies. My attention is drawn to the fact that an officeholder can assign to another party actions in respect of fraudulent and wrongful trading, transactions at an undervalue and preferences, and extortionate credit transactions.  Once assigned the proceeds of such claims do not go towards the company’s asset ‘pot’ and therefore secured creditors do not benefit.

 

The Act has eased constraints limiting the ability of unconnected parties from having an interest in insolvency claims. In my view this opens two main arteries of potential beneficiaries.  Firstly, it enables creditors to buy claims, the directors of the company itself do not appear to be prevented from being a purchaser, so why not the  company’s D&O insurers who may have subrogated rights?  Secondly, as the Act enables entities without a prior commercial interest in the company to buy the claims it may ‘commoditise’ these claims, as an example, a third-party funder  (TPF) could purchase from the administrator claims providing a hassle free solution to the administrator and a quick and easy source of money for the creditors.  The TPF can then own the claims under their own name and seek to profit (or not) from future recoveries.  Undoubtedly entities in the market are already considering such proposals and opportunities.

Before SBEEA a proposition from a TPF to an officeholder generally had to be in accordance with the Association of Litigation Funders’ code-of-conduct i.e. investing in the case and providing monies to pay legal costs in return for a profit upon recovery.  This model leaves the running of the case to others and does not allow funders to unduly influence the course of a claim for fear of falling foul of Maintenance and Champerty laws.  However, now a Funder can overtly own the claims in their own right or as part of a package involving other creditors.

 

The legal industry and law firms have a challenge before them so how do they respond? With the advent of Alternative Business Structures surely it is now possible for law firms to work with the ‘money men’ and set up their own facilities to address this potential market?  It will of course be expected that professional ethical standards are upheld and conflicts are avoided but for a law firm undertaking a decent volume of such work then opportunities will arise to represent a new group of clients or indeed innovate as the TPF market continually strives to do.

 

Legal commentators, of course, see the Act from differing standpoints but general themes are emerging about the down sides. Namely, directors may think twice before calling in the administrator which could make matters worst when eventually the liquidators hove into view.  Those advising directors before a company enters administration need to take careful stock of the ramifications of their advice.  Also, an assessment of whether or not an Administrator should assign claims needs to be thought through carefully.

 

Soporific it may be in its unabridged form but SBEEA has the potential to change established practices for better or worse. We would be interested to hear your thoughts so please contact us.

 

TSD