Towards a new Insolvency Regime for Northern Ireland

BANKING

TOWARDS A NEW INSOLVENCY REGIME FOR NORTHERN IRELAND

Sinéad McGrath discusses how possible changes to the insolvency laws may provide failing businesses with a second chance.

Insolvency Law in Northern Ireland is facing a period of reform following a wide ranging review of insolvency laws in England and Wales and the introduction of new legislation. This new legislation is likely to provide the blue print for an overhaul of insolvency procedures in Northern Ireland and this article highlights the possible changes.

Small Companies Moratorium

The Insolvency Order (NI) 2003 came into operation on 1st April 2003 and introduces a formal moratorium for small companies facing financial difficulties that will provide these companies with a breathing space from creditors for a short period. These initial reforms are likely to be followed by more fundamental modernisation of bankruptcy and insolvency legislation over the coming months. Reform has been driven by the government's desire to encourage entrepreneurship in the UK economy and by an increased emphasis on preventing viable businesses experiencing difficulties from going to the wall unnecessarily. The reforms in the Enterprise Act 2002 in England and Wales (the English Act) attempt to strike a balance
between the interests of business and creditors by promoting a collective approach to insolvency - the provisions are likely to be mirrored in Northern Ireland.

Administrative Receivers

The English Act restricts the ability of a floating charge holder to appoint an administrative receiver. There are exceptions to this prohibition, for example, floating charges created before the Act comes in to force and in relation to certain specialist areas such as public private partnership projects.

The Act introduces a revised administration procedure allowing an administrator to be appointed not only by a court order, but also out of court by the company itself or by a floating charge holder if the company defaults on the terms of its loan agreement. The out of court route into administration is designed to reduce the bureaucracy and costs associated with the court application and to speed up the administration process by putting an upper time limit of 12 months on the timetable for completing the administration.

The Changing Role of the Administrator

There is an increased emphasis on the role of the administrator in rescuing the company as a going concern - if this is not possible then the administrator is to focus on achieving the best outcome for the company's creditors as a whole. In line with this new concept of a collective approach to insolvency, the preferential rights of government to recover unpaid taxes ahead of other creditors is to be partially abolished. Although the government is prepared to give up preferential status in respect of certain debts, it does not want to provide a windfall to floating charge holders and accordingly a small proportion of the Company's property will be made available for distribution to unsecured creditors once fixed charge liabilities have been discharged.

Personal Insolvency Reform

The English Act also introduces significant reforms to the personal insolvency regime including a reduction in the discharge period for most bankrupts from 3 years to 12 months. This is designed to reduce the stigma attached to "innocent bankruptcies" and to promote business restarts. In contrast, those bankrupts who are regarded as culpable, irresponsible or reckless will be subject to tougher restrictions with a new Bankruptcy Restriction Order lasting up to 15 years.

At present, the wide ranging insolvency reforms contained in the Act do not extend to Northern Ireland. The DETI have indicated that there will be a consultation process with interested parties in Northern Ireland over the coming months regarding the introduction of similar reforms. It is likely that draft legislation will be presented for discussion in early 2004 with implementation of the new laws in late 2004.

If the new NI legislation does follow the GB pattern, Banks may initially be faced with a choice between sticking with their right to appoint an administrative receiver under floating charges created before the new legislation comes into effect and opting to run with any new streamlined administration procedure. As the existing administration procedure has seldom been used in Northern Ireland, this shift would involve a significant rethink by Banks in their approach to secured lending - no doubt they will be carefully monitoring the success or otherwise of the new administration procedure in England and Wales in the intervening period.

Sinéad McGrath is a Partner in the firm's Commercial Property Department specialising in banking and commercial property work. She recently advised a number of Northern Irish clearing banks on their response to the Competition Commission Report on the provision of banking services to small and medium sized enterprises. Sinéad can be contacted at sinead.mcgrath@lestrangeandbrett.com

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