Perhaps one of the most significant changes to insolvency legislation last month is the power of an administrator to distribute the prescribed part to unsecured creditors without the permission of the court.
The changes also make it clear that an administrator is not allowed to end an administration by moving a company into creditors’ voluntary liquidation under the flip procedure if the only funds available for unsecured creditors are those comprised in the prescribed part.
The old wording of the Insolvency Act 1986 (paragraph 83 of Schedule B1) states that a company may only move from administration to creditors’ voluntary liquidation if the administrator ‘thinks … that a distribution will be made to unsecured creditors of the company (if there are any’. The new rules on the flip procedure apply to all existing cases as well as new cases from last month.
The Insolvency Service has said that their view is that a payment out of the prescribed part to unsecured creditors did not ever allow an administrator to trigger the move to a CVL from administration under paragraph 83. This does not reflect common practice (or the former wording of the rule!).
So – how does an administrator satisfy the test of ‘thinking a distribution will be made’?
For example, could a company move from administration to CVL to bring a claim e.g. against the former directors? If the claim is successful there would be a dividend to unsecured creditors.
Whether a distribution ‘will be made’ is a matter for the administrator to judge, based on the facts of the particular case.
There is currently no case law that offers guidance on whether an administrator may legitimately form the view that a distribution will be made if the funding for that distribution is conditional on some future event (such as a successful outcome in litigation). The Courts do however, tend to give weight to Insolvency Practitioners’ commercial judgment.
In cases where there is conflict with stakeholders about the best process – a more certain route of putting the company into liquidation could be to apply for a court order to end the administration, and make a winding up order at the same time. The Courts allow officeholders to make such an application, even if the strict statutory grounds for doing so do not exist.
This post was edited by Rachael Bentley. For more information, email firstname.lastname@example.org.
 paragraph 65(3), Schedule B1 IA 1986, as amended by section 128 of SBEEA 2015
 paragraph 83, Schedule B1 IA 1986, as amended by section 128 of SBEEA 2015
 Re Ballast plc  EWHC 2356 (Ch)
 under paragraph 79 of Schedule B1
 Re Graham and Philpott  EWHC 3272 (Ch)