Part Xxiv: Insolvency
629.Insolvency and winding up are relevant to regulation for two reasons. First, there are implications for existing customers if a financial service business becomes insolvent. Second, winding up may itself be part of the appropriate regulatory response to events. Thus it may be desirable to wind up a company to protect not just the interests of customers who have entered into contracts with it, but also those who might do business with it in future, if it continued to trade. Subject to the particular provisions of Part VII of the Companies Act 1989 for transactions carried out on regulated markets, the general law of insolvency applies, and will continue to apply, to most financial services businesses, as it does to other businesses. However, it is supplemented by provisions which allow the regulators, alongside creditors, to petition the court for the winding up of an authorised business on the grounds of insolvency, and, alongside the Secretary of State, to petition the court to wind up an authorised business on the grounds that this would be just and equitable.
630.Different arrangements apply to certain mutual societies. The arrangements under the relevant legislation, for example the Building Societies Act 1986, will continue to apply to relevant societies, with functions transferred in that case from the Building Societies Commission to the Authority in accordance with the provisions of Part XXI.
631.The insolvency provisions of the Act are intended to build upon these existing arrangements, establishing, so far as is practicable, a common approach across all sectors. Sections 356, 357, 367 and 375 provide the Authority with the power to ask the court to initiate various insolvency procedures. Sections 356, 362, 363, 365, 371 and 374 make clear that the Authority has the right to be heard by the court in insolvency proceedings instigated by third parties. Sections 369, 376, 377, 378 and 379 carry forward provisions of the ICA 1982 dealing with the insolvency of insurance companies (which because of the particular nature of insurance business, must in some respects be dealt with in a different way to other authorised persons).
632.At the same time, the Part will fill a number of gaps in the coverage of the predecessor regimes. Section 359 will allow the Authority to ask the court to make an administration order in respect of authorised businesses, as an alternative to winding up. Section 372 will give the Authority powers to petition the court to declare bankrupt an insolvent sole trader providing financial services. Sections 360 and 366 make changes to the insolvency regime for insurers.
633.Part XV (Financial Services Compensation Scheme) is also relevant to customers of authorised firms in financial difficulties.
Section 356: Authority’s powers to participate in proceedings: company voluntary arrangements
634.Insolvency legislation allows companies in financial difficulties to propose a voluntary arrangement with creditors; that is, for creditors to agree to take a proportion of what they were owed as a final settlement of their debts. If agreed, such an arrangement is binding on all creditors who were aware of the proposal, subject to their right to ask the court to intervene if the arrangement seems improper or unfair. This section gives the Authority the right to apply to the court in the same way as a creditor, and also makes clear that the Authority may be represented in any such proceedings initiated by a creditor.
Section 357: Authority’s powers to participate in proceedings: individual voluntary arrangements
635.In England and Wales and in Northern Ireland insolvency law provides that an individual who is in financial difficulties may apply to the court for a moratorium during which he may prepare a proposal to his creditors for settlement of his debts. Whilst this moratorium is in force the individual is protected against the presentation of a bankruptcy petition.
636.Subsection (1) of this section provides that the Authority is entitled to be heard by the court on an application for such a moratorium, if this is made by an individual who is an authorised person. Subsections (3) and (4) provide that the Authority is entitled to send a representative to attend and speak at any meeting of creditors summoned to consider a proposal which a debtor brings forward, and that it shall be informed of the results of any such meeting. Subsection (5) goes on to provide the Authority with the same rights as creditors to challenge in court a decision by the meeting to agree a creditor’s proposal, or to challenge the implementation of an agreed proposal, if it believes that this is in some way unfair or irregular, whilst subsection (6) provides that the Authority is entitled to be heard by the court if any other person makes such a challenge.
Section 358: Authority’s powers to participate in proceedings: trust deeds for creditors in Scotland
637.Section 357 provides the Authority with powers to be involved in individual voluntary arrangements proposed for authorised persons. Such arrangements are only possible in England, Wales and Northern Ireland. This section makes provision for the Authority to have certain rights in the equivalent arrangement in Scots law (a voluntary trust deed for creditors within the meaning of section 5(4A) of the Bankruptcy (Scotland) Act 1985).
638.The purpose of a trust deed under Scots law is to allow a person who cannot pay his debts to hand over his assets to a trustee, who may then arrange a settlement with his creditors as a alternative to proceedings for sequestration under the 1985 Act. Subsections (1) and (2) provide that where a trust deed is granted in respect of an authorised person, the trustee must, as soon as he becomes aware that the person concerned is an authorised person, inform the Authority, and send it copies of the deed and any other documents which he has sent to the creditors.
639.Under subsection (3) the Authority is given the same rights as certain creditors who have not received notice of the trust deed, or who have objected to it, to petition for the sequestration of a debtor who is an authorised person.
640.If the trustee proposes at any stage to hold a meeting of creditors, subsections (4) and (5) require him to inform the Authority, which will have the right to send a representative to attend and speak at the meeting. However, the Authority will not have the right to vote at the meeting, except on those occasions where it is itself a creditor of the person concerned.
Section 359: Petitions
641.General insolvency law provides for the court to place a company or partnership into administration, that is to allow it to continue in business, under the supervision of an administrator, as an alternative to winding it up. This section allows the Authority to ask the court to do this in respect of present or former financial services businesses and appointed representatives or persons who are or have carried on financial services business without authorisation, where it would be in consumers’ interests for the business to remain in being, rather than be wound up. It also provides that for such persons failure to pay money due to consumers on time shall count as sufficient evidence to allow the initiation of administration proceedings.
Section 360: Insurers
642.At present, the law prohibits insurance companies from being put into administration. When insolvency law first made provisions for administration in 1985, it was not clear whether this procedure would be appropriate for such companies, given the special nature of insurance business. Experience has shown that it may be helpful to make this option available, so this section gives the Treasury the power to make an order removing the prohibition in relation to insurers. “Insurers” for these purposes will be defined in regulations made by the Treasury.
Section 362: Authority’s powers to participate in proceedings
643.This section makes clear that when a creditor or other third party asks the court to place in administration a person who is doing or has done financial services business, or who is or has been an appointed representative, or persons who are or have carried on financial services business without authorisation, then the Authority shall have the right to be represented at the hearing. It also gives the Authority the right to receive any information or proposals sent by the administrator to creditors, to attend and speak at any meeting of creditors called to discuss the administration, and to have the same rights as creditors to ask the court to intervene, if it considers that the administration is being carried out improperly or unfairly. It also gives the Authority the same power that creditors have under section 425 of the Companies Act (and the equivalent Northern Ireland provision), where a scheme is proposed to settle some or all of the debts of a company in administration, to ask the court that this be put to a vote of creditors.
Section 363: Authority’s powers to participate in proceedings
644.This section provides that when a receiver is appointed in respect of a company which is or was an authorised person, or an appointed representative, or which is or has been carrying on regulated activities without authorisation, the Authority is entitled to be represented at any hearing at which the receiver applies to the court for directions. It also provides that the Authority has the right to receive any information or proposals sent by the receiver to creditors and to attend and speak at any meeting of creditors called to discuss the winding up.
Voluntary winding up
Section 365: Authority’s powers to participate in proceedings
645.This section gives the Authority the right to be represented at any court proceedings to wind up voluntarily a financial services company, other than an long term insurer. It also provides the Authority with the same powers that creditors have to ask the court to decide any questions arising out of the winding up, or to order that a scheme, under section 425 of the Companies Act (or the equivalent Northern Ireland provision), to settle some or all of the debts of the company, should be put to a vote of creditors. In addition, it gives the Authority the right to receive any notice or document required to be sent to creditors and to attend and speak at any creditors’ meeting.
Section 366: Insurers carrying on long-term business
646.Under the predecessor legislation, there is a prohibition on the voluntary winding up of insurance companies carrying on long term, or life assurance, business. The reason is that if such companies went into voluntary liquidation the rights of endowment policyholders would accrue, so that they would be entitled only to the current value of their policy, and not to the terminal bonuses they would expect if their policies ran on to the end of their term. This section removes this absolute prohibition, but provides that voluntary winding up can only take place with the Authority’s prior permission. This will allow the Authority to ensure that winding up will only proceed subject to arrangements being made to meet the legitimate expectations of policyholders.
Winding up by the court
Section 367: Winding-up petitions
647.This section provides that the Authority may ask the court compulsorily to wind up any company or partnership which is doing or has done financial services business or which is or has carried on financial services business without authorisation. The powers also apply to an appointed representative. As with the other provisions in this part which empower the Authority to initiate proceedings, this enables the Authority to act on behalf of consumers, who could in theory take action themselves, but may in practice lack the resources and expertise to do so. The court may agree to this in cases where the business cannot pay its debts, or where it decides that it would be “just and equitable” to wind up the business. The Authority might make an application under the latter ground if, for example, a business had been guilty of such serious rule breaches that the Authority had found it necessary to cancel its permission in order to protect the public. This section also provides that for such businesses failure to pay money due to consumers on time can count as sufficient evidence to allow the initiation of insolvency proceedings.
Section 368: Winding-up petitions: EEA and Treaty firms
648.This section makes clear that the Authority can only petition under section 367 for the winding up of a business which is authorised in another EEA State, and is entitled to provide financial services in the United Kingdom because of that authorisation, when it has been asked to do so by the home State regulator concerned. This is because the issues that generally arise in relation to the winding up of a business are issues which are primarily the concern of the home State regulator, rather than of the host State where the business is being carried on.
Section 371: Authority’s powers to participate in proceedings
649.This section makes clear that when a creditor, or other third party, asks the court to wind up a person who is doing or has done financial services business, or who is or has been an appointed representative, the Authority has the right to be represented at the hearing, and at any subsequent hearing. It also provides that the Authority has the right to receive any information or proposals sent by the liquidator to creditors and to attend and speak at any meeting of creditors called to discuss the winding up, and to have the same rights as creditors to ask the court to intervene. It also gives the Authority the same power that creditors have under section 425 of the Companies Act (or the equivalent Northern Ireland provision), where a scheme is proposed to settle some or all of the debts of a company being wound up, to ask the court that this be put to a vote of creditors.
Section 372: Petitions
650.Section 367 gives the Authority power to ask the courts to wind up companies or partnerships doing financial services business. The section also confers a power in respect of sole traders doing financial services business. The Authority will be able to petition for the bankruptcy of such persons, or in Scotland, for the sequestration of their estate, if they are or appear unable to pay their debts to consumers. It should be noted, however, that here, as in insolvency law generally, inability to pay debts is the only ground on which a sole trader can be made bankrupt - there is no equivalent to the provision covering companies and partnerships that these may be wound up because the court feels it is “just and equitable” to do so. This is because sole traders’ business affairs are not legally distinct from their personal finances.
Section 374: Authority’s powers to participate in proceedings
651.This section makes clear that when a creditor, or other third party, asks the court to make a bankruptcy order for, or in Scotland to sequestrate the estate of, an individual who is doing or has done financial services business, then the Authority shall have the right to be represented at the hearing, and at any subsequent hearing. It also provides that the Authority has the right to receive any report sent by an insolvency practitioner to creditors and to attend and speak at any meeting of creditors called to discuss the bankruptcy.
Provisions against debt avoidance
Section 375: Authority’s right to apply for an order
652.The Insolvency Act 1986 provides creditors, liquidators and administrators of insolvent persons with the right to ask the court to set aside transactions which appear to have been entered into to defraud creditors (that is, where assets are transferred as a gift, or sold at less than their full value, with the intention of putting them beyond the reach of creditors). This section provides the Authority with an equivalent right to make an application to the court in relation to transactions entered into in the course of financial services business.
Supplemental provisions concerning insurers
Section 376: Continuation of contracts of long-term insurance where insurer in liquidation
653.This section provides for the business of an insolvent insurer so far as it relates to contracts of long-term insurance to be transferred to another company, rather than for the policyholders to receive a share of the assets available on winding up. Policyholders of long term insurers face different problems to most consumers if the company fails. They enter into agreements, for example for pensions, which are designed to last many years, and the benefits they expect to receive build up over time. Also, the terms of the contract (and importantly the premium) are set at the outset. If, for example, during the course of the contract they were to develop an illness they might not then be able to obtain alternative cover. For these reasons, it is desirable, where possible, to maintain the insurer’s business as a going concern, or to find an alternative insurer to take over its policies, rather than allowing it to be wound up.
Section 377: Reducing the value of contracts instead of winding up
654.This section is intended to facilitate timely payments on, or the transfer of, insurance contracts of a company which has become insolvent, rather than leaving these to be matters to be resolved at the end of an insolvency process, which may take a considerable period of time.
Section 378: Treatment of assets on winding up
655.This section empowers the Treasury to make regulations to allow for the separate treatment in insolvency situations of an insurer’s contracts of long-term and general insurance, given the special characteristics of long term business (referred to in the note on section 376 above).
Section 379: Winding-up rules
656.This section enables the making of rules to deal with the winding up of insurers, under the powers of the Insolvency Act 1986.