Dear insolvency practitioner > Chapter 7 > Creditors'/Liquidation committee

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1.   Functions carried out by insolvency practitioner Section where there is no creditors’ or liquidation committee (committee) including sanction to employ solicitors

Where there is no committee in a case where the company has been wound up by the court (compulsory liquidation) or a bankruptcy the functions of the committee are vested in the Secretary of State under Sections 141(5) and 302(2) of the Insolvency Act 1986. Since 2 April 2001 appropriate members of staff in insolvency practitioner Section as duly authorised officers have exercised these powers.  

Matters that require sanction by the Committee 

Sanction may be granted for the exercise of the following powers: 

Bankruptcy

  1. those listed in Schedule 5, Part I of the Act;

  2. appointment of the bankrupt to superintend the management of his estate, to carry on his business, or to assist the trustee under Section 314(2) of the Act;

  3. division in its existing form among the creditors of any property which cannot readily be sold, under Section 326 of the Act.

Compulsory Liquidation

  1. those listed in Schedule 4, Parts I and II of the Act;

  2. division in its existing form among the creditors of any property which cannot readily be sold, under Rule 4.183.

General Considerations

All requests for sanction should be made to insolvency practitioner Section in writing. They must be accompanied by Form CAU 101, charging the appropriate fee (currently £27) to the estate account. Sanction will only be granted in respect of a specified power and attention must be paid to the following paragraphs which detail the information required before any sanction can be given. A separate CAU 101 is required for each sanction. 

Requests for sanction should not be made retrospectively except in an emergency, in which case, no undue delay should occur in applying for sanction (S314(4) and R4.184(2)). 

Specific Requests

Authority to take or defend legal proceedings

A written request for sanction should include the following information:

  1. details of the solicitors to be used, and any special terms as to their costs;

  2. the amount of funds in the insolvent’s estate, together with details of any further realisations which are expected either as a result of the proceedings or otherwise;

  3. an estimate of the costs of fighting the case, and of the potential costs of losing it;

  4. the arrangements made for payment of the costs where the estate funds (including future realisations) are inadequate;

  5. if indemnities are to be relied upon, details of the amount, by whom given and the grounds upon which the practitioner considers that the indemnifiers are good for the amount of their indemnities;

  6. the likely benefit to the estate if the proposed proceedings are successful, together with an indication of the prospects  of success;

  7. an explanation of the need for, and objective of, the proposed proceedings.

If the funding is by a conditional fee agreement, the following, further, information should be provided:

  1. the uplift on fees to be applied;

  2. how any liability for costs, expenses and disbursements are to be met;

  3. the extent to which any recoveries will be absorbed by legal fees;

  4. the views of the principal creditors to this arrangement.

The sanction, when granted, will include a financial limit based upon estimated costs. If the practitioner needs, at a later date, to request an increase in the limit for costs, he should provide the reasons for the increase and details of any changes in the factors listed in the earlier application. 

Note:  While sanction is required to commence or defend any action or   legal proceedings, it is not required merely to employ solicitors. 

All other requests for sanction 

All other requests for sanction should include the following information:

  1.  the need for the proposed action;

  2. the effect of the proposed action;

  3. details of the approval of major creditors who may be adversely affected by it. 

Generals enquiries may be directed to IPU.Email@insolvency.gov.uk


2.   Expenses of  Liquidation Committee 

Rule 4.169 of The Insolvency Rules 1986 states that the "the liquidator shall defray out of the assets, in the prescribed order of priority, any reasonable travelling expenses directly incurred by members of the liquidation committee or their representatives in respect of their attendance at the committee's meetings, or otherwise on the committee's business". 

The Service has been made aware of an instance where the meeting of the (duly constituted) liquidation committee was held immediately after the section 98 meeting, and the travelling expenses of the creditor (in effect to and from the creditors' meeting) have been reimbursed from the assets as expenses of attending the committee meeting. 

It is the view of the Service that it would not be appropriate for the travelling expenses of the liquidation committee to be reimbursed by the liquidator from the company's assets in such a situation, as it is doubtful whether the expenses can be described as having been incurred directly in respect of attendance at a meeting of the committee. 

(First published in Dear IP no. 43, January 1999)


3.   Delayed submission of sanction application.

Section 314(4) IA86 provides that the creditors’ committee may ratify anything that the trustee has done under the provisions of subsections (1) & (2) without the prior sanction of that committee. However, subsection (4) also provides that such ratification by the committee should be sought “without undue delay”. Where an  application is made to the Secretary of State, acting in lieu of a creditors’ committee for those purposes it is expected that in the majority of cases IPs should be able to submit the application at the same time the action requiring sanction is commenced. It will only be in exceptional cases that staff in insolvency practitioner Section cannot be contacted by telephone to agree the sanction “in principle” in anticipation of the written application, which preferably should be faxed, fax number 0207 291 6773. Even where an agreement “in principle” can not be obtained in advance of a delayed application, the IP should still consider discussing the matter with staff in insolvency practitioner Section in advance of the written application.

Where staff acting on behalf of the Secretary of State consider that undue delay has occurred before the application has been made, and are therefore unable to sanction the application, practitioners are reminded that they may instead apply to the court under the provisions of the section 314(4) IA86 for ratification.

The same guidance also applies to a liquidator seeking ratification under the provisions of Rule 4.184(2) IR86.

Generals enquiries may be directed to IPU.Email@insolvency.gov.uk


NB: this article replaces that issued in Dear IP No.5

4.   Further guidance on sanction applications: undervalue transactions; preferences; misfeasance & compromised claims.

Article Withdrawn January 2011


5.   Provision for adverse costs.

As article 1 of this Chapter indicates, in an application for sanction it is necessary to detail how adverse costs are to be dealt with. Delays in dealing with applications have occurred as a result of IPs failing to indicate the proposed arrangements for dealing with such costs. In the majority of cases the IP, or his firm, undertakes to meet these costs should they arise, but IP Section cannot presume that this will be so. Therefore when applying for sanction IPs should indicate how these costs are to be provided for.  

Generals enquiries may be directed to IPU.Email@insolvency.gov.uk


6.   Guidance on applications for sanction under s.141 (5) and 302(2) of the Insolvency Act 1986 

Article Withdrawn December 2006


7.    Sanction applications

Article Withdrawn December 2006


8.   Sanction applications

Article Withdrawn December 2006


Enterprise Act 2002

 

9.    Restrictions on individuals becoming members of a creditors’ committee (or liquidation committee)

 

Rule 6.156 has been changed to provide that a member of a creditors’ committee in bankruptcy proceedings cannot be represented by a person who is subject to a bankruptcy restrictions order, bankruptcy restrictions undertaking, or an interim bankruptcy restrictions order, or who is a disqualified director.  However, a member can be represented by a person who has entered into a composition or arrangement with his own creditors.

 

Rule 6.158 has been changed to remove the automatic termination of a person’s membership of a creditors’ committee following the member’s entry into a composition or arrangement with his own creditors.

 

Equivalent changes have been made for liquidation (rules 4.159 and 4.161), administration (rules 2.55 and 2.59) and administrative receivership (rules 3.21 and 3.23).

 

 

Generals enquiries may be directed to Policy.unit@insolvency.gov.uk

 


10. Electronic Application for Sanctions 

insolvency practitioner Unit based at Ladywood House, 45/46 Stephenson Street, Birmingham, B2 4UZ, is responsible for carrying out various functions on behalf of the Secretary of State, including the role of liquidation and creditors’ committee under Section 141(5) and 302(2) of the Insolvency Act 1986, where none has been formed.  In this capacity, the Secretary of State considers applications to grant powers exercisable with sanction under Schedules 4 and 5 of the Insolvency Act 1986. 

Applications for sanction may now be made electronically, using forms available on the Insolvency Service website, under the heading: Information for and about insolvency practitioners.  Two forms are available, Sanction 90% and Sanction 10%.  The first is the most commonly used, when making application for authority to take or defend legal proceedings.  For example, proceedings to obtain an order for possession and sale of a property.  All other applications may be submitted on the Sanction 10% form. 

The process will require you to download the requisite form onto a word document or similar for completion and submission to the insolvency practitioner Unit at IPU.sanctions@insolvency.gov.uk

Generals enquiries may be directed to IPU.Email@insolvency.gov.uk


11. Guidance on powers exercisable with sanction.

Insolvency practitioners are asked to note that as a result of the Enterprise Act 2002, the following changes to guidance given in paragraphs 4 and 6 of Chapter 7 of Dear IP relating to powers exercisable with sanction. 

Following enactment of the Enterprise Act 2002 with effect from 15 September 2003, a Liquidator’s power to bring legal proceedings under the provisions against debt avoidance, adjustment of prior transactions and penalisation of directors and officers, pursuant to sections 213, 214, 238, 239, 242, 243 and 423 of the Insolvency Act requires sanction of the liquidation committee or the court. In cases of companies that have been wound up by the court, where there is no liquidation committee, the committee’s functions are vested in the Secretary of State in accordance with Section 141(5).

Also, with effect from 15 September 2003, the Enterprise Act 2002 provides that a Trustee’s power to bring legal proceedings under sections 339, 340 and 423 of the Insolvency Act in respect of provisions against debt avoidance and adjustment of prior transactions, requires permission of the creditors’ committee or the court. Where there is no creditors committee, the committee’s functions are vested in the Secretary of State in accordance with Section 302(2).

Generals enquiries may be directed to IPU.Email@insolvency.gov.uk


12. Applications to the Secretary of State to exercise powers specified in Schedules 4 and 5 of the Insolvency Act 1986 

In order to improve the service provided to insolvency practitioners where sanction is sought to exercise certain powers contained within Schedules 4 and 5 of the Insolvency Act 1986 the sanction application forms available on the Insolvency Service internet site have been updated.  An additional form has been introduced to be used when an insolvency practitioner requires sanction to operate a local bank account whilst continuing to trade an insolvent’s business.    

The forms are available on the website at the following link: 

http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/iparea/sanctionsforms/sanctionsforms.htm 

Any enquiries regarding this article should be directed towards Joe Clogan at Insolvency Practitioner Unit, Fourth floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6BS;  email: joe.clogan@insolvency.gov.uk

General enquiries may be directed to:  IPU@insolvency.gov.uk

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