Court of Session signals increased scrutiny of insolvency applications

While that scrutiny will apply across the board, we have seen particular challenges arise in the context of administration extensions and in requests for the approval of renumeration in recent cases.

The 1986 Insolvency Act places a term of one year on an administration. This means the administration process will automatically come to an end after a year unless the administrator obtains an extension. The first extension may be obtained by gaining the consent of creditors. However, any further extensions following this are a matter of discretion for the court, meaning there is no guarantee further time will be awarded. This one-year time limit, subject to possible extensions, is not applicable in liquidations.

When will an extension to administration be granted?

An extension can only be granted prior to the end of the term of the administration. Once that period has elapsed, the court is not able to grant an order extending the term of the administration. If it is foreseeable that an extension is likely to be required, it is important to begin preparations well in advance to ensure creditors can be properly consulted and that application is made in good time.

If an extension is sought, the courts will expect administrators to provide evidence of the progress made in the administration process to date, including efforts made to close down any outstanding matters – such as payments owed to creditors. While it is often the case that matters outside the officer-holders’ control prevent further progress being made, the court will expect to be advised of the latest correspondence on these matters and of the estimated time periods to reach a resolution.

It must not be assumed that 12-months is an appropriate period of any extension. Instead, the duration sought should reflect the work left to be done in the administration process. While in some cases a full year extension may be required, many other cases will only need a shorter period – three or six months may be sufficient. In making the application, it is important to be able to justify the period sought.

The consent of secured creditors should be obtained before an extension request is submitted to the court. While this is not a formal requirement within the Insolvency Act, the court will expect consent to be provided as evidence to support the extension application.

Unsecured creditors should also be approached (particularly where there is a likelihood of a dividend being paid to them) as their views may be relevant and should be addressed by the administrator within the application made to the court. These creditors should be invited to respond with any objections, with sufficient time provided to allow those to be articulated.

Practitioners should ensure that the communications sent to all creditors clearly explain the reasons for, and the duration and purpose of, any proposed extension.

In summary, while it will often be appropriate for an administration to be extended to allow the objectives of the administration to be achieved, it is important to show the court that steps are being taken to make prompt progress in the case and to provide a clear rationale for the further time.

Remuneration claims requirements during insolvency processes

During recent cases, the Court of Session has also made clear that administrators must take care to comply with the technical rules in Rule 3.95 and 3.96 of The Insolvency (Scotland) Company Voluntary Arrangements and Administration) Rules 2018 (131 pages / 1 MB ) in relation to claims for renumeration and outlays.

In Scotland, the administrator’s claim for remuneration and outlays is made first to the creditors of the company. If the creditors do not make a decision, the administrator must make an application directly to the court for a determination.

The relevant rules are clear that any claim to creditors for approval of outlays and remuneration must be made within two weeks of the end of each six-month accounting period within an administration.

While it might be regarded as being more economical to hold off on seeking approval for remuneration until two or more accounting periods have elapsed, doing so is a breach of these mandatory rules and will require relief from the court. Administrators should also consider the risks of drawing remuneration without proper authority following on from any late approval.

In the event that relief is required, it is important to make an application to the court quickly. This application should set out the nature of the breach and the steps that have been taken to avoid this happening again in the future. The court will place considerable weight on the extent to which prejudice has been caused to creditors, but it must not be assumed that relief will automatically be granted in the absence of any prejudice.

Relief is at the discretion of the court, and even if granted, the court may not be prepared to allow the expenses of the application for relief to be expenses in the administration. this means that these costs may be payable separately and administrators who seek to spare the estate some expense can, in doing so, be left with the cost of putting matters right.

Co-written by Jacob Hay of Pinsent Masons.