Official Report: Minutes of Evidence

The Chairperson (Mr Brett): I am delighted to welcome William Gowdy KC. He is an insolvency practitioner (IP) at the Bar of Northern Ireland. William, thank you very much for joining the Committee meeting, today. I will hand over to you, and you can outline any concerns that you have in relation to the Bill.

Mr William Gowdy (The Bar of Northern Ireland): Good morning, Mr Chairman. On a technical point, you referred to me as an insolvency practitioner. As you will be aware, that has a specific meaning in the Insolvency (Northern Ireland) Order 1989. I am a lawyer practising in insolvency, but I am not an authorised appointment-taking insolvency practitioner.

The Chairperson (Mr Brett): My apologies.

Mr Gowdy: No, no; I just want to make sure that the record is entirely clear and that no one is confused.

The first point about the Bill is that it is in the context of our insolvency law. The underlying purpose of our insolvency law is to provide rescue to people who find themselves in financial difficulties; to find them a way to be relieved of the oppressive burden of debt; and, where they are in business, to allow them to start again. That is balanced by public interest considerations where there has been misconduct on their part. The second purpose of our insolvency legislation is to ensure fair pro rata distribution among our creditors. Those are the high-level priorities that the Assembly, I respectfully say, needs to bear in mind when considering the legislation.

Secondly, the policy in this area of legislation, for a generation, has been that Northern Ireland should follow the position in England and Wales as closely as possible. However, the situation here is that Northern Ireland is lagging up to 12 years behind England and Wales, and that does not serve the purposes that I have just mentioned. When Northern Ireland is using old rules and England and Wales have moved on, it does not serve either of those two purposes in general, in that it reduces the pool of those who are willing to take insolvency appointments in Northern Ireland as the discrepancy grows. It has to be against the interests of debtors and creditors if there is less competition among practitioners to take appointments.

Where one has insolvency practitioners based outside Northern Ireland taking appointments, the discrepancy leads to a situation in which there can be traps for the unwary, where old rules that no longer serve the public interest are still in place in Northern Ireland and are missed by insolvency practitioners who mainly practise in England and Wales, and there are technicalities that can lead to an insolvency process failing. For example, it can lead to a debtor who has invested in a rescue-type process, such as an individual voluntary arrangement (IVA), being told that that has failed because their IP has missed the fact that they need to file papers in court in Northern Ireland. Or, in other situations where an IP misses a similar filing requirement or a requirement to hold a meeting, that can be used as a technical argument to argue that a step in the process has become invalid, which gives rise to cost, particularly legal cost, rather than dealing with the substantive issues in the case, getting in and administering the assets.

My first key point, therefore, is that there is clear public interest in catching up with the processes that have been in place in England and Wales for some time, are bedded in and are largely accepted by the insolvency community as working well. However, we have to recognise that, in a system of devolution, Northern Ireland is not England and Wales, and just because something is right in England and Wales does not necessarily mean that it will be right in Northern Ireland. That means that we need to see where there are public interest issues in Northern Ireland where public interest in Northern Ireland is different. One issue to flag up here is the provision for the assignment of post-insolvency causes of action, which, certainly from the point of view of lawyers practising in contentious insolvency situations, is one of the more controversial provisions in the English legislation. It has always been accepted that an insolvency office holder in either personal or corporate insolvency can sell or assign the claims that the insolvent had before they entered into insolvency. Where a company is insolvent because a counterparty has breached a contract, that claim against the counterparty is clearly an asset that has always been capable of assignment.

Up until the legislative changes in England and Wales, claims that the company could not have brought itself but that the insolvency office holder can, such as claims to set aside a payment made to one creditor at a time when there was not enough money to pay all creditors, or a claim to recover for the insolvent estate property that was given away for less than its market value, were not assets that could be sold by the insolvency office holder; instead, the insolvency office holder had to bring those in through the court process. In doing so, the insolvency office holder would be live to the fact that he or she acted as an officer of the court and was acting not in their own interests but in the interests of the creditors as a whole, and, if there is a prospect of surplus, in the interests of the insolvent themselves. Obviously, if those causes of action are sold, there are no duties owed by the person to whom they are sold. The Bar Council's paper makes reference to a case that is progressing through the court system, so I cannot say too much about the particulars of that case. However, the initial ruling from the master suggests that an assignment of that sort of claim raises concerns from a judicial public policy point of view.

Northern Ireland is a smaller jurisdiction than England and Wales. In England and Wales, there is an established market for the third-party acquisition of those sorts of claims. There is not a market that I am aware of for those claims in Northern Ireland, so there is a real risk that the provision may, in the context of Northern Ireland, ultimately end up being a dead letter. The only context in which one sees assignments of causative action occurring in Northern Ireland is where, for example, there is an insolvent company that has a claim perhaps against its main lender or a business counterparty that the office holder is not sure about bringing, but the controllers of the company wish to bring, and that is then dealt with by the office holder's assigning it back to the controllers of the company so that they can continue to bring their claim.

These sorts of post-insolvency claims are not the sort of claims that the controllers of the company want to bring back to assert. They are more likely to be the sort of claims that the controllers want to get rid of.

The English papers suggested that this might be of interest to creditors to bring. Again, in practice, that is overstated generally. Creditors are reluctant to throw good money after bad in chasing after an insolvent company. There is already a situation where, if an insolvency office holder does not have the fighting fund necessary to bring a contentious case, but there are creditors who are motivated to put something forward, the creditors can come to terms with the office holder so that the case is funded but the office holder brings the claim.

For those circumstances, even in England and Wales, the public policy for the assignment provision was more controversial. Those concerns, in my view, continue to apply here and might even apply more strongly in Northern Ireland, where there is no established market for assignments of claims. That is one concern.

The next issue is the movement to a default of no meetings or other positions. That makes perfect sense. Quite often these meetings are a rubber-stamping process and do not take place, with everything being dealt with on proxies. However, the proposed legislation makes provision for a meeting to be called if requested by the creditors. There may be situations where an office holder considers that they want the benefit of calling a meeting of creditors and have discretion to call a meeting. Office holders, as we know, are professional persons, regulated professionals and officers of the court. They are not going to do that unnecessarily, but I respectfully suggest that we do not rule out the position that an office holder may wish to call a meeting of creditors rather than write out and let creditors request a meeting.

The Chairperson (Mr Brett): OK.

Mr Gowdy: The other issue in that context is the move to a deemed consent situation. In other words, rather than require the office holders to have enough support from creditors to be able to say, "We are going to do this unless you come back", generally, where the office holder requires a positive decision of creditors, rather than having their discretionary powers to get on and administer the estate, it is controversial, and the reason that the office holder wants to go to creditors is that they are concerned that their discretion could be challenged. Therefore, from the point of view of office holders and creditors, a deemed consent provision does not address that. In practice, I do not think that there is significant disquiet with the approach of either asking creditors to support or, if the office holder wants to do something that may be controversial but the creditors do not come back, to invite the creditors' views and then, if there is nothing from the creditors, to apply for the court to support that. It gives the office holder a security in those controversial cases that even a deemed consent will not do, because, in those situations, the office holders may be looking at a concern about a challenge from a former controller, the bankrupt or someone who is not clearly a creditor. My suggestion is that we should think clearly about whether there is a need for deemed consent rather than the prescribed decision-making processes under the action.

When we come to the question of the immediate appointment of the official receiver, that is a welcome proposal. It seems to have worked without issue in England and Wales. The one concern that I have about the legislation here is that it could be taken to suggest that the official receiver takes office unless there has been an insolvency practitioner preparing a report, under article 248 of the Insolvency (Northern Ireland) Order 1989, or there is a failed IVA. Under the existing legislation, the court has, under its general power of administration and superintendence of insolvencies, appointed liquidators immediately in corporate insolvency cases in circumstances where the petitioning creditor has been in discussion with the insolvency service, and the insolvency service has not been able to act immediately, and the creditor has lined up an insolvency practitioner, rather than have the steps of the official receiver take office and then, very quickly, the Department make an appointment. There have been cases where the court has exceptionally appointed an insolvency practitioner to liquidate a company. Now, I appreciate that we are talking about bankruptcy, and I cannot say that I have seen that in practice, but the same logic would apply; that consideration should be given to whether the legislation should not come close to ruling out the courts' existing power in exceptional cases to appoint an outside IP immediately on the making of the order.

In summary, those are what I see as the key issues, from the point of view of a barrister practising in insolvency, Mr Chairman, unless there is anything else that you would like me to address at this stage?

The Chairperson (Mr Brett): No, I think that is quite a useful overview. I have one member who wants to ask a question, Sinéad McLaughlin, if that is okay, William?

Mr Gowdy: Yes, certainly.

Ms McLaughlin: Thank you very much. That was very detailed. You highlighted that, in England and Wales, any creditor can bring a petition under certain circumstances. What would be the practical implications of that difference between Northern Ireland and GB?

Mr Gowdy: The detailed insolvency system is very different in Scotland, but in England and Wales, if you are a creditor with an undisputed debt — for example, a paid creditor of a sole trader with an unpaid account for materials, or a bank with an overdrawn current account — and there is no way of paying that, you can proceed immediately to present a statutory demand, which is a formal demand for payment. The implications of which are that, if the debt is not paid in 21 days, you can then proceed to bankruptcy. At the expiry of the 21-day period, the creditor can proceed to bankruptcy.

Under the current practice in Northern Ireland, which was introduced as part of the response to the pandemic, a petition will not be entertained unless the creditor has first obtained a judgement. Therefore, in Northern Ireland, you incur an additional layer of cost and delay. One might say, "That reduces the risk of people being put under insolvency when they are not really insolvent". That is one argument. However, the contrary argument is that that delay means that where someone is genuinely insolvent but has their head in the sand about it, there is a delay and additional cost for the trading counterparty, who may themselves be a small business, in getting the situation moved on to where they can perhaps make a claim on their credit insurance, if they have that, or get to the situation where funds are divided equitably among all creditors, rather than the debtor paying who they can or paying no one and continuing to spend money without getting the help that they would get if they were in a formal insolvency situation. Respectfully, that is what I see as the drawback between the current practice in Northern Ireland, the practice that formerly pertained for the emergency period during the pandemic and the practice in England and Wales.

There are slight differences in the rules. The rules were wholeheartedly reviewed in England and Wales in 2016. We have done some of that exercise here, but we have not done it entirely. On the whole, the position in England and Wales is that you do not have that additional step of having to obtain a judgement from the High Court or the County Court before proceeding to an insolvency remedy, even if you, as a creditor, know that your claim is entirely unopposed.

Ms McLaughlin: So there is a delay factor here?

Mr Gowdy: Yes. There is delay and additional cost to the creditor.

Ms McLaughlin: OK. That does not sound too practical.

You referred to the assessment of a non-bankrupt spouse's right to the family home. How does that differ between Northern Ireland and England and Wales?

Mr Gowdy: That was seen more historically, before the legislation came into effect in 2009 that provided that the trustee in bankruptcy had a period of three years to commence proceedings to realise the family home. The position in England and Wales is largely that, no matter the delay, the trustee in bankruptcy's claim proceeds. However, in Northern Ireland, the court concluded that, in most of those cases, the delay factor meant that the right of the non-bankrupt's spouse and family to their family home overrode the creditor's interests. In Northern Ireland, the courts weighed the factors that they needed to weigh under the Human Rights Act 1998 differently from those in England and Wales. There were no cases that anyone felt were worth taking to the Supreme Court to come to a conclusion on whether the courts were right to weigh those factors differently on the facts of those cases or whether the same approach should be taken in both jurisdictions. That issue is now almost entirely of historical relevance because of the three-year rule.

Ms McLaughlin: Right. OK, that is fine. Thank you very much.

Mr Honeyford: Thank you, William. You mentioned at the start of your remarks the difference between devolved regions and the worry about translating something directly across to a context that is not equal to other parts. I want to tease out a bit of that. In England and Wales, people are able to lodge a bankruptcy petition in a County Court and the High Court, but, in Northern Ireland, they have to go to the High Court, as far as I am aware. I have read that a couple of times, but can you clarify that? Are you saying that, given the delays and costs when it comes to court time, we should look to change that, or are you happy enough with the way that it is presented?

Mr Gowdy: You are talking about the practice guidance that says that creditors other than the taxing and rating authorities need to obtain a judgement before they proceed to bankruptcy proceedings.

Mr Honeyford: Yes.

Mr Gowdy: There is an additional delay and cost factor in Northern Ireland from the requirement to obtain a judgement that was not there under the 1989 legislation as enacted and is not the position in England and Wales. My view is that applying the existing legislation properly provides a better position for genuine creditors and people who are genuinely insolvent than the situation where the creditor is required to incur additional cost and delay. The position will still remain that, if the creditor has reason to believe that the debt is disputed on bona fide grounds, they should not resort immediately to insolvency processes but will have to obtain a judgement from the County Court or the High Court first. In the situation where there is no answer to the debt and the debt is undoubtedly due but not able to be paid, my view is that it is contrary to the interests of the creditors as a whole for them to have to incur additional delay and cost before being able to access insolvency remedies.

The Chairperson (Mr Brett): OK, William. Thank you so much for taking the time to come to Committee and provide that evidence. It has been very useful.

Mr Gowdy: Thank you, Mr Chairman, for accommodating me with the link.

The Chairperson (Mr Brett): Not at all, thank you.