Changes to insolvency bonding requirements
Legislative changes have been made which changes the insolvency bonding arrangements from 1 December 2024 with transitional provisions applicable through to 1 January 2026.
As part of the response to the consultation on the future of insolvency regulation, the government committed to making some minor amendments to the insolvency bonding framework. These amendments are now the subject of a Statutory Instrument, The Insolvency Practitioners (Amendment and Transitional Provisions) Regulations 2024. The reforms will apply to what is typically known as ‘enabling bonds’ obtained by insolvency practitioners prior to them being authorised to accept insolvency appointments.
In summary, the bonding reforms are:
- The general penalty sum is increased from £250,000 to £750,000, and will apply across all cases where the specific penalty sum (SPS) is insufficient, including those where no SPS cover is in place
- Minimum statutory requirements for bonds will include provisions for the payment of costs and expenses reasonably incurred or charged by the successor insolvency practitioner. Specifically this would include the costs and expenses of investigating the suspected fraud or dishonesty; the costs and expenses of making a claim under the bond, including costs incurred in providing documents or evidence or responding to requests for further information; the costs and expenses of obtaining expert advice (including legal advice) in relation to a claim or potential claim under the bond; and the costs and expenses of administering the insolvent estate, which duplicate costs incurred or charged by an insolvency practitioner before the successor insolvency practitioner’s appointment to act in the relevant case
- Minimum bond wording will require a clause included on calculation of interest from the date of relevant loss to the date of claim for that loss, with Sterling Overnight Index Average (SONIA) as the benchmark
- Bonds will be required to include a run-off period of at least 2 years from release or discharge from office
- Where the bond includes a maximum indemnity period, this should be no less than 6 years from the date of appointment, with the ability to extend with the agreement of the bond provider
- At least 60 days’ notice will be required to be given by the bond provider to the IP and authorising body before a bond expires or is cancelled due to non-payment of a premium
Transitional arrangements
While the new provisions come into law on 1 December 2024 transitional provisions are required to allow the orderly arrangement of bonds. Enabling bonds are typically arranged on an annual basis with no unique renewal date across the profession. As a result, it will be a full 12-month period before all insolvency practitioners go through a renewal process. The transitional provisions reflect that, as well as a period to allow bond providers to amend their policy wording and have this approved by the Secretary of State.
For current bonds issued, the old approved wording will remain valid until the bond expires.
From 1 December 2024, bonds may either be issued with the new provisions or on the old approved wording.
From 1 January 2026, all bonds issued will need to have had their wording approved by the Secretary of State in line with the new provisions.
Action required
The Insolvency Service have already had discussions with the major bond providers and therefore it is anticipated that they will already have started to prepare. In the main, the changes being brought in will not directly impact insolvency practitioners in the short term. The changes will impact policy wording and terms and with the extended policy coverage it is likely that premiums payable for enabling bonds will increase. Insolvency practitioners should therefore speak with their bond provider to understand the likely timescale for their enabling bond provider introducing the new terms and the likely cost impact. Insolvency practitioners may also wish to take the opportunity to review their enabling bond provider arrangements and consider the market options that are available.
