Getting to grips with the new Insolvency Rules
Steve Allinson discusses the overhaul of insolvency legislation intended to consolidate the existing rules and modernise procedures
6 April 2017 is a watershed date for all those involved in the insolvency and restructuring industry. On that date we have the commencement of a whole new set of insolvency rules. Given that each year over 14,000 companies in England and Wales go through an insolvency procedure, and each of those will usually have a long list of creditors potentially facing bad debts, the impact is not insignificant, and that is not taking into account the total number of personal insolvencies – over 91,000 in 2016.
The Insolvency (England and Wales) Rules 2016 (the Rules) are a major overhaul of insolvency legislation aimed at modernising and updating procedures which have been in force for some 30 years via the Insolvency Rules 1986. Since that date we have seen 28 sets of Insolvency Amendment Rules, and at a stroke these are all being repealed and a new regime placed before us. This will enable the insolvency office holder to use streamlined procedures and communication systems which should simplify and speed up insolvency and, as a spin-off, save expenses which come from the insolvency estate.
The rules aim to do three things. The first is to consolidate the existing rules and the multiple amendments, changes, and statutory instruments introduced over the years. The second aim is to simplify and modernise the language. The third is ‘to incorporate various changes in the law which are intended to reduce red tape’. The means and methods of communication have moved on significantly since 1986 and to reflect those improvements a number of key changes are contained in the new rules.
Although the main work in understanding these rules will fall to insolvency practitioners, as lawyers we may be called upon to advise creditors, debtors, directors, or insolvency practitioners. Thus, this article will seek to flag some of the most likely areas for lawyers to consider for the commencement of this brave new world.
One of the most striking features of the rules is their departure from the familiar, albeit frequently criticised, structure of the existing rules.
The rules are split into 22 parts. Those parts are either specific to a given insolvency procedure or are ‘common parts’ which apply to a number of different procedures. The common parts are found at parts 14 to 21, as well as part 1, which deals with interpretation, time, and rules about documents.
Within the specific procedures, it is noteworthy that the old winding-up part has now been subdivided into three separate parts for the different winding-up procedures.
Further, the rules entirely do away with statutory forms for use in insolvency proceedings. The explanatory notes to the rules explain that this is part of a process of ‘future proofing’ them by reducing the need for amendments to forms. Instead of statutory forms, part 1 of the rules sets out what should be included in various documents and notices.
The transitional provisions acknowledge limited circumstances in which the statutory forms may still be used after commencement. This may sound very stark and a recipe for much head scratching, but already the Insolvency Service has announced that it will be hosting a number of templates, as will Companies House, and the commercial publishers are also very busy in this arena at the moment. The message is clear that the area of form development will settle down over the coming months.
In no particular order, I would venture to suggest that the following areas (both corporate and personal) are most relevant for the insolvency lawyer:
Restrictions on calling creditors’ meetings;
Removal of requirement for creditors’ meetings;
New decision-making procedures;
New deemed consent procedure;
Ability to opt out of correspondence;
Use of websites;
Payment of small dividends without formal claim;
- Electronic communication; andJurisdictional issues.
There is, however, no substitution for spending time on each part as the rules bed down over the coming months.
There are now four ‘decision procedures’ specifically defined in rules 15.2 and 15.3, namely virtual meetings, correspondence, electronic voting, and physical meetings. Physical meetings may only be used in exceptional circumstances. In addition, a new concept of ‘deemed consent’ can now be used to obtain a decision from creditors, but it is not a ‘decision procedure’ as defined by the rules. The development of the deemed consent procedure could well be the area of the Rules that promotes the most interest and debate.
In essence, it means that, in future, an office holder will be able to write to creditors with a proposal which will be deemed to be accepted and approved unless more than 10 per cent (by value) object. If such an objection is registered, an alternative decision-making process will be employed at the discretion of the office holder. This could include electronic voting, correspondence, or a virtual meeting. Therefore, if objections are not received by the decision date (as defined in the rules), creditors will be deemed to have consented to the decision or resolution. Deemed consent may, however, not be used for the approval of remuneration, as such a decision is considered to be too important to be passed in this way.
The ‘headline’ of no more physical meetings has also promoted much initial debate, although it is not an absolute removal as creditor choice still ultimately remains. In essence, the requirement to hold physical meetings is being removed (unless 10 per cent in value, 10 per cent in total number of creditors, or ten individual creditors request one; that ‘rule of ten’ is, in itself, an interesting development). We shall just have to wait and see whether these changes prove effective and what choices practitioners make in terms of their decision-making processes. Final meetings are also being abolished in liquidations and bankruptcies.
Opting out of correspondence
The rules set out how a creditor may opt out of receiving correspondence and further specify the documents which must be delivered to creditors who have opted out in any event. Importantly, any notice given by an office holder to a creditor informing them of an intended dividend is excluded from the effects of the changes. The purpose of the opt-out provisions is to reduce red tape by removing from office holders the need to provide detailed information to those who have little interest in receiving it, perhaps where the recipient has become resigned to the fact that they will not receive a dividend from the insolvent company or the bankrupt.
This is really going to be a challenge for insolvency practitioners. Once a creditor has opted out of receiving any further correspondence, they are under an ‘obligation’ to ensure that no further correspondence is sent to that creditor. The exception is if there is a notice of intended dividend, then everyone has to receive it. Creditors can also opt back into correspondence at any time.
The new rules recognise that emails are the most efficient form of communication, and if creditors had been used to communicating with the insolvent company or individual in this way, then the practitioner can continue with this process without the need for specific consent going forward.
In addition, insolvency practitioners can use websites to deliver information without the need to go to court or write to creditors every time something new is posted.
An insolvency practitioner can accept the figures in the statement of affairs or books and records if the amount owed is less than £1,000. They should write to the creditor and inform them of the figure which has been ‘proved’ from these sources. The creditor will have to notify them if the amount is ‘inaccurate or no debt is owed’.
Inevitably, in a piece of legislation of this size there have to be transitional provisions. However, the aim has been to try to simplify the transition from old to new where possible. The specific provisions are set out in schedule 2. In general, the transitional provisions require that the new rules will apply to all cases and not just new cases after 6 April 2017.
Coherent and intuitive
There is a lot to assimilate in the coming months. Once the initial hard work of preparing for the rules is done, we will be able to start to assess whether they will achieve their aim of promoting efficiency and increasing returns to creditors.
Once one gets beyond the unfamiliarity of the new structure, the result is a coherent and intuitive body of rules which successfully consolidates a number of different sources into a single instrument. Only time will tell whether they will meet expectations, and whether they will be a worthy successor to those which have been with us for the last 30 years.
Steve Allinson is a consultant at Shoosmiths and non-executive chairman of the board at the Insolvency Service