The changes

Since 29 December 1986, the Insolvency Act 1986, as amended by 23 subsequent statutory instruments, has governed the way in which insolvency practitioners, lawyers, creditors, debtors and others dealing with insolvency issues, have addressed procedures such as bankruptcy, administration, liquidation and voluntary liquidation.

The result of this incremental and, therefore, perhaps unfocussed change is a rather voluminous set of primary and secondary legislation which is often confusing to follow. The rules have regularly been criticised by practitioners and the judiciary as overly bureaucratic and too expensive, often leading to lower returns to creditors. The Government, in announcing its proposals to modernise and recast the Insolvency Rules, rather than simply consolidate them, aims to arrive at a set of rules which are clearer and more logical, easier and quicker to use, and generally better suited to the challenges posed by insolvency issues in the 21st century.

Accordingly, it has published a consultation document, available online (see below), which explains the difficulties with the current rules and its aspirations for change. The document includes a working draft of the new rules following initial consultation with insolvency professionals at Annex 1, explanatory notes at Annex 2 and a list of consultation questions at Annex 3.

The main amendments include:

  • Creating an extensive list of definitions, clear guidance for interpretation and plain language 
  • Removing creditors’ meetings as the default process for decision-making 
  • Abolishing final meetings of creditors in bankruptcy and liquidation where an insolvency practitioner is the office-holder 
  • Removing the requirement for a liquidator to chair voluntary liquidation meetings of creditors and allow a suitably experienced person within the liquidated firm to be chair in their place 
  • Permitting debtors declaring their own bankruptcy to do so directly to the court 
  • Enabling creditors to extend administrations for either 6 or 12 months, rather than the current restriction to 6 months
  • The Government also intends to reduce the amount of bureaucracy in insolvency procedures, for instance by permitting practitioners to put all case information on a website without an order of the court, simplifying proxies and broadening their use for repeat creditors and removing the need for office-holders to distribute very small dividends to creditors.

It is presumed that processes will be carried out electronically wherever possible within the relatively near future. The Government acknowledges this will require careful drafting of precedents to ensure that aim is achieved, which cannot be said to have been a particular strength in the past. A further change is the removal of the currently mandatory use of first class post where postal delivery is used. This, it is hoped, will further reduce the cost of administrations and increase the level of returns to creditors.

The Government, therefore, is attempting to empower insolvency practitioners, even encouraging participation in the consultation by calling them “stakeholders”, to assist it in shaping the new landscape of the Insolvency Rules, and in governing the way they themselves will operate. Although not a root and branch reform, the proposals are certainly ambitious. The Government is clearly keen to be seen to be willing to place a significant amount of trust in practitioners, providing them with the tools to ensure its aims, as well as those of practitioners, are met.

Our assessment

The net effect of the new Insolvency Rules, however they might look following the consultation process and the drafting and enactment of the requisite primary legislation, is obviously unclear at this stage. The Government’s intentions and the desired end-point are clear – less uncertainty, bureaucracy and cost, more speed and more money available for distribution to creditors and with a system better able to meet the demands of any and all interested parties in the 21st century.

Whether those aims are met might well depend on the willingness of the profession to contribute to the process as a whole, and although it is easy to be cynical, the new rules are unlikely to be as complicated, unwieldy and unclear as they are currently.

The effect of the changes for practitioners and their insurers is similarly uncertain. The most likely scenario is that there will be a greater number of complaints and claims initially, as all those affected by the new rules adjust and adapt to them. Subsequently, following that period of adjustment, and on the assumption the government’s aim to simplify the insolvency process are at least partially met, it is possible that the number of complaints and claims against practitioners will actually decrease.