The Insolvency Rules 1986 have been revoked and the Insolvency (England and Wales) Rules 2016 (IR 2016) come into force today. There are 22 Parts and 11 Schedules. Each Part is intended to cover a specific process or area, for example:
- Part 2: CVAs
- Part 3: Administrations
- Part 6: CVL
- Part 7: Winding up by the court
- Part 10: Bankruptcy
- Part 12: Court procedure and practice
- Part 14: Claims and distributions
- Part 22: Prohibited names (s.216)
Why the new rules?
- "a significant degree of future-proofing, as there will be less need for amendment to accommodate advancements in technology, business practice, and to enable e-delivery": see Explanatory Memorandum to the IR 2016
- Streamlining, restructuring, clarity, simplicity, changes in policy, modernisation and a reduction in the cost of administering estates (with improved dividends for creditors)
General points of note:
- There is a table of specific information required to identify persons and proceedings: see r.1.6.
- There are standard content requirements for numerous documents, for example notices for court proceedings and results of decisions: see Part 1 Chapters 4-8.
- Prescribed formats: r.1.8. You may depart from the requirements of a rule stating the contents of a document where either (i) the circumstances require a departure or (ii) the departure is immaterial, however compliance is essential on (i) titles of documents and (ii) statutory demands: see r.1.9.
- Any application (other than an application for an administration order, a winding up petition or a bankruptcy petition) must comply with the list of requirements: r.1.35.
- There is no longer any need to use a prescribed form, unless Schedule 2 para 15 applies, which provides four circumstances in which an old form "may" be used. This rule does not apply retrospectively.
2. Transitional provisions:
The transitional provisions are numerous: see Introductory Rule 4 and Schedule 2. Whether the IR 1986 rules continue to apply will depend on the facts of your matter, however there are numerous times when the old rules will continue to apply, but these will over time be few and far between.
3. Small debts
Which processes does this apply to?
Administration, winding up and bankruptcy: see r.14.1(1)
What is a debt?
- The definition of a bankruptcy debt is retained: see s.382 IA 1986;
- "Debt" for the purposes of administration and winding up means any debt or liability to which the company is subject on or before the relevant date or may become subject to after the relevant date, including any interest: see r.14.1(3). There are provisions within Part 14 as to calculation of interest and set-off/mutual dealings;
- For corporate insolvency, this includes tortious liability: see r.14.1(4); and
- The definition of debt or liability is very broad: see r.14.1(5-6).
What is a "small debt"?
This is the total debt where it does not exceed £1,000: see r.14.1(3).
When is the relevant date? R.14.1(3)
- When the company enters into administration or went into liquidation, that date;
- When the company enters into administration and is immediately preceded by winding up, or vice versa, the earlier of the two; and
- For bankruptcy it is the date of the bankruptcy order.
How does it work?
- R.14.31: the office-holder "may" treat a debt, which is a small debt according to (i) accounting records or (ii) the statement of affairs of the company or bankrupt, as if it were proved for the purpose of paying a dividend. There exists discretion here (which no doubt the IR 2016 intend for office-holders to utilise), but if the discretion is exercised there are four fixed requirements: see r.14.31(2).
- A creditor is deemed to have proved for a debt for the purposes of determination and payment of a dividend, but not otherwise, where (see r.14.3(3):
(a) The debt is below £1,000
(b) A notice had been delivered to the creditor of an intention to declare a dividend (pursuant to r.14.29) and that notice complies with r.14.31; and
(c) The creditor has not advised the office-holder that the debt is incorrect or not owed in response to the notice. The office-holder can create a list of small debts and send this out to small debt creditors: see r.14.31(3).
4. Officeholder reports and communications
From 6 April 2017, creditors can opt out of communications from the office-holder pursuant to r.1.36-1.39, for example when they feel that there appears to be no real prospect of a distribution. They can opt back in at any time.
The office-holder must provide certain information upon first communication with the creditors (r.1.39 – unless the first communication took place before 6 April 2017, pursuant to the transitional provision), and must continue to send the following documents to opted-out creditors (r.1.37):
- a notice required to be delivered to all creditors pursuant to IA 1986
- a notice of change of office-holder or contact details
- notices of distribution or intended distribution and
- any other documents required by the Rules.
Creditors are deemed to have given their consent to be contacted by the office-holder by electronic communication (r.1.45). This applies unless the relevant order was made before 6 April 2017 (Sch 2 para 3) and:
- when they had customarily communicated in that way with the debtor pre-insolvency; and
- when they had not expressly revoked such deemed consent to e-communication
Office-holders can now give notice that all future notices will be placed on a specified website and retained on the website for at least two months after the end of the insolvency process (r.1.49-1.51). This excludes documents requiring personal delivery, notices of intention to declare a dividend, or documents not 'delivered' generally and you no longer require the court's permission to do so.
This should make the office-holder's task more efficient and in line with modern working practices.
The officeholders' obligation to circulate progress reports every 6 to 12 months (depending upon the procedure – rr.18.6-18.8) is fixed by reference to the date of first appointment and is unaffected by the appointment of another insolvency practitioner. This provision will have immediate effect in all cases from 6 April 2017, but the obligations under the previous rules will continue to apply to any obligation to file a report which arose, but has not been fulfilled before that date. Note: the reintroduction of requirement of the administrator's progress report upon conversion of administration to CVL, rather than simply the notice to the Registrar of Companies (r.3.60).
Statement of affairs
A statement of affairs in an administration will protect the privacy of the company's employees, ex-employees and consumer customers by displaying their details in a separate schedule and only summarising their claims within the body of the statement (r.3.30(6)).
If the Official Receiver is concerned that publication of some or all of a bankrupt's statement of affairs would either prejudice the conduct of the bankruptcy or might reasonably be expected to lead to violence against the bankrupt, an application can be made to the court that the statement is either not filed or its disclosure restricted (r.10.57).
The old rules on statements of affairs continue to apply if the relevant order was made before 6 April 2017 (Sch 2 para 4).
5. Automatic appointment of OR as first rustee in bankruptcy
From 6 April 2017 s.287 IA 1986 ('Receivership pending appointment of trustee') will be amended: a new s.291A will provide that, instead of becoming Receiver and Manager of the bankrupt's estate pending appointment of a trustee in bankruptcy, the Official Receiver will immediately be appointed as trustee upon the making of a bankruptcy order, unless the court appoints the IVA supervisor as trustee.
There is now no delay between the making of the bankruptcy order and the automatic vesting of property in a trusttee. This new provision applies where bankruptcy order made on or after 6 April 2017 and where an order was made before 6 April 2017 but no TiB has been appointed by 6 April 2017.
There will be no need to call creditors' meeting under ss.293-295 IA 1986 to appoint a first trustee in bankruptcy, as those provisions are omitted from the updated version of IA 1986. Furthermore, the OR can still be removed as trustee under amended s.298 IA 1986, using a modified procedure which is consistent with the new rules on creditors' decision-making.
6. IPs as interim receivers
Previously an IP could only be appointed as an interim receiver ahead of a bankruptcy petition hearing in quite limited circumstances (on debtors' petitions). The amendments to s.286 IA 1986 now permit the court to appoint an IP as interim receiver in all circumstances (the OR may also be appointed as interim receiver, as previously): rr.10.49-10.54.
7. Creditors' meetings replaced with "deemed consent" and "decision procedures"
There have been creditors' meetings similar to today's since the late nineteenth century. One of the ambitious aims of the new rules is to replace creditors' meetings in almost all circumstances with more modern decision-making processes.
The ways that decisions are made under the new rules may be divided into two categories:
(a) the deemed consent procedure, and
(b) decision procedures.
The "deemed consent procedure" is a way of making decisions but, confusingly, not a "decision procedure" under the rules (see s.246ZE and 379ZA of the Act).
Under the deemed consent procedure, the person seeking a decision from creditors, normally the insolvency practitioner (IP), sends a proposal to creditors. If she does not receive objections from a minimum number of creditors, the creditors are deemed to have approved the proposal.
The deemed consent procedure can be used for most decisions under the Act. Most importantly, it cannot be used for decisions about the IP's remuneration, conduct or release, nor for approving IVAs and CVAs.
There are detailed regulations about what the IP's notice must contain. Unfortunately, these are not contained in one place. There are regulations for corporate insolvency (s.246ZF) and personal insolvency (s.379ZB) in the Act, regulations for both cases in the rules (r.15.7), standard regulations for all notices (r.1.4-1.5 and r.1.29-1.31) and additional regulations in particular cases. Most importantly, the notice must identify the proceedings in question, the IP's proposed decision and the consequences of objecting or not doing so.
The rules about service are no easier. The IP sending out the notice must calculate when the notice will be deemed to be served. There are nine rules about that (r.1.42-50), including r.1.43 under which the date of service may depend on whether the sender and recipient belong to the same document exchange. The IP must then calculate the minimum notice required – this depends on which of the 17 categories (see r.15.11) the matter falls into.
Unless the IP receives objections from 10% of the creditors by value, 10% of the creditors by number or 10 creditors, then creditors are deemed to have approved the proposal. If the IP does, the creditors are deemed not to have made a decision about the matter. If the IP wants to pursue the matter, he must do so by a "decision procedure".
The rules identify four specific decision procedures:
(b) electronic voting
(c) virtual meetings, and
(d) physical meetings.
There is a residual category - "any other decision making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally".
The legislator appears to frown on physical meetings. They are only permitted in limited circumstances, normally only where there has been a request for a meeting by 10% of the creditors by value, 10% of the creditors by number or 10 creditors.
Again, the decision-making process begins with the IP sending out a notice. Again, there are a detailed regulations about what the notice must contain: regulations for all decision procedures (r.15.8), regulations for specific procedures (r.15.4-15.6), regulations for all notices (r.1.4-1.5 and r.1.29-1.31), and specific regulations for specific cases. The same rules about deemed service and minimum notice apply.
For the most part, decisions are made by majority according to value.
There are rules dealing with the inevitable cases where a creditor claims to be unable to take part in a decision process (because, for instance, they cannot access a website or connect to a conference call). These rules contain short time limits.