Summary: The Insolvency Rules 2016 will come into force on 6 April 2017. This article highlights some of the main areas of change.

The long awaited Insolvency Rules 2016 (the “2016 Rules”) were laid before Parliament on 25 October 2016, and will come into force on 6 April 2017. The Insolvency Rules 1986 (the “1986 Rules”) and all amending legislation will be repealed. The 2016 Rules aim to:

  • consolidate the 1986 Rules and subsequent amendments;
  • restructure and modernise the 1986 Rules;
  • reflect modern business practice and increase efficiency; and
  • implement policy changes introduced by primary legislation.

The 2016 Rules are 448 pages long, and the explanatory memorandum runs to seven pages. Insolvency professionals now have five months in which to familiarise themselves with the new procedures and rules before 6 April 2017. There will be significant changes required to the way in which insolvency practitioners (IPs) conduct insolvency procedures. Comparing the 1986 Rules to the 2016 Rules is not an easy task, as the structure and lay out is entirely different.

Consolidation

Since the 1986 Rules were introduced, they have been amended by 28 different statutory instruments. The 2016 Rules consolidate all of these amendments.

Restructuring

The language used in the 2016 Rules has been modernised, and the structure updated to make navigation simpler. To avoid repetition, there is greater use of common parts applicable to multiple insolvency procedures. For example:

Part 14

Claims by and distributions to creditors in administration, winding up and bankruptcy

Part 15

Decision making

Part 17

Creditors’ and liquidation committees

Part 18

Reporting and remuneration of office holders (administrators, liquidator and trustees in bankruptcy)

Part 19

Disclaimer in winding up and bankruptcy

To avoid confusion, Parts 5, 6 and 7 set out separate provisions dealing with creditors’ voluntary liquidation, members’ voluntary liquidation and winding up by the court.

Abolition of statutory forms

The 2016 Rules no longer prescribe any statutory forms. Instead, the required titles and contents of notices and documents are now detailed in the rules themselves. Part 1 sets out general rules about documents, and specific rules set out the exact requirements for particular notices. Rule 3.23, for example, sets out the required heading and contents of a notice of intention to appoint an administrator by a company or its directors. The required information must be provided in the order listed in the relevant rule or in another order which the maker of the document considers would be convenient for the intended recipient.

The explanatory memorandum to the 2016 Rules states that this should build in “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-technology”. In practice, firms will need to develop and regularly check and update their own templates and checklists for each procedure, document or notice. It is possible that certain creditor bodies, such as HMRC, will introduce their own template forms and insist on their use, or insist on delivery in a particular format.

The old statutory forms will only continue to be used where the transitional provisions confirm that the 1986 Rules will continue to apply.

It is expected that Companies House will continue to use prescribed forms for documents that are required to be submitted to the Registrar of Companies.

Policy changes

The Small Business, Enterprise and Employment Act 2015 and the Deregulation Act 2015 introduce various amendments to the Insolvency Act 1986, which will also come into force on 6 April 2017. These amendments require corresponding provisions in the 2016 Rules. These changes aim to remove unnecessary regulatory burdens, and reduce the cost of administering insolvency proceedings, in order to improve dividend outcomes for creditors. They also reflect changing use of technology so that office holders and creditors can take advantage of the quickest, most cost effective methods of communication.

The main changes are summarised below:

Restrictions on calling creditors’ meetings

An office holder can no longer call a physical meeting of creditors unless requested to do so by a minimum number of creditors – either 10% of creditors by value, or 10% of creditors by number, or 10 individual creditors.

Removal of requirement for creditors’ meetings

The requirement to hold certain meetings has been abolished.

Section 98 meetings are no longer required, and creditor approval of a liquidator in CVL must be obtained using either the deemed consent procedure, or a virtual meeting.

Final meetings of creditors in liquidation and bankruptcy are no longer required. Instead the liquidator or trustee must file a final report. The liquidator or trustee’s release from liability is subject to creditors’ rights to raise an objection within a prescribed period.

These provisions will apply to meetings in all insolvency proceedings, including those commencing before 6 April 2017, except certain meetings where notices or reports were issued before that date.

Progress reports

The office holder’s obligation to produce progress reports every 6 – 12 months (depending on the insolvency process) is fixed in relation to the day of appointment, and will not be affected by any change of office holder.

New deemed consent procedure

Where an officeholder writes to creditors with a proposal, and fewer than 10% by value of creditors object, the proposal is deemed to be approved.

New decision making procedures

Other procedures may be used as an alternative to deemed consent. These are correspondence, electronic voting, virtual meetings, physical meetings (subject to the restrictions above), or any other procedure which enables all creditors entitled to participate in the making of the decision to participate equally.

Ability to opt out of correspondence

Creditors can opt out of receiving certain communications from office holders. They can also opt back in at any time. This will necessitate office holders ensuring that their records of ‘opted in’ and ‘opted out’ creditors are correct whenever communications are being sent.

Electronic communication

Communication by email is to be encouraged. A creditor who communicated with the debtor by email before the insolvency proceedings commenced will be deemed to have consented to electronic communication by the office holder, unless that consent is revoked. The deemed consent provision will not apply to insolvency proceedings commenced before 6 April 2017.

Use of websites

An office holder can give notice to creditors that future notices will be published on a website without further notification to creditors. This is subject to certain exceptions; documents for which personal delivery is required, notices of intention to declare a dividend, and documents which are not delivered generally.

Payment of small dividends without formal claim

An office holder may now treat debts of less than £1000 as proved without the requirement for the creditor to submit a formal claim, providing that the debtor’s accounting records or statement affairs records the debt.

Transitional provisions

The transitional provisions in the 2016 Rules mean that they will apply to all cases, not just cases commencing after 6 April 2017. There are some saving provisions, for example those relating to meetings called before 6 April 2017. The deemed consent provisions relating to electronic communication will only apply to proceedings commenced on or after 6 April 2017.

But what about administration expenses?

Early drafts of the 2016 Rules attempted to codify case law surrounding the thorny issue of administration expenses. In particular they tried to codify the Lundy Granite principle, as approved by the Court of Appeal in Re Game Group [2014] EWCA Civ 180, and the guidelines on provable debts and the meaning of “necessary disbursement” set out in Lord Neuberger’s judgment in Re Nortel Companies [2013] UKSC 52.

However, the proposed amendments are not included in the final version of the 2016 Rules. Perhaps the Insolvency Service took a decision that the position as set out in Game and Nortel is sufficiently clear. Or perhaps attempts to agree drafting to codify the principles raised more questions than they answered. As Lord Neuberger commented in Nortel, “it would be dangerous to try and suggest a universally applicable formula” to deal with these questions.

Conclusion

There is a lot to assimilate in the next five months. Once the initial hard work of preparing for the 2016 Rules is done, we will be able to start to assess whether the 2016 Rules will achieve their aim of promoting efficiency and increasing returns to creditors.

This article first appeared in Corporate Rescue & Insolvency journal, December 2016.