After three years in the making the new insolvency rules[1] will come into force on 6 April 2017. The new rules create a consolidated, restructured and modernised take on the 1986 rules to take account of various legislative changes[2]

One of the most notable changes is the abolition of section 98 meetings[3], as the default method for initial decision making in CVLs.  How will this affect the concept of creditor engagement?

What’s changing?

Section 98 of the Insolvency Act 1986, and the requirement for a section 98 meeting, are to be abolished.  Once the new rules take effect, in a CVL, the creditors’ nomination of a liquidator(s) takes place via either:

  • A process of deemed creditor consent[4]; where the directors deliver written proposals for the nomination of a liquidator to creditors and, unless 10% or more in value object, they are deemed to approve; or
  • A virtual meeting[5].

The date for the decision of creditors on the nomination must be within 14 days of the date of which shareholders resolved to wind the company up.

Where the directors have asked creditors to make a decision on the nomination of a liquidator(s) via the deemed consent procedure, and more than the specified number object (so that the creditor decision to approve the nomination cannot be treated as having been made) the directors must then seek a decision from the creditors on the nomination of a liquidator by holding a physical meeting[6].

The likely impact.

Practical considerations:

If intending to advise directors to use the deemed consent procedure, proposed liquidators will have to plan their timing carefully, or risk finding themselves in the twilight zone of section 166 Insolvency Act 1986[7] between where they’ve been appointed by shareholders, but their nomination has not been approved (or deemed approved) by creditors. 

They must also bear in mind that, even if they do plan matters meticulously, if sufficient creditors object and a physical meeting is required, they could still find themselves in the limbo of sec. 166 for a short period at least. Use of a virtual meeting may be preferable to avoid that.

Directors thinking they can use the deeming procedure to bypass creditors and tie up a deal with the liquidator in the interim should beware.

On the plus side:

The aim is to reduce costs and increase returns to creditors.  In practice creditor’s meetings are often not well attended (if at all), which arguably makes them unnecessary in the majority of cases.  The changes mean that creditors will only bear the cost of a physical meeting when it has actually been requested by them, albeit that the request is a minority request.

The use of virtual meetings is encouraged which could result in increased creditor participation.  Methods of communication have transformed since 1986 and the requirement of a physical meeting is often an outdated concept in the 21st century. Adopting digital forms of communication is likely to save costs, and benefit all involved.

However, the down side:

When physical creditor meetings are attended, they provide a good opportunity for discussion and explanation; and the chance for creditors to put the directors through their paces.  A minority creditor with intimate knowledge of the position can often draw out information a majority creditor / the Liquidator may miss. The meeting can often result in the Liquidator obtaining useful information that would otherwise be missed. 

This may be more difficult to achieve via the new rules, which may result in decreased creditor engagement (i.e. another form to fill in); or worse the perception that the process is a closed book that leaves minority creditors feeling hard done by and out in the cold without a platform to make their case.

Virtual meetings often aren’t the same, and IT glitches often make it difficult to engage. Is Britain’s broadband network ready for this?

The absence of a physical meeting may result in creditors feeling disengaged from the process, or that there is less accountability on the part of the directors.  There will inevitably be situations when some creditors request a physical meeting but the threshold for calling one is not met, resulting in disgruntled creditors that may feel as if they have not been given an effective opportunity to have their say.

Time will tell how this will play out, but in reality I suspect little fuss will be made about the changes by creditors overall.  Ultimately, who is going to complain about reduced costs / hassle, and more convenient means of communication. Although personally I suspect the long term effects will (albeit inadvertently) result in reduced creditor engagement.