The 2017 Insolvency Rule Changes
The Insolvency (England and Wales) Rules 2016 come into effect on 6th April 2017. They represent the single biggest change to the profession of Insolvency Practitioners since the Insolvency Act of 1986. The new rules cover 448 pages (and the explanatory memorandum covers seven pages!). It might, therefore, be a while before all parties get used to all the changes. However, the main aim of the changes is to increase creditor engagement in the insolvency process – especially through the use of modern communication systems to streamline processes – and to reduce the unnecessary administrative burdens that were seen to often reduce returns to creditors. This article looks at just some of the main changes.
The End of Physical Creditors’ Meetings
A key change is the end of automatic physical creditors’ meetings. These meetings are called at various points of the insolvency process for a variety of reasons, including: getting decisions from creditors on the Insolvency Practitioner’s remuneration, whether legal action needs to be taken and if an administration period needs to be extended.
Under section 98 of the Insolvency Act 1986, shareholders can call a meeting of creditors to put a company into a formal liquidation process. At this meeting the “Statement of Affairs” is presented to any creditors that attend. However, in recent times, most section 98 meetings are only attended by the insolvency practitioner and the director(s). It was felt such meetings were involving costs and expenses that were being charged to the insolvency estate.
Under the new rules the ‘Statement of Affairs’ will now be forwarded in advance of any meeting. In addition, Insolvency Practitioners will now be directed to write to the creditors with a proposal which will be deemed to be accepted and approved. This will remove the need for a physical creditors’ meeting unless more than 10% (by value) object. If such an objection is received an alternative decision making process will be employed at the discretion of the Insolvency Practitioner. Options for an alternative include: electronic voting, correspondence or a virtual meeting.
Importantly, the Insolvency Practitioner may only call a physical meeting if specifically requested to by at least:
- 10% by value of creditors, or
- 10% in total number of creditors, or
- 10 individual creditors
The Role of Digital Communications
Typically, traditional post has been used as a significant communication vehicle between Insolvency Practitioners and Creditors. Underpinning the abolition of the need for physical meetings is the recognition and encouragement of the use of digital communications. These include emails, Skype and Creditors’ areas on websites, to make the insolvency process more efficient.
In addition, those Creditors who do not see any benefit in being actively involved in an insolvency process can now opt out of receiving correspondence and the need for them to read all progress reports and respond to requests for decisions. Once again, the intention of the new legislation is to streamline and speed up. It should be noted that those creditors who do opt out of receiving correspondence will still receive dividend payments if they become available.
The final meeting, currently used to formally conclude the insolvency process, will in the future be performed by email. Once again it can be seen that a main thrust of the legislation is to speed the process up and reduce costs.
In addition to the rule changes the wording used in the legislation is more modern in style.
What do the Changes Really Mean?
The changes are more to do with speeding up the insolvency process, making it more efficient and reducing unnecessary costs, than any fundamental change to the main insolvency areas of liquidations, administrations, bankruptcies and individual voluntary arrangements.
Our view is that the new rules will require some getting used to by Insolvency Practitioners and creditors alike. In particular the requirement for IPs to provide creditors with all the information they need on their new rights and obligations. We anticipate that this could lead to larger and more detailed initial letters being sent by IPs to creditors. In theory we welcome the new rules and the improved efficiencies they aim to achieve. Ultimately it is how the industry responds to the new Rules that will determine how well they work.
In the meantime it is certain that businesses that are in risk of insolvency will continue to face changes. Some of these changes will affect them adversely. At this point it is vital for directors facing financial difficulties, or even insolvency, to take advice on what course of action they need to take. Indeed, the sooner advice is sought and taken, from a licensed insolvency practitioner, the more that can be done to help.