New insolvency rules: What are the changes and how will you be affected?

New insolvency rules enter into effect on 6 April 2017. Caroline Sumner of R3 discusses what the changes mean for the insolvency profession

The Insolvency (England and Wales) Rules 2016 should be cautiously welcomed by the insolvency profession. Having been talked about for a number of years, they will finally come into force with effect from 6 April 2017. They represent the most significant legislative change to affect the insolvency profession in the three decades since the Insolvency Act was introduced in 1986, and consolidate the existing rules and their amendments into a single piece of legislation. At the same time, the language has been modernised and simplified, making them easier to read and follow. Separate insolvency rules for Scotland will be introduced later this year.

The key aims of the legislators in introducing these changes were to increase creditor engagement in the insolvency process and to reduce unnecessary administrative burdens, which reduced returns to creditors. So, what are the main differences that creditors will notice following their implementation on 6 April 2017?

Abolition of physical creditor meetings

Firstly, physical creditor meetings have been abolished as the means by which insolvency practitioners seek appointments in insolvency cases and, once appointed, obtain decisions from creditors on matters such as their remuneration, taking legal action, and extending administration periods.

Instead creditors will be asked to make decisions by a variety of means including by correspondence, electronic voting and virtual meetings. Physical meetings will only take place if creditors have actually requested them. Insolvency practitioners will also be able to seek confirmation of decisions made using the deemed consent procedure, whereby if no creditors object within a specified period, the decision is deemed to have been approved. All of these measures are designed to assist the insolvency practitioner in choosing the method which will suit the creditors best, making it easier for creditors to get involved and take part in the decision-making process. It is hoped that new technologies will be developed to assist insolvency practitioners in making these new decision procedures work in practice.

Electronic communication

To reflect the modern working practices that already exist, the new insolvency rules encourage the use of electronic communication between insolvency practitioners and creditors rather than traditional post, recognising that email is a fast and efficient means of communication. They also permit a much wider use of an insolvency practitioner’s website as a means of making information more widely available to creditors. Creditors will be able to log on and see all of the reports and decisions sought on a case at a touch of a button.

Creditors who see no benefit of being actively involved in an insolvency process, for example, where there will be no dividend payment anticipated due to a lack of available assets, will be able to “opt out” of all correspondence and avoid having to read through unwanted progress reports or requests for decisions. Opting out will not, however, mean that they do not receive dividends if they become available. This should be welcomed by many creditors who often express frustration at receiving endless unwanted reports.

No fundamental change to individual insolvency processes

Overall the rules do not make fundamental changes to the individual insolvency processes such as liquidations, administrations, bankruptcies and individual voluntary arrangements. These processes will continue for creditors and directors pretty much as they do now. The rules do simplify some matters however. Insolvency practitioners and creditors should welcome the removal of final meetings in bankruptcy and all types of liquidation. These served no real practical purpose and it is a sensible move to be able to deal with the release of the IP by correspondence. The ability of an insolvency practitioner to accept small debts (those below £1,000) for distribution purposes without the creditor having to formally prove will be welcomed, but will be most beneficial in IVAs where consumer debts of low values are common. This should reduce the administrative burden for insolvency practitioners and creditors alike.

Decision-making procedures

There will be teething problems ahead as creditors, directors and insolvency practitioners get used to the new decision-making procedures. Creditors will need to be provided with additional information explaining what the new processes are and how they work. There are substantial additional requirements under the new rules for insolvency practitioners to provide creditors with information on their new rights and obligations and this will increase the size of the initial letters received by creditors. How this is managed by individual insolvency practitioners will be key to the success in implementing the changes.

Insolvency professionals will be used to explaining the current s98 meeting process to directors considering placing their companies into liquidation. The s98 meeting will be no more following the implementation of the rules and those in the profession will need to be aware of the new processes to be followed for the appointment of an insolvency practitioner as liquidator. The most common process envisaged to be used will be the deemed consent procedure but virtual meetings could also be called.

What does the future hold?

Whether these changes will lead to greater creditor engagement and produce the increased returns anticipated by the legislators remains to be seen. What is certain is that these changes are coming, and coming in very soon.

Caroline Sumner is technical director of R3, the insolvency and restructuring trade body.

Related reading