Overhauling complex insolvency rules to modernise the system is going to be tricky, warns Mike Jervis
The Insolvency Service has taken on the massive challenge of overhauling the rulebook for how company collapses and personal insolvencies are handled in England and Wales.
Overhauling complex insolvency rules to modernise the system is going to be tricky, warns Mike Jervis
Article starts here] The Insolvency Service has taken on the massive challenge of overhauling the rulebook for how company collapses and personal insolvencies are handled in England and Wales.
Let's put this challenge into context: when the Insolvency Act originally came into force in 1986, Top Gun and Alien were riding high at the box office; the phrase 'credit crunch' didn't exist and the general public hadn't heard of the internet, Facebook or Twitter.
Rules which were first introduced when the British High street was the unchallenged destination of choice for the average consumer are being modernised again after the big changes in 2010 and all previous amendments are being streamlined as well for good measure. Be under no illusion: this is a big challenge despite the changes made in 2010. The level of engagement and sophistication of stakeholders, and the technology available for communication, has changed beyond recognition in the 27 years since the rules were first adopted.
The Enterprise Act abolished administrative receiverships in most circumstances and the profession has evolved to cope with that. That was a massive change – insolvency practitioners have to be flexible and adaptable – these rule changes are less revolutionary but will still require a colossal effort to achieve the right result.
So where do you start when it comes to streamlining a rule book so densely packed and so subject to regular additions and deletions of text at different times that it has been pilloried in the House of Lords as an 'impenetrable thicket'?
In an age where bad news travels even faster than before – a social media post or online article can have a major impact on a company's fortunes as creditors, suppliers, trade credit insurers and the public become aware of it – the framework which governs it must be fit for purpose.
The main objective
The most important goal is to adopt a new structure including common parts for matters such as meetings, claims and distributions, and reporting and remuneration, which will apply across a number of procedures.
However, this wholesale review follows on from a plethora of other consultations having an impact on the sector. All these various moving parts need to be addressed and that's before you factor in the differing laws in other parts of the UK. Will the revamp follow through to changes to the Scottish insolvency rules? This is just one of the questions that must be considered, but for now let's look at the current landscape and what is being proposed.
The new rules bring together the original rules and 23 amending statutory instruments (SI). They also make common provision for processes, such as meetings of creditors, which apply across different insolvency procedures, to make it easier for users. This will result in a more logical structure to improve clarity and consistency, the Insolvency Service hopes.
The re-write also aims to future-proof the rules, for example, by making it easier to submit information electronically and instead of prescribing forms for delivering required information or notices, the rules set out the required content but not the format. But the Insolvency Service has listened to feedback from stakeholders that the time is not yet right to do away with prescribed forms. So they will provide for necessary ones in a separate SI.
Downsides
Although there is much to be welcomed in the new rules, there are also some shortcomings. The new structure means that all the rule numbers will be different following the revamp. The drive to use plain English will require small changes of wording which will have to be isolated, interpreted and perhaps disputed by various stakeholders. This will take some getting used to for a profession that uses highly technical terms and deals in highly technical situations. But if the new structure, including common parts, is more sensible and logical, and if small differences between procedures have been removed, that will be helpful. There will also be more changes of substance than were originally proposed.
Specifically, what is to be welcomed is that the proposals included in the Red Tape Challenge consultation as well as a number of technical changes suggested by stakeholders, have found their way into the Insolvency Service's plans. This project is looking to save significant sums for the benefit of creditors by cutting the administrative burden.
When the rules go live
The new rules will come in for insolvency procedures filing after a particular date - but historical cases will continue to be governed by the original rules and 23 amending instruments, so the full benefit of the new rules will not be felt for some time.The good news is that when the rules go live, a case which comes under the new regime will adhere to one set of standards as opposed to the old rules with whichever of the 23 sets of amendments apply. Of course, this will only be the case until the next set of amendments.
The rules which have been published for consultation are still very much a working draft. The Insolvency Service is looking for comments on the language, style and structure, as well as content. The deadline for responses is 24 January 2014 so the clock is ticking on this.
The updated legislation must address the sometimes conflicting issues faced by the insolvency community. Some of the proposals to achieve efficiency and cost reduction may be at the expense of creditor engagement in insolvency processes. This means every effort must be made by interested parties to engage with the Insolvency Service to help achieve its aim of building a framework which works for all stakeholders and improves consistency and transparency.
What you need to know: Red Tape Challenge
The majority of the Red Tape Challenge measures are set to impact on the revised rules. The following measures have been included in the consultation to modernise insolvency rules.
Removing creditors' meeting as the default for decision making – new rules have been drafted covering company voluntary arrangements, individual voluntary arrangements, administration and administrative receivership, etc (where the new rules have not yet been drafted, there is a note of the intended procedure, rather than draft rules).
Abolition of final meetings of creditors in bankruptcy and liquidation where an insolvency practitioner is the office holder.
Removing the requirement for the liquidator to chair voluntary liquidation meetings of creditors and allow a suitably experienced person within their firm to be chair in their place.
Allowing creditors to opt out of receiving further communications from the office holder (other than those relating to the payment of a dividend).
The additional measures below will also have a significant impact on the new rules.
Allowing office holders to put all case information on a website without an order of court, while only informing creditors of this at the outset.
Enabling creditors to extend administrations for either six or 12 months, rather than the current six months.
Simplifying proxies and broadening their use for 'repeat' creditors.
Allowing office holders to distribute in respect of low value claims without a proof of debt.
Removing the need for office holders to distribute very small dividends to creditors.
Technical changes
Clarifying notice provisions where the appointment of an administrator is made by the directors, to address issues arising from Minmar (929) Ltd v Khalatschi [2011] EWHC 1159 to support planned changes in the Deregulation Bill, currently under scrutiny in parliament.
Revising rules relating to the conversion of debts in a foreign currency into sterling as the current rules refer to the 'middle exchange rate' which is no longer available. The new rules provide for the office-holder to fix a single rate for a currency with recourse to the court where there is objection.
Amending the effective date of removal of a liquidator or trustee where they have been removed from office and a replacement appointed, in order to avoid a period of overlap in appointments which is undesirable.
Limiting the time creditors in a non-interim order individual voluntary arrangement can challenge the decision on a proposal to achieve consistency with interim order cases where the Insolvency Act sets a time limit (s. 262(3)).
Aligning administration with other procedures so that notice of an intended distribution need only be given to creditors who have not proved.
Remove references in rules to bills of exchange and promissory notes as these are outdated and not required.
Correction of errors in current rules, such as rule 5.24(4), which requires notice of an adjourned meeting in an IVA to be filed in court, even in non-interim order cases where there is no court involvement.
Simplifying resignation procedures for liquidators and trustees by aligning rules with the Act which provides that resignation is effected by giving notice to the registrar of companies/court. The requirement for the members/creditors to 'receive' and 'accept' the resignation has been removed as being inconsistent with the Act, as the role of the members/creditors is to consider the appointment of a replacement.
Simplifying the release of the resigning liquidator/trustee so it is effective when notice of the resignation is given and making it consistent with the Act – which does not provide for creditors to obstruct release. Resignation (in limited circumstances, eg, ill health or a conflict of interest of the office holder) is considered by the Department for Business, Innovation and Services (BIS) to be a release from their acts and omissions, but does not prevent court applications to challenge the former liquidator/trustee's remuneration or expenses.
Recasting the provisions about set-off in administration and winding up following the decision by the Court of Appeal in Kaupthing, Singer and Friedlander Ltd (in administration) [2010] EWCA 518.
Mike Jervis ACA is a partner and head of the insolvency team at PwC
