The New Insolvency Rules

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New Insolvency Rules are due to come into force on 6 April 2017. This is the first time since 1986 that all of the UK’s legislation relating to insolvency procedure is being placed in one document.

The new rules do three things:

  1. consolidate the existing rules and their amendments into a single set of rules
  2. modernise and simplify the language; and
  3. incorporate various changes in the law which are intended to reduce the burden of red tape.

While these seem fairly significant, the Government, through the Insolvency Service, has stated that it is not trying to change the fundament procedures in insolvency regimes, but is instead making it easier to follow all the rules, whilst taking the opportunity of modernising the language and updating how stakeholders are notified and kept informed.

The new rules:

Creditors will not have to be sent progress reports individually

The Insolvency Practitioner (IP) can write to creditors at the outset giving details of a secure portal on their website where all the information can be retrieved.

Creditors can even opt out of receiving that information and then the IP must not send information, the only exception being notices to claim a dividend.  These changes are in a bid to reduce costs of the IP such as postage.

No physical meetings need to be held in Administration and Liquidation.

The removal of physical meetings is the default position in all insolvencies under these new measures.

In most cases the office holder can use deemed consent.  The office holder will write to creditors with a proposal. The proposal is deemed approved unless 10 per cent or more of the creditors object.

Then the office holder will need to use an alternative decision making process but the holding of a physical meeting can only go ahead if requested by 10 per cent of creditors. So this is:

  • 10 per cent or more by value of the creditors
  • 10 per cent of the total number of creditors. Or
  • 10 individual creditors.

This means the cost of holding a meeting can only be charged to an insolvency case where creditors have requested it.

Final meeting are barely, if ever, attended, but earlier Section 98 meetings where a company is placed into insolvent liquidation are still often attended by SME directors and sole traders and play an important role. These parties tend to be creditors who will personally suffer a loss as the liquidation will have a material impact on their cash flow and profitability.

Section 98 meetings are regularly used to ask the director questions face-to-face and to let the director know their feeling and the hardship caused by their company’s failure.  These can be useful to Insolvency Practitioners as they give a greater understanding of the working practices of the failed business, which helps in the subsequent investigation.

An exception to the no physical meetings are the initial meetings for Company Voluntary  Arrangements (CVAs) and Individual Voluntary  Arrangement (IVAs), but as these tend to be more negotiations rather than just after the event information gathering it is vital to maintain these meetings.

Debtor privacy protection against threats and violence.

A debtor can ask for a Court Order to protect their safety by keeping their address private before starting a formal insolvency procedure. Under these rules a person considering applying for a DRO, bankruptcy or an IVA can apply to court for an order that their address be withheld ahead of applying for an insolvency solution. Although violence is unusual, some debtors can feel very vulnerable especially for their families.

The rules relating to employees changes as their home addresses will not be included as creditors in the statement of affairs of their employer.

To prevent abusive behaviour by other creditors and the publication of private data. Employees will also not be taken into account when voting on resolutions as unpaid wages claims are deemed preferential and therefore must vote as preferential creditors to pass resolutions but, realistically, employees hardly ever, if ever, vote on these resolutions.

Clarity is introduced for the IP as all procedures such as agreeing creditors’ claims will be harmonised across all types of insolvency procedures.

The Rules have been designed to make the administrative procedures, such as the calling of meetings and agreement of creditors’ claims, the same for all types of insolvency e.g. Liquidation, Administration etc whilst reducing the administrative cost of insolvency.

The new Rules follow the principle that rules in one Part, which do the same things as rules about a different procedure, in another Part should, so far as possible, use the same wording. Also the order of the rules in relation to different procedures should be the same.

All creditors’ claims less than £1,000 will be deemed to be accepted for dividend purposes if they agree with the debtor’s records.

Where a creditor’s claim is less than £1,000 the office holder can rely upon the debtors records but the creditor needs to be informed of that.  Of course a creditor can still submit a proof of debt if they dispute the debtor’s records.

Administration

The remuneration of an Administrator can be approved by preferential and/or secured creditors. But preferential creditors are mostly employees of the company who do not engage in the Administration process, so the new rules allows the Administrator to exclude employees from the process to vary the remuneration terms if these same employees did not participate in the original vote.

Voluntary Arrangements (VA)

The nominee and supervisor do not need to maintain and retain time records unless that forms the basis of their remuneration.

But a warning – VA expenses will no longer carry priority over later bankruptcy or liquidation expenses if the VA fails.

In essence the new Insolvency Rules are designed to be cheaper and more streamlined in an attempt to stop correspondence using paper and holding meetings creditors have no interest.  Let us see how the new rules pan out as they seem to have sided with the apathetic creditor but maybe that is appropriate.

Communication with Creditors

Creditors can opt out of future correspondence so the office holder must stop sending any report accounts to a creditor who has opted out, BUT take care as they cannot opt out of Notice of Intended Dividends

Any creditor who has opted out can opt back in again at any point should they wish to.

Paperless communication

Creditors can request to be kept informed by email with no paper being sent to them.  You may also send creditors via the internet details of a secure portal where they can obtain information and updates.

These measures represent a fairly significant change to the insolvency process. Businesses unsure of their position in light of these changes should speak to our experience team of Insolvency Practitioners at Gibson Hewitt.

We can help guide your through insolvency so that you remain compliant throughout, whilst finding a suitable solution that meets the needs of you and your business.

To find out more about our range of award-winning services, please contact us.

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