The challenges of consolidating the Insolvency Rules

Original news

The Insolvency Rules 1986 (SI 1986/1925) (the Rules) have been described by the House of Lords as an ‘impenetrable thicket’ owing to extensive amendments, additions and deletions of text. The government is therefore proposing to consolidate and replace the Rules, modernising them and reordering their structure on clearer and more logical lines. A consultation on the proposals has been launched by the Insolvency Service (IS), and closes on 24 January 2014.

What is the background to this consultation?

Since 1986, the Rules have been heavily amended by numerous amending statutory instruments to reflect changes in primary legislation, case law and policy. Rather than simply consolidating the existing Rules and their many amendments, the IS intends ‘to modernise and recast the Rules; taking the opportunity to reorder the whole structure on more logical and clear lines’.

The draft Rules also contain some proposed technical changes on which comments are invited. Some of these arise directly from the government’s Red Tape Challenge initiative (the insolvency proposals in relation to which were announced in July 2013). The document specifically states that not all of the proposed Red Tape Challenge measures have been fully worked through in the draft rules, and that therefore that draft should be regarded as work in progress. The IS acknowledges the draft contains some inconsistencies across the different insolvency procedures and it is continuing to address them.

The draft Rules also contain some other proposed technical changes, many of which were suggested by stakeholders before the launch of the Red Tape Challenge.

What is the structure of the new Rules?

The consultation document points out that in the existing Rules, those rules applicable to the different types of liquidation (ie members’ voluntary, creditors’ voluntary and winding up by the court) are amalgamated and, in the main, those which apply in the particular type of liquidation are designated in the heading to the rule. The IS states that feedback from stakeholders has been that this arrangement is confusing.

The IS anticipates that, by contrast, the new Rules will be easier to use because:

1. the new Rules include an extensive list of definitions and clear guidance for interpretation at the beginning
2. where procedures are common to different types of insolvency, they are set out together for ease of reference—eg a common part for claims by and distributions to creditors, and
3. the liquidation parts are written out in full for both voluntary winding up and winding up by the court

What are the key changes to use of language, and to communications provisions?

Language

The consultation document states the IS has aimed to make the Rules easier to understand with plainer language, more modern terms, improved consistency in terms of language and order of provisions across insolvency procedures and clear delivery provisions.

Communications provisions

The consultation document states the new rules have been drafted on the presumption that processes will in due course be carried out electronically wherever possible. Thus the required contents of particular documents are clearly set out in the body of the rules rather than being prescribed by a statutory form, to make it easier to enable documents to be delivered by electronic means—ie ‘preparing the system for moving to electronic delivery of information when the forms would become redundant’.

How are Red Tape Challenge measures addressed?

Measures included in the draft Rules

The following Red Tape Challenge measures are included in the draft Rules:

• the removal of the creditors’ meeting as the default for decision making—new rules have been drafted covering: company voluntary arrangements (CVAs);  individual voluntary arrangements (IVAs) and 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)
• the abolition of final meetings of creditors in bankruptcy and liquidation where an insolvency practitioner is the office-holder
• the removal of the requirement for the liquidator to chair voluntary liquidation meetings of creditors, and allowing a suitably experienced person within his or her firm to chair the meeting in his or her place
• allowing creditors to opt out of receiving further communications from the office-holder (other than those relating to the payment of a dividend)

Other significant measures

The other Red Tape Challenge measures that the IS considers will have a significant impact on the new Rules are as follows:

• allowing office-holders to put all case information on a website without an order of the court, while only informing creditors at the outset
• to enable creditors to extend administrations for either six or 12 months, rather than the current six months.
• allowing office-holders to distribute in respect of low value claims without a proof of debt
• simplifying proxies and broadening their use for ‘repeat’ creditors
• removing the need for office-holders to distribute very small dividends to creditors

Other technical changes

The other technical changes that are included in the draft Rules are as follows:

• Clarifying the notice provisions where the appointment of an administrator is made by the directors, in order to address issues arising from the decision in Minmar (929) Ltd v Khalatschi [2011] EWHC 1159 (Ch), [2012] 1 BCLC 798 to support planned changes in the Deregulation Bill that are currently the subject of pre-legislative scrutiny in Parliament.
• Revising the 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 an undesirable period of overlap in appointments.
• Limiting the time within which creditors in a non-interim order IVA can challenge the decision on a proposal, in order to achieve consistency with interim order cases where the Insolvency Act 1986 (IA 1986) sets a time limit (IA 1986, 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.
• Removing references in the rules to bills of exchange and promissory notes as these appear to be outdated and not required.
• Correction of errors in the current rules: the consultation document cites, as an example, current r 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 the resignation procedures for liquidators and trustees by making the rules more consistent with the IA 1986, 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 IA 1986, 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 IA 1986—which does not provide for creditors to obstruct release. Resignation can only take place in limited circumstances (eg ill-health or a conflict of interest of the office holder), and the IS considers that release from their acts and omissions does not prevent an application being made to court to challenge the former liquidator’s/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 Re Kaupthing, Singer and Friedlander Ltd (in administration) [2010] EWCA Civ 518, [2011] 1 BCLC 12.