A Summary of the Key Changes in the Insolvency Rules 2016

Contents

1. Introduction and materials

2. The Structure of the Rules and the Abolition of Statutory Forms

3. Changes to Jurisdictional Provisions

4. Changes to Creditors’ Meetings

5. Changes to Officeholder Reports and Communications

6. Distributions without formal claim for debts of less than £1000

7. Changes to the Appointment of Trustees

8. Insolvency Practitioners as Interim Receivers in Bankruptcy Proceedings

1. Introduction

The Insolvency Rules 2016 (“the 2016 Rules”) were published and laid before parliament on 25 October 2016. The rules will come in to force on 6 April 2017. The following note summarises the key features of the rules. For further detail the reader is referred to the following sources:

Full text of the Rules

Explanatory memorandum

Derivation table

2. The structure of the rules and abolition of statutory forms

• The new rules entirely do away with statutory forms for use in insolvency proceedings.  The explanatory notes explain that this is part of a process of “future proofing” the rules by reducing the need for amendment to forms. Instead of statutory forms, Part 1 of the 2016 Rules sets out what should be included in various documents and notices. So, for example, rule 1.35 sets out the contents of application notices, rule 7.5 sets out the prescribed contents of a creditors winding up petition, rule 7.26 sets out the prescribed contents of a contributory’s winding up petition etc. The order in which the prescribed information is to appear is defined in rule 1.8, and rule 1.9 allows variations from prescribed contents (except in statutory demands) if the circumstances require or the departure is immaterial.The transitional provisions acknowledge limited circumstances in which the statutory forms may still be used after commencement, in summary it appears that the old statutory forms should only be used in circumstances where the Insolvency Rules 1986 (“the 1986 Rules”) still apply under transitional provisions: 2016 Rules Sch 9 para 15
• Consolidation of provisions to reduce repetition. The rules relating to distributions, decision making, creditors’ committees, officeholder remuneration and disclaimer, which previously appeared in more than one place within the parts applicable to different insolvency procedures, have been grouped together under new Parts of the 2016 Rules. Where possible, this results in a single regime under the rules applicable to all types of procedures, but there are exceptions, for example, various rules dealing with creditors’ claims and distributions are stated to apply only to administration and winding up, because the corresponding provision in bankruptcy proceedings is contained within the Insolvency Act 1986 (“the 1986 Act”).

3. Changes to jurisdictional provisions

• Clarification of the county court’s jurisdiction in relation to corporate insolvency. The previous rules did not clearly state whether the county court’s jurisdiction to wind up companies with share capital of less than £120,000 also extended to other forms of corporate insolvency. Rule 12.3 makes clear that by reason of s.251 of the 1986 Act (which defines “the court”, for the purposes of all forms of corporate insolvency, as “the court with jurisdiction to wind up the company”), the county court does have jurisdiction in respect of other forms of corporate insolvency process. As the insolvency practice direction still requires that certain insolvency proceedings (in particular administration applications) be allocated to a judge, and circuit judges have not traditionally dealt with insolvency proceedings, it remains to see how this will be dealt with in practice.
• New(ish) provisions for the destination of appeals from decisions of district judges in corporate matters.  The appeal will either lie to a high court judge sitting in a district registry, or to a registrar in bankruptcy of the High court as specified in Schedule 10. Although this change was originally intended to be introduced in the 2016 Rules, as a result of the delays it was introduced by way of amendment to the 1986 Rules, and is already in effect (having commenced on 3 October 2016). Appeals from the county court in bankruptcy proceedings continue to be governed by s.375 of the 1986 Act.

4. Changes to creditors’ meetings

New rules specifying alternative forms of decision making

Sections 122 and 123 of the Small Business Enterprise and Employment Act 2015 (“SBEE”), which come into force on 6 April 2017, will amend the 1986 Act by inserting new sections 246ZE to 246ZG and 379ZA to 376ZC. These amendments mark a significant change in how decisions of creditors (or as the case may be contributories) will be taken in all types of insolvency proceedings.  These sections together with Part 15 of the 2016 Rules flesh out an entirely new decision making regime.

• New Procedure for Deemed Consent. Section 246ZF and 379ZB of the 1986 Act provide that where an officeholder writes to the creditors with a proposal, and does not receive objections from 10% of creditors in value, the proposal is deemed to be approved. This procedure is available unless the court or the insolvency legislation requires the use of a “creditors’ decision making procedure”.  Rule 15.7 sets out the details of this procedure.
• Restrictions on use of physical meetings.  Whereas the 1986 Act placed heavy reliance on physical meetings, under the new regime an Officeholder cannot summon physical meeting of creditors unless requested by to do so by either 10% of the creditors in value, 10% of the total number of creditors or 10 individual creditors: sections 246ZE and 379ZA of the 1986 Act.
• Alternative Creditors’ Decision Making Procedures.  Rule 15.3 of the 2016 Rules defines the following procedures that may be adopted as an alternative to deemed consent:
  – correspondence;
  – electronic voting (described in rules 15.2 and 15.4);
  – virtual meetings (as described in rules 15.2 and 15.5);
  – physical meetings (described in rules 15.2 and 15.6, and subject to the aforementioned restriction);
  – any other decision making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally.

Abolition of requirement for certain meetings

Section 22 and Schedule 9 of SBEE make various amendments to the 1986 Act abolishing the requirement for certain meetings altogether.  The 2016 Rules contain provisions to replace those meetings.

• Abolition of physical s.98 Meetings.  Paragraph 22 of SBEE Sch. 9 removes s.98 from the 1986 Act.  Rule 6.14 of the 2016 Rules provides that creditor approval of a liquidator in creditors’ voluntary liquidation must be obtained either using the deemed consent procedure or a virtual meeting.
• Abolition of Final Meetings. Amendments made by SBEE Sch 9 replace the provisions of sections 94, 106 and 146 and 331 of the 1986 Act, which require final meeting of creditors in liquidation and bankruptcy proceedings, with a requirement that the liquidator or trustee submit a final report.  Part 18 of the 2016 Rules prescribes the information to be included in such reports, the procedure for seeking further information on that report, and the procedure for challenging remuneration claimed.
• New provisions for release of liquidators and trustees. As the creditors will no longer be able to raise an objection to the release of a liquidator or trustee at the final meeting, section 173, 174 and 299 of the 1986 Act are amended by SBEE Sch 9 to provide that release is subject to creditors’ rights to raise an objection within a defined period. The period is defined by the 2016 Rules as the later of 8 weeks from delivery of the prescribed notice (which is to accompany the final reports) or the determination of an application for further information or challenge to remuneration.

Commencement and Transitional Provisions relating to meetings

The aforementioned provisions relating to meeting come into force on 6 April 2017 and will apply to meeting in all insolvency proceedings , including those commenced before that date, but will not apply to the following meetings (See 2016 Rules Sch 9, para 5 and 6, SI 2016/1020 Regulation 5):

• A meeting which is required to be held as a result of a notice issued before 6 April 2017,
• A meeting requisitioned by a creditor or contributory before that date,
• A meeting an administrator is required to hold pursuant to a request made before that date under paragraph 52 of Sch B1 to the 1986 Act, and
• Meetings as a result of final reports to creditors sent before that date in bankruptcy and insolvency proceedings.

5. Changes to the officeholder reports and communications

• Allowing Creditors to Opt out of Communications.  The 2016 rules will also bring into effect a further amendment to the 1986 Act by SBEE, allowing creditors to opt out of receiving communications from officeholders.  Rules 1.37 to 1.39 set out how a creditor may opt out, specify the documents which must be delivered to creditors who have opted out in any event (for example, changes of officeholder contact details, and notices of distributions)and describes the information officeholders must provide about this right in their first communication with creditors.These provision will have immediate effect in relation to proceedings from 6 April 2017.An officeholder may provide information about the entitlement to opt out before 6 April 2017 but is not obliged to do so in first communications sent before that date: 2016 Rules Sch 2, para 2.
• Encouragement of email communications. The 1986 Rules only permit officeholders to communicate with creditors by email where the creditor has given written consent.  Rule 1.45 of the 2016 Rules provide that a creditor who communicated with the debtor by email before the insolvency proceedings commenced is deemed to have consented to receive documents by email from the officeholder, unless that consent is revoked before the document is sent.The provision for deemed consent will not apply in insolvency proceedings commenced before 6 April 2017: 2016 Rules, Sch 2 para 3
• Improvements to use of websites.  The amended 1986 Rules require an officeholder who wishes to communicate with creditors by publishing future notices on a website, without also sending a notice to creditors that the specific document is available to view on the website, to obtain permission from the court.  Rule 1.50 of the 2016 rules removes the requirement for permission and allows an officeholder to simply give notice to creditors that future notices (with the exception of documents requiring personal delivery, notices of intention to declare a dividend or documents not delivered generally) will be published on a website.Absent any qualifying transitional provision, it appears these provisions (which are in any event permissive) will have immediate effect in all cases on 6 April 2017
• Amendment of Progress Report Provisions.The officeholders’ obligation to circulate progress reports every 6 to 12 months (depending upon the procedure) is fixed by reference to the date of appointment and is unaffected by the appointment of another insolvency practitioner. It appears that this provision will have immediate effect in all cases from 6 April 2017, but that the obligations under the previous rules will continue to apply to any obligation to file a report which arose, but has not been fulfilled before that date: 2016 Rules, Sch 9 para 7.
• Reintroduction of final progress report on conversion of administration to CVL. The requirement for a final progress report on conversion of an administration to liquidation under paragraph 83 (which was removed from the 1986 Rules by the Insolvency (Amendment) Rules 2010) is reintroduced (subject to transitional provisions in Sch 2 para 22 of the 2016 Rules).
• Address details of consumers and employees will no longer be published in Statements of Affairs filed at Companies House. In the interests of preserving personal data of individuals, where a statement of affairs that is to be filed with the Registrar of Companies would otherwise include details of creditors who are consumers or employees, the 2016 Rules require that statements of affairs to be filed should simply note the number such creditors and the total value of their debts. The details of the creditors and their claims should be set out in a schedule to the Statement of Affairs that will not be filed and published.These provisions will not apply to insolvency proceedings commenced before 6 April 2017: 2016 Rules Sch 2 para 4.

6. Distributions without formal claim for debts of less than £1000

• New provisions allowing an officeholder to treat small debts as proved. Where a debtor’s accounting records or statement of affairs records a small debt due to a creditor (that is a debt where the total sum owed to the creditor is less than £1000), an officeholder may, with a view to limiting the costs of inquiry into that debt, decide to treat that debt as proved for the purpose of payment of a dividend.  In order to do so, the officeholder must, when sending notice of the dividend to the creditor in question, include additional information as prescribed in rule 14.31. If the creditor does not respond to advise the officeholder that the debt is incorrect or not due the debt will be deemed to be proved by rule 14.3 and the officeholder will pay a dividend to the creditor accordingly.

7. Changes to the appointment of trustees

• Automatic appointment of Official Receiver as first trustee immediately upon the making of a bankruptcy order With effect from 6 April 2017 s.287 of the 1986 Act will be amended (again, by SBEE) and a new s.291A will be inserted which provides that, instead of becoming receiver and manager of bankrupt’s estate pending appointment of a trustee, the Official Receiver will immediately be appointed as trustee upon the making of a bankruptcy order, unless the court appoints a supervisor as trustee.  This will mean there is no longer any delay between the making of the bankruptcy order and the automatic vesting of property in a trustee.The transitional provisions provide the OR will not only become trustee where a bankruptcy order is made after 6 April 2017, but will also become trustee where the bankruptcy order was made before 6 April 2017 but no trustee has been appointed by that date: 2016 Rules Sch 9 para 13.
• No requirement for the OR to summon a creditors’ meeting to appoint a first trustee. Sections 293 to 295 of the 1986 Act, which provide for creditors meetings to consider the first appointment of a first trustee will be omitted with effect from 6 April 2017.  Amendments to subsection 298 allow the OR, the court, or 25% or more the creditors to require that a creditors’ meeting to be summoned to consider removing the OR as trustee. The rules set out a procedure by which a replacement trustee may be nominated if not chosen at that meeting.

8. Insolvency practitioners as interim receivers in bankruptcy proceedings

• As a consequence of amendments to section 286 of the 1986 Act which come into force on 6 April 2017, it will be possible for the court to appoint insolvency practitioners as interim receivers between presentation of a petition and a bankruptcy order.  Although it was always possible to appoint the OR, the appointment of an insolvency practitioner was previously only possible in very limited circumstances on debtor’s petitions. The 2016 rules are amended to reflect the additional information to be produced in support of such an application.