The Insolvency Rules 2016: an assault on red tape?

This article was first published in LexisNexis' Corporate Rescue and Insolvency Journal.

KEY POINTS

• The Insolvency Rules (IR 2016) are now in force in England and Wales, replacing the 1986 rules in their entirety.
   
• Despite much protest from industry bodies, IR 2016 abolish prescribed forms. Nevertheless, there is considerable overlap between the prescribed information required by the new Rules and the information printed on the prescribed forms in Sch 4 to IR 1986. It is arguable that rather than achieving the goal of cutting the administrative burden on the system, abolishing the prescribed forms will only serve to increase it.
   
• A part of IR 2016 that has attracted somewhat less focus, but which is arguably as significant, is the provision dealing with the destination of insolvency appeals. The decisions of a significant number of district judges in county courts will potentially become subject to an appeal to the Companies Court registrars in London. This is curious, not least because district judges and registrars are supposed to be of equal rank.

The long-awaited overhaul of the Insolvency Rules 1986 (IR 1986) is now complete, and the Insolvency Rules 2016 (IR 2016) came into force on 6 April 2017. The journey to this point has not been without its difficulties and it would be fair to say that many had anticipated them being in force some time earlier. Perhaps unusually for provisions so overtly procedural in their nature, IR 2016 have also proved to be somewhat controversial. This article seeks to examine two aspects of the new Rules worthy of particular comment:

• the abolition of prescribed forms; and
   
• the destination of appeals against decisions in insolvency proceedings.

WHAT ARE THE NEW RULES?

It is possible to trace the origins of the reforms for which IR 2016 represent the final product back to 2011 when the government launched its so-called 'Red Tape Challenge'. This was described as an initiative to reduce the amount of 'unnecessary burdens and bureaucracy' in UK legislation. Between August and September 2012, the Challenge's attention turned to insolvency legislation. The conclusions were as follows:

'Responses to the Red Tape Challenge indicate that stakeholders believe that insolvency law broadly strikes the right balance between the interests of debtors and creditors. Our insolvency system compares favourably with that in other countries, and is consistently ranked highly by the World Bank for speed of resolution of corporate insolvencies and the amount of monies returned to creditors.

The proposals in this consultation are therefore of an incremental and technical nature…

The objective of the proposals is to identify savings in the costs of administering insolvency proceedings which should result in more money being returned to creditors, but without weakening the regulatory regime.'

(Red Tape Challenge — changes to insolvency law to reduce unnecessary regulation and simplify procedures — a consultation, para [4])

The proposals were picked up by the Insolvency Service which, on 26 September 2013, published the consultation document Modernisation of Rules Relating to Insolvency Law. In addition to the consultation document, a set of draft rules intended to replace the IR 1986 was published, along with an explanatory note. Industry professionals were invited to comment on the draft by 24 January 2014 and more than 1,000 responses were received.

The Insolvency Service reviewed those responses but did not document or summarise them. Instead, it produced a revised draft which was sent to the Insolvency Rules Committee in July 2015. At that stage, it was envisaged that the Rules would come into force in October 2016. As it was, this process was delayed and IR 2016 were not laid before Parliament until 25 October 2016 and thus could not come into force until April this year.

WHAT DO THE NEW RULES ACHIEVE?

In the explanatory memorandum that accompanies the IR 2016, the Insolvency Service has identified three primary objectives:

1. Consolidation: distilling the procedural rules of insolvency back into a single code. By the time IR 2016 came into force, IR 1986 had been the subject of 28 amending instruments.
    
2. Restructuring: renumbering, reordering and recasting the Rules into a more intuitive and user-friendly format.
    
3. Modernisation: amending the Rules to take into account commercial and legislative developments between 1986 and 2016.

The two matters addressed in this article do not readily fall into any of these three objectives. Nevertheless, a closer examination of the provisions giving effect to them reveals an alternative purpose, the origins of which lie squarely within the Red Tape Challenge that fired the starting gun for these reforms. The extent to which that purpose has been achieved is open to some considerable doubt.

THE ABOLITION OF PRESCRIBED FORMS: THE REFORM EXPLAINED

Schedule 4 to IR 1986 (as amended) contained a series of forms whose use in relation to various insolvency practices and procedures was mandatory. The use of these forms was directed in the specific rules governing the practice or procedure in question. These rules were bolstered by r 12A.30(1) which stated:

'Subject to the next Rule, the forms contained in Schedule 4 to these Rules must continue to be used in insolvency proceedings as provided for in specific Rules.'

There was an exception set out in r 12A.30(2):

'The forms must be used with such variations, if any, as the circumstances may require.'

The new general position is set out in IR 2016 r 1.8(1) and (2):

'Where a rule sets out requirements as to the contents of a document any title required by the rule must appear at the beginning of the document.

Any other contents required by the rule (or rules where more than one apply to a particular document) must be provided in the order listed in the rule (or rules) or in another order which the maker of the document considers would be convenient for the intended recipient.'

The exception is now in r 1.9:

'(1) Where a rule sets out the required contents of a document, the document may depart from the required contents if —

(a)     the circumstances require such a departure (including where the requirement is not applicable in the particular case); or

(b)     the departure (whether or not intentional) is immaterial.'

The specific rules relating to the insolvency procedure in question now no longer mandate the use of prescribed forms and there is no equivalent to Sch 4 to IR 1986 in IR 2016.

On one reading, IR 2016 appears, by implication, to prohibit the use of prescribed forms after the commencement date. Paragraph 15 of Sch 2 to IR 2016 (the Transitional Provisions) states:

'A form contained in Schedule 4 to the 1986 Rules may be used on or after the commencement date if –

(a)     the form is used to provide a statement of affairs pursuant to paragraph 4 of this Schedule;

(b)     the form relates to a meeting held under the 1986 Rules as described in paragraph 5(1) of this Schedule;

(c)     the form is required for the administration of a fast-track voluntary arrangement pursuant to paragraph 12 of this Schedule;

(d)     the form is required because before the commencement date, the officeholder sought to obtain the passing of a resolution by correspondence; or

(e)     the form relates to any application to the court or petition presented before the commencement date.'

This implication arises because these Transitional Provisions set out a very limited number of circumstances in which prescribed forms may be used after the commencement date. Where those circumstances are not present, one might conclude that the old prescribed forms cannot be used.

If IR 2016 actually sought to prohibit the prospective use of the old Sch 4 forms, it might reasonably be assumed that it would have said so explicitly in r 1.8 rather than just by implication in the Transitional Provisions. A more likely interpretation of the Transitional Provisions is that, where those circumstances arise after the commencement date, the Sch 4 forms can be used irrespective of whether they contain all the prescribed information set out in IR 2016.

Practitioners will quickly conclude that there is considerable overlap between the prescribed information in IR 2016 and the information printed on the prescribed forms in Sch 4 to IR 1986. In some, perhaps many, cases, the contents of a Sch 4 form will be fully compliant with IR 2016. It would thus be highly curious if such a Sch 4 form, accurately and diligently completed after 6 April 2017, was rejected by the court on the sole basis that it had been taken from Sch 4 to IR 1986. The assumption must be that the court would not do this.

THE ABOLITION OF PRESCRIBED FORMS: THE CONTROVERSY

A number of consultation respondents voiced very serious concerns to the Insolvency Service when the proposed reform was put to them. Two respondents deserve particular mention.

R3 responded to this part of the consultation with the following comment:

'We believe that the decision to set out the required contents of documents in the Rules rather than being prescribed in a statutory form is likely to lead to a proliferation of formats for the provision of information, which will lead to confusion. This will be a particular concern for businesses (small and large), which will need to educate their staff on what they need to look for when receiving information from IPs.'

These sentiments were echoed by the City of London Law Society (CLLS):

'We believe that there is merit in prescribed forms. This ensures that information is not missed accidentally… and that all stakeholders are used to seeing information in the same way. For example, we consider that it is likely to be helpful for the court or the registrar of companies to see certain prescribed information presented in the same way consistently.'

These views did not sway opinion at the Insolvency Service and the reform went ahead as planned. The justification for abolishing the prescribed forms was set out in the explanatory memorandum which accompanies IR 2016 at para 7.3 as follows:

'This builds in a significant degree of future-proofing as there will be less need for amendment to accommodate advancements in technology, business practice and to enable e-delivery.'

This justification sheds little light on the internal reasoning of the Insolvency Service or why it was felt that consultation criticisms were ill-founded. It is likely that the concern which weighed heaviest on the minds of the Insolvency Service was the administrative burden which technological and social innovations placed on the Rules' draftsmen. Specifically, where such innovations demanded a change to the prescribed information required to be included by those undertaking an insolvency procedure, it was, under IR 1986, potentially necessary also to amend a large number of the forms in Sch 4. A desire to ease that burden would seem consistent, at least in the minds of the Insolvency Service, with the objectives drawn from the Red Tape Challenge which set these wheels of reform in motion back in 2012.

But has that objective really been achieved by the abolition of prescribed forms and, if so, at what cost to other stakeholders?

R3 and the CLLS plainly thought not and it is easy to understand why. Both of these influential industry stakeholders observed that IR 2016, by abolishing the prescribed forms, had allowed, perhaps even encouraged (in r 1.8(2)), a proliferation of compliant forms to develop. Because IR 2016 is prescriptive as to content but largely silent as to format, it is possible that a range of 'house styles' will come to develop with regular participants in the industry defaulting to a format most attractive and convenient to them and their view as to the convenience of the recipient. These various house styles or templates may all be fully compliant with the Rules and, in substance, they may be identical to one another. The variations in the format may mean, however, that, at a glance, they appear wholly unconnected.

Far from cutting the administrative burden of the system, this risks increasing it substantially. A busy environment such as a court registry requires, in order for it to function efficiently, an ability at times to delegate tasks to junior and/or inexperienced staff with instructions to follow a process. Having prescribed forms which are readily identifiable and familiar to court staff facilitates this efficient processing of the relevant documents.

What also of the litigant-in-person (LIP)? Numerous recent reforms of civil procedure in England and Wales have sought to make the legal system more accessible to LIPs. The abolition of prescribed forms seems to run wholly contrary to that trend in the field of insolvency. Where, under IR 1986, LIPs set out to undertake an insolvency process, they were effectively prompted by the spaces on the form to include the prescribed information. It would readily be apparent to the LIP that a piece of prescribed information had been omitted because a section of the prescribed form would be blank. Under IR 2016, LIPs have no such prompt. They must, in theory at least, comb through the Rules and cross-refer to their documents, to ensure that they have included all the prescribed information.

The worst of these difficulties, at least for insolvency professionals, are likely to be ameliorated by the development of standard forms or templates. At the time of writing, the Insolvency Service has published 18 such templates on its website, HMCTS has published 23 and Companies House has published 63. These are in addition to the templates which will be published by the commercial precedent providers. The success or failure of the reform may well depend upon whether practitioners typically default to using those published templates or whether many of them exercise their freedom to produce templates of their own.

THE DESTINATION OF APPEALS

Part of the new Rules which has attracted somewhat less focus, but which is arguably as significant, is the provision dealing with the destination of insolvency appeals. Rule 12.59(2) of IR 2016 now provides a comprehensive point of reference for the destination of appeals in corporate insolvency proceedings. It says:

'(2) Appeals in civil matters in proceedings under Parts 1 to 7 of the Act and the corresponding Parts of these Rules lie as follows —

(a)     where the decision appealed against is made by a District Judge sitting in a hearing centre specified in the first column of the table in Schedule 10 —

(i)     to a High Court Judge sitting in a district registry, or

(ii)     to a Registrar in Bankruptcy of the High Court; as specified in the second column of the table;

(b)     to a High Court Judge where the decision appealed against is made by —

(i)     a Circuit Judge sitting in the County Court,

(ii)     a Master,

(iii)     a Registrar in Bankruptcy of the High Court , if that decision is made at first instance, or

(iv)     a District Judge sitting in a district registry;

(c)     to the Civil Division of the Court of Appeal where the decision appealed against is made by a Registrar in Bankruptcy of the High Court, if that decision is an appeal from a decision made by a District Judge; and

(d)     to the Civil Division of the Court of Appeal where the decision is made by a High Court Judge.'

For the most part, this provision is to be commended for its clarity and ease of use. On closer scrutiny, however, r 12.59(2)(a), when read with Sch 10, highlights a potentially significant feature when one seeks to appeal the decision of a district judge sitting in a county court. In summary, where the decision at issue was taken outside of London and the South East of England, the appeal lies to a High Court judge sitting at one of a small number of regional district registries. For example, an appeal against a decision of a district judge in a corporate insolvency matter in Barnsley County Court is to be appealed to a High Court judge sat at Leeds District Registry.

In London and the South East of England, the destination of an appeal against the decision of a district judge in a county court lies to a registrar in bankruptcy at the High Court. County courts caught by this provision extend as far afield as Oxford, Newport (Isle of Wight) and Norwich.

This is not, in fact, a change brought about by IR 2016. This has been the position since October 2016. The advent of the new Rules, however, confirms the fact that the decisions of a significant number of district judges in county courts will potentially become subject to an appeal to the six full-time registrars in London (supported by their deputies by virtue of r 12.59(4)).

This is curious for at least two major reasons. The first is that conventional wisdom dictates that a district judge and a registrar are considered to be judges of equivalent status or rank. It seems anomalous, therefore, that in this very specific part of civil procedure only, judges will determine appeals of decisions of other judges of equivalent rank. Indeed, it appears possible that a decision of a full-time district judge in a county court in South East England may come before a deputy registrar on appeal.

The second curiosity becomes evident when one compares r 12.59 with the Rules relating to appeals in bankruptcy matters. The latter remains governed by s 375 of the Insolvency Act 1986, unamended by the introduction of the new Rules or by the reforms which came into effect in October 2016:

'An appeal from a decision made in the exercise of jurisdiction for the purposes of those Parts by the county court or by a Registrar in bankruptcy of the High Court lies to a single judge of the High Court; and an appeal from a decision of that judge on such an appeal lies to the Court of Appeal.'

It is likely to remain common practice for proceedings to be brought to wind up a partnership concurrently with proceedings to make its partners bankrupt. Where such proceedings are determined in a county court in South East England, a surprising outcome emerges where one now seeks to appeal that decision. This is because an appeal against the decision to wind up the partnership will now lie to a registrar, whilst an appeal against the decision to make the partners bankrupt will continue to lie to a High Court judge. Two different judges, at different levels within the judicial hierarchy, will be called upon to review the same decision simultaneously.

The scope for problems arising from these curiosities is immediately apparent. The issue of different judges hearing the appeals of the same decision in a partnership scenario may be addressed by the court itself. Chief Registrar Baister, speaking extra-judicially, has observed that whilst the destinations of the appeals in this partnership scenario might be different, there is nothing in the Rules which requires the registrars to hear the appeal of the winding up aspect. They could, therefore, transfer the appeal to the High Court judge hearing the bankruptcy appeals. Although an imperfect solution, it would plainly be preferable to the circumstance dictated on the face of the Rules and the Act themselves.

What is not clear, however, is what additional burden this will create for the registrars. At present, the registrars are generally thought to deliver swift and efficient determinations commensurate to the urgency of many of the matters which come before them and their deputies. The changes to the destination of appeals open up a potentially vast new appellate jurisdiction for a small group of judges and their support staff. This is likely to significantly increase the box work of the registrars as they must presumably now also make determinations on the grant of permission to appeal.

It may be that this appellate jurisdiction will grow in the future. As previously identified, IR 2016 leaves appeals of bankruptcy decisions in the hands of High Court judges. Might there be a temptation soon to transfer those matters to the registrars as well? Such an expansion into further appellate jurisdictions must be handled with some caution. It is vital that the registrars continue to be able to handle the traditional workload of petitions and applications with due speed and efficiency. Delays in the higher courts ought not be used as a justification for overburdening the registrars.

CONCLUSION

This article focuses on just two aspects of IR 2016. Their introduction has proved controversial and many other areas, not discussed here, have provoked significant debate within the profession. A more comprehensive summary of those changes and the controversies related to them is provided by a handout produced by the team at Hardwicke.

A recurring theme in the changes brought about by the introduction of IR 2016 seems to be a desire to cut costs and reduce waste in the administration of insolvency proceedings. This is to be commended, as wasteful and costly processes are plainly an obstacle to achieving the greatest returns for creditors. The risk of false economy in these reforms is great, however. Reducing the burden of legislative amendment is to be encouraged, but not at the expense of the efficient administration of court staff or the needs of LIPs. Similarly, it is undoubtedly vital that insolvency appeals can be heard quickly and by judges properly equipped to hear them. This should not be achieved, however, through an incoherent appeal structure. Nor should it be achieved by overburdening the registrars and their support staff.

IR 2016 are unlikely to mark the end of reform to the procedural rules of insolvency. It falls to be seen what the consequences of these reforms will be and whether any of the much-maligned 'red tape' has really been cut.

FURTHER READING

LexisPSL Restructuring and insolvency: Overviews: The Insolvency (England and Wales) Rules 2016 — what's new in Lexis PSL?

RANDI Blog, 6 April 2017: The Insolvency (England and Wales) Rules 2016 come into force

The Insolvency Rules 2016: worth the wait? (2016) 6 CRI 221