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Updated Insolvency Rules – What’s New?

On 6 April 2017, the new Insolvency Rules 2016 will come into force.  The existing rules date back to 1986, long before email and the internet changed the way in which business is carried out.  The new provisions are aimed at reducing the red tape involved with insolvency processes, and replacing out of date methods, to better reflect modern business practice.

From a creditor’s perspective, it is hoped that these changes will lead to less administrative clutter, and the potential for increased dividends in insolvencies, due to increased efficiency and a reduction in office holders’ costs of administering insolvency proceedings.

The key areas which will impact on creditors will be as follows.

Formal meetings of creditors

The default decision making mechanism under the old rules is by way of holding physical meetings of creditors, at which the votes of the creditors are counted.

The reliance on holding meetings is time consuming and increases the total cost of the insolvency process.  Further, physical attendance at a meeting is arguably not necessary, given modern communications technology.  Creditors meetings are also often called to adopt proposals that are clearly in the best interests of creditors, which can lead to poor attendance.  However, even where a meeting of creditors attracts no actual attendees, it is still necessary for the office holder to arrange a meeting room, in addition to charging for the attendance of the IP at the meeting.  This leads to unnecessary expense which eats into the pot ultimately available for unsecured creditors, leading to reduced returns.

The new rules provide that physical meetings will not be held unless requested by 10% of the creditors.  Instead, the rules provide that office holders may employ a range of alternatives, including virtual meetings, email, telephone conferencing, electronic voting, or any other procedure that enables all creditors to participate equally.

Final meetings of creditors (at which IPs currently set out the distribution of assets at the end of the insolvency process) will be replaced by a written report.  Section 98 meetings (for the approval of Creditors’ Voluntary Liquidations) will also be abolished, to be replaced with virtual meetings, or the new deemed consent procedure.

Deemed Consent

A system of ‘deemed consent’ will be introduced, whereby an IP may send notices to creditors by email, and, unless 10% in value of the creditors object to the proposal, it will be deemed to be approved by the creditors.

Opting-out of ongoing correspondence

Creditors will have the option to opt-out of receiving further correspondence in an insolvency process, where, for example, it is clear from the initial notices received that no recovery will be made.

This will reduce the administrative burden on creditors, by removing the need to monitor matters which are appropriate to be written off.  The rules protect the creditors’ position in the event of an unexpected windfall in the insolvency, by requiring that the IP still send a notice of dividend payments to all creditors regardless of whether they have opted out of correspondence.

Acceptance of small claims

The new rules also simplify the process for the acceptance (for dividend purposes) of smaller claims.  Where a creditor is owed less than £1,000, they are no longer required to submit a proof of debt.  IPs will instead be permitted to establish the validity of smaller claims by simply referring to the accounts and financial records of the insolvent party.  This will limit the costs of enquiring into debts, as well as reducing the work required of the creditors.

Conclusion

The new rules represent a significant change to the day to day administration of insolvency processes.  Insolvency practitioners, their advisors, and creditors alike will all have to get up to speed with the new framework.

For Council creditors, the changes should lead to a more streamlined process, reducing the administrative burden on Councils’ revenues teams, and bringing the potential for increased returns.