27 April 2017
New Insolvency Rules 2016: How do the changes impact on you and your business?
On 6 April 2017 new rules came into force which bring about some of the biggest changes to the UK insolvency industry for more than 20 years.
The Insolvency (England and Wales) Rules 2016 provide a completely new procedural framework for the Insolvency Act 1986 (“the Act”). Certain provisions of the Act have also been amended by the introduction of the Small Business and Enterprise and Employment Act 2015.
The new rules are designed to reflect modern business practice and to make the insolvency process more efficient. In particular, they are intended to:
- consolidate existing rules and amendments into a single piece of legislation;
- modernise language to make it easier to use and understand;
- enable electronic communications with creditors including e-mail communications and use of websites;
- remove the automatic requirement to hold physical creditors meetings (although creditors will be able to request meetings);
- enable creditors to opt out of further correspondence and for small dividends to be paid by the office holder without requiring a formal claim from creditors
What does this now mean for you?
- If you have to manage credit or are at risk of suffering bad debts, the new rules affect you;
- You may need to fundamentally re-appraise and change your approach where your debtor(s) are insolvent and attempt to enter into an insolvency procedure such as Liquidation, Company Voluntary Arrangements, Administration or Bankruptcy if the debtor is an individual;
- As a creditor you will now need to be more proactive, particularly in the early stages of the process;
- Fundamentally there is now more onus on you as a creditor to take action quickly in order to protect your position.
We can help – speak to a member of our team who will guide you through the new rules.
The New Rules – Key Facts
Removal of the need for creditors meetings
The principal changes govern decisions taken at creditors meetings. In an attempt to reduce cost the new rules have amended the process so that physical creditors meetings are not now the norm for seeking decisions from creditors in insolvency proceedings.
Prescribed Decision procedures
Where a decision is sought on any matter by creditors, the decision may be made by a “qualifying decision” procedure which now includes:
- Electronic voting;
- Virtual meeting;
- Physical meeting; or
- Any other decision making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally.
However, a physical meeting of creditors is not automatic and will only be summoned in certain circumstances.
In addition, an Insolvency Practitioner (“IP”) or any other person (such as the directors of a company who seek a decision from creditors or shareholders) can use the deemed consent procedure by writing to creditors with a proposal. The proposal (which can include a decision on the appointment of an IP) will set out a deadline for the creditors to respond. Provided they do not receive objections from 10% or more of creditors by value before the deadline has expired then the proposal will be deemed to be approved (e.g. the liquidator will be appointed).
The deemed consent procedure can be used for most decisions under the Act. However it cannot be used for decisions concerning the IP's remuneration, conduct or release, nor for approving Individual Voluntary Arrangements and Company Voluntary Arrangements.
In the event that 10% or more of creditors object to the proposal then the IP will use one of the alternative decision-making processes set out in the new rules. For example, a physical meeting, virtual meeting, correspondence or electronic voting. This decision will normally be at the discretion of the IP.
Although a creditor with less than 10% of the total value of creditors’ claims will not be able to prevent proposals presented by deemed consent, they can object to them and raise concerns with the IP, who will then have to consider whether deemed consent is appropriate. Creditors should therefore engage with the IP as early as possible if they have any concerns about the proposed decision procedure that is to be used.
Appointment of a liquidator in Creditors Voluntary Liquidation
If you are exposed to a bad debt as a result of a voluntary liquidation process, you will be impacted by the new rules. The deemed consent procedure is likely to be used in most cases to place a company into liquidation and to appoint a liquidator.
Directors of a company must now deliver a notice to creditors seeking a decision on their nomination of a liquidator by the deemed consent procedure or a virtual meeting. Creditors have as little as 3 business days’ notice to respond to this proposal. If 10% or more of creditors by value object then the company must call a physical meeting which is to take place within 14 days after the objection was made.
Creditors may still require that a physical meeting is held in any case in accordance with the above paragraph. However, the changes shift the onus onto the creditors to take action if they require a meeting or if they object to the proposed appointment of a liquidator who will have been nominated by the directors and shareholders of the debtor company.
Debts less than £1,000
Where an IP is able to rely on information contained in a company’s or a bankrupt’s statement of affairs or accounting records, they may treat the debts below £1,000 as proved, without the creditor having to submit a formal proof of debt form. The IP will simply notify the creditor that their debt will be treated as proved and that a dividend will be paid to them if possible.
- A creditor can now opt out of receiving correspondence from the IP. The creditor must send the IP a notice in writing confirming that he wishes to opt out of future correspondence for this to take effect.
- An opted-out creditor will be included in the dividend process and can still vote on any proposal. Creditors will also retain the ability to opt back in to receiving correspondence.
- Where the creditor and IP used electronic communication (such as emails) to communicate pre-insolvency, then the creditor is deemed to have consented to this continuing post-insolvency.
An IP can now give notice that all future notices will be placed on a specified website and retained on the website for at least two months after the end of the insolvency process.
We can help
If you have any questions then please contact a member of our insolvency or credit management team. We can guide you through the new procedures and support your claim as a creditor.