Insolvency Oracle

Developments in UK insolvency by Michelle Butler

The Insolvency Rules “2015”: A Moveable Feast

Leave a comment

Peru465

I realise that talk of the Insolvency Service’s IP fees consultation has pretty-much smothered the draft Rules consultation. However, I’ve yet to get to grips with that one, so here are my thoughts – and a copy of my response – on the (already superceded!) draft “2015” Rules.

The consultation closed on 24 January and it seemed to me that, despite the enormity of the task, many IPs and associates went to a lot of effort to make thorough responses. Regrettably, personally I only managed to review a few of the sections in detail – and only then did I look at the consultation questions (yes, I know, that was a pretty stupid way of doing things!). I attach my response here: MB response 24-01-14. The Government’s consultation homepage is: https://www.gov.uk/government/consultations/modernisation-of-the-rules-relating-to-insolvency-law.

This is not meant to be an overview of the proposed changes – I’ve not covered the non-controversial aspects (that would be too boring!) – but I consider (but I don’t really answer – sorry!) the following:

• Just how draft are the Draft Rules and are we going to get to see how current/future initiatives impact on them?
• How huge a task will it be to absorb the changes and is there anything that can be done to make the job easier?
• Does the Consultation Document cover all the changes or do we have to look closer at the detail?

The condition of the Draft Rules

The Insolvency Service is between a rock and a hard place, but personally I think they have made the right decision in releasing these draft Rules even whilst they are draft to a greater degree than we’re accustomed for statutory instruments opened to consultation.

The Service acknowledges that the draft is a work in progress document and that there are inconsistencies across the different insolvency processes. The Service did pre-empt the outcome of the Red Tape Challenge somewhat and included within the draft Rules some of the proposed measures, such as removing more statutory meetings (which seems very odd now in the context of the fees consultation) and enabling creditors to opt out of receiving communications, but other measures arising from the Red Tape Challenge exercise – such as avoiding the payment of small dividends and effectively communicating by website alone – are not reflected in the draft Rules. Given that the RTC outcome had not been revealed when this consultation commenced, this is not surprising, but it demonstrates the moveable feast of insolvency legislation and the difficulties in seeking to set in stone – at pretty-much any point in the next half-decade or so – a revised set of Rules.

In the face of this continually moving conveyor belt of legislative proposals, it is understandable that the Service does not wish to hold up the process of revising the Rules and, personally, I am pleased that we have been given this work-in-progress look at the draft. In reading the draft, I have suppressed any nagging concern that much of my effort has already been wasted in view of more recent proposals and yet more of the draft will be overtaken by future events, because the alternative – that we don’t get to see a draft until the last minute – doesn’t bear thinking about.

But what are the Insolvency Service’s plans now? Will they continue to work on the draft, absorbing the responses to this consultation, the further RTC outcomes, the IP fees conclusions, the fall-out from Teresa Graham’s review of pre-packs, perhaps the rules around the S233 changes (which are yet to be the subject of a consultation, right?), and give us little opportunity to review a further draft on the basis that we’ve had our chance? I hope not. I hope we get to have another opportunity to comment on a draft. Whilst matters of agreed policy may not be up for debate in the Rules arena, my review of only a few sections of these draft Rules has demonstrated to me the value of having others input on the practicalities of the processes set out.

The Big Picture

I pity the first JIEB students after the Rules are enforced, although it will be a fantastic opportunity to get ahead of the pack and become the go-to person in one’s practice. How us old’uns with our rubbery neurons are going to get the hang of it all, I don’t know!

I shudder to think about the amount of time – and (non-chargeable) money – that will be expended to get internal systems, diaries, and templates new Rules-compliant… and the inevitable mistakes that will be made; after all, templates always require a bit of fine-tuning after the first (second… third…) version, don’t they? One way that firms can cushion the blow right now is to future-proof standard documents, strip out all those Rules references: after all, do readers really need to know that something has been produced pursuant to Rule xxx?

The Consultation Document is silent on a key issue, I think: are the Rules going to apply to all cases existing as at R-Day or only to new appointments after the new Rules begin to take effect? I appreciate that it would be a rare thing for the new Rules to apply to all cases, rather than just new cases, but it is not entirely unheard-of, and think of the safeguards that would need to be put in place if a firm’s case-load were a mixture of pre- and post-new Rules cases. It’s been tough enough for practices to handle the complexities of running a portfolio of mixed pre/post-2009 and pre/post-2010 Rules cases, but these changes go so much further, it will make our heads spin!

Little has been said of making any changes to the Act. I am sure there is a reluctance to go there, given the more significant difficulties in seeking changes to primary legislation. However, I think it undermines some of the effort made to modernise the Rules, if we cannot fix the Act provisions at the same time. In particular, I think the practical difficulties arising from the Enterprise Act 2002 have now become evident and it seems a wasted opportunity not to tweak those whilst we’re at it. And aren’t there Act changes, such as extending the phoenix provisions to companies that don’t survive Administration, that have been given an airing but seem to have now gone quiet? It would also seem useful to wrap in some of the other statutory instruments that involve significant overlap with the Rules, such as the Insolvency Practitioners Regulations (which will need to be revisited in view of the RTC anyway) and what about Insolvent Partnerships? Then again, I guess the Service has enough on its plate already!

The Detail

Although pretty-much all of the Rules have been re-jigged, the Consultation questions focussed around some of the more fundamental changes, such as the overall structure, which is a massive change, but well worth doing, in my view.

They invited us to comment on the format of setting out in the Rules the prescribed content of notices, forms etc., rather than prescribing a statutory form, the suggestion being that this makes “it easier to enable documents to be delivered by electronic means, preparing the system for moving to electronic delivery of information when the forms would become redundant”. I appreciate that the aim is to future-proof the process, but I don’t think we have to accommodate any transmission process other than textual, do we? We’re not exactly future-proofing for Elysium-style neural downloads, are we? Therefore, I really don’t think that it helps to do away with prescribing forms, as it just means that someone else is going to have to create them (and get paid for it). Even if every IP in the country only goes to a handful of suppliers, that’s still an unnecessary amount of duplication in my books, and micro-businesses will be burdened with a disproportionate expense. Perhaps a middle-ground would be to provide forms, but prescribe only that the information set out in the forms need be delivered? Anyway, do we know whether Companies House will stomach just any old form..?

The Consultation Document lists ten “minor and technical changes” (paragraph 42) – and I think they’re right: they are pretty minor. However, what I think is a little disingenuous is the fact that, if you have the time and the determination to scrutinise the detail of the draft Rules, I’m sure you’ll find far more technical changes that aren’t quite so minor!

I knew there was no way I’d get through the complete draft Rules, so I decided to focus on the sections that will impact mostly on Administrations – Parts 3 and 17. I managed to shoe-horn my thoughts into the consultation’s question 20 (“Do you have any other suggestions or comments on the structure or the content of the rules?”). My full response (MB response 24-01-14) lists my observations, but here are a select few:

• The current R2.48 Conduct of Business by Correspondence for approval of the Administrator’s Proposals is to be replaced by a new correspondence-based process whereby creditors can lodge a “notice of objection” (the only other option appearing to be that they keep silent) and, if 10% or more of the creditors by number or value object, the Administrator “may convene a meeting of creditors to seek their approval or seek approval of a revised statement of proposals” (R3.37). My thoughts are: what is wrong with the current process? What if a creditor just wants to modify the Proposals? How is an IP supposed to calculate whether the 10% threshold has been over-reached? This 10% threshold – of creditors by value (and sometimes by number) of the total – is repeated throughout the Rules. Research has shown that lack of creditor engagement is a recurring problem, so why erode the process whereby creditors who actually make the effort to vote are most influential?

• The Service has made yet another attempt to tidy up the filing and reporting processes when a Paragraph 83 move from Administration to CVL form is filed. This time, they are suggesting a return to the issuing of a final report simultaneously with the ADM-CVL form. However, they have drafted a requirement that, “if anything happens between the sending of the notice to the registrar of companies and its registration which the administrator would have included in the report had it happened before then”, the (former) Administrator must file and circulate “a statement of appropriate amendments to the report”. My issue is that, technically, “anything” could include the crediting of additional bank interest or even the incurring of time costs, so this could result in IPs needing to issue – at some cost – pretty meaningless statements. Ideally, I would prefer the Act (if only!) to be amended so that the date when the ADM-CVL move takes effect is the date that the form is signed, not registered, so that we can escape all this nonsense. After all, I can think of no other event such as this where the timing is in the hands of Companies House. Alternatively, if we are stuck with Companies House controlling the conversion date, couldn’t the Liquidator report on “anything” that had happened in that small window when he issues his annual report?

• The Service has made a big deal about the savings that will be made from reducing the requirements to have creditors’ meetings – and indeed the draft Rules include a general process for conduct by correspondence (in addition to R3.37 for Administrators’ Proposals). However, this excludes fees decisions, which need to be dealt with either by a committee or resolution of creditors (apart from Para 52(1)(b) cases, the provisions for which, disappointingly, are left unchanged). Given that this is pretty-much the only matter to be addressed at creditors’ meetings, I cannot see that many meetings will be avoided, other than final ones (which, let’s face it, already are a complete non-event and cost nothing other than a Gazette fee, as all the expense arises from the need to issue a final report etc.). Of course, if the IP fees consultation proposals are taken forward, we may find IPs trying harder to generate creditor interest in meetings, which erodes to some extent the Service’s message that great savings will be made by these Rules/RTC measures.

These are just a few of the intriguing changes I’ve spotted. I do sympathise with those who have the job of revising these Rules. I’ve only had to deal with few-pager SIPs and the Ethics Code before and they were tough enough. In those cases, we certainly didn’t please all the people all of the time and I am sure the same will be true of the Rules. All that I ask is that we’re kept informed, so that we can manage the transition as best we can… and, if questions continue to be raised about whether IPs are giving “value for money”, that the critics remember that it’s the enormous costs associated with these kinds of changes that IPs have no choice but to pay.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s