Insolvency Oracle

Developments in UK insolvency by Michelle Butler

The Rules’ complexities: get used to them!

Leave a comment

In their report on the 2016 Rules’ review, the Insolvency Service all but acknowledges that some of the Rules leave IPs playing Twister, being forced into shapes that just won’t fit.  However, there are few admissions that things need to change.  Generally, all we can hope for is a review-on-the-review, which will consider further what, if anything, should change.

In this article, I cover:

  • The CVL process – top of the InsS’ list for change
  • The InsS maintains a general reluctance to fix fees
  • The new decision processes – successful or too complicated?
  • The InsS sees few problems with committees, dividends, the lack of prescribed forms, SoAs and personal data
  • But there are a handful of odds-and-sods that the InsS intends to change

The InsS report on their review can be found at https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

My personal consultation response is at https://insolvencyoracle.com/consultation-responses/

CVLs to change

One area that the InsS does appear committed to change is the CVL process.  In scope for consideration are:

  • The fact that the Rules only empower an office holder, not a director (or an IP acting on their instructions), to deliver documents by website
  • The fact that, although the Temporary Insolvency Practice Direction allows remote statutory declarations, a more permanent change to verifying Statements of Affairs would be beneficial
  • The fact that the Rules do not provide for the liquidation estate to pay any non-R6.7 pre-appointment expenses, e.g. the costs of seeking the shareholders’ resolution to wind up
  • Some respondents’ requests for more time to consider S100 decisions and SoAs

I find the last point a irritating: the new Rules’ S100 process for commencing CVLs is already more creditor-friendly than the IR86’s S98.  Now, the Statement of Affairs must be received by creditors at the latest the business day before the decision date, whereas under the IR86 the SoA only needed to be provided to the meeting.  Also, the new Rules’ 3-business-days-between-delivery-and-the-decision-date means that the notice period is usually one day longer than it was under the IR86. 

True, few CVLs need to happen quickly, but an extension in the period really must be accompanied by wider scope for the advising IP’s costs, as well as those of agents and solicitors, to be paid from the estate where the work is done with a view to the CVL.

 

A lacklustre response on fees

It was disappointing to read the InsS’ opening comment on the general subject of fees that:

“It is not certain that the rules on a necessarily moderately complex topic can be made clearer”. 

Pah!  You’re just not thinking hard enough, guys.

But at least we have some comfort that the InsS has “particularly noted concerns around rules 18.24 to 18.27 on changes to the bases of remuneration”, a topic on which I have blogged on several occasions, and they propose to review these fees rules “at a future date”.

While the InsS notes “concerns that the new Rules are not effective for small cases, including the absence of the ability of remuneration in a CVL to default to Schedule 11 scales”, they stated that “stakeholders”suggested “that reintroducing this measure… would make the process more complicated”.  Strange, I’m not sure why anyone would be against this measure.

They also stated that it might make “the process burdensome and more expensive rather than more efficient” if the rules were to provide different fee criteria for small cases, although the report does not make clear to what suggestion this was alluding. 

In my consultation response, I had suggested a de minimis statutory fee (after all, the OR has a set fee of £6,000) in recognition of the basic statutory and regulatory requirements of all CVLs, BKYs and WUCs.  This IP statutory fee either could be granted as automatic or, if the InsS weren’t comfortable in taking off all the reins, could be approved using the deemed consent process.  Personally, I was not suggesting different fee criteria for small cases, I was suggesting that this could be the standard for all cases, leaving the office holder to seek approval in the usual way for any fees above this de minimis level. 

I’m not entirely surprised that they’ve ignored such a suggestion from little me.  However, to suggest that there is no process by which the Rules could be changed to help IPs avoid the burden and expense of seeking the court’s approval where creditors refuse to engage in a decision procedure on fees is disappointingly defeatist and, I suspect, reflects a persistent lack of understanding of the difficulties encountered by many IPs.

Not even fees estimates to change

The report also noted that several respondents had made suggestions to simplify the fees estimate requirements.  The InsS gave several reasons why they felt there should be no changes, including:

  • the fees estimate provisions align with the statutory objective that regulators ensure that IPs provide high quality services at a fair and reasonable cost (hmm… does spending truck-loads of time creating a fees estimate pack really achieve this?);
  • “the level of fees charged by officeholders have often been a cause of complaint amongst creditors and sanctions by their regulators” (“often”?  Really??  The InsS Regulatory Report for 2021 reported that 5 out of 423 complaints were about fees and only one of the 53 regulatory sanctions listed was about the level of fees); and
  • “amending the Rules in the ways that have been suggested would have the effect that creditors would once again find it difficult to scrutinise and challenge remuneration due to a lack of timely information”. 

It’s a shame that the InsS appears to view the time that IPs spend in complying with the copious information requirements as time – and cost to the estate – well spent.

The case for physical meetings

Before the new Rules came into force, I think that many of us thought that removing the power to convene a physical meeting and replacing this with a variety of decision processes was unhelpful and an unnecessary complication.  Although the InsS report indicates that these views have persisted, personally I think that 5 years of experience with the new decision processes, as well as the pandemic lockdowns, has led many of us to think that maybe this new normal of decision-making isn’t so disastrous after all. 

But I do struggle to accept the report’s contention that “there is some suggestion that the new processes have not been detrimental to creditor engagement”, unless by “engagement” they simply mean “voting”.  It seems the InsS is arguing that correspondence and deemed consent decision processes “may encourage creditor engagement precisely because they reduce the need to spend time and money actively interacting with officeholders in cases of lesser interest”.  Hmm… this might explain why it seems that some creditors lodge objections to deemed consents and then fail to engage when the IP is forced thereafter to convene another decision procedure. 

I also had to smile at the InsS’ suggestion that the increased number of creditor complaints over the complexity of the decision processes may actually reflect creditors’ increased interest in engaging!

Decisions, decisions…

Fundamentally, the InsS report concludes that the new processes require no material changes.  In particular:

  • The InsS is happy with the 11.59pm cut-off time;
  • The InsS is happy that non-meeting votes cannot be changed (R15.31(8)); they state that, to provide otherwise “would require a framework to govern exactly how and when that could happen” (Would it really?  It’s not as if we have a framework for changing a vote submitted by proxy, do we?)
  • The InsS is happy that there is no ability to adjourn a non-meeting process; they consider that “naturally officeholders would not use a non-meeting process where there was any indication that an adjournment might be needed”
  • The InsS is happy that their Dear IP 76 encouragement for IPs to take a pragmatic approach as regards the statutory timescales for delivering documents to overseas creditors is sufficient
  • In response to some comments that office holders would value the discretion to convene a physical meeting, the InsS believes that at present “the restriction on physical meetings is operating correctly, this does not rule out future changes in this area”

But the InsS has indicated that a couple of suggestions are worthy of further consideration:

  • That creditors with small debts should not be required to prove their debt in order to vote
  • Fixing the apparent inconsistency in requiring meetings, but not non-meeting decision procedures, to be gazetted

Information overload

The InsS report does acknowledge that “information overload” as regards creditors’ circulars for decisions is “a core concern”.  However, they suggest that this is in part because some IPs “are still in the process of determining how best to use and present the new decision-making options”.  Charming!  But, InsS, you cannot escape the truth that the new Rules require an extraordinary amount of information – R15.8 alone covers a page and a half of my Sealy & Milman!

Surely we can cut out some of the gumpf, can’t we?  For example, some people raised the point that R15.8(3)(g) requires pre-appointment notices to include statements regarding opted-out creditors even though no such creditors would exist at that stage.  The InsS suggests the solution lies in adding yet further information in such notices if IPs “think that reproducing the literal wording of the rules could cause confusion”. 

This implied confirmation that IPs do need to provide such irrelevant statements in notices is frustrating, given that the court had previously expressed the view (in re Caversham Finance Limited [2022] EWHC 789 (Ch)) concerning the similarly irrelevant requirement of R15.8(3)(f) for notices to refer to creditors will small debts:

“I think that Parliament cannot have intended that redundant information should be included on the notice”. 

Well, the InsS has spoken: they do require such redundant information.

Are decisions like dominoes?

I love it when the InsS writes something that makes me go “ooh!” 

The report describes the scenario where a decision procedure was convened to address several decisions, but then “a physical meeting is requested in one of those decisions but not the others”.  Someone had suggested that the physical meeting be convened to cover all the original proposed decisions or that the Rules make clear that the request applies only to one. 

The InsS has responded that they consider that:

“the Rules are clear that each decision is treated separately for the purposes of requests for physical meetings”. 

While I can see this from Ss 246ZE(3) and 379ZA(3) – these refer to creditors requesting that “the decision be made by a creditors’ meeting” – I have not seen this being applied in practice. 

So this means that every time a creditor asks for a physical meeting, it seems the director/office-holder should ask them what decision(s) they want proposed at the meeting and, if there are any decisions that they don’t list, then these decisions should be allowed to proceed to the original decision date.  Interesting.

What about concurrent decision processes?

The report noted comments that the Rules are unclear as to whether a decision procedure can run concurrently with a S100 deemed consent process in order to seek approval of pre-CVL expenses or the basis of the liquidator’s fees. 

The InsS’ reaction to this issue is curious.  The report merely flags the “risk” that the decision procedure on fees would be ineffective where the creditors nominate a different liquidator to that resolved by the company (would it?  Why??). 

So… does this mean that the InsS doesn’t see any technical block to these concurrent processes?  Are we any clearer on this debate that has been running since 2017?

What about the reduced scope for resolutions at S100 meetings?

The report notes that the new Rules have excluded the IR86’s provision that S98 meetings may consider “any other resolution which the chairman thinks it right to allow for special reasons”, which was previously used as the justification for S98 meetings also considering the approval of pre-CVL fees.  Does this omission affect the ability for fees/expenses decisions to be made at S100 meetings?

The InsS’ response to this one is equally cryptic.  They appear to be saying that, as “rule 6.7 now includes expenses that were omitted from the Insolvency Rules 1986”, the “any other resolution” provision is no longer necessary. 

I don’t get it: R6.7 is no wider in scope than the old Rs 4.38 and 4.62, so there’s no remedied omission as far as I can see.  The problem is that the new Rules still lack an explicit provision that the initial S100 meeting may consider other resolutions, such as approval of the R6.7 expenses and indeed the basis of the liquidator’s fees.  At least it’s nice to have the InsS’ view that there is no problem, I suppose!

Committee complexities

The InsS report does not pass comment on whether respondents’ questioning “the value of continually requesting that creditors decide whether to create a committee” was a good point worth taking forward.

The report does suggest that the InsS won’t be taking forward issues around the establishment of a committee where there are more than 5 nominations.  The InsS considers that the decision in Re Polly Peck International Plc (In Administration) (No. 1), [1991] BCC 503, “remains relevant”.  This decision concluded that, “where more nominations are received than available seats on the committee, that a simple election should be held with those nominees who receive the greatest number of votes (by value) filling the vacancies”.  Ah yes, the simple election – simples! 

The more recent decision, Re Patisserie Holdings Plc (In Liquidation) ([2021] EWHC 3205 (Ch)), suggests that even where fewer than 5 nominations are received, those nominations will only be decisive where they have been made by the majority creditors.  Therefore, it seems to me that we are still left with a cumbersome committee-formation process stretching over two decision processes.

No going back on prescribed forms

The InsS is of the view that the decision to abolish prescribed forms was the correct one.  The report states that there does not appear “to be truly widespread difficulty” and they maintain that their impact assessment had accommodated the familiarisation cost appropriately. 

Although I think this unfairly plays down the impact on small businesses, I do think the boat has sailed on this debate.  I would have loved the InsS to have provided optional templates to support the prescribed content rules, but given that even the InsS’ own proof of debt form does not help creditors to meet all the Rules’ requirements, it is probably safer that they did not.

No easy fixes for dividends

An age-old bugbear is the hassle for all parties where a dividend payment is paltry.  It does the profession no favours when office holders are required to post out cheques for sums smaller than the postage stamp. 

I understand that the InsS did consider the pre-IR16 request to provide a statutory threshold for dividend payments below which they need not be paid.  But I’d heard that this had been considered unconstitutional, as every creditor has the right to the dividend no matter how small.  Instead, the InsS gave us the “small debts” provisions, which I think do the opposite and only increase the likelihood that office holders will be sending small payments to creditors who consider it is just not worth their trouble. 

This time around, it was suggested to the InsS that creditors be entitled to waive their dividend rights in favour of a charity or that this process could be automatic for payments below a certain amount.  The InsS rejected this suggestion, citing that it would simply add a different administrative burden onto office holders and creation of an automatic process would impair creditors’ rights to repayment.

The report does a good job of explaining why a NoID for an ADM must be sent to all creditors, not just those who have not proved as in other cases.  This is because the ADM NoID triggers the set-off provisions of R14.24, so all creditors need to know about it.  So no change there either.

Some respondents commented on the generally unnecessary duplication of requiring employees to submit proofs even though the IP receives information about their claims sent to the RPO.  This is an area that the InsS has noted for future consideration.

SoAs and personal data

I’m sure we remember the kerfuffle created by Dear IP chapter 13 article 97, which seems (or attempts) to grant IPs the discretion to breach the Rules requiring the circulation to creditors of personal data in Statements of Affairs.  Well, it seems that the InsS has already forgotten it.

As regards suggestions that the Rules might restrict the circulation of the personal details of employee and consumer creditors, the report states that the InsS is:

“satisfied that the current balance struck by the Rules remains an appropriate one” 

Oh!  So does that mean they will be recalling the Dear IP article?

Respondents also raised other concerns regarding the disclosure of personal details:

  • the requirement for non-employee/consumer creditors’ details to be filed at Companies House, so this would include personal addresses of self-employed creditors etc.
  • the need to disclose an insolvent individual’s residential address on all notices
  • the fact that, if the InsS is truly concerned with creditors being able to contact each other, then wouldn’t email addresses be more relevant?

The report states that “these issues will remain under consideration for amendment in future updates to the Rules”.

The opt-out process: who cares?

In my view, far too much space in the report was devoted to explaining the feedback of the creditor opt-out process, with the conclusion that the InsS “will give further thought to whether there should be any changes to, or removal of, these provisions”. 

I was not surprised to read that few creditors – “less than 1%” (personally, I would put it at less than 0.1%) – have opted out.  One respondent had a good point: don’t the opt-out provisions give the impression “that information provided by officeholders has no value or interest”?  Even the report referred to creditors opting out of “unwanted correspondence”.  Doesn’t this suggest something more fundamental, that in many respects the Rules are overkill and that communications could be made far more cost-effective?

Odds-and-sods to fix

The report acknowledged the following deficiencies in the Rules… or in some cases the InsS admitted merely the potential for confusion:

  • ALL: the court’s ruling in Manolete Partners plc v Hayward and Barrett Holdings Limited & Ors ([2021] EWHC 1481 (Ch)), which highlighted the limited scope of “insolvency applications” in R1.35 leading to additional costs – this issue has been singled out by the InsS as being one of the “most pressing” to resolve
  • ADM: the requirement for the notice of appointment of Administrators to state the date and time of their appointment – in view of the expansive comments by the courts on this topic, it is surprising the InsS only intends to “give further consideration to removing this requirement”
  • ADM/CVL/MVL/WUC: oddly, the report states that, as R18.3(1)(b) does not explicitly require a progress report to include details of the company (but just the bankrupt), this “gives the appearance of an error so may be confusing”.  However, R18.3(1)(a) states that reports need to identify “the proceedings”, which under R1.6 includes information identifying the company, so I don’t understand the problem.  In contrast with some of the items mentioned above, the InsS apparently thinks that this issue is of such significance that they “will look to rectify this in a future update to the Rules”.  Guys, where are your priorities?!
  • CVL: “The differing use of the word ‘between’ in rules 6.14(6)(a) and 15.4(b)” (i.e. in one case, the InsS believes it does not include the days either side of the “between”, but in the other case, I think they believe it does) – the InsS has set aside for further review whether the contexts make this inconsistency sufficiently clear
  • BKY: the fact that R10.87(3)(f) lists the contents of a notice being that the Trustee will vacate office once they have filed a final notice with the court, but the Act/Rules do not require the Trustee to file such a notice
  • BKY/WUC: the 5-day period in which to nominate a liquidator or trustee after the date of the OR’s notice – the InsS acknowledged that the short timescale has caused issues (indeed! Especially considering this seems to be the only Rules’ timescale that does not start on delivery of the notice, but rather on the date of the notice)
  • CVA/IVA: Rs 2.44(4) and 8.31(5) appear to have caused some confusion as they now state that a supervisor “must not” (previously: “shall not”) vacate office until the final filing requirements have been met
  • CVA: the fact that there is no provision to file at Companies House any notice of a change of supervisor – again, the InsS’ response is surprisingly non-committal; they will merely “consider whether this justifies creating an additional filing requirement for officeholders”
  • IVA: R8.24 was overlooked in the EU Exit changes and still reflects the wording required when the UK was part of the EU

So much to do, so little opportunity

This article demonstrates the Insolvency Service’s long to-do list.  And this is only the Rules’ review.  Last month, the InsS issued a call for evidence on the personal insolvency framework and they will have a fundamental role in the statutory debt repayment plan process expected to be rolled by the end of this year… and of course no doubt behind the scenes they are working on the response to the proposed single regulator consultation. 

With such high profile projects, when on earth are they going to find the time to get back to the Rules?!

Author: insolvencyoracle

In working life, I am a partner of the Compliance Alliance, providing compliance services to insolvency practitioners in the UK. In my blogging life, I remain pretty-much Insolvency Oracle, set up after leaving the IPA in 2012 on becoming free to express my personal opinions in public.

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 )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.