Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Emerging from the fog: some Amendment Rules

 

Long time, no see! Jo Harris has done a great job of keeping up with her monthly updates, whereas regrettably I have failed to blog throughout this crazy-busy time. But the release of new Amendment Rules is worthy of extra-special effort on my part.

The new statutory instruments, which (subject to Parliamentary scrutiny) will come into force on 8 December 2017, can be found at:

 

The Partnership Amendments

The bulk of the Partnership Amendments brings E&W LLPs and processes falling under the Insolvent Partnerships Order 1994 into line with the Insolvency (England & Wales) Rules 2016 (“2016 Rules”). Similarly, they also wrap the Administration of Insolvent Estates of Deceased Persons Order 1986 into the 2016 Rules regime.

They also add a positive duty on office holders of insolvent partnerships in Administration or Voluntary Liquidation to report on the conduct of officers of the partnership in the same manner as reports in corporate insolvencies, i.e. within 3 months of commencement. Officers of partnerships in liquidation can now also become subject to CDDA compensation orders.

The LLP changes are subject to transitional provisions similar to those that accompanied the 2016 Rules (e.g. where an old rules meeting has been convened before the relevant date, the meeting is concluded under the old rules) – of course with the relevant cut-off date being 8 December 2017.

  • Form 600 – Notice of the Liquidator’s Appointment

Unsurprisingly as it is governed by the Companies (Forms) (Amendment) Regulations 1987, changes to the Form 600 had not been wrapped in to the 2016 Rules changes. The Partnership Amendments replace the prescribed form with prescribed contents in the style of the 2016 Rules.

These changes to Form 600 have effect only in relation to liquidators appointed after 8 December 2017, so you should keep hold of the old Form 600 for a few more weeks. In any event, as far as I can see the new Form 600 has not been released yet on .gov.uk. Presumably, it will appear at https://www.gov.uk/government/collections/companies-house-forms-for-insolvency-rules-2016 soon.

 

The Amendment Rules

For me, this set of amendments is far more interesting. It has been badged by the InsS as making “minor corrections and clarifications which have been brought to our attention since the new insolvency rules came into force in April 2017”. But don’t get your hopes up. The Amendment Rules tackle a peculiar small cluster of rules.

  • Closing bankruptcies and compulsory liquidations

We all knew that the 1994 Regs that required Trustees and Liquidators to send to the InsS an R&P (aka Form 1) within 14 days of “the holding of a final general meeting of creditors” needed changing. However, I had assumed that all the InsS would do would be to drop the meeting reference so that the Form 1 would be sent on the IP vacating office – I think this is how most IPs have been fudging their way through the closure processes since April.

However, the Amendment Rules make a surprising change: from 8 December, submission of the Form 1 must occur within 14 days of sending the final account/report to the creditors. This means that the new closure process appears to be:

  1. The Liquidator/Trustee sends a notice that the administration has been fully wound up and the final account/report to creditors.
  2. Within 14 days of (1), the Liquidator/Trustee sends Form 1 to the InsS. The amended 1994 Regs continue to refer to the Form 1 as covering “the whole period of his office”, although as the IP will still be in office for another 6 weeks or more, it is difficult to see how this truly can be achieved.
  3. At least 21 days before the end of the 8-week period, the Liquidator/Trustee delivers notice of the intention to vacate office to the OR.
  4. 8 weeks (plus delivery time) after (1), provided that there are no outstanding challenges to fees/expenses etc.:
    • The Liquidator sends a copy of the notice under S146(4) to the SoS.  The notice is Form WU15 plus a copy of the final account that was sent to creditors under (1) above. These are also sent to the Registrar of Companies and the Court.
    • The Trustee sends a copy of the notice under S298(8) (which states whether any creditors objected to the Trustee’s release) to the SoS. We have learnt that the InsS also expects this notice to refer to R10.87 – without this reference, it seems that the InsS is rejecting the notice. R10.87(5) states that the notice must be accompanied by a copy of the final report, i.e. the report produced at (1) above. The notice and the final report are also sent to the Court.

The key point arising from the Amendment Rules is that in future the submission of Form 1 will occur at least 6 weeks before the IP vacates office. This reinforces the 2016 Rules’ approach that the account must be drawn down to nil with no remaining VAT issues etc. when the final account/report is issued at the start of the 8-week countdown.

In my autumn 2016 Rules’ presentations, I have been highlighting the issue of how to deal with any quarterly charge made on the IS account during the 8-week period. In the past, the InsS has expected IPs to leave £22 in the account in order to settle this, if the quarterly charge falls due in the 8-week period. It seems that, from 8 December 2017, the InsS may no longer charge to maintain the account after the Form 1 has been delivered to them. In effect, the Form 1 may be the trigger for the InsS to close the account.

In view of the significant changes to the required process made by this amendment that seemed at first glance quite insignificant, I am very pleased to have learnt that the InsS intends issuing guidance to IPs on what is required (and thank you, InsS, for dealing with my niggly queries).

  • Committees

This is something that was worth taking the trouble to fix: because of the 2016 Rules’ obsession with tagging everything to “delivery” (except of course when it involves the OR!), Liquidation/Creditors’ Committees never became established – and therefore could not act – until the notice had been “delivered” (R17.5(5)). Therefore, gone were the days when there could be a creditors’ meeting at which the newly-elected committee members were asked to stay behind after the meeting so that the office holder could hold the first committee meeting. Rather, the 2016 Rules required the newly-elected committee members to disperse for at least a few days until the office holder was certain that the notice of the committee’s establishment had been delivered and then the first committee meeting could be summoned.

The Amendment Rules return some sense to the process. Unfortunately, technically the notice still must be “sent” before the committee can act, but at least we no longer have to wait for “delivery”.

An odd wrinkle is that R17.29(3) remains untouched. Therefore, where an Administration is followed by a Compulsory Liquidation, the Liquidation Committee (i.e. the Creditors’ Committee that existed in the Administration) cannot act until the notice of continuance of the committee has been “delivered” to the Registrar. Never mind. I think we can live with this inconsistency.

  • Proxy forms

If you blinked, you will have missed it: the Amendment Rules swiftly return the 1986 Rules’ restriction on the content of proxy forms.

Personally, I thought that the 2016 Rules’ relaxation, which allowed proxy forms to display the name of the members’ nominated liquidator, was quite sensible – after all, don’t companies use such proxy forms all the time to appoint auditors? – provided of course that the form was also designed to enable a creditor easily to nominate a different IP.

However, the Amendment Rules again prohibit proxy forms from being sent out displaying the name of anyone as nominee for the office holder (as well as the name of anyone as proxy-holder, which has always been in the 2016 Rules).

  • S100 Reports

In my view, the 2016 Rules’ excessive use of “notices” with their copious prescriptive standard contents defeated the argument that an objective of the new rules was to reduce costs. Whereas under the 1986 Rules a simple one-page letter sufficed, in many cases the 2016 Rules require a long-winded notice. The circular produced after the S100 decision is one such example.

Whilst I accept that the grammar was questionable, I think that R6.15(1) could have been interpreted as requiring a “notice” providing a report on the S100 decision process to be issued. The Amendment Rules have changed this so that the “notice” is now “accompanied by a report”. Now that R6.15(1) presents us with only a list of accompaniments, I am left wondering what exactly our notice should state!

  • Other Corrections

To be fair, the Amendment Rules do fix some obvious errors, albeit that I think we have all managed to apply those particular 2016 Rules on the basis that we could see what they meant to say.

For example, paragraph 21 of Schedule 2 could have been interpreted as meaning exactly what it says: “the 1986 Rules apply” in certain pre-October 2015 cases – what, all of the 1986 Rules..? But I think we all realised that it meant that those pre-October cases did not need fee estimates etc. The Amendment Rules now specify which of the 2016 Rules do not apply.

I also couldn’t help but smile that the Amendment Rules finally correct the transitional provision on when the next progress report is required on an Administration that extended pre-April 2017… although of course all such Administrations are already 8 months older, so this argument has come and gone… but thanks, InsS, for listening 😉

Personally, I think there are other 2016 Rules that would benefit from further clarification (e.g. the inconsistent use of the word “between” and whether the Centrebind 14-day limit applies where a S100 decision date has been postponed because of requests for a physical meeting etc.), but every little helps.

It’s easy to forget the decades of debate and case law that went into refining our understanding of the 1986 Rules. Although in part the 2016 Rules are a product of our standing on the shoulders of giants, in many respects they venture into uncharted territory, which no doubt will generate decades more of furrowed brows.

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Emerging Interpretations of the New Rules – Part 1: the biggies

Along with Dear IP 76, the Insolvency Service’s Rules blog has been a fascinating read. If you don’t fancy trawling through all 148 comments, here are my personal favourites. There are too many to cover in one go, so I’ll start here with a handful of the more contentious:

  • How do the New Rules affect existing VAs?
  • What is the deadline for forcing a S100 physical meeting?
  • What happens if a Centrebind is longer than 14 days?
  • How should you handle decisions sought from preferential creditors alone?
  • How should creditors comply with the Rules when submitting notices and forms?

 

I’ll also take this opportunity to reflect on how these emerging interpretations and the Amendment Rules have impacted on my previous blog posts. I have tried to update old blog posts as time has moved on, but I cannot promise that old blog posts – or indeed this one – will remain current. Things are moving fast.

Dear IPs can be found at: https://goo.gl/wn8Vog (although no. 76 has yet to appear)

The Insolvency Service’s Rules blog is at: https://theinsolvencyrules2016.wordpress.com/

 

Can we rely on the Insolvency Service’s answers?

Nick Howard’s introduction to Dear IP 76 states candidly “While it is only a Court that can give a binding interpretation of the law, the enclosed article sets out the policy intentions and how we believe the Rules support those”. That’s understandable. Much as we thirst for a cut-and-dried answer, we cannot have it. Just like the 1986 Rules, it will take decades to establish robust interpretations and even then there will always be the Minmar-like decision that takes us by surprise.

  • What about the Rules blog?

To be fair, the Service provided it with the purpose “to offer users the chance to share their thoughts and experiences as they prepare for commencement” of the Rules. It was never meant to be an inquisition of the Insolvency Service, but it was inevitable that it would turn out that way and I am very grateful that the Service has grasped the nettle and been prepared to post their views publicly for the benefit of us all.

  • So what comfort can we draw from the answers?

At the very least, the Service’s explanations are extremely valuable in understanding how they meant the Rules to work and in giving us all a starting point. I wonder if it could be seen a bit like the new mantra, “comply or explain”: if we don’t trust an answer, we need to be certain that our reasons for departing from it are well-founded. And at the very best, the Service has provided explanations that make us say: “right, yes I can see that. Thanks, I’ll work on that basis”.

 

What are the New Rules’ Impacts on Existing VAs?

The difficulty for the Insolvency Service – and indeed for all of us – is that of course each VA is dependent on its own Proposals and Standard Terms & Conditions (“STC”), so expressing any opinion on the effect of the New Rules on VAs in general is going to be dangerous.

  • The difference between IVA Protocol and R3 STCs

The majority of IVAs use either the IVA Protocol or R3’s STC, so you might think it would be relatively straightforward at least to establish some ground rules for these two documents and then leave each IP to determine whether the Proposal itself has any overriding effect. Dear IP seems to have made a stab at this in relation to the IVA Protocol at least. However, I think it is important to bear in mind that Dear IP makes no mention of R3’s STCs and from what I can see there is a chasm of difference in how the two STCs have incorporated the 1986 Rules.

True, both STCs define the “Rules” as the Insolvency Rules 1986 as amended and the Service makes the case for equating this to the 2016 Rules. I have heard argument that the Service’s reliance on S17 of the Interpretation Act 1978 does not stack up: if a contract – which is what we’re talking about here – refers to Rx.xx of the Insolvency Act 1986 (as amended), does it not remain as such notwithstanding that the 1986 Rules have been revoked?

This takes me to the chasm between the two sets of STC: for example, the IVA Protocol STC state that “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules” (19(1)), whereas the R3 STC describe in detail how to convene meetings and conduct postal resolutions with no reference to the Act or Rules. Therefore, personally I am struggling to see how the 2016 Rules affect existing VAs’ methods of seeking creditors’ agreements where those VAs are based on the R3 STC. However, I also question whether the R3 STC restrict meetings to physical ones – when I read the STC cold, I’m not persuaded that they don’t also work for virtual meetings (but then again, don’t most meetings happen only on paper anyway?) – so it seems to me that the R3 STC may allow a variety of routes but, thankfully, without all the baggage that the 2016 Rules carry with them, which may load down Protocol IVAs in view of their vague reference to “in accordance with the Act and the Rules”.

  • Does Dear IP make the IVA Protocol position clear?

It’s Dear IP’s treatment of the Protocol STC’s wording, “The Supervisor may… summon and conduct meetings of creditors… in accordance with the Act and the Rules”, that puzzles me. On the one hand, Dear IP acknowledges that the Act and Rules “remain silent on how decisions are taken once in (sic.) a voluntary arrangement is in place”… so they seem to be saying that the Act and Rules are irrelevant to a supervisor looking to call a meeting. But then Dear IP says: “we do not believe [supervisors] should feel restricted to only using a physical meeting. We expect supervisors to take advantage of the new and varied decision making procedures that are available under the Act as amended and the 2016 Rules”.

But how possibly can the phrase, “the supervisor may summon and conduct meetings of creditors”, morph into for example: “the supervisor may seek a decision by means of a correspondence vote”? This is too much of a stretch, isn’t it? Rather than be meant as a comment on the application of the 2016 Rules to existing VAs, perhaps the Service is simply stating that it would like IPs to incorporate the various processes in future VA Proposals and STC, don’t you think?

Because the Act and Rules in themselves do not empower supervisors to seek decisions, does this mean that the Protocol STC’s words “in accordance with the Act and the Rules” are redundant? Or are these words supposed to mean that the supervisor should “apply the provisions of the Act and Rules in so far as they relate to bankruptcy with necessary modifications”, as paragraph 4(3) of the Protocol STC states? Ok, if the latter is the case, then what is the effect of S379ZA(2), i.e. that a trustee cannot summon a physical meeting unless sufficient creditors request one? This would seem to take us far from the Dear IP position where supervisors should not “feel restricted to only using a physical meeting”.

For these reasons, I think the Dear IP is horribly muddled. Perhaps the IVA Standing Committee might like to clarify the position in relation to their STC..?

 

What is the deadline for forcing a physical meeting in a S100 scenario?

This is another area that seems to have got horribly muddled. It seems to me that much of the confusion over this arises because of the conflating of two potential creditor responses: (i) a creditor can object to a decision sought by deemed consent; or (ii) a creditor can request a physical meeting. It is true that, when a S100 decision on the liquidator is sought by deemed consent, the consequence of either response is the same: a physical meeting is summoned. However, the Rules around each response are different.

  • The deadline for objections

R15.7(2)(a) states that the notice seeking deemed consent must contain “a statement that in order to object to the proposed decision a creditor must have delivered a notice, stating that the creditor so objects, to the convener not later than the decision date”. “Not later than the decision date” must surely mean that objections delivered on the decision date are valid (note: although this rule only specifies what must appear in a notice, S246ZF(4) makes clear that “the procedure set out in the notice” is binding).

  • The deadline for physical meeting requests

For a S100 decision, R6.14(6)(a) states that “a request [for a physical meeting] may be made at any time between the delivery of the notice… and the decision date”. I have heard argument that “between” excludes the days at each end, which would mean that the deadline for requests would be the end of the day before the decision date. At first, I was persuaded by this interpretation, given that, if I were to count how many people in a queue were between me and the ticket office, I would not include myself in the number… but then someone asked me to pick a number between 1 and 10..!

This interpretation of “between” also makes little sense when considering R15.4(b), which states that an electronic voting system must be “capable of enabling a creditor to vote at any time between the notice being delivered and the decision date”… so the IP isn’t interested in votes cast on the decision date then..?

  • The Insolvency Service’s policy intentions

How does Dear IP pull these threads together? It states: “The policy intention (in all cases) is that a request for a physical meeting must arrive before the decision date. The policy intention with regard to electronic voting is that creditors may cast their votes up until the decision closes (i.e. 23:59 on the decision date). We believe that the 2016 Rules are capable of supporting both these policy intentions.”

The Insolvency Service appears blinkered in their statement that the 2016 Rules support the policy intention, because they simply focus on requests for a physical meeting. Irrespective of how “between” is interpreted, the fact is that a deemed consent can be objected to up to 23.59 on the decision date and such an objection would force a physical meeting. Therefore, a members’-appointed liquidator will still be left in the position of not knowing whether there will be a last-minute objection that will force an unexpected c.week-long Centrebind.

 

What happens if a Centrebind is longer than 14 days?

I feel I should apologise for wasting people’s time in explaining (via this blog (https://goo.gl/hikYKr), R3 presentations and our webinars) the risks that a Centrebind could last longer than 14 days if material transactions need to be reported or a physical meeting needs to be convened.

  • The Insolvency Service’s simple answer

The Insolvency Service gave the simple answer on their blog that “it is sufficient that the original decision date was within the required timescale”. In other words, provided that the convener fixed the decision date for the S100 deemed consent process or the virtual meeting not later than 14 days after the winding-up resolution, it is of no consequence that this decision date falls away because the date of a consequent physical meeting falls outside this timescale.

I find the Insolvency Service’s answer startling. Personally, I would expect the Rules to make explicit that it is the original S100 decision date that matters, in the same way as Para 51(2) uses the expression “initial decision date” when setting down the 10-week deadline for Administrators to seek approval of their proposals (i.e. Para 51(3) explicitly provides that Administrators do not get into a pickle if creditors reject a decision by deemed consent and then the Administrator convenes another decision process with this second decision date falling outside the 10 weeks).

  • Can this principle apply also to VA Proposal decision dates?

What about the other instance when an important decision date deadline must be met: the approval of an IVA Proposal? R8.22(7) states that this decision date must be not more than 28 days from the date on which the nominee received the Proposal (or when the nominee’s report was considered by the court). Given that 14 days’ notice is required, it would be very possible for a physical meeting decision date to be outside this timescale. Would it matter as long as the original decision date was inside it? The Rules do not address this point, but neither do they address the unintended Centrebind position.

Much as my heart’s cockles are warmed by the Insolvency Service’s answer, personally I would be nervous in relying on it.

 

How do you deal with preferential creditors’ decisions?

The Insolvency Service’s answers on this topic are eminently sensible and I am more than happy to live with them… but it’s just that I cannot help but continue to ask myself: “yes, but where does it say that?”

The questions surround the New Rules’ defined process for seeking prefs’ approval of matters such as the Administrators’ fees. Exactly how do you conduct a decision procedure of prefs alone?

Firstly, what do you do with pref creditors who have been paid in full? R18.18(4) states that pref creditors must make a decision on fees, if the Administrator “has made or intends to make a distribution” to prefs (in a Para 52(1)(b) case). This would seem to include prefs who have been paid in full, but R15.11 excludes them from receiving notice of the decision procedure.

But, actually, what do we mean when we refer to pref creditors being paid in full? Usually we mean that the pref element of their claim has been paid in full, but often they will still have a non-pref unsecured claim. How do you calculate a pref creditor’s value for voting purposes?

R15.31(1)(a) states that, in an administration, votes are calculated “according to the amount of each creditor’s claim as at the date on which the company entered administration, less any payments that have been made to the creditor after that date in respect of the claim”.

  • Another simple answer from the Insolvency Service

The Insolvency Service’s answer to these questions was: “Our interpretation is that [R15.31(1)(a)] would lead an administrator to consider the value of outstanding preferential claims at the date that the vote takes place. This would only include the preferential element of claims, and if these had been paid in full then the administrator would not be expected to seek a decision from those creditors.”

Personally, I don’t see that R15.31(1)(a) gets us anywhere: it doesn’t state that a creditor’s claim is only its preferential element when a decision procedure is only open to pref creditors and it doesn’t state that you do not need to seek a decision from pref creditors who have been paid their pref elements in full… but in all other respects I like the Service’s answers!

 

Do creditors need to get forms absolutely correct?

There is no denying that the 2016 Rules have placed a heavier burden on us all to get the details correct. Many things that we were used to doing in simple text form are now described as “notices” and every statutory notice must include “standard contents”, which often require the addition of new detail such as insolvents’ company registered numbers or residential addresses.

  • The validity of old proofs of debt

In many cases, creditors are not spared these requirements. For example, the prescriptive detail of proofs of debt – R14.4 – is quite different from the old requirements. If you are adjudicating on pre-April proofs, can you accept them for dividend purposes? Indeed, can you rely on a Notice of Intended Dividend process commenced before 6 April?

As regards the need for creditors to submit new proofs to meet the New Rules’ requirements, the Insolvency Service answered: “Section 16 of the Interpretation Act 1978 may be relied upon here, and proofs which have already been submitted do not become invalidated.”

Incidentally, S16 of the Interpretation Act 1978 states that a “repeal does not, unless the contrary intention appears… affect the previous operation of the enactment repealed or anything duly done or suffered under that enactment [or] affect any right, privilege, obligation or liability acquired, accrued or incurred under that enactment”, so does this help as regards NoIDs? Are IPs safe to rely on old NoIDs as protecting them from late creditors? This wasn’t the question put to the Service, but it would seem to me the only way the New Rules could possibly work.

However, I’m not quite sure how S16 helps IPs decide now whether to admit an old proof for dividend purposes, when surely they must measure proofs against the New Rules, mustn’t they? But, realistically, what could an old proof possibly be lacking that might struggle to get it admitted under the New Rules?

  • Providing the detail required for new proofs

I asked the Service about the requirement for a proof to be authenticated. R1.5(3) states that “if a document is authenticated by the signature of an individual on behalf of… a body corporate of which the individual is the sole member, the document must also state that fact”. If a creditor failed to state this on a proof, would it render the proof invalid? And, if so, does this obligate office holders to check this point?

Alternatively, does R1.9(1)(b) help us all out? This rule states that “where a rule sets out the required contents of a document, the document may depart from the required contents if… the departure (whether or not intentional) is immaterial”.

The Insolvency Service’s answer was: “The extent to which an office-holder could rely on rule 1.9(1)(b) here would be a matter for them to decide, possibly in liaison with their regulatory body.” I can understand why the Service was not tempted to put their neck on the block on this question, but it does demonstrate to me the nonsensical nature of the New Rules: they set out prescriptive detail of what must be provided… then add a rule that states it’s okay if a departure is “immaterial”. Why put prescriptive immaterial requirements in the Rules in the first place?!

  • Do creditors need to meet the notice requirements?

I felt a similar irritation when I read Dear IP’s article, “Do creditors’ notices have to comply with standard content”, for example when creditors object to a decision sought by deemed consent. The Service seems to be implying that the answer is no: “if it is clear what the creditor is seeking in their notice, it should be accepted”. Again, this leaves me wondering: if a creditor is free to run a red light, why put the lights up in the first place?

Having said that, R1.9(1)(b) might be a useful one to remember the next time the RPB monitors call… although we might expect some debating over what is “immaterial”.

  • The detail (not) required for proxy forms

I think it is also worth mentioning here the observation made on the Service’s blog at the lack of prescription when it comes to proxy forms. The Service explained that “the requirement to authenticate [a proxy form] was removed as a deregulatory measure, because authentication does not confer legitimacy. As long as the office-holder is satisfied that the proxy comes from the creditor then the requirements for submission are met.” So a creditor must sign a hard copy proof but need not sign a proxy form. Well, fancy that!

 

In my next post, I’ll set out some other nuggets gleaned from the Insolvency Service’s blog.