Tom D'Arcy

What are the effects of the new insolvency rules?

The new Insolvency Rules came into effect on the 6th April 2017. The new rules are already undoubtedly having a significant impact on the Insolvency profession. They represent the most significant shake up in the insolvency professional legislation for more than 30 years when the Insolvency Act was introduced in 1986. The changes have been brought about with the intention of increasing creditor engagement and to streamline the profession. It is still too early to tell whether these changes will bring about the desired improvements but what we can be sure of is many IPs are having to make significant investments in their IT and processes.

The new legislation aims to consolidate the existing rules and their amendments into a single piece of legislation. As well as modernising and simplifying the language used to make it easier to understand, the new rules also introduce gender neutral language. Separate insolvency rules for Scotland will be introduced later in the year.

The key aims of the legislators in making these changes were to increase creditor engagement in the insolvency process and to reduce unnecessary administrative tasks that in turn increase costs and reduce the returns to creditors. There will be no fundamental changes to the actual individual insolvency procedures.

The reduction of administration and streamlining activities will be achieved through the stopping of physical creditor meetings and the encouragement of electronic communication.

The end of physical creditor meetings

For a number of years there has been a gradual decline in creditor attendance at physical meetings.  As a result, physical creditor meetings have been abolished as the means by which insolvency practitioners seek appointment on insolvency cases and, once appointed, obtain decisions from creditors on matters such as their remuneration, taking legal action, and extending administration periods.

Physical meetings will now only take place if creditors have actually asked for them.  Instead creditors will be asked to make decisions by a variety of means including by correspondence, electronic voting and virtual meetings. Insolvency practitioners will also be able to ask for confirmation of decisions made using the deemed consent procedure, whereby if no creditors object within a specified period, the decision is deemed to have been approved. All of these measures are designed to assist the insolvency practitioner in choosing the method which will suit the creditors best, making it easier for creditors to get involved and take part in the decision-making process.  IPs will need to have access to modern technologies to fully take advantage of the different decision procedures available and in some cases at considerable cost. As the new rules bed in, it is hoped that new technologies will be developed alongside the rules, to assist insolvency practitioners in making these new decision procedures work in practice including forms of electronic communication.

Communication Methods – Electronic

To bring the service in line with modern business, the new insolvency rules encourage the use of electronic communication between insolvency practitioners and creditors rather than traditional post. The use of email is a faster and more efficient means of communication. Also more web based solutions will be developed such as the use of an insolvency practitioner’s website as a means of making information more widely available to creditors. In due course, the aim is for creditors to be able to log on and see all of the reports and decisions sought on a case 24 hours a day.

Creditors who see no benefit of being actively involved in an insolvency process, for example, where there will be no dividend payment anticipated due to a lack of available assets, will be able to “opt out” of all correspondence and avoid having to read through unwanted progress reports or requests for decisions. Opting out will not, however, mean that they do not receive dividends if they become available. This should be welcomed by many creditors who often express frustration at receiving endless unwanted reports. However this means that IPs will need to keep two address lists, ensuring opt-out creditors don’t receive general communications but do receive dividend letters.

While there are no real changes to procedures the change in communications and the removal of face to face meetings will undoubtedly streamline the process.  Also the ability of an insolvency practitioner to accept small debts (those below £1,000) for distribution purposes without the creditor having to formally prove will be welcomed, but will be most beneficial in IVAs where consumer debts of low values are common. This should reduce the volume of administration activity for insolvency practitioners and creditors alike.

More upfront communication is needed as creditors need the new processes to be explained but this should be reduced as the new rules become more familiar. There are substantial additional requirements under the new rules for insolvency practitioners to provide creditors with information on their new rights and obligations and this will increase the complexity of the initial letters received by creditors. How this is managed by individual insolvency practitioners will be key to the success in implementing the changes.

It will still take time for creditors, directors and insolvency practitioners to get used to the new decision making processes.

Here at White Maund we are embracing the new changes with investment in our website and full adoption of the new communication methods. We aim to provide as much information as possible through our website in terms of guides and case studies but if you would like advice on how the new rules operate please do get in touch.