Will rule changes create a period of uncertainty for insolvency practitioners?

Shakespeare Martineau's Sean Moran outlines what insolvency practitioners need to watch out for with regulatory changes that came into effect this week.

Important rule changes affecting the way insolvency cases are handled will create a period of uncertainty for practitioners but they should bring benefits to the profession and creditors in the longer term.

The new Insolvency (England & Wales) Rules 2016, which came into force on 6th April 2017, include new procedures for creditors meetings and voting to pass resolutions. For insolvency practitioners, this has caused some concern, particularly as inconsistencies in the new legislation are bound to emerge, which may need to be tested in the courts.

The legislative changes are intended to increase creditor engagement and drive efficiencies by reducing the amount of administration involved in insolvency processes with a view to improving levels of engagement and saving costs. Although for example greater use of e mail communication is a positive step in this direction, industry opinion formers believe that in some respects certain other new measures could have the reverse effect.

Specifically, the new rules abolish the requirement for certain meetings to take place. Physical meetings have historically been used to secure the appointment of insolvency practitioners, approve their fees and secure the go ahead of creditors for important decisions relating to the strategy in a case. From 6 April the office-holder must first use other procedures to secure approval of resolutions, using electronic voting, virtual meetings or “deemed consent”. Creditors or contributories can object to these procedures and requisition a physical meeting but this would require a minimum of 10% to do so in writing.

It is feared that insolvency practitioners managing such processes via electronic communication methods in future may face challenges with the absence of reliable internet access in many areas. This could lead to some creditors feeling disengaged from proceedings. The lack of physical creditor meetings could also lead to increased monitoring and compliance issues for practitioners as there could for example be uncertainty about whether correct procedures have been followed in recording creditor claims.

Despite the concerns that have been raised about the incoming rule changes, it is important to recognise that they are essentially procedural and will not change the fundamental principles in the existing legislation. They are designed to dovetail with the Insolvency Act. This could be part of the problem, however, as practitioners fear there could be a clash between the old and new procedures.

In the short term, the changes mean that office holders will have to hit the ground running on 6 April. The lack of transitional provisions in the majority of the new rules ensure the changes will affect on-going cases immediately and whilst some face-to-face meetings have already taken place, approval for future decisions will need to be sought under the new regime. This could lead to confusion for creditors and practitioners alike. Uncertainty surrounding the new procedures could also cause delays in progressing cases in the short term.

Practitioners in smaller insolvency practices, who tend to rely on referrals from the official receiver rotas, are likely to be among those most disadvantaged by other changes coming into effect under the new rules. With effect from 6 April the Official Receiver (OR) will immediately be appointed trustee in bankruptcy on the making of a bankruptcy order and in cases where bankruptcy orders were made prior to 6 April but no trustee has been appointed.

Under these changes there will also be no requirement for the OR to summon a creditors meeting to appoint a first trustee. A meeting to remove the OR as trustee can only be convened by the OR, the court or 25 per cent or more of the bankrupt’s creditors. The OR will therefore handle more personal insolvencies directly and fewer cases will be outsourced to private practitioners. This may well result in a backlog of cases, due to a lack of resources to the disadvantage of creditors generally.

Despite being motivated by a desire to modernise and improve insolvency processes, the rule changes could have the opposite effect in the short term. However, it is hoped that as the new procedures bed in and any issues arising have been clarified, a more streamlined system will enable practitioners to administer cases efficiently and ensure that creditors are fully engaged in the insolvency process.

Sean Moran is a partner and insolvency law specialist at Shakespeare Martineau.

See also: Insolvency advice for companies in trouble – It is the one thing every entrepreneur hopes will never happen, but it’s expected to hit 20,000 companies next year. We talk to those in the know about how to handle insolvency.

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