Insolvency Rules: An issue of inconsistency

13 August 2021

The Insolvency (England Wales) Rules 2016 represent one of the most important pieces of secondary legislation in the insolvency framework.

More than most aspects of this framework, the Rules and the policies they implement make a fundamental difference to the day-to-day work of the insolvency profession.

It’s for this reason that when the Government published a call for evidence to inform its five year review of the Rules, we welcomed the opportunity to respond. Our full response can be found here, while this blog post summarises some of the main points we made in our submission.

Background

The current iteration of the Rules came into force in April 2017. It aimed to consolidate, modernise and simplify the earlier 1986 version of the Rules, and to implement policy changes introduced by primary legislation such as the Deregulation Act 2015 and the Small Business, Enterprise and Employment (‘SBEE’) Act 2015.

The SBEE Act also contained a requirement for the Insolvency Service to carry out a review of, and publish a report on, the 2016 Rules, within five years of them coming into force.

Overview

When the Government put forward proposals to modernise the 1986 Insolvency Rules in 2014, we noted that while “we fully support the aim of the making the Rules clearer, easier to follow and removing inconsistencies”, we were concerned that the draft changes “do not achieve this objective”. We raised concerns around both new and remaining inconsistencies, and some of the changes adding to – rather than reducing – complexity.

Seven years on, it is clear that some areas of the 2016 Rules have hindered – rather than improved –  the UK’s insolvency framework, for three main reasons:

1.      There are significant issues related to clarity and consistency. R3 members have highlighted areas within the Rules which are confusing, unclear, where inconsistencies exist, and where there is simply too much information for creditors to take on board. 

2.      The lack of flexibility around how decisions and creditors’ meetings are conducted has made it harder for insolvency practitioners to establish effective working relationships with the individuals who may have valuable information about a case. Difficulties in obtaining this information have sometimes made it harder for insolvency practitioners to carry out their duties of maximising returns to creditors.

3.      Both of the above themes have had a damaging knock-on effect to creditor engagement. Information overload, decision-making complexity and inconsistencies have all made it harder for creditors to get involved in insolvency processes.

Scope of the review

The recently published call for evidence looks at how well the Rules have implemented the policies of the Deregulation and SBEE Acts – rather than the policies themselves. However, it is very difficult to assess one without also looking at the other. Given that the Rules “[require] the review [of the Rules] to consider whether the underlying policy objectives to which those rules seek to give effect remain appropriate”, we are urging the Insolvency Service to also take into account, and act on, stakeholder views on these policies, when carrying out its review. Doing so would not only improve the efficiency of the insolvency profession’s work, but crucially improve outcomes and experiences for creditors.

Inconsistency and lack of clarity

Although one of the primary objectives behind the consolidation and restructuring of the Rules was to increase clarity and remove inconsistencies, issues relating to these two areas remain, causing practical problems for our members and discouraging creditors from engaging in insolvency procedures.

In general, the large volume of information that insolvency practitioners are required to provide to creditors creates an additional barrier to clarity. A simplification of what insolvency practitioners are required to include within progress reports across the various insolvency procedures would make it much easier for creditors to identify what work has been carried out by the practitioner on a case, and whether or not the work was adequate.

Requiring secured creditor approval by vote

Inconsistencies across various areas of the Rules have also resulted in practical difficulties. One example, raised by several of our members, concerns the requirement to obtain approval of fees or administration extensions from secured creditors by vote, even after these creditors have been paid in full. From the secured creditor’s perspective, their involvement in an insolvency procedure understandably should come to an end once they have been paid, and so it is often difficult for insolvency practitioners to obtain their approval once this has happened.

As the Rules cover what a practitioner should do in the situation where an unsecured creditor has been paid, they should also clarify an appropriate procedure for when a secured creditor has been paid.

Physical meetings

In an attempt to modernise the insolvency framework and improve creditor engagement, the Rules prescribed that the majority of decisions should be taken remotely. The SBEE Act abolished the use of physical meetings as the ‘default’ decision-making procedure, with the Rules then stating that an insolvency practitioner can only call a physical meeting if it is requested by 10% of creditors.

However, while a physical creditors’ meeting should not be the default in all insolvency cases, these meetings are often a crucial opportunity for insolvency practitioners to engage with the individuals who may have valuable information about a case. The absence of this opportunity has made it more difficult for insolvency professionals to effectively carry out their duties to creditors. Our members have also found that creditors are unlikely to want to compromise or better their rights without a verbal discussion, meaning that the options for rescuing the business are reduced.

Although virtual meetings have been a helpful option during the COVID-19 pandemic, the appropriate technology does not currently exist to be able to conduct them effectively in many cases, particularly where there are very large numbers of creditors. The alternative to virtual meetings – postal correspondence – can be very costly in cases where thousands of creditors are involved, meaning less money can be returned to creditors.

We have suggested that insolvency practitioners acting as officeholders should be allowed the discretion to call a physical meeting where they believe one is necessary. This would save creditors time and money, and better allow members of the insolvency profession to carry out their duties.

Moving forward

As the Government progresses with its review, we will continue to highlight R3 members’ views with a view to ensuring that the Rules can further evolve to reflect and support modern business practice. Improving this crucial aspect of legislation will not only benefit the insolvency profession – it will help creditors and the wider body of stakeholders too.