Knowledge & Opinions
27 Jun 2017

England and Wales: Major changes to creditor participation under the new insolvency rules

The long-awaited modernisation of the rules applicable to insolvency cases took place on 6 April 2017 resulting in a major overhaul of the law governing insolvencies in England and Wales. The new insolvency rules, under The insolvency (England and Wales) rules 2016 have now replaced the old rules applying to insolvency cases under the insolvency rules 1986 (subject to some very limited exceptions and transitional provisions). The old rules were considered out of line with modern business practice with the original version of the rules having been introduced over 30 years ago. MSI's UK South Coast law member Lester Aldridge explains further.

The new rules operate (as was the case with the previous rules) alongside the Insolvency Act 1986 which remains the primary source of insolvency law applicable when a debtor becomes subject to a formal insolvency procedure. The main insolvency procedures in England and Wales are as follows:
  • For individuals: individual voluntary arrangement, bankruptcy, debt relief order;
  • For companies and LLPs: company voluntary arrangement, administration, liquidation.
For creditors that are owed money by an insolvent debtor, the Insolvency Act 1986 and the new Insolvency Rules set out the manner in which their claim shall be dealt with by the insolvency practitioner appointed (or proposed to be appointed) and all communications with them, including in respect of any payment due. It is a core principle of all insolvencies that claims of unsecured creditors shall rank equally with each other for payment from the insolvency estate. This means that after the secured creditors and costs and expenses of the insolvency process have been settled, any remaining funds available shall be distributed between the remaining unsecured creditors in proportion to the amount of their claims. The new rules set out modernised and more efficient processes for the insolvency practitioner to deal with creditors in respect of their claims. Key features of the new rules are as follows:
  • Changes to the format of creditors’ meetings (abolishing physical meetings as the default forum for creditor participation in decision-making)
  • Promotion of alternative decision-making procedures (including by way of virtual meetings, electronic poll or by correspondence)
  • Abolition of statutory forms with new prescribed wording for written communications
  • Creditors’ rights to opt-out of receiving reports and correspondence
  • Measures to facilitate communication with creditors (e.g. via email/websites)
For creditors who are owed money by a debtor subject to an insolvency procedure in England and Wales, but who are themselves based in another jurisdiction, the new insolvency rules assist communications with the use of e-mail and website encouraged. However, there are some potential issues for creditors since there will no longer be physical meetings convened for creditors (or their representatives) to attend to vote on key matters (such as the appointment of the insolvency practitioner) and alternative decision making procedures will be applied. This could result in certain decisions being made without a creditor’s active participation, particularly where correspondence or other notices are inadvertently overlooked. If enough creditors, being either: 10% in value, 10% in number or ten individual creditors require it, the insolvency practitioner must convene a physical meeting on a decision and applicable voting rules will operate in respect of such meetings. In the case of creditors outside of England and Wales, a physical meeting could allow more time for the instruction of proper representation at that meeting and for certain questions to be raised that might otherwise not be addressed with the insolvency practitioner. In most cases, the new Insolvency Rules will improve efficiency in insolvency cases. However, greater reliance on electronic communications and the introduction of the alternative decision making procedures (i.e. other than by physical meetings) will mean that creditors (particularly those based overseas) shall need to carefully monitor information provided about decisions proposed and to be voted on and respond to voting deadlines promptly (noting applicable time zone variations). For more information and guidance, the Insolvency & Business Recoveries team at Lester Aldridge are on hand to assist with any queries relating to the application of the new Insolvency Rules. In particular, any creditors who are owed money by insolvent debtors may want practical guidance as to how they can lodge their claim and participate in the insolvency process in order to improve the prospect of recovering sums they are owed by an insolvent debtor.

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