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Insolvency (Amendment) Rules 2010 – Key provisions in practice for insolvency lawyers
Bulletin No 257
Statutory Instruments:
The Insolvency (Amendment) Rules 2010 (SI 2010/686)
Insolvency (Amendment) (No.2) Rules 2010 (SI 2010/734)
Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2010 (SI 2010/18)Synopsis:
The Insolvency (Amendment) Rules 2010 (SI 2010/686) and the Insolvency (Amendment) (No.2) Rules 2010 (SI 2010/734) came into effect on 6 April 2010 (‘the 2010 Rules’). The 2010 Rules together with certain enabling changes to the IA 1986 contained in the Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2010 (SI 2010/18), bring into effect a large number of mostly minor changes to insolvency practice and procedure by amending the existing IR 1986. Further changes are expected to be implemented in 2011 when the Insolvency Service envisages completing a project to consolidate the IR 1986.
This bulletin summarises changes that will be implemented under the 2010 Rules of most relevance to insolvency lawyers, and we attach a link to the Insolvency Service website where the statutory instruments with the respective Explanatory Memoranda and related stakeholder commentary can be accessed:
www.insolvency.gov.uk/insolvencyprofessionandlegislation/consolidation/consolidationhome.htm
A large number of the changes are purely procedural, and many will have more impact on IPs than insolvency lawyers. However, from 6 April 2010, it will be essential for members to review the text of the 2010 Rules when making any application, or producing a witness statement, notice or report etc, covered by IR 1986 to ensure compliance with the applicable rules. For example, as well as the more widely-publicised changes such as IPs’ use of websites for sending documentation to creditors, remote attendance at meetings, and replacing affidavits with witness statements, there are also minor changes to the contents of many reports, to the notice periods for submission of reports and for holding certain meetings, and to the recipients of copy orders and reports. A new form is also required to be used for most applications.Topics Covered: Insolvency Rules 1986
Transitional Arrangements
The detail of the transitional arrangements appears in Schedule 4 to the 2010 Rules. Essentially this provides that the changes implemented through the 2010 Rules apply:
- in their entirety to all insolvency proceedings commencing on or after 6 April 2010 (and that do not follow on immediately from proceedings that commenced before 6 April 2010); and additionally
- partially to insolvency proceedings that commenced earlier, largely where the amendments relate to purely procedural measures that do not affect the substance of creditors’ rights (such as replacing affidavits with witness statements, authentication, e-delivery, remote attendance at meetings, etc).
The main changes
1. Office-holders’ remuneration and reporting
Provisions relating to office-holders’ remuneration have changed across all procedures. Instead of fixing the basis of the office-holders remuneration either as a percentage of the value of property dealt with or on a time spent basis, the office-holder can now be remunerated alternatively on the basis of a fixed fee, or a combination of any of the three bases for different aspects of the work. More detailed fees and expenses information must be provided in all progress reports and in administration proposals, and creditors have augmented rights to request further information and to challenge excessive fees and/or expenses.
Bankrupts gain an explicit power to challenge the trustee’s remuneration or expenses as excessive (if they can show a likelihood of an estate surplus, and with the court’s permission), and upon an application to annul a bankruptcy order. The difficulties for annulment applicants following the Halabi case (bulletin #148) have also been addressed.
2. Pre-appointment administration expenses
Provision has been made permitting certain unpaid pre-administration costs to be paid as an administration expense where such costs have been approved by the creditors’ committee, creditors or the court.
Pre-administration costs are defined as “fees charged and expenses incurred by the administrator or another person qualified to act as an insolvency practitioner, before the company entered administration but with a view to its doing so”. “Unpaid pre-administration costs” are defined as pre-administration costs that were not paid when the company entered administration.
Points to note in relation to this definition are:• Only fees, charges and expenses incurred by the administrator or another person qualified to act as an insolvency practitioner are included. This is a reference to s.390 IA 1986, pursuant to which a person is not qualified to act as an insolvency practitioner unless, among other things, they are bonded. There is therefore no loophole available here for license-holding solicitors unless they are providing services with a view to becoming the administrator. Equally, solicitor’s fees incurred by the company or the directors (as opposed to the IP), for example, will not be included.
• The fees, charges and expenses must be incurred with a view to the company’s entering administration, and an explanation must be given as to why the work was done before the company entered administration, including why or how it furthered the purpose of the administration. It is not clear how widely this provision will be interpreted. Arguably, work done before a decision is taken to pursue administration may not be covered by the provision, so that general insolvency advice in relation to the company’s options may not count as an unpaid pre-administration cost. On the other hand, work done towards preparing the actual administration filing or application and accompanying documents should fall within the definition, (provided they had been incurred by the prospective administrator etc, and remained unpaid when the company entered administration). This distinction in the nature of the prospective administrator’s role was scrutinised in the recent case of In the matter of Johnson Machine and Tool Co. Limited [2010] EWHC 582 (Ch), (which, of course considers the position under existing provisions before the 2010 Rules took effect), pursuant to which the court has a discretionary power to order that pre-administration costs be treated as an expense of the administration. In that case HHJ Purle QC commented that:
‘a distinction may, and often will, need to be made between the costs associated with advising the directors as to the appropriate way of dealing with the insolvency and the subsequent costs of the proposed administrator in considering and preparing the form 2.2B and any necessary witness statement, following the advice that administration is the appropriate route.’
Fees and costs incurred in negotiating a pre-pack, where applicable, might fall within the definition, provided they satisfy the criteria on a case-by-case basis. However, no payments under the rule are assured as, in all cases, the administrator must follow the approval procedure provided for in the rules and secure approval for the payment from the creditors’ committee, creditors or the court. Accordingly, early judicial clarification of the scope of this provision will be welcome. At least until then, a cautious approach against an expectation that pre-pack transaction costs will be a pre-administration expense is the safest one to adopt, but scarcely what the early departmental announcements had encouraged the profession to expect.
• To be considered for payment as an administration expense, the pre-appointment costs must be unpaid when the company enters administration.
In terms of the procedure required to be followed where invoking the new provisions, a comprehensive statement must now be included in the administrator’s proposals detailing any pre-administration costs charged or incurred by the administrator (or, to the administrator’s knowledge, by any other person qualified to act as an insolvency practitioner) together with information about the circumstances and agreements pursuant to which the costs were incurred. The administrator’s proposal document must also make it clear that payment of pre-administration costs as an administration expense is subject to approval under r.2.67A and not part of the administrator’s proposals. Unpaid pre-administration costs must then be approved in the usual way by the creditor’s committee, or if none, a creditors’ resolution. If creditor approval is not possible or refused, the administrator may apply to court to have the costs approved.
3. Electronic Communication
The amendments permit notices and documents between the insolvency office-holder and creditors to be delivered electronically if the recipient consents. These changes apply to all insolvency proceedings from 6 April 2010 and are detailed within IR.12A.
From 6 April 2010, notices of appointment of administrators by QFC’s under para 14 sch B1 made outside of court business hours in England and Wales may be made by email to rcjcompanies.orders@hmcourts-service-gsi.gov.uk as an alternative to the existing fax facility.
4. Authentication
To facilitate electronic delivery of documents, where the rules previously required a signature, the rules now require that the document instead be “authenticated”. The provision mirrors the same concept in the Companies Act 2006. Where hard copy documents are used, the requirement to authenticate them will be satisfied by signing them. A non-paper document is sufficiently authenticated if the identity of the sender is confirmed in a manner specified by the recipient or where there is no such manner specified, if a communication contains or is accompanied by a statement of identity of the sender and the recipient has no reason to doubt the truth of that statement.
5. Meetings
Inconsistencies in timings for lodging proofs and proxies have been removed: the universal time is now 12 noon on the business day before a meeting (or any adjournment of it). Notice periods for meetings have been changed. Resolutions may be adopted by correspondence in winding-up and bankruptcy (as is already the case in administration). New rules allow creditors and members to attend meetings remotely. The convenor must ensure that anyone so attending can exercise any right to speak and vote at the meeting. Even in this electronic era, there will be many IP firms who would only have conference call facilities instead of, e.g., video conferencing services. If the desire is to save costs to the estate, the latter might prove more expensive than a traditional, physical, meeting, especially if hired on a case-by-case basis. The power of the court to order that notice of a meeting be given by advertisement only, already present in liquidation and bankruptcy, is being extended to administration.
6. Changes to Forms, replacement of affidavits and other procedural changes
There are minor amendments to many statutory forms aimed broadly at standardising and simplifying their format, and to reflect other procedural changes effected through the 2010 Rules, for example the replacement of affidavits with witness statements supported by statements of truth. The suite of statutory forms is listed at Schedule 4 to IR 1986, and paras 503-558 of the 2010 Rules detail the relevant amendments required to the forms.
The most significant change is that the pre-existing differentiation between originating applications and ordinary applications has been removed and there will now be one form of application notice, Form 7.1A, which will be used in nearly all applications in the course of an extant proceeding covered by IR 1986. Initiating applications, such as winding up and bankruptcy petitions, remain and administration applications are not affected.
The Insolvency Service has stated its intention to stop detailing prescribed forms and instead list the content of information required. It is envisaged that this will facilitate electronic communications and filing. Some forms under the 2010 Rules have been replaced with a list of contents in this way, but a number of existing forms have been re-prescribed and are included within the 2010 Rules. The Registrar of Companies has also published on the Companies House website updated forms and new forms that will, as a result of the 2010 Rules, now be required to be filed there.
Throughout the Rules, references to affidavits have been removed and replaced with a requirement for witness statements with a statement of truth. In some cases this statement will be incorporated into the document to be verified and in others the reference to an affidavit is replaced by a reference to a witness statement supported by a statement of truth. “Statement of truth” has the same meaning as in the CPR.
Various other changes have been made to court procedure, which is dealt with principally at Part 7 IR 86. In particular: (i) it is now presumed that hearings will take place in open court unless the registrar/ judge makes an order to the contrary and (ii) restrictions have been placed on those entitled to inspect the court record without a court order. Helpfully, the manner in which the IR 86 diverge from the otherwise applicable CPR has been signposted in more detail through a new Rule 7.51A, replacing the existing Rule 7.51.
7. Disclaimer
The disclaimer procedure has been simplified by removing the need for the notice to be sealed by the court. Disclaimer notices will now need serving on the Chief Land Registrar, in the case of registered titles, and on the Registrar of Companies in company liquidations.
8. Liquidator’s and Bankruptcy Trustees’ Powers without Sanction
Certain of the powers of liquidators and bankruptcy trustees that were previously exercisable only with sanction (i.e. the power to compromise a company’s debts) have now been relegated to part 3 of schedule 4 IA 1986 (or Part 2 of Schedule 5 for trustees) in England & Wales only so that compromises can now be entered into without sanction.
9. Modernising language
A number of phrases or words have been modified, tidied up or amended for consistency. For example, “as the court sees fit” has been changed (without changing the effect) to “as the court sees just”. “Leave of the court” is now “permission of the court”. Hearings previously held “ex parte” are now held “without notice”. “Deponents” have become “nominated persons”, and a person previously “nominated” to be a chairman at the s.98 IA 1986 meeting is now “appointed” instead. Time limits measured in numbers of days have, where the number is 7 or less, been replaced with a number of “business days” instead (e.g. 7 days is now 5 business days).
10. EC Regulation on Insolvency Proceedings
Changes have been made to reflect the fact that administration has for some time been included in the list of permitted secondary proceedings contained in Annex B of the EC Regulation, and to cover the circumstances where either a CVA or administration proceedings are opened as main proceedings and need to be converted into secondary proceedings, or a person is appointing an administrator or applying for such an appointment, and needs to state whether the proceedings will be main or secondary proceedings. In order to qualify as secondary proceedings for the purposes of the EC Regulation, the purpose of the administration must be restricted to exclude rescuing the company as a going concern.
11. Statutory Demands
Company statutory demands must now include a statement that the company has the right to make an application to the court for an injunction restraining the creditor from presenting or advertising a petition for the winding up of the company.If you wish to be removed from the ILA mailing list and not receive any further updates please click here
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