Home Business Company Law What are the Insolvency Rules?

What are the Insolvency Rules?

The Insolvency Rules 2016

On 6 April 2017 a new and consolidated set of insolvency rules came into force. The Insolvency (England and Wales) Rules 2016 provide the procedural steps to be followed in the conduct of all corporate and personal insolvency proceedings under the Insolvency Act 1986.

The 2016 Rules repeal and replace the Insolvency Rules 1986, together with all subsequent and multiple amendments. As such, they provide a major overhaul of insolvency proceedings, consolidating three decades of procedural change into one single statutory instrument.

In addition to providing a consolidated procedural framework, the new insolvency rules have been completely restructured and modernised to make the insolvency process more efficient, cost effective and user-friendly. In particular, the rules have been redrafted to reflect modern business practice and advances in technology.

All these changes have significantly impacted on the way in which insolvency practitioners conduct insolvency procedures and engage with creditors. Below we examine some of the key changes to the insolvency rules that can affect creditors, company directors and insolvency practitioners alike.

The key structural changes to the insolvency rules

The structure and style of drafting in the new insolvency rules has been completely modernised. This includes the use of updated language and gender-neutral drafting. Furthermore, the consolidation of provisions, the use of non-legislative notes and the abolition of statutory forms are all intended to make the new rules easier to interpret.

Consolidation of provisions

Significant structural changes to the insolvency rules have been achieved through the consolidation of provisions. In this way the rules seek to avoid undue repetition through the greater use of common parts that apply to various different insolvency procedures.

By way of example, the rules relating to decision-making, which previously appeared in more than one place within the parts applicable to different procedures, have now been grouped together under Part 15 of the 2016 Rules. These will apply in all insolvency proceedings in the future. This results, where possible, in a single regime under the insolvency rules applicable to all types of procedures.

Further structural changes to the insolvency rules have been achieved by separating out the winding-up provisions into three separate parts – for members’ voluntary liquidation, creditors’ voluntary liquidation and compulsory liquidation.

Use of non-legislative notes

Over the last three decades the Insolvency Act 1986 has been heavily amended. This has resulted in a lack of consistency in what is contained in the 1986 Act and what needs to be contained within the insolvency rules to supplement the Act.

To assist users with navigating the new rules in conjunction with the primary legislation, the 2016 Insolvency Rules contain a number of non-legislative notes giving pointers as to other rules and provisions under the 1986 Act. These are contained within square brackets and are labelled simply as ‘notes’. These notes have the following different purposes:

  • To draw the user’s attention to the individual provisions in the 1986 Act which a particular rule completes, for example, the non-legislative note for rule 1.2 (defined terms) provides guidance as to those terms defined within that provision as well as under the Act;
  • To refer the user to matters which are not in the insolvency rules, for example, where a rule in the common parts applies to some but not all insolvency procedures, there are notes to indicate where equivalent provisions are found in the Act for the procedures that are not covered;
  • Finally there are notes which point the user to other parts of the insolvency rules that are relevant to an individual rule or a part of the 2016 Rules, for example the guidance on the information required in documents by Part 1.

Abolition of statutory forms

The introduction of the new insolvency rules has also seen the abolition of statutory forms previously used under the Insolvency Rules 1986.

Under the Insolvency Rules 2016 the information requirements for notices and documents previously contained in forms have now been imported into the relevant rule as specified prescribed content. By way of example, rule 7.5 sets out the prescribed contents of a compulsory winding up petition.

Further, Part 1 of the Insolvency Rules 2016 provides general information relating to the form and content of documents, including the prescribed format of documents and variations from prescribed contents.

The key policy changes to the insolvency rules

In addition to the structural change, the Insolvency Rules 2016 also give effect to recent policy changes following a series of deregulation initiatives and amendments made to the 1986 Act by the Deregulation Act 2015 and the Small Business, Enterprise and Employment Act 2015.

In particular, these changes include enabling more convenient and cost effective methods of communication with creditors and removing (or reducing) unnecessary regulatory burdens such as physical meetings and paper correspondence.

Use of electronic communication

Where a debtor and a creditor have been customarily corresponding electronically prior to insolvency, under the 1986 Rules an insolvency office-holder could not continue to correspond in that way without first obtaining the creditor’s written consent.

Under the Insolvency Rules 2016 this has changed, such that where electronic communication was customarily used pre-insolvency, that method of communication can continue post-insolvency.

Removal of creditors’ meetings

Under the Insolvency Rules 2016 meetings have been removed as the default mechanism for seeking decisions from creditors in insolvency proceedings. Instead the insolvency rules set out a process of deemed consent, where written proposals are sent by the office-holder to creditors and unless 10% or more in value of creditors object, they are deemed approved.

Further, even if 10% or more of creditors object, the office-holder still does not have to call a physical meeting but rather has the discretion to use an alternative decision-making process, for example, correspondence, electronic voting or by holding a virtual meeting. It is for the office-holder to decide which alternative form a meeting will take, save except in the following two cases:

  • Physical meetings can only be called if requested by 10% of creditors in value or number, or by ten individual creditors;
  • The appointment of a liquidator in a creditors’ voluntary liquidation must be either by deemed consent or by a virtual meeting. If creditors object to the use of deemed consent then the company must immediately call a physical meeting.

Opting out of further correspondence

Under the previous insolvency rules office-holders were required to send all notices and reports to all known creditors. This applied even where a creditor had no further interest in a case and required no further information. Under the new insolvency rules, the creditor can opt out of future mailings. Creditors will, however, retain the ability to opt back in to receiving notices.

Should I seek legal advice?

The Insolvency Act 1986 is a complex piece of legislation that has been heavily amended since it came into force thirty years ago. Further and notwithstanding the significant overhaul of the insolvency rules, the procedures relating to insolvency can often be difficult to apply in practice.

For creditors, company directors and insolvency practitioners alike, it is crucial that you understand the process and, where applicable, you comply with your statutory duties. As a company director it is also important that you seek early expert legal advice from an insolvency lawyer to explore the various issues surrounding insolvency and the options available to you and your company.

Must Read

N244 Form (Where to Find & How to Complete!)

12 minute read Last updated: 13th August 2019 The N244 form is an application notice, used to apply for a court order in the...

Claiming Under the Sale of Goods Act (What You Should Do!)

5 minute read Last updated: 12 August 2019 Claiming under the Sale of Goods Act is the route a consumer should take if they...

Nemo Dat Quod Non Habet

Nemo dat quod non habet, literally means "no one gives what he doesn't have". This is a legal rule, sometimes called the nemo dat...

Faulty Goods under Warranty (Your Consumer Rights!)

Where an item under warranty develops a fault, the path to remedying the situation may be as straightforward as claiming against your warranty but...

Sale of Goods Act (Your Consumer Rights!)

The Sale of Goods Act 1979 states that all goods purchased or sold in the UK must be as described, of satisfactory quality and...