The Insolvency Rules are changing – for better, or worse?

In the past if your business suffered a bad debt from an insolvent customer generally the first you would hear of this officially was by receiving an invitation from an Insolvency Practitioner (the IP) to a meeting of the company’s creditors. The meeting was generally held in the IP’s office or a local hotel for larger company failures. This meeting was chaired by a director of the insolvent company and was the only real opportunity for the creditors of the company to have their say, to put the directors on the spot and to find out where all the money had gone!

The general perception was that this meeting was well attended, lively and entertaining and useful for identifying what had gone wrong in the company and mistakes that had been made. The reality was somewhat different. Creditors very rarely attended these meetings making comments such as ‘I’ve lost money anyway, why lose more travelling to a pointless creditors meeting’. In an effort to recognise and address these concerns the insolvency service set about modernising and updating the existing rules, which were introduced in 1986,  firstly to seek an increase in creditor engagement and secondly to ensure all modern methods of communication could be used in the process generally.  Bulley Davey’s Paul Ward explains some of the changes brought about by the Insolvency (England and Wales) Rules 2016, which came into effect on 6th April 2017:

“The first, and arguably the most significant step was to abolish the meeting of creditors, which at first glance seems an odd way to seek an increase in the level of creditor participation in the insolvency process.  The initial meeting of creditors has been replaced with a variety of ‘decision procedures’ including a virtual meeting, electronic or postal voting or even by way of deemed consent.  We consider that for the majority of cases that we handle it is likely that there will be a virtual meeting of creditors, whereby the creditors will have the ability to dial into a conference call where they will be able to raise questions of the director, in much the same way as they can currently at a physical meeting.

“From the creditor’s perspective the key advantage will be that they will be able to access the virtual meeting from their desk, with all relevant documents relating to the insolvent company’s affairs being available to them on a website, thereby avoiding the significant time and cost of travelling to a physical meeting. Whether this will lead to an increase in creditor involvement in the insolvency process remains to be seen.

“It has to be said however that the physical meeting will not disappear completely. Creditors can still request a physical meeting where certain thresholds are met and it is our view that in the case of some larger more complex cases a physical meeting is likely to be more desirable from both a practical and effectiveness perspective.

“In addition, the new rules bring in other aspects around communication with creditors, to include the ability to opt-out of communications from the IP and also the ability for the IP to merely post reports and notices onto a specific website, thereby saving potentially significant costs for the benefit of the creditors.  We believe this to be a change for the better as we are fully aware that creditors do not always wish to receive large statutory reports in the majority of cases.

“At Bulley Davey we believe that over time these changes to the rules will increase creditor participation at the start of the process as creditors realise that the commitment required to attend the virtual meeting is significantly less than the commitment required to attend a physical meeting.  We do however doubt that creditor engagement during the process will increase where periodic reports are merely placed on websites as there will be no requirement to inform creditors that documents have been published.  Either way we are embracing these new rule changes and can only encourage anybody with an interest to fully participate in the insolvency process for the overall benefit of all creditors.

“It should be stressed that the general duty of the IP to investigate the conduct of the directors and the affairs of the company are not being changed through the introduction of these new Rules.  We continue to encourage and value the input and engagement of creditors as this can be a valuable source of information when carrying out these tasks.