Corporate report

First Review of the Insolvency (England and Wales) Rules 2016

Published 5 April 2022

Applies to England, Scotland and Wales

Introduction

I am pleased to publish this first report on the operation of the Insolvency (England and Wales) Rules 2016 (“the Rules”), as required under the review framework introduced by the Small Business, Enterprise and Employment Act 2015.

The Rules came into force in 2017 following a wider effort to streamline the insolvency regime and reduce unnecessary regulation, the ultimate goal of which was to provide better outcomes from insolvency and increased returns to creditors. Achieving that important aim in respect of such a large body of detailed legislation was by no means a straightforward task. The Rules consolidated the bulk of the existing secondary legislation, updated the insolvency framework with modern and gender-neutral language, and provided a clearer and more user-friendly rulebook for insolvency processes. At the same time, they introduced the supporting provisions for the changes to insolvency law and practice contained in the Deregulation Act 2015 and the Small Business, Enterprise and Employment Act 2015.

Given the significance of this detailed insolvency legislation, it is right that we should periodically re-examine its operation to ensure that its provisions remain both necessary and fit for purpose. This first review following such a large change represents an especially important milestone, and the Government has approached it accordingly. The Insolvency Service issued a Call for Evidence in March 2021, eliciting comments on over one hundred different points from across the insolvency sector and other interested parties. These responses, many of which deal with very specific technical issues within the Rules, demonstrate the depth of interest in securing an insolvency framework that is excellent on all levels.

I am grateful to everyone who responded, including the insolvency professionals who provided extensive descriptions of their experiences working with the Rules on a day to day basis. A detailed analysis of all of the responses has been completed, the results of which are presented here.

This report meets the Government’s legal requirement to report on the operation of the Rules, as well as supporting our ongoing commitment to ensuring that the UK’s insolvency regime remains among the best in the world.

Lord Callanan

Minister for Business, Energy and Corporate Responsibility

Executive Summary

The Rules contain a five-yearly review clause, that also requires the publication of a report on the findings. This first review has been informed by a Call for Evidence on the operation of the Rules, carried out between March and June 2021, which attracted numerous in-depth responses from across the insolvency sector.

The report finds that the Rules as a whole are operating correctly and achieve the goals that were set for them. They provide appropriate detailed procedures to support the Insolvency Act 1986, as well as consolidating and modernising the preceding secondary legislation; implementing policies contained in two other acts of Parliament; and introducing other modernisations such as electronic communication between officeholders and creditors. Those policies remain appropriate ones, and could not be achieved with less regulation.

The review and Call for Evidence also uncovered numerous other issues related to the Rules and the insolvency regime. Some of these are minor technical points, while others, although they do not compromise the operation of the insolvency regime or the system of regulation established by the Rules, remain significant items in their own right. Respondents to the Call for Evidence highlighted, for example, that while the Rules permit officeholders to deliver documents via website, this does not extend to directors; and that various deadlines prescribed in the Rules can be very tight and so difficult to comply with. Certain issues that derive from primary legislation fall outside of the scope of the review, such as the low take up of the provisions allowing creditors to opt out of receiving correspondence. These have nevertheless been noted.

Where the Government has determined that it may be possible to improve the current regime, further work will be done to follow up on the issues that have been raised. This includes addressing a small number of very minor and simple points, which will be resolved via amending secondary legislation. A longer list of more substantial items will be reviewed in future as other work and priorities allow. Of these, attention will initially be given to the Creditors’ Voluntary Liquidation process and the scope of insolvency applications.

The Review

This section covers the legal requirement for the Secretary of State to carry out a review and publish this report, the work that has been done to accomplish this, and the findings of the statutory review.

Requirements

A report is required by rule 7 of the Rules, inserted in compliance with the Small Business, Enterprise and Employment Act 2015. In line with the Government’s view that regulations affecting business should be subject to periodic review, rule 7 requires the Secretary of State to carry out a review of the Rules; set out the conclusions of the review in a report; and to publish the report.

The law further specifies that the report must:

• set out the objectives intended to be achieved by the regulatory system established by the Rules;
• assess the extent to which those objectives are achieved; and
• assess whether those objectives remain appropriate and, if so, the extent to which they could be achieved with a system that imposes less regulation.

The objectives that underpin the Rules are, therefore, set out below, together with the findings of the review in respect of the questions posed.

Regulatory Objectives

The primary aim of the Rules is to establish the detailed procedure for the conduct of company and individual insolvency proceedings under the Insolvency Act 1986, giving effect to that Act. That objective was shared with the previous Insolvency Rules 1986 (SI 1986/1925); the objectives in replacing that existing version with the Rules being (in summary):

• Providing a system that is easier for users to understand than that contained in the Insolvency Rules 1986, by consolidating those Rules and the 28 amending instruments that had been made subsequent to their coming into effect in 1986, as well as updating their structure, language and style so as to better meet the needs of users including the judiciary, insolvency officeholders, creditors, and public officials;
• Giving effect to policy changes made to the Insolvency Act 1986 by the Deregulation Act 2015 and the Small Business, Enterprise and Employment Act 2015; and
• Implementing specific other new policies (described in the Explanatory Memorandum to the new Rules) to modernise the UK insolvency regime.

The policies included in the Deregulation Act and Small Business, Enterprise and Employment Act to which the Rules gave effect included for example:

• Allowing insolvency practitioners to be appointed as interim receivers in bankruptcy cases;
• Removal of the requirement for a bankrupt person in a creditor’s petition bankruptcy to submit a Statement of Affairs;
• Removal of the requirement for insolvency practitioners to hold a final meeting of creditors in every liquidation and bankruptcy case;
• Removing the requirement to hold a physical meeting of creditors, replacing it with a new decision-making process that included the concept of deemed consent;
• Giving creditors the ability to opt out of receiving certain notices from insolvency officeholders;
• Officeholders being allowed to use their discretion to not require a proof of debt in certain cases; and
• The official receiver being appointed as trustee on the making of a bankruptcy order.

The additional new policies that the Rules introduced included:

• Providing for electronic communication between officeholders and creditors;
• The use of websites to communicate certain information such as statutory notices;
• Simplification of time periods for progress reports in insolvency cases, particularly where there is a change of officeholder;
• Greater protection for personal information of customers and employees in Statements of Affairs which are filed with the registrar of companies; and
• The abolition of the prescribed forms previously used to communicate certain information.

The Government’s Call for Evidence

In order to assist the assessment of the Rules, the Insolvency Service published a Call for Evidence on 11 March 2021. This remained open until 30 June 2021, attracting 25 responses from the insolvency sector and others with an interest in the insolvency regime. Some responses collated input from a range of parties, with the result that the true number of individuals and organisations feeding into the review was considerably higher than the raw number of responses.

Many of the questions within the Call for Evidence were directed towards the legal requirements of the review. Questions asked, for example, whether the Rules provide an appropriate framework for the UK’s insolvency regime; whether that framework is clear; whether the updated language used in the new Rules improves upon that of the preceding Insolvency Rules 1986; and what changes if any could be made to meet those goals.

Other questions sought information on particular areas that were understood to be of concern to stakeholders, such as creditor engagement.

In order to ensure that everything relevant to the operation of the Rules would be captured, the Call for Evidence invited comment even where the issues in question might not be clearly within scope of the review. It is therefore not unexpected that in many cases, although not all, the responses received were wide-ranging in terms of the topics covered.

Outcome and findings

The UK’s insolvency regime has operated efficiently and effectively for many years, and is widely regarded as one of the best in the world. Although insolvency law cannot remain static as the demands of the wider economy and the needs of its users change, any broad finding that the Rules have failed to give effect to the Insolvency Act 1986, or that they do not provide both an appropriate and necessary framework to achieve that goal, would no doubt be surprising to many.

This was borne out in the responses to the Call for Evidence. While not all respondents wished to address all of the questions, the majority of those commenting on the framework as a whole were content that the Rules do provide an appropriate framework for the UK’s insolvency regime; and that the framework is clear (while at the same time, there remain a number of individual rules and areas which could be improved upon or clarified, as discussed below).

The majority of respondents likewise agreed that the updated language employed by the Rules improves upon that used in the Insolvency Rules 1986; that the Deregulation Act and Small Business, Enterprise and Employment Act policies have been fully and clearly implemented; and that the implementation of other new policies is clear.

Respondents were less confident that the new policies introduced by the Rules were in all cases positive and effective, with the abolition of prescribed forms for example attracting a fair degree of negative comment (this is further addressed in a separate section below). Taken together, however, most respondents appeared to consider the new policies to be the right ones for a modern efficient regime.

We did not identify any suggestion that there are areas that the Rules cover, but should not, i.e. where less regulation would achieve the same objectives. While there were comments that the contents of certain notices, for example, could be simplified, this did not stretch to any widespread perception that the notices themselves are not needed. The requirements as regards physical meetings of creditors, which were frequently cited, derive from the Small Business, Enterprise and Employment Act rather than the Rules. This also applies to the rules that allow creditors to opt out from correspondence. In that case, notwithstanding that the policy does not originate within the Rules and so is out of scope of the present review, we recognise the general perception that it is unnecessary and will (as noted below) return to it at a future date.

In light of the responses to the Call for Evidence and our review of the points raised, we consider that the system established by the Rules remains fit for purpose: taken as a whole, it achieves the objectives set out above for which it was established; those objectives remain appropriate ones for the Rules; it is not possible to achieve the objectives through a system that imposes less regulation.

Notwithstanding the above, a considerable number of issues were raised on technical points in the Rules, and on particular topics where those responding felt that the rules were in error or could be improved. These can be grouped into categories, reflecting the main concerns shared by the respondents:

• Clarity and consistency of the Rules
• Omissions, errors and unnecessary rules
• Removal of prescribed forms
• The creditor opt out process
• Electronic communication
• Insolvency applications and claim forms
• Pre-appointment work
• Fee estimates
• Creditor approval of proposals and fees
• Decision-making processes
• Creditor committees
• Data disclosure issues
• Claims and dividends
• EU exit
• New proposals
• Restriction on calling physical meetings of creditors

These topics are further explored in individual sections below. Additional sections have also been included to capture the relatively small number of issues that did not fall into one of the other categories, and cross-cutting remarks regarding creditor engagement.

Issues Raised

Clarity and consistency of the Rules

While on the whole respondents appeared content that the overall framework provided by the Rules is clear and that updated language is helpful, a number of responses were more critical. This mixed response largely reflects various individual rules which the responses highlighted as being unclear or apparently contradictory, rather than criticism of the Rules as a whole.

Commentary suggests that some users do find the structure of the Rules less intuitive than the previous Insolvency Rules 1986, and it was suggested that the headings provided may not always fully describe the content. It was proposed that guidance on navigating the Rules would be appreciated by new users, and we will produce a brief summary of the structure of the Rules for that purpose.

It is important for the reader to hold in their mind that the Rules clarify and provide detail to the Act, and that the law should be read holistically. When read in this manner, apparent discrepancies often fall away and the correct interpretation is clear. A number of points raised fall into this area, for which the Rules do not need correction in our view. For example, the Rules’ more consistent use of “deliver”, in contrast to the Act’s use of various terms such as “send”, “furnish” or “deliver”, gives a precise meaning to those general expressions, which would otherwise be ambiguous. Similarly, the meaning of “previous” and “former” liquidator, in rule 7.73, is apparent when considered in the context of a handover from one (former) liquidator to a successor.

By contrast rule 10.87(3)(f), regarding the contents of the notice sent to creditors prior to the release of a trustee, makes a reference to it being filed at court that does not appear to be reflected elsewhere in the Rules or the Act. On the face of it this requirement should be made clearer. We have set aside, for further review, whether the differing use of the word “between” in rules 6.14(6)(a) and 15.4(b) is sufficiently clear in context.

A number of points have been raised querying whether particular phrasing for certain documents is acceptable under the Rules, and we appreciate that there will always be some uncertainty as to whether a given approach is sound until it has been tested in court. However, we are not aware of any widespread dispute or confusion between parties as to the requirements, or any issue where the law is producing a surprising or unhelpful result in practice, so as to suggest that the Rules should be amended. We are therefore content that the Rules provide clear and sufficient guidance on the content of documents, while the question of whether specific wording or content meets the requirements is a matter for the courts to adjudicate rather than the Government.

Previous amendments to the Insolvency Rules 1986 converted time periods of less than two weeks into business days, whereas for the most part other, longer periods have been left in calendar days. We are not aware that this has created any difficulties for users of the Rules but will nevertheless consider whether, at a future point, the time periods should be rationalised so as to provide consistency throughout.

We agree that there is disparity between the different rules for different types of insolvency procedures, which creates what can appear on the face of it to be unhelpful inconsistencies between them. This has been highlighted to us as making the rules governing remuneration more difficult to follow for creditors, for example, and we will consider whether these can be brought into line and simplified. It is not always true that individual and corporate insolvency are comparable or should be subject to the same rules, but we accept that differences between processes raise the possibility for confusion and so in general should be kept to the minimum necessary. One example of a necessary discrepancy is between rule 14.29(1)(a) in administration, where the notice sent to creditors triggers set off on the debts owed (see rule 14.24(1)), hence all creditors must receive it even if they have already proved their debt; and rule 14.29(1)(b) in liquidation which, although superficially similar, does not fulfil the same purpose.

There may be other disparities in the Rules where the original justification for the disparity no longer applies, or is no longer sufficient. For example, the rules for meetings vary from those for other decision procedures, notably requiring gazetting. When the new rules on decision procedures were introduced an effort was made to remain consistent with the previous rules where possible, so as to help this change occur smoothly. We will consider if this rationale continues to apply.

Fees and expenses are a common topic as regards clarity but, aside from discrepancies between insolvency procedures mentioned above, it is not certain that the rules on a necessarily moderately complex topic can be made clearer. It is necessary to ensure that creditors are aware of the fees charged by an insolvency officeholder and the work that has been done to justify them, as well as what remuneration has actually been drawn, and where the case stands as regards any fee estimate that has been made. Nevertheless, we have particularly noted concerns around rules 18.24 to 18.27 on changes to the basis of remuneration. In view of their importance to many of the users of the Rules, we will further review the rules on remuneration at a future date.

The Creditors’ Voluntary Liquidation (CVL) process was raised in this context as being unhelpfully inconsistent and opaque. Respondents have also raised a number of issues on this front in other areas of the review, as noted below, and we consider that the process as a whole should now be further reviewed. We will examine what changes need to be made to improve it and to ensure that it remains fit for purpose.

Some responses suggested changes to the Rules that were not legal matters but instead intended to assist the reader. This included for example the insertion of cross-references, annotations, or revised headings. Such non-legal changes would not be appropriate for inclusion in any amending legislation but could be considered for inclusion in future guidance. Other responses proposing changes to the way in which specific provisions, such as rule 7.111, are numbered, would if implemented put those provisions at odds both with modern drafting convention and the numbering of similar provisions elsewhere in the Rules.

Omissions, errors and unnecessary rules

Overall, the responses to the Call for Evidence demonstrated that there are no significant errors within or omissions from the Rules and that users are broadly content. The points raised do not appear to be causing significant issues with the operation of the regime and, in many cases, were raised by a sole respondent who had identified them.

A number of responses in this area appear to relate to misunderstandings, for instance the inclusion within regulatory guidance (Statement of Insolvency Practice 6) of requirements in relation to an insolvency practitioner’s report under section 98 of the Insolvency Act 1986: the relevant legal requirements are covered within the Rules and have not been omitted.

Other points have been resolved since the introduction of the Rules through other legislation, for example by subsequent amendments, such as the Insolvency (England and Wales) (Amendment) Rules 2017, which resolved an issue with rule 6.20(2) concerning the status of a liquidator where creditors appoint a replacement liquidator.

However, there are other areas which we agree warrant further consideration and/or rectification. A number of the issues raised are discussed in greater detail below:

Concerns that the new Rules are not effective for small cases, including the absence of the ability of remuneration in a CVL to default to Schedule 11 scales, have been noted. However, feedback received from stakeholders suggests that reintroducing this measure (which was a feature of the regime prior to its removal in 2010) would make the process more complicated. Due to the wide-ranging nature of businesses utilising the rules, the inclusion of different criteria for smaller businesses risks making the process burdensome and more expensive rather than more efficient.

A concern was raised that the opt out process is mentioned in the Rules even where it is not possible: the statement required by rule 15.8(3)(g) has to be given, even in cases where opting-out is not possible and there are therefore no creditors to whom the statement might apply. Officeholders do however have discretion as to the precise wording of the statement, which allows them to include appropriate caveats should they think that reproducing the literal wording of the rules could cause confusion.

The updated wording shown within rules 2.44(4) and 8.31(5), which replaced the previous “shall not” in the Insolvency Rules 1986 with “must not”, appears to be causing some confusion as to when a voluntary arrangement supervisor can vacate office. We will consider whether this should be amended in any future changes to the Rules.

Some responses suggested that the inclusion of the time and date of an administration appointment within the notice of appointment appears to be superfluous and could lead to confusion when compared to the time and date of the court’s endorsement. We will give further consideration to removing this requirement, on the basis that the court’s time and date will be sufficient.

Similarly, it appears that rule 6.16 contains an unnecessary requirement for an administrator who then becomes liquidator to provide information to new creditors. We will likewise consider removing or modifying this requirement, given that the information is also available at Companies House.

The inclusion of anachronistic references to “registrars” does not affect the Rules in practice, as this is a defined term. We will however consider updating this to use more modern terminology in a future update to the Rules.

One respondent asked why Hire Purchase creditor rights are not the same in an administration as they are in other procedures. This difference is intentional rather than an error, as the key objective of an administration is to rescue the business, making the ongoing use of secured assets essential, whereas in in other procedures the Hire Purchase agreement is terminated and the creditor can subsequently prove, and vote, for any shortfall in their security.

Although the prescribed wording for bankruptcy disclaimers contained in the new Rules differs to the wording in the Insolvency Rules 1986, we consider that the meaning remains clear.

By contrast, the omission of a replacement Rule allowing the court to consolidate two or more bankruptcy petitions presented against the same debtor may be unhelpful, albeit this was a deliberate decision at the time that the Rules were drafted. We will consider whether this should be reinstated in a future update to the Rules.

Concerns that the rules regarding Company Voluntary Arrangements are lacking a rule for Companies House to be notified of a change of supervisor appear to be well-founded. There is no such rule at present and the public record is out of date after a change has taken place. We will consider whether this justifies creating an additional filing requirement for officeholders, and if so we will look to include it in any future changes.

The omission of a reference to companies in rule 18.3(1)(b) (which deals with the contents of officeholders’ progress reports) gives the appearance of an error so may be confusing, and we will look to rectify this in a future update to the Rules.

The risk of overlapping appointments where there is a change of officeholder was raised in more than one context. This is not considered to be a matter of significant concern as the regime makes adequate provision for the existence of multiple simultaneous officeholders.

It was noted that meetings resolutions have been reduced in scope. This reflects the fact that rule 6.7 now includes expenses that were omitted from the Insolvency Rules 1986. These expenses were previously paid via “any other resolution which the chairman thinks it right to allow for special reasons”. As this is no longer necessary, the provision has been removed from the new Rules.

Whilst overseas postal deliveries are not directly addressed in the Rules, officeholders have been encouraged to take a pragmatic approach and, where appropriate, extend time limits and deadlines to reflect when notices are likely to be delivered in reality. This position was confirmed in the content of Dear IP issue 76, which was published contemporaneously with the Rules.

Responses highlighted a number of references to repealed legislation, which we will look into removing or replacing in due course. References to the repealed Schedule A1 of the Insolvency Act 1986 have been removed by the Insolvency (England and Wales) (No.2) (Amendment) Rules 2021.

Removal of prescribed forms

The current Rules were drafted to facilitate the transfer of information by electronic means, and encourage the use of modern ways of working and communicating within the UK’s insolvency regime. This policy informed the decision to specify the content of documents within the body of the rules, and remove the requirement to use rigidly prescribed forms. Removing prescribed forms avoids the risk that a person who has clearly provided all of the necessary information will nevertheless be considered not to have complied with the Rules, purely because the information was not provided in a particular form.

Some respondents highlighted that one consequence of the decision to remove these forms, which had previously served as templates for users, has been a degree of inconsistency and errors in providing the correct information. It has been suggested that the forms should be reintroduced. However, as was intended, the abolition of a statutory format has also enabled practitioners and other organisations to devise replacement templates that are tailored to their particular needs and system requirements.

The Rules continue to provide comprehensive detail regarding the information that must be included within different notices and communications, and it does not appear that the removal of forms has caused any gap in what information is legally required. Nor does there appear to be truly widespread difficulty. The real-world experience reported to us is in line with the impact assessment undertaken during development of the Rules, which acknowledged that there would be a familiarisation cost to practitioners in implementing the changes. Similarly, reversing that decision would result in additional costs to the insolvency sector to implement further changes, as well as to the public purse. Several agencies, including HM Courts and Tribunals Service and the Insolvency Service, have since provided templates for users encompassing a large number of the previously prescribed forms, to facilitate the provision of information in a format which interfaces with their own systems.

We therefore remain of the view that the decision to abolish prescribed forms was the correct one, and that it should not be reversed.

The creditor opt out process

The Call for Evidence asked respondents to provide, in their estimation, what percentage of creditors choose to opt out of receiving information. It sought views on whether the creditor opt out process could be improved, and if so, how. We received feedback from a number of respondents on these questions.

The overwhelming response was that the creditor opt out is rarely used, with estimates that less than 1% of creditors chose to exercise the option. In some cases, respondents were not aware that the opt out had ever been requested. There was a general feeling that rule 1.50 allowing the use of websites to deliver documents has effectively made the provision redundant, as creditors who do not want to receive information need not log onto the website (although it was also pointed out that a significant number of smaller practices might not use websites).

Respondents commented that the provisions add to the amount of material which had to be included in the first communication to creditors. They also present a compliance risk for the officeholder in the event that they communicate with an “opted out” creditor, or fail to communicate with a creditor who has opted back in. It was felt that the amount of information which a creditor has to provide in order to opt out could be confusing and might deter creditors from doing so. One respondent also considered that the ability to opt out gave the impression that information provided by officeholders has no value or interest.

Overall, respondents felt that Rules 1.38 and 1.39 should be removed in light of the infrequent use of the opt out procedure. It was recognised that this would also require amendment to primary legislation, and so falls outside of a review of the Rules.

If the provisions are not removed, it was proposed that they should be streamlined. Suggested amendments included, for example, that the ability to opt out should be at the officeholder’s discretion, or that there should be a certain number of creditors before the officeholder is required to inform creditors of the ability to opt out.

The opt-out provisions are used infrequently and represent a burden on officeholders, and there is therefore merit in the argument that they should be repealed. Equally, as the provisions are used, albeit in a limited number of cases, there remains an argument that those who wish to should be able to opt out of unwanted correspondence whether in letter or electronic form. We will give further thought to whether there should be any changes to, or removal of, these provisions in a future amendment to the Rules or primary legislation.

Electronic communication

The introduction of the Rules expanded the possible use of electronic communication in managing insolvency cases, which already existed in the Insolvency Rules 1986 but until that point was subject to onerous restrictions. Responses to the call for evidence suggest that a small number of issues remain to be resolved in order to make electronic communication fully effective.

One broad issue relates to the use of websites to deliver documents. Under the Rules, the officeholder in an insolvency can make use of a website following the issue of a notice to the documents’ recipients. However, this is not always available to directors and insolvency practitioners acting prior to the commencement of the insolvency, nor to creditors who wish to communicate electronically in return. Observing that delivery of documents through websites by officeholders appears to have worked well, we will consider (subject to further exploration of any difficulties that may be involved and the safeguards that might be required) extending this option to others where they are engaging with insolvency processes involving multiple recipients, for possible inclusion in a future update to the Rules.

The challenge facing creditors is a different one. While they are unlikely to need to issue documents via website, there is no explicit requirement under the current Rules for officeholders to accept electronic communication when managing cases, and so creditors might be required to provide hard copy letters and documents. Accepting electronic communication is a modern business practice and we consider that it would be unreasonable for insolvency practitioners to adopt a less flexible approach other than in exceptional circumstances. As this is a matter of maintaining professional standards and the reputation of the profession, any necessary guidance to practitioners will be via the regulatory process rather than through a change to the law.

With the increasing use of email for communication, businesses and individuals often use email addresses as their main contact details, rather than their physical addresses. As noted under “data disclosure issues”, below, we will keep the use of email under review and will consider how it should be reflected in the Rules in future.

Another issue has arisen in respect of the limited number of statutory declarations required by the Act, as a result of the Covid-19 pandemic. It is understood that a statutory declaration must be signed in the physical presence of an authorised person, but this has been impossible or inadvisable in many cases throughout the last two years. The matter has been resolved as regards the pandemic under the Temporary Insolvency Practice Direction 2020, with courts recognising the defect in the process that remote swearing creates as not prejudicial. While the suggestion that these temporary arrangements should be replaced with a more permanent change to the law has been noted, particularly for consideration in the further review of the CVL process that we will undertake, a permanent change would require the amendment of primary legislation and is outside the scope of this review of the Rules.

Respondents highlighted, following the introduction of electronic “CE filing” at the High Court, a number of seeming contradictions between the Rules and court practice. For the most part these contradictions are illusory, as rule 1.46 allows the filing requirements in the Rules to be overridden by the court rules (contained in, for example, Practice Direction 510 on Electronic Working). This includes rule 3.20 that deals with out of hours appointment of an administrator and was addressed in the recent Temporary Insolvency Practice Direction. We understand however that the interaction of the different requirements has, for example, led a respondent to attempt to physically take documents to court, so as to be sure of not breaking the law, in full knowledge that they would be turned away and required to use the electronic filing process.

There is an argument therefore for the Rules to be updated to reflect electronic filing. Nevertheless, this remains a developing area. As electronic filing is not used in the County Court, it would not be possible at present to maintain consistency throughout the Rules were they to be amended with High Court practice in mind. We will nevertheless keep under consideration what amendments may be needed to reflect any future developments in this area. As a separate matter, we consider that minor changes to the Rules could be made to facilitate the transfer and use of electronically sealed documents where, for example, the court is currently required to send multiple copies even where transferring documents by email.

Insolvency applications and claim forms

Following the court’s ruling in Manolete Partners plc v Hayward and Barrett Holdings Ltd & Ors [2021] EWHC 1481 (Ch), concerns have been raised about the scope of “insolvency applications” that can be made with reference to rule 1.35. Whether a particular claim can be made as an insolvency application can determine both which court should be applied to and the court fee that will be charged, making this an important administrative point for court users as well as for the courts themselves. The judgment clarifies that insolvency applications are available in respect of a relatively narrow set of claims, and has implications for (among others) claims that have been assigned by insolvency officeholders to third parties.

As a result of the ruling, respondents are mindful of the need to issue both an insolvency application and a Part 7 claim where matters fall both within and outside of Parts I-XI Insolvency Act 1986. Respondents suggested that, where such proceedings turn on the same facts, this has some unhelpful consequences, including the risk of matters being heard by different courts with differing procedures, increased costs, protracted proceedings and an unnecessary administrative burden.

Whilst this is not an anomaly caused directly by the introduction of the new Rules, we acknowledge the concerns that have been raised. We agree in principle that court proceedings should be addressed as efficiently as possible, in an appropriate forum, and without unnecessary bureaucracy.

We will carefully consider the above points, as well as the possible changes that can be made to the Rules and their implications, to determine whether the scope of insolvency applications should be amended.

Pre-appointment work

Respondents have suggested that the payment of pre-appointment expenses in a CVL should be allowed in the winding up on a similar basis to their treatment in an administration.

In practice, we understand that an insolvency practitioner engaged by directors intending to enter a CVL will ensure that their pre-appointment costs (including costs other than those allowed by rule 6.7) will be paid by either the company or a third party before the winding up commences. The effect of this is that funds available in the winding up may be diminished, but without the creditors being given the opportunity to approve the costs in the way they would in an administration, and without full details being provided to creditors (which in administration would be required by rules 3.35(10)(a) and 3.36). The informal arrangements are therefore by comparison less transparent to and subject to less control by creditors, albeit mitigated by Statement of Insolvency Practice 7, which imposes requirements that insolvency practitioners must follow when presenting financial information, as a condition of their authorisation. Respondents further suggested that allowing these costs to be formally paid post-appointment would enable the VAT element of the costs to be recovered in the CVL for the benefit of creditors.

We will consider the above further, to confirm whether the law can and should be amended, as part of our review of the CVL process.

Respondents also suggested that there is a lack of clarity in the 2016 Rules as to whether it is possible for a proposed liquidator in a CVL to seek approval of their (payable) pre-appointment expenses and liquidator’s remuneration by convening a separate decision alongside the deemed consent procedure used to appoint them as liquidator. In the majority of CVL cases the creditors confirm the nomination of the liquidator chosen by the company. It would be appropriate therefore to align the confirmation of the appointment of the liquidator with the decision procedure for pre-appointment expenses and liquidator’s remuneration, where circumstances permit. This does create a risk for the insolvency practitioner that the liquidator nominated by the company is not the same as the person nominated by the creditors, in which case the decision procedure on remuneration will be ineffective.

Fee estimates

The Rules set out the detailed basis on which remuneration and expenses of officeholders are determined. Remuneration may be based on either a fixed amount, a percentage value of the assets, on a time cost basis, or a combination of all of these. Where any element of the officeholder’s fee is based on time costs, they must provide creditors with detailed information in the form of a fee estimate, including details of work to be undertaken, hourly rates to be charged and any expenses likely to be incurred. On whichever basis the remuneration is set, the officeholder must provide an estimate of anticipated costs, which must be approved by creditors.

A number of respondents commented that the level of detail required of an officeholder in providing a meaningful fee estimate to creditors absorbs significant resource, making the fee approval process both lengthy and costly. One respondent commented that the burden of producing a fee estimate of the anticipated time and cost for work in more complex insolvencies, for instance trading cases, can push the cost up considerably. Another respondent stated that a better understanding of the position of a case is often required in order to produce a fee estimate, meaning that rather than being issued before any work has been undertaken, it may not be issued for a number of weeks. The general view expressed in responses received regarding fee estimates was that the requirement to provide a fee estimate adds to the administrative expenses of a case and so impacts negatively on the funds available for creditors.

An alternative proposed in one of the responses would be to require a cap to accompany any time-based remuneration resolution. The cap would not need to be accompanied by a detailed justification of how it had been arrived at, saving time and costs in producing the fee estimate. If the officeholder found that the estimate was no longer accurate, they could be required to report to creditors to explain and justify any increase, but would not be able to draw any remuneration over the estimate unless agreed by creditors.

Against the above concerns, it is important to hold in mind the background to this element of the Rules. The requirement for practitioners to produce a fee estimate was introduced to address concerns expressed by stakeholders that there was no statutory obligation to provide early information about the likely level of fees, or details of the likely expenses of a case. Creditors therefore usually only discovered the officeholder’s remuneration and costs at the end. In these circumstances creditors’ only route of appeal is to the court, which can be both time-consuming and expensive.

The requirement for fee estimates also aligns with the statutory objectives introduced by the Small Business Enterprise and Employment Act 2015, which require insolvency regulators to ensure that insolvency practitioners provide high quality services at a fair and reasonable cost to the recipient. The level of fees charged by officeholders have often been a cause of complaint amongst creditors and sanctions by their regulators. It is therefore right that there should be transparency in relation to remuneration and costs at an early stage, to provide creditors and other interested parties with the confidence that the rules have been properly complied with. It is also right that creditors should be able to challenge the officeholder regarding the expected remuneration and costs at an early stage before any fee is taken.

We acknowledge the concerns that have been expressed, that producing fee estimates may take longer than was originally envisaged. However, we remain of the view that officeholders will have the professional skill and judgement to provide sufficient information about the likely remuneration and costs of a case, meeting the requirements set out in legislation, the statements of insolvency practice, and published guidance. Amending the Rules in the ways that have been suggested would have the effect that creditors would once again find it difficult to scrutinise and challenge remuneration due to a lack of timely information, undermining the reputation of the insolvency regime and profession.

Officeholders are required to make every effort to ensure that the initial estimates accurately reflect the work that will be completed. However, it is clear from the responses to the Call for Evidence that some cases will take longer than expected or will require further unforeseen work, and thereby incur greater costs than were initially forecast. The Rules have specific provisions for both eventualities, to enable an officeholder to seek an additional estimate to account for the unanticipated costs. In such cases the officeholder is required to produce a revised estimate for approval by creditors.

Creditor approval of proposals and fees

Engagement with creditors is a crucial part of the insolvency process and one that is enshrined in both the primary and secondary legislation. It is creditors that have lost out in an insolvency and it is right that it is creditors from whom key decisions are sought.

Decisions pertaining to remuneration in particular are deeply embedded in the reporting process.

• The report is the medium by which an officeholder informs creditors of the remuneration charged in a period…
• …alongside the activity that that remuneration reflects and,
• where relevant, how that compares with the fee estimate set by creditors.
• It is from a period following the date of the report that creditors may challenge the remuneration charged in a period[1].

A number of respondents commented on the reporting provisions, suggesting that they were overly complex (leading to unnecessary costs) and disproportionate to creditors’ interests. One respondent advocated that the reports in some procedures be made discretionary. While appreciating the impact on insolvency practitioners, we consider that the reporting requirements are a valuable engagement medium for communicating with creditors and that this should continue. A suggestion was made that an ‘executive summary’ should be provided for in the rules. Nothing in the Rules prevents such a summary being included within a report under the existing rules. Indeed, we would encourage insolvency practitioners to present necessary information to creditors in the most attractive way possible – an executive summary may be the best medium to convey information in a complex case. Equally, mandating an executive summary in every case would be disproportionate: some cases would not merit such an approach. We remain confident that practitioners will use their professional judgement in conveying statutory information in the most efficient and effective way possible.

Some respondents raised issues related to administration cases where statements had been made pursuant to paragraph 52(1)(b) of Schedule B1 to the Insolvency Act 1986, highlighting the difficulties that can sometimes occur when only secured and/or preferential creditors need to be consulted on certain matters under the Rules. It is clear that in some cases engagement with this smaller group of creditors can be difficult. However, we consider that the overall efficiencies provided for by the Insolvency Act and Rules across all such cases outweigh the difficulties that can occur in a minority of them.

Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the Government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors.

There were a number of more minor changes suggested to the reporting rules. Where these would make the process more efficient, while not depriving creditors of information relevant to them, we will consider them for inclusion in a future amendment to the Rules. We are mindful that much of the reporting content in the Rules is related to the underlying policy on officeholder remuneration. Accordingly, the reporting requirements should not be considered in isolation from the wider issue of remuneration.

Decision-making processes

The Small Business, Enterprise and Employment Act 2015 (“SBEEA”), which received Royal Assent on 26 March 2015, made changes to the Insolvency Act 1986 which would remove the use of physical meetings as the default mechanism for decision making by creditors in insolvency proceedings. Instead, officeholders would be able to use a variety of other procedures which did not involve creditors meeting together in the same space, including a new process of deemed consent, whereby in certain cases a decision could be proposed and if there was no objection then that decision would be made. Physical meetings could still be held, but this would only be when a certain number of creditors had made such a request. That number was 10% of creditors by voting value or by number of creditors, or ten individual creditors.

The SBEEA changes did not come into force until 6 April 2017, at the same time as the Insolvency (England and Wales) Rules 2016, which gave the framework under which the new processes would operate. The implementation of measures in the primary legislation was one of the stated objectives of the new Rules, and Part 15 was drafted specifically to give effect to the new decision-making processes. In doing so the drafting did not attempt to go behind the various decisions which are made by creditors in insolvency proceedings, but rather replace the requirement to hold physical meetings with modern alternatives which were more in line with current business practices. The timing of the decisions in the context of the insolvency proceedings, as well as time limits for notices etc, were therefore maintained wherever possible, in line with those set out in the Insolvency Rules 1986.

This did mean that in some cases there would be tight deadlines for delivery of notices to creditors by directors and officeholders, and some cases where creditors would be required to act quickly in order for their votes to count. In mitigation, it was considered that the increase in opportunities for creditors to engage, which would be provided by the new measures, would lead to increased creditor awareness and interest, and so there would be increased motivation to meet the tighter deadlines.

The rules for the appointment process for CVLs, in particular, were drafted with the specific intention of ensuring that existing efficiencies which had been developed by insolvency practitioners over many years could be retained. A process of CVL commencement and liquidator appointment was being used by many firms, whereby the directors would call the company meeting for the purposes of voting on a resolution to wind up voluntarily, and appointing a liquidator, and a creditors’ meeting would be called the same day, where the creditors’ vote on the appointment of the liquidator would be taken. This meant that the period between appointment of the liquidator by the company and the agreement of the appointment by creditors was minimised, reducing the risk of there being an extended period where the liquidator’s powers would be restricted by section 166 of the Insolvency Act 1986. The rules for the appointment of the liquidator in a CVL, and the agreement of that appointment by creditors, were drafted in such a way that the decision date for creditors could be on the same day as the meeting at which the company resolved to wind up voluntarily.

The process of decision making was of great interest to respondents to the Call for Evidence, and numerous stakeholders including insolvency lawyers, consultants, regulators, and insolvency practitioners gave their views. Some key themes emerged in those responses:

• the new rules are complex, and difficult for officeholders to operate and many creditors to understand;
• some time limits set out in the rules are difficult or impossible to adhere to; but
• there is some suggestion that the new processes have not been detrimental to creditor engagement; and
• the rules have been successful in implementing the changes made to primary legislation.

Complexity of the new rules

The decision-making parts of the new Rules were drafted to replace physical meetings as the default mechanism for all decisions made in insolvency proceedings. There was no intention to otherwise change processes for which decisions were being made, or to introduce new time periods. At the same time, it was considered important not to remove creditors’ rights to require that a physical meeting be convened, especially since the costs of such a meeting would be met out of estate funds which would otherwise be available to make dividend payments. The deemed consent procedure was introduced, which can streamline decision-making in many cases but will add an additional step to the process where creditors object to its use.

These constraints inevitably led to a more complex set of procedures than had previously been the case. The current policies are underpinned by an expectation that officeholders will select the most appropriate method for each decision based on the facts of each case. For example, if there could be opposing opinions amongst creditors, deemed consent should not be used to seek a decision; and where there is significant creditor interest, a virtual meeting might be the most appropriate method to use. In this way the incidences of situations where, among others, creditors object to a proposal presented by a deemed consent process and a second decision procedure is needed, can be minimised.

A specific piece of feedback received from respondents was that the Rules provide too many options for decision making, and one respondent went so far as to suggest that only deemed consent and virtual meetings are needed, given the successful use of virtual meetings during the Covid-19 pandemic. This was balanced by the view of another respondent who stated that electronic voting and voting by correspondence were popular processes and had been widely used. The Rules were drafted with an intention to give officeholders the greatest possible flexibility with regard to how they went about seeking decisions, and that included an option to use a process which had not been specifically covered, as long as that process allowed for a fair vote, and the opinions of all relevant creditors to be heard. Despite the acknowledged complexity of this approach, there does not appear to be consensus amongst stakeholders or strong evidence as to how it might be simplified without removing options that officeholders find valuable.

One respondent highlighted that whilst the restrictions on the use of deemed consent for certain procedures, such as the approval of voluntary arrangement proposals or approval of insolvency practitioner fees, was reasonable, these processes were scattered through the Rules. It was felt that this had led to confusion. During development of the Rules it was recognised that it would be useful to refer to the restrictions on the use of deemed consent in one place, and a corresponding note was added to rule 15.7.

A further issue was raised regarding the cut off point for a decision which is made by means other than a meeting or deemed consent. The Rules set this at 11.59pm on the decision date. The point was made that it would be better if this was during business hours, for example midday or 4pm. This matter was considered carefully during drafting. It was necessary for voting to end at a defined point, and it was decided that this should be at the end of the day rather than at the end of business hours in the UK, recognising that many creditors are outside of this jurisdiction. The new processes were designed to increase creditor engagement, and a cut off during business hours could be perceived as having been designed for the convenience of officeholders, rather than creditors.

Some stakeholders commented that consideration should be given to extending the Rules to provide a mechanism for creditors to change their minds after they have voted in non-meeting decision procedures. There have been instances where creditors had tried to change their votes using correspondence, which had had the effect of making their vote a negative one, and was unlikely to be what they had intended. As things stand, a change of vote is expressly prohibited by rule 15.31(8). Again, this matter was considered during development of the Rules, and it was concluded that the vast majority of creditors would recognise the concept of a decision or vote being final, without the ability to reverse it once made. A creditor’s vote at a meeting would be counted and applied, and the decision made based on the vote, with no option to change the vote at a later time. Amending the Rules to allow a vote made outside of a meeting to be changed once it has been cast would require a framework to govern exactly how and when that could happen, which would have the unfortunate consequence of adding further complexity.

Another additional mechanism suggested by respondents was the ability to adjourn decisions which are being made by processes other than meetings. The lack of such a provision was intentional, and the ability to adjourn has been deliberately limited to meetings, whether virtual or physical. The rationale was that naturally officeholders would not use a non-meeting decision procedure where there was any indication that an adjournment might be needed, though it was acknowledged that they would not be able to predict all eventualities. Non-meeting procedures were considered to be more suitable for straightforward yes or no decisions, where calling a virtual meeting may not be the best use of resources, and leaving the possibility of their remaining open not only adds complexity but raises the risk of manipulation of the vote.

The question of potential technology limitations during a virtual meeting, which may mean that the meeting does not qualify as a virtual meeting according to the definition in rule 15.2, was also raised. Again, this question was considered during development of the Rules. We remain of the view that an officeholder will be able to use their judgement and experience to deal appropriately with such a situation, without the need for a prescriptive set of rules setting out what must happen.

A further point raised was the situation where the officeholder is seeking more than one decision from creditors concurrently, and a physical meeting is requested in one of those decisions but not the others. A suggestion was made that in those circumstances it might be better to apply the request for a physical meeting to all of the ongoing decisions, or at least clarify that the request would only apply to one. We consider that the Rules are clear that each decision is treated separately for the purposes of requests for physical meetings, and applying a provision that the request applies to all ongoing decision processes could result in some being delayed unnecessarily (for example where the decision dates are different).

Respondents also commented on the large amount of information that was now required to be sent to creditors, and the several different notice periods, which could easily lead to mistakes being made and, at worst, invalid appointments. This too was noted during drafting of the Rules, and was the main driver for the inclusion of rule 15.11, which in large part restated provisions included elsewhere in the Rules. It was suggested that some information currently required to be sent with notices, such as information on small debt provisions or the option for creditors to opt out of receiving correspondence, should be permitted to be placed on a website. Another proposal was that creditors whose debt qualifies as small debt in accordance with paragraphs 13A of Schedule 8 and paragraph 18A of Schedule 9 to the Insolvency Act 1986, should not be required to prove their debt in order to vote in a decision procedure. We will give further consideration to whether these suggestions can and should be included in a future amendment to the Rules.

Lastly in this section, a reference was made to a perceived inconsistency of language within the rules, when referring to “qualifying decision procedures”, “creditors’ decision procedures”, and simply “decision procedures”, for example in rule 15.3. It was suggested that it would be helpful if the Rules simply used “qualifying” or “creditors’” where applicable. Although we have noted that point, and will consider how concepts referred to Part 15 might best be expressed when considering any future amendments to those provisions, rule 15.2 defines “decision procedure” as including both “qualifying” and “creditors’” decision procedure. It is debateable however whether (where a rule covers both types of decision procedure) substituting each reference to a decision procedure with a reference to “a qualifying or a creditors’ decision procedure (as the case may be)” would make for clearer drafting.

Time limits

The Rules were intended to replace the position where physical meetings were the default mechanism for decision making, with the new processes. Wherever possible, existing timeframes were preserved, so as not to prolong decisions and to avoid unintended consequences. Given the nature of some of the processes, this did lead to some timeframes being short.

Respondents observed that in some cases there was insufficient time for the creditors to object to deemed consent or to request physical meetings, and this had had a detrimental impact on engagement. This was especially apparent in the process of agreeing the appointment of a liquidator in CVL proceedings, and rules 6.14(7) and 6.14(8)(d) (which deal with the provision of information during that process) were specifically mentioned.

The process of liquidator appointment in a CVL has two stages. The company appoints the liquidator at the meeting at which it is resolved that it will enter voluntary liquidation proceedings. The creditors must then agree the appointment, but if they do not they must also be given the opportunity to nominate a different liquidator, and then a vote taken on that nomination. The notice period for the creditors’ meeting which took place under section 98 of the Insolvency Act 1986 (prior to its revocation by the SBEEA) was 7 days, but in that case the Statement of Affairs was laid before the meeting. The new Rules observed that notice period by requiring that the Statement of Affairs be delivered to the creditors on the day before the decision date at the latest, and then requiring that the decision date be within 14 days of the date that the company resolved to enter voluntary liquidation. It was intended that this would allow for creditors to nominate a different liquidator to that appointed by the company, and then for there to be sufficient time for the directors to seek a decision procedure on those nominations. Only deemed consent or a virtual meeting could initially be used, because of the possibility that there could be more than one nomination, which would require rounds of voting.

This did lead to tight timeframes, reflecting the pre-existing tight section 98 notice period. During development of the Rules, stakeholders had indicated that the requirement to lay the Statement of Affairs before the creditors’ meeting allowed directors to call the meeting and then have several days in which to prepare it. The new Rules sought not to remove this flexibility, at the cost of there being only limited time available to creditors to make their decisions. We will consider whether this should be amended as part of our further review of the CVL process.

One respondent noted that the Rules permit the creditors to request a physical meeting of creditors before a notice of a decision procedure or deemed consent has been sent. It was suggested that this could be problematic where the nominee in a CVA is working to a particular timescale, in which case the request for a physical meeting became very disruptive. To address this it was proposed that the period in which creditors can request a physical meeting could be altered in order to minimise the risk of this happening. However, this is an intentional feature of the Rules: if it is clear that a physical meeting will be beneficial, creditors are able to request it without the need to bear the cost of notices being sent. It also reduces the time taken to reach a decision. One of the reasons for limiting the period during which creditors could make such a request to five business days (a week) was to prevent decision procedures from continuing indefinitely, balancing the time that the creditors need to consider the position with the need to minimise uncertainty for the officeholder organising the decision procedure.

An observation was made on the operation of rules 7.52(5) and 10.67(6), which require creditors to provide details of insolvency practitioners whom they wish to nominate for the office of liquidator or trustee in compulsory liquidation or bankruptcy proceedings respectively. The nominations must be made within five days of the date of the notice inviting them to do so. The issue identified appears to be driven by rules 7.52(8) to 7.52(11) or 10.67(8) to 10.67(11), as the case may be. Where creditors require the official receiver to seek nominations then the decision date must be within 21 days of the date when the period for nominations ends. The creditors must then be given 14 days’ notice of the decision date. This is to ensure that when the decision is requisitioned, it takes place in a timely manner, and followed the time limits previously set down in the old rule 4.57 of the Insolvency Rules 1986. The 28 days previously prescribed by the old rule 4.57(2) now has to include the nomination period plus the 14 days (including deemed CPR postage dates). Having the new decision date within 21 days of the nomination period ending allows for the 14 days’ notice, but means that the nominations must be received within five days of the nomination request. It was envisaged that where such a scenario arose, creditors would already be interested and would be observing the proceedings closely, but it is clear that in practice the very short time period involved has caused issues. We will therefore consider whether the time periods should be amended in a future update to the Rules, and if so in what way.

Rule 8.22(7), which prescribes the parameters for when a decision date for consideration of an IVA proposal by creditors must be, was also mentioned as a rule where the required timeframe was very tight. We will similarly consider whether this should be extended.

Evidence of impact on creditor engagement

The new decision-making procedures were in part intended to give creditors increased opportunities to engage with the process. For example, a creditor told us that having lost money in an insolvency, they were most unlikely to compound that loss by spending time and money travelling to a meeting, which could even involve an overnight stay if it was in a different part of the country, but that they would be very likely to attend if they could simply join online at little cost to themselves.

Feedback from stakeholders shows that there is some engagement with the new processes. Comments that creditors have found the new processes to be confusing, that they have attempted to change their votes, and that time limits are too short, all highlight features of the Rules that have caused difficulty. However, they are also indicators of creditor engagement with the decision-making processes. Previously insolvency practitioners had estimated that only four per cent of creditors typically attended meetings (though more used proxies to allow the chair to cast a vote for them): the feedback we have received leaves open the question of whether the new processes have in fact been detrimental to creditor engagement, which is not to say that this could not be further improved, for example through less complexity or more flexible timeframes.

One response which did question the impact on creditor engagement, suggested that the requirement for a deposit where a decision was being requisitioned as required by rule 15.19 was deterring creditors from making such a requisition. Provision to this effect has been in existence for many years (see for example old rules 2.37 and 4.61 in the Insolvency Rules 1986), and we consider it to be an important protection for officeholders against potentially vexatious requisitions. It is important to note that it only applies to situations where the creditor wishes for the officeholder to commence a decision procedure. It does not apply to the situation where there is an ongoing decision procedure and the creditor wishes to request a physical meeting.

The impact of the Rules as a whole on creditor engagement is further explored under the heading of “Creditor engagement”, elsewhere in this report.

Successful implementation of the measures in the Small Business, Enterprise and Employment Act 2015

There were no instances where information provided by respondents suggested that specific processes did not work, or certain timetables were impossible to comply with. That is, on the evidence available, the Rules have successfully implemented the decision-making processes introduced by the SBEEA.

Two responses did refer to difficulties with the requirements regarding timing of the holding of a physical meeting to consider a CVA proposal in rule 2.31. The problem identified appeared to be with interaction of that rule with rule 2.27, which specifies that a decision date must not be less than 14 days from the delivery of the notice of the decision. However, rule 2.27 applies where there is no physical meeting, and rule 2.31 will apply when the creditors request one: there does not appear to be a conflict, even if creditors request the meeting before the notices are sent.

Similarly there appeared to be confusion over the term “initial decision” in paragraph 51(2) of Schedule B1 to the Insolvency Act 1986, in the context of an objection to deemed consent where that process is used to seek the agreement of the creditors to the administrator’s proposals. The initial decision date is intended to be the first one set, whether using deemed consent or a decision procedure, and the date must meet the requirements of paragraph 51(2). If creditors objected to deemed consent then a decision procedure would be needed, and a new decision date set in accordance with the requirements of Part 15 of the rules.

Creditor committees

Cases where creditors’ or liquidation committees are formed are comparatively few across the whole insolvency landscape. However, where they occur they are a valuable representative tool via which the creditors (and in certain situations, contributories) can engage with the insolvency officeholder. A committee is wholly a creature of the insolvency framework. Its creation, formation and function is outlined in the Insolvency Act and Insolvency Rules. Accordingly, it is important to ensure that the Rules provide a clear, concise and efficient legislative framework to nurture engagement with creditors.

Respondents made a number of comments on the committee rules. Many suggested that the changes to the committee formation rules, as a result of the wider changes in respect of decision-making, led to the committee rules becoming unnecessarily bureaucratic. The value of continually requesting that creditors decide whether to create a committee, alongside other decisions, was particularly questioned. Suggestions were made to end this practice, and only require a decision from creditors on the formation of a committee alongside the first other decision to be sought, or to only refer to the creditors’ right to create a committee rather than seeking a decision each time.

Committees set the basis for an officeholder’s remuneration (other than where the official receiver is officeholder). In the absence of a committee, or where the officeholder considers a basis set by the committee insufficient, the basis can be set by the general body of creditors; and similarly, if the general body of creditors does not set an acceptable basis for fees, the officeholder can ask the court to do so. Where fees are set on a ‘time and rate’ basis, the officeholder may not exceed their initial estimate of their fees without first reverting to the body that set the basis initially – that is, the committee, the creditors or the court. Some respondents queried why the creditors or court should be involved in this process if a committee has been formed between the initial setting of the basis (by the creditors or the court) and the exhaustion of the fee estimate. The primacy of the committee – being the first body able to set the basis – should mean that in these circumstances the officeholder should instead revert to the committee. This point may also be relevant where there has been a material and substantial change in the circumstances of the case since the initial setting of the remuneration.

A respondent highlighted that the Rules did not state what should be done when there are greater than five nominations for membership of a committee. This point was considered by the court in respect of the equivalent provisions in the earlier Insolvency Rules 1986 (which do not vary substantively from similar content in the current Rules): in Re Polly Peck International Plc (In Administration) (No.1), [1991] BCC 503. That is, where more nominations are received than available seats on the committee, that a simple election should be held, with those nominees who receive the greatest number of votes (by value) filling the vacancies. Although that caselaw was not codified in the Rules when they were updated, we consider that it remains relevant.

A number of more minor procedural changes were suggested, where it was felt that the existing rules suffered from lacunae that caused officeholders difficulties in practice.

Where the changes suggested above will make committees more efficient and aid engagement with creditors, we will consider them for inclusion in a future amendment to the Rules.

Data disclosure issues

Respondents raised a number of questions as to whether the current processing and disclosure of personal data in insolvency proceedings represents the best possible approach. This included querying inconsistencies in the treatment of personal addresses of individual self-employed creditors and consumer creditors or employees. For example, rule 3.30 provides that in administration, the statement of affairs must include the names and postal addresses of all creditors. Rule 3.35 provides that the details of employees and some consumer creditors may be omitted and kept in separate schedules, but this rule does not apply to individual self-employed creditors.

Some respondents questioned the disclosure of personal details through the provision of creditor lists to other creditors under rule 1.57. While these respondents acknowledged the benefit to creditors of being able to contact each other, they queried whether mandatory provision of personal addresses was proportionate.

Respondents suggested amending the Rules to limit publication of personal addresses of individual creditors, employees, company officers and shareholders. One proposed amendment to the requirements under the Rules would allow for email addresses to be circulated instead of postal addresses. Another suggests that an officeholder also be given the discretion as to whether to disclose a change of residential address of an insolvent.

Following our review, we are satisfied that the current balance struck by the Rules between the needs of the different parties and the administration of insolvency cases remains an appropriate one. While there is clearly an administrative benefit to uniformity in terms of how creditors’ information is processed and used in any given insolvency procedure, we consider that it is also necessary to ensure that, where appropriate, data requirements have due regard to the circumstances of various types of creditor. That may require applying a different approach to those creditors, such as consumer creditors and employees, who are more likely to be acting in a personal (non-professional) capacity. There are substantive benefits to ensuring that creditors are able to contact each other, whereas electronic communication is increasing but not ubiquitous, and any move to substitute electronic contact details for physical addresses would require considerable care.

This is an important area where individuals’ needs and society’s views have continued to evolve. These issues will therefore remain under consideration for amendment in future updates to the Rules.

Claims and dividends

A number of discrete points were raised in respect of creditors’ claims and the payment of dividends, and are addressed below.

Timing to adjudicate claims

Rule 14.32(1) requires that the officeholder admit or reject proofs delivered within 14 days of the last date for proving. One respondent suggested that this be extended to 28 days, on the grounds that the deadline could be difficult to meet in cases with large numbers of claimants or complex claims. The time limit was extended from the five business days set down in the previous Insolvency Rules 1986, which had operated effectively for many years, to 14 days in the current Rules. With this in mind, there are no plans at present to extend it further.

Employee claims

Unless subject to an exemption, all creditors wishing to make a claim in an insolvency must submit a proof of debt (under rule 14.3). One respondent suggested that the current exemptions be extended to include employees whose claims have already been accepted by the Insolvency Service’s Redundancy Payments Service (RPS) for payment from the National Insurance Fund. In such cases, the RPS will submit a subrogated claim in the insolvency for the sum paid over to the employee, while the employee can claim any remaining unpaid amount from the insolvency themselves. Respondents suggested that to require a proof of debt from the employee as well as from the RPS appears to be unnecessary duplication. This will be considered further, for possible amendment in a future update to the Rules.

Dividend deadlines

It was suggested that the deadline to declare a dividend under rule 14.30 be extended from two to four months. The amendment of the equivalent deadline in the Insolvency Rules 1986 in respect of winding up and bankruptcy procedures, which brought the time available to the current two months from the last date of proving, also brought it into line with the deadline for administrations. As with the time available to adjudicate claims, there are no current plans to extend it.

Treatment of small/nominal dividends

Rule 14.27 provides that the officeholder must declare and distribute dividends among the creditors in respect of the debts they have proved. Respondents stated that where the amount of dividend is below a certain amount, many dividends remain unclaimed and the distribution process is onerous. It was suggested that creditors be given the option to waive their entitlement to such dividends, with the funds being donated to a nominated charity.

While there are provisions within client money regulations to pay over unclaimed funds to charity, these apply where the entitled persons cannot be traced. To extend the provisions to cover those creditors who have submitted proofs but are due only small dividends would impair creditors’ rights to repayment and would be out of step with other professions handling client money. At the same time, a process whereby creditors must be asked to waive their entitlement to a dividend (and their preferences acted upon) would create an even greater administrative burden on officeholders than carrying out the distributions. For these reasons, while we accept that in certain circumstances small dividends can be onerous, the suggested solution cannot be taken forward.

EU exit

In response to the UK’s exit from the European Union, the Rules were amended by the Insolvency (Amendment) (EU Exit) Regulations 2019. References to EU legislation were removed, and other areas were amended to take into account changes to the retained elements of the Insolvency Regulation, in particular changes to the so-called “centre of main interests” (COMI) test. Respondents raised a small number of points in this area in respect of amendments that they felt had been missed, and in relation to COMI and recognition.

Rule 8.24, which requires a report of creditors’ consideration of an Individual Voluntary Arrangement to be prepared and specifies its contents, has not been updated to take into account the new COMI test and so is not in synch with the rest of the current regime and legislation. Rule 15.41 retains a special case in respect of companies incorporated in EEA states that, respondents suggested, does not appear to be justified following our departure from the EU.

Not all respondents were clear as to the purpose behind the retention of the (modified) COMI test in UK law following EU exit. This has since been set out in the Insolvency Service’s Dear IP newsletter, issue 135. In addition, some concern was raised that where the Rules reference legislation originating in the EU it may not be clear which version, original or retained, is now meant. This is however addressed in section 436 of the Insolvency Act 1986 (as amended) which sets the definition of “the EU Regulation”.

Other respondents suggested that it would be helpful to expand the “confirmation” of Creditors’ Voluntary Liquidations under rules 21.4 and 21.5, which was also retained to assist with the international recognition of UK insolvency proceedings, so as to cover debtor petition bankruptcies, voluntary arrangements, and administrations entered via the out-of-court procedure.

We will consider the outstanding points above for inclusion in a future amendment to the Rules.

New proposals

We received a number of proposals in responses to the consultation, with some helpful suggestions for improving the insolvency regime. We are grateful to respondents for suggestions in relation to security deposits, special manager and officeholder resignations, and placing IVA information on credit reports. We will keep these proposals under review for development when time permits, as part of our ongoing commitment to maintaining a world class insolvency framework.

Respondents also raised the issue of bonding for special managers. A consultation on the future of insolvency regulation (i.e. the authorisation of insolvency practitioners), which asks questions on this topic, was launched on 21 December 2021 with an end date of 25 March 2022. This can be found at: The future of insolvency regulation - GOV.UK (www.gov.uk)

Finally, we also received requests to review the prescribed part calculation, an important source of funds for unsecured creditors. Policy in that respect has been recently reviewed. Following a previous consultation, it was decided not to alter the calculation but to increase the cap from £600,000 as it was previously, to £800,000, in line with inflation since 2003. The change was implemented through the Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020, which came into force on 6 April 2020.

Restriction on calling physical meetings of creditors

Several respondents to the Call for Evidence commented on the restrictions on the use of physical meetings which were introduced on commencement of the new rules. This was a change effected by the Small Business, Enterprise and Employment Act 2015, making the relevant changes to the Insolvency Act 1986. The new insolvency Rules implemented these changes by setting up a framework for decision making, but since the new processes were introduced in primary legislation, specifically in sections 246ZE and 379ZA of the Insolvency Act 1986, they are outside of the scope of this review, and most respondents acknowledged that.

Generally, those that raised this issue said that the measure had gone too far, and that having the discretion to hold a physical meeting would be a useful addition to the officeholder’s toolkit. Two respondents said that this was particularly the case for Company Voluntary Arrangements.

The restriction on the use of physical meetings does not apply where 10% of the creditors by value, or number, or 10 creditors, request that one be held. There is no restriction on such a request being made before the initial decision notices have been sent out. It was envisaged that this combination would facilitate holding a physical meeting where it was clear to the officeholder that it would be beneficial, because they would be able to talk to creditors and discuss the benefits in order that they could make a decision on whether a request should be made. They would not however be obliged to make such a request.

Several respondents indicated that officeholders could usefully be given the discretion to hold a physical meeting without a request, where it is clear that it would be beneficial to creditors and the proceedings generally.

While at present we consider that the restriction on physical meetings is operating correctly, this does not rule out future changes in this area. Despite being outside of the scope of this review, the feedback from respondents has been noted for consideration in that event.

Other comments and issues

In addition to those fitting the general themes dealt with in this report, a small number of points have been raised that do not fall into other categories.

Where these representations relate to the operation of parts of the insolvency framework that are not covered by the Rules, or to other primary or secondary legislation, then they fall outside of the scope of this review. We are nevertheless grateful to those who have highlighted areas in which they feel that the current regime can be improved, and these have been noted for consideration in future policy development.

For example, new legislation would be required to address the courts’ determination (in The Joint Administrators of LB Holdings Intermediate 2 Limited v The Joint Administrators of Lehman Brothers International (Europe) and others [2017] UKSC 38) that section 189 of the Insolvency Act does not provide for statutory interest to be paid in a liquidation other than from the date that it commenced. This leads to a situation in which statutory interest not paid out in a preceding administration is then “lost” and cannot be paid in a subsequent liquidation. If change is required it cannot be effected through the Rules, however, as the primary legislation is clear, and so this matter falls outside of the scope of the review.

The interaction between the requirements for service in advance of a hearing (under rule 12.9) and provisions for service outside of the jurisdiction was brought to our attention. There is not in our present view any deficiency in rule 12.9 itself. Rule 14(3) sets out the general rule that service should be effected at least 14 days before the date fixed for the hearing; however rule 14(2) and, in particular 14(3)(c) give the court a wide discretion to give different directions regarding service or to extend of abridge the deadline for service. We consider that these provisions strike the appropriate balance between setting a deadline that is appropriate in the vast majority of cases while nevertheless giving the court discretion to give alternative directions as to service where necessary. We nevertheless remain open to future evidence that the system is not performing as intended with adverse results.

During the course of the review we have also considered whether there are lessons to be learned from the recent emergency legislation brought forward in response to the coronavirus pandemic. While much of that legislation is new and has not yet been fully tested in practice, and other measures were temporary in nature, the second set of temporary restrictions on winding-up introduced the requirement that a creditor must be owed £10,000 to bring a winding-up petition against a company. It is notable that under the normal insolvency regime there is no monetary limit on bringing petitions to wind up a company, and that a creditor may rely on an unpaid statutory demand to demonstrate a company’s insolvency where there is a debt of £750 or more, in contrast to the requirement for a creditor bringing a bankruptcy petition to be owed £5,000 or more. We will give further consideration to whether the company limits should be amended (having regard to the experience gained while the temporary coronavirus measures were in place) to provide greater protection for companies against creditors pursuing relatively small debts, and if so, how this should be achieved.

Creditor engagement

One of our aims when developing the rules that govern insolvencies is to ensure that everyone who is affected has a chance to have their say, and to help make decisions about the things that affect them. This often focuses on creditors, as they feel a large part of the impact of an insolvency but (unlike the insolvent or their officeholder) are rarely directly involved in its management. Creditor engagement with insolvencies was highlighted in our Call for Evidence on the operation of the Rules, and one that a number of respondents commented upon in some detail.

Although there is little holistic evidence of the impact, where respondents commented it was largely to suggest that in their experience, certain changes have made it harder for creditors to engage in insolvency processes. These include, in particular:

• The fact that notices and reports can be and are uploaded to a portal, rather than sent directly to the recipients;
• The reduced use of physical meetings; and
• The removal of prescribed forms.

However, not all feedback received was negative. Respondents noted that:

• virtual meetings and votes by correspondence offer more opportunities for creditors to engage meaningfully with an insolvency; and
• the new means of communicating with creditors have made the underlying interactions less onerous.

To an extent, where the changes might discourage creditors from engaging, this highlights a tension between efficiency and engagement in insolvency proceedings: each of the above changes was made to facilitate a modern, effective regime; and following this review they remain, in our view, the correct approach. This was echoed by respondents who recognised the value of changes while at the same time describing a negative effect on creditors’ engagement.

The above must also be viewed in light of our aim for the insolvency regime, which is to ensure that creditors have the means to engage where it is appropriate and important to them to do so, not to require that they take part in all cases regardless. The sentiment is often expressed that creditors will be reluctant to “throw good money after bad” by engaging, in the absence of a clear incentive such as a potential dividend. This includes spending time reading reports and contributing to decisions about the insolvency in any form, and it is not our goal to force engagement on a creditor who has made a commercial decision not to take part.

It is perhaps relevant therefore that other significant changes affecting the insolvency landscape, while made in the public interest, have affected creditors’ prospects of recovering money through an insolvency process. It was suggested that this has in turn impacted on engagement. The reintroduction of Crown Preference through the Finance Act 2020, the new powers of the Pensions Regulator under the Pension Schemes Act 2021, and restrictions on creditor action during the pandemic under the Corporate Insolvency and Governance Act 2020 were highlighted in this regard.

Taken in this context, the introduction of decisions by correspondence and deemed consent may encourage creditor engagement precisely because they reduce the need to spend time and money actively interacting with officeholders in cases of lesser interest: where creditors might have previously not been able or willing to attend a physical meeting, under a deemed consent process they no longer need to take action in order to agree with the proposed approach, and retain the ability to object should they wish. While an increase in creditor complaints about the complexity of processes and documentation is concerning, and cannot be dismissed (not least when similar concerns have been raised by established and frequent creditors), it may in some cases reflect increased creditor interest in affecting the outcomes of insolvencies.

A core concern however appears to be one of “information overload”. As noted in the main body of the report above, the decision-making process is now necessarily more complex than in the past. The impact of this complexity appears to go beyond the requirement for officeholders, who are expected to be comfortable with the regime, to select the best option and explain it to creditors. Although it mirrors the previous requirements and prescribed forms, or perhaps as a consequence of this, respondents considered the information that the Rules require is too detailed. It was suggested that a degree of simplification could be achieved in officeholders’ reports, focusing on the key information that is relevant to creditors. One non-officeholder noted that there is now more paperwork for creditors at the outset of a Creditors’ Voluntary Liquidation than there was before – and that while many of these documents have always been provided to creditors, the process has become more confusing rather than less.

To some extent this may be an initial confusion. It is clear from respondents’ comments that at least some insolvency practitioners are still in the process of determining how best to use and present the new decision-making options, as might be expected in the first few years of the operation of the Rules. The anecdotal evidence suggests little change in engagement from the most experienced creditors. Nevertheless, we have noted the above concerns and will consider what future changes can be made to improve creditors’ experiences without undermining the other aims of the regime.

Conclusions

As suggested earlier in this report, the responses to the Call for Evidence confirm our view that the insolvency regime, taken as a whole, remains fit for purpose. The Rules are necessary and appropriate legislation that provide the detailed process and safeguards governing insolvencies in the UK.

The purpose of the review has been to evaluate the Rules and their operation, not to develop solutions to specific issues. However, in a small number of cases the Call for Evidence has highlighted errors and similar straightforward issues in the Rules, which we will correct. In addition, a larger number of specific areas have been identified for further review and, potentially, inclusion in future updates to the Rules. We consider the CVL process and the scope of insolvency applications to be the most pressing of the latter, reflecting the numerous representations made to us regarding those issues. Inclusion on the latter list does not in itself indicate that legislative change is definitely needed in that area: in many cases it reflects a need for additional investigation to determine what action, if any, should be taken.

The tables below summarise the necessary corrections and areas to be considered further:

Corrections

Rule(s)	Action
e.g. 7.22	Remove the need for multiple copies of electronic documents to be provided by the court
8.24	Amend to reflect the current Centre of Main Interests test
10.87	Clarify the requirement to file the notice to creditors at court
15.11	Clarify when notices must be sent to creditors who have been paid in full
18.3	Clarify rule 18.3(1)(b)

Future work / further consideration

Rule(s)	Action
Part 1 Ch. 9	Extending delivery of documents through websites to non-officeholders
1.35	Determine the appropriate scope for insolvency applications in light of Manolete Partners plc v Hayward and Barrett Holdings Ltd & Ors [2021] EWHC 1481 (Ch)
E.g. 1.37	Whether the opt out provisions should be amended or revoked
2.448.31	Whether the current “must not” is clear or should be amended
3.24	Consider removing the time and date of an administration appointment from the notice of same
Part 6	Review the CVL process, including but not limited to: use of statutory declarations; timing and content of the information provided to creditors; pre-appointment expenses
6.14(6)(a)15.4(b)	Whether use of the word “between” is sufficiently clear
6.16	Consider removing the requirement for an administrator who then becomes liquidator to provide information to new creditors that is readily available at Companies’ House
7.5210.67	Whether the time periods for nominating a liquidator or trustee, in compulsory liquidation or bankruptcy, should be amended
8.22	Whether the decision date for an IVA proposal should be extended
14.3	Consider adjusting the proof of debt rules so that employees do not need to submit a claim where the Redundancy Payments Service has already provided full details of the debt
14.23	Address the issue of statutory interest that is not paid in administration being “lost” if the company subsequently enters liquidation (linked to section 189 of the Insolvency Act 1986)
E.g. 14.31	Whether information currently required to be sent with notices, such as information on small debt provisions or the option for creditors to opt out of receiving correspondence, should be permitted to be placed on a website
15.13	Consistency in whether meetings and other decision procedures should have to be gazetted
15.41	Whether, and if so how, the treatment of companies incorporated outside the UK should be harmonised
Part 17	Consider changes suggested to make committees more efficient and aid engagement with creditors
18.24 –18.27	Review the rules on remuneration for clarity. Alongside this, consider suggestions made in respect of reporting requirements in the Rules.
21.421.5	Consider expanding the “confirmation” of Creditors’ Voluntary Liquidations to cover debtor petition bankruptcies, voluntary arrangements, and administrations that are entered via the out-of-court procedure
-	Consider adding a rule requiring Companies House to be notified of a change of supervisor in a CVA
-	Give further consideration to whether the company limits should be amended to provide greater protection for companies against creditors pursuing relatively small debts
-	Whether rules are needed to govern the consolidation of two or more bankruptcy petitions presented against the same debtor
-	Whether creditors whose debt qualifies as “small” under the Insolvency Act 1986 should be permitted to vote in a decision procedure without proving their debt
-	Produce a brief summary of the structure of the Rules
Various	Whether the use of “business days” in the rules should be further harmonised
Various	Update anachronistic references to “registrars”
Various	Remove or update highlighted references to repealed legislation
Various	Remove any unnecessary disparities between the rules for different insolvency procedures
Various	Whether the disclosure of personal information required by the Rules should be amended, to provide greater privacy and/or to reflect the frequent use of email as opposed to physical addresses for communication purposes
Various	Examine in greater detail proposals in relation to security deposits, special manager and officeholder resignations, and placing IVA information on credit reports
Various	What future changes can be made to improve creditors’ experiences

Next Steps

Future work will be undertaken in respect of each of the above areas. Where policy changes are identified and it is appropriate to do so, public consultations will be issued setting out the Government’s proposals. It is not expected that any of the work that we have identified will necessarily lead to consultations or other public documents, as preliminary reviews may conclude that (despite any initial views expressed in this report) the Rules should not be changed.

The progress of further review work, any future proposals to make changes to the Rules, and particularly any legislation, are subject to the Government’s prioritisation of its work and the scheduling of the parliamentary calendar in the usual fashion.

Further Information

Enquiries regarding this report may be sent to the Insolvency Service’s Policy team, by email to Policy.Unit@insolvency.gov.uk.

Physical written correspondence may be sent to:

Policy Team
The Insolvency Service
16th Floor, 1 Westfield Avenue
London
E20 1HZ

Please mark correspondence for the attention of Andrew Shore.

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[1] The close connection between reporting and remuneration is the reason that the official receiver – whose remuneration is not set by creditors – does not issue periodic progress reports. While this discrepancy between insolvency practitioners and official receivers was noted by several respondents, the reasoning had been outlined in the impact assessment to the Insolvency (Amendment) Rules 2010, which brought in progress reports for compulsory winding up and bankruptcy.