This Technical Alert is to remind members that the new Scottish Insolvency Rules come into effect on 6 April 2019.
On this date Scotland will experience the biggest change to its corporate insolvency proceedings in more than a generation as TWO sets of rules will come into force:-
The Insolvency (Scotland) (Company Voluntary Arrangement and Administration) Rules 2018
The Insolvency (Scotland) (Receivership and Winding up) Rules 2018
It should also be noted that at the same time, the final suite of changes to Scottish specific elements of The Insolvency Act 1986 (‘IA86’) will be enforced with the commencement of the Public Services Reform (Insolvency) (Scotland) Order 2016.
Whilst the procedures governing corporate and personal insolvency in England & Wales (‘E&W’) and Scotland are similar in many respects, with IA86 being the governing statute in both jurisdictions, there are some key differences. With regard to corporate insolvency, different procedural rules apply in Scotland. Therefore, having two sets of Rules has been necessary to gain the relevant parliamentary approvals as the processes are controlled by the UK Parliament and the Scottish Parliament respectively under devolution arrangements.
The Rules mirror, as far as possible, those rules that came into effect in E&W in 2016 – the language has been modernised and simplified and they incorporate all previous amendments made in the years prior to its introduction.
Other key changes include:
- Removal of all prescribed forms which are currently circulation;
- Enabling of electronic communications with creditors;
- Removal of the automatic requirement to hold physical creditors meetings, although creditors will be able to request meetings;
- Enabling of creditors to opt out of further correspondence and for small dividends to be paid by the office holder without requiring a formal claim from creditors.
Despite significant change, the procedures for approval of an IP’s fees and disbursements in Scotland remain relatively the same and are very different from the procedures in E&W. It is also worth noting that the new Rules have no impact on personal insolvency, which continues to be subject to the Bankruptcy (Scotland) Act 2016.
Although the Rules consolidate 32 years of amendments to statutory instruments since the rules came into force in 1986 and contain impressive lists of revocations, the new Rules do contain some duplication across both sets. For example, Part 1 of each of the administration and winding-up rules defines scope, times, and documents. Decision making, proxies and corporate representation, the EU regulation and block transfer of proceedings also enjoy commonality, but under different section numbers in each set of rules.
Key points to note:-
- CVLs – The CVL entry process will once again be common across the UK and will provide a level playing field for all IPs, wherever they are located, and widens the choice of IP firm from a director’s perspective.
- MVLs – The statutory rate of interest in corporate insolvency in Scotland will reduce from 15% to 8% (in line with the judicial rate and the applicable rate in personal insolvency in Scotland) and will apply to MVLS!
Members should be aware that there are currently no transitional periods with respect to these provisions so they will apply to all MVLs which remain open at 6 April 2019, or which are commenced after this date.
Scottish IP’s contemplating an MVL immediately post 6 April 2019 need to be mindful that statutory interest will apply, and deal with the payment of pre and post appointment corporation tax accordingly. (Further guidance – Tax Technical Alert dated 20 March 2018)
- Court liquidation – When an IP acting as an Interim Liquidator seeks a nomination as liquidator from creditors and receives a nomination(s), the IP must revert to creditors with a decision making procedure for appointment. If only one nomination is made (presumably for the interim liquidator to continue as liquidator), then a deemed consent procedure could be used. If two or more nominations are received, a decision by correspondence or virtual meeting is the next logical step but the Rules are not explicit. IPs will therefore need to give some thought to the situation and which procedure best suits.
- Liquidation process – Part 7 of the winding up rules sets out how accounting periods, progress reports and final reports will apply in future and from what date retrospectively. As a rule, the start date for progress reports in a CVL will be the date of the appointment of a liquidator and in a court liquidation it could be variously the date of appointment (if there is one) or the appointment of the interim liquidator in all other cases.
- Relevant date for claims – The relevant date for claims is moving from the date of the presentation of the petition in court liquidation to the date of the winding up order. As the appointment of a provisional liquidator is more prevalent in Scotland, IPs should think carefully about the consequences of their actions in the period of provisional appointment.
- Remuneration and accounting periods – The first two six month accounting periods will remain, but thereafter an IP can defer a claim or remuneration without court or committee approval.
- Administration – Despite having the advantage to remedy the issues that have arisen in E&W following the introduction of new rules, these new Rules appear to repeat some problems found in the E&W legislation. For example, listing the date and time of appointment in the notice documents to court.
- Transitional provisions – Whilst the Rules do contain some transitional provisions, they do not seem to go far enough to ease confusion for IPs. Therefore, R3 in collaboration with its STC are urgently seeking some form of guidance from the Insolvency Service on the transitional provisions. Any guidance received will be provided to members.
R3 and its Scottish Technical Committee will aim to provide members with more detailed guidance, by way of Technical Alerts and Bulletins over the coming months following the implementation of the new Rules, as well as providing more specific guidance on changes where necessary.
The changes introduced by the new Rules will be far reaching and will apply to all Scottish cases (excluding personal insolvencies), not just those commenced following the implementation date. They will also remove all of the presently used prescribed forms. We recommend therefore that members ensure that document packs have been amended to reflect new standard contents.
Members are encouraged to consider what form of decision procedure will be appropriate for the size and nature of the cases members administer and think about what platform best suits a virtual meeting provision. There is support available, not just from R3; however we would urge you not to simply rely on third parties telling you what is changing. There is no alternative to gaining a proper working knowledge of the changes to be made independently.