On 7 August 2024 a Technical Alert was issued to members about two court decisions where the court was required to consider whether an office holder should have sought the consent of paid secured creditors to extend the period of administration under paragraph 76 of Schedule B1 of the Insolvency Act 1986. In both cases the court determined that the administration period had been validly extended and the consent of the paid secured creditors was not required.
The issue at the core of the two decisions related to extensions in administrations and secured creditor apathy when they have been paid off in full by the time the extension is required and the additional costs if relevant creditor consent was not forthcoming.
The alert to members can be found here.
Letter to The Insolvency Service (‘INSS’)
Given that the findings in the decisions conflicted with previous INSS guidance, R3 with the support of the Regulatory Professional Bodies (ICAEW, ICAS and IPA) wrote to INSS asking that they consider the following options –
(1) As a matter of priority amend its view that ‘a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made’ and issue a Dear IP to the profession to assist insolvency practitioners as soon as possible.
And/or
(2) Amend the Insolvency (England and Wales) Rules 2016 to reflect the practical approach demonstrated by ICC Judge Prentis and HHJ Paul Matthews.
Response
The INSS has responded and are happy for R3 to share the following –
“As you will appreciate, while the judgments (and your letter) concerned extensions to administration and secured creditors, the Insolvency Service’s previously stated view on ‘creditor’ applied to all usages of the term in insolvency law. Accordingly, when analysing the impact of the judgments, we had to consider the wider impact beyond the specific subject matter of Pindar and Toogood. We did not wish to make a statement on secured creditors and extensions to administration, only for this to then be taken out of context for other usages of ‘creditor’ in legislation, as this could have caused subsequent problems for all insolvency office-holders, whether insolvency practitioner or official receiver.
We have analysed the judgment and taken legal advice. As a result of the judgments and the advice, we will be reframing our view of the term ‘creditor’ in the insolvency legislation. We will no longer contend that the meaning of the word ‘creditor’ is fixed and crystallised at the date of entry into an insolvency procedure.
Our revised view, following legal advice, is that the term is context-specific. For example, as the court noted in the Pindar/Toogood judgments, the construction of the definition of ‘secured creditor’ at section 248 Insolvency Act 1986 means that such a party is no longer a creditor for insolvency law purposes once the charge has been satisfied. On the other hand, where a bankruptcy is annulled on grounds of payment in full (s282(1)(b) Insolvency Act 1986), rule 10.139 Insolvency (England and Wales) Rules 2016 (notice to creditors) would make no sense if the use of the word ‘creditor’ in that rule excluded those who had received payment. In that instance, the term ‘creditor’ must apply to one whose debt had been paid. Accordingly, where a creditor has been paid, it will be for the professional judgment of the office-holder whether a particular insolvency law provision relating to creditors is engaged following that payment.
As our reframed view is that the term is context-specific, no legislative amendment is required. However, we will be placing an article in a forthcoming issue of Dear IP on the matter along these lines to provide guidance to office-holders going forwards.”
In terms of the Dear IP, we understand that this is due to be published around the end of this month (June 2025).
R3 Technical Team