Qualifying decision procedures

This article was first published in The Gazette, and the original article can be found online here.

The implementation of the Insolvency Rules 2016 has introduced a number of changes to the procedures in insolvency regimes.

The aim behind many of these changes was to solve the issue of updates to the procedures being rather reactive, and instead look to future-proof the rules, so that practitioners can take advantage of new advances in technology and communication, without needing to wait for an update to permitted procedures.

'Old' collective decision-making procedures

One of the most significant amendments has been to the way in which creditors collectively make decisions. Physical meetings for this purpose have been held since the late-19th century, but for many years, it has been increasingly rare that creditors attend these meetings in person. Instead, most business with creditors has been transacted by proxy attendance.

As a reflection of this decline in physical attendance, the Small Business Enterprise and Employment Act 2015 introduced sections 246ZE and section 379ZA to the Insolvency Act 1986, which abolish physical meetings as the default decision-making mechanism in all insolvency processes. As a result, physical meetings will now be the exception rather than the rule, with the most obvious casualty being the section 98 meeting to place a company into creditors’ voluntary liquidation.

Arguably, this is the most controversial reform introduced by the new rules, for which there was very little support during the consultation process. Supporters argue the new rules reflect the reality of limited creditor engagement and will save both time and money, while allowing technology to play its part in the decision-making process. Critics argue that the abolition of physical meetings as the default will only deter creditor engagement still further, as well as depriving creditors of the opportunity to question directors and debtors and compare notes with one another. 

The new qualifying decision procedures

In place of physical meetings, decisions of creditors (or contributories) in corporate insolvency procedures must now be made by a qualifying decision procedure. The Insolvency Rules 2016 introduce the following procedures for collective decision making:

  • Correspondence.
  • Electronic voting, which ‘includes any electronic system which enables a person to vote without the need to attend at a particular location’. Among other things, the notice to creditors must explain how to access the system and include details of any password. Unless electronic voting is being used at a meeting, the system must allow creditors to vote at any time until the decision date, and must not provide details of votes cast by other creditors.
  • Virtual meetings, which means ‘a meeting where persons who are not invited to be physically present together may participate in the meeting including communicating directly with all the other participants in the meeting and voting (either directly or via a proxy holder)’. Among other things, the notice to creditors must explain how to access the virtual meeting, and include details of any access code or password. The notice must also contain a statement that the meeting may be suspended or adjourned by the chair.
  • Any other decision-making procedure that enables creditors to participate equally.

Physical meetings: the 'rule of 10'

Under s.246ZE(9) and s.379ZA(9) of the Insolvency Act 1986, physical meetings can now generally only be requested within five business days of the notice of the decision-making procedure, and only if made by:

  • 10 per cent of creditors by number
  • 10 per cent of creditors by value
  • 10 individual creditors

As with all rules, there are exceptions including, for example, the winding up by the court of an authorised deposit taker, where meetings are mandatory and notice must be given to the FCA, unless the court orders otherwise.

Deemed consent

It is worth noting that an additional procedure, that of deemed consent, is also a new mechanism by which decisions are approved. In this procedure, the office-holder sends a notice specifying that the deemed consent procedure is being followed, and giving directions for how to object to the decision. The issue will be deemed to have been accepted as if it were voted through in the qualifying decision-making procedure, unless the requisite number of creditors/contributories object.

However, deemed consent is not a qualifying decision procedure, and therefore, cannot be used in all situations in which a decision is required. An example of this is decisions relating to office-holders' remuneration.

Qualifying decision procedures in practice

With the 2016 rules now several months old, insolvency practitioners and creditors alike are getting to grips with the new procedures.

While the removal of physical meetings is a significant amendment to collective decision making, the new procedures still require the active consent of at least one of the creditors/contributories. It will be interesting to consider in due course whether these more modern forms of decision-making procedure have increased creditor engagement. 

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