Out with the old...

Since the beginning of April we’ve getting to grips with new legislation which aims to make the insolvency process simpler and more accessible for creditors and to modernise the rules to fit in with today’s methods of communicating electronically.

For example physical meetings are largely a thing of the past. Now email correspondence, virtual meetings or electronic voting are the default means of decision making by creditors.

In fact to further streamline the process, the new concept of ‘deemed consent’ has been introduced. This means that in almost all decisions where a vote by creditors is required, the decision will be deemed to have been accepted unless the requisite number of creditors object.

Whilst these changes are great in theory, in practise there is still a way to go in achieving a streamlined, modern process that truly engages and benefits creditors.

More information up front for creditors

Before the new legislation, creditors had to wait for information until during or after the physical creditors meeting. Now, creditors receive a statement of affairs or summary of the history of the insolvent business at the outset so that they have full information in readiness for any deemed consent decisions.

More information for creditors at an early stage can only be a good thing as it enables them to gain a better understanding of the situation and the likely recoveries. It also enables them to ask the relevant questions and engage in the process at an earlier stage.

However, from our perspective, the new system does not go far enough in embracing modern communication methods which actually results in a more cumbersome system.

The benefit of providing that initial company information is undermined because the process does not allow for this information to be communicated digitally. This leads to increased time, paper and postage costs. These costs are more keenly felt in small business insolvencies.

Are creditors more engaged?

Here at MLG we’ve taken a decision that the majority of cases we will utilize the deemed consent procedure rather than convene virtual meetings as the formal process of appointing a Liquidator. Whilst this is a more streamlined process for appointing a Liquidator, our experience to date does seem to suggest that the process doesn’t achieve what it set out to achieve, as there is very little evidence that creditor engagement has been improved.

Getting costs approved

The Insolvency legislation, quite rightly, requires Liquidators to obtain specific approval for the basis of their fees, whether that is pre-liquidation (the statement of affairs fee) or post liquidation (Liquidators fees).

Pre April 2017 a resolution would normally be sought at the initial meeting of creditors with the relevant IP providing costs estimates to that meeting. Now, if the Liquidator is appointed through the ‘deemed consent’ procedure, then he cannot obtain approval for payment of costs without a separate approval process.

Here at MLG Associates we have decided that the most effective route will be to report to creditors at the earliest possible time setting out the work we have done and the costs that are incurred. In our view this is the best way of keeping creditors informed and engaged.

Unfortunately, in the smaller insolvencies that we regularly deal with, creditors lack the incentive to engage in this approval process as they are not going to have any financial return. This leads to an additional level of bureaucracy to obtain approval and could ultimately need application to court.

In our opinion, this does not benefit creditors or the Insolvency Practitioner and could lead to significantly higher costs.

It’s early days for these new rules. Let’s hope that the regulators take on board feedback and continue to improve the process for the good of all involved.