Monday, February 13, 2017

Approving a voluntary arrangement under the New Rules

Even the least observant will have noticed that the Insolvency world will change a bit on 6 April, when the Insolvency (England and Wales) Rules 2016 (“New Rules”) come into force. As we expected, the various training providers have started to roll out their courses. Apart from Gareth’s webinar for R3 on the new decision procedures, we don’t intend producing training sessions, but we will drop articles onto the Blog that pick on key areas, using the number of clients who ask about them, or are likely to be affected by them as a guide to their significance.

Our first concern is about voluntary arrangements. At first glance, they appeared to be largely unaffected by the New Rules, but there is one significant change that you need to be aware of, especially if you work in a volume IVA provider. The New Rules include terms triggering some hitherto dormant sections in the Small Business, Enterprise and Employment Act 2015 (“SBEE”). The one that has the most impact on VAs is that you may no longer hold a physical meeting, unless specifically requested by a qualifying creditor or group of creditors. Instead, you have to use a “decision procedure”. 

Rule 15.3 sets out the prescribed decision procedures, which are: a) correspondence; b) electronic voting; c) virtual meeting; d) physical meeting; and e) any other decision making procedure which enables all creditors who are entitled to participate in the making of the decision to participate equally. Physical meetings are only allowed where requested by the requisite creditors or where ordered by the court, under section 379ZA (246ZE for CVA).

Rule 8.22(3)(d) (Rule 2.25(5)(b) for CVA) says that any notice sent requesting the decision procedure should include “a statement as to how a person entitled to vote for the proposal may propose a modification to it, and how the nominee will deal with such a proposal for a modification”. There are no further provisions setting out how this should work, and none of the rules for the individual decision procedures shed any light on this. 

The problem, as we see it, is that it will not be practical to use correspondence or electronic voting, as both just list decisions to be voted on by a set date and time and cannot be adjourned (rule 15.23, which allows adjournments only applies to “a meeting”). As a result, in order to be flexible enough to accept modifications, negotiate any changes and allow time for the debtor and creditors to consider the revised terms, it is likely that all VA decisions will need to be by virtual meeting, unless the creditors request a physical meeting. 

This may not be a huge difference, as long as you have your documentation and systems ready for the change. Currently, certainly in IVAs and to a lesser extent in CVAs, creditors are invited to a physical meeting, but submit proxies instead of attending. If you change your notices to meet the new requirements and refer to a virtual meeting, and you have facilities, such as call conferencing, available to allow attendance, it is likely that the creditors will still largely vote by proxy. The creditors might even agree, in IVAs, by some device such as the IVA protocol, that they will not exercise their right to “attend” and will simply vote by proxy. That might make it possible to adapt existing systems at little or no additional cost. If, however, each IP is required to implement systems to allow creditors to actively “attend” virtual meetings for every debtor, the cost in change to IT systems and case handling could be significant.

We did consider whether the requirement in rule 8.22(3)(d) above was wide enough to allow the IP to set out a system for correspondence or electronic voting that somehow circumvents the timing and other requirements in the Rules. For instance, could the IP say that “modifications can be notified at any time up to, and including, the decision date, and the decision may be deferred by up to 14 days to allow for consideration of any modifications”? That could, we suspect, lead to abuse, given that there is nothing to stop such a term extending the decision by weeks or months. We therefore thought that was not a likely interpretation. Furthermore, we were concerned that a Court might take a dim view of IPs manipulating the rules to work around what Parliament had drafted in other rules. Braver people that us have tried, and failed, to guess what a Court would do in a particular set of circumstances, so we think that it is better to take the safe option and only do something that you know will be acceptable.

We did ask the Insolvency Service about this and they said, “You are right that the new rules are not very prescriptive about how a nominee and the creditors must go about agreeing a modification. The reasoning behind this is that the VA is an agreement between the debtor and their creditors, so the rules do not need to spell out exactly how that agreement is reached, other than saying what information must be available to creditors and the requisite majorities (which in the new rules are in rule 15.34). The 1986 rules were similarly non-prescriptive. As you point out, the remit of rule 8.22(3)(d) is quite broad.

I think you are also right to note that electronic voting and a meeting by correspondence might not be the most suitable media in which to discuss modifications. It has been our intention throughout though to avoid limiting options available to an office-holder wherever possible, and to leave them to form their own opinion on the most appropriate way to seek a decision from the creditors

We think that this could require quite a bit of work, especially by those working in the volume IVA sector. We are currently working on amending our packs and they will work on the assumption that the approval of the proposals and any subsequent variation will need to be dealt with by virtual meeting, unless the requisite creditor or group of creditors request a physical meeting. Most of our existing clients will have access to our packs without charge when they are completed, and we will let the wider IP community know when they are available for sale. However, it is not just a matter of changing wording in documents to refer to “decision” instead of meeting. On a practical level, you will need to develop a system to conduct the meetings. 

Assuming that you use telephone calls for now, because we think that weaknesses in internet coverage make video conferencing unlikely at present, you will need to provide creditors with a phone number and log-in details. You will then need to log-in for each virtual meeting you arrange, just in case a creditor decides to phone up and participate in the meeting. Hopefully though you will be able to get the agreement of the voting agents that they will not actually participate in a virtual meeting in the same way that they do not currently attend physical meeting. You will also need a system to monitor responses as they are received, so that you convene a physical meeting in any cases where the requisite creditor or group of creditors request one, as soon as the relevant threshold is passed.

Your notices of the virtual meeting will need to include the following, in addition to the proposals, nominee’s report and SIP 9 disclosure that you currently make:

a) details of all matters on which decisions are sought;
b) a statement that decisions will be sought via a virtual meeting, and giving all of the necessary information to enable access to the virtual meeting, including phone numbers, access codes and passwords;
c) the decision date;
d) a statement that a creditor may vote for the amount of their claim at the interim order date if there is an interim order, or the decision date if there is no interim order, or in either case at the bankruptcy order date if the debtor is an undischarged bankrupt;
e) a statement that proxy forms must be submitted in advance of the meeting;
f) a statement of the requisite majorities for voting under rule 15.34;
g) a statement that creditors with claims of less than £1,000 are still required to have submitted their claim in order for their vote to be valid;
h) a statement that creditors may, within 5 business days of delivery of the notice, request a physical meeting of creditors to consider the matter, provided the request is supported by a proof of their claim (if not already lodged), and that a meeting will be convened if creditors requesting a meeting represent a minimum of 10% in value or 10% in number of creditors, or simply 10 creditors, where “creditors” means “all creditors”;
i) a statement that creditors have the right to appeal the decision made by applying to Court under Rule 15.35 within 21 days of the decision date;
j) a statement that the Chair may adjourn or suspend the meeting if necessary, and must do so if it is resolved so at the meeting; and
k) a statement that creditors who are excluded or affected by an exclusion may complain to the Chair or convener by no later than 4 p.m. on the business day following the exclusion or notice of exclusion, in accordance with rule 15.38. Explain that an excluded creditor is a person who has taken all necessary steps to attend the meeting but was unable to do so.

As you can see, that is likely to make the notice longer. Only time will tell whether that is likely to increase creditor engagement, or simply leave them baffled!

There is one further point worth making at this stage about the practical application of this. Approval by a virtual meeting takes place at the time of the meeting, subject to your decision if someone complains that they have been excluded (see point (k) above). You therefore need to be careful what you tell the debtor and how soon you notify creditors. If you ring the debtor immediately after the meeting to say that the arrangement has been approved, only to have to overturn that decision on receipt of a complaint, it could get very awkward. Similarly, issuing a chairman’s report saying one thing, then having to follow it up with a completely different outcome could confuse and annoy the creditors. Time will tell how big an issue this will be. Hopefully, if the status quo is maintained and few creditors even try to “attend”, then exclusions will be rare and we will have worried for nothing.