Common Ground: Insolvency (Scotland) Rules 2018

The new Scottish corporate insolvency rules will come into force on 6 April 2019. At the same time, the final suite of changes to Scottish specific elements of the Insolvency Act 1986 will be enforced with the commencement of the Public Services Reform (Insolvency) (Scotland) Order 2016.

Two sets of Rules

Due to a partially devolved corporate insolvency regime, Scotland’s new corporate rules are found in two pieces of secondary legislation: The Insolvency (Scotland) (Company Voluntary Arrangement and Administration) Rules 2018 and the Insolvency (Scotland) (Receivership and Winding up) Rules 2018 (“the new Scottish Rules”). Together, they will bring Scotland’s corporate insolvency regime broadly in line with England and Wales from 6 April 2019. But not entirely. Certain aspects of the Scottish procedures will remain distinct – for example accounting periods and remuneration approval processes. It is also worth noting that the new Rules in Scotland have no impact on personal insolvency, which continues to be subject to the Bankruptcy (Scotland) Act 2016.

Decisions, decisions…

Scottish IPs are now getting to grips with provisions familiar to our English cousins: the restriction on an officeholder’s ability to hold a physical meeting of creditors, and the move to decisions of creditors by deemed consent (where available) or by one of a number of prescribed decision procedures: correspondence, virtual meeting or electronic voting, with physical meetings available only where requested by the requisite number or value of creditors (the 10:10:10 rule).

The good news for practitioners dealing with Scottish appointments from 6 April 2019 is that a lot of creditors and stakeholders will be familiar with the decision-making process already. On the other hand, if the English experience is anything to go by, it won’t necessarily increase engagement and deemed consent will be the default process.

Consolidation or duplication?

One of the driving principles behind the new Rules North and South of the Border was to consolidate 32 years of amendments to statutory instruments since the existing Rules came into force in 1986. The new Scottish Rules contain impressive lists of revocations, but also a fair amount of duplication across both sets. Part 1 of each of the administration and liquidation 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.

Those familiar with the 1986 Scottish Rules will know that currently the Administration rules rely heavily on the Liquidation Rules for their provisions. The new Administration Rules no longer do so, and the process is set out in detail in Part 3 of the new Rules. The process for a CVA is similarly detailed in Part 2. There is an extension, rather than contraction, of the Scottish Rules pertaining to Liquidation. Part 4 of the existing 1986 Rules applies to Court Liquidation, and then Schedules 1 and 2 set out how Part 4 applies to CVL and MVL (if at all, in the case of the latter procedure), but each of these liquidation processes now has a dedicated part in the new Scottish Rules.

CVL in Scotland

The CVL entry process will once again be common across the UK. Directors North and South of the border will seek a decision from creditors as to their preferred liquidator and gone will be the costly statutory advertising requirements and personal attendance at a section 98 meeting that, post-2017, survived in Scotland only. This provides a level playing field for all IPs, wherever they are located, and widens the choice of IP firm from a director’s perspective.

Court Liquidation

As you know, there are a lot of distinct Scottish terms – gratuitous alienation, for example! Here is another one: “guddle”, meaning muddled or messy. To use it in a sentence, one might say ‘the new court liquidation process to appoint a liquidator is a bit of a guddle’.

In their capacity as interim liquidator IPs will need to seek a nomination as liquidator from creditors, and if no nomination is provided, will revert to the relevant court to seek confirmation in office as liquidator. That’s the easy bit, which has not significantly changed from the 1986 provisions.

If, however, a nomination (or nominations plural) is received, the IP must go back 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. Practitioners therefore need to give some thought to the situation and which procedure best suits. The standard appeals (10% in value to deemed consent) and the 10:10:10 Rule in relation to physical meeting requirements apply, so it could be possible, in a contentious liquidation, for deemed consent to lead to a decision procedure, but still end up in a physical meeting. The familiar (and comfortable) court liquidation process has been up-ended. Deep breath everyone!

Liquidation process

Where commonality does feature, it relates to the post- appointment liquidation process. Part 7 of the Liquidation 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 the appointment of the provisional liquidator (if there is one) or the appointment of the interim liquidator in all other cases.

Relevant date for claims

Another surprise is the relevant date for claims moving from the date of the presentation of the petition in court liquidation to the date of the winding-up order. The definition of relevant date is unhooked from s129 and instead attached to the definitions in s247 of the Insolvency Act 1986. Given too that 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

As those of you dealing with Scottish cases know, the process for obtaining approval for remuneration is distinct from England and Wales and invariably involves the court. The remuneration approval process will remain largely unaltered, which limits the impact of the decision-making procedures when compared to England and Wales.

A more welcome revision may be the changes to the operation of accounting periods that allow an IP to manage accounting periods, albeit with court or committee approval. The first two six-month accounting periods will remain, but thereafter a practitioner can defer a claim for remuneration without court or committee approval.

MVL in Scotland

So how does the MVL process fare in the new Rules shake-up? The good news is that the entry process remains unchanged North and South of the border. Statutory interest is now consistent – both in terms of amount and application, but will automatically apply in retrospect to MVLs open at 6 April 2019. IPs need to review cases now for outstanding creditor claims and ensure that where these, and the corresponding statutory interest burden, might be material, they are paid in full before 6 April. If that is not possible, then shareholders need to know the quantum of back-dated interest that’s going to impact on their capital return. You may also need to dust down some indemnities as well.

From 6 April 2019, 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 applies in MVLs, which is not the case under the 1986 Rules. Schedule 2 of the 1986 Rules specifically doesn’t apply Rule 4.66 and 4.67 to MVLs. Scottish IPs 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.

Administration

For the reasons set out already, the biggest change to the Administration Rules is their length. The 1986 Liquidation Rules, on which Scottish administrations relied, have been written out in full in the new Administration Rules – for example Creditors’ Committees and Claims. The Scottish Administration Rules are the closest to their English equivalents, but it is disappointing to see some of the glitches arising from the English provisions being imported directly into the Scottish Rules – specifically, listing the date and time of appointment in the proposals and notice documents. There are also duplicate, but conflicting, Rules on the order of priority. Watch out for more guidance on these areas in the coming months.

Key steps for your practice

Your geographical location, and your familiarity with the English Rules, will dictate how much preparation your practice requires for the introduction of the new Scottish Rules. You may already be familiar with the changes that the new Rules are bringing, or you might need training and guidance on their introduction and implementation.

You will need to amend your document packs to reflect new standard contents. You will also need to consider what form of decision procedure will be appropriate for the size and nature of the cases you administer and think about which platform best suits a virtual meeting provision. Consider too the benefits and opportunities presented by these changes in terms of cost saving to how you operate, particularly surrounding the use of websites as a principal form of communication with creditors.

For further information about how we may assist you in adjusting to these changes, contact: enquiries@insolvencysupportservices.com

First published in the Spring 2019 edition of RECOVERY magazine and reproduced with the permission of R3 and GTI Media.