An update on the Scottish Insolvency Rules 2018 in practice
This article follows on from the series which looked at the significant changes to insolvency procedures in Scotland from 6 April 2019.
The Insolvency (Scotland) (Company Voluntary Arrangement and Administration) Rules 2018 (ISCVAAR 2018) and the Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 (ISRWUR 2018), (referred to jointly as the 2018 Rules), came into force on 6 April 2019.
In this article, Steven Wood looks at some of the issues that have arisen in practice following the introduction of the 2018 Rules. Further article(s) covering other issues identified will follow.
Delivery of draft final account to members in an MVL
Rule 3.11 ISRWUR 2018 relates to the delivery of the draft final account to members in an MVL. It states that the Liquidator must give members a minimum of 8 weeks’ notice of a specified date on which the liquidator intends to deliver the final account, as required by section 94(2) of the Insolvency Act 1986 (the 1986 Act).
The intention was for the rule to provide for the 8-week period to be shortened with the members’ consent. Unfortunately, there is essentially a paragraph missing in comparison to the equivalent rule (5.9) in the Insolvency (England and Wales) Rules 2016.
The result is that paragraph 3 states that the 8-week period can be shortened “if every member confirms in writing to the liquidator that they do not intend to make any such request or application.” However, there is no prior paragraph to define what “request or application” is being referred to.
The AiB acknowledge that there is an issue with the drafting and have provided the following guidance:
“We will seek to address this when the opportunity arises, but in the meantime, the policy intention is clearly not to have processes drawn out unnecessarily. So, within the current draft, we believe there is sufficient comfort within the legislation as written to allow winding up prior to the 8-week period where the liquidator has confirmed that the members are content.”
Transitional and savings provisions - progress reports and statements to the registrar of companies
Schedule 2 of ISRWUR 2018 provides transitional and savings provisions. The Accountant in Bankruptcy (AiB) have produced guidance covering the operation of these for selected relevant aspects of ISRWUR 2018.
Paragraph 7 of the transitional and savings provisions relates to progress reporting obligations in liquidations.
The AiB have recognised within the guidance that paragraph 7(2) states that the provisions of the ISRWUR 2018 regarding progress reporting do not apply at all to cases where the petition was presented prior to 6 April 2019. However, the intention was simply to disapply the reporting provisions of ISRWUR 2018 for circumstances where paragraph 7(1) applies.
The AiB accept that there is a conflict between the two sub-paragraphs and intend to amend sub-paragraph 2 in due course. In the meantime, the AiB’s advice is that reporting should be in line with the policy intention, namely that the provisions of ISRWUR 2018 should be followed unless the obligation to report arose prior to 6 April 2019.
However, the application of the guidance then raises a further question – what should be the period covered by the first report issued after 6 April 2019 given ISRWUR 2018 moves to annual reporting periods and changes the commencement of reporting period to the earlier of the appointment of a liquidator or the winding up order/resolution.
Taking the guidance into account, the transitional provisions are silent on what to do in these circumstances. This issue is perhaps best illustrated through an example.
|Date of petition||15 November 2017|
|Winding up order/Interim Liquidator appointed||20 December 2017|
|Last prepared r4.10 I(S)R 1986 report||Period from 16 May 2018 to 15 November 2018|
|Next r4.10 I(S)R 1986 report due||Period from 16 November 2018 to 15 May 2019|
Paragraph 7(1) does not apply as reporting obligations have been complied with up to 6 April 2019. In such circumstances, based on the AiB’s guidance, the provisions of ISRWUR 2018 should apply. If ISRWUR 2018 had been in effect from the start of this case, then the first report would have been for the period 20 December 2017 to 19 December 2018. The subsequent report would be from 20 December 2018 to 19 December 2019. So, should the next report be from 16 November 2018 to 16 November 2019 or from 16 November 2018 to 19 December 2019?
In the absence of specific transitional provisions, we are of the view that either option would be acceptable. On a practical level, based on case management diaries and creditor expectations it perhaps makes greater sense to keep the original start date and move to annual reporting cycles based on that. In the example above the next report being for the period from 16 November 2018 to 16 November 2019. Reporting for the period from 16 November 2018 to 19 December 2019 is perhaps likely to be more confusing for creditors receiving the report.
Appointment of administrator taking place out of court business hours: content of notice
Rule 3.21 ISCVAAR 2018 deals with the contents of a notice of appointment of administrator lodged in court by the holder of a qualifying floating charge, in circumstances when the appointment is taking place out of court business hours.
Rule 3.21(1)(k) requires the notice to contain “a statement whether the proceedings flowing from the appointment will be main, secondary, territorial or non-EU proceedings and the reasons for so stating and that a copy of the statement accompanies the notice of appointment.”
As currently drafted, the rule, therefore, requires the EU statement to be contained both on the face of the notice itself and in an accompanying statement.
The Insolvency Service have advised that while rule 3.21(1)(k) does result in duplication this was their intention. They have confirmed that they will keep this matter under review when considering whether amendments to ISCVAAR 2018 are required.
In the meantime, a notice of administrators’ appointment out of hours should contain an EU statement on the face of the notice as well as in an attached schedule to avoid any question regarding validity of appointment.
Appointment of liquidator under section 138(1) of the 1986 Act (interim liquidator)
Rule 4.18(3) of the Insolvency (Scotland) Rules 1986 provides that the responsibility for notifying an officeholder of an appointment as interim liquidator under section 138(1) of the 1986 Act sits with the court. However, the equivalent Rule (5.21) of ISRWUR 2018 is silent on this matter.
The AiB have confirmed that the removal in ISRWUR 2018 was a deliberate decision as part of a review of what should form part of the Insolvency Rules and what should form part of the Court Rules.
The Act of Sederunt (Sheriff Court Company Insolvency Rules) 1986 were amended by the Act of Sederunt (Rules of the Court of Session 1994 and Sheriff Court Rules Amendment) (Miscellaneous) 2019 but remain specific as to the circumstances in which the court must send an interlocutor to the liquidator, being when the court appoints a liquidator under sections 100(3), 108 or 138(5) of the 1986 Act.
Consequently, a lacuna in legislation exists surrounding the notification of the court’s appointment of an interim liquidator under s138(1) of the 1986 Act. This also extends to appointments made in terms s139(4) (different persons nominated by creditors and contributories) and s140(1) or (2) (liquidation following administration or voluntary arrangement). The AiB intend to highlight this matter to the Scottish Civil Justice Council, who are responsible for the Court Rules, to enable them to decide what action they consider is most appropriate to address this.
This issue is not considered to impact appointments made by the Court of Session, where rule 74.26(1)(a) of the Rules of the Court of Session 1994 continues to apply. It states that “Where the court pronounces an interlocutor appointing a liquidator the Deputy Principal Clerk shall send a certified copy of that interlocutor to the liquidator”
As this rule is silent under which circumstances the court appoints a liquidator, this covers an interim liquidator appointment under s138(1) of the 1986 Act.
ICAS has been in dialogue with HMRC in relation to this matter, in their capacity as principal petitioning creditor in Scotland. ICAS has requested that process is put in place within HMRC to ensure that the interlocutor is passed by them to the appointed interim liquidator immediately on receipt, with the other information provided by HMRC as standard following on later.
Insolvency practitioners should liaise closely with petitioning creditors and their agents in relation to cases where they have consented to act, to ensure that they receive notification of their appointments without delay.