Claims under the Insolvency Scotland Rules 2018
By David Menzies
14 February 2019
This article forms part of a series looking at the significant changes to insolvency procedures being brought in in Scotland from 6 April 2019. In this article, David Menzies looks at the changes relating to claims.
Provisions relating to the claims by and distributions to creditors are one of the areas which has been treated as a ‘common part’ under the Insolvency (Scotland) (Receivership and Winding Up) Rules 2018 (the ISRWUR 2018). They can be found in Part 7 of the ISRWUR 2018 and apply to MVLs, CVLs and in winding up by the courts.
Equivalent provisions are contained in Chapter 15 of the Insolvency (Scotland) (Company Voluntary Arrangements and Administrations) Rules 2018 (the ISCVAAR 2018) and apply to administrations.
The ISRWUR 2018 and ISCVAAR 2018 are referred to together as the Insolvency Scotland Rules 2018.
Requirement to claim
The Insolvency Scotland 2018 Rules require that, in order for a creditor to obtain an adjudication as to the creditors entitlement to a dividend, creditors must submit a claim not less than 8 weeks before the end of an accounting period. The provisions in Chapter 4 of Part 7 ISRWUR 2018 apply to all forms of winding up and therefore the requirement to submit a claim extends even to MVLs.
A claim is taken to be a statement of claim (the prescribed content of which is set out in r7.16(3) ISRWUR 2018) and documentary evidence of debt, although this later requirement may be waived by the liquidator in relation to any debt or class of debt.
As is the case under the Insolvency (Scotland) Rules 1986, claims submitted in one period do not require to be resubmitted for subsequent accounting periods and are deemed to have been resubmitted.
Deemed claims and small debts
The most significant change is to deemed claim provisions. These are the provisions which allow the office holder to deal with a creditor as if they have submitted a claim without the creditor submitting a claim. Creditors who have submitted a claim in an administration which preceded a liquidation are deemed to have submitted in the liquidation. Similarly, where a claim has been submitted in a liquidation which precedes an administration is deemed to have been submitted in the administration. A creditor is only required to submit one claim for both insolvency procedures.
The Insolvency Scotland Rules 2018 (Rule 7.34 of the IRSRWUR 2018 and Rule 3.118 of the IRSCVAA 2018) introduces a deemed claim process for small debts. Where there is a small debt, defined as being not more than £1,000, then the creditor is deemed to have submitted a claim for the purposes of adjudication and dividends (but not otherwise) where the office holder has issued a notice to the creditor no later than 12 weeks before the end of an accounting period and the creditor has not, not later than 8 weeks before the end of an accounting period, advised the office holder that the debt is either incorrect or not owed.
It should be noted that the treatment of creditors with small debt as having claimed is discretionary on the office holder. The notice issued to creditors must include in it the following information:
- the amount of the debt
- a statement that the debt stated in notice will be treated accepted for the purposes of paying a dividend unless the creditor advises the office holder that the amount of the debt is incorrect or that no debt is owed
- a statement that the creditor must notify the office holder no later than 8 weeks before the end of the accounting period if the amount of the debt is incorrect or if no debt is owed
- inform the creditor that where the amount of the debt is incorrect the creditor must also submit a statement of claim not later than 8 weeks before the end of the accounting period to receive a dividend
Determining small debt value
The value of the small debt can be either the amount in the accounting records or the statement of affairs (rule 7.35(3)(a) IRSRWUR 2018 and 3.119(3)(a) IRSCVAA 2018).
The wording of the rule makes it unclear whether all small debt creditors in a case should be valued from the same source or whether this can vary from creditor to creditor.
Questions also arise on what can be taken as ‘accounting records’. As we know, an insolvent’s records are often chaotic, incomplete and out of date. So where for instance a company maintains electronic accounting records on Sage, for example, does accounting records only refer to what is on Sage when the company enters insolvency or can other documents to considered?
Neither the Insolvency Act 1986 or Companies Act 2006 defines accounting records. Although of no statutory backing, the explanatory notes to the Companies Act 2006 (para 639) says:
‘Accounting records is a broad term and there is no specific definition as the records may differ depending on the nature and complexity of the business. For a simple business, these may include, for example, bank statements, purchase orders, sales and purchase invoices, whilst a more sophisticated business may have integrated records, which it holds electronically.’
This is perhaps helpful in determining how accounting records should be interpreted. My own view is that any document belonging to or sent to the company which might set out the true liability to a creditor could be used. So, for example, where the accounting records are not up to date and a statement of affairs hasn’t been provided then if in amongst the papers there is a statement from the creditor at or close to the date of insolvency then that could be used.
Given the overall policy intent behind this change, it is likely that using the accounting records or statement of affairs as the source of debt value should be assessed on a case by case and creditor by creditor basis depending on the availability and reliability of the accounting records and the statement of affairs. In other words, use whatever information is available and considered most accurate.
Creditor onus
Where it is decided to utilise the small debt provisions, the onus will always remain on the creditor to ensure that the amount of the debt is correct and to notify the office holder if it is incorrect. Notwithstanding this, the officeholder should make appropriate and proportional enquiries as to the debt value attributed prior to issuing notices to creditors.
Other considerations
While the rationale behind the new small debt provisions are sensible – time and costs savings for both creditors and office holders from not having to complete statement of claims and adjudicate on them – there are practical difficulties in operating the provisions as set out above.
Further, the officeholder would be best advised to think about small debt from the first communication with creditors. The notification to small debt creditors as set out in the Insolvency Scotland Rules 2018 occurs only when the officeholder issues a notice to creditors. This, of course, is only likely to be issued sometime after the appointment. Ordinarily, the office holder would invite creditors to submit their claim in the initial communication with creditors.
To be entitled to vote, a creditor must have submitted a statement of claim together with documentary evidence to the convenor on or before the decision date (or in the case of a physical meeting at or before the meeting). Where a meeting is adjourned the chair may decide to accept a claim if submitted prior to the meeting being reconvened.
If the creditor is not required to submit a claim, then unless they do so they will not be entitled to vote. This poses risks for the office holder in considering voting in any decision procedure. Great care will require to be taken to ensure that these votes are excluded.
It is likely that to incorporate all relevant information for the wide variety of permutations that creditors may find themselves in into a single initial circular will be overly complex and confusing to creditors. It may be that two forms of the initial circular required – one for creditors of up to £1,000 and one for those creditors more than £1,000. Alternatively, the small debt process may end up unutilised or underutilised with office holders treating the small debt creditors in the same way as every other creditor.