Small debt – big hassle? Claims under The Insolvency (England & Wales) Rules 2016
This article forms part of a series looking at the significant changes to insolvency procedures being brought in from 6 April 2017. In this article, David Menzies looks at the changes relating to creditor 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 (England and Wales) Rules 2016 (the 2016 Rules). They can be found in Part 14 of the 2016 Rules and apply to administrations, winding up and bankruptcy.
While the basic provisions remain unchanged from the Insolvency Rules 1986 there are some subtle changes to be aware of.
Requirement to prove
The 2016 Rules now require that the default position is that creditors must submit a proof unless either a rule or an order of the court provides otherwise. In a members voluntary liquidation there is no requirement for a creditor to submit a proof unless the liquidator requires it. The ‘option’ for the liquidator to request a proof in a CVL is therefore removed.
The most significant change is to deemed proof provisions. These are the provisions which allow the office holder to deal with a creditor as if they have submitted a proof without the creditor submitting a proof. The existing rules already provided for this for a liquidation which was preceded by an administration and vice versa thus allowing a creditor to only submit one proof for both insolvency procedures.
Rule 14.3(3) of the 2016 Rules introduces a deemed proof process for a new situation. Where there is a small debt, defined as being not more than £1,000, then the creditor is deemed to have proved for the purposes of adjudication and dividends (but not otherwise) where the office holder has issued to the creditor a notice of intended dividend or distribution and the creditor has not 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 proved is discretionary on the office holder. The notice of intended dividend or distribution in such cases must include in it the following information:
- the amount of the debt
- a statement that the debt stated in notice will be treated as proved 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 by the last date for proving 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 proof 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 14.31(2)(a)).
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.
Where it is decided to utilise the small debt proof 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 office holder should make appropriate and proportional enquiries as to the debt value attributed prior to issuing notices to creditors.
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 proofs and adjudicate on them – there are practical difficulties in operating the provisions as set out above.
In addition, the office holder 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 2016 Rules occurs only when the office holder issues a notice of intended dividend or distribution. This of course is only likely to be issued sometime after appointment. Ordinarily the office holder would invite creditors to submit their proof in the initial communication with creditors.
To be entitled to vote, a creditor must have informed the convenor or chair in writing of the debt (rule 1.2(2), definition of proof or prove). If the creditor is not required to submit a proof, then it is likely that they will not inform in writing of a debt and 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 in to 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.