The wait is almost over!

As reported in our recent article Rules of Engagement for Creditors, the UK Insolvency Rules (England and Wales) 2016 (“IR2016”) are about to arrive heralding procedural reforms effective (subject to transitional provisions) on 6th April 2017.

Whilst most people’s attention will be on the changes introduced by IR2016, it should be noted that there are existing special regimes which will not be affected by the new rules – and also, other changes which are being introduced on or around 6 April. We highlight these below.

Will IR2016 apply to all insolvencies?

No. In the rush to ensure compliance with the new rules, it should not be overlooked that the new rules are not applicable (or only in a modified form) to all insolvency regimes.

Non-Treasury Special Insolvency Regimes

The Insolvency (England and Wales) Rules 2016 (Consequential Amendments and Savings) Rules 2017 state that the Insolvency Rules 1986 (pre-amendment) continue to have effect insofar as they apply to proceedings under the following instruments:

• Railway Administration Order 2001

• Limited Liability Partnerships Regulations 2001

• Energy Act 2004

• Energy Administration Rules 2005

• PPP Administration Order Rules 2007

• Water Industry (Special Administration) Rules 2009

• Energy Act 2011

• Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012

• Energy Supply Company Administration Rules 2013

• Postal Administration Rules 2013

For regimes under the above, the old Insolvency Rules 1986 (together with the prescribed forms) remain in place for the time being.

Treasury Special Insolvency Regimes

Whilst it has not been set out in a Statutory Instrument, caution should be applied to all special insolvency regimes governed by HM Treasury, primarily those dealing with the insolvency of financial institutions. These regimes have generally evolved their own sets of rules and regulations, which have to date applied the Insolvency Rules 1986 with amendments.  Most of these special regime rules have not yet been varied to incorporate references to the new rules.

The Deregulation Act 2015, Small Business, Enterprise and Employment Act 2015 and Insolvency (Amendment) Act (Northern Ireland) 2016 (Consequential Amendments and Transitional Provisions) Regulations 2017 (together the “Regulations”) come into force on 7th April 2017, the day after the IR2016. Collectively the Regulations make amendments to ensure that the reforms to general corporate insolvency are reflected in HM Treasury’s modified special insolvency regimes, where general insolvency law is applied to financial institutions.

These Regulations amend the following primary legislation:

• Building Societies Act 1986

• Friendly Societies Act 1992

• Financial Services and Markets Act 2000 (FSMA)

• Banking Act 2009

• Financial Services (Banking Reform) Act 2013

The Regulations also amend some subordinate legislation, including:

• Building Societies (Insolvency and Special Administration) Order 2009

• Financial Services and Markets Act 2000 (Administration Orders Relating to Insurers) Order 2010

• Investment Bank Special Administration Regulations 2011

• Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013

Where an insolvency would fall under the above, or any other special insolvency regime, its interaction with the new Rules should be considered carefully and checked to assess exactly how the new rules are to be applied.

Changes to the Investment Bank Special Administration Regime

Whilst considering the interaction between the IR2016 and special insolvency regimes, and being alive to the fact that IR2016 will understandably grab the headlines on 6th April 2017, it is important to remember (in the world of investment banks at least) that this is not the only important rule change that comes into force on that day.

The Investment Bank Special Administration Regulations 2011 (“SARs”) were introduced in response to the shortcomings of the existing insolvency legislation when dealing with the collapse of Lehman Brothers.  The SARs were subsequently reviewed by Peter Bloxham in his report which was published in January 2014 and reviewed by way of a Government consultation.  HM Treasury, which has the power to vary the existing regulations dealing with investment banks, has now published Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 which comes into force on 6 April 2017 to coincide with the introduction of IR2016.

The highlights to the changes are:

• Extension of the definition of “investment bank” under section 232 of the Banking Act 2009 to include:

  • managing an AIF (Alternative Investment Fund) or a UCITS (Undertakings for Collective Investment in Transferable Securities); or

  • acting as trustee or depositary of an AIF or UCITS.

• Extension of the bar date to cover client monies – the original bar date provisions were only applicable to non-monetary client assets. The theory is that client monies in a pooled account are harder to identify and client money claims should not be restricted by time as to whether they can claim or not.  However, in practice, historic client monies have been very difficult and costly to deal with when clients are not responding. Accordingly, the provision for setting bar dates for non-money client assets claims in the existing rules has simply been extended to cover client monies with further safeguards for clients by introducing the concept of soft and hard bar dates. Soft bar dates can be set on reasonable notice and without court sanction. Whilst clients are urged to meet such a deadline, failure to do so may not be as severe for them as missing a hard bar date which, subject to limited exceptions, is likely to lead to the client’s claim (whether a money or non-money client asset claim) becoming an unsecured creditor claim against the general estate. These changes also make it more cost effective to transfer residual client monies to the investment bank for the benefit of the general estate.

• Adding to the original Objection 2, (engagement of market infrastructure bodies) by adding a specific objective to co-operate with the Financial Services Compensation Scheme under a new objective.

• Company estate to be responsible for costs relating to the bank’s failure to comply with regulatory requirements as to the holding of client assets (so that clients are not responsible for such costs).

• Extension of the continuation of service provisions relating to the safe custody of client assets.

• Making it easier for a special administrator to transfer and deal with client assets.

• Barring clients from claiming interest on client money claims from the general company estate (except for specific exemptions).

Attention should naturally be on the new rules coming into force in 6 April. However, do keep in mind – particularly in relation to special administration regimes – that other changes are also coming into force (now and in the future with an ongoing consultation over revisions to the CASS Rules) and it should not be assumed that the IR2016 will be applicable to such regimes in exactly the same way as they would be to a non-special procedure governed by the Insolvency Act 1986.

James Moore is co-author of this article.