Stephen Baister advises practitioners on some of the changes brought about by the new insolvency rules and regulations

After the changes wrought by the Insolvency Act 2000 and the Enterprise Act 2002 to an insolvency regime that was itself less than 20 years old, practitioners could reasonably have hoped for a period of stability and calm reflection. No such luck.


The Insolvency (Amendment) Rules 2005 (SI 2005/527), followed closely by the Insolvency (Amendment) Regulations 2005 (SI 2005/512), both came into force on 1 April 2005. The first major area of change relates to provisions governing mutual dealings and set-off.


Last year, in Re West End Networks Ltd (in liquidation) [2004] UKHL 24; [2004] 2 AC 506, the House of Lords considered whether, in a winding up, a VAT credit due to the company could be set off against the Crown's subrogated claim for notice and redundancy payments due under section 167(3) of the Employment Rights Act 1996. The problem was one of timing - the VAT credit was due at the time of liquidation, but the statutory claim necessarily arose only thereafter, so it was contingent.


However, the House of Lords held that it sufficed that there was an obligation arising out of contract or statute such that a future payment would or could become due. Set-off was allowed as the Crown was both debtor and creditor.


Until the introduction of the new insolvency rule 2.85, there was no rule providing for set-off in administrations equivalent to rule 4.90 governing liquidations. New rules 2.85 and 4.90 clarify some uncertainties and bring the two provisions into line. Both provide that: 'An account shall be taken of what is due from each party to the other [namely, company and creditor] in respect of the mutual dealings, and the sum due from one party shall be set off against the sums due from the other' (see sub-rule (3)).


However, mutual dealings that may not be included in the set-off are defined. These include any debt acquired by a creditor by way of an agreement entered into after one of the relevant dates set out in rules 2.85(2)(e) and 4.90(2)(d), namely the date of administration or liquidation and similar dates. But generally, the new rules aim to cover all debts owed to the company as well as all debts owed by the company, including debts that are future or contingent. The administrator or liquidator has power to place a value on the debts for the purpose of the set-off. Rules 2.78 and 4.83 allow an appeal against the administrator's or the liquidator's valuation.


Rules 2.105 and 11.13 contained a formula for calculating the discounted value of a debt that was not due at the actual date of payment (for example, following disclaimer). It has been re-formulated to take account of dicta of the House of Lords in Re Park Air Services Ltd [2000] 2 AC 172.


At long last, and following pressure from the Court of Appeal in Ram v Ram [2004] All ER (D) 89 (Nov), the anomaly by which matrimonial debts could not be proved in bankruptcy has been mitigated by a change to insolvency rule 12.3(2)(a). An obligation to pay a lump sum or costs now becomes provable. Periodical payments remain non-provable.


Section 371 of the Insolvency Act 1986 allows the court to make an order for the redirection of the bankrupt's post for a period not exceeding three months. The provision has long been regarded by some as Draconian, but is a useful weapon against a bankrupt who is suspected of concealing information. It survived the scrutiny of the European Court of Human Rights and the coming into force of the Human Rights Act 1998 (see Foxley v United Kingdom (2000) EHRR 25; [2000] BPIR 1009).


However, in Singh v Official Receiver [1997] BPIR 530, then-Vice-Chancellor Sir Richard Scott, expressed some misgivings about the procedure governing applications, noting that an application made ex parte and on the basis of no more than a letter in support, was a matter of some concern. Oddly, neither the Act nor the rules made any specific provisions dealing with section 371 applications.


This has now been remedied by new rule 6.235A, tucked away in chapter 26 (Miscellaneous Rules in Bankruptcy), which provides welcome clarification. Sub-rule (2) sensibly provides that the application should be made without notice unless the court directs otherwise. It thus recognises the reality that making such an application on notice would almost invariably render any order useless, but requires the court to exercise a filter and provide for notice if it is considered that it is right that the bankrupt (or perhaps another party likely to be affected) should know what is being sought.


Sub-rule (3) provides that the application must be supported by a report (where it is made by the Official Receiver) or by an affidavit (if it is being made by a trustee) setting out the reasons for seeking an order. Sub-rule (5) allows the court to make an order subject to conditions, and sub-rule (6) provides that the order must identify the person on whom it is to be served but that it need not be served on the bankrupt unless the court otherwise directs.


That the insolvency provisions relating to service out of the jurisdiction are 'free-standing' has long been accepted in practice. However, it remained doubtful whether EC Regulation No 1348/2000 of 29 May 2000 on service applied to insolvency proceedings. Courts and practitioners have proceeded on the basis that it does not, and the 2005 rules confirm that view.


The new rules make a number of other minor amendments, for example, by replacing references to the sheriff with references to the 'enforcement officer'.


The 2005 regulations also deal with remuneration. A new part 5A of the Insolvency Regulations provides that an insolvency practitioner must supply free of charge to any creditor, director or contributory of a company, or individual where the case relates to an individual, a statement of the number of hours spent on the case by the practitioner and his staff, the average hourly rate for that work and the number of hours spent by each grade of staff. Not a bad idea.


Minor amendments are made to a wide range of prescribed forms. The abolition of prescribed form 4.3 (affidavit verifying winding up petition) has already caused confusion. The requirement to verify a petition has not been abolished. It is merely the prescribed form that has gone. Rule 4.12, which prescribes verification and the manner thereof, remains.


Stephen Baister is the Senior Bankruptcy Registrar