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Do the Insolvency Rules 2016 need amending?

The application:

The application in question was issued before IR 2016 came into force and was therefore decided upon IR 1986. However, the judgment is very helpful because it comments upon IR 2016 nonetheless.

The administrators had realisations to distribute but were "aware of several significant categories of actual or potential" expenses claims which had not yet been made [28]. Until those expenses claims had been resolved it would not be possible to make "any (or any meaningful) distribution to unsecured creditors" [49].

The IR 1986 and IR 2016 provide a mechanism for the claiming of and adjudicating upon provable debts. However, the 1986 Act, IR 1986 and IR 2016 do not provide a similar mechanism for expenses. Instead, the "unstated assumption" is that claims for expenses will be made and paid (or reserved for) before any distribution to unsecured creditors [56].

In the circumstances, the administrators applied for directions pursuant to paragraph 63, Schedule B1 of the Act and put forward a mechanism to provide for finality which in summary was as follows:-

1. a deadline for claiming expenses;

2. a period to allow the administrators to agree or determine expenses claims;

3. time for any application to court regarding any disputed claim;

4. distribution to unsecured creditors; and

5. any late claims for expenses to then rank pari passu and be paid out of any assets still remaining but without disturbing any earlier distribution to unsecured creditors.

Jurisdiction:

Bloom was authority for paragraph 63 being used to resolve any doubt as to what qualifies as an administration expense.

The submission the Judge wrestled with was whether paragraph 63 also provided jurisdiction [81] "to authorise administrators to distribute the property of the company to unsecured creditors who rank lower in order of priority in the statutory waterfall without regard to any claims for administration expenses that have not been made by a specified date."

The Judge reviewed several authorities, including Re WW Realisations 1 Ltd [2011] BCC 382 where administrators sought directions to make a distribution to secured creditors without provision for landlords and local authorities unless they made a claim by a particular deadline [77]. However, what was not considered in those authorities was whether such directions [82] "would illegitimately (i) extinguish the rights of creditors or vary the statutory waterfall, or (ii) amount to judicial legislation." These issues came into "closer focus" post Bloom and Re Lehman Bros [2017] UKSC 38.

The Judge concluded [84] that the proposed directions would not "extinguish any rights or vary the statutory waterfall" although the directions might "potentially affect the available fund" for late expenses claims. He also concluded [87] that as a matter of jurisdiction such directions could be given "even though that carries a risk that, at the end of the administration, insufficient assets might have been retained to enable a late expense claimant to be paid under paragraph 99(3)."

Further, he concluded that the directions were not judicial legislation. On the contrary they were based upon "a well-established judge made rule" as explained by Lord Neuberger in Re Lehman Bros [2017] UKSC 38 (paragraph 13).

Discretion:

Having identified that he had jurisdiction, the Judge then decided [94] that he should exercise his discretion in favour of ordering the directions because they balanced the need:-

1. to protect the persons who had yet to assert expenses claims; and

2. to minimise any further delay to the conclusion of the administrations and facilitate a distribution to unsecured creditors.

Comment:

The IR 1986 applied to this case. However, the new IR 2016 would not have helped. Instead, the court needed to use a "well-established judge made rule" to avoid the two issues that had come into "closer focus" post Bloom and Lehman.

It may well be that in future the Insolvency Rules Committee will choose to embrace the facts of this case and create a mechanism for expenses claims which uses the existing principles for debt claims.

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