Gone but not forgotten: G-Tech rises again – The continuing application of the Insolvency Rules 1986 to charitable incorporated organisations and others…

Halloween may now be nothing more than a pumpkin and chocolate laden memory, but Insolvency Practitioners and charitable incorporated organisations beware, there is a zombie still prowling the legislative plains.

The Insolvency (England and Wales) Rules 2016 heralded a new era in procedural insolvency law, stepping away from the strict requirements as to form set out in the Insolvency Rules 1986 and embracing instead a practical and pragmatic approach to compliance. In doing so, many of the old arguments regarding validity/invalidity of out-of-court administration appointments were left behind, leaving a far more practical and pragmatic emphasis on substance over form emerging from cases such as Re Assured Logistics Solutions Ltd[1] and Re Ceart Risk Services Ltd[2].

Those arguments are gone but not forgotten. Nor, indeed, are they truly gone: in what is clearly a trap for the unwary, the snappily named Insolvency (England and Wales) Rules 2016 (Consequential Amendments and Savings) Rules 2017/369 (“ the Savings Rules”) expressly provide that the 1986 Rules continue to apply to the insolvency/administration of certain bodies and organisations. The (somewhat surprising) wording of the Savings Rules is as follows:

r.3: Savings in relation to special insolvency rules

The Insolvency Rules 1986, as they had effect immediately before 6th April 2017, insofar as they apply to proceedings under the following instruments, continue to have effect for the purposes of the application of—

(a) the Railway Administration Order 2001;
(b) [ … ]
(c) the Energy Act 2004;
(d) the Energy Administration Rules 2005;
(e) the PPP Administration Order Rules 2007;
(f) the Water Industry (Special Administration) Rules 2009;
(g) the Energy Act 2011;
(h) the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012;
(i) the Energy Supply Company Administration Rules 2013; and
(j) the Postal Administration Rules 2013.

What does this mean for organisations to which this suite of secondary legislation might apply? In short, it means that great care must be taken by advisors and Insolvency Practitioners to ensure that the correct process is followed when consulted about a move by the organisation into an insolvency process.  In the first instance they must consider: do the 1986 Rules still apply and, if so, is there a stock of 1986 Rules prescribed forms in the filing cabinet?

The need for caution is particularly stark in respect of out-of-court administration appointments, where the distinctions drawn in cases such as G-Tech Construction Ltd[3] and Re Kaupthing Capital Partners II Master LP Inc[4] between fundamental defects (so as to render an appointment a nullity and incapable of rescue) and defects which are not fundamental (giving rise instead to an irregularity that can be rescued by either r.12.64 Insolvency (England and Wales) Rules 2016[5], (“the 2016 Rules”) or para 104 Sch B1 Insolvency Act 1986) have historically been of crucial importance.

Developments in both caselaw and statutory instrument together with an increased (and welcome) emphasis on practicality and substance over form, had meant that such distinctions had been considered to be largely historic in the context of the vast majority of out-of-court appointments. Indeed, as recognised by Marcus Smith J in Re Skeggs Beef Ltd,[6] over time cases falling into the former category had been largely constrained to those in which there has been a failure to file a notice of appointment in the correct form (and even then there is a debate as to whether such a stark conclusion would be reached if an appropriate case ever reached the Court of Appeal or came before a sufficiently ambitious first instance Judge). However, such authorities remain binding on the position under the 1986 Rules, with the consequence that where the 1986 Rules continue to apply due to  the express carve-out in the Saving Rules, the distinctions carry exactly the same weight (and can lead to exactly the same concerning conclusions) as they used to, meaning that there is no rules cure to an invalid appointment.

This question of invalidity as a function of the failure to use forms prescribed by the 1986 Rules recently came back before the court in the as yet unreported matter of Circle Housing and Support CIO. Although the learned Insolvency and Companies Court Judge had been prepared to take a purposive or indeed practical approach when faced with the apparently invalid appointment of office-holders to a charity that provides sheltered accommodation to vulnerable adults, there was no escaping the grip of the old procedural law prior to the introduction of the 2016 Rules. It was with considerable regret that the court and the applicants were compelled to review and apply the principles applicable to the grant of a further administration order, to be given effect at the time and date of the original but invalid out of court appointment.

A secondary consequence of the Savings Rules might well be an unexpected spike in the second-hand value of the nineteenth edition of Sealy and Milman’s Annotated Guide to the Insolvency Legislation, being the last edition in which the 1986 Rules made an appearance. It would also seem that practitioners specialising in charitable incorporated organisations, railway companies or electricity suppliers might wish to check whether their historic appointments were all safely the subject of appointments under the relevant rules.

Rowena Page of Maitland Chambers was instructed by Simeon Gilchrist, a restructuring and insolvency partner of Edwin Coe LLP, together with his colleague Nicole Davis, in the matter of Circle Housing and Support CIO. The joint administrators sought advice on validity from Rowena and Simeon only after their appointment.

If you have any questions regarding this subject please contact Simeon Gilchrist or any member of the Restructuring & Insolvency team.

[1] [2012] BCC 541

[2] [2013] Bus LR 116

[3] [2005] BPIR 1275

[4] [2010] EWHC 836 (Ch)

[5] Formerly r.7.55 Insolvency Rules 1986

[6] [2020] BCC 43 at [21]-[22]

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