Debenture holders bitten by moratoriums

Chief Bankruptcy Registrar William James looks at revisions to the company and individual voluntary arrangement regimes just implemented

On 1 January 2003, those provisions of the Insolvency Act 2000 which relate to voluntary arrangements (sections 1 to 4, schedules 1, 2 and 3) came into effect.

Consequential changes to the Insolvency Rules 1986 have been effected by the Insolvency (Amendment) (No.

2) Rules 2002, SI 2712/2002.

Changes to CVAs

As the law stood, the directors of a company who wished to propose a company voluntary agreement (CVA) with its creditors were unable to obtain any protection from creditor enforcement until the arrangement had been approved, except by applying for an administration order.

This has been a major drawback because the reality is that as soon as notices of meetings are sent out by the nominee, debenture holders adopt a hostile attitude and most frequently the floating charges crystallise.

The Insolvency Act 2000 (sections 1 and 2, schedules 1 and 2) provides a choice for the directors.

After the appointed day they may proceed to a CVA either with or without the protection of a moratorium.

Only companies which are small companies for the purposes of section 247(3) of the Companies Act 1985 and satisfy the other qualifying criteria set out in schedule 1A of the Insolvency Act 1986 are eligible for a moratorium.

The process begins with the directors serving a proposal on the nominee.

The moratorium will commence as soon as the directors file in court the company's proposal, a statement of the company's affairs, a statement that it is eligible for a moratorium, and a statement from the nominee that he has consented to act and that in his opinion the arrangement has a reasonable prospect of being approved and implemented, the company is likely to have sufficient funds available to it during the proposed moratorium to enable it to carry on its business, and meetings of the company and its creditors should be summoned to consider the proposed voluntary arrangement.

The rules (as amended) prescribe form 1.9 for use in connection with the filing in court of these documents which are themselves prescribed forms (forms 1.5, 1.6, 1.7, 1.8).

The moratorium will continue for 28 days and may be extended by resolution for up to two months after the date when the meetings of the company and its creditors are first held, or, if those two meetings are held on different days, on the day of the later meeting.

The first meetings must be held within the 28-day period.

The obtaining of a moratorium is an alternative procedure to that involving an administration order for a CVA and will have significant advantages over the existing (and co-extensive) procedure.

For example, it will not involve the expense of a petition for administration.

It will prevent the enforcement by a secured creditor of its security without permission of the court.

It will also prevent debenture holders from applying to the court for such permission with a view to obtaining crystallisation of a floating charge and will, therefore, suspend the crystallisation of floating charges pending the termination of the moratorium.

The provisions of a CVA moratorium are extended to partnerships by the introduction of the Insolvent Partnerships (Amendment) (No.

2) Order 2002, SI 2708/2002.

Changes to IVAs

An individual has also been given a choice of procedure regarding individual voluntary agreements (IVAs).

He is now able to apply for an interim order or not as he wishes, depending on whether or not he needs protection from his creditors at the time.

If he does, the procedure is the same as it is now.

However, it should be noted that part 5 of the insolvency rules has been replaced entirely by a substituted part 5 which is contained in part 3 of the schedule to the Insolvency (Amendment) (No.

2) Rules 2002.

If a debtor does not intend to obtain the protection of an interim order, he will be spared the expense of a formal application although it is likely that a filing fee will be payable, for it will still be necessary to file certain documents in court.

In particular, the nominee must file his report and with it a copy of the debtor's proposal and of his statement of affairs, and the nominee's consent to act.

All these documents must be filed with form 5.5 which will contain a statement that it is not intending to apply to the court for an interim order.

In every case, whether there is an application for interim order or not, the nominee's report is required to state expressly that, in his opinion, the arrangement has a reasonable prospect of being approved and implemented.

Where, however, no application for an interim order is made, rule 5.14(1) provides that the court will not read the report unless an application is made under the Act or the rules in relation to the debtor's proposal, for example, an application under section 262 (challenge to decision of the meeting of creditors).

Nominee and supervisor

A nominee or supervisor will not have to be an insolvency practitioner but, in respect of all voluntary arrangements, will have to be a member of a body recognised by the secretary of state for the purpose.

No such body has yet been recognised by the secretary of state.

In every case, the nominee and supervisor will have to have in force security for the proper performance of his functions in accordance with the Insolvency Practitioners Regulations 1990 (as amended by the Insolvency Practitioners (Amendment) Regulations 2002, SI 2710/2002).

There are other changes, some more significant than others.

Sections 5 and 260 of the Insolvency Act 1986 have been amended.

An arrangement will in future bind every person who in accordance with the rules was entitled to vote at the meeting (whether or not he was present or represented at it) or would have been so entitled if he had had notice of it, as if he were a party to the voluntary arrangement.

Both a CVA moratorium and an IVA interim order will have the effect of staying a landlord's rights of forfeiture by peaceable re-entry and of levy by distress during the period when the moratorium or interim order has effect (paragraph 12, schedule A1 and section 252(2) of the Insolvency Act 1986 (as amended)).

Transitional provisions are contained in the Insolvency Act 2000 (Commencement No.

3 and Transitional Provisions) Order 2002, SI 2711/2002.

Chief Bankruptcy Registrar William James sits at the Royal Courts of Justice and is a member of the Association of District Judges