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Insolvency and Corporate Recovery: Articles

Keynotes on the Insolvency Act 2000
SGH Keynotes - Revised January 2003
The Insolvency Act 2000 was given Royal assent on 30 November 2000, and partly came into force in April 2001. As from 1 January 2003, the remaining provisions of the Insolvency Act came into force. These notes deal with primarily the provisions that came into effect on 1 January 2003.
1. Entry Into Force

Date in Force	Provisions of Legislation	Reference
30/11/2000	s14 Insolvency Act 2000 - power of Secretary of State to give effect to UNCITRAL Model	Insolvency Act 2000
02/04/2001	ss5-8 & Schedule 4 Insolvency Act 2000 - amendments to CDDA 1986 s9 Insolvency Act 2000 - Landlords rights to forfeiture and peaceable re-entry in administration	SI 2001 No. 766
02/04/2001	Amendments to handling of funds in bankruptcy trustees in bankruptcy’s ability to invest surplus monies retained in ISA in Government securities)	SI 2001 No. 761 & 762
01/01/2003	Balance of Insolvency Act 2000, including: Schedules  &   - CVAs; Schedule    - IVAs; Amendments to the Insolvent Partnerships, (Amendment) (No. 2) Order 2002; Amendment to Insolvency Practitioners Regulations; Amendments to the Insolvency Rules 1986, in particular Part 5 thereof	SI 2002 No. 2711 SI 2002 No. 2711 SI 2002 No. 2708 SI 2002 No. 2710 SI of 2002 No. 2712

2. UNCITRAL Model Law on Cross-Border Insolvency
The Insolvency Act 2000 granted the Secretary of State power to adopt the UNCITRAL Model Law. To date it has not been adopted. The Model can only be adopted by resolutions being passed in both Houses of Parliament. Consequently it is unlikely that the UNCITRAL Model will be adopted during the current Parliamentary term.
The UNCITRAL (United Nations Commission on International Trade) Model Law on cross-border insolvency is not dependent on reciprocity. Whilst the Model has yet to be adopted within the jurisdiction, insolvency practitioners (within the United Kingdom) can take advantage of the Model in any country where it has been adopted.
The primary objectives of the Model are, in cross-border insolvency scenarios, to prevent local realisation of assets by creditors, and to make it easier for foreign insolvency practitioners to realise assets abroad (through facilitating recognition procedures for foreign insolvency proceedings, and by giving direct access to Courts in jurisdictions where the Model has been adopted).
The EC European Insolvency Regulation, which came into force on 31 May 2002, whilst only creating intra-European Union effects, is based largely on the provisions of the UNCITRAL Model.
The relevant section also gave the Secretary of State power to introduce regulations to amend s426 Insolvency Act 1986 (co-operation between Courts exercising insolvency jurisdiction) so as to further facilitate cross-border insolvency administration . Again, to date, no regulations have been proposed to amend this section of the Insolvency Legislation.
3. Landlord’s Rights to Forfeiture & Peaceable Re-entry
Prior to the Insolvency Act 2000, landlords were entitled to forfeit a lease, and exercise peaceable re-entry, in insolvency scenarios. This eroded the principles of the rescue culture, and the protection intended to be afforded by administrations/voluntary arrangements.
The Insolvency Act 2000 expressly provides that landlords are no longer able to exercise any right of forfeiture by effecting peaceable re-entry where:
A company has presented an application for an administration order - s9 Insolvency Act 2000;
IVAs, SUBJECT TO an interim order having been applied for;
CVAs, SUBJECT TO a moratorium (see below) having been applied for;
PVAs, subject to a moratorium.
1. Directors Disqualification
The relevant provisions came into effect on 2 April 2001. Changes were introduced primarily to save costs, since previously Defendants to disqualification proceedings could only dispose of the same by either defending the claim to trial, entering into a Carecraft disposal, or not opposing an application. All of the aforementioned entailed a costs order being made against a Defendant.
The amendments introduced by the Insolvency Act 2000 provide an alternative method of disposing of proceedings, where defendants can give a disqualification undertaking. An undertaking can be given both before or after the issue of CDDA proceedings where if an undertaking is given prior to the issue of proceedings, the proposed defendant is not liable for the Secretary of State’s/Official Receiver’s costs.
A disqualification undertaking has the same effect as a disqualification order, insofar as an individual cannot take part in or be concerned in (whether directly/indirectly) the promotion/formation/ management of a company or a limited liability partnership.
The Secretary of State/Official Receiver, or an individual who has been disqualified by way of undertaking, can apply to Court to vary the period of disqualification imposed by undertaking. To date there are no reported cases indicating that such an application has been made.
2. Changes to Voluntary Arrangements
The relevant sections of the Insolvency Act 2000 came into force on 1 January 2003.
The new provisions do not apply where, in relation to a:
IVA/CVA (directors’ proposal), where the intended nominee has endorsed a copy of the written notice of the CVA proposal prior to 1 January 2003;
CVA proposal by a liquidator/administrator, acting as nominee, where the notice summonsing the meetings under s3 Insolvency Act 1986 has been sent out prior to 1 January 2003; and
CVA proposal by a liquidator/administrator, not acting as nominee, where the intended nominee has endorsed a copy of the written notice of the proposal prior to 1 January 2003.
1. Nominees & Supervisors
Previously nominees and supervisors had to be licensed insolvency practitioners. This is no longer the case.
Any member of a body recognised by the Secretary of State can act as a nominee and supervisor.
Any person recognised by an appropriate professional body, in order to act as nominee/supervisor, must put in place sufficient security for the proper performance of his functions.
As at January 2003 no bodies have been "recognised" by the Secretary of State. In practice as at January 2003, only licensed insolvency practitioners can act as nominee/supervisor. This is likely to change.
2. Creditors Bound by VAs
Previously only creditors who had had notice of, and were entitled to vote at, a meeting convened for the purpose of considering a VA proposal (whether or not represented) were bound - ss5 & 260 Insolvency Act 1986.
These sections of the Insolvency Legislation have been amended so as to bind every person who in accordance with the Insolvency Rules was entitled to vote at the meeting (whether or not present/represented), or would have been so entitled if they had had notice of the meeting.
In other words, there is no longer any specific requirement for a creditor to have received notice in order to be bound. This is likely to give rise to litigation. A situation could arise where a nominee is not advised of particular creditor(s), perhaps deliberately by the directors in order to sway the voting. Such creditors would not have voted at the meeting, but would have been entitled to vote had they received notice. Consequently they would be bound. In such scenarios applications to challenge the validity of the arrangement are likely to arise.
3. Changes to CVA/PVA
The provisions brought in force in relation to CVAs are extended to PVAs.
Prior to the Insolvency Act 2000, companies seeking to put forward proposals for a voluntary arrangement could not obtain protection from creditor enforcement unless a petition for administration had been presented pursuant to Part II Insolvency Act 1986. Although putting forward CVA proposals is one of the statutory purposes for which an administration petition can be presented, administrations are expensive and the directors effectively lose control. In view of costs, directors often put forward CVA proposals without seeking the benefit of the moratorium afforded by an administration (with the result that creditors, and in particular debenture-holders, often become hostile upon receipt of notice of a CVA meeting).
The Insolvency Act 2000 introduced a regime whereby certain companies can, without presenting a petition for an administration order, obtain the benefit of a moratorium (in virtually identical terms to the moratorium created upon presentation of an administration petition).
5.3.1 Small Companies
Only small companies, within the meaning of s247(3) Companies Act 1985, are eligible to apply for a CVA moratorium. To qualify, in the year ending with the date of filing or in the company’s financial year which ended last before the date of filing of the CVA, a company must satisfy two of the relevant requirements, namely:
turnover equal or less than £2.8million;
balance sheet total equal or less than £1.4million; and/or
50 or less employees.
A holding company that satisfies the requirements of being a small company will not be able to apply for a moratorium if it is the holding company of a group which (as a group) does not qualify as a small or medium sized group.
2. Ineligible Companies
Companies cannot apply for a CVA moratorium if:
they are already subject to formal insolvency proceedings (e.g. Administration order, winding-up, Administrative receivership, CVA);
a provisional liquidator has been appointed;
within the previous twelve months prior to filing, the company has been subject to a CVA moratorium where a voluntary arrangement did not come into effect or came to an end without being fully implemented;
during the period of twelve months ending with the date of filing, a voluntary arrangement has come to an end prematurely and an order under s5(3)(a) Insolvency Act 1986 (stay of proceedings in winding-up or discharge of administration order) has been made;
it is engaged in insurance business, any authorised deposit taking, parties to a market contract or whose property is subject to a "market charge" (per Part V  Company Act 1989), a party to a "money market contract" or a "related contract" or whose property is subject to a "money market charge" (per Financial Markets & Insolvency (Money Market) Regulations 1995), or a company whose property is subject to a "systems charge" (per Financial Markets & Insolvency Regulations 1996);
the company has incurred liability, under an agreement, of £10million or more.
5.3.3 Procedure to Obtain Moratorium
To obtain a moratorium, the directors must serve upon the nominee the following:
CVA proposal;
Statement of affairs, to be delivered no later than seven days after the date of delivery of the CVA proposal, and made up to a date not more than two weeks prior to the date of delivery of the statement of affairs (subject to extension of not more than two months prior to date of delivery);
Any other information the nominee may require.
Following receipt, the nominee is obliged to give a statement in the prescribed form stating whether or not in his opinion:
1. The proposed CVA has a reasonable prospect of being approved, and implemented;
2. Whether the company is likely to have sufficient funds, during the moratorium, to enable it to carry on its business; and
3. Whether meetings of the company, and its creditors, should be summoned to consider the proposal.
The nominee’s statement must be submitted within twenty-eight days of receipt of the proposal, and must be attached to his comments together with (if appropriate) consent to act.
In forming his opinion if the nominee is entitled to rely on information given to him by the directors, unless he has a reason to doubt its accuracy. In view of the potential liability of the nominee/supervisor, this may give rise to litigation.
Thereafter the company obtains the CVA moratorium by filing at Court the requisite documentation (including proposal, statement of affairs, statement of the company’s eligibility for a moratorium, consent to act, and nominee’s statement).
5.3.4 Duration of Moratorium
The initial moratorium lasts for twenty-eight days. During this time the meetings of the company and creditors must be held to consider the proposals.
At a meeting of creditors, the moratorium can be extended for a maximum period of two months from the date of the meeting.
5.3.5 Obligations of Nominee During CVA Moratorium
One of the major concerns of insolvency practitioners will be that, during the CVA moratorium, a nominee is obliged to monitor the company’s affairs to form an opinion whether:
1. the proposed VA has a reasonable prospect of being approved, and implemented; and
2. the company is likely to have sufficient funds available to it to enable it to carry on its business during the moratorium period.
If the nominee decides, during the CVA moratorium, that the VA is unlikely to be approved, or there are insufficient funds to enable the company to carry on to trade its business, he must withdraw consent to act.
Any creditor who is dissatisfied with any act/decision/omission of the nominee can apply to Court. This includes a specific right to apply to recover any damages/loss suffered as a result of the conduct of the nominee (subject to the company not having applied for such an order against the nominee). Therefore any nominee who does not properly monitor the company’s performance during the CVA moratorium period, and/or does not report/act accordingly, could be personally liable
4. Changes to IVA Regime
Previously the IVA procedure had to be commenced by issuing an application for an interim order, which could only be applied for once in every twelve months. Consequently, where an IVA proposal was unsuccessful, bankruptcy was usually inevitable.
The Insolvency Act 2000 introduces an alternative regime. If a debtor requires the protection of the moratorium created upon presentation of an application for an interim order, he can still apply to Court in the usual manner. The provisions for application for an interim order, and IVA proposals, are unaffected in this regard by the introduction of the Insolvency Act 2000.
Alternatively, where a debtor does not require the protection of the moratorium, a debtor can now put forward IVA proposals without applying for an interim order. This means that debtors can put forward IVA proposals more than once within twelve months.
Although an application for an interim order is not necessary, there are still filing requirements. It is highly likely that a Court fee will still be charged.
Part 5 of the Insolvency Rules 1986 has been almost entirely amended to reflect the relevant changes.
Revised 18 February 2003

Further information
If you would like further information please contact:

Daniel Sejas
020 7544 5555
daniels@sghlaw.com

Disclaimer
This article is copyright Sprecher Grier Halberstam LLP.2003 and should not be construed as legal advice or opinion in any specific facts or circumstances. The contents are intended for general information purposes only. You are urged to contact a suitably qualified lawyer for specific advice.