UK: Corporate Recovery and Insolvency

Insolvency Act 2000 – Voluntary Arrangements
Last Updated: 24 January 2003
Article by Barry Donnelly

Co-Authored By Bruce Lincoln

On 1 January 2003, the provisions of the Insolvency Act 2000 relating to voluntary arrangements, came into force.

Section 1 and Schedule 1 introduce a moratorium procedure for small companies, where the directors intend to put forward a proposal for a CVA. The moratorium is obtained by filing certain documents in court, without the need for a hearing, but the directors must have drawn up the proposal before documents can be filed and the moratorium takes effect. The maximum initial period of the moratorium is 28 days which may be extended by a maximum of 2 months following the meeting of creditors.

Section 2 and Schedule 2 contain amendments to the existing CVA procedures, and Section 3 and Schedule 3 contain amendments to the IVA procedure. In Section 4, changes relating the qualification and authorisation of insolvency practitioners in relation to voluntary arrangements generally, are set out.

In addition, various statutory instruments came into effect on 1 January 2003. The full legislation and explanatory notes are available on the HMSO website at http://www.legislation.hmso.gov.uk.

A company is eligible for the moratorium procedure if, in the year ending with the date of filing, or where the company's most recent financial year ended before that date, it satisfies two or more of the requirements set out in Section 247(3) of the Companies Act 1985, for being a small company, namely:

- turnover of not more than £2.8 million;

- balance sheet total of not more than £1.4 million;

- no more than 50 employees.

The company will not be eligible for the moratorium if:

- it is already subject to formal insolvency proceedings;

- a provisional liquidator has been appointed;

- there has been a moratorium in force in relation to the company in the previous 12 months and either no voluntary arrangement came into effect, or an arrangement which did come into effect came to an end without being fully implemented;

- an arrangement which came into effect as a result of a proposal by an administrator or liquidator has come to an end without being fully implemented, and within 12 months of the date of filing an Order has been made to discharge the administration Order or to stay or sist the winding-up proceedings.

The company is also not eligible if it is engaged in conducting insurance business, is a party to certain capital markets arrangements or has incurred a liability of £10 million or more under an agreement.

The Financial Services Authority is entitled to participate in the moratorium procedure if the company concerned is or has been an authorised person, appointed representative or is carrying on or has carried on a regulated activity in contravention of the general prohibition.

Company Voluntary Arrangements

CVA Rules applied to Isle of Man Companies

In Re Television Trade Rentals Limited [2002] BCC 807, the provisional Liquidators of two Isle of Man companies which traded in England, applied for Orders that the English Court provide assistance to the Isle of Man High Court pursuant to a letter of request, asking it to direct and declare that the provisions of Part I of IA 1986 (CVAs), should apply to the companies pursuant to Section 426 of IA 1986. There were no equivalent procedures in the Isle of Man.

The Court granted the Orders, on the basis that it was well established that the exercise of the Section 426 jurisdiction involved a discretion as to what assistance ought to be given. Nevertheless, the Court ought to render all assistance it could and endeavour as a matter of comity to give effect to the request. Pursuant to Section 426(5), the only law which could be applied was English law since there were no corresponding powers under the law of the Isle of Man.

In deciding which law to apply, the Court also took into account the connection of the parties with England and with the Isle of Man. The English connections were very strong: the majority of creditors were English; the companies carried on business in England and their affairs were inextricably entwined with an English company.

Status of Payment to Creditors Not Bound by CVA’s

In Re TBL Realisations Plc (8 August 2002), the Court of Appeal considered the question of payment to creditors of a company subject to a CVA, who were not bound by the CVA.

The company, a bank, went into administration after the FSA gave notice of intention to revoke its banking licence. After collection of the loan book, the Administrators proposed a CVA in order to distribute the assets realised by them. The creditors approved the CVA and the Administrators were appointed Supervisors.

Some months before the administration, the Respondents had issued proceedings against the bank, claiming damages of approximately US$3 million for alleged negligent misstatement in relation to a reference. They obtained leave to pursue the action in the administration. The Judge held that the Respondents were not bound by the CVA since the chairman of the meeting had refused their claim for voting purposes. He further held that they were not CVA creditors as defined since funds paid by the Administrators to the Supervisors would be held on the trusts of the CVA and could then no longer be used to pay the Respondents. The Judge accepted an undertaking from the Administrators to retain sufficient funds to pay the Respondents' damages claim in full, outside the CVA. Ultimately, the claim was settled for approximately US$575,000 and the Administrators applied to determine whether the Respondents should be paid that sum or only pari passu with the CVA creditors as if they had been admitted to vote at the meeting and were therefore bound by the CVA.

On appeal, the Court of Appeal stated that the relevant question was how much the Administrators should be directed to retain outside the CVA. Both the company and the Administrators were contractually bound by the terms of the CVA, obliging the Administrators to realise the assets of the company and to pay all funds realised (subject to specific exceptions) to the Supervisors. There were to be no unsecured creditors outside the CVA (except for those whose debts were incurred after the date of approval). If there were creditors not bound by the CVA, the CVA made provision for them to be brought within it. If the effect of bringing in non-CVA creditors would be to reduce the likely dividend by more than 10%, provision was also made for re-negotiation. The CVA did not provide for assets to be retained by the Administrators to meet the claims of creditors outside the composition because the existence of such creditors was inconsistent with the underlying premise.

The Court found that the Respondents were entitled to be treated no less favourably than the CVA creditors and no less favourably than they would be treated in a liquidation. Therefore, the Administrators were released from their undertaking to retain sufficient funds to pay the Respondents' claim outside the CVA, on terms that they paid the Respondents with respect to their judgement debt an amount equivalent to the dividends which the CVA creditors had or would receive under the CVA.

Liquidation

Liquidators' Prospective Litigation Costs not payable out of Floating Charge Assets

In Re Demaglass Limited (10 July 2002), the Court considered an application by Liquidators of two companies for payment of prospective litigation costs in investigating the companies' trading, out of the assets which were subject to floating charges.

The Liquidators had requested payment of their expenses out of the floating charge assets, for investigating certain aspects of the companies' trading before and during receivership and if necessary taking proceedings, but the Receivers disputed the Liquidators' entitlement to expenditure not yet incurred and the amounts claimed.

Upon the Liquidators' application for an Order requiring the Receivers to pay over funds as claimed liquidation expenses, the Judge dismissed the applications.

The Court held that:

- where Receivers held undistributed floating charge assets at the date of a winding-up Order, those assets would become subject to the payment of liquidation expenses and the Liquidators' preferential creditors (see Re Leyland Daf Limited [2002] EWCA Civ 228);

- Rule 4.218 IR 1986, describes the liquidation expenses which may be paid out of floating charge assets (see Re Toshoku Finance (UK) Plc [2002] All ER 961);

- in addition, certain litigation costs may come out of the assets ahead of the liquidation expenses (see Re Toshoku; Re London Metallurgical Co.[1895] 1 Ch 758);

- there was nothing in Rule 4.218 entitling the Liquidators to receive payment for prospective expenses. The heads of Rule 4.218 were couched in the past tense or suggested that something had already happened to give rise to the need for payment. A fiduciary could not normally take money out of a fund until a positive event had occurred which entitled him to do so;

- the costs of investigating possible preferences and transactions at an undervalue were not costs of proceedings to get in any assets of the company within Rule 4.218(1)(a) (see Lewis v. Commissioners of Inland Revenue [2001] 3 All ER 499; Re M C Bacon Ltd [1990] BCC 430);

- so far as claims vested in the companies (rather than the Liquidators) were concerned, such as misfeasance claims, the costs were not capable of falling within Rule 4.218(1)(a) because the recoveries would be floating charge assets and not assets of the company (see M C Bacon);

- even if the costs of a successful claim would be capable of coming within Rule 4.218(1)(a), the costs of an unsuccessful claim would not (see Mond v. Hammond Suddards [2000] BCC 445);

- the costs were not within Rule 4.218(1)(m) because none of the costs were "necessary" even if they were otherwise capable of being disbursements.

Note: This decision (and in particular Lewis v. Commissioners of IR above) has been ameliorated by the introduction of Rule 23 of The Insolvency (Amendment) (No. 2) Rules 2002 (SI 2002/2712), with effect from 1 January 2003. It amended Rule 4.218 to provide, among other things, that costs properly chargeable in relation to legal proceedings which the Official Receiver or a Liquidator has power to bring in his own name or that of the company, are payable as a first priority out of the assets. A similar amendment has been made to Rule 6.224 in relation to the order of payment of costs in bankruptcy.

Enterprise Act 2002

The Enterprise Act received Royal Assent on 7 November 2002. Its corporate insolvency provisions are expected to come into force this April and the bankruptcy provisions in April 2004.

SIP 9

A revised version of Statement of Insolvency Practice 9 (Remuneration and Disbursements) (England & Wales) took effect on 31 December 2002. It is available for review on the R3 website (www.r3.org.uk).

Private Examination

In Re RBG Resources Limited; Shierson & Another v. Rastogi & Another [2002] EWCA Civ 1624; [2002] BCC 1005, the Court of Appeal considered the correct exercise of the Court's discretion when ordering the private examination of directors of the company (in compulsory liquidation) against whom proceedings had already been commenced by Liquidators.

The proceedings alleged fraud and claimed damages or compensation.

It was common ground before the Court of Appeal that the power to order private examination under Section 236 IA 1986 should be read together with Section 235, which placed a duty on directors to co-operate with Insolvency Practitioners. Although Section 235 contained a mandatory obligation upon a director to give information reasonably required, the Court has a clear discretion whether to order a private examination under Section 236, although it was likely to be a powerful factor in favour of making an Order. Nevertheless, in exercising its discretion, the Court had to conduct a balancing exercise.

The Court of Appeal accepted that as directors, the case for examination was stronger than if the Respondents had been third parties. Nevertheless, the oppression of ordering examination of persons against whom proceedings have been commenced, must also be weighed in the balance.

Whilst it was oppressive to require a Defendant accused of serious wrong doing to provide pre-trial depositions and to prove the case against himself, that oppression might be outweighed by the legitimate requirements of the Liquidator.

In this case, the legitimate requirements of the Liquidators to obtain speedy information from those who had run the companies and other considerations similar to those in Bishopsgate Investment Management Ltd v. Maxwell [1993] Ch. 1, outweighed the oppression to the directors in being required to submit to a private examination. Indeed, the Court of Appeal considered that the need for making the Order was overwhelming in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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