Introduction
The insolvency
act 2000 "the Act" received Royal assent on 30 November
2000 and became effective in Scotland on 1 January 2003
in terms of the introduction of a court protected debt moratorium
for the purpose of instigating a company voluntary arrangement.
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How
does the process work?
The directors
of an eligible company lodge an application in court setting
out the reasons why the company is experiencing financial
difficulties and tabling the terms of the proposed voluntary
arrangement i.e. a moratorium, which is designed to improve
the overall financial position for the benefit of the company,
employees, customers and creditors. The documentation will
include a statement from a nominee that he believes the
proposed voluntary arrangement has reasonable prospect of
being approved by creditors and implemented, and that the
company is likely to have sufficient funds to enable the
business to be continued.
A court will not
be asked to opine on the proposals: the simple expedient
of lodging the required documentation is sufficient to trigger
the process.
What
is an eligible company?
An eligible company
is one that satisfies two or more of the requirements for
being a small company, specified in section 247 of the companies
act 1985, as reflected in the most recent set of financial
statements. As at 1 January 2003 these requirements are:
1. turnover not
exceeding £2,800,000
2. gross assets
i.e. fixed assets plus current assets, not exceeding £1,400,000
3. average number
of employees not more than 50
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Who
is a nominee?
A nominee is a
person from a body recognised by the secretary of state
as being capable of acting in such capacity. This is likely
to be an insolvency practitioner because such a person is
already a member of a recognised body but if it is a company
doctor or turnaround specialist who is not a qualified insolvency
practitioner it is important to note that the nominee must
be able to provide a bond of caution before being permitted
to act.
How
long does a moratorium last?
The maximum period
is three months because the nominee has a period of up to
28 days to convene meetings of the company and its creditors,
and these meetings can extend the moratorium for a further
period of two months.
When
does a moratorium start?
The first day
is when the directors of a company lodge an application
in court and hence, only those who the company consults
beforehand are likely to be aware that a moratorium is being
contemplated. For example, the nominee selected by the directors
will have to be aware of the proposals and will wish an
opportunity to satisfy himself that he has obtained a full
and balanced view of the proposals and that there is a likelihood
of success. The time taken to complete this aspect of the
process will depend upon the complexity of the proposals,
the extent of the company's financial difficulties and the
ready availability/reliability of information to validate
the proposals.
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Is
diligence possible after the moratorium starts?
No. An administrator,
receiver or liquidator cannot be appointed whilst a moratorium
is in force and indeed, the new legislation specifically
disallows a floating charge holder from amending its floating
charge documentation to circumvent the moratorium process.
A landlord cannot repossess property and a supplier providing
goods on lease or hire purchase cannot recover such goods,
except with leave of court.
How
are creditors advised?
Creditors, including
preferred creditors and the company's bank do not need to
be consulted before the application is submitted to court.
The nominee must
convene a meeting of all known creditors in order that the
proposals can be tabled and approved, with or without appropriate
notification. The meeting must be convened within 28 days
of the application being lodged in court and the individual
circumstances of each case will dictate how quickly a nominee
will wish to convene such meeting. Notification thereafter
will be by way of public advert, letter to all known creditors
and the submission of a prescribed form to the registrar
of companies. Notification is required on all company invoices/notepaper
that a moratorium is in force.
Are
creditors bound by the moratorium?
Yes, if the meeting
of creditors approves the directors' proposals, with or
without modification, all creditors are bound by it.
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What
if a creditor was dissatisfied with the process?
Anyone who feels
disadvantaged can challenge a nominee's actions in court
or those of the directors. It will be fairly usual for the
directors to remain in office during the moratorium and
hence, in charge of trading activities. On the basis that
a qualified insolvency practitioner has had to approve the
initial proposals and satisfy himself that they are likely
to succeed, it is hoped that as long as the proposals are
being followed there should be little requirement to revert
to court.
Who
creates the moratorium proposals?
The directors,
in consultation with the prospective nominee. The moratorium
is unlikely to be progressed unless it is realistic in its
general terms and has clearly defined proposals which incorporate
a plan of action, benefit analysis and targets for achievement.
Thereafter, creditors have an opportunity to modify the
proposals before the moratorium is approved but the responsibility
for achieving the results will rest with the company and,
should the nominee conclude that the original proposals
are unlikely to be achieved at any stage during the process,
he can bring the moratorium to an end by withdrawing his
written consent to act.
Moratorium proposals
cannot include the variation of a secured creditor's rights
(unless such creditor agrees) or the reduction of any preferential
entitlement which a creditor would have in any other formal
insolvency procedure.
Are
there restrictions on continued trading?
Yes. A company
subject to a moratorium cannot take credit for more than
£250 from a supplier unless such supplier is advised
that a moratorium is in process and agrees to continue supplying.
Thus the company and the nominee must be satisfied that
sufficient cash and credit resources will be available to
support ongoing trading e.g. from a bank, creditors or any
other source. A business where customers pay in advance
for a service such as travel agency or night-club/bar may
be able to trade on its own cash resources more readily
than a business with a different cashflow structure and
each case will be judged on its specific circumstances.
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Can
I sue the nominee?
The legislation
does not grant the nominee the same level of statutory responsibility
and protection enjoyed by a receiver or liquidator. A nominee
will try to ensure that he does not expose himself to legal
action given the rigorous procedures for preparing and approving
the proposals. It is naïve to assume that case law
will not develop as a result of legal action instigated
by disgruntled creditors, but it would be unfortunate if
this insolvency option was diverted from its purpose of
promoting the spirit of rescue and recovery.
Can
the nominee obtain assistance?
The meeting of
creditors is empowered to elect a moratorium committee who,
themselves, can be granted certain functions by the meeting
of creditors. Expenses approved at the meeting of creditors
can be paid to the moratorium committee which may mean that
individuals are more willing to assist the nominee than
tends to be the case in a receivership or liquidation. One
benefit of the moratorium committee is the provision of
knowledge and industry expertise to the nominee.
If specialist
assistance is required, for example to value assets or review
legal ownership of intellectual property, the initial proposals
are likely to address this issue.
What
happens when the moratorium concludes?
Notification is
provided to the court, the registrar of companies and all
known creditors. An advert will be published such that it
is brought to the attention of the general body of creditors.
The company will revert to the directors and its legal status/position
will be the same as it was on the day before the moratorium
commenced.
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Can
I complain about a director and his actions?
A creditor or
shareholder who shows just cause may apply to court for
an order regulating a director's activities. Such director
will have a right of representation in court and any order
made against the director would be required to safeguard
the interests of all those who have dealt with the company
in good faith and for value.
Are
there any pre-moratorium offences?
Yes, certain activities
will be considered to be an offence if undertaken by a company
officer in the 12 month period immediately preceding the
date of the moratorium and include:
-
Concealing
any part of the company's property, including a debt,
to the value of £500 or more.
-
Fraudulently
removing any part of the company's property to the value
of £500 or more.
-
Concealing,
destroying, mutilating or falsifying any book or paper
affecting the company's property or affairs.
-
Making any
false entry in any book or paper affecting or relating
to the company's property or affairs.
-
Fraudulently
parting with, altering or making any omission in any
document relating to the company's property or affairs.
-
Pawning, pledging
or disposing of any company property which has been
obtained on credit and has not been paid for.
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Is
this a good idea?
The protected
debt moratorium process provides an opportunity to deal
with a company in financial difficulties in a positive and
proactive manner. With court protection such that either
a minority creditor or a group of creditors acting together
do not prejudice the benefit that can be obtained for the
majority, the legislation offers a challenging opportunity
to preserve economic value.
Conclusion
The concept of
rescuing a company thereby preserving trading links and
jobs is sound but only if the company has a sound economic
basis for existing and is being run in a manner likely to
prove commercially positive. The moratorium procedures will
be attractive for many companies but are not a panacea for
all: receivership and liquidation appointments will continue,
but perhaps at a lower level than currently encountered.
These notes are prepared for guidance
only and should not be treated, or relied upon, as a definitive
view on any of the issues addressed and, before any action
is taken, specialist advice should be sought. In this regard,
Michael Reid (insolvency practitioner) e-mail: reidm@mestonreid.com
or Michelle Byrne (insolvency manager) e-mail: byrnem@mestonreid.com
will be happy to answer any questions which you may
have and speak to any business which you consider may benefit
from this process.
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