House of Lords - Explanatory Note
      
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Session 1999-2000
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Insolvency Bill [H.L.]


 

These notes refer to the Insolvency Bill [H.L.]
as introduced in the House of Lords on 3rd February 2000 [HL Bill 28]

INSOLVENCY BILL [H.L.]

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EXPLANATORY NOTES

INTRODUCTION

1. These explanatory notes relate to the Insolvency Bill [H.L.] as introduced in the House of Lords on 3rd February 2000. They have been prepared by the Department of Trade and Industry in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

SUMMARY

3. The Bill provides for:

  • small companies1 in financial difficulty to make voluntary arrangements with their creditors by providing the option of a moratorium2 to give the firm's management time to put a rescue plan to creditors and for minor modifications to be made to the provisions relating to the existing company3 and individual4 voluntary arrangement schemes;

  • changes to the procedure for disqualifying persons who are unfit to be company directors by allowing the Secretary of State to accept undertakings which would have the same legal effects as disqualification orders5 made by a court and for various technical amendments to be made to existing legislation in relation to disqualification;

  • the procedure for reporting delinquent officers and members of a company with a view to prosecution to be changed;

  • amendment of section 219 of the Insolvency Act 1986 to ensure that it is compatible with the European Convention on Human Rights (ECHR);

  • the property of a person who dies insolvent to be treated in the same way as that of a live insolvent (England and Wales only);

  • a power to make rules or regulations concerning the investment of funds held in the Insolvency Services Account on behalf of bankruptcy estates, and the payment of interest on such funds; and

  • a power to make regulations to give effect with or without modifications to the model law on cross-border insolvency which was adopted by the United Nations Commission on International Trade Law (UNCITRAL) of which the UK is a member state; and for the amendment of section 426 of the Insolvency Act 1986 (co-operation between courts exercising insolvency jurisdiction)

1. Section 247(3) Companies Act 1985 defines a small company as one which satisfies two or more of the following criteria:

  • Turnover - not more than £2.8 million.

  • Balance sheet total - not more than £1.4 million.

  • Number of employees - not more than 50.

2. Moratorium is a temporary stay, or in Scotland a sist, on certain legal acts and processes from being performed or continued.

3. Company Voluntary Arrangements were introduced by the Insolvency Act 1986 Part I and provide a means for financially troubled companies to reach a legally binding agreement with their creditors in satisfaction of their debts or a scheme of arrangement of their affairs. A proposal for a voluntary arrangement will determine who the nominee is to be. The nominee is the person chosen by the directors to put their voluntary arrangement to the creditors and the company and to act as supervisor of the voluntary arrangement if it is implemented. A liquidator or an administrator of the company may also propose a voluntary arrangement.

4. Individual Voluntary Arrangements were introduced by the Insolvency Act 1986 Part VIII and similarly provide a means for financially troubled individuals to reach a legally binding agreement with their creditors in satisfaction of their debts or a scheme of arrangement of their affairs (England and Wales only).

5. A person can be disqualified by the courts, by way of a disqualification order, from being an insolvency practitioner or director or from being involved in the promotion, formation and management of a company, for a maximum of fifteen years, if his conduct in an insolvent company (or partnership in England and Wales) makes him unfit and if other specified conditions are satisfied.

BACKGROUND

Moratorium in company voluntary arrangements

4. Company rescues can be made more difficult or can be thwarted because of the absence of provision in the Insolvency Act 1986 for obtaining a short moratorium in the company voluntary arrangement procedure whilst a proposal for a voluntary arrangement is being drawn up and considered.

5. The absence of a moratorium means that, until the arrangement is formally approved, any creditor can take legal action against the assets of the company and so jeopardise the prospects of the voluntary arrangement succeeding. The addition of an optional moratorium to this procedure will offer the management of a small company a short time within which to put a rescue plan to creditors.

6. In the last three years an average of 500 company voluntary arrangements have been agreed annually.

Disqualification Undertakings

7. The present director disqualification regime was introduced by the Company Directors Disqualification Act 1986. In particular, this allows the court to make a disqualification order against a director of an insolvent company whose conduct as a director of that company either on its own or when taken with his conduct of other companies is such as to make him in the view of the court unfit to be involved in the management of a company. The application is made by the Secretary of State or the official receiver. Over the past two years, about 2800 disqualification orders have been made under Section 6.

8. At present disqualification can only be achieved by means of court proceedings and there are delays in getting cases through the courts. The power to accept undertakings which is to be conferred on the Secretary of State will mean that, where there is agreement, disqualification can be achieved administratively by the director giving an undertaking to the Secretary of State. This will result in earlier disqualification for those who give an undertaking. It will also save time.

Reports by liquidators of criminal misconduct by company officers or members

9. In certain circumstances, Section 218 Insolvency Act 1986 requires a liquidator1 to report suspicions of criminal misconduct by company officers or members to the Director of Public Prosecutions, who may then refer such reports to the Secretary of State for investigation. The Bill requires liquidators to make such reports directly to the Secretary of State rather than to the Director of Public Prosecutions. In Scotland reports will continue to be made to the Lord Advocate who will no longer be able to require the Secretary of State to investigate the alleged offences.

     1 A liquidator is the insolvency practitioner appointed to realise the assets of a company and distribute the proceeds to creditors in a liquidation.

Restriction on use of answers obtained under compulsion

10. Section 219 of the Insolvency Act 1986 allows answers obtained under powers of compulsion, derived from the Companies Act 1985, to be used as evidence against that person. This is not compatible with the judgment of the European Court of Human Rights in the case of Saunders v. UK. The Court decided that for the prosecution to use answers given pursuant to a power of compulsion in subsequent criminal proceedings infringed Mr Saunders' rights under Article 6 of the European Convention on Human Rights. The Bill therefore amends section 219 to make it compatible with the Convention.

Property of deceased insolvents

11. The order-making power contained in Section 421 of the Insolvency Act 1986 is not sufficient to ensure that all property, the ownership of which was vested in a deceased debtor immediately prior to his death (including his share in property held on a joint tenancy), is available to his creditors in insolvency proceedings where the insolvency order was made after the debtor's death1. That means that in some instances, what may appear to be the main, if not the only asset, namely the debtor's interest in the matrimonial home, will be beyond the reach of his creditors. The Bill therefore amends Section 421 by providing that the deceased's interest in property which he held on a joint tenancy on the day he died becomes part of his estate and may be dealt with accordingly.

     1 This was established by the decision of the Court of Appeal in the case of In re Palmer Deceased (A Debtor) [1994] Ch. 316.

Bankruptcy: Interest on sums held in Insolvency Services Account

12. For many years it has been possible for funds held in the Insolvency Services Account for a company in liquidation to be invested in Treasury Bills or other government securities for the benefit of the estate. There was also a facility for funds in excess of £2,000 to be placed on an interest bearing account and since 1994, interest of 3.5% per annum has been paid automatically on such funds. Similar provisions have never applied to bankruptcy estate funds. The Bill, therefore, gives the Secretary of State the power to make rules or regulations which will remove that anomaly.

Model law on cross-border insolvency

13. The UNCITRAL model law seeks to facilitate the process of obtaining recognition of foreign insolvency proceedings; to introduce a greater degree of certainty as to the assistance the courts can give a foreign officeholder and the stage of the proceedings at which the assistance is given; and to require courts with insolvency jurisdiction to co-operate with each other. The power taken in the Bill will enable the Secretary of State with the agreement of the Lord Chancellor to give effect in our law to the model law, with or without modifications.

THE BILL

14. The matters dealt with in the Bill may be summarised as follows:-

  • Clauses 1 - 3 and Schedules 1 - 3 deal with voluntary arrangements;

  • Clause 4 deals with the qualification and authorisation of nominees and supervisors in voluntary arrangements;

  • Clauses 5 - 8 and Schedule 4 deal with disqualification;

  • Clause 9 deals with the reporting of suspected offences;

  • Clause 10 deals with the restriction on use of answers obtained under compulsion;

  • Clause 11 deals with deceased insolvents;

  • Clause 12 deals with the interest on sums held to the credit of bankrupts' estates in the Insolvency Services Account;

  • Clause 13 deals with the model law on cross-border insolvency.

COMMENTARY ON CLAUSES

Clause 1: Moratorium where directors propose voluntary arrangement

15. This Clause introduces Schedule 1 to the Bill, which makes the option of applying for a short moratorium available to an eligible company where its directors intend to put a proposal to the company's creditors for a company voluntary arrangement.

Clause 2: Company voluntary arrangements

16. This Clause introduces Schedule 2 to the Bill. The Schedule makes various amendments to the existing company voluntary arrangement procedure in Part I of the Insolvency Act 1986 and to the Building Societies Act 1986.

Clause 3: Individual voluntary arrangements

17. This Clause introduces Schedule 3 to the Bill which makes various amendments to the existing individual voluntary arrangement procedure in Part VIII of the Insolvency Act 1986.

Clause 4: Qualification or authorisation of nominees and supervisors

18. This Clause amends Part XIII of the Insolvency Act 1986, which deals with insolvency practitioners1 and their qualification.

19. Subsection (2) extends the meaning of "to act as an insolvency practitioner" so as to include a person who acts as a nominee in relation to a company or individual voluntary arrangement.

20. Subsection (3) inserts a new subsection (1A) to Section 389 of the Insolvency Act 1986. The amendment means that it will not be an offence to act as a nominee or supervisor whilst unauthorised to act as an insolvency practitioner provided that the individual is authorised to act as a nominee or a supervisor under subsection (4).

21. Subsection (4) introduces a new Section 389A to the Insolvency Act 1986, which provides for persons to act as nominees and supervisors if authorised to do so by a body recognised by the Secretary of State for that purpose and they satisfy the requirements for security and are not otherwise ineligible e.g. by reason of bankruptcy. The Secretary of State may recognise any body which appears to him to meet specified criteria aimed at ensuring that its members are fit and proper persons and properly trained to act as nominees and supervisors and have appropriate bonding in place. The Secretary of State may revoke an order recognising such a body if, in his view, it no longer meets the requirements for recognition.

1 Insolvency practitioner is a person who has the conduct of an insolvency procedure, e.g. a liquidator in a winding up of a company.

Clause 5: Disqualification Orders

22. A person who is subject to a disqualification order made under the Company Directors Disqualification Act 1986 may not without the leave of the court:

  • be a director of a company, or,

  • be a liquidator or administrator of a company, or

  • be a receiver or manager of a company's property, or

  • in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company.

for the period specified in the order. It is a criminal offence to contravene a disqualification order. Civil penalties may also be incurred in respect of such contravention.

23. Subsection (1) amends Section 1 of the Company Directors Disqualification Act 1986 by providing that an individual who is the subject of a disqualification order cannot obtain the leave of the court to act as an insolvency practitioner. This is to make it consistent with Section 390(4)(b) of the Insolvency Act 1986, which provides for an absolute ban an on individual acting as an insolvency practitioner if he is subject to a disqualification order.

24. Subsection (2) further amends Section 1 of the Company Directors Disqualification Act 1986 and provides that any period of disqualification begins 21 days after the date on which the disqualification order is made unless the court orders otherwise.

25. Subsection (3) defines the term "receiver" for the purposes of the Company Directors Disqualification Act 1986.

Clause 6: Disqualification undertakings

26. This Clause amends the Company Directors Disqualification Act 1986 by providing that directors whom the Secretary of State considers unfit may consent to a period of disqualification without the need for court involvement by giving a disqualification undertaking to the Secretary of State. The period of disqualification would be for a maximum of fifteen years and in the case of an undertaking under Section 7 of the Company Directors Disqualification Act, as amended by this Clause, for a minimum period of two years. New Section 8A of that Act which will be inserted by this clause provides that the disqualified person may subsequently apply to the court to vary the undertaking he has given.

Clause 7: Effect of Northern Irish disqualifications

27. Disqualification in Northern Ireland is governed by the Companies (Northern Ireland) Order 1989 which makes similar provision for disqualification in Northern Ireland to that made for Great Britain by the Company Directors Disqualification Act 1986.

28. Subsection (1) of the clause provides that a disqualification order made under Northern Irish legislation will have the same effects in Great Britain as one made under the Company Directors Disqualification Act 1986.

29. Subsection (2): Disqualification is a devolved matter and Northern Ireland may, or may not, wish to bring in legislation for disqualification undertakings. If it should make such provision this clause will enable effect to be given to the undertakings in Great Britain.

Clause 8: Amendments

30. This clause introduces Schedule 4 to the Bill, which makes minor and consequential amendments about disqualification, Part I making such amendments to the Company Directors Disqualification Act 1986 and Part II to other enactments.

Clause 9: Investigation and prosecution of malpractice

31. This clause amends Section 218 of the Insolvency Act 1986. The clause provides that, in a winding up by the court, the court may direct the liquidator to report apparent criminal misconduct by company officers or members of the company to the Secretary of State rather than to the Director of Public Prosecutions. The clause also requires a liquidator in a voluntary winding up to report suspicions of criminal misconduct by company officers or members to the Secretary of State rather than to the Director of Public Prosecutions. It also provides that the Secretary of State may exercise powers under the Companies Act 1985 when investigating the alleged misconduct. In the case of a winding up in Scotland, such misconduct will still be reported to the Lord Advocate.

Clause 10: Restriction on use of answers obtained under compulsion

32. This clause amends section 219 so that answers given by an individual under a power of compulsion (conferred by section 218(5)) cannot be used against him by the prosecution in subsequent criminal proceedings except in very limited circumstances.

Clause 11: Insolvent estates of deceased persons

33. This clause amends Section 421 of the Insolvency Act 1986 by reversing the effects of the Court of Appeal decision in the case of In re Palmer Deceased (A Debtor) [1994] Ch. 316. In March 1994 the Court of Appeal attributed the ordinary, rather than the technical, meaning to "the estate of a deceased person" used in the context of an order-making power in Section 421. The consequence of that is that the debtor's interest, on the day of his death, in his share in property held on a joint tenancy (usually the matrimonial home) does not become available to the trustee1 of a deceased insolvent. This clause provides that an order made under Section 421 may now provide that all property, ownership of which was vested in the deceased debtor immediately prior to his death (including his share in property held on a joint tenancy), be available to creditors in insolvency proceedings where the insolvency order was made after the debtor's death. Section 421 only applies to England and Wales.

1 The trustee is the person appointed to realise the assets of a deceased individual and distribute the proceeds to the creditors.

Clause 12: Bankruptcy: Interest on sums held on Insolvency Services Account

34. This clause enables the Lord Chancellor, with the concurrence of the Secretary of State, to make rules relating to the investment of bankruptcy estate funds held in the Insolvency Services Account and the payment of interest on those funds.

Clause 13: Model law on cross-border insolvency

35. This clause enables the Secretary of State, with the agreement of the Lord Chancellor, to give effect, with or without modifications, to the United Nations Commission on International Trade Law (UNCITRAL) model law on cross-border insolvency by secondary legislation. The clause provides that the secondary legislation may include amendments to section 426 of Insolvency Act 1986. This section provides for co-operation between courts exercising insolvency jurisdiction.

Clause 16: Extent

36. This clause provides that, apart from amendments made by the Bill to provisions which apply to Northern Ireland, the Bill does not apply to Northern Ireland.

Schedule 1: Moratorium where directors propose voluntary arrangement

37. Paragraphs 1, 2, 3 and 4: These paragraphs amend the Insolvency Act 1986 by the insertion of a new Section and Schedule (Section 1A and Schedule A1) to that Act so that the directors of eligible companies, if they so wish, can apply for a short moratorium for their company during which a proposal for a company voluntary arrangement can be put to its creditors.

38. Paragraph 1 Schedule A1: Interpretation. This defines some of the terms which are used in Schedule A1.

39. Paragraphs 2 to 4 Schedule A1: Eligible companies. These paragraphs set out which companies are eligible for a moratorium. To be eligible a company must satisfy two or more of the conditions for being a small company specified in Section 247(3) of the Companies Act 1985. Insurance companies as defined in the Insurance Companies Act 1982, certain banks (current and former), companies which are parties to market contracts or any of whose property is subject to a market charge (market contract and market charge being defined by Part VII of the Companies Act 1989) or companies which are "participants" (within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999) or any of whose property is subject to a collateral security charge1 are ineligible for a moratorium. Also ineligible are companies which are subject to formal insolvency proceedings or where in the previous 12 months a moratorium failed.

1 Banks and insurance companies have special insolvency regimes which are designed to protect depositors (banks) and policyholders (insurance companies). Companies covered by Part VII of the Companies Act 1989 or the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 are subject to modified insolvency regimes. The modifications are designed to ensure that the financial markets continue to function in the event of the insolvency of one of their participants.

40. Paragraph 5 Schedule A1 The Secretary of State may, by regulations, amend the eligibility criteria.

41. Paragraph 6 Schedule A1: Nominee's statement. This paragraph places a duty upon the directors seeking a moratorium to provide information to the nominee. They must give him a document setting out the terms of the proposed company voluntary arrangement and another containing details of the company's assets, debts and other liabilities, together with any other information the nominee may request. If the nominee considers that the proposal has a reasonable prospect of being approved and implemented, that sufficient funding is available and that meetings of the company and the creditors should be held, he must provide a statement to the directors to that effect. In reaching his view, the nominee may rely on the information provided by the directors unless he has reason to believe it may be inaccurate.

42. Paragraph 7 Schedule A1: Documents to be submitted to Court. To obtain a moratorium the directors must file certain documents at court. The list of documents to be filed may be amended by regulations.

43. Paragraph 8 Schedule A1: Duration of moratorium. This paragraph sets out the duration of a moratorium. It provides that a moratorium comes into force when the documents required to be submitted to the court are filed.

44. The maximum initial moratorium period is 28 days. This period is capable of extension or reduction by order of the Secretary of State. A meeting of the company and creditors held within the initial period may decide to extend the period of the moratorium by up to a further two months (see Paragraph 30 Schedule A1). The Secretary of State may by order increase or decrease that two month period.

45. The moratorium may be brought to an end by a decision of the meetings of creditors and company to approve a company voluntary arrangement. Alternatively, it may be ended:-

  • by a decision of the court;

  • by the withdrawal by the nominee of his consent to act;

  • by a decision of the meetings of creditors and company;

  • on the expiry of the initial moratorium period of 28 days if both the first meetings of the company and creditors have not taken place; or

  • if there is no decision by the meetings to extend it.

46. Paragraph 9 Schedule A1: Notification of beginning of moratorium. This places a duty on the directors of the company to notify the nominee that a moratorium has come into force.

47. Paragraphs 10 to 11 Schedule A1: When a moratorium comes into force, and when it ends, the nominee must advertise that fact and also notify the registrar of companies and the company. In the case of a moratorium coming into force he must also notify any creditor who has petitioned for the winding up of the company and, where it ends, any creditor of whose claim he is aware.

48. Paragraph 12 Schedule A1: Effects on creditors, etc. This deals with the effects of a moratorium upon parties, other than the company, during the period that a moratorium is in force.

49. Save for an excepted petition1 to wind up a company no insolvency proceedings can be commenced against the company. Except with the leave of the court, no steps may be taken to enforce any security over the company's property or repossess any goods in the company's possession under any hire-purchase agreement2, nor can any other proceedings, execution or other legal process be commenced or continued or distraint be levied. No meeting of the company may be held or requisitioned without the consent of the nominee or the court.

50. Where a petition (other than an excepted petition) for the winding up of the company has been presented before the beginning of the moratorium, proceedings on the petition are stayed during the moratorium. Section 1273 of the Insolvency Act 1986 will not apply during the moratorium or in the 28 day period referred to in paragraph 35(5)(a) of Schedule A1. Where an excepted petition for the winding up of the company has been presented to the court before the beginning of a moratorium it can continue unaffected by the coming into force of the moratorium.

1 An excepted petition is a petition presented by the Secretary of State pursuant to Section 124A of the Insolvency Act 1986 on the grounds that it is in the public interest to wind up a company or pursuant to Section 72 (1)(b) of the Financial Services Act 1986 or Section 92(1)(b) of the Banking Act 1987 on the grounds that it is just and equitable that the company be wound up.

2 Hire-purchase agreement includes conditional sale, chattel leasing and retention of title agreements.

3 Section 127 Insolvency Act 1986 provides that any disposal of a company's property, and any transfer of shares, or alteration in the status of the company's members made after the presentation to the court of a winding-up petition is invalid unless the court orders otherwise. Because of the disapplication of section 127, disposals will be governed by the moratorium provisions instead of by that section.

51. Paragraph 13 Schedule A1: Security granted during moratorium. Security given over a company's assets during the moratorium will be unenforceable unless at the time it was granted there were reasonable grounds for believing it would benefit the company.

52. Paragraph 14 Schedule A1: When a moratorium is in force a company may not enter into a market contract or give a market charge as defined in Part VII of the Companies Act 1989 nor may it give a transfer order or a collateral security charge within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999.

53. Paragraph 15 Schedule A1: Company Invoices, etc. All invoices, orders and letters, on which the name of the company appears, must also state the name of the nominee and refer to the fact that a moratorium is in force. If this provision is breached the company and any officer of the company who, without reasonable excuse, authorises or permits the breach, commits an offence.

54. Paragraph 16 Schedule A1: Obtaining credit during moratorium. During the moratorium a company may not obtain credit to the value of £250 or more without first telling the person who is giving the credit that a moratorium is in force. Obtaining credit includes obtaining goods under a hire-purchase agreement and the case where goods are agreed to be sold under a conditional sale agreement. It also includes the receipt of payment in advance for the supply of goods or services. If this provision is breached the company and any officer of the company who knowingly and wilfully authorises or permits the breach commits an offence.

55. Paragraphs 17 and 18 Schedule A1: Disposals and payments. During the moratorium the company may only dispose of any of its property or make any payment of a debt which existed at the start of the moratorium if there are reasonable grounds for believing that the disposal or payment will benefit the company and it is approved by the moratorium committee1, or, if there is no such committee, by the nominee. There is nothing to stop a company, during a moratorium, selling its property in the ordinary course of its business e.g. a garage selling cars. If these provisions are breached, the company and any officer of the company who, without reasonable excuse, authorises or permits the breach commits an offence.

1 See paragraph 33 of Schedule A1.

56. Paragraphs 19 to 21 Schedule A1: Disposal of charged property, etc. These paragraphs permit the disposal, during the moratorium, by the company (by sale or otherwise) of charged property1 and any goods which are in the possession of the company under a hire-purchase agreement if the court or the holder of the security or owner concerned agrees. Provision is also made for how the property must be dealt with and how the sale proceeds are to be dealt with. If these provisions are breached the company and any officer of the company who, without reasonable excuse, authorises or permits the breach commits an offence.

1 Charged property means property on which a creditor has a specific claim (e.g. by way of a mortgage) in respect of money owed to him.

57. Paragraph 22 Schedule A1: Monitoring of company's activities. This paragraph imposes a duty on the nominee to monitor the company's affairs during the moratorium in order to form an opinion whether or not the proposed voluntary arrangement (or that arrangement with any modifications of which he has been notified) has a reasonable prospect of being approved and implemented and the company is likely to have sufficient funds to enable it to continue its business through the moratorium. The term "business" refers to that business which the company proposes to carry on during the moratorium. The nominee may seek further information from the directors for the purpose of forming his opinion.

58. Paragraph 23 Schedule A1: Withdrawal of consent to act. This paragraph provides that a nominee must withdraw his consent to act if:

  • he considers that the voluntary arrangement proposal (or, if he has received notice of modifications, the proposal as modified) no longer has a reasonable prospect of being approved or implemented; or

  • he considers that the company will not have sufficient funds to enable it to continue to carry on its business through the moratorium; or

  • he becomes aware that on the date of filing the company was not eligible for a moratorium; or

  • the directors do not provide him with necessary information which he requests.

59. The paragraph provides that the moratorium comes to an end if the nominee withdraws his consent to act. The paragraph further provides that a nominee may not withdraw his consent to act in other circumstances. Where the nominee does withdraw his consent he must give notice of that to various parties and failure to do so without reasonable excuse is an offence.

60. Paragraph 24 Schedule A1: Challenge of nominee's actions, etc. The court, on the application of any creditor, director or member of the company or any other person affected by the moratorium who is dissatisfied by any decision or act of the nominee, may confirm, reverse or modify that decision or act and give directions to the nominee or make any order it sees fit, either during or after the moratorium.

61. Paragraph 25 Schedule A1 sets out the course of action creditors may take if there are reasonable grounds for believing that the company has suffered a loss as a consequence of any act, omission or decision of the nominee, but the company does not propose to take any action. If the court concludes that the act of the nominee was not reasonable it may order the company to pursue any claim against the nominee or authorise a creditor to do so or to make any other order it sees fit.

62. Paragraph 26 Schedule A1: Replacement of nominee by court. This paragraph provides that in certain circumstances (for example, if it is impracticable or inappropriate for the nominee to continue) the court may direct that the nominee be replaced by another person with the necessary qualification.

63. Paragraphs 27 and 28 Schedule A1: Summoning of meetings/conduct of meetings. These paragraphs provide for the summoning, conduct and reporting to the court of the outcome of such meetings of the creditors and the company as the nominee calls. He may call meetings of the creditors and of the company whenever he thinks fit.

64. Paragraph 29 Schedule A1: Approval of voluntary arrangement. This paragraph provides that the meetings summoned under paragraph 27 of Schedule A1 shall decide whether or not to approve the proposed voluntary arrangement (with or without modifications). But such modifications may not, without the concurrence of the creditors concerned, affect the right of a secured creditor to enforce his security or the rights of preferential creditors (as defined in Section 386 of the Insolvency Act 1986) to be paid in priority to other debts.

65. Paragraphs 30 to 32 Schedule A1: Extension of Moratorium. These paragraphs permit the initial period of the moratorium to be extended for a maximum period of up to two months provided certain conditions are satisfied.

66. The Secretary of State may make an order increasing or reducing the period by which the moratorium period may be extended.

67. Paragraph 33 Schedule A1: Moratorium Committee. Where a moratorium is extended this paragraph makes provision for a moratorium committee to be set up to exercise functions conferred on it by the meetings held under paragraph 27 of Schedule A1 where those meetings have approved an estimate of the expenses to be incurred in carrying out the committee's functions.

68. Paragraph 34 Schedule A1: Effectiveness of decisions. This paragraph determines when decisions under paragraphs 29, 30 or 33 of Schedule A1 are to take effect. It also provides that in the case of a conflict, the decision of the creditors' meeting is to prevail subject to the right of any member to apply to court for an order that the decision of the company meeting should prevail instead.

69. Paragraph 35 Schedule A1: Effect of approval of voluntary arrangement. This paragraph provides that a decision approving a company voluntary arrangement binds all creditors of the company owed money at the start of the moratorium including unknown creditors1. If unknown creditors come to light after the voluntary arrangement has been completed they can claim the dividend they would have received from the company. If the voluntary arrangement ends prematurely then all creditors cease to be bound by the voluntary arrangement. It also, subject to certain restrictions, requires the court to dismiss any petition (other than an excepted petition) for the winding up of the company.

1 Unknown creditors means persons who were not served with notice of the meeting at which the company voluntary arrangement was approved but who would have been entitled to vote had they had notice of it.

70. Paragraph 36 Schedule A1: Challenge of decisions. This paragraph provides, by way of application to the court, for the decision approving a company voluntary arrangement to be challenged on the ground that it unfairly prejudices the interests of a specific person or that there has been some material irregularity in the conduct of a meeting held under paragraph 27 of Schedule A1. Unknown creditors who come to light after the voluntary arrangement has been completed can apply to the court on grounds of unfair prejudice. On such an application the court may, for example, revoke or suspend the decision approving the voluntary arrangement or direct that new meetings be summoned to consider any revised proposal.

71. Paragraph 37 Schedule A1: Implementation of voluntary arrangements. This paragraph provides for the implementation of an agreed company voluntary arrangement, and for the person who is carrying out the functions of the nominee to become the supervisor of the voluntary arrangement. It also enables people who are dissatisfied with any action of the supervisor to apply to the court and sets out what the court can do in such circumstances. It also enables the supervisor to apply to court for directions or petition for the winding up of the company or an administration order1 and enables the court to fill any vacancy in the office of supervisor.

1 See Part II of the Insolvency Act 1986

72. Paragraph 38 Schedule A1: Challenge of directors' actions. This paragraph provides that any creditor or member of the company can apply to the court if he considers that the company's affairs have been or are being managed in a way which is unfairly prejudicial to the interests of creditors or members or that an actual or proposed act or omission of the directors is or would be so prejudicial. The paragraph only applies in relation to acts or omissions of the directors during the moratorium. On such an application the court may, for example, make an order to regulate the management by the directors of the company's affairs or an order to bring the moratorium to an end.

73. Paragraph 39 Schedule A1: Offences. This paragraph provides that any person who was an officer of the company who did certain acts in the 12 months prior to the start of the moratorium is to be treated as having committed an offence, e.g. if the officer has fraudulently removed company property worth £500 or more, or destroys or falsifies the company's records in relation to its property in that period. Any person who is an officer of the company during the moratorium who does the same things also commits an offence. The paragraph provides defences which may be raised in relation to the offences.

74. Paragraph 40 Schedule A1 This paragraph provides that it is an offence for an officer of the company to seek to obtain a moratorium, or an extension of it, by making a false representation or fraudulently doing, or failing to do, anything.

75. Paragraph 41 Schedule A1: Void provisions in floating charge documents. This paragraph provides that any provision in a floating charge is invalid if the charge is to crystallise1 on the obtaining of, or any action to obtain, a moratorium.

1 A floating charge is a charge over the assets for the time being of a company referred to in the mortgage or other document creating the charge. It only affects those assets under specific circumstances set out in that document, when it crystallises, that is, becomes a fixed charge over the actual assets owned by the company at that time which fall into the class (es) covered by the charge.

76. The remaining paragraphs 5 to 12 of Schedule 1 make consequential amendments to various parts of the Insolvency Act 1986. For example the amendments to Section 233 will not permit suppliers of gas, water and electricity to require a nominee to pay outstanding debts for supply as a condition of supply during the moratorium. The amendment to Section 387 provides that the relevant date for determining preferential claims is the date on which the moratorium comes into force. A new Section 417A is added (order - making power to increase or reduce monetary sums specified in Schedule A1) to take account of the addition of the new company voluntary arrangement moratorium.

 
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Prepared: 4 February 2000