Revisions to UK Insolvency Procedures

The Government has a stated aim of encouraging enterprise. There will, however, always be business failure.

Merely encouraging enterprise without an overhaul of insolvency procedures to provide a framework to stimulate early action to improve the chances of rescuing failing companies, and to encourage failed entrepreneurs to try again, is insufficient. Consequently, there have been recent significant developments in statutory insolvency procedures.

INSOLVENCY ACT 2000

The first changes were made by the Insolvency Act 2000. The parts of that Act that amend the legislative framework for insolvency procedures came into force in England, Wales and Scotland on 1 January 2003. The Act is likely to come into force in Northern Ireland later this year.

In summary, changes made are to two insolvency procedures:

Company Voluntary Arrangement (CVA)

A CVA is a binding agreement between a company and its creditors. It usually involves creditors receiving less than the total amount of their debt, and/or payment to them being delayed. The procedure was introduced by the Insolvency Act 1986, but the absence of a moratorium in the period between initiating the procedure and the acceptance of binding proposals at meetings of creditors and the company negated its effectiveness. The Insolvency Act 2000 introduces a new CVA procedure that includes a moratorium.

This new CVA moratorium procedure is only available to companies that satisfy two or more of the requirements for being a small company, as set out in the Companies Act 1985.

Various types of small company are, however, specifically excluded from the procedure, including those involved in market contracts and public private partnerships.

Under the new procedure, a 28 day moratorium automatically comes into effect once proposals for a CVA, a report on those proposals by an insolvency practitioner (who acts as nominee), and various other documents are filed in court.

The main effects of the moratorium are that:

• no other insolvency procedures can be commenced, and, except with the leave of the Court:
• a landlord may not exercise any right of forfeiture
• no other steps may be taken to enforce any security over the company's property, or to repossess goods in the company's possession, and
• no other legal proceedings maybe commenced or continued.

During the moratorium, meetings of the members and creditors are convened to consider the CVA proposals. The meeting will either reject, or accept, with or without modifications, the CVA proposals.

The Insolvency Act 2000 also introduces changes that extend the effect of all approved CVAs, irrespective of whether they are approved under the new moratorium procedure or under the Insolvency Act 1986 procedure.

A CVA will now bind not only every creditor who is entitled to vote at the meeting, but also every creditor who would have been entitled to vote at the meeting if they had been given notice of it. Thus unknown creditors are bound by the arrangement.

Individual Voluntary Arrangement (IVA)

An IVA is the personal insolvency equivalent of a CVA. In contrast to CVAs, the Insolvency Act 1986 provided a moratorium for those seeking an IVA.

However, the Insolvency Act 2000 introduces a simplified procedure for non-traders (i.e. consumer debt cases). This recognises that in the vast majority of consumer debt cases a moratorium to protect the debtor from action by creditors is unnecessary

Consequently, in a consumer debt IVA under the new procedure all that is required is the filing in court of the debtor's proposals, and a report on those proposals by an insolvency practitioner who acts as nominee.

The nominee then convenes a meeting of creditors to consider the IVA proposals.

The existing IVA procedure involving a moratorium through the court making an "interim order" is, however, still available in consumer debt IVAs if it is considered appropriate. This may include, for example, where a creditor has threatened, or commenced, bankruptcy proceedings.

As with CVAs, the effect of an approved IVA has been extended, irrespective of whether they are approved under the new simplified procedure or under the Insolvency Act 1986 moratorium procedure.

IVAs will now bind not only every person who is entitled to vote at the meeting held to consider the debtor's proposals, but also every person who would have been entitled to vote at the meeting if they had been given notice of it. Thus unknown creditors are bound by the arrangement.