Protecting the debtor

Anne McGrath says insolvency law reform is still high up on the Government's agenda.

The Queen's Speech has come and gone with n'er a royal whisper of the proposed reform of insolvency law, which Secretary of State for Trade and Peter Mandleson have been strongly pushing for.

But the DTI has confirmed that it is still very much to the fore and will appear as soon as legislative time-tabling allows. A DTI spokesman said they were optimistic that it would appear during the legislative session.

Details have yet to be released, and as we all know that is where the devil resides, on a moratorium attached to a Company Voluntary Arrangement (CVA).

The background note on the Insolvency bill states: “The proposed legislation would include the introduction of a moratorium for small companies for an initial period of 28 days, with an extension to three months with the consent of all creditors…the moratorium would be subject to monitoring by a licensed insolvency practitioner, so as to protect the position of creditors and prevent abuse from unscrupulous traders.”

Proposals to reform insolvency laws first surfaced in 1993 under the then Conservative government. After a lengthy consultation, reform fell off the agenda – or, as some claim, was effectively kicked off by the powerful boot of the banks.

This time around, the banks appear to be more relaxed about the introduction of a moratorium attached to CVAs. Possibly, as Julian Maples, insolvency partner at Theodore Goddard, says because the threat has long been waiting in the wings and they have had time in the interim to put in place their own procedures to side-step the need for moratoriums.

Richard Baines, a licensed insolvency practitioner at Osborne Clarke, says that while the CVA with a moratorium would not be a universal panacea, he welcomes it as another procedural tool in the armoury of business rescue, especially for the use of smaller companies. But he emphasises that this depends on exactly what is offered. Where companies have left it too long, a moratorium attached to a CVA will give valuable breathing space and protection against any dissident creditor, while a voluntary arrangement proposal is formed, says Baines.

He feels the Insolvency Act 1996 has failed in its intention to create effective rescue procedures. CVAs are infrequently used alone, but rather more usually within the context of an administration. Administrations will give a complete moratorium without time limits, but at the moment there is considerable formality in obtaining one and despite some recent changes to the rules, they remain very expensive. A CVA with a moratorium which can be filed immediately, will be a cheap and effective way of helping smaller companies.

It is unclear whether secured creditors will be included. Some, like Paul Saffron, insolvency solicitor with Jay Benning & Peltz, consider it necessary for the new procedure to enable companies to protect themselves against debenture holders. If limited to unsecured creditors, it would be a waste of time. Secured credit could be enforced at any time, preventing a CVA from getting off the ground.

Tony Bugg, insolvency practitioner at Linklaters, says he would only welcome a moratorium for small companies if it provided a level playing field for arrangements, with ordinary creditors to be negotiated without affecting the rights of secured creditors. Bugg believes we cannot allow the balance to shift any further in favour of the debtor. “Our system is creditor driven and there are good policy reasons for this,” he says, he would be strongly opposed to any measure which introduced the American Chapter 11 in through the back door.

Many insolvency solicitors feel the proposed reform should not be restricted to small companies. Theodore Goddard's Maples says that in practice it will restrict itself. Even a limited moratorium will still fall short of the protection offered by an administration, he suggests, and will not offer the security required by companies of any size. Nicholas Frome, of Lovell White Durrant, disagrees. He says that although it may initially be tested on small companies, if it flourishes it should, and will (by later statutory instrument) be available to all companies.

A further concern, shared by Brett Israel, insolvency solicitor at Bird & Bird, is how the moratorium will be supervised. The general feeling is that the directors of failing companies may not be the best people to control the CVA. Whether management is taken over by insolvency practitioners, or whether they merely police the process from the sidelines, remains to be seen.