Getting to grips with debt

Government in both Edinburgh and London has been busy amending the law on individuals and corporate entities in financial difficulties.  The remaining provisions of the Insolvency Act 2000 came into force on 1 January, 2003.  The Enterprise Act 2002 received Royal Assent in November 2002, and subsidiary legislation is expected later this year to give effect to its corporate insolvency reforms. The Debt Arrangement and Attachment (Scotland) Act 2002 was passed by the Scottish Parliament in November and, again, secondary legislation is awaited to give effect to its reforms.  Meanwhile, personal insolvency reform for England and Wales will probably come into force in early 2004. We await a view from the Scottish Executive on whether it will adopt similar changes.

Company Voluntary Arrangements

The final parts of the Insolvency Act 2000 provide for a moratorium procedure for small companies.  This will prevent any creditor enforcing any rights to require payment of a debt.  The moratorium begins on filing a proposal with the Court by the company’s directors and lasts until the arrangement is approved by the creditors.  The moratorium also restricts the company’s ability to obtain credit and dispose of property.

The provisions also make several technical amendments to CVA procedures, including a new requirement for the CVA supervisor to report on its termination and not simply on completion of the arrangement.

Corporate Insolvency

The key reforms to corporate insolvency in the Enterprise Act 2002 are:

1. The Crown’s preferential right to recover debts due to Inland Revenue, Customs & Excise and Social Security in personal and corporate insolvency is removed.  The other categories of preferential debts remain unchanged.  In corporate insolvency this abolition may have simply enhanced the return to floating charge creditors.  The Act therefore provides for an (as yet unspecified) amount of the floating charge proceeds to be made available to ordinary creditors;
2. Floating Charges granted after the effective date (which, though not yet stipulated, the Government has indicated will not be retrospective) will entitle the holder to appoint an Administrator but not an Administrative Receiver.  Floating charges granted before the effective date will continue to entitle the holder to appoint an Administrative Receiver.  In addition, there are certain exceptions, for example - major lending (in excess of £50m), PFI/PPP and other utility projects, and lending to Registered Social Landlords;
3. The procedure for appointing an Administrator is streamlined.  An application to Court will not be necessary.

The reforms raise interesting issues such as the effect on banks’ credit analysis and security requirements particularly as it will remain possible to appoint a Receiver pursuant to a limited assets floating charge.  The party seeking an Administrator’s appointment must sign a statutory declaration containing onerous requirements which may give problems to third parties.  There is no provision for a super preference for administration funding and this, together with strengthened rights for creditors to question the actions of insolvency practitioners, may lead to some interesting problems.

The Act restates the purpose of Administration as saving companies rather than businesses and sets a target of 12 months to complete administrations whilst also providing that Administrators must not do anything which harms the interests of creditors as a whole.

Personal Financial Difficulties

The Debt Arrangement and Attachment (Scotland) Act 2002 intends to provide a structure for debt repayment by private individuals in situations where the debtor is likely to be able to pay all of his creditors in full.  An agreed payment programme to settle debts is the central feature of the Debt Arrangement Scheme.  The other is a moratorium on enforcement action by all unsecured creditors once a Debt Payment Programme (“DPP”) has been approved by creditors and by a new Civil Enforcement Commission.  The DPP restricts the debtor from obtaining new credit.  A debtor proposing a DPP must first obtain advice from a Money Advisor on the proposals, and once approved, an approved Payments Distributor will receive payments on behalf of all creditors and distribute them in accordance with the DPP.  The debtor may require deductions from his wages for payment into the DPP and a DPP may generally run from three to five years.  It remains to be seen whether a DPP will be more attractive to debtors than bankruptcy (particularly if the Scottish Executive follows the English legislation and reduces the period of bankruptcy to twelve months) or whether a DPP will be sufficiently attractive to creditors without an earnings order.

The Enterprise Act reduces the period of bankruptcy in England and Wales to 12 months (or less in certain circumstances) instead of three years.  However, the period can be extended in certain circumstances.  In addition, there are provisions for a bankrupt’s property to revert to his estate unless it has been sold by the Trustee within a period of three years and low value property (not yet defined) will be exempted from sale.  Finally, the new provisions introduce Bankruptcy Restriction Orders which will operate in a similar fashion to Directors’ Disqualification Orders.

All in all, insolvency practitioners and those advising them have a lot of new legislation to digest during 2003.

Alistair Burrow, Tods Murray