Restriction on use of answers obtained under compulsion

11.     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 ECHR 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 Act therefore amends section 219 to make it compatible with the Convention.

Property of deceased insolvents

12.     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 insolvent 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 deceased insolvent'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 Act therefore provides, by way of new Section 421A to the Insolvency Act, that the value of any interest in jointly-owned property, lost to the deceased insolvent's estate by the operation of the survivorship rules, is to be recoverable for the benefit of that estate and, therefore, for the creditors of the deceased insolvent.

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

13.     For many years it has been possible for funds held in the Insolvency Services Account for a company in liquidation to be invested in government securities for the benefit of the estate. There was also a facility for funds in excess of £2,000 to be placed in 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 Act, therefore, gives the Secretary of State the power to make rules or regulations which will remove that anomaly.

Model law on cross-border insolvency

14.     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 Act will enable the Secretary of State in England and Wales (with the agreement of the Lord Chancellor) and in Scotland (with the consent of the Scottish Ministers) to give effect in our law to the model law, with or without modifications.

THE ACT

15.     The matters dealt with in the Act may be summarised as follows:-

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

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

• Sections 5 - 8 and Schedule 4 deal with disqualification of company directors;

• Section 9 prohibits the exercise of the right of forfeiture by peaceable re-entry during the administration procedure, except with leave of court;

• * Section 10 deals with the reporting of suspected offences;

• Section 11 deals with the restriction on use of answers obtained under compulsion;

• Section 12 deals with insolvent estates of deceased persons;

• Section 13 deals with the interest on sums held to the credit of bankrupts' estates in the Insolvency Services Account;

• Section 14 deals with the model law on cross-border insolvency; and

• Section 15 deals with the rights of the Financial Services Authority to make certain applications to the court and makes repeals.

COMMENTARY ON SECTIONS

Section 1: Moratorium where directors propose voluntary arrangement

16.     This Section introduces Schedule 1 to the Act, 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 and its creditors for a company voluntary arrangement.

Section 2: Company voluntary arrangements

17.     This Section introduces Schedule 2 to the Act. 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.

Section 3: Individual voluntary arrangements

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

Section 4: Qualification or authorisation of nominees and supervisors

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

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

21.      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).

22.     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 only recognise a body which appears to him to meet specified criteria ensuring that its members are fit and proper persons and properly trained to act as nominees and supervisors and where such persons 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.

Section 5: Disqualification Orders

23.     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 liabilities may also be incurred in respect of such contravention.

24.     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.

25.     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.

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

Section 6: Disqualification undertakings

27.     This Section 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 1986, as amended by this Section, for a minimum period of two years. New Section 8A of that Act which will be inserted by this section provides that the disqualified person may subsequently apply to the court to vary the undertaking he has given.

Section 7: Effect of Northern Irish disqualifications

28.     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.

29.     Subsection (1) of the section 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.

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

Section 8: Amendments

31.     This section introduces Schedule 4 to the Act, 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.

Section 9: Administration Orders

32.     This section amends Sections 10 and 11 of the Insolvency Act 1986. The section provides that a landlord or other person to whom rent is payable may not exercise the right of forfeiture of the lease of a company's premises by means of peaceable re-entry where a company has applied for, or is subject to, an administration order, except with leave of court.

Section 10: Investigation and prosecution of malpractice

33.     This section amends Section 218 of the Insolvency Act 1986. The section provides that, in a winding up by the court, the court may direct the liquidator to report apparent criminal misconduct by past or present company officers or members of the company to the Secretary of State rather than to the Director of Public Prosecutions. The section also requires a liquidator in a voluntary winding up to report suspicions of criminal misconduct by company officers past or present 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.

Section 11: Restriction on use of answers obtained under compulsion

34.     This section amends Section 219 of the Insolvency Act 1986 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.

Section 12: Insolvent estates of deceased persons

35.     This section inserts a new Section 421A into the Insolvency Act 1986 by addressing 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 to distribute among the creditors of a deceased insolvent. This section allows the trustee of a deceased insolvent, if certain conditions are met, to apply to the court to recover the value of the deceased insolvent's former interest in a jointly-owned property from the survivor for the benefit of the estate. The purpose of an order under section 421A is to cover debts and other liabilities of the insolvent estate. Section 421A applies only in 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.

Section 13: Bankruptcy: Interest on sums held in Insolvency Services Account

36.     This section 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.

Section 14: Model law on cross-border insolvency

37.     In England and Wales this section enables the Secretary of State (with the agreement of the Lord Chancellor) and in Scotland (with the agreement of the Scottish Ministers) to give effect, with or without modifications, to the UNCITRAL model law on cross-border insolvency by secondary legislation. The section 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.

Section 15: Amendments of Financial Services and Markets Act 2000 and repeals

38.     The Financial Services Authority is given the right to make an application under sections 6 or 7 of the Insolvency Act 1986 or its Northern Ireland equivalents (Articles 19 or 20 of the Insolvency (Northern Ireland) Order 1989). This section also makes repeals.

Section 17: Extent

39.     This section provides that, apart from amendments made by the Act to provisions which apply to Northern Ireland, the Act does not apply to Northern Ireland.

Schedule 1: Moratorium where directors propose voluntary arrangement

40.     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 obtain a short moratorium for their company during which a proposal for a company voluntary arrangement can be put to its creditors.

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

42.     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, money market contracts or a related contract or any of whose property is subject to a market charge, money market charge or system-charge (market contract and market charge being defined by Part VII of the Companies Act 1989 and money market contract, related contract or money market charge being defined by the Financial Markets and Insolvency (Money Market) Regulations 1995 and system-charge being defined by the Financial Markets and Insolvency Regulations 1996) 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 charge (within the meaning of the Financial Markets and Insolvency (Settlement Finality Regulations 1999) are ineligible for a moratorium¹. 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 or the Financial Markets and Insolvency (Money Market) Regulations 1995 or the Financial Markets and Insolvency Regulations 1996 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.

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

44.     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.

45.     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.

46.     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.

47.     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 32 Schedule A1). The Secretary of State may by order increase or decrease that two month period.

48.     The moratorium may be brought to an end by a decision of the meetings of creditors and the company to approve a company voluntary arrangement having effect under paragraph 36. 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 the nominee has failed to summon either of the first meetings of the company or creditors;

• if either of those meetings has not met when summoned to be held, unless the moratorium is extended under paragraph 32; or

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

49.     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.

50.     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.

51.     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.

52.     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, in each case, 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, nor can a landlord forfeit the lease of a company's premises by means of peaceable re-entry. No meeting of the company may be held or requisitioned without the consent of the nominee or the court.

53.     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 127 ³ of the Insolvency Act 1986 will not apply during the moratorium or in the 28 day period referred to in paragraph 37(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.

54.     Paragraph 13 Schedule A1. The moratorium, whilst in force, prevents a floating charge from crystallising, or restrictions being imposed on the disposal of any of the company's property.

55.     Paragraph 14 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.

56.     Paragraph 15 Schedule A1: Paragraphs 16 to 23 apply in relation to a company which is subject to a moratorium. The fact that a company enters into a transaction in contravention of paragraphs 16 to 22 does not make that transaction void or unenforceable against the company.

57.     Paragraph 16 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.

58.     Paragraph 17 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.

59.     Paragraphs 18 and 19 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 the company makes a disposal or payment contrary to these provisions, otherwise than in pursuance of an order of court, the company and any officer of the company who, without reasonable excuse, authorises or permits the contravention commits an offence.

1. See paragraph 35 of Schedule A1.

60.     Paragraphs 20 to 22 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.

61.     Paragraph 23 Schedule A1: When a moratorium is in force, a company commits an offence if it enters into a market contract, a money market contract or a related contract grants a market charge, a money market charge or system-charge¹, gives a transfer order or provides any collateral security. Any officer of the company who, without reasonable excuse, authorises or permits the company to enter into such a transaction also commits an offence. However the fact that a company enters into any of those transactions does not make the transaction void or have the effect of making any such transaction unenforceable by or against the company.

1     See paragraph 1 of Schedule A1 to the Act for the definition of these terms