Northern Ireland Assembly Flax Flower Logo

INSOLVENCY BILL

EXPLANATORY AND FINANCIAL MEMORANDUM

INTRODUCTION
  1. This Explanatory and Financial Memorandum relates to the Insolvency Bill. It has been prepared by the Department of Enterprise, Trade and Investment ("the Department") in order to assist the reader in understanding the Bill and to help inform debate on it. It does not form part of the Bill and has not been endorsed by the Assembly.
  2. The Memorandum needs to be read in conjunction with the Bill. It does not give, and is 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.

    3. BACKGROUND AND POLICY OBJECTIVES

    Moratorium in company voluntary arrangements
  3. Company rescues can be made more difficult or can be thwarted because of the absence of provision in the Insolvency (Northern Ireland) Order 1989 for obtaining a short moratorium¹ in the company voluntary arrangement² procedure whilst a proposal for a voluntary arrangement is being drawn up and considered.

    4. 1. Moratorium is a temporary stay on certain legal acts and processes from being performed or continued.

    2. Company Voluntary Arrangements were introduced by the Insolvency (Northern Ireland) Order 1989 Part II and similarly 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. 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.
  5. In the last three years an average of 6 company voluntary arrangements have been agreed annually.

Right of peaceable re-entry under administration order and individual voluntary arrangement procedure
  1. At present a landlord or other person entitled to rent may thwart a rescue attempt by exercising the right of peaceable re-entry in order to bring a tenant's lease to an end. The Bill will prohibit that right, except with leave of the High Court, whilst a company is subject to an administration order procedure and whilst an individual is subject to an individual voluntary arrangement procedure.

Reports by liquidators of criminal misconduct by company officers or members
  1. In certain circumstances, Article 182 of the Insolvency (Northern Ireland) Order 1989 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 Department for investigation. The Bill requires liquidators to make such reports directly to the Department rather than to the Director of Public Prosecutions.

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

Restriction on use of answers obtained under compulsion

  1. Article 183 of the Insolvency (Northern Ireland) Order 1989 allows answers obtained under powers of compulsion, derived from the Companies (Northern Ireland) Order 1986, 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 (ECHR). The Bill therefore amends Article 183 to make it compatible with the convention.
Property of deceased insolvents
  1. The order-making power contained in Article 365 of the Insolvency (Northern Ireland) Order 1989 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 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 Bill therefore provides, by means of a new Article 365A to the Insolvency (Northern Ireland) Order 1989, 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.

Model law on cross-border insolvency

  1. The United Nations Commission on International Trade Law (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 Department with the agreement of the Lord Chancellor to give effect in our law to the model law, with or without modifications.

PURPOSE OF THE BILL AND SUMMARY OF ITS MAIN PROVISIONS
  • The primary purpose of the Bill is to make available to small companies attempting to enter a voluntary arrangement with their creditors the option of a short moratorium during which they will be protected from legal proceedings, including proceedings for winding-up. This will provide such companies with the same enhanced opportunity to put together a rescue package as has been made available in GB through the enactment of the Insolvency Act 2000 and which under current law is also available to individuals. Small companies are defined by Article 255(3) of the Companies (Northern Ireland) Order 1986 as companies satisfying two out of three criteria, namely having a turnover not exceeding £2.8 million, having a balance sheet total not exceeding £1.4 million, and having 50 or less employees.
  • The Bill will include a range of other measures. It will: -

    • CONSULTATION
    1. A consultation document outlining in detail the proposal for a new Insolvency Act to amend current insolvency law was circulated to a wide spectrum of interests, including MPs, Assembly Members, representatives of interested professions and business associations and the various equality interest groups. None of the replies received were unfavourable.

      2. OPTIONS CONSIDERED
    2. Two options have been identified: -

      3. Option 1: Do nothing.

      Small companies wishing to obtain a breathing space to propose a voluntary arrangement will continue to have to attempt to procure a voluntary arrangement under the current unsatisfactory law with the attendant risk of failure through creditor intervention, or will have to undertake the more complex and costly procedure of applying to the Court for an administration order.

      Creditors in deceased insolvencies will be denied access to the value of the deceased insolvent's interest in any jointly owned property.

      Option 2: Legislate to introduce the moratorium procedure, thereby increasing the likelihood of small companies in financial difficulties being saved, and legislate to provide for the value of interests in jointly owned property belonging to deceased insolvents to be recoverable for the benefit of their creditors. There is no alternative to address the problems other than through legislation.

      Unless creditors' hands are stayed through a statutory moratorium, there will always be a risk right up until such date as a company voluntary arrangement proposal is formally approved, that some of them will step in to exercise their rights against the assets of the company thereby jeopardising the prospects of the proposal succeeding. Without statutory provision existing case law denying interests in jointly owned properties to the estates of deceased insolvents will continue to apply.

      OVERVIEW
    3. The Bill has 14 clauses and 4 Schedules

    COMMENTARY ON CLAUSES

    Clause 1: Moratorium where directors propose voluntary arrangement

    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 and its creditors for a company voluntary arrangement.

    Clause 2: Company voluntary arrangements

    This clause introduces Schedule 2 to the Bill. The Schedule makes various amendments to the existing company voluntary arrangement procedure in Part II of the Insolvency (Northern Ireland) Order 1989 and to the Building Societies Act 1986.

    Clause 3: Individual voluntary arrangements

    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 (Northern Ireland) Order1989.

    Clause 4: Qualification or authorisation of nominees and supervisors

    This clause amends Article 3 of the Insolvency (Northern Ireland) Order 1989, which deals with acting as an insolvency practitioner1. It also inserts a new Article 348A dealing with arrangements for authorisation of nominees and supervisors.

    Subsection (1) 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.

    Subsection (2) inserts a new paragraph (1A) in Article 348 of the Insolvency (Northern Ireland) Order 1989. 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 paragraph (1) of Article 348(A).

    Subsection (3) introduces a new Article 348A to the Insolvency (Northern Ireland) Order 1989, which provides for persons to act as nominees and supervisors if authorised to do so by a body recognised by the Department for that purpose and they satisfy the requirements for security and are not otherwise ineligible e.g. by reason of bankruptcy. The Department may only recognise a body which appears to it to meet specified criteria ensuring that its members are fit and proper persons and properly trained to act as nominees and supervisors and there must be appropriate bonding in place.

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

    The Department may revoke an order recognising such a body if, in the Department's view, the body no longer meets the requirements for recognition.

    Clause 5: Administration orders

    This clause amends Articles 23 and 24 of the Insolvency (Northern Ireland) Order 1989. The clause 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 the High Court.

    Clause 6: Investigation and prosecution of malpractice

    This clause amends Article 182 of the Insolvency (Northern Ireland) Order 1989. The clause provides that, in a winding up by the High 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 Department 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 past or present or members to the Department rather than to the Director of Public Prosecutions. It also provides that the Department may exercise powers under the Companies (Northern Ireland) Order 1986 when investigating the alleged misconduct.

    Clause 7: Restriction on use of answers obtained under compulsion

    This clause amends Article 183 of the Insolvency (Northern Ireland) Order 1989 so that answers given by an individual under a power of compulsion (conferred by Article 182(4)) cannot be used against him by the prosecution in subsequent criminal proceedings except in very limited circumstances.

    Clause 8: Insolvent estates of deceased persons

    This clause inserts a new Article 365A into the Insolvency (Northern Ireland) Order 1989 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 (in Northern Ireland, Article 365). 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 clause allows the trustee of a deceased insolvent, if certain conditions are met, to apply to the High 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 Article 365A is to cover debts and other liabilities of the insolvent estate.

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

    Clause 9: Model law on cross-border insolvency

    This clause enables the Department, with the agreement of the Lord Chancellor, to give effect, with or without modification, to the UNCITRAL model law on cross-border insolvency by secondary legislation.

    Clause 10: Interpretation

    This clause sets out the meaning of certain terms used in the Bill. Subsection (2) deals with the legislative status of functions conferred on the Financial Services Authority.

    Clause 11: Orders

    This clause empowers the Department to make subordinate legislation to deal with matters arising as a result of the introduction and implementation of provisions of the Bill.

    Clause 12: Repeals

    This clause introduces Schedule 4 to the Bill which lists repeals to the Insolvency (Northern Ireland) Order 1989 and the Companies (No. 2)(Northern Ireland) Order 1990.

    Clause 13: Commencement

    This clause provides for the Department to make an order (or orders) bringing the provisions of the Bill into operation except for this clause and clauses 9, 10(1), 11 and 14 which will come into operation on Royal Assent.

    Schedule 1: Moratorium where directors propose voluntary arrangement

    Paragraphs 1, 3, 4 and 5: These paragraphs amend the Insolvency (Northern Ireland) Order 1989 by the insertion of a new Article and Schedule (Article 14A and Schedule A1) to that Order 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.

    Paragraph 2: This paragraph adds regulations made under paragraph 5 of Schedule A1 to those regulations which can be made under the Insolvency (Northern Ireland) Order 1989 which must be laid and approved by the Assembly.

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

    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 Article 255(3) of the Companies (Northern Ireland) Order 1986. Companies carrying on a regulated activity of effecting or carrying out contracts of insurance which are not exempt from the general prohibition, within the meaning of section 19 of the Financial Services and Markets Act 2000, in respect of that activity, companies which have permission under Part 4 of that Act to accept deposits, companies which continue to have a liability in respect of a deposit held in accordance with the Banking Act 1979 or the Banking Act 1987, and companies which are parties to market contracts or any of whose property is subject to a market charge or system-charge (market contract and market charge being defined by Part V of the Companies (No. 2) (Northern Ireland) Order 1990) and system-charge being defined by the Financial Markets and Insolvency Regulations (Northern Ireland) 1996 or companies which are "participants" (within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999) or any equivalent which may be enacted for Northern Ireland in the future 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) or any equivalent which may be enacted for Northern Ireland in the future 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 V of the Companies (No. 2) (Northern Ireland) Order 1990 or the Financial Markets and Insolvency (Settlement Finality) Regulations or the Financial Markets and Insolvency Regulations (Northern Ireland) 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.

    Paragraph 5 Schedule A1: The Department may, by regulations, amend the eligibility criteria.

    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.

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

    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 High Court are filed.

    The maximum initial moratorium period is 28 days. This period is capable of extension or reduction by order of the Department. 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 31 Schedule A1). The Department may by order increase or decrease that two-month period.

    The moratorium may be brought to an end by a decision of the meetings of creditors and company to approve a company voluntary arrangement having effect under paragraph 35. Alternatively, it may be ended: -

    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.

    Paragraph 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 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.

    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.

    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 High 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 High Court.

    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. Article 1073 of the Insolvency (Northern Ireland) Order 1989 will not apply during the moratorium or in the 28 day period referred to in paragraph 36(5)(a) of Schedule A1. Where an excepted petition for the winding up of the company has been presented to the High 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 Department pursuant to Article 104A of the Insolvency (Northern Ireland) Order 1989 on the grounds that it is in the public interest to wind up a company or pursuant to Section 367 of the Financial Services and Markets Act 2000 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. Article 107 of the Insolvency (Northern Ireland) Order 1989 provides that any disposal of a company's property, and transfer of any shares, or alteration in the status of the company's members made after the presentation to the High Court of a winding-up petition is invalid unless the Court orders otherwise. Because of the disapplication of Article 107, disposals will be governed by the moratorium provisions instead of by that Article.

    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.

    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.

    Paragraph 15 Schedule A1: Effect on company. Paragraphs 16 to 22 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 21 does not make that transaction void or unenforceable against the company.

    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.

    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.

    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 34 of Schedule A1.

    Paragraphs 20 and 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 High 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 specific claim (e.g. by way of a mortgage) in respect of money owed to him.

    Paragraph 22 Schedule A1: Market contracts, etc. When a moratorium is in force a company commits an offence if it enters into a market contract, grants a 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.

    Paragraph 23 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 as to 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.

    Paragraph 24 Schedule A1: Withdrawal of consent to act. This paragraph provides that a nominee must withdraw his consent to act if:

    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.

    Paragraph 25 Schedule A1: Challenge of nominee's actions, etc. The High 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.

    Paragraph 26 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 High 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 make any other order it sees fit.

    Paragraph 27 Schedule A1: Replacement of nominee by High Court. This paragraph provides that in certain circumstances (for example, if it is impracticable or inappropriate for the nominee to continue to act) the High Court may direct that the nominee be replaced by another person with the necessary qualification.

    Paragraphs 28 and 29 Schedule A1: Summoning of meetings/conduct of meetings. These paragraphs provide for the summoning, conduct and reporting to the High 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 to be held within the period set out in paragraph 8(3).

    Paragraph 30 Schedule A1: Approval of voluntary arrangement. This paragraph provides that the meetings summoned under paragraph 28 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 Article 346 of the Insolvency (Northern Ireland) Order 1989) to be paid in priority to other debts.

    Paragraphs 31 to 33 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.

    The Department may make an order increasing or reducing the period by which the moratorium period may be extended.

    Paragraph 34 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 28 of Schedule A1 where those meetings have approved an estimate of the expenses to be incurred in carrying out the committee's functions.

    Paragraph 35 Schedule A1: Effectiveness of decisions. This paragraph determines when decisions under paragraphs 30, 31 or 34 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 the High Court for an order that the decision of the company meeting should prevail instead.

    Paragraph 36 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 amount 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 High Court to dismiss any petition (other than an excepted petition) for the winding up of the company.

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

    Paragraph 37 Schedule A1: Challenge of decisions. This paragraph provides, by way of application to the High 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 28 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.

    Paragraph 38 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 High Court and sets out what the Court can do in such circumstances. It also enables the supervisor to apply to the 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 (Northern Ireland) Order 1989.

    Paragraph 39 Schedule A1: Challenge of directors' actions. This paragraph provides that any creditor or member of the company can apply to the High 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. When making an order under this paragraph the Court is required to have regard to the need to safeguard the interests of persons who have dealt with the company in good faith and for value. In the event that the company subsequently enters administration or liquidation (on a petition presented before the moratorium) any such application under this paragraph is to be made instead by the administrator or liquidator (as the case may be).

    Paragraph 40 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 these offences. The paragraph further makes it an offence to knowingly take in pawn or pledge, or otherwise receive company property where to do so would lead to the person pawning, pledging or disposing of the property committing an offence, either during the period of a moratorium or during the 12 months after the day on which the pawning, pledging or disposal took place, should a moratorium be obtained within that time.

    Paragraph 41 Schedule A1. This paragraph provides that it is an offence for an officer of a 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.

    Paragraph 42 Schedule A1: Void provisions in floating charge documents. This paragraph provides that any provision in a floating charge is invalid if it provides for the obtaining of, or any action to obtain, a moratorium, to be an event causing the charge to crystallise1 or restrictions to be imposed on the disposal of property or a ground for the appointment of a receiver.

    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.

    Paragraph 43 Schedule A1: Functions of the Financial Services Authority. This paragraph gives the Financial Services Authority the right to participate in the moratorium procedure if the company is or has been regulated by the Authority.

    The remaining paragraphs 6 to 12 of Schedule 1 make consequential amendments to various parts of the Insolvency (Northern Ireland) Order 1989. For example the amendments to Article 197 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 Article 347 provides that the relevant date for determining preferential claims is the date on which the moratorium comes into force. A new Article 362(1) 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.

    Schedule 2: Company voluntary arrangements

    Part I - Amendments of the Insolvency Order

    This Schedule makes amendments to the provisions of the Insolvency (Northern Ireland) Order 1989 relating to company voluntary arrangements where there is no moratorium.

    Paragraph 3 of Schedule 2: The nominee must state in his report to the Court whether in his opinion the proposed company voluntary arrangement has a reasonable prospect of being approved and implemented.

    Paragraph 3 of Schedule 2: Amendments are made to the circumstances in which the Court may replace a nominee in line with the new moratorium procedure.

    Paragraph 5 of Schedule 2: A decision by the creditors' meeting to approve a proposed voluntary arrangement is to prevail where this conflicts with the decision by the meeting of the company, subject to the right of a member to challenge this on an application to the Court. Where such an application is made and the company is or has been regulated by the Financial Services Authority, the Authority is entitled to be heard on that application.

    Paragraphs 6 and 7 of Schedule 2: The company voluntary arrangement will bind all of the company's creditors including unknown creditors who are entitled to claim from the company the amounts they would have received if they come to light after the voluntary arrangement has been completed. Such creditors may also make an application to the Court on the ground that their interests are unfairly prejudiced by the voluntary arrangement that is approved.

    Paragraphs 8 and 12 of Schedule 2: It is an offence for an officer of a company to seek to obtain the approval of the members or creditors to a proposed voluntary arrangement by making a false representation or fraudulently doing, or failing to do, anything.

    Paragraph 10 of Schedule 2: The nominee or supervisor is required to report suspected offences to the Department. The Department is granted certain powers to investigate such suspected offences.

    There are also consequential amendments resulting from clause 4 (Qualification or authorisation of nominees and supervisors) and other minor amendments of a clarificatory nature.

    Part II - Amendments of Part II of Schedule 2 to the Insolvency Act 2000

    Paragraph 13 of Schedule 2: The Financial Services Authority will be able to exercise powers under the Insolvency Act 2000 to carry out investigations on reports of suspected offences from nominees or supervisors being referred to it.

    Schedule 3: Individual voluntary arrangements

    This Schedule makes amendments to the provisions of the Insolvency (Northern Ireland) Order 1989 relating to individual voluntary arrangements.

    Paragraph 2 of Schedule 3: Except with the leave of the High Court, a landlord or any other person to whom rent is payable may not effect peaceable re-entry to premises let to a debtor, and distress may not be levied whilst an interim order is in force. Similarly such persons may not effect peaceable re-entry (without leave) whilst an application for an interim order is pending and the Court may forbid the levying of distress in that period (paragraph 4 of Schedule 3). An example of levying distress is where a creditor seizes goods for money due.

    Paragraph 6 of Schedule 3: The nominee must state in his report to the Court whether he considers that the proposed individual voluntary arrangement has a reasonable prospect of being approved and implemented. Amendments are also made to the circumstances in which the Court may replace a nominee.

    Paragraphs 7 and 8 of Schedule 3: An individual may put a proposal for an individual voluntary arrangement to his creditors without first having to obtain an interim order.

    Paragraphs 10 and 11 of Schedule 3: The individual voluntary arrangement will bind all of the individual's creditors including unknown creditors who are entitled to claim from the individual the amounts they would have received if they come to light after the voluntary arrangement has been completed. They may also make an application to the Court on the ground that their interests are unfairly prejudiced by the voluntary arrangement that is approved.

    Paragraphs 12 and 15 of Schedule 3: It is an offence for an individual to seek to obtain the approval of an individual voluntary arrangement by making a false representation or fraudulently doing, or failing to do, anything.

    Paragraph 12 of Schedule 3: The nominee or supervisor is required to report suspected offences to the Department.

    Paragraph 14 of Schedule 3: The amendment to Article 347 provides the relevant date for determining claims where no interim order is obtained is the date on which the voluntary arrangement takes effect. There are also consequential amendments resulting from clause 4 (Qualification or authorisation of insolvency practitioners) and other minor amendments of a clarificatory nature.

    FINANCIAL EFFECTS OF THE BILL
    1. There are no additional Northern Ireland exchequer or staffing costs arising from the Bill proposals. Before outlining the additional costs, it is important to note that the decision to opt for a moratorium is a voluntary one.

      2. The Bill would give rise to additional costs for companies attempting to enter voluntary arrangements which elect to take up the option of a moratorium. They would have to pay a nominee for applying for the moratorium, and carrying out the administrative procedures and the monitoring of the company which are required while the moratorium is in force. It is anticipated that such costs would be less than would be incurred with the alternative of an administration order procedure and they would of course be less detrimental than company failure due to inability to propose a rescue procedure in the absence of a moratorium.

      The taking up by companies of the option of a moratorium might prompt creditors with concerns about their situation to seek legal advice. It is estimated that the total legal costs to such creditors for each company taking up a moratorium could amount to £750. Based on a notional figure of 12 voluntary arrangements annually, total costs should not exceed £9,000.

      It is also expected that insolvency practitioners will incur one off costs in setting up new systems, computer software and documentation. Such costs could be in the range £500 to £5,000 per firm and could total £17,500 to £175,000 for the 35 firms of insolvency practitioners in Northern Ireland.

      EFFECTS ON EQUAL OPPORTUNITY
    2. An equality screening of the provisions contained in the Bill has been carried out and no adverse impact in terms of equality of opportunity has been identified. A copy of the consultative document including these equality considerations was sent to the Equality Commission and widely circulated to the various interest groups (some 250 in number). Neither the Commission nor the interest groups raised any concerns.

      3. HUMAN RIGHTS ISSUES
    3. The provisions of the Bill are considered compatible with the Human Rights Act 1998. A copy of the consultative document was sent to the Human Rights Commission; the Commission did not raise any concerns.

      4. EQUALITY IMPACT ASSESSMENT
    4. No adverse impact from this technical piece of legislation has been identified for any of the groups listed in section 75 of the Northern Ireland Act 1998. A full Equality Impact Assessment will be carried out as part of an overall assessment of the Insolvency Service's policies and services.

      5. SUMMARY OF THE REGULATORY APPRAISAL
    5. It is possible to state that benefits can be expected to flow from the bringing in of the main provision in the Bill, the option of a moratorium for small companies attempting to enter voluntary arrangements. It is to be expected that some companies which would otherwise have failed will survive and that their contribution to the economy in terms of output and jobs will be maintained. It is however impossible to quantify what these benefits will be because the extent to which the new moratorium will be taken up is unknown. It is therefore impossible to weigh the expected costs against the expected benefits. It can be said that the costs associated with the moratorium procedure will fall mainly on the companies availing of the procedure, and it will be entirely at the discretion of the individual company's management whether or not they wish to incur these costs or simply do without the moratorium. The only costs to the wider community are expected to be those incurred by creditors seeking advice about their rights, and these are not expected to amount to more than £9,000 annually for the whole of Northern Ireland. There will be a cost for professionals in the field of insolvency in gearing up to carry out the new procedures, but that is a one off investment made with a view to earning future fees.

      6. SECRETARY OF STATE'S CONSENT
    6. The Bill deals with three matters which are reserved under paragraph 9(b) of Schedule 3 to the Northern Ireland Act 1998, one matter which is reserved under paragraph 9(c) of Schedule 3, and one which is reserved under paragraph 23 of Schedule 3. It has therefore been necessary to obtain the Secretary of State's consent under section 8 of the Northern Ireland Act 1998 to the consideration of the Bill by the Assembly.

      7. LEGISLATIVE COMPETENCE
    7. At Introduction the Minister of Enterprise, Trade and Investment had made the following statement under section 9 of the Northern Ireland Act 1998:

    "In my view the Insolvency Bill would be within the legislative competence of the Northern Ireland Assembly."