Creditors’ meetings under the Insolvency Act 1986
Creditors’ meetings provided for under the Insolvency Act
1986 (the Act) vary in purpose according to the type of insolvency procedure
and to the stage of the insolvency at which they are called. Some meetings
allow creditors to choose the insolvency practitioner who will administer the
insolvency procedure, whilst others are intended to keep creditors informed and
in some cases allow the wishes of creditors to be taken into account in the
administration of the insolvency.
The over-riding intention in all cases is that creditors
should have a chance to protect their position by attending and voting at such
meetings, either in person or through a representative. This brief is an
outline of the meetings that take place under the Act in England and Wales and
the purpose of those meetings. The Act, and the accompanying insolvency rules,
contains detailed procedures for each meeting but these have been generalised
for the sake of clarity.
The voluntary arrangement procedure allows a company,
whether solvent or insolvent, to propose a legally binding scheme of
arrangement or composition of its debts with its creditors.
The proposal may be made by the company’s directors, or its
administrator or liquidator, and must set out why creditors should be expected
to concur with it and must include full details of the company’s affairs. A
voluntary arrangement must be implemented and supervised by an insolvency
practitioner.
Separate meetings of both creditors and members (in that
order) must be held on at least 14 days’ notice to consider the proposed scheme
(section 3). The proposal must indicate how the various classes of creditors
are to be dealt with and the quantum and timing of distributions. Neither the
scheme, nor any modifications, can affect the rights of secured or preferential
creditors unless those creditors agree. Copies of the proposal and a statement
of affairs must be sent out with the notices of the meetings.
The majorities required to approve the scheme are:
Notice of the results of the meetings must be sent to every
person who received notice of the meetings. The scheme supervisor must keep
those creditors bound by the scheme informed of progress every 12 months and on
completion of the scheme. An approved voluntary arrangement is binding on every
creditor who was entitled to vote at the meeting, whether or not he was present
or represented at the meeting.
Find out how McTear Williams & Wood can help with company voluntary arrangement here.
The administration procedure imposes a moratorium on legal
steps being taken against the company and is aimed mainly at achieving the
survival of the company. An application to the Court for an administration
order may be made by a creditor, the directors or the company. An
administration order will not be made if an administrative receiver is in
office (unless his appointer agrees, or the charge is open to attack) or if the
company is already in liquidation.
Until 15 September 2003 the only way to enter administration
required an application to court supported by an independent accountant’s
report and a formal court hearing at which a barrister argued the case for an
order to be made. This was often quite time consuming (2 or 3 weeks) and
expensive (a minimum of £15,000 to £20,000) effectively ruling it out as an
option for smaller businesses. Post 15 September in all cases the independent
accountant’s report is replaced by a simple written consent of the proposed
administrator. For floating charge holders (typically banks), the company
(resolution of shareholders), or the board of directors, there is a new without
court order entry route into administration which will be much quicker (2 or 3
days) and less costly (£3,000 to £5,000). It is intended that this will become
the “gateway procedure” into insolvency.
The purposes of administration are replaced by a hierarchy
of objectives:
The administrator must consider the first option and only if
this is not reasonably practicable would he move onto the second objective and
likewise the third objective. Unlike administrative receivers the administrator
owes an express duty of care to creditors as a whole and must not unnecessarily
harm their interest.
Taken together these changes are aimed at simplifying
administrations, reducing costs and making them accessible to medium and
smaller businesses. In our view the new legislation goes a good way to allowing
directors to take control of their company’s destiny rather than handing control
to their bank or other creditors.
The administrator, within months of his appointment must
call and hold a meeting of creditors of the company and present his proposals
for achieving the objective within 10 weeks of the administration order (section
23). Fourteen days’ notice of this meeting must be given and a copy of the
proposals must be sent to all known creditors.
The meeting of creditors will, subject to any modifications
accepted by the administrator, approve or reject the proposals but, if the
meeting declines to approve the proposals, the administrator must refer the
matter back to the Court which may then make any order that it sees fit.
Creditors may vote at the meeting only if they have submitted a claim to the
administrator before the meeting, together with, if necessary, a proxy. A
simple majority by value of those present and voting in person or by proxy is
required for the approval of the administrator’s proposals.
Where the administrator’s proposals are approved, the
meeting of creditors may establish a creditors committee to assist the
administrator in discharging his duties. Notice of the result of the meeting
must be sent to every person who received notice of the meeting, and the
administrator must advise creditors of the progress of the administration every
six months and on completion.
The administrator has the power to call a meeting of
creditors at any time and he has a duty to do so if requested by 10% in value
of the creditors or if so directed by the Court.
Find out about administration orders in London, Southampton, Bedford, Chelmsford, Peterborough, East Anglia, Norwich, Colchester, King's Lynn, Bury St Edmunds, and Cambridge.
Administrative receiverships
An administrative receiver is appointed by a debenture
holder secured by a floating charge over a company’s assets, in order to
recover monies due to that debenture holder. Prior to the Act there was no
legal requirement for the administrative receiver to advise unsecured creditors
of any matter relating to the receivership.
Under the Act, the administrative receiver must not only
notify all creditors of his appointment within 28 days but, unless the company
goes into liquidation, he must within three months of his appointment, call a
meeting of creditors (section 48) on 14 days’ notice and present a report
dealing with the events leading up to his appointment, a summary of the
statement of affairs, details of his trading and disposal of assets, the quantum
of secured and preferential creditors and the possible outcome for other
creditors. Where the company goes into liquidation within the three months, the
administrative receiver is relieved of this obligation, as it will be dealt
with by the liquidator. The administrative receiver may apply to the Court to
be released from the duty to call a meeting of creditors, but his report must
state that he intends to do this and must be circulated or advertised not less
than 14 days before the application.
The meeting may resolve to establish a creditors committee
to assist the administrative receiver in carrying out his duties and, if
required, obtain information from him. Creditors may vote at the meeting only
if they have submitted a claim to the administrative receiver before the
meeting, together with, if necessary, a proxy.
Compulsory liquidations (winding-up by the Court)
A company can be wound up by order of the court upon
presentation of a petition either by the company or its directors, or by any
creditor or creditors, contributory or contributories, or by all or any of
those parties together or separately.
The possible grounds for such a petition are contained in
section 22 of the Act and include where a company had not traded for a year,
where the number of its members has dropped below two, where the Court is of
the opinion that it is just and equitable to wind up, and where the company is
unable to pay its debts. This latter ground is usually evidenced by the
non-payment of a judgement debt or statutory demand for payment served on the
company by a creditor.
Where a winding-up order is made, the Official Receiver, by
virtue of his office, usually becomes the liquidator. He has a duty to decide
within 12 weeks whether there is any benefit in summoning meetings of creditors
and contributories for the purpose of choosing someone else to be liquidator
(section 135). At a first meeting of creditors, the only resolutions that may
be passed are those relating to the appointment of a named insolvency practitioner
to be liquidator and the appointment of a liquidation committee. Creditors may
vote at their meeting only if they have lodged a proof of debt and, if
necessary, a proxy. A majority in value of those present and voting, in person
or by proxy, is required to pass a resolution.
Whether or not the Official Receiver decides to exercise his
power to summon meetings, he may be forced to do so if requested by 25% of in
value of the company’s creditors. Such a meeting may also establish a
liquidation committee, or the liquidator may, if he thinks fit summon separate
general meeting of the company’s creditors and contributories to consider that
question.
Under section 168, the liquidator may also from time to time
summon general meetings of creditors and contributories to ascertain their
wishes, or he may be directed to do so by a members’ resolution or by 10% in
value of the company’s creditors. When the winding-up is complete, a liquidator
who is not the Official Receiver summons a final general meeting of creditors
under section 146 at which the creditors consider the liquidator’s report and
determine whether or not he should be released from office.
During the liquidation, a liquidator may be removed by an
order of the court or by a general meeting of the creditors summoned for that
purpose (section 172). Section 195 (which applies to all liquidations) allows
the court to direct meetings of creditors or contributories to be held, in
order to ascertain the wishes of those creditors or contributories.
Read our Guide to Compulsory Liquidations to find out more.
Creditors’ voluntary liquidations
Where no statutory declaration of solvency has been made by
the directors in a voluntary liquidation, to the liquidation is termed a
creditors’ voluntary liquidation (“CVL”), as opposed to a members’ voluntary
liquidation (“MVL”). A CVL requires a meeting of creditors and this is held
under section 98 on at least seven days’ notice within 14 days of the company
meeting at which it is initially decided to put the company into liquidation.
At a section 98 meeting, the directors must lay a statement of affairs before
the creditors, who have a chance to ask questions of the directors, and of the
liquidator nominated by the company if he has already been acting. The
creditors also decide whether to accept the liquidator nominated by the company
or to appoint a liquidator of their choice. They may also appoint a liquidation
committee, the rules relating to which are broadly the same as those applying
in a compulsory liquidation (see above). Creditors may vote only if they have
submitted such proof of debt as is required in the notice of meeting (usually a
statement of claim) and if they have lodged a proxy, where one is required,
before the meeting. A majority in value of those present and voting, in person
or by proxy, is required to pass a resolution.
In members’ voluntary
liquidation, if the liquidator forms the opinion that the company is insolvent
and will be unable to pay its debts in full, he must summon a meeting of
creditors to convert the MVL into a CVL. Such a creditors’ meeting is held
under sections 95 and 96 of the Act and has the same effect as a section 98
meeting.
In a continuing liquidation, annual creditors’ meetings are
held at which the liquidator presents an account of his acts and dealings and
of the conduct of the liquidation during the preceding year, he may apply to
the Department of Trade for dispensation from holding the meeting if the
expense of acting it outweighs any benefit that would be gained.
Similarly, at the end of a liquidation, when the company’s
affairs are fully wound up, a final meeting of the company and of the creditors
is called prior to dissolution. During the liquidation, a liquidator may be
removed from office by an order of the Court or by a general meeting of the
company’s creditors summoned specially for that purpose in accordance with the
Rules (section 171).
Read our Guide to Creditors Voluntary Liquidations here.
Insolvency of individuals
An individual may propose a voluntary arrangement or a
petition may be made to the court, by the individual or one of his creditors
for a bankruptcy order to be made. The purpose, effect and timing of meetings
of creditors held under these procedures are similar to those in company
voluntary arrangements and liquidations.
Notices and proxies
The Act stipulates three matters for all meetings of
creditors in any insolvency procedure
Individuals can attend meetings in their own right or can
appoint a representative to attend as a proxy on their behalf. A company, as
such, cannot attend a meeting and must appoint a person who will represent it.
The representative of either an individual or a company is appointed by use of
the proxy form sent out with the notice of every meeting and the notice must
state the place to which, and by what time, the proxy must be returned to
enable the representative to attend.
A company may be represented at a meeting without the need to complete a proxy if it passes a resolution of its directors authorising any person it considers fit to act as its representative at any meeting of creditors of a company of which it is a creditor. The person authorised to act may exercise the same powers as the company itself would be able to exercise if it were an individual creditor. This includes the ability to vote on any resolutions for the appointment of a liquidator (section 375 Companies Act 1985).