House of Commons - Trade and Industry

Select Committee on Trade and Industry Second Report

II MORATORIUM

11. There has been general welcome for the proposal that legislation should be introduced to provide for a voluntary moratorium to give the directors of a company facing insolvency a breathing space to formulate preliminary proposals for a rescue, obtain the consent of a nominee to act and certify the proposals as having a reasonable chance of success, and then call a creditors meeting. During that time the company could, subject to certain constraints necessary to protect its creditors from abuse, continue to trade. A similar moratorium is already in place in the arrangements for companies in administration and for individual voluntary arrangements, and apparently is the norm in insolvency codes in many other countries.[14] As a result of earlier consultations on the subject there is a broad consensus, evident from the written and oral evidence, that a moratorium along the lines proposed will be useful.

12. While the vast majority of company insolvencies are in the form of liquidations or receiverships, there are now around 500 CVAs a year, compared to the handful seen during the difficult years of the early 1990s, despite the absence of a moratorium provision, or of special measures to encourage financing of firms in this position.[15] Dependent on the criteria used, around 40 percent of these CVAs can be regarded as successes. The figures have to be treated with some caution. A number of CVAs are apparently "distribution CVAs", where the CVA structure is used as a cheaper or more convenient means of distribution of funds to creditors than a liquidation, but with similar outcomes.[16] Nor is it a priori a matter of regret that the CVA structure is still relatively uncommon and that attempts to get them going often founder. The SPI stressed that even in the current relatively benign economic circumstances a CVA would be the appropriate procedure for only a limited number of companies.[17] The BBA told us of the number of CVAs presented which were ill-thought out, and which seemed to be more an attempt by a practitioner to gain a fee than an honest presentation of a rescue attempt.[18] Professor Franks emphasised that there were perfectly valid reasons for a secured lender to resist a CVA.[19] Furthermore, the absence of a moratorium is only one of a number of barriers to be overcome. The lack of finance for CVAs is no doubt the biggest problem. It was also put to us that the insistence of the Inland Revenue and Customs and Excise on full payment of taxes due and of local authorities in respect of rates meant that CVAs often failed in cases where a bank would otherwise be supportive.[20] While the proposed moratorium is welcome, it is not a panacea for companies in difficulty. For many companies in difficulty the Company Voluntary Administration procedure is wholly unsuitable. The present bill is indeed, as the Deputy Inspector General of the Insolvency Service described it, "a modest but worthwhile proposal",[21] the results of which may be rather less than its advance publicity suggests.

Rescue culture

13. The Bill has been presented as part of an attempt to stimulate a "rescue culture" in insolvency law and practice, filling what has long been perceived as a lacuna in the new arrangements introduced in the 1986 Insolvency Act. The 1982 Cork Report was more or less explicitly concerned to bring about that same goal, by proposing voluntary arrangements, suggesting both that the idea of a rescue culture is hardly novel and that it is not easy to effect real change. The new arrangements got off to a bad start because of the recession, which was at its worst in terms of company failures in 1992 and 1993. It was widely felt at the time that banks had been excessively inclined to put in receivers rather than seek to rescue ailing companies and save jobs, and that professional insolvency practitioners were more interested in winding up companies and taking the fees than rescuing them. The proposal for a moratorium directed particularly at smaller companies for whom administration was too dear has its origins in that period.[22]

14. We were therefore interested to be given the general view that the rescue culture had become much more firmly embedded in recent years. The banks told us that the rescue culture made good financial sense in that banks made money out of ongoing businesses, not insolvencies.[23] Insolvency practitioners told us that " there is much more focus on a rescue culture".[24] The CBI and the Law Society and the ICAEW repeated this in different terms, while attributing it in some cases to dislike by the banks of the public perception that they are acting unreasonably.[25] Professor Franks drew on his current research to suggest that things were indeed changing, but warned "Whether they have evolved enough, unfortunately we will not know until we hit the next recession and that, I think, is a problem".[26] This attitude of perhaps healthy scepticism was also reflected in evidence from the Insolvency Service, whose Deputy Inspector General told us — "I think there is a concern in Government that if, heaven forfend, we should have another recession banks would revert to type...there is some lingering suspicion that if circumstances turn considerably adverse that the stresses and strains might tear the best of intentions apart".[27] Some suggested that the need for a moratorium had receded over the years since it was first mooted.[28] The proposals in the Bill, modest as they are, must be shown to be relevant not to the circumstances of the recession of the early 1990s in which they were conceived, nor only to the currently more benign climate, but to the variety of economic circumstances which may arise in future years.

Separation of moratorium from wider reviews

15. The general welcome has been moderated in several important respects. Many feel that it might make more sense to await the outcome of the major reviews now under way of company rescue mechanisms and of the effect of insolvency law and practice on the enterprise culture before legislating for one rather narrow area, however worthy. Both reviews are likely in due course to result in legislation, and any change made now is more than likely to be of a temporary nature. There must be some risk that measures agreed upon now will be found to preclude other options; as Professor Franks put it, you might be buying into "a package of proposals which might be sensible but might preclude alternatives".[29] Nor does there seem to be any great urgency in proceeding ahead of wider measures;[30] it is unlikely that there are that many businesses in difficulties which would be saved as a result of the introduction of a moratorium.[31] Mr Michael Steiner from the Law Society put the general assumption clearly — "It may be that the Bill has been in the cupboard for some time, some parliamentary time has been made available and it has been pulled out and it is just unfortunate that six months ago it was decided to have an insolvency review at the same time..".[32] The narrow scope of the Bill means that a number of issues within CVAs are not fully addressed, let alone the general structure and direction of insolvency law.

16. Against that must be set the confidence expressed that it is hard to visualise any outcome of the wider review that would not encompass a moratorium along the lines proposed;[33] that facilitating the rescue of even a handful of companies in short term difficulties would be worthwhile; and that in any event, as the Deputy Inspector General of the Insolvency Service warned us, it may be quite a few years — "well into the next Parliament" — before the wider review results in legislation to put before Parliament. In an ideal world we would prefer that the legislation be deferred until it can be merged with the results of the wider review; but the world is not ideal and opportunities for such legislation are not frequent. We have to express our surprise that the Government should have concluded that this modest measure deserved priority over, for example, the long-awaited legislation implementing the Scott Report in respect of the licensing of arms exports. That is however no reason to resist the Bill. We are happy to see it proceed, on the clear understanding that it is not used as a vehicle to tag on other bits of insolvency law reform as it passes through Parliament.

Other concerns

17. Witnesses expressed some general concerns with the proposals, notably the question of funding a company under a moratorium or indeed a CVA ; the balance to be struck between a light regime of monitoring by the nominee and a more intrusive regime to assuage the anxieties of creditors; and with two particular related proposals, on the qualification to be required of nominees and supervisors and on the proposed notice of receivership. We deal with these below. Several respondents also produced detailed critical analyses of the Bill, which we are confident will have been taken on board by the department. Some expert observers have expressed the fear that the relative complexity of the arrangements proposed may lead to their being little used and suspect that a more fruitful route would to simplify the route to obtaining a CVA or an administration, as was indeed proposed in the 1993 consultation exercise, rather than potentially complicating it. We hope that the wider review will address the issue of the growing complexity of insolvency law and practice, noting that practitioners expressed their view that the complexity and by extension the costs of the administration procedure had been exaggerated.

Objective research

18. There is generally admitted to be a continuing absence of knowledge of CVAs among practitioners, and indeed a dearth of objective research on insolvency matters. Professor Franks told us that, in stark contrast to the situation in the USA, the number of relevant studies in the UK could be counted on the fingers of one hand and still leave some fingers spare and that " the amount of empirical research available is so scanty that you are really having to rely on what academics call a priori reasoning..".[34] The Deputy Inspector General confirmed this, telling us candidly that "there is very little evidence about anything in the insolvency world. There is a marked absence of any empirical data whatsoever..".[35] In our recent Report on Small Businesses and Enterprise we counselled "caution in tinkering with insolvency law in an attempt to change prevailing cultural attitudes and in producing proposals for change grounded more on perceptions than on analysis of real events". While we accept that the absence of objective data on the insolvency world makes life difficult for policy makers, the solution lies to some extent in their own hands. Before Ministers bring broad and more ambitious proposals before the House in the area of insolvency law, Parliament is entitled to see the results of more extensive study than has hitherto been embarked upon into the realities on the ground.

Obtaining a moratorium

General

19. The procedures for obtaining a moratorium reflect the existing procedures for administration, including the making of a report by an independent person. Part II (paragraphs 6 to 11) of the proposed new Schedule A1 deals with the requirements for obtaining a moratorium. The principal concern is the requirement in paragraph 6 (1) that directors submit to the nominee "a document setting out the terms of the proposed voluntary arrangement" before a moratorium can come into effect, presupposing that the directors have been able to produce such a proposal.[36] The 1993 and 1995 proposals suggested that the whole purpose of the moratorium was to give the directors, assisted by the nominee, the necessary breathing space from creditors to pull together such a proposal. The 1993 paper indeed suggested an "immediate moratorium .... to allow time for discussions with major creditors and secured lenders", and that it would be "operative" upon the filing in court by the directors of an intention to set up a CVA and by the nominee of a consent to act ...".[37] The 1995 proposals suggested that a nominee's view that a CVA might be a suitable solution to its difficulties would be based on information from the directors and any negotiations considered appropriate: but did not seem to assume the existence of firm proposals for an arrangement.[38] The explanatory notes on the draft clauses still describe the moratorium as being intended to "grant a breathing space to allow management time to formulate proposals for a rescue .....". As witnesses suggested, directors of a company facing difficulties often do not recognise their gravity until some particular event, and then they do not have the time to formulate proposals in the detail apparently envisaged. It is at this stage that they need the protection of a moratorium from creditors actions.[39] The current proposal seems to provide the protection of a moratorium only after a nominee has ratified a proposed arrangement, which is then worked up in more detail and put to a creditors meeting.[40] At the same time the response to consultation revealed some concern at making a moratorium too easy of access, and that desperate or unscrupulous directors would file for a moratorium as a knee-jerk reaction to financial difficulty.[41]

20. The terms of the new section 1A of the Act, to be inserted by paragraph 2 of Schedule 1 to the Bill, — " Where the directors of an eligible company intend to make a proposal for a voluntary arrangement, they may apply for a moratorium for the company" — suggest that the broad purpose is clear. It is evident to us that what should be required to be submitted to a nominee, and then examined by him, and filed (or in Scotland lodged) with the court, is not a document containing a proposed voluntary arrangement, but such information as is required to enable the nominee to judge whether such an arrangement has a reasonable prospect of being produced by the directors and subsequently implemented, subject to amendment by a creditors meeting. We do not however favour any quick and easy solution which would provide a moratorium simply on demand, followed by an assessment of the viability of a CVA. The crux is how much work a nominee should be expected to do before being able to assure a court that there is a reasonable prospect of success. We consider that the current proposal is somewhat ponderous, and that a swifter means of obtaining a moratorium is required. What is required is a balance between recognition that a moratorium may be needed urgently to give time for a nominee to sit down with directors and others and work out if there are likely to be proposals which can be put to a creditors meeting with some chance of acceptance; and some limitation on making the protection of a moratorium available simply on demand, where there is often no chance of an arrangement subsequently proposed being accepted.

Nominee's statement

21. Several witnesses doubted the appropriateness of requiring the nominee to give an opinion on whether or not a proposed arrangement has a reasonable prospect of being approved, that being a matter for the creditors to decide, and of its nature difficult to foresee.[42] It is mainly a matter of phraseology, although we accept that a perfectly sensible proposal may fall foul of a creditors meeting. We therefore suggest that the nominee's statement to the directors — and thereafter to the court — should give his opinion as to whether or not there is a reasonable prospect of a workable voluntary arrangement being drawn up which warrants, in the light of his professional judgement and experience , being submitted to creditors.

Assurance of funding

22. The 1995 paper proposed that "the nominee should be required to consider the availability of funding as part of his initial assessment as to whether there is a reasonable prospect of a successful CVA ...",[43] and included a statement that "adequate funding is available for the period of the moratorium" as part of the documents to be submitted to court.[44] The nominee is indeed required in the draft clauses to give his opinion that the company is likely to have sufficient funds available to it during the proposed moratorium to be able to carry on business. Several witnesses suggested that he should also be under a specific duty to seek direct confirmation from the funding source and also from the principal creditors.[45] The CBI noted that "the nominee is in office to offer a degree of reassurance to the creditors who have been deprived of their immediate remedies. Creditors can only feel reassured by his presence if they know that he must make his own independent enquiries and cannot therefore be led by the nose by the directors."[46] The BBA took the view that "the need for the nominee to verify statements made about funding will ensure communication between the nominee and the banks".[47] It would indeed be odd for a nominee to be able to certify his confidence in a proposal without taking some steps to seek assurance on funding other than from the directors but the Head of Lending Services at HSBC warned that some practitioners might out of self-interest "be prepared to look on the optimistic side and believe they can deal with this later".[48] We favour some specific duty on the nominee to assure himself independently of any information from the directors that the company does indeed have sufficient funding for the moratorium.

Search for a nominee

23. While there are a number of detailed matters raised by respondents, there is one matter not raised which causes us some concern. In oral evidence a witness referred to the possibility of a company in trouble "shopping around" to find a practitioner willing to act as a nominee; and if the first nominee approached proved unwilling to act, for example as a result of being unconvinced that there was a reasonable prospect of an arrangement being arrived at, seeking further until one was found.[49] The draft bill excludes from eligibility for a moratorium a company which has had a moratorium in force during the preceding 12 months without coming to a CVA, as a means of discouraging serial moratorium seekers, but has no evident provision to discourage serial search for a friendly nominee. To an extent this comes back to the issue of appointment of the nominee, raised in the earlier consultations, in respect of the possibility of the nominee being appointed by the court or subject to approval of secured creditors. The current proposal assumes appointment by directors of a professional whose duty is not to those who appoint them and pay them. There is something to be said for court involvement at some stage, even if only on a negative basis, and for the professional rules of practitioners to ensure that potential nominees assure themselves that they are not simply the latest in a line of practitioners approached. We would favour the introduction of some means of external control to ensure that directors of companies in difficulty cannot simply trawl insolvency practitioners until one is found who will make the declarations necessary for the obtaining of a moratorium.

Eligibility: small companies

24. Paragraph 3 of new Schedule A1 restricts eligibility for a moratorium to small companies, as defined in the Companies Act. The Bill also gives power to the Secretary of State to amend by regulations the qualifications for eligibility, so that the restriction to small businesses could be removed. The 1995 proposals stated that the new procedure would not be restricted by statute to smaller companies, although accepting that it had been designed with smaller companies in mind, particularly in terms of the timescales laid down. It concluded that " there seems to be no reason why larger companies should be prohibited from filing for a moratorium if they are able to comply with the requirements of the procedure".[50] There is a general acceptance that SMEs are indeed the target, in terms of their expected pattern of financing as well as the greater likelihood of being taken unawares by financial difficulties.[51] The basic structure is however quite capable of bearing the eligibility of larger companies. Several witnesses felt that the moratorium could best be tested on smaller companies: others that it was inherently ill-suited to larger companies: while others saw no reason not to extend it to all.[52] There was however consensus that if it were limited in the first instance to smaller companies — and we broadly share the view that this is a prudent step — any extension to companies as a whole in the light of experience should be possible only as a result of further consultation and debate. Regulations extending eligibility for a moratorium to larger companies should require further consultation so that the results of experience to date can be factored into the decision; and the secondary legislation should require affirmative resolution.

Notice of receivership

25. Clause 10 would give the Secretary of State powers to bring in secondary legislation to require a warning notice to be given to a company of an intention to appoint an administrative receiver. Professor Franks noted that it would be a radical step to thus constrain the rights of floating chargeholders, explicitly not taken in the last major insolvency review.[53] The proposal has its origins in the identification by the working party appointed in 1992, reflected in the 1993 paper, of "secured creditors' right to appoint a receiver" as a major barrier to the use of CVA provisions: primarily because a secured creditor may have little to gain and much to lose from a CVA, whereas unsecured creditors may well prefer a CVA to a liquidation or receivership with little or any return to them. Several alternative approaches were suggested, including directors being obliged to give secured creditors notice of intention to file for a moratorium, or secured creditors having to give notice of an intention to appoint a receiver. The latter proposal, described as "a fairly radical step", was put forward for consultation as a proposal, with a 7 days' notice period.[54] The 1995 proposals, reflecting concerns expressed in the responses, proposed a 5 working days written notice, with an abridgement where the company consented to a receiver or with the leave of the court. The document described the purpose of the rule as "to give the directors the opportunity to approach a potential nominee and time for the nominee to advise the directors on the potential for a rescue and file for a moratorium if considered appropriate".[55]

26. The objections to this are manifold —

procedural: it is strongly represented that such a radical change in the rights of all secured creditors, including banks and others, potentially with retrospective effect, and not confined to companies potentially interested in coming to a voluntary arrangement with creditors, should not be introduced in this way, on the back of legislation largely confined to the procedure for introducing a moratorium procedure for smaller companies, but should be set out plainly and in full in primary legislation, including the notice period, any allowance for waiver of the notice period with the company's consent or with leave of the court, the provisions to apply during the notice period to the behaviour of directors: and should be the subject of proper consultation and wider debate:[56]
practical: although the 1995 document rather baldly assumed that other creditors would not be aware of the existence of the proposed notice and so would not take precipitate action,[57] there is an evident danger that creditors who did become aware of it (including directors) might seek a range of remedies available.[58] The directors would be placed in what the SPI called "a very difficult position", being in evident danger of wrongful trading. [59] They might react by seeking an administration order rather than trying to put together proposals for a CVA; equally likely is a "period of paralysis".[60] Furthermore, as the Deputy Inspector General put it, it may not be reasonable to expect a bank which has given notice of its intention to put in a receiver to carry on cashing the company's cheques, leaving the company barely viable.[61] Several witnesses were concerned at the effect on the lending practices of banks were they to run the risk of being denied power to appoint a receiver.[62] A number of respondents also pointed out that many receiverships were undertaken with the active consent of the directors and that any system should allow for that, as also for the court to waive any notice period in cases of suspected fraud.[63]
fundamental: a number of witnesses question the logic of the whole proposal, since it is claimed that secured creditors — in practice, primarily banks but increasingly others[64] — only appoint a receiver following discussions with the company and attempts to rescue it, or where there is a well-founded fear of fraud or malpractice. The BBA noted the existence of the 1997 Code which had been drawn up in response to the sort of concerns which gave rise to the proposals in Clause 10, and which are currently under review. They emphasised that putting in a receiver was "very much the end of the road" and that options for a company in difficulties such as a CVA should already have been explored before that stage.[65] The Head of Lending Services at HSBC told us that "it should never be a surprise to the company that it has reached this point".[66] The CBI stated that it was a practice more associated with "a few years back" than now .[67] The SPI told us that in practice these days receivers were very rarely appointed on a "drop-dead" basis, except in cases of suspected fraud and that they had no experience of reckless appointment of receivers.[68] Mr Steiner from the Law Society said that "the perception that the banks appoint receivers overnight except in cases of suspected fraud is totally misplaced."[69]

27. It is indeed difficult to envisage many situations in which there are promising prospects for a CVA but where the principal secured creditor sees no alternative to appointing a receiver. Put differently, since the bank's money is needed to make a rescue work, it is hard to envisage one being carried out in the face of an expressed intention of a secured creditor to put in a receiver. Whether or not a secured creditor is to be allowed to vote at a creditors meeting during a moratorium or on extending it, as the Head Of Lending Services at HSBC put it, "the bank is going to need to be a major negotiating player in getting a CVA together that works".[70] The proposal has clearly been put forward not so much in response to perceptions of what may in current economic circumstances be the common practice of banks and other secured lenders as in an attempt to provide in advance a weapon to be used should the banks turn nasty in any future recession.[71] We are not convinced that these are good grounds for legislation, nor that were these fears to be realised the proposal to introduce a period of notice would have any great beneficial effect. Without ruling out the introduction in other legislation, following consultation and full discussion, of a notice period along the lines envisaged in Clause 10, we consider that it is indeed premature to seek to introduce it in advance of the current review of the 1997 Bankers Code: and that to have sought to do so by taking broad and poorly defined powers to make secondary legislation in a bill primarily concerned with introducing a moratorium period to ease the way to a CVA was ill-advised. We recommend that Clause 10 be dropped from this legislation.

Nominees

Qualification

  28. Clause 4 of the draft Bill seeks to give powers to the Secretary of State to recognise bodies to authorise those who may act as nominees during a moratorium or supervisors under a CVA, by inserting a new section 389A in the 1986 Act. For the purposes of this provision, a body may be so recognised "if it maintains and enforces rules for securing that its members —
    (a)  are fit and proper persons to act as nominees or supervisors, and
    (b)  meet acceptable requirements as to education and practical training and experience."
At present only licensed insolvency practitioners (IPs) function as supervisors of a CVA. The 1993 paper raised the question as to whether the nominee function "could adequately be performed by others such as company doctors, non-IP solicitors or accountants independent of the company". It proposed that "the nominee and, subsequently, supervisor ought to be a member of a regulated profession who understands the procedures and is subject to regulation by his supervisory body. Whether this need be an IP is more doubtful and views are sought." At a later passage, dealing with the perception that one barrier to greater use of CVAs was the fear of provisions connected with insolvency, the paper noted that "the supervisor need not necessarily be an IP, (although a change in perception might follow if IPs had a more positive role). However, there are, so far as is known, no company doctors currently dealing with companies after suspension of payments. A level of both legal and accountancy skills is needed in such a situation and that is what the IP is trained to provide ....... IPs could rename themselves along the lines of "rescue and insolvency consultants" to make clear their dual role. Specialist company doctors could be one way forward, since the term "insolvency practitioner" is not entirely consistent with the concept of a rescue culture."[72]

29. The responses were generally unfavourable, based on the belief that only an IP could command the confidence of the public, the courts and creditors, particularly in a moratorium, and have a wide enough knowledge of other insolvency options. Only a handful supported the opposite view, that a moratorium and CVA required business management skills found in company doctors.[73] The 1995 proposals ducked the issue, declaring that "the nominee and subsequent supervisor must be persons who are independent, qualified and experienced, subject to a regulatory regime, have indemnity insurance and are monitored", while admitting that insolvency practitioners were "being encouraged to demonstrate that they have the right training and culture and can achieve the right results to show that they are the right people for the job."[74]

30. Perhaps not surprisingly, given the nature of those consulted, the provisions of Clause 4 have been firmly rejected by most respondents to the draft clauses, on grounds similar to those put forward in response to the 1993 consultation —

the danger of an unduly narrow perspective on possible outcomes since only insolvency practitioners have the "breadth of knowledge and experience to be able to evaluate all the alternative courses of action that are open to directors"[75], many of whom will naturally opt for a CVA even where it is not the appropriate option.[76]
a vested interest for such partially qualified practitioners in recommending only those voluntary arrangements for which they would be authorised to act
difficulties (familiar from similar attempts to define professional bodies in other legislation) in defining the bodies.[77]

The SPI also suggested that the proposal would be at variance with the idea floated in the Company Rescue Review of a single gateway and review by an IP of the best option: and with the recommendations of the Insolvency Regulation Working Party.[78] The BBA noted that "the nominee is an important component in banks' decisions to fund businesses in a moratorium", suggesting that a company doctor might be less persuasive in these circumstances than an IP known to the bank.[79] In oral evidence the Head of Lending Services at HSBC told us that he would be "very worried" at seeing people outside the IP profession, which had been improved enormously by the licensing process, while welcoming anything that could be done to remove the chance that actions were being taken simply in pursuit of a fee.[80] The ICAEW, representing many accountants not licensed IPs who might consider themselves well suited to the role of nominee nonetheless shared the consensus view expressed, as did the Law Society representing solicitors.[81] Mr Joseph on the other hand, speaking for the CBI, felt that there might indeed be positive merit in extending eligibility beyond the IP profession, noting that there were people involved in implementing the rescue culture who were not insolvency practitioners, and Professor Franks was in favour "of spreading the net as widely as possible".[82]

31. We have some sympathy with the underlying anxiety behind the proposals in Clause 4. Insolvency practitioners may not only be seen as more akin to undertakers than doctors, thus discouraging directors from seeking their advice in good time, but may favour liquidation over rescue as a result of the general direction of their professional experience and expertise or even for base motives of personal gain. We also note the suggestion that "the number of people willing to supply the service would also influence the price at which it is supplied".[83] There does however seem to us to have been a confusion of roles, between a company doctor whose services may well be required, in addition to or in place of the directors of a failing concern,[84] and a legally and fiscally qualified professional who has responsibilities to the wider public and to the courts for overseeing and monitoring the activities of directors enjoying an exceptional and temporary degree of protection from creditors. A nominee is not required to run a company during a moratorium any more than is a supervisor, but to assess at the outset if there are sufficient grounds to apply for a moratorium and then to ensure that the protection given by the moratorium is not abused .

32. We have the impression that the powers sought in the Clause may be echoes of battles which are being and will continue to be fought on a broader front. It would in our view be prudent first to establish a moratorium regime and only in the light of experience of its operation and of the outcome of the wider review consider altering the existing system of professional authorisation. The Deputy Inspector General told us that the department would want to see what sort of fist licensed insolvency practitioners made of the procedures before deciding to act.[85] That suggests that it would be more appropriate to address the issue head-on in the outcome of the insolvency review. Although we note the view of officials that it is a "very valuable part of the Bill"[86], we see many good arguments against the Clause and few in favour. No strong argument has been advanced to us to suggest that limiting the power to act as a supervisor or nominee to licensed insolvency practitioners is a barrier to greater use of voluntary procedures; nor that the tasks of a nominee or supervisor is of such a different nature to other insolvency tasks as to require different professional skills. While we wholeheartedly endorse the suggestion of Professor Franks that the system as a whole would benefit from loosening up and from learning from the experience of other professionals, we are not convinced that the best way to give creditors confidence in a procedure with which they are likely to be unfamiliar is to give the key role to a range of professional people. In a moratorium and a subsequent CVA, it is for the directors, not the nominee or supervisor, to rescue the company. We recommend that the provisions seeking to give the Secretary of State power to authorise professions other than licensed insolvency practitioners to act as nominees or supervisors be dropped from this Bill, and be considered within the wider review of insolvency.

Role and powers

33. The proposals for the role and powers of the nominee during a moratorium seem to be a mix of those of a supervisor under a CVA and an administrator, reflecting the need to provide some comfort for creditors who find themselves constrained without having had the opportunity to express their preferences. The tasks of the nominee during the moratorium continue to cause some concern, primarily on the basic issue raised in the earlier consultations as to how "light a touch" is appropriate in the monitoring to be carried out by a nominee, before and after calling a creditors meeting, and in the event of an extension of the moratorium. The heavier the touch, the more the costs, in terms of the time of the nominee which must be paid for. The more onerous the duties and responsibilities of the nominee, the higher the indemnity insurance he will require against potential liabilities, including indemnity insurance. The lighter the touch, the more anxious creditors may be at leaving the directors in relatively unfettered control and liable to dissipate assets.[87] The responses to the 1993 paper were divided but doubtful, one recorded as being "suspicious of any scheme that allows already failed directors to continue as before" and querying what is intended by "a relatively low level of monitoring."[88] The 1995 paper suggested a "statutory base level of supervision, comprising scrutiny of weekly management accounts by the nominee" and concluded that the prescription of a common level of supervision to be applied in all cases would be "inappropriate".[89] In oral evidence to us on this subject, the Deputy Inspector General made it plain that the general policy was to leave the level of supervision up to the professional discretion of the nominee, who would be expected " to monitor with as light a touch as possible to ensure the success of as many CVAs as possible".[90] In general terms we accept that the ideal situation is that the nominee should monitor a company with a light — and therefore a relatively cheap — touch, subject to fulfilling statutory duties. It is of course there that the difficulties lie, particularly the extent to which a nominees will find it necessary to cover their back against subsequent legal action.

34. Several witnesses suggested that a problem with the draft clauses was that, while omitting even a "statutory base level" of nominee activity, they pile potentially onerous responsibilities on nominees, exposing them to civil action for acts or omissions, at a time when the directors remain in control.[91] The Law Society warned that the risks to nominees were such as to make it likely that they would prefer administration and the protection of a creditors committee:[92] ICAEW stated that the responsibilities given to nominees were "unfairly onerous" given their limited powers and that professionals would be "very cautious" about getting involved:[93] the IOD noted that a great deal of work was imposed on the nominee, who would have to be paid for it:[94] ICAS feared that the procedure could become as "costly and cumbersome" as administration.[95] The SPI suggested that the nominee as an office holder independent of the company and without a duty of care to it could scarcely be made liable as proposed for loss to the company so long as not in breach of statutory duties.[96] Under paragraph 14 of new Schedule A1, every invoice is to carry the nominee's name, a provision objected to by the SPI as conveying an inaccurate impression of their role.[97] The nominee is liable for a series of acts of authorising or permitting improper disposals or obtaining of credit. A nominee is, under paragraph 22, to monitor the company's affairs sufficiently to form an opinion as to the continuing prospect of a CVA being approved and implemented and its funding being sufficient to carry on business for the rest of the moratorium. Paragraphs 24 and 25 cover the possibility of challenge to a nominee's actions. Paragraph 15 provides that security granted by a company during the moratorium may only be enforced if there were reasonable grounds for believing that it would benefit the company. The SPI suggested that this required "further consideration", a suggestion reinforced by the BBA's indication that banks might want a comfort from the nominee to that effect before lending.[98] The Law Society raised a number of concerns on this paragraph.[99] Paragraph 8 of the Schedule seems to make the nominee potentially liable for payments to utilities during a moratorium, a provision questioned by the Law Society and the SPI.[100] Paragraph 12 of Schedule 1 sets out the various offences which a nominee can commit; we can see that it is a potentially daunting list. As Mr Steiner of the Law Society put it to us, there is a fear that the moratorium may be abused if it is not properly controlled and on the other hand if it is properly controlled it starts to become expensive.[101] Giving creditors the right to take action against a nominee for matters outside his control does not only signally fail to resolve this issue; it makes matters worse.

35. The nominee has a potentially onerous task in the fairly short period of at most a few weeks before the creditors meet.[102] The directors will of course still be in control, with the protection of a moratorium, and — as a result of the absence of any notice requirement to all creditors — with some creditors probably being unaware of the company's position. During that time the nominee has a general duty to ensure that the special protection given by the moratorium is not abused. That may require some specific statutory minimum level of supervision, such as inspection of management accounts and control over any disposals of non-trading assets or borrowings.[103] If a CVA is agreed at that meeting, then the CVA regime comes into play. If the moratorium is extended, it would seem reasonable to leave it up to the creditors meeting and the nominee to agree a suitable level of monitoring and of the acceptable level of costs.[104] . It is plain that the balance of duties and liabilities envisaged for the nominee requires some revisiting, to ensure both a light touch and protection of the legitimate interests of creditors. No more duties or sanctions should be laid on the nominee than are strictly necessary in the unique circumstances of a moratorium.

Subsequent office

36. Paragraph 27 of new Schedule A1 seeks to prevent a nominee who has been connected with a moratorium failing to end in a CVA from acting as an IP in relation to that company — presumably because of fear that the nominee might deliberately or negligently bring about the failure in order to engineer an opportunity for a profitable appointment as a receiver. Leaving aside the need to tighten this against ready circumvention, several witnesses suggested that the nominee, having gained a good knowledge of a company's position, might be well qualified for such a role, subject to the agreement of the court.[105] We suggest that further consideration be given to the justification for the blanket prohibition proposed on a nominee subsequently acting towards the company in a different capacity.

Funding a moratorium

37. The witnesses before us were agreed that the greatest obstacle to the establishment of a CVA was not the absence of a moratorium period, but the lack of funding for a company to continue trading;[106] and that there were no easy answers. "Lack of funding" had indeed been identified in the 1993 as a principal barrier to CVAs: both medium and long term finance, described as "the most fundamental element of a rescue scheme", and initial working capital, where it was observed that "a company with an identified source of long term funds can fail because of immediate working capital shortages." The draft bill makes no pretence of addressing this issue, and it is doubtful how far legislation can go in solving the problem .

38. One option floated in 1993 for facilitating such funding was statutory super priority (SSP), whereby funds advanced during a period of moratorium or a subsequent voluntary arrangement enjoy priority over other existing creditors should it come to a distribution. The 1995 paper however, reflecting the responses received, stated that SSP would not be available, partly on the grounds that competition between lenders to provide SSP funds might militate against the proper consideration of the viability of the business by a lender.[107] It concluded, rather hopefully, that some funders might find companies in a moratorium a good investment. The 1993 paper had also suggested that the trend in the USA toward the provision of finance by specialist recovery funds in return for an equity state might be reflected in the UK.[108] In oral evidence to us the BBA suggested that super-priority would be difficult to envisage in an SME context in the absence of free assets such as unsecured debt.[109] Mr Steiner told us however that there was a lot of interest in some kind of super priority lending; ICAS suggested that the absence of such priority security could lead to "severe difficulties in funding ongoing trading during a moratorium"; Mr Flynn told us that the possibility of such lending did form part of the considerations of the wider review.[110] It is evident that the idea of some sort of super-priority lending to facilitate the funding of companies working their way out of difficulties is very much alive.

39. The detailed provisions in the proposed new Schedule A1 provide the framework for financing which existing creditors will examine before agreeing to any extension of a moratorium and which potential lenders will look at before advancing funds or goods. Paragraph 12 provides a blanket block on creditors actions: but the subsequent paragraphs raise a number of issues which the responses to the "technical" consultation suggest require some further thought, so that as the Law Society put it those considering financing the moratorium will have greater certainty as to the nature of their risk. Concerns have been expressed about the provisions for the continued use of goods supplied as is a growing practice under retention of title or lease. The Finance and Leasing Association called for deletion of paragraph 19 relating to the disposal of charged property, noting that the procedures seemed to have been inappropriately introduced from the administration regime, and calling for a freeze on the disposal of charged property during the period of moratorium.[111] SPI raised concerns about the way the parallel provisions applying to administrations under s15 of the Act had been transposed. IOD and the CBI raised similar concerns over the effects on hire-purchase agreements.[112] There seems to be no protection granted under paragraph 12 (i) (f) against a landlord's right of peaceable re-entry, which the law allows in the case of moratoria for individual insolvencies. The CBI wrote that the unfettered right of a landlord to take possession peacefully could single-handedly kill off an otherwise perfectly viable rescue attempt. The BBA described this as an anomaly and the SPI suggested that "the company should also be protected against peaceable re-entry by a landlord during a moratorium".[113] The BBA suggested that no allowance had been made for factors of debts and suggested clarification of that and of the position of fixed charges on book debts.[114] The consultation has thrown up a number of matters of great practical significance for the operation of a moratorium, affecting the likelihood of existing creditors voting for its extension if sought and of the company concerned being able to carry on business. The relations of a company with its landlord; its utilities supplier; those who lease it the tools of a trade — these are matters of more than merely technical interest which require clarification on the face of the bill.