Debtor's Welcome to their Brother
Debtor's Welcome to their Brother
A note to the drafting sub Committee. It highlights the objectives of the Committee. It also emphasises that there should be a set of general principles and a philosophy that guide the Committee’s work.
The report highlights a number of areas within the Insolvency Law that the Committee considers in detail.
They were giving priority to Lenders over Unsecured Creditors, and this was felt to be unfair. Receivers appointed under Floating Charges had considered their main duty was to the Debenture Holder and not to the company as a whole. The Committee, therefore, recommends that Receivers should have wider responsibilities for, and be more accountable to, creditors. Some difficulties include conflict of duties with Liquidators, conducting litigation, and limiting those persons who get to be appointed a Receiver.
Second, in the absence of a Floating charge, the Committee found that following other rescue paths was impossible. Therefore, the Committee recommends that a company gets given the power, through the Courts, to appoint an Administrator, with powers similar to those of a Receiver.
the Committee notes an increase in the use of retention of title clauses by Suppliers- the Romalpa clauses. They note that the issue is that they disturb the balance of powers between secured and unsecured creditors and suppliers. The Committee recommends that these clauses are registered, but that they are- contrary to the wishes of Consultees- unlikely to be outlawed.
The alternatives to Bankruptcy for individual debtors are unsatisfactory. The Committee recommends that a new system be put in place, which is as successful as the Bankruptcy system, but which does not require reference to the Courts to the same extent as the current system.
There should be three separate routes to individuals, the purpose of which is to make the route easier for innocent individuals than to criminal and reckless insolvents. Also, it is intended to co-ordinate the insolvency procedures of both companies and individuals so that they are easily understood by the public.
The area of voluntary liquidation is said to work well, apart from certain detailed aspects that need to be harmonised with other procedures. Compulsory liquidation is another area where no changes are needed, though harmonisation with other aspects may be required.
There is a necessity for defining the foundation of evidence, which is used to open insolvency proceedings. The legal position of companies and individuals between the date of cessation and the commencement of insolvency proceedings is unclear.
The committee favours restricting preferential rights of creditors. Consumer creditors should not justify their priority on the basis that they did not accept a commercial risk, nor on the basis of sympathy. Further, the priority of the wage-earner means little in light of the introduction of other rights in social legislation. The committee therefore recommends that preferential rights be abolished, except for quasi-trust funds, and employees’ claims for wages and salaries.
The law relating to directors who continue to run companies that are obviously insolvent is unsatisfactory, since it requires actual dishonesty. This is problematic, since this does not serve cases where directors genuinely believed they could take their companies out of insolvency. In borderline cases, where fault is due to lack of knowledge or incompetence, the committee recommends that the Directors be disqualified from directing the company, or other companies, unless they receive relief from the Courts.
In criminal bankruptcy, some companies would be set up deliberately to defraud the community. In these cases, the claimants would unlikely to have much of personal assets anyway, and proceedings are not worthwhile. In sophisticated criminal bankruptcy, the issue is that most cases do not get prosecuted. More powers should be given to the courts to make orders under civil or criminal proceedings.
With regards to Fraudulent preferences under s.44 of the Bankruptcy Act 1914, the report suggests that the meaning of Fraudulent in this context is misleading. The report makes the recommendation that no motive needs to be demonstrated when Trustees or Liquidators avoid a preference and seek a repayment from the creditor instead.
The Committee recommends that s.322 of the Companies Act 1948 should be extended to include fixed charges, which could only be attacked as fraudulent preferences as above. Second, the section has been interpreted too narrowly. This led to anomalies, which, the Committee recommends, could be rectified so that the charge becomes valid only to the extent that the lending was actually increased.
Third, the Committee recommends that charges over all forms of assets of a company be registered, failure of which would result in them being void against a Liquidator.
With respect to abuse suffered by creditors and shareholders, which is disclosed by a Liquidator, but which does not damage the company itself, the Committee recommends that Liquidators be empowered to take proceedings that not only benefit the company itself, but also the shareholders and creditors.
When companies operate in groups, and some run into difficulties, two issues usually arise. The first one relates to the guarantees that some companies give to the others’ liabilities(cross-guarantees). The second one is the extent to which parent companies are responsible for the subsidiaries’ liabilities.
As to the first issue, the Committee recommends that while the freedom of companies to cross-guarantee other companies, accounts should show the maximum amount of the contingent liabilities, as well as the name of the for which a benefit is given. This will give a clear idea of the state of affairs with respect to a guarantee.
As to the second issue, the Committee recognises that the proposition that parent companies should always be responsible for their subsidiaries’ debt has been challenged. The Committee recommends that a Holding company should exercise its power over a subsidiary in the same was that the Directors of that company would act.
T.H. Traylor
11th December 1978