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Lord McIntosh of Haringey: That is why in those circumstances, we do not need the amendment. The other circumstances that I have outlined would bring the moratorium to an end. The moratorium comes to an end, most obviously, if the nominee loses confidence in it. It can, however, come to an end if the creditors' meeting votes against it and the nominee loses confidence in it—if a significant shareholder indicates his objection to its continuation. If it comes to an end, naturally liquidation proceedings would

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then be appropriate. If people are agreed—if the shareholders, where appropriate, the company and the creditors are agreed—by votes in both meetings that the moratorium should continue, it seems somehow wrong that there should be the alternative, destructive procedure starting in the middle of a moratorium. It is after all, rather a short moratorium.

Lord Kingsland: The noble Lord has, possibly, made my point for me; but I shall look carefully in Hansard to see whether or not that assessment is correct. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 11 not moved.]

Lord Kingsland moved Amendment No. 12:

    Page 14, leave out line 19.

The noble Lord said: There is another important difference between the moratorium in paragraph 12 and that which arises when an administration petition is presented; it relates to the position of a debentureholder. As noble Lords are by now aware, under paragraph 12 it is proposed that in some instances a third party can enforce its rights against a company if it obtains the consent of the nominee or the leave of the court.

The leave of the court can, of course, be granted on terms. For example, a landlord who wants to take proceedings to forfeit a lease can apply for the leave of the court. If he does, the court may give him leave and may impose terms, such as ordering that he can only take proceedings for forfeiture if the company does not pay the rent during the moratorium. Such an order would prevent a landlord from taking advantage of the past indebtedness but would give him priority during the course of the moratorium.

In contrast, some third parties are not given the right to apply to the court for leave to enforce their rights. An example of this is a debentureholder who wishes to appoint an administrative receiver. Thus, there are two classes of rights: those which can be enforced with the leave of the court and those which cannot be enforced even with that leave. Rights that can be enforced with the leave of the court include calling or requisitioning a meeting of the company, taking steps to enforce security over the company's property, repossessing goods in the company's possession under any hire purchase agreement, commencing or continuing proceedings, execution or other legal process and levying distress against the company or its property.

By contrast, the other rights referred to in the paragraph cannot be enforced at all, even with the leave of the court: no petition can be presented to wind up the company; no resolution may be passed or order made for the winding-up of the company; no petition for an administration order may be presented; and no administrative receiver of the company may be appointed. However meritorious the claim, those rights cannot be enforced.

It is difficult to see any policy reasons for the distinction between the two classes. The distinction is also unreal if one considers the position of a

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debentureholder with a debenture containing fixed and floating charges. A debentureholder will be able to enforce the fixed charges in the debenture with the leave of the court, but will not be entitled to appoint an administrative receiver under the floating charge. Why should that be the position?

The position is particularly odd as regards a debentureholder who wants to appoint an administrative receiver under the floating charge. That is because the approval of the voluntary arrangement brings the moratorium to an end and the voluntary arrangement cannot prevent the debentureholder from appointing an administrative receiver. It seems extraordinary that a debentureholder can appoint an administrative receiver if a voluntary arrangement is approved but cannot do so before it is approved while there is a chance that it might be.

This strange situation is even more baffling when compared with the administration order procedure. Under Section 10 of the Insolvency Act 1986, there is a limited moratorium during the period beginning with the presentation of a petition for an administration order and ending with the making of an order or the dismissal of the petition. The hearing of the petition is usually within five days. During that relatively short period, there is a limited moratorium; however, it does not prevent the presentation of a petition for the winding-up of a company or for the appointment of an administrative receiver. A debentureholder has an absolute right to appoint an administrative receiver and, if he exercises that right, the court cannot make an administration order.

Effectively, the debentureholder has a veto on an administration order being granted. So far as concerns a creditor who presents a winding-up petition, he is entitled to be represented at the hearing for an administration order and can argue against an administration order. Those rights are abrogated by paragraph 12 without the protection of the court; neither the debentureholder nor the creditor who wishes to present a winding-up petition has any right to apply to the court for leave to appoint an administrative receiver or present a winding-up petition. That is manifestly undesirable.

As a general rule, company directors will, understandably, go to almost any lengths to avoid a winding-up order. If paragraph 12 is accepted in its present form, a petition can be prevented from being presented, simply by a nominee's recommendation under the provision in paragraph 7, however strong the grounds for a winding-up petition may be.

Similar considerations apply with respect to the appointment of an administrative receiver. Today, one has to apply for an injunction restraining the debentureholder from appointing an administrative receiver, usually with little chance of success. In future, all one will need to do is to find an insolvency practitioner and get him to obtain a moratorium under paragraph 7, and that will prevent the debentureholder from appointing an administrative receiver. The scope for abuse is immense.

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As I understand it, the Government's first response to this argument is to say that it would be unacceptable to have two insolvency procedures of the same kind; but if a winding-up order is made—and I have made this point already in another context—the moratorium would come to an end. There would be only one insolvency procedure thereafter, and that would be liquidation.

The Government also say that a creditor could apply to the court to challenge the nominee's decision not to withdraw his consent; but the test is likely to be stiff. It would probably be necessary to show, in these circumstances, that the nominee's decision is manifestly unreasonable, or based on a failure to consider relevant matters, or the consideration of irrelevant matters. That could be a formidable obstacle to surmount. Why should he have to negotiate simply to present a winding-up petition or appoint an administrative receiver?

We have reflected on further amendments to this paragraph. The aim of the moratorium is the approval of the proposed voluntary arrangement under paragraph 29. It prevents creditors breaking rank. Sub-paragraph (4) of paragraph 29 prevents a meeting of members or creditors approving any proposal or modification which affects the right of a secure creditor to enforce the security, except with his concurrence.

The approval of the voluntary arrangement which the moratorium was intended to facilitate will allow secure creditors to enforce their security. However, the effect of the moratorium in paragraph 12 is to prevent secure creditors from doing so. On the one hand that seems to us to be wrong; because success in the shape of approval of the voluntary arrangement is the result of allowing a secure creditor to enforce his security, which is a mark of failure. It is therefore in the interests of unsecured creditors not to approve the voluntary arrangement in order to prevent a secure creditor from enforcing his security.

On the other hand, it may be desirable to forestall the secure creditors while negotiations are conducted with them with a view to their concurring in the voluntary arrangement. Furthermore, if they are secured they should be protected during the period of the moratorium and are unlikely to suffer much prejudice.

The Minister will no doubt be relieved to hear that, on balance, we prefer the moratorium to prevent secure creditors enforcing their security except as regards debenture holders with power to appoint administrative receivers. As I have already explained, they fall into a different category because such debentureholder security usually extends to assets that can be easily disposed of during the course of a moratorium. Accordingly, we do not propose any amendment other than this. I beg to move.

Lord McIntosh of Haringey: Indeed, the noble Lord, Lord Kingsland, ended by answering his own case very effectively; he led his troops up the hill and down

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again. This is the same argument as applied to the previous group of amendments. The only successful outcome of a moratorium is that everybody is satisfied that the business carries on and that the directors are left in charge of the business and everyone, including the debentureholders, the floating charge holders, are satisfied with whatever arrangement is agreed to. That is the only way in which a moratorium can be successful.

If that is to happen, one cannot have two procedures going on at the same time. That is the fundamental argument. The amendment would reduce the benefit for a company of obtaining a moratorium. Our intention is to give the company's management a short breathing-space in which to put a rescue plan to all its creditors. The amendment could make that pointless. The amendment would mean that would be nothing to stop a floating charge holder from appointing an administrative receiver during the moratorium. That would almost certainly be disastrous for any rescue attempt.

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