Part XIV of the Insolvency Act (Chapter 253) offers a debtor two alternatives to adjudication, each driven by the creditors rather than by the Court.
Section 181 — liquidation by arrangement
(1) A debtor who is unable to pay his debts may summon a general meeting of his creditors.
(2) The meeting may, by special resolution — a majority in number and 75% in value of those present and voting — declare that the affairs of the debtor are to be liquidated by arrangement and not in insolvency.
(3) That meeting, or a subsequent meeting held at an interval of not more than one week, may appoint a trustee, with or without a committee of inspection.
(4) Unless prevented by sickness or other satisfactory cause, the debtor shall (a) be present; (b) answer any inquiries made of him; and (c) produce a statement showing the whole of his assets and debts, and the names and addresses of his creditors — or have someone produce it on his behalf.
The resolution, the statement of assets and debts, the trustee’s name and the committee members’ names are sent to the Registrar, who shall inquire whether the resolution was duly passed and, if satisfied and a trustee has been appointed, register them without delay. They are open for inspection.
The liquidation is deemed to have commenced from the date of the appointment of the trustee. In the absence of fraud, registration is conclusive evidence that the resolution was duly passed and all requirements complied with — though on sufficient cause the registration may be cancelled by the Court on a creditor’s application.
Sections 183 to 189 — how the arrangement runs
183. The provisions on first and subsequent meetings of creditors apply — but every meeting is presided over by a chairman elected at the meeting, and no creditor may vote until he has proved, by statutory declaration, a provable debt, its amount, and any prescribed particulars.
184. A certificate by the Registrar as to the trustee’s appointment has the same effect as a certificate under section 57 — conclusive evidence, and deemed a transfer of property for registration purposes.
185. On the trustee’s appointment, the property that would be divisible if the debtor were made insolvent vests in the trustee; and all settlements, transfers, charges, payments, obligations and proceedings that would be void against a trustee in an insolvency are void against him.
186. The trustee has the same powers and duties as a trustee in insolvency, and the property is distributed in the same manner. Where no committee of inspection is appointed, the trustee may act on his own discretion in cases where he would otherwise have had to refer to it.
187. The creditors may prescribe the bank into which the trustee is to pay money and the sum he may retain; and the audit provisions for elected trustees apply.
The insolvency provisions apply so far as applicable, and the appointment of the trustee under section 181 is deemed to be the presentation of a petition, the service of a petition, or an order of adjudication, as the case requires. References to an insolvent are read as references to the debtor, and to an insolvency as references to the liquidation.
That single provision imports the divisible property rules, the avoidance provisions with their six-month look-backs, the proof of debt rules and the order of priority — without a Court adjudication.
The provisions on close of insolvency, discharge and release of a trustee do not apply. Instead, the close may be fixed, and the discharge of the debtor and the release of the trustee granted, by a special resolution of the creditors in general meeting — but a trustee shall not be released unless his accounts have been audited.
The trustee reports the discharge to the Registrar, and a certificate of discharge given by the Registrar has the same effect as one given to an insolvent under Division VII.2.
Sections 191 to 195 — compositions with creditors
Without any proceedings in insolvency, the creditors of a debtor unable to pay his debts may, by an extraordinary resolution, resolve that a composition be accepted in satisfaction of the debts due to them.
The debtor shall, unless prevented by sickness or other satisfactory cause, be present at both meetings, answer any inquiries, and produce a statement of the whole of his assets and debts and the names and addresses of his creditors.
Under section 1, an extraordinary resolution must be passed by a majority in number and 75% in value of the creditors present at a general meeting, and then confirmed by a majority in number and value at a subsequent meeting held not less than seven nor more than 14 days later.
Two meetings, a week or two apart, give creditors time to reflect. Under section 191, in calculating the majority for a composition, the value of secured creditors’ debts is estimated as nearly as possible in the same way, and the same description of creditors may vote, as in an insolvency.
The resolution and the statement go to the Registrar, who inquires and, if satisfied, registers them — until registration the resolution has no effect.
Before registration the debtor shall make oath (a) that he has fully and truly disclosed all his assets and liabilities, the names of his creditors and the amounts of their debts, and (b) that he has not granted or promised any payment or security, made or promised any preference, or entered into any collusive agreement, for the purpose of obtaining assent to the resolution. The oath is registered with the resolution.
Any creditor may inspect the statement. In the absence of fraud, registration is conclusive evidence of due passing and compliance — but may be cancelled by the Court on sufficient cause, on a creditor’s application.
194. The creditors may, by a further extraordinary resolution, add to or vary the provisions of a composition — without prejudice to the rights of persons taking interests under it who do not assent. The variation is registered in the same way and with the same consequences.
195. A composition is binding on all the creditors whose names and addresses and the amounts of whose debts are shown in the statement produced to the meetings, but does not affect or prejudice the rights of any other creditors. It may be enforced by the Court on motion by any person interested, and disobedience is a contempt of court.
An omitted creditor is not bound and may sue. That makes the section 192 statement the critical document, exactly as the creditor list is under section 244(2) of the Companies Act, where a compromise binds only creditors given notice.
Sections 190, 197 and 198 — failure and fraud
Where it appears to the Court on satisfactory evidence that a liquidation by arrangement cannot proceed without injustice or undue delay — because of legal difficulties, because there is no trustee, or for any other sufficient reason — the Court may, on the petition of the debtor or of a competent creditor, adjudge the debtor insolvent.
Section 197 makes the same provision for a composition, on the grounds of legal difficulties or any other sufficient reason.
A debtor who makes an arrangement or composition remains liable for the unpaid balance of any debt (a) that he incurred or increased, or (b) of which he obtained forbearance before the date of the arrangement or composition, by fraud — unless the defrauded creditor has assented otherwise than by proving his debt and accepting dividends.
The exception mirrors section 137(3)(a): a discharge in insolvency does not release a debt incurred by fraud or breach of trust, and neither does a composition. Note the qualification — merely proving and taking a dividend is not assent.
Part XV completes the Act: where the Minister is satisfied that substantial reciprocal provisions exist, he may declare a foreign country by notice in the National Gazette, and the Court shall assist a court of that country having jurisdiction in insolvency, having regard to the rules of international private law, on a written request (ss 200 to 203).
Sources
- Insolvency Act (Chapter 253) — ss 1, 57, 137, 181–199, 200–203
- Companies Act 1997 — s 244
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.