Section 2 of The Insolvency Act 1986 - Company Voluntary Arrangements (CVAs) - Nominee's duties
CVA procedure before the creditors meeting (in cases where the nominee is not also acting as liquidator/administrator)
This section of The Insolvency Act 1986 is applicable as to what a nominee is duty bound to do in those CVA cases where the directors do not require a freeze on creditors actions ahead of the CVA creditors meeting to consider the CVA proposal.
Section 2 of The Insolvency Act 1986 provides the law on that initial procedure that the nominee must follow and his legal duties in connection with the CVA proposal. (The "nominee" is the named insolvency practioner instructed by the directors in connection with the proposed CVA).
The actual wording of Section 2 of The Insolvency Act 1986 is shown in bold below.
2. Procedure where nominee is not the liquidator or administrator:
(1) This section applies where the nominee under section 1 is not the liquidator or administrator of the company [and the directors do not propose to take steps to obtain a moratorium under section 1A for the company].
(2) The nominee shall, within 28 days (or such longer period as the court may allow) after he is giving notice of the proposal for a voluntary arrangement, submit a report to the court stating -
(a) [whether, in his opinion, the proposed voluntary arrangement has a reasonable prospect of being approved and implemented,
(aa)] whether, in his opinion, meetings of the company and of its creditors should be summoned to consider the proposal, and
(b) if in his opinion such meetings should be summoned, the date on which, and time and place at which, he proposes the meetings should be held.
(3) For the purposes of enabling the nominee to prepare his report, the person intending to make the proposal shall submit to the nominee -
(a) a document setting out the terms of the proposed voluntary arrangement, and
(b) a statement of the company’s affairs containing -
(i) such particulars of its creditors and of its debts and other liabilities and of its assets as may be prescribed, and
(ii) such other information as may be prescribed
(4) The court may -
(a) on an application made by the person intending to make the proposal, in a case where the nominee has failed to submit the report required by this section or has died, or
(b) on an application made by that person or the nominee, in a case where it is impracticable or inappropriate for the nominee to continue to act as such,
direct that the nominee be replaced as such by another person qualified to act as an insolvency practitioner, or authorised to act as nominee, in relation to the voluntary arrangement.]
In other words the nominee has to consider what is being proposed and then report to the court his opinion on the Company Voluntary Arrangement (CVA) proposal. The idea behind this is to ensure that the proposal is serious and has a realistic chance of being of interest to creditors and is capable of implementation.
The case of Greystoke v Hamilton-Smith and others was just one law case that has considered the meaning of the exercise of the nominee's duties under The Insolvency Act 1986. While that case was a personal insolvency case rather than a company insolvency case the decision is relevant to nominees who act in respect of a company. In that case the court concluded that a nominee has a duty to,
- Ensure that the true position is shown as regards debtors and creditors
- In broad terms the proposal has a real prospect of being implemented
- In broad terms there is no unavoidable and manifest unfaiirness.
As well as complying with section 2 insolvency practioners must also comply with Statement of Insolvency Practice number 3 (SIP 3) concerning voluntary arrangements.
Should you need free advice on the main case law addressing and interpreting Section 2 of The Insolvency Act 1986 regarding a nominee's duties in a Company Voluntary Arrangement (or indeed any other section of that Act) please contact us by submitting the information request form shown on the right hand side of this page.