The new Insolvency Act — Santa for the broke?
THERE can be no doubt that the new Insolvency Act, as soon as it takes effect, should be well-received, particularly by those who have fallen on hard times. The Act may be to the broke business person what Santa Claus is to a forsaken child at Christmas — the bearer of a long-awaited gift.
It is a significant milestone that the opportunity to more easily rehabilitate one’s self financially is about to play a larger part in our legal framework.
Whilst the new Act provides an avenue of possible relief for debtors in distress, there are a few elements, also to be introduced, with which those who sit in the shoes of creditors may wish to acquaint themselves.
The Proposal
A proposal is an arrangement for a composition, an extension of time or a scheme or arrangement. A composition is a mutual agreement between the parties under which obligations of a debt are settled.
Those who are entitled to make a proposal include persons facing imminent insolvency, insolvent persons, the liquidator of an insolvent person, a bankrupt, and a trustee of an estate in bankruptcy. The inclusion of a person facing imminent insolvency on the Christmas list of persons who may make a proposal is a ‘first’, certainly for the region, and one which should no doubt propel this Act into a benchmark position.
The proposal process may be commenced by lodging with one of Santa’s helpers, a trustee, a copy of the proposal in writing setting out the terms. The proposal must be signed by the person making it. It may be made with creditors as a group or separated into classes, or with secured creditors.
The trustee has a duty to examine the proposal and consider the financial situation of the debtor, the cause of his financial difficulties or insolvency, and report that to the creditors. The proposal, once accepted by the required majority of creditors, may be deemed approved by the Court without the need for an actual Court proceeding, unless notice of objection is given by the Supervisor of Insolvency (supervisor) or any creditor.
Where a proposal is approved it is binding on the creditors in respect of all unsecured claims and secured claims in respect of which the proposal was made, and accepted by the required majority of secured creditors. Where a proposal is rejected by the creditors, the debtor is deemed to have made an application for an assignment, and if he was not already a bankrupt, he becomes bankrupt. It is possible to file a notice of intention to make a proposal before the actual proposal is made.
An insolvent person who files a notice signalling an intention to make a proposal has 30 days thereafter to file the actual proposal. Before the period expires, that person may also apply for an extension. It is important to note that whilst an individual extension cannot exceed a period of 45 days, the overall period allowed is up to five months.
The supervisor may grant any extension where satisfied that any creditor would not be materially prejudiced by the granting of that extension.
The Stay
Of paramount importance for proceedings in Jamaica is the stay that the Insolvency Act provides for, and the ways in which a person who wishes to make a proposal may benefit from this gift which, regrettably for some, has an expiration date. There are three critical stays to consider: (a) the stay on filing of a notice of intention; (b) the stay on filing of a proposal; and (c) the stay
on the commencement of bankruptcy.
(a) Notice of Intention Stay
This will take effect when a notice of intention to make a proposal has been filed with the effect that no creditor will have a remedy against the insolvent person or that person’s property during the period of the stay. Also, during that period a creditor is barred from continuing or commencing proceedings against the debtor. In this case, the stay could potentially remain in effect for a period of up to six months, taking into consideration that an insolvent person may apply for, and receive, extensions totalling up to a further five months within which to file a proposal.
(b) Proposal Stay
There is also a stay on the actual filing of the proposal. As a result of this stay, during the period no creditor to whom a proposal has been made has a remedy against or can commence or continue proceedings against that debtor. The stay remains in effect until the trustee is discharged, having completed his obligations.
(c) Bankruptcy Stay
A similar stay takes effect on the bankruptcy of any debtor. This stay will however last until the trustee is discharged.
However, Santa has a gift for the secured creditor in respect of the stay as it would not affect those who take possession of secured assets before a proposal is filed. Immunity also extends to secured creditors who give a notice of intention to enforce against a security at least 10 days before the notice of intention or the actual proposal are filed.
Likewise secured creditors to whom a proposal has not been made would not be prevented from dealing with their security during a proposal stay.
Finally, secured creditors may put forward an outright refusal of the proposal and thereafter a secured creditor in that class may deal with his security as if the proposal had not been made.
There are several other important provisions of note to which all creditors, whether secured or not, will want to pay close attention. The Insolvency Act is a critical tool for encouraging entrepreneurship in Jamaica and it is therefore important that we all familiarise ourselves with this gift from Santa for 2014.
Rachel McLarty is an associate at Myers, Fletcher & Gordon and is a member of the firm’s Property Department. She may
be contacted via Rachel.McLarty@mfg.com.
jm or you can visit the firm’s website at www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.