proposed funders as well as major suppliers and other trading partners. Assurances from such parties will have to be sought and trading projections analysed. The overall effect, it has been suggested, may be that the amount of work involved, and the attendant expenses, will prevent the moratorium CVA procedure from performing as a cost-effective device for smaller companies.96 The CVA, moreover, may be further reduced in its attractiveness because the moratorium does not protect the company during the period in which proposals are being developed and a nominee may fear that consulting with creditors before a moratorium comes into effect may trigger their taking precipitate action against the company.

Crown creditors and CVAs

In the consultations that the IS held in its 1999 Review Group discussion paper on rescue and reconstruction mechanisms the ‘most heartfelt’ response on CVAs concerned ‘the uncommercial attitude of the revenue departments (Inland Revenue and Customs and Excise (HMRC)) to proposals for CVAs’. At that time the Crown enjoyed preferential status for such debts and IS consultees complained that the revenue departments’ insistence on 100 per cent payment, and the time taken to consider proposals, frustrated many CVA proposals that unsecured creditors would otherwise approve. Respondents consistently criticised the apparent unwillingness of these departments to deal with CVA proposals on their merits or to take a longer-term view of the prospects of a company’s survival. The Review Group recommended that the Inland Revenue (IR) and Customs and Excise should work to develop a more commercial approach to CVAs so that proposals were judged on their merits and, where appropriate, less than 100 pence in the pound should be settled on if it was judged that a CVA would offer superior returns.97

In order to produce a more consistent and responsive approach to CVA proposals, the Review Group recommended that the two revenue departments should investigate integrating their work on CVAs, look at the staffing implications of a more responsive approach and consider the need to bring in private sector skills to bear on decisions relating to CVAs and their commercial viability. They should also, said the Review Group, explore with the Insolvency Service how to take a more proactive role in

96 See Smith and Neill, ‘Insolvency Act 2000’, p. 85. R3 also made this argument: see R3, ‘The Moratorium Provisions for the Company Voluntary Arrangement Procedure in the Insol vency Bill 2000’ ( 2 000 ) 16 I L& P 77.

97 IS 2000, p. 24.

warning directors of the possible consequences of continuing to trade during insolvency and of the possible need for professional advice.

In accordance with these suggestions, the IR and the Customs and Excise set up a Voluntary Arrangements Service (VAS) in Worthing which has been running since 2 April 2001. It is managed by the IR on behalf of HM Revenue and Customs.98 The stated aims of the VAS are ‘to help its customers, to work collaboratively with the private sector and other government departments and to make a full contribution to business rescue by supporting viable businesses through periods of temporary financial difficulty’.99 To this end, the VAS publishes criteria by which it will judge the acceptability of proposals put to it by troubled companies.100

The Enterprise Act 2002 abolished the Crown’s right to be paid as a preferential creditor.101 Has this development enhanced or detracted from the CVA as a rescue process? In the lead up to the 2002 Act there was a general acceptance that abolition of the Crown’s preferential status would produce more successful CVAs102 but, in 2003, the President of R3 reported a number of R3 members’ concerns that, in the light of abolition, the VAS had changed its policy on voting for voluntary arrangements. In response to communications on this matter, the VAS ‘emphatically confirmed that there is absolutely no effort being made by them to increase the amount of return from voluntary arrangements’.103 The VAS emphasised that it supported proposals that were workable and designed to increase returns for creditors, including the Crown, without detracting from the company’s survival prospects.104

98See D. Ellis, ‘Inland Revenue and Business Rescue’ (2001) Recovery (September) 18–19.

99Ibid., p. 18.

100On HMRC standard modifications that it likes to see in CVAs and HMRC expectations on the duration of CVAs see G. Krasner, ‘Duration of CVAs’ (2006) Recovery (Winter) 3.

101Enterprise Act 2002 s. 251.

102In 1999 the Review Group reported the broad view that this would be the effect of abolition since: ‘the larger the dividend that can be proposed to unsecured creditors, and as importantly, the earlier it can be paid to them, the more likely they are to support proposals which would allow the survival of the company’: see IS 2000, pp. 25–6. The Review Group added that it would be important that the benefits of abolition should accrue to unsecured creditors and not to the holders of floating charges – hence the Enterprise Act 2002’s creation of the ring-fenced fund or ‘prescribed part’ under which a percentage in value of assets subject to a floating charge has to be given over to form a fund available to unsecured creditors: see now IA 1986 s. 176A; and ch. 3 above.

103See J. Verrill, ‘President’s Column’ (2003) Recovery (Winter) 36–7. 104 See ibid.

The nominee’s scrutiny role

An advantage of CVA procedures since the Insolvency Act 2000 is that

moratorium protection from creditors can be achieved without the need to incur the trouble and expense of a court action.105 The IP who acts as

nominee accordingly fulfils an important role in assessing prospects of success and filtering out non-viable proposals. This is a reason for insisting that the nominee be a fully qualified IP, or a person authorised to act as a nominee or supervisor by a body recognised by the Secretary of State.106 The role is, however, a difficult one since nominees rely heavily on information supplied to them by the directors and they will not have the power or time to conduct thorough investigations.107 One commentator described the predicament: ‘If too much reliance is placed on the nominee as a filter it will inevitably lead to escalation in cost as nominees seek to protect their own position by “due diligence”, or become conservative in recommending a CVA as viable; the result is that the proposed cheap and speedy procedure aimed at smaller companies will become prohibitively expensive and slow.’108

The Insolvency Act 2000 demands that when the nominee submits to the directors a statement109 which indicates an opinion on, inter alia, whether the CVA has a reasonable prospect of approval and implementation, the nominee is ‘entitled to rely on the information submitted to him’ by the directors in their CVA proposal ‘unless he has reason to doubt its accuracy’.110 The Law Society cautioned that there was a ‘clear danger’ in the nominee simply relying on the information supplied by directors.111 Concern has also been raised that for a nominee to be able to give the statement referred to above, he will need to be involved ‘in the day to day management of the business and to have carried out a

105Of course, after the reforms of the Enterprise Act 2002 it is now also possible to put a company into administration (and gain the protection of a moratorium) without going to court: see ch. 9 above.

106Insolvency Act 1986 s. 4(2).

107It is noteworthy also that the chairman of a creditors’ meeting will be allowed by the court to value claims on the basis of the evidence produced by the creditor or debtor and has no duty to investigate independently: see Re Newlands (Seaford) Educational Trust [2007] BCC 195. (Chair supported in valuing landlords’ claim – for in excess of £1 million – at £1 in accordance with Rule 1.17(3) of the Insolvency Rules 1986, since representations did not allow the ascertaining of the claim’s appropriate value.)

108Brown, Corporate Rescue, pp. 663–4.

109See now Insolvency Act 1986 Sch. A1, para. 6(2).

110Insolvency Act 1986 Sch. A1, para. 6(3).

111Law Society Company Law Committee, Comments, p. 5.

significant investigation’.112 This could prove expensive. Concern was also expressed that the nominee will have significant responsibilities without authority in that he has no control over the assets which he would have if he were a provisional liquidator or other office holder, nor does he control the actions of the directors during the period of the moratorium.113

A further worry that was expressed by the Law Society perhaps evidenced a low opinion of the professional standards of IPs. The Society said: ‘We are also concerned that companies will be encouraged to shop around amongst those authorised to act as nominees until they can locate one prepared to provide an appropriate statement in order to secure a moratorium. This concern was shared by the Select Committee.’114 The Society added that such loopholes created the potential for a voluntary arrangement to go badly wrong, bringing the whole process into disrepute amongst creditors.115

In defence of the Insolvency Act 2000 regime, it could, however, be argued that nominee scrutiny, even if erring on the defensive side, is liable to be quicker and cheaper than resort to court and that the twenty- eight-day limit of the moratorium should restrict some of the dangers of abuse that are associated with the longer terms of the United States Chapter 11 moratorium.116

Rescue funding

A fundamental challenge for troubled companies is that of securing new funds in order to finance continuing activities while a CVA is being negotiated and in order to provide for the longer-term survival of corporate operations.117 The availability of longer-term financing will crucially affect the success or failure of the CVA since creditors are unlikely to agree to the company’s proposals without the prospect of secure funding.118 The SPI survey for 1997–8 suggested that in 43 per

cent of cases the biggest barrier to turnaround was lack of appropriate finance119 and R3’s 1998–9 survey indicated that in one in five cases of

112 Alexander, ‘CVAs: The New Legislation’, pp. 8–9.

114Law Society Company Law Committee, Comments, pp. 4–5.

115Ibid., p. 5. 116 See ch. 6 above.

117 The adequacy of an adequate funding stream for the period until approval can be secured is a legal as well as practical requirement: see IA 1986 Sch. A1, para. 6(2)(b). On rescue and funding more generally see chs. 6 and 9 above.

118DTI 1993, p. 5. On the importance of funding see IS 2000, pp. 33–5.

119IS 1999, p. 12.