Sun | Nov 18, 2018

Few take shelter under new insolvency law

Published:Friday | June 9, 2017 | 12:00 AM
Justice Ferdinand Smith, superintendent of insolvency, speaks during an interview at the Office of Insolvency in New Kingston on Wednesday, June 7.

A freshly minted operation run from Grenada Crescent in New Kingston, the Office of the Supervisor of Insolvency (OSI), has seen only four cases of individuals and companies proposing to rehabilitate their finances under bankruptcy protection so far.

The cases include two individuals with debt upwards of $25 million and two companies, which have among them more than 200 creditors and debt upwards of $500 million.

But there are another eight companies and three additional individuals for whom notices of receivership have been submitted to the OSI.

Such notices of receivership, which are a prelude to bankruptcy proceedings, could have been avoided if individuals involved had taken steps to propose a solution geared to satisfy creditors, says Justice Ferdinand Smith who was appointed supervisor of insolvency in August 2016.

Smith, a retired judge, operates with a support staff of three – deputy supervisor Fayola Evans-Roberts, licensing and compliance officer Ariel Van Cork, and assistant to Justice Smith, Allison Martin-Duncan.

They run the regulatory arm of the Office of Insolvency created on January 1, 2015 by the Bankruptcy and Insolvency Act. The law has introduced several innovations to assist the indebted restructure their affairs – all aimed at removing the stigma once attached to bankruptcy.

More sensitisation needed

According to Justice Smith, in an interview with the Financial Gleaner this week, the slow pace of business at the OSI might be due to a need for sensitisation about the services. But he also says the new law, which favours debtors, has, from his perspective, made insolvents more willing to seek a solution to their financial problems.

The Insolvency Act, passed in October 2014, consolidated legislation relating to bankruptcy, insolvency, receiverships, provisional supervision and the winding up of companies. The legislation repealed the Bankruptcy Act, and included an amendment of the Companies Act.

An insolvent individual or company is defined as one with over $300,000 in debt and unable to meet their obligations as they become due, or who has ceased to pay.

OSI services are free to the public. The agency itself is state-funded.

The new law supports the rehabilitation of debtors and the preservation of viable companies, but also seeks to protect the rights of creditors.

Older laws were replaced or amended because they gave the interest of creditors primacy above all and made little or no provision for rehabilitation or reorganisation of the business and affairs of the debtor.

“One of the innovations is the ‘Notice of Intention to Make a Proposal’. An insolvent person may file a notice of that intention. Once that notice is filed, the law provides that actions against him are stayed," said Justice Smith.

It allows the debtor to avoid going to court.

Smith said debtors "may come to the office and show us the details of their business. Once we are satisfied that they are insolvent, we will look now at the proposal, which is the scheme to deal with all the creditors with a view to rehabilitating the business."

The new law makes it possible to rescue a business which is distressed but still viable.

"Under the old regime, this was not possible," said the OSI head.

"The new focus is on rehabilitation. Formerly, under the Companies Act, the receiver would be appointed - at the creditor's request - to pay debtors and dissolve the company," he explained.

On review of individual cases, the OSI will approve a trustee who files the notice of intention, assists in producing the rescue proposal, convenes a meeting with creditors and works to secure approval for the proposal. The trustee will also assist the debtor in restructuring and even refinancing, Smith said.

Clients are charged a nominal fee by the trustee.

Staving off insolvencies

The supervisor of insolvency said yet another innovation of the recent law is a programme for staving off looming insolvencies.

This applies to the business person or individual who foresees events over a period of 12 months which could lead to bankruptcy.

"The individual does not have to wait. He can come to us with a proposal before," Smith observed. "If he cannot afford a private trustee, we can appoint one for the imminent insolvent," he added.

The trustee is expected to be an attorney with five years of experience in insolvency law and also licensed by the OSI. Smith noted that where under the previous law there were liquidators separate from receivers in the winding up process, the role of the trustee now subsumes them all.

The law now requires all persons acting as receivers and liquidators to be licensed by the OSI.

The office is working on a training programme for trustees, to be run by the Norman Manley Law School, but in the meantime the office has approved 13 acting trustees, Smith told the Financial Gleaner.

In its most advanced bankruptcy protection case, the OSI head said the debtor has made the proposal to sell property to back most of what is owed to debtors. The proposal was accepted and the property has been placed on the market.

Justice Smith noted that if creditors reject the debtor's proposal, the case will proceed to bankruptcy, which is adjudicated in the courts. But even when an interim receiver is appointed by the court, the trustee still has the window to produce a notice of intent to make a proposal, he said.

Individuals and companies who fail to bring to their problems to the OSI run the risk of having creditors apply to the court for a receiving order and eventually be declared a bankrupt, he warned.

With regards to the other three cases for which notices have been given, the justice said "a lot of work seems to be going into making the proposal attractive to creditors".

Enhancements to insolvency law include a distinction between 'property' and 'income' of an individual bankrupt, and recognises that the debtor requires income to pay basic living expenses.