(a) Where a corporate borrower is in financial difficulty and an unsecured debt has become due, would it be usual or customary for an unsecured creditor (particularly, a bank creditor) and/or the corporate borrower to attempt to negotiate some suitable arrangement for repayment of the debt before the creditor invokes legal recovery methods?

 

Yes, but whether there will be an arrangement depends ultimately on the size of the debt and the debtor's ability to propose an arrangement which is satisfactory to the creditor both in terms of duration of instalments and the prospect that the arrangement will be adhered to.

(a) What mechanisms are available under the legal system of this economy for unsecured creditors to collect debts owed to them by the corporate debtor?

 

The mechanisms available for an unsecured creditor to collect debts from a corporate debtor who fails to pay voluntarily are principally legal action, the obtaining of judgment and execution thereon. There are a number ways to execute a judgment for the payment of a debt. They are:

(i) issuing a writ of seizure and sale of movable or immovable property;

(ii) applying to garnish any debt due or accruing to the debtor from some third party, including money in a bank account; and

(iii) applying for the appointment of a receiver by way of equitable execution.

An unsecured debtor may also apply to wind up the corporate debtor.

If the corporate debtor is in liquidation or judicial management, the unsecured creditor's only remedy is to file a proof of debt with the liquidator/judicial manager. Proofs of debt in liquidation are lodged for the purpose of calculating dividends; proofs of debt in judicial management are lodged for the purposes of voting at the statutory creditors' meetings.

(b) In practice, which method(s) of recovery of unsecured debts are most commonly employed by unsecured creditors of a corporate debtor?

 

The method most commonly employed by unsecured creditors is to commence legal prceedings, obtain judgment and levy execution on the known assets of the corporate debtor. The method of execution used depends on what information, if any, the judgment creditor has regarding the assets of the judgment debtor.

Most unsecured creditors are extremely reluctant to initiate winding up proceedings because: (a) they are expensive; (b) the liquidation process is generally slow; (c) recovery is usually very small; (d) other unsecured creditors will gain the benefit of the liquidation proceedings with no obligation to bear the costs; and (e) the petitioning creditor has to share the assets of the company with all other creditors. The only exception to this general observation is a preferential creditor who is assured of payment in priority over the general body of unsecured creditors and thus has an incentive to commence winding up proceedings.

E3. Effectiveness of judicial system

(a) How effective is the judicial and court system for the purposes of debt collection?

 

The judicial and court system is highly effective for the purposes of debt collection both in terms of the outcome and the timeliness of the adjudication of legal liability.

(a) What effect, if any, does the commencement of insolvency proceedings against a corporate debtor have on debt recovery proceedings?

 

The convening of meetings to consider a scheme of arrangement has no effect on debt recovery proceedings. Unsecured creditors are therefore free to commence proceedings subject to the court's power to restrain such proceedings under section 210(10).

The presentation of a winding up petition does not impose an automatic statutory moratorium on debt recovery proceedings. However, the court has the power to stay pending proceedings on the application of the company, any creditor or any contributory. Furthermore, there is an automatic statutory moratorium subject to the leave of court where a provisional liquidator is appointed before a winding up order is made. Any attachment, sequestration, distress or execution put in force against the corporate debtor after the presentation of a winding up petition is void. Furthermore if execution is put into force before the presentation of the winding up petition but has not been completed as at that date, a creditor is not entitled to retain the benefit of the execution against the liquidator.

The presentation of a judicial management petition imposes an automatic statutory moratorium on the commencement of legal proceedings or execution proceedings without the leave of court.

(b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on debt recovery proceedings?

 

The agreement of a majority in number and 75% in value of the creditors of a company to a scheme of arrangement and the subsequent approval thereof by the Court results in a statutory contract which is binding on all creditors of the company. In these circumstances, all such creditors including dissentient creditors are prohibited from recovering or attempting to recover their debt outside the parameters of the scheme.

The formal pronouncement of a winding up order brings into effect a mandatory statutory stay of proceedings against the company. The only recourse then open to unsecured creditors is to file a proof of debt with the liquidator for his adjudication and to appeal to the High Court if the adjudication is adverse.

The formal pronouncement of a judicial management order continues the mandatory statutory moratorium imposed upon the presentation of the petition preventing the commencement or continuation of legal or execution proceedings. The moratorium continues in force so long as the judicial management order is in force. A judicial management order is in force in the first instance for 180 days subject to the court's powers of extension upon application by the judicial manager.