The reality of Covid 19, with the shutdown of businesses and restrictions of movement, will inevitably put greater stress on debtors’ abilities to meet their obligations to creditors. In the introduction of the new insolvency regime in Jamaica in 2014, there was great emphasis on ensuring that insolvent persons can be rehabilitated and rescued during times of economic strife. It will, therefore, be no surprise if Jamaicans now turn to this regime for those rescue opportunities. What will this mean for creditors? How are creditor’s rights balanced under the rescue regime of the Insolvency Act?
Under the Insolvency Act, debtors will have the option to put forward proposals geared towards providing the reliefs necessary to weather the difficult economic times. To become binding on creditors, however, the requisite majority of creditors must vote for the acceptance of the proposal and the court must approve the proposal or be deemed to have approved the proposal. Creditors must therefore be vigilant and let their voices be heard. At the meetings at which proposals are discussed, creditors can make amendments to the proposal and creditors who reject the proposal can have a further opportunity to be heard by making their objections known to the court. The court will refuse to approve a proposal the terms of which are not fair and reasonable to the creditors; are oppressive; are not calculated to benefit the general body of creditors ; or, where the debtor is an employer, does not at least cover the amount that the employees and former employees would have received if the entity was wound up.
The filing of a proposal results in automatic stays restricting creditors from exercising remedies against the insolvent person or the insolvent person’s property or commencing or continuing any action, execution, or proceedings for the recovery of the debt. This stay remains in place until the proposal is fully performed or the debtor becomes bankrupt. This stay, however, will not prevent a secured creditor to whom the proposal has not been directed from realizing or otherwise dealing with his security.
Similar stays automatically result also from the filing of a notice of intention to file a proposal and remain in place until the filing of the proposal (when the stay on filing a proposal takes over) or the debtor becomes bankrupt. This stay applies to all creditors, including secured creditors. However, both the stay on filing of a proposal and the filing of a notice of intention to file a proposal will not apply to a creditor who has already taken action by sending a notice of intention to enforce his security more than 10 days before the proposal or notice of intention to file proposal was filed, or has already taken possession of the secured assets for the purpose of realization before the filing of the proposal or notice of intention to file proposal.
Additionally, and in any event, a creditor who is aggrieved by the stay may apply to the court for the removal of the stay. The court in that event would need to be satisfied that the creditor is likely to be materially prejudiced by the continued operation of the stay or otherwise that it would be equitable to lift the stay. A creditor who is therefore vigilant and moves quickly to enforce its security or to proactively register its objections to the court can ensure that he can continue to deal with or realize his security.
In the hope of safeguarding the securities market, the Insolvency Act also provides that the prohibition against terminating, amending or accelerating agreements upon the filing of a proposal or notice of intention to file a proposal does not apply to “eligible financial contracts”. There are a long list of financial contracts included as eligible financing contracts, including, for example, futures agreements, swap agreements, derivative agreements, foreign exchange agreements, commodity agreements, securities or commodities repurchase or reverse repurchase agreements, master agreements, collateral arrangements, to name but a few. Where an eligible financial contract was entered into before the filing of the notice of intention or proposal, the setting off and netting provisions under such contracts can proceed in accordance with the terms of the contract.
Creditors who are prohibited by the stay from terminating their agreement with the debtor, are not obliged to further advance money or credit to the debtor and can require immediate payment for goods, services, use of leased or licensed property or other valuable consideration to be provided after the notice of intention or proposal has been filed. The Insolvency Act, however, recognizes that, to keep the business alive while working out the arrangement with the creditors, the business may require additional financing which creditors may be reluctant to provide to an already ailing entity. The Insolvency Act therefore makes provision for the court to make an order authorizing the debtor to borrow money which may be secured against the property of the debtor in priority to the claims of any secured creditor of the debtor and even in priority to a security or charge arising from a previous order where the person in whose favour the previous order was made consents. It is believed that this super-priority should encourage creditors to extend further financing to the ailing business to keep it alive and give the proposal a better chance at succeeding in rehabilitating the debtor.
The court, in making this order, will consider: (a) the period during which the debtor is expected to be subject to proceedings under the Insolvency Act; (b) how the debtor’s business and financial affairs are to be managed during the proceeding; (c) whether the debtor’s management has the confidence of its major creditors; (d) whether the loan would enhance the prospects of a viable proposal being made in respect of the debtor; (e) the nature and value of the debtor’s property; (f) whether any creditor would be naturally prejudiced as a result of the security or charge; and (g) the report of the insolvency practitioner.
The Insolvency Act does afford debtors opportunities to recover from dire circumstances but in doing so the rights of creditors have not been forgotten. Creditors must however be vigilant. Here are just a few tips for creditors to keep in mind:
- Examine your credit portfolios. Ensure that your secured credit facilities are, and remain, fully perfected;
- Ensure that you hold the relevant certificates of title needed to enforce your security;
- Ensure that any security agreement has been duly stamped with stamp duty;
- Check on the state of the secured property and where it is located;
- Let your voice be heard in relation to the proposals put forward by the debtor;
- Consider whether there are orders which the courts can make to afford you with relief as a creditor where you would be unduly and materially prejudiced;
- Consider whether a super-priority would provide enough protection to allow for the grant of further financing to the ailing business.