Provisional Supervision – Meetings of Creditors and Investigation Powers
First Meeting of Creditors
The provisional supervisor is required to convene a first meeting of creditors within 10 business days of the date of his appointment. He must give at least seven days notice of this meeting and although the draft proposals make no reference, it’s reasonable to assume that it will be necessary to hold the meeting at a place and time that is convenient for the majority of creditors.
Convening the meeting within this timeframe is likely to pose practical difficulties for the provisional supervisor, particularly if the accounting records of the company are not up to date – a common enough problem encounted with companies that are experiencing financial distress. The 10 business days requirement effectively gives the provisional supervisor a relatively short time-frame within which to assemble an accurate list of the company’s creditors from its accounting records and send out notices. Our assumption at the moment is that it will be necessary to send the notice of the meeting by post. It would be a very progressive approach, although unfortunately unlikely, if the provisional supervisor were given the option to communicate with creditors by electronic means, rather than being limited to “snail mail”.
At the meeting, the provisional supervisor is required to table a “declaration of relevant relationships” as a means of enhancing transparency as regards his appointment. In addition, if the provisional supervisor is being ”funded”, details of this funding must also be disclosed at the meeting to allow creditors to decide whether or not it creates any potential conflict of interest.
The purpose of the first meeting of creditors is to decide:-
- whether or not the existing provisional supervisor should continue in office; or
- whether he should be replaced; and
- to appoint a committee of creditors, the functions of which would be to appear to be similar to those of a committee of inspection in a liquidation.
It seems likely that the functions of the committee will be set out in more detail in the actual Bill, when it is published.
The provisional supervisor’s powers extend to requiring present and/or former officers of the company to provide a statement of affairs and, in quite broad terms, to assist the provisional supervisor in the undertaking of his functions.
Final Meeting of Creditors
The final meeting of creditors is supposed to be held within 45 working days of the appointment of the provisional supervisor. However, this time can be extended for up to 6 months with the approval of a meeting of creditors. It can be further extended, (for a period to be decided by the court), but only on the application of the provisional supervisor.
The purpose of the final meeting of creditors will be to either:-
- approve a voluntary arrangement, (with or without modifications);
- decide whether the company should be wound-up; or
- terminate the provisional supervision.
This final provision has probably been inserted to cater for situations where the purpose of the provisional supervision has actually been achieved during the period of the provisional supervisors’ appointment and accordingly there is no need for a voluntary arrangement, nor is there any need for the company to go into liquidation. Is it possible to envisage circumstances in which the provisional supervision process is used where a company has a genuine cash-flow problem and where it simply needs short-term protection from pressing creditors. In such a case there may be justification for appointing a provisional supervisor by virtue of the fact that the company is insolvent because it is unable to pay its debts as when it they become due. However, there may be no need to go down the route of a voluntary arrangement proposal if this cash-flow problem has been resolved during the period of provisional supervision.
The issue of the majorities required to approve a voluntary arrangement has been a movable feast during the various iterations of this draft legislation. The current position, as put forward by government, is that it will require a majority in value of two thirds and a majority of 50% of those present and voting to pass a resolution approving a voluntary arrangement proposal.
In addition, in order to avoid creditors connected with the Company, management or shareholders pushing through proposals which might be to the detriment of the general body of unconnected creditors, there is a further provision that at least 50% in value of non-connected creditors must have voted in favour of the proposal. For the avoidance of doubt, the majorities required relate to creditors who are actually present or represented and entitled to vote at the meeting. For resolutions other than the approval of the voluntary arrangement proposal, the majority in value required is reduced to 50%.
There are strong arguments in favour of removing the “headcount rule” and replacing it with a larger majority in value, such as say 75%, as is the case with individual voluntary arrangements. The continued inclusion of the headcount rule appears to be a backward step for which no real explanation has been put forward by the administration. It seems likely that this will be brought up again at the LegCo committee stage when it is to be hoped that a majority in value figure can be agreed as being a better alternative.
End of the Provisional Supervision
The provisional supervision will effectively come to an end following the final meeting of creditors. The outcome of the meeting is invariably likely to be either the acceptance by the creditors of a voluntary arrangement proposal or alternatively a decision to wind-up the company and place it into voluntary liquidation as at the date of the meeting of creditors. This will be deemed to be the date that the liquidation commences for anti-avoidance provisions.
The provisional supervision can also come to an end if the first creditors meeting is not held within 45 days and no application has been made to extend that time, nor has the sanction of creditors been sought to extend the time.
This is an interesting part of the legislation in that if gives liquidator-like powers to the provisional supervisor, but in a coporate rescue scenario.
The draft envisages that a provisional supervisor might apply to court for someone to be examined pursuant to, it is assumed, provisions that are similar to those in s.221 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance. Whilst this seems like an attractive power for the provisional supervisor to have available to him, in practice it is difficult to see how he will be able to exercise this power in the relatively short period for which he is in office.
In a liquidation, it invariably takes many, many months to obtain an order pursuant to s.221 and for the examination to then take place. This is particularly the case when the application is contested. Given that the final meeting of creditors, at which the company’s voluntary arrangement is to be proposed, is scheduled to take place within 45 days of his appointment it is difficult to see how the private examination powers can be properly enforced within that time-frame.
Having said that, if it transpires that a voluntary arrangement is not an appropriate way forward and the company eventually proceeds into liquidation, those powers are available to the liquidator in any event. It is also possible, because the period within which the final meeting is to be held can be extended by up to 12 months, that on certain occasions this power could be usefully exercised by a provisional supervisor for the benefit of the creditors.
In the next post, the position of employees of the Company is addressed. This is particularly relevant given that it is these very contorversial provisions that have delayed this legisltion reaching the statute books for the last 15 years or so.