This is obviously a major change to this area of the law, an administrative receiver primarily owes duties to his appointer rather than to the company’s creditors as a whole. His primary function, simply stated, was to seek repayment of the money owed to his appointer. An administrative receiver has no power or obligations to seek to put together a rescue plan for the company.
This abolition probably will create an increased emphasis on informal rescue processes, perhaps with earlier discussions between debtor companies and their bankers and other stakeholders. This also will lead to a reduction in availability or marginal increase in cost of credit and/or stringent fixed security and guarantee requirements as with marginal advantage to existing banks over potential new banks on switching of accounts. Moreover, this will give administration a more attractive proposition for directors of distressed companies and will make it easier for companies to seek protection from creditors while they seek to get their finance in order.
- Streamline the administration by reforming and significantly expanding the administration procedures.
7) Fewer UK firms set to go bust, BBC, 15, September, 2003
Administration was introduced in the 1986 Insolvency Act as an insolvency process involving all creditors and providing a moratorium on enforcement of security and other actions against a debtor company – with a view to putting in place the a rescue, hitherto the administration process has not been much used compared to administrative receivership – largely, it is said, because administration could be blocked by banks entitled to appoint an administrative receivership under their floating charges(8). As administration was originally commenced only by court petition, it was also criticised for being cumbersome and expensive, with banks generally favouring administrative receivership to achieve rescues when a moratorium against actions by others was not considered essential.
The principal reform to administration has therefore been to permit an administrator to be appointed without a court petition but court appointment of an administrator remains competent. It is worth noting that a floating charge also qualifies to appoint an administrator if it relates to only part of the company’s assets provided it purports to entitle appointment of an administrator ( or opts into the new regime ) and the rest of the company’s assets are otherwise rescued to the charge holder.
There are now three methods by which an administrator can be appointed:
- appointment by court.
- Out of court appointment by the company or its directors.
- Out of court appointment by holder of a floating charge, and a statutory hierarchy of objectives.
In the court procedures and under the prior system, the UK court has discretion as to whether to grant the order. Whereas using the out of court route, the holder of a qualifying floating charge is entitled to appoint an administrator as of right,
8) Enterprise Act and insolvency Law reforms, Rajak, 2003, comp law 24(1),3.
as are the directors and company if there is no holder of a qualifying floating charge or the holder the holder of the qualifying floating charge consent. In contrast, there is no similar “gating” or entry issues under Chapter 11( the debtor has a legal right to enter the procedure).
There has also been some attempts to speed up the administration process, the out of court version of which runs broadly as follows:
- Director/qualifying floating charge holder notify intention to appoint administrator and lodge papers in court, thereby providing interim moratorium.
- Notice given to (prior) qualifying floating charge holders, providing five days ( if by directors ) or two days ( if by qualifying floating charge holder) for (prior) qualifying floating charge holder to appoint its own administrator.
-
(1st day) Appointment of administrator if consent or no alternative action.
- (By day 11) directors give statement of affairs and creditors list to administrator.
- (By week 8 ) administrator’s report and proposals sent to creditors and lodged with registrar of companies.
- (By week 10) initial creditors meeting held to approve report and proposals (unless insufficient property to make distribution to unsecured creditors.
- (By end of month 12) administrator automatically vacates the office unless extended up to six moths on one occasion by creditors or otherwise by court.
In addition to streamlining the process, the objectives of administration have been changed. Originally, the purpose of which for an administrator could be appointed to a company could be anyone of a series, including:
- the survival of the company and the whole or any part of its undertaking as a going concern; or
- a more advantageous realisation of the company’s assets than would be effected in a winding up; or
- the approval or sanctioning of a formal statutory arrangement with creditors and/ or other relevant parties.
Where the new objectives of administration are, in order:
- to rescue the company and if that is not reasonably practical then;
- to achieve a better realisation of assets for the company’s creditors as a whole than in liquidation and finally;
- where (1) and (2) are not reasonable practical, to realise the assets for the benefit of the of one or more secured or preferential creditors.(9).
These amendments and refocusing of administration seems likely to increase the number of administrations, with possible earlier action and greater co-operation by directors in the light of the incentive of the primary objective being saving the company rather than its business; a possible increase in debt for equity swaps and other arrangements for the same reasons and possibly with out administration talking place; a possible reluctance on the part of administrations to sell a company’s business quickly as going concern in view of the timetable. Administration objectives and other specific provisions in the new legislation are imposing duties on administrators to all creditors ( all with consequent risks to overall value realised or preserved); possible difficulties for administrator in obtaining funds to continue trading the company as a going concern until proposals are approved and finally, a possible reduction in rescues of businesses and jobs due to primary objective of administration being saving the company (rather than its business).(10)
9) The Enterprise Bill 2002, a move towards rescue culture, Mike Stevenson, insolvency law and practice, Vol.18, No.5, 2003.
10) See Supra N 7
Under this act the administrator will have the ability to utilise the existing managements’ skills and resources, should he come to the conclusion that the management are in abetter position to manage the affairs of the business whilst the administrator carries out the task of reorganising the finances and perhaps reaching agreement with creditors.
*This is definitely not a debtor possession procedure. The insolvency practitioner is in control and in position, rather than the management. The UK government clearly debated the concept of debtor-in-possession ( Chapter 11 procedure in the United States), which provides the debtor with wide-ranging and valuable power with which it disclaim, adopt or assign contracts, combined with the ability to sell assets and borrow money, but recognised the benefits of the fully established skills of the UK insolvency profession, as well as the weakness of the Chapter 11 system, which is, amongst other things very court driven(11). Although Chapter 11 focuses extensively on retention of the company as prime vehicle for the rescue of the business going forward, in the US, as in the UK, many cases still end in the sale of one or more parts of the debtor’s business as a going concern rather than in the rescue of the company.
The Enterprise Act reforms have not however. Gone as fare as Chapter 11 if the US Bankruptcy Code as a licensed insolvency practitioner is still required to take control of the company’s administration rather than leaving the debtor in position as is the basic position under Chapter 11. Similarly the American “super priority” for funding provided to effect a rescue has also been omitted from the Enterprise Act reforms.
This, of course, equates with the better return for creditors than they would obtain in a liquidation as envisaged by the new Act.(12)
11) The Enterprise Act 2002, John Alexander, insolvency law and practice, Vol.19, No.1, 2003.
12) Ibid
After all this, the question remain, will administration deliver business rescue, more business rescue and only business rescue? One could agree with Harry Rajak when he said that “ the Enterprise Act has provided some neat streamlining of this regime even to the point of enabling it to come into existence without a court hearing, thereby reproducing something receivership’s much praised absence of stifling and expensive bureaucracy. Furthermore, with the pulling back of receivership and Crown preference, both could wreak havoc, the space has been created for use to be made of the talents and commercial acumen and demands of unsecured creditors and the debtor” ( Harry Rajak )(13)
- The crown’s preferential status in respect of certain debts due agencies such as the Inland Revenue has been abolished. These debts, which previously ranked for payment out of floating charge assets ahead of the charge holder and enjoyed protected status where the debtor company was proposing a corporate voluntary arrangement, will from now on rank as unsecured claims.
This meant that these debts were paid before anyone other creditors, such as banks and other firms got any money, but now by this act(14), more money is set to go to trade creditors. It is hoped that “this change will help reduce so-called domino insolvency where the collapse of one firm drags down its unpaid suppliers with it”(15). In addition, this will have the beneficial effect of increasing the private borrowing base calculation for the UK corporate borrowers. Accordingly, this gives troubled debtors more room to negotiate with lenders because the lender’s collateral will not deteriorate as quickly as in the old system. This will on one hand give the debtor more time in which to form a viable proposal for reorganisation and on the other will
13) ) The Enterprise Act and insolvency Law reforms, Rajak, 2003, comp law 24(1),3.
14) Enterprise Act, Section 246.
15) See ,the DTI’s White paper, “insolvency – a second chance” The end of administrative receivership., John Tribe, Complaw 60 , 2002.
exercise a less tolerant attitudes to arrears on the part of the Inland Revenue and Customs & Excise and a consequent reduction in the use of the Inland Revenue and Customs & Excise as unofficial providers of working capital. One may ask why should this promote entrepreneurship? It may reduce the Crown to lowly status of ordinary creditor along with all the other unfortunates who have hitherto rarely received any meaningful dividend out of an insolvent state, but how does this promote entrepreneurship? The point is that the abolition of Crown preference made it politically much more difficult for the banks to insist on retaining the full scope of operation of administrative receivership and therefore, this amendment will play a major role in creating a rescue culture and will bring the UK legislation into line with a number of foreign jurisdictions, e.g. Australia and Germany.(16)
- Creating a new funds for the unsecured creditors.
There can be no doubt that ordinary unsecured creditors have frequently been prejudiced by the all embracing nature of the conventional floating charge and its security over all assets of the company.
An additional and significant change is the unsecured creditor carve out. Under this concept, the legislator is hoping that unsecured creditors will receive a minimum percentage distribution in a liquidation funded out of the floating charge holders’ security realisation. But there are still some problems arise with the current drafting in attempting to protect the unsecured creditors, such as there is no proof of debt mechanism or procedures for making distribution to unsecured creditors, so it is not clear how an administrator or receiver can make the fund available to unsecured creditors.
Before concluding, the UK business insolvency laws were always among the most
16) See. Supra N. 13.
creditor friendly in the world and left little room for debtors management to control their fate. In the united kingdom it was perceived that bad management was largely responsible in one way or another for most corporate failures. Accordingly, for centuries private receivership was the preferred method of banks and secured creditors for claim enforcement. The Enterprise Act seeks to restrict the use of administrative receivership in which a single creditor has effective control and to shift the balance to an administration procedure that takes into account the interest of all creditors including general unsecured creditors. These changes bring the UK system closer in line to the US system, where the goal of insolvency in the debtor’s financial reorganisation while maximising the value for junior stakeholders.
Conclusion:
The UK Enterprise Act 2002 by (encouraging administration, limiting administrative receivership, abolishing Crown preference and providing for a quicker return to the market place of unfortunate bankruptcy) should make a significant change from prior practice, diminishing the power of secured creditors and increasing the prospects for a reorganisation that a bit closer to the US Chapter 11. while Considerable differences remain, between UK and US corporate insolvency procedures: the UK has no super priority for financing made during the insolvency process which leaves significant control with the company’s existing financiers (who will often to be the only party able to provide the requisite funds); the company’s office holders do not retain their powers. Although administration can be an out of court procedure, the duties imposed on an administrator, and the tensions between the purposes of administration, make it easy to predict stakeholders taking any grievances with progress of an administration to court. Of course, time will tell how the legislation works in practise, but for the main time it is worth saying that according to The Department Of Trade And Industry, the number of firms collapsing is on the decrease, figures showed that 3,316 companies went bust between October and December compared with 3,386 for the previous quarter last year. (17)
17) See. Supra N. 7
References
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3) The Law of Insolvency, Ianf. Fletcher, Sweet and Maxwell, London 2002, third edition.
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Articles:
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2) Case Report, “Liquidation Costs and Receivership Costs”, Anthony Mann QC, Insolvency Law and Practice, Vol.18, No.4, 2002.
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13) Enterprise Bill receives Royal assent, 8th November 2002 Department of trade and industry.
14) The Enterprise Act and insolvency Law reforms, Rajak, 2003, comp law 24(1),3.
15) The Reform of Corporate insolvency law in Great Britain, Mcknight, 2001 JIBL 16(8/9) 213.
16) A radical new look of insolvency law, Company lawyer 2003,23(1), 1 editorial.
Reform of Corporate rescue, Milman, Insol LJ 2001, 1-2.
17) Fewer UK firms set to go bust, 15 September, 2003. bbc.
18) The Enterprise Act- Corporate Insolvency Reform, Tods Murray, September 2003,
19) Comparison of Chapter 11 of the United States Bankruptcy Code and the System of Administration in the United Kingdom, Jonesday Gouldens,
20) the DTI’s White paper, “insolvency – a second chance” The end of administrative receivership., John Tribe, Company lawer 60 , 2002.
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