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12 May 2014
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7 July 2014
25 March 2014
Until recently it was an undisputed assumption that secu-red lenders held a top position within formal UK insolvency procedures and this position led to a similar position of dominance within the restructuring world.
In July a white paper arrived from the newly appointed Secretary of State for Trade and Industry which set out the two gods of "Productivity and Enterprise" in all their glory. The main corporate insolvency reform is that administrative receiverships are to be abolished and replaced by a streamlined administration procedure. There is an exception for certain capital market transactions.
Clearly the Government sees an urgent need for reform, having raised it so early in its second term. Having had a week to digest the white paper, it is probably useful to consider why it is necessary and what will happen if it comes into effect. Clearly further details will emerge as the white paper is enacted.
The white paper talks about "widespread concern that a large number of administrative receivership appointments in the early 1990s may [have caused] companies to fail unnecessarily". This would seem unnecessarily unfair to secured lenders. It is difficult to see how, in the early 1990s, as the country was in full-scale recession, different insolvency procedures could have had a significant effect. It is easy to forget that the secured lenders suffered as a result of the last recession. Since then secured lenders have invested large amounts of resource into early warning units designed to help companies recognise when they have a problem and to deal with it as soon as possible. These units preserve customer value. For many companies these intensive care functions, particularly in the smaller, owner managed market, represent the only source of external help they will receive to avoid the failure.
This supportive attitude of secured lenders is widespread and has given rise to the British Banking Association Code of Practice. This embodies the desire of secured lenders to be entirely transparent in their dealings with distressed corporates.
The white paper, while abolishing administrative receivership, replaces it with a right for secured lenders to apply for an administration order. Secured lenders can apply for an administration order providing they hold a valid floating charge and they are owed money; there is no need for any further evidence. There is little here that seeks to fundamentally alter the rights or behaviour of secured lenders.
Where administrations are sought by other stakeholders (including the company itself) the white paper has abolished the right of veto previously held by secured lenders. However, the white paper goes on to say that, where the various stakeholders compete as to the identity of the administrator, the court shall have regard to the interests of creditors principally affected by the administration. Given that secured creditors tend to be the largest single creditor and that it is extremely rare for unsecured creditors to be represented at all at hearings of administration petitions, it is again unlikely that this will influence the rights or behaviour of secured creditors.
On reflecting on the white paper, it is difficult to reach the conclusion that an awful lot will change within the actual operation of the insolvency procedure. However, perhaps the main thing which the Government is determined to achieve here is that there is a perception of change. This Government, more than most, is concerned with perception. Streamlined administration may well be perceived as being a more all-inclusive remedy and, as referred to in the white paper, a better fit with "international law based on collective procedures". In essence, this white paper, in terms of its main corporate reform, is more about perception than actually altering the procedure itself. Simon Neilson-Clark, partner, DLA