The insolvency pill
12 August 2002
In the productivity and enterprise white paper 'Insolvency - A Second Chance', the Government outlined its proposals to modernise the UK's insolvency regimes. Commentators have been at odds. Some say that, in the course of amendment, the Enterprise Bill has been distorted and can no longer achieve its objectives. Others have accused the Government of bending to pressure from the secured creditors, effectively to preserve the status quo. But is this criticism too harsh?
The Enterprise Bill introduces provisions which significantly expands the administration procedure; removes floating chargeholders' rights to appoint administrative receivers, except for certain capital market arrangements and public-private partnership projects, where administrative receivership will be preserved; abolishes Crown preference in all insolvencies; intends to reduce the stigma associated with honest failures; and provides more effective protection against reckless and culpable bankrupts.
The Government has consistently proposed to abolish administrative receivership (save for capital market transactions), which should be replaced with administration, a "collective" procedure "in which all creditors participate, under which a duty is owed to all creditors and in which all creditors may look to an office holder for an account of his dealings with a company's assets". The vanguard proposals envisaged a new, court-based route into administration for floating chargeholders, where there would be no need to prepare an independent report of the company's affairs, but where at least five days notice of the proposed appointment would need to be given to the company. However, the revised, streamlined administration process provides for administrators to be appointed both in and out of court. Administrators may be appointed:
- By the court upon application of the company, its directors or a liquidator, one or more of its creditors (including contingent and prospective creditors), the holder of a qualifying floating charge, the Justice's chief executive for a Magistrates Court, or a combination of two or more of these parties.
- Out of court by the holder of a qualifying floating charge.
- Out of court by the company or its directors, provided they have first given notice to any qualifying floating chargeholders.
The introduction of a procedure to appoint administrators out of court, merely by filing documents and without the necessity for a hearing, is seen by some to dilute the court's influence in favour of floating chargeholders. So are they in fact administrative receivers by another name?
Regardless of whether he is appointed in or out of court, an administrator will always be an officer of the court. An administrator's duties are far wider than those of an administrative receiver. Fundamentally, while an administrative receiver's duties are primarily only owed to their appointor, an administrator is accountable to all creditors. This has a significant effect on the manner in which the insolvency process is conducted and goes a long way to achieving the Government's aim of making the process more inclusive. That it is now as easy for a qualifying floating chargeholder to arrange for the appointment of an administrator under the Enterprise Bill seems to be aimed at ensuring that costs are not escalated and the courts are not inundated as a result of the reforms.
The primary objective is to rescue the company. Where the primary objective cannot reasonably be achieved, a subordinate objective arises - to achieve a better result for the company's creditors as a whole than would be likely if the company had been wound up without first entering administration. Finally, if this proves impractical, the administrator's objective of last resort must be to realise the property for the benefit of one or more of the secured or preferential creditors. At this stage, the administrator is merely obliged to ensure that they do not unnecessarily harm the interests of the company's creditors as a whole.
Critics of the reforms perceive this restatement of the purposes of administration to weaken the statutory framework in favour of the rights of secured creditors.
However, a number of current administrations operate in circumstances where assets are realised principally for the benefit of secured creditors. There will always be some form of priority in the arrangement of a corporate's affairs and the restated objective simply recognises existing commercial realities.
Another area of the Enterprise Bill highlighted by its critics is the preservation of a floating chargeholder's right to intervene before an administrator can be appointed. Currently, a floating chargeholder is entitled to five days notice before a petition for an administration order can be considered by the court. This provides a window in which the floating chargeholder can effectively veto the proposed administration by appointing its own administrative receiver. The Enterprise Bill preserves the notice period, but proposes that a floating chargeholder should have five business days in which to respond, failing which its agreement to the appointment of the company's proposed administrator is implied. However, if it chooses to respond, the qualifying floating chargeholder is entitled to apply to court for the appointment as administrator of its preferred insolvency practitioner. The court is obliged to make the appointment unless it considers that the circumstances of the case justify a refusal to do so.
The Government's streamlining of the administration procedure does not stop at facilitating the swift appointment of an administrator: creditors are to be provided with information promptly and the administration must proceed and be concluded expeditiously.
The administrator must now provide creditors with a copy of their proposals for achieving the purpose of the administration within 28 days instead of three months.
Furthermore, unless the administrator is of the view that there are insufficient funds for all creditors to be paid in full, or that there will be no distribution to unsecured creditors (other than in respect of monies which will arise as a result of the abolition of the Crown preference - see below), they are required within six weeks of their appointment to send an invitation to the initial creditors meeting to every creditor of whose claim they are aware.
Both periods can be extended with the consent of all of the company's secured creditors and at least 50 per cent of the unsecured creditors.
However, even where the period is extended, the initial creditors meeting will take place earlier than under existing administration legislation and, as now, will provide secured and unsecured creditors with an opportunity to approve and modify the administrator's proposals for the manner in which they intend to conduct the administration.
This provides unsecured creditors with far more influence and information concerning the insolvency process than was ever possible - or indeed intended - in administrative receivership, and goes a long way to satisfy the Enterprise Bill's aim of providing an inclusive system in which all creditors can participate.
The corporate insolvency provisions of the Bill concludes on an upbeat note, which has received little criticism.
Following an international trend, most notably in recent years by Germany and Australia, the preferential status currently enjoyed by Crown creditors (principally the Inland Revenue and HM Customs & Excise) is to be abolished.
It appears that the Government has not yet determined the precise manner in which money that would otherwise have gone to the Crown creditors will be ringfenced for the company's unsecured creditors, but what seems undeniably clear is that the pot of assets available for unsecured creditors is imminently to be swelled. Cynics have suggested that this valuable concession is not wholly unconnected with the recent judicial tightening of the requirements to create a valid fixed charge on book debts (as heralded in the Privy Council decision in Re Brumark Investments Limited). However, it is unlikely that we shall ever know whether the coincidence is by chance or design.
The essence of the Enterprise Bill has not been as radical as some had hoped. However, it does represent a genuine attempt to extend the ability to participate in the insolvency process to stakeholders beyond simply the secured lenders. The Government has undertaken an interesting balancing act which, on the whole, has resulted in secured lenders retaining a degree of influence within the insolvency process while keeping other creditors better informed. Given the role of secured lenders in the UK economy, this is hardly surprising.
However, in a world of increasing globalisation, the question has to be asked as to how long the UK can continue to favour the floating charge. There are increasing parallels between the US Chapter 11 system and many European insolvency regimes, neither of which are comfortable with the floating charge concept. This leaves the UK, with its focus upon the floating charge, looking increasingly isolated. While the streamlined administration procedure will provide a better fit with international law based on collective procedures, it may well be that this is just the first of many steps that the UK must take to harmonise its procedures with the rest of the world.
Simon Neilson-Clark is head of business support and
restructuring at DLA in London