Wrapping it up

Insolvency reforms move a step closer with the dawn of the Enterprise Act. Patricia Godfrey reports

The Enterprise Bill (the bill) finally became the Enterprise Act (the act) with the grant of royal assent on 7 November. This article concentrates on the principal insolvency reforms, highlighting a series of last-minute amendments. It is anticipated that the corporate insolvency reforms and the abolition of Crown Preference will be introduced early in the 2003 financial year, with the personal insolvency provisions following in the course of 2004.

The principal reforms to insolvency laws are:

Restricting the ability of lenders to appoint an administrative receiver

The act removes the ability of lenders to appoint an administrative receiver save in two circumstances. The holders of floating charges in place before the new provision becomes law and financiers involved in certain capital markets and other transactions, where the ability to appoint an administrative receiver is fundamental to the effective operation of the market, will retain their rights to appoint an administrative receiver.

The act shifts the balance in favour of the collective administration procedure, which takes into account the interests of all creditors. It will be interesting to see whether those lenders which retain their right to appoint an administrative receiver under pre-existing floating charges will opt for the new streamlined administration procedure, or whether they will stick with administrative receivership as their tried-and-trusted remedy.

Reforms to the administration process

• Two routes into administration The act streamlines the administration process with the objective of making it more efficient and effective. There will now be two routes into administration: the existing court route (which will be simplified) and an out-of-court route for directors, companies and floating charge holders. Under the new system, floating charge holders with a qualifying and enforceable floating charge will be able to appoint as administrator the insolvency practitioner of their choice without having to apply through the courts and without notice to the company.

• Purpose The act also replaces the existing four statutory purposes of administration with a single three-tier purpose. The primary object is for the administrator to perform their functions with the objective of rescuing the company as a going concern; and where that is not reasonably practicable, to achieve a better result for the creditors as a whole than would be likely were the company wound up. Only where it is not reasonably practicable to achieve either of the first two objectives, the administrator’s task will be to realise the property with a view to making a distribution to one or more secured or preferential creditors.

• Time Limits The act seeks to increase speed and efficiency in the conduct of administrations. Under the act, the administrator is now required to send their proposals to creditors within eight weeks of their appointment and to hold a creditors’ meeting within 10 weeks of their appointment. The bill originally restricted these time limits to 28 days and six weeks respectively, which met with much criticism from the insolvency profession as being too short, unrealistic and ultimately counterproductive. As a result, last minutes changes were approved. The bill also restricted the duration of administration to three months, but late campaigning led to an extension so that an administration will automatically cease after one year in the absence of an extension. The act and the rules (yet to be published) will provide for extensions at the discretion of the court or by consent, subject to limitations.

• Powers The act introduces an important extension to the powers of an administrator, enabling distributions to be made to both secured and preferential creditors without the need to obtain court permission. Distributions may also be made to unsecured creditors with permission of the court. Late amendments have led to a new provision in the act, which enables an administrator to make a payment to unsecured creditors where that payment is likely to assist in achieving the purposes of the administration. The concept of payments and expenses in administration raises some thorny issues and this latest amendment is to be welcomed.

• Safeguards Checks and balances are coupled with the extended powers afforded to administrators. In addition to the new time limits placed on administrators, creditors and members will now be able to apply to the court if they believe that the administrator is not performing their functions as quickly and efficiently as is reasonably practicable. An interested party can also apply to the court if they consider that the administrator has been guilty of misfeasance. No doubt these new provisions (arguably ripe for precise interpretation) will lead to judicial guidance and new case law sooner rather than later.

Abolition of Crown Preference

The act abolishes Crown Preference and introduces a ‘special fund’ for the benefit of unsecured creditors. The Inland Revenue, Customs & Excise and social security contributions lose their preferential status, which should bring real benefits to unsecured creditors.

The act also provides that a special fund is to be set aside for unsecured creditors, after preferential creditors have been discharged, and prior to payment being made to any floating charge holder. It should be noted that a debenture holder exercising their right to appoint an administrative receiver under a pre-existing floating charge will not be obliged to set aside a special fund. Little detail is currently available on the percentage or amount of monies to be placed in the fund and how the fund will operate. Depending on how the numbers stack up, there may be a powerful incentive for the debenture holder to opt for administrative receivership, rather than be burdened with the special fund on an administration.

Personal insolvency reforms

The act also introduces major changes to bankruptcy. In particular, a bankrupt will have an automatic right in most cases to a discharge within 12 months or less of being made bankrupt. For the culpable, the act introduces bankruptcy restriction orders (BROs). Doubtless, individuals will now think twice before embarking on an individual voluntary arrangement (IVA), as there may be little incentive to work for your creditors if a bankruptcy will be concluded within a year.

Insolvency Act 2000

While all eyes have been on the Enterprise Act, it should not be forgotten that the remaining provisions of the Insolvency Act 2000, in particular the new Company Voluntary Arrangement (CVA) moratorium for small companies, will come into force on 1 January 2003. As a result, small companies in financial difficulty will now be able to enter voluntary arrangements with their creditors. An initial moratorium of 28 days will be available for management to put a rescue plan to creditors. This new procedure is restricted to ‘eligible companies’ (as defined in section 247 of the Companies Act 1985). In summary, this means companies that meet two of the following three requirements: (i) turnover not exceeding £2.8m; (ii) balance sheet total not exceeding £1.4m; or (iii) no more than 50 employees. All creditors are bound by this initial moratorium and significantly floating charge holders have no right of veto.

Although restricted in its application, this represents an interesting new development. By leaving control effectively with those managing the business, it will be interesting to see whether this tentative ‘dipping of the toe’ in the debtor-in-possession arena meets with success. n

Patricia Godfrey is a partner and head of insolvency and corporate recovery at Nabarro Nathanson