Taking things one step at a time

The joint DTI/Treasury Review Group launched its examination of the rescue culture in January 1999 and issued its preliminary consultation paper in September that year. At the beginning of November, the long-awaited and much-trumpeted report on the 1999 consultation made its belated appearance.

The report is dated May 2000. So why did it remain in hiding for six months? There could have been any number of reasons (all good) for temporary suppression, but the smart money is on continuing divisions between the DTI and the Treasury over the vexed question of Crown preference.

How did we get to here?

No one would deny the usefulness of the current debate, despite its chequered history. The process had a bad start, initiated by politicians as opposed to people who knew what they were talking about. In his maiden period of ministerial bliss as DTI secretary, Peter Mandelson waxed injudiciously eloquent about the excellence of Chapter XI of the US Federal Bankruptcy Code as just what we needed – a view thankfully not shared by the review group. On Stephen Byers' accession, he found this particular drum abandoned in the Mandelson retreat, picked it up and carried on beating. He oversaw the review process.

The 1999 consultation debated principles and contemplated radical changes. It cast itself as a clarion call for reform. As the echoes subside, the report emerges as a rather half-hearted effort – a few modest changes and a call for further improvements in future. A strong and vocal contingent will, however, see it as a triumph for practical good sense over untargeted reforming zeal.

The reaction from the front line

The group was, with one or two notable exceptions, unsoiled by much in the way of hands-on practical experience in the UK. The composition of the group was surprising. One or two more practitioners would have improved the mix and, in particular, it seems unsatisfactory that the group (which considered predominantly legal matters) did not include a practising specialist lawyer.

The 1999 consultation stimulated strong and articulate responses. The group wanted informed debate and got it. The further one got from the sharp end, it seems, the more reformist the views became. The QC respondents apparently expressed radical views, as did the non-practitioners. The academics were more radical still.

However, the predominant view reported from the front line from the practitioners (whether lawyers or accountants) who were actually dealing with these problems on a daily basis, was that the machine did not need fixing. The group is to be commended for the fairness with which it acknowledges this reaction, which will undoubtedly have come as a disappointment to several of its members. It would have been easy (and cheap and wrong) to characterise the reaction as self-satisfied, self-serving and the inevitable reaction of people too close to – and too financially involved with – the trees to make any valid judgements about the wood. In fact, no one is totally uncritical of our system. Every practitioner has their individual wish list of changes, but the basic mechanisms are sound.

The eternal triangle

The group concerned itself a great deal, and rightly, with the balance of power between the three main creditor groups – secured, preferential and unsecured creditors. It contemplated abolition of the floating charge, the fixed charge over book debts (a much-visited battlefield for more than two decades) and of Crown preferential rights in insolvencies. In the end, it advocated none of those things. It did, however, hold fast to the view that the administration procedure and company voluntary arrangement (CVA) are more likely to produce a better result for all classes of creditor than administrative receivership (where a receiver takes control for a floating charge holder). The group wishes to encourage much greater use of these procedures, continuing a trend which the Deloitte & Touche figures suggest has already begun. No sensible person would object to that.

There are three concrete proposals in this respect. The first is overdue and wholly uncontroversial: namely, that the moratorium in administration or small company CVAs (currently before Parliament in the Insolvency Bill 2000) should be extended to preclude a landlord from exercising the right to take peaceful possession of premises occupied by the company without consent or leave of the court.

The second is that floating charge holders should lose their current right of veto in administration. At present, a debenture holder must be given notice of an administration petition and, if they appoint an administrative receiver before the petition is heard, it must be dismissed. Under the new proposal, which is likely to be warmly welcomed, the right of veto will go, but the debenture holder will remain entitled to receive notice of any administration petition, to be heard on the petition about the appropriateness of administration in all the circumstances, and to make submissions about the choice of administrator.

The third proposal (as sensible as the first two) is that fixed charges over book debts should crystallise at the very start of an administration or CVA, so that post-commencement book debts can be used to finance continued trading. It also puts forward an adaptation of the administration procedure for use as a "single gateway" procedure in all trading cases. As yet, there is no recommendation to this effect. The idea will require careful consideration and debate if it is to gain widespread support.

Crown preference

It is clear from the report that the Crown departments received a very bad press in the 1999 consultation. All practitioners have to deal regularly with the Inland Revenue and Customs & Excise. What most bring back from the experience is an impression of ignorance, inefficiency, bloodymindedness and a total absence of commercial judgement. In the business rescue milieu, the Crown is notoriously the least-impressive player. There will therefore be disappointment that the universal clamour for the abolition of Crown preference has gone unheeded. One can assume that it has been saved at the insistence of the Treasury.

What the group proposes instead is something fuzzier, under the banner of "administrative change": all corporate insolvency cases should be handled by centralised units (already the case for the Inland Revenue); the centralised units should cooperate and ideally merge; they should deal with CVA proposals more efficiently; they should use their discretion to develop a more flexible and commercial approach to CVAs; they should give helpful warnings to companies in arrears; and to achieve all this, they should upgrade their staffing, buying in private-sector skills if at all possible. While no one could deny the merit of these suggestions, the magnitude of the task should not be underestimated. We are talking about cultural change on an epic scale.

Image and perception

In three respects, the report addresses the question of perception. The directors' disqualification system looks inefficient – it takes too much time to pursue the guilty, and the innocent are left hanging in the balance for too long. The report urges expedition of the reporting/assessment process and a procedure for notifying decisions not to proceed.

The group agonised over the old chestnut about the appointment of practitioners as administrative receivers where they had previously acted as investigating accountants for the appointing bank. It worried about the conflict it believed to be inherent in this situation (generally acknowledged in theory). Almost everyone replied that this is not a problem in practice and that to preclude such appointments would increase costs and reduce efficiency. The report goes against legislative intervention but urges the banks and the insolvency profession to set out clear policy and ethical guidelines to overcome what the group believes to be a widespread perception of conflict and injustice.

Finally, the report turns the spotlight on the renamed Association of Business Recovery Professionals (R3), formerly the Society of Practitioners of Insolvency. The group calls for "a real change of approach to the problems of companies in difficulties" to match the name change. But this suggestion is bound to irritate many practitioners as a gratuitous mispositioning of cart and horse. As any R3 luminary will tell you, the name change was neither a public deception nor an aspirational puff, but a rebadging to reflect what the profession is already doing.

The report also recommends that the insolvency profession strives to make its approach to administration more management friendly and cost effective, a call which chimes harmoniously with existing moves within the profession itself.

An iterative process

Quixotically, the report expresses its ambition to be "a starting point in what should be a continuing process of change and improvement in our insolvency law". Our insolvency law was subjected to root and branch reform less than 15 years ago and has been tinkered with many times since. The present phase of change started nearly two years ago when the group was formed, not when the report was published. English law is always in a "process of change and improvement". Not really a starting point for anything, then – just another short step down the road.

In practical terms, the report is moving us into a selfperpetuating review process. It calls for more research, more debate, ethical guidance, improved attitudes and the establishment of a standing advisory committee to stimulate the process. It will be an iterative process and all the major players will gladly participate. Practitioners will, as a general proposition, be relieved by the moderate tone and manageable short-term ambitions of the report. Systemic reform is wholly unnecessary. By contrast, regular, sensible assessment and steady improvement of the fine, battle-hardened and sophisticated system already available to us in the UK is greatly to be encouraged.

Mark Andrews is deputy chairman and head of the reconstruction and insolvency group at Denton Wilde Sapte.