All Change for Insolvency

The Enterprise Act 2002 received Royal Assent on the 7th November 2003.  The Act contains measures that reform competition law, strengthen consumer protection and modernise the insolvency regime.  This article is concerned with the changes to corporate insolvency law effected by the Act which came into force on the 15th September 2003.

Corporate Insolvency

The changes introduced by The Enterprise Act 2002 will drastically amend the current system.  The government wish to promote more enterprise by removing the fear of failure by making the insolvency regime more "debtor friendly" by ensuring fair treatment for the benefit of a company and its creditors.  The changes are intended to assist in the rescue of viable companies rather than encourage their winding up.

Appointment of an Administrator

• An Administrative Receiver may no longer be appointed under a floating charge unless the transaction falls within one of the following exceptions:
  - Certain capital market transactions involving indebtedness of at least £50 million and the issue of a capital market investment
  - Public-private partnership projects, which give the lenders step-in rights to continue the project
  - Other project finance transactions where the project company incurs indebtedness of at least £50 million and the lender has step-in rights
  - Utility projects involving step-in rights
  - Appointments by registered social landlords
  - Certain financial market contracts.
  
• A person may now appoint an Administrator of a company if it could previously have appointed an Administrative Receiver.
• An Administrator may be appointed without a court hearing if it has a "qualifying floating charge", namely the charge :
  -  Is enforceable
  - Gives the holder security over the whole or substantially the whole of the company's property
  -  Is contained in a document that contains a power to appoint an Administrator or an Administrative Receiver or makes reference to the appropriate section of the Act.
• The creditor must file a statutory declaration with the court, that the floating charge is enforceable.  The creditor must reasonably believe the enforceability of the floating charge, failing which, he will be committing a criminal offence and may have to indemnify the Administrator against an invalid appointment.
• A creditor must give notice to holders of prior floating charges, prior to appointing an Administrator.
• A company may now not only appoint an Administrator through Court Appointment but may appoint its own Administrator out of court. 

Streamlining Administration

• Under the Insolvency Act 1986, the purpose of an Administration order was the survival of the company as a going concern, the approval of a CVA (Creditors Voluntary Arrangement), the sanctioning of an arrangement by the company with its creditors, or a more advantageous realisation of the company's assets that would be effected on a winding up.
• Under the Act the Administrator will have to perform his functions with the following objectives, in the following order;
   -  Rescue the company as a going concern
  -   Achieve a better result for the company's creditors as a whole than would be likely if the company were wound up
  -  Realise property in order to make a distribution to one or more secured or preferential creditors. 

Discharge after 12 months in "most" cases

• An Administrator's appointment may only last 12 months, after which the appointment will automatically cease unless it is renewed by consent or by the court.
• Only one extension of the Administrator's appointment is permitted by consent, after which intervention by the court must be sought.
• If the Administration is unlikely to result in a distribution to preferential or unsecured creditors, the Administrator needs only to obtain the consent of each secured creditor.
• If the Administrator considers the purpose of the Administration has been achieved, an Administration instigated by the out of court method can be brought to an end by filing notice with the court and the Registrar of Companies.  There is no need for the court to discharge the Administration. 

Abolition of Crown Preference

• The Crown's preferential status is abolished in relation to PAYE, NIC and VAT to that of unsecured status, ranking equally with the general body of creditors, although the Crown's subrogated rights of employee claims for wages and holiday pay remains.
• A prescribed percentage of floating charge realisations, known as "top slice" will be ring fenced to by-pass the secured creditors for distribution to unsecured creditors.  This fund is only available to floating charges created after 15th September 2003.
• The fund is 50% of an amount of the company's net profit not exceeding £10,000 and 20% of any net profit in excess of £10,000, with a maximum allocation of the top-slice fund for unsecured creditors of £600,000. 
   

Foreign Companies

• The Act introduces the possibility of extending English insolvency procedures by statutory instrument to companies incorporated outside the UK, and thereby achieving certainty and consistency. 

Summary

A creditor with a fixed and floating charge debenture will, instead of being able to appoint its own Administrative Receiver (unless it falls within one of the exceptions above) now have to appoint an Administrator.  Whether this will make a great deal of difference in practice remains to be seen. 

This is only a general guide, and is not definitive of all the changes.  If you have a particular problem or need more specific advice then you should consult your solicitor. 

Should you wish to discuss the information contained in this article further, or have questions relating to this area of law, please contact Tony Sutton.