The Enterprise Act 2002 ("the Act") came into existence on 7th November 2002 and its provisions will result in significant changes to the existing insolvency regime, placing greater emphasis on company rescue. The provisions relating to corporate insolvency and the abolition of crown preference are set to commence in early September 2003, and those relating to individual insolvency and the financial regime of The Insolvency Service will commence on 1 April 2004.
The insolvency sections fall into four main categories: Corporate Insolvency; the Abolition of Crown Preference; Individual Insolvency; and the Financial Regime and it is the first two categories that are potentially the most radical.
At present, under Part II of the Insolvency Act 1986, the court is able to make an administration order in respect of a company in financial difficulties, the intention being to protect the company from its creditors whilst attempts are made to rescue it. However, in practice, the holder of a floating charge over the company's assets has an effective veto over the appointment of an administrator as they must be given notice of an application for an administration order. This usually leads to the floating charge holder appointing an administrative receiver who primarily owes duties to their appointor rather than the company's creditors as a whole.
The changes to the existing corporate insolvency regime intend to change this by focusing on streamlining the administration procedure and restricting the use of administrative receivership as follows:-
Abolition of Crown Preference
- Out of Court Appointment of Administrator - At present, administrators can only be appointed by the court. However, to speed up the process, qualifying floating charge (QFC) holders, a company or its directors will also be able to appoint administrators without the need for a court hearing.
Holders of QFC's must give at least two days' notice to any prior QFC holders of their intention to appoint an administrator and a company or its directors must give any QFC holders at least five days' notice. During this period of notice, those QFC holders that are entitled to appoint an administrator may either consent to the proposed administrator or appoint one of their own choosing. In practice therefore, it would appear that the QFC holder still retains an effective veto over the appointment of an administrator that they do not approve of.
- Purpose of Administration - In order to place greater emphasis on company rescue, the administrator will be required to carry out their functions with the following objectives (in order of priority) (a) rescuing the company; (b) achieving a better result for the creditors than on a winding up; or (c) realising property to make a distribution to one or more secured or preferential creditors.
- Timescale for Administration - An administrator must provide proposals to the creditors within eight weeks of their appointment; must convene a meeting of creditors within ten weeks of their appointment; and all administrations will automatically cease after twelve months from the date on which they came into effect. However, provisions do exist that permit the extension of the administration for a further six months.
- Administrative Receiverships - Holders of floating charges created on or after the relevant section comes into force are to be prohibited from appointing an administrative receiver. However, the Act does set out exceptions to this rule for certain large financial transactions and holders of floating charges created before the sections come into effect.
As a preferential creditor, the Crown can currently claim its debts ahead of other creditors. However, the Act will abolish the Crown's preferential status and instead provide that a prescribed part of floating charge realisations be made available for distribution to unsecured creditors. The exact proportion has yet to be determined.
The draft Insolvency Rules are now available for inspection on the Insolvency Service website at http://www.insolvency.gov.uk/draftenterprise/draftenterprise.htm
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Andrew Parker at