“Reforms Made By The Enterprise Act 2002 To The Laws Regarding Administrative Receivership, Administration And Preferential Debt-Holding Created A Fairer And More Efficient Corporate Insolvency Regime.” Discuss.
Essay Preview: “Reforms Made By The Enterprise Act 2002 To The Laws Regarding Administrative Receivership, Administration And Preferential Debt-Holding Created A Fairer And More Efficient Corporate Insolvency Regime.” Discuss.
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English corporate insolvency law is being reformed. Enterprise Act 2002 (EA 2002), which came into force in September 2003. It is designed to facilitate company rescue and to produce better returns for creditors as a whole. In order to achieve these goals, it has brought some most significant changes to the corporate insolvency regime regarding to administrative receivership, administration and preferential debt-holding. Before going into any further, we have to aware that fairness is a rather subjective concept and the changes may have different effects on different parties. In the following paragraphs, I am going to discuss the impact of the reform on creditors especially in terms of fairness and efficiency and regards to administrative receivership, administration and preferential debt-holding respectively. To some extent, the reform does make the regime fairer and more efficient, but there are some concerns as well.
With respect to administrative receivership, the EA 2002 provides that the holder of a qualifying floating charge may not appoint an administrative receiver of the company. This prohibition applies only to floating charges created after a date to be appointed (i.e. September 2003). It is still possible to appoint an administrative receiver such that the charge existed before September 2003 or the company is one of a limited number of special cases, such as to project companies in public-private partnership projects or utility projects, and companies have capital market agreements. Therefore apart from the certain special cases, the only option left to floating charge holders creates after September 2003 is to appoint an administrator out-of-court (which is also a change brought by EA 2002). As a result, administration receivership may seem a lot less attractive than before and should be used less frequently now and administration should become a more popular option. On one hand, this change makes the corporate insolvency regime fairer, especially for unsecured creditors. This is because even though an administrative receiver is deemed to be the companys agents by IA 1986, s. 44 (1) (a), the agency relationship is unusual in the way the receiver is nominally the agent of the company, his primary duty is to realize the assets in the interests of the debenture holder (often the one appointed him) (Gombo Holdings UK Ltd. v. Homan) and he or she does not owe the duty act in the interests of the companys creditors as a whole. This creates the problem that floating charge holders were given unhealthy amount of power to secure their own debts and therefore lack of the incentive to rescue a falling company, which resulting many companies close down too soon. Also, they do not take into account the interest of unsecured creditors and therefore unsecured creditors are usually left with nothing. After the reform, since the only option for floating charge holders is to appoint administrator and an administrator has to performe his functions in the interests of creditors of the company as a whole (IA 1986, Sch B1, para 3 (2) ), unsecured creditors are expected to be given more of a stake and better prospect of recovery. On the other hand, the prohibition on administrative receivership is not as far-reaching as it seems to be because this provision only applies to those floating charge creates after the coming into force of the new legislation, there are still many of those holding “old” floating charge and they are not affected by the new provision. Therefore the fairness it brings is not very significant at the moment, but it should become more significant as time passes.
Regarding to administration, there are a few key changes by EA 2002. Firstly, the purpose of administration has been affected. It states in IA 1986, Sch B1, para 3 that the prime objective of administration is to rescue the company as a going concern. If this is not reasonable practicable, the object will be to achieve a better result for the companys creditors as a whole that would be likely if the company were wound up. Finally, if neither of them is reasonably practicable, the objective is to realize property in order to make a distribution to one or more secured or preferential creditors. The hierarchy of objectives is designed to prevent banks appoint administrators who would proceed under para 3 (1) (c) to make distributions to the secured and preferential creditors so resulting little different from the appointment of an administrative receiver. More importantly, this change creates a procedure which switches from a remedy focused on secured creditors to a collective procedure in the interests of all the creditors: