" A vigorous entrepreneurial society is vital to sustaining economic and social development. While businesses will occasionally fail in competitive markets, viable companies should not be allowed to go to the wall unnecessary. The Enterprise Bill aims to help companies survive". (1) Prior to the first Bankruptcy Act (2) it was common practise to hang debtors, more recently, debtors prisons were continually full, and in modern time the courts have been littered with failed entrepreneurs and costumers overwhelmed by debt.
Will the new legislations provide a framework that will actually allow failing businesses to be rescued and truly give companies a second chance, or will it simply give rise to an increasingly large bureaucracy? This article will evaluate the extent to which the Enterprise Act 2002 successfully implements the Government's objectives of promoting an effective rescue culture in the UK, by seeking the middle ground between, on the one hand, the old regime in the UK, dominated by the banks through the instrument of receivership and, on the other, Chapter 11 (3) with its increasingly criticised stance favouring the debtor.
Therefore. It will concentrate on two main points, the first is the amendments to the corporate insolvency law by the Enterprise Act 2002 to create a rescue culture, and the second is the influence of Chapter 11 on this act, but to achieve this, we need to understand the thinking behind the UK Government's motivation for bringing in the 2002 Enterprise Act and particularly the amendments on the corporate insolvency. The Government's proposals are aimed at: 1) Create a fairer system in which there is a duty of care to all creditors and all creditors are able to participate.
1) Desmond Flynn, Chief Executive, The Insolvency Service, 14 January 2002. Insolvency law & practice, Vol. 19, No1, 2003. 2) Bankruptcy Act 1542. 3) US Bankruptcy Code 1978 2) Maximise economic value by aligning incentives properly and ensure that companies in financial difficulty do not go to the wall unnecessarily. These objectives are very far reaching and aim to create and encourage an enterprise culture coupled with a rescue culture similar to that which prevails in America. The principal changes for the corporate insolvency framework by the Enterprise Act 2002 are:
1) Restricting the use of administration receivership, subject to a certain limited exemptions in effect removing floating charge holders' rights to appoint administrative receivers. (4) the limited exceptions are: i) Appointment under a charge created before the "appointed day" ( 15 September 2003). ii) Appointment under a floating charge ( before or after 15 September 2003) created in relation to excepted activities or cases, such as capital market, public-private partnership, utilities, project finance, financial market and registered social landlord.
(5) Under the old law, administrative receivership has provided banks a swift and flexible means, within their control, by which to recover their debts from the company assets. When banks lent money to a firm they could insist on the right to appoint a receiver if the company could not pay it's debts, and if this happened, the receiver would run the firm in the bank's interest, using the firm's assets to pay off the money owed to the bank while ignoring the unsecured creditors.
It was argued that often after the bank's receiver had finished this task, there was little left of the company and they often went bust. However, in a move to increase the use of administration(6), 4) Enterprise Act 2002, Section 245. 5) The Enterprise Act 2002, outline of changes to Insolvency Law. Shashi Rajani, Insolvency Law & Practice, Vol. 19, No 5, 2003.
6) Administration has been possible since 1986, but few were implemented on cost grounds and because receivership typically worked well from the banks' prospective and to promote an approach to business insolvency that takes into account the interest of all creditors, the availability of all out of court administrative receivership will be abolished with several limited exceptions. Under the new law banks will no longer be able to appoint a receiver, they can only appoint an administrator and one could agree with John Davies (Association of Chartered Certified Accountants) when he said "the abolition of bank's right to appoint receivers should improve the prospects of survival for companies which are only experiencing temporary problems"(7).
bbc This is obviously a major change to this area of the law, an administrative receiver primarily owes duties to his appointer rather than to the company's creditors as a whole. His primary function, simply stated, was to seek repayment of the money owed to his appointer. An administrative receiver has no power or obligations to seek to put together a rescue plan for the company. This abolition probably will create an increased emphasis on informal rescue processes, perhaps with earlier discussions between debtor companies and their bankers and other stakeholders.
This also will lead to a reduction in availability or marginal increase in cost of credit and/or stringent fixed security and guarantee requirements as with marginal advantage to existing banks over potential new banks on switching of accounts. Moreover, this will give administration a more attractive proposition for directors of distressed companies and will make it easier for companies to seek protection from creditors while they seek to get their finance in order.