CORPORATE INSOLVENCY AND RESCUE

Corporate Insolvency And Rescue

Corporate Insolvency And Rescue

The moratorium that applies when an administration order is made can provide companies in financial difficulty with the vital breathing space needed to develop a rescue package. Providing a quick, easy and cheap route into administration will increase the likelihood of companies (particularly those that are owner-managed) seeing rescue as an option at an early stage - when a rescue plan is more likely to succeed.

The Enterprise Act 2002 received Royal Assent on 7 November 2002. It will be introduced in England, Wales and Scotland gradually over the next 12-18 months, when the necessary secondary legislation is introduced.

The Government's approach in effecting reform of corporate insolvency procedures is encapsulated by the following statement from The Insolvency Service:

“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 unnecessarily. The Enterprise Act aims to help companies survive and increase accountability and transparency by promoting collective insolvency procedures, in particular Administration - recognised as an effective tool in encouraging company rescue - and restricting the use of administrative receivership. In doing so the Act aims to ensure a better balance between companies and their creditors.”

There are three main areas where changes have been made, and these are explained below.

Administration Orders In summary, the changes relate to:

simplifying the procedure for putting a company into administration

the purpose of an administration

extending the powers of administrators to make distributions of assets to creditors.

At present an administration order can only be made by the Court, which is a complex and expensive process. Consequently, the Enterprise Act 2002 introduces procedures whereby floating charge holders, companies and their directors can appoint an administrator through an out-of-Court procedure merely by giving notice to the Court and various other specified persons. This is in addition to the existing Court route available under the Insolvency Act 1986, which remains the only route available to creditors.

Irrespective of how the administrator is appointed, Court or out-of-Court procedure, the Act replaces the existing four statutory purposes of administration under The Insolvency Act 1986 with a single, clearly defined purpose, albeit with two sub-purposes:

the prime objective is for the administrator to perform its functions with the objective of rescuing the company as a going concern, which is taken to mean with as much as possible of its business; or

if this is not reasonably practicable, the administrator should pursue the objective of achieving a better result for the creditors as a whole than would be likely if the company were wound up. If this second objective would achieve a better result for the creditors as a whole than the first, then it may be pursued; or

where it is not reasonably practicable to achieve either of the above, the administrator's objective will be to realise property to make a distribution to one or more secured or preferential ...