The Enterprise Act 2002

The Enterprise Act 2002

Introduction

English corporate insolvency law has been reshaped by the Enterprise Act 2002. The Act was intended to 'to facilitate company rescue and to produce better returns for creditors as a whole'. Administrative receivership, which placed control of insolvency proceedings in the hands of banks, is for most purposes being abolished. It is being replaced by a 'streamlined' administration procedure. Whilst it will still be possible for banks to control the appointment process, the administrator once in office owes duties to all creditors and must act in accordance with a statutory hierarchy of objectives. In this article, we seek to describe, and to evaluate, this new world of corporate rescue.

Discussion

History of Bankruptcy

Bankruptcy laws in England date back to medieval times when a creditor (someone you owe money to) could seize either the body of the debtor (someone who owes money) or his belongings, but not both. When the person was seized, detention was at the creditor's pleasure, and debtor's prisons were commonplace. Bankruptcy was therefore seen as a criminal offence. The first Bankruptcy Act was in 1542 and there was no prospect of rehabilitation if there was any debt outstanding. It was only in 1861 that the concept of rehabilitation was born with less that 100% recovery of the debt and people were allowed to have a fresh start, however many of the concepts did not change until the mid 1980's and the Insolvency Act of 1986.

Background to the Reforms

The Act was preceded by a Review of Company Rescue Mechanisms, the principal recommendations of which were largely adopted by the government. The White Paper, Productivity and Enterprise: Insolvency - A Second Chance, explains the weaknesses of the previous law that it was hoped the new Act would remedy. First, the government considered that the existing law did not do enough to promote a 'rescue culture'. This term refers to a legal and institutional response to financial distress that is geared in the first instance to attempting to save a troubled business, rather than simply to close it down and distribute proceeds to creditors as quickly as possible. There was a perception that the existing system was not doing enough to promote rescues. The Insolvency Act 1986 had introduced two procedures that were geared towards corporate rescue—administration and Company Voluntary Arrangements—the uptake of both of which had been 'disappointingly low'. The White Paper concluded that this was because secured creditors with relevant floating charges were able to block a petition for administration or a proposed CVA by appointing an administrative receiver (AR). By removing the secured creditor's right to appoint an AR, it concluded, the new Act would thereby increase the number of administrations and CVAs, and consequently the number of corporate rescues.

Secondly, there was concern that the AR procedure was inefficient, in the sense that it failed to maximise value for creditors. The problem with AR, well known to practitioners and academics alike, is that there may be a divergence between the interests of the ...