Business Recovery and Insolvency Practitioners

Important changes to corporate insolvency law were introduced in September 2003. These are contained in the Enterprise Act 2002 and are designed to promote the rescue culture and give a better outcome to stakeholders in the event of corporate insolvency. In particular, trade creditors should see a better return on their debts and they should lodge their claims in all cases, and fully participate in the insolvency process.

The most significant changes are as follows:

The preferential status of debts due to the Inland Revenue and Customs & Excise (Crown debts) has been abolished. This should result in more money being paid to trade creditors and employees from the assets of insolvent companies.
The preferential status of claims made by employees remains and because they are no longer competing with Crown debts for their share of the insolvent company’s assets, employees could receive a greater payout than was previously the case.
Where a floating charge exists, a reserve fund of approximately 20% of assets that would have previously gone to the Crown will be set aside and allocated for the benefit of unsecured creditors.
The right to appoint an administrative receiver has been abolished as a means of enforcing all debentures (i.e. floating charges) created after 15 September 2003.
Holders of debentures created after 15 September 2003 will be required to appoint an administrator to enforce their security.
Administrators may still be appointed by court order but a streamlined procedure now allows a debenture holder, the company or the directors to appoint an administrator out of court.
An administrator will owe duties to all the creditors of the insolvent company, irrespective of how he is appointed and by whom.
There will in future be only one purpose of administration. The administrator must perform his functions with the objective of:
1. rescuing the company as a going concern, or
2. achieving a better result for the company’s creditors as a whole than would be likely if the company was wound up, or
3. realising property in order to make a distribution to one or more secured or preferential creditors
The administrator must attempt to achieve the above objectives in the order of priority shown above, unless this is not reasonably practicable. In addition to this, he must not attempt to achieve the third objective by unnecessarily harming the interests of the creditors as a whole.

This summary is intended to be a brief guide and should not be taken as a definitive guidance. Legal advice should be sought on specific matters.

For details on terms used pleased see our glossary.

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