Business Recovery and Insolvency Practitioners

NEWS: The Enterprise Act 2002

Added: 04/02/2003

1. Enterprise Act 2002

This Act received Royal Assent on 7 November 2002. Part 10 of the Act deals with reforms to corporate and individual insolvency, which are awaiting detailed secondary legislation before coming into force. No dates have been given, but the provisions relating to corporate insolvency are expected to commence around mid 2003.

The main features of the changes to corporate insolvency are:

To promote the use of the administration procedure to rescue a company as a going concern. Where this can not be reasonably achieved, the administrator is to achieve a better realisation of the assets for the creditors as a whole than could be obtained under a liquidation and if this is not reasonably practicable the administrator must realise the assets for the benefit of one or more secured creditor

To abolish the right of a floating charge holder, subject to certain exceptions, to appoint an administrative receiver. However the holder of a floating charge created before the new provisions come into effect will continue to have the right to appoint an administrative receiver under that charge after the Act comes into force.

To introduce an out of court procedure for the appointment of administrators by qualifying floating charge holders as well as the company and its directors and to reform the court procedure to make it cheaper and easier to use

To remove the Crown’s preferential creditor status in respect of debts due to Inland Revenue and Customs and Excise. For a time after the Act comes into force this may produce a "windfall" for floating charge holders and in future may lead to money being available to unsecured creditors

To make provision for a “prescribed part” of the company’s net property to be available to unsecured creditors. Details of this “prescribed part” are still to be published.

It will be important to ensure that future floating charges are drafted so as "qualify" within the terms of the Act.

Exceptions to the abolition of administrative receivership will apply in relation to capital markets (for the reason that SPV's tend not to have unsecured creditors), PPP, utilities, project finance and financial markets. There are a number of criteria that must be met if "true sale" or whole business securitisations and private note or commercial paper issues are to be excepted.

2. Small Company Rescue Procedure

On 1 January 2003 Part 1 of the Insolvency Act 2000 came into force, bringing into effect the provisions of this Act which enable qualifying “small” companies to obtain a short moratorium against all creditor action without having to first seek an administration order.

Subject to certain exceptions, any company which satisfies any two of the following criteria: its turnover must not exceed £1.4 million, its balance sheet must not exceed £2.8 million, or it has less than 50 employees, and that is not already subject to insolvency proceedings may apply to the court for a 28 day moratorium in which to negotiate a voluntary arrangement with its creditors.

During the moratorium the company may not be wound up, no administrator or administrative receiver may be appointed and no floating charge may crystallise. In addition, without the prior leave of the court, there can be no forfeiture of premises, no security can be enforced, no goods can be repossessed and no legal proceedings may be commenced against the company.

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