The Enterprise Act 2002 (the "Act") and consequential amendments to the Insolvency Rules came into force on 15 September 2003. The Act will have a significant impact on the enforcement options available to secured lenders.
Abolition of administrative receivership
Holders of floating charges created on or after 15 September 2003 will no longer be able to appoint an administrative receiver unless they fall within a small number of exceptions. The exceptions are: capital market arrangements, public-private partnerships, utility projects, project finance and financial market contracts and registered social landlords. Apart from these exceptions, administration will become the collective procedure of choice for enforcing security. To make this workable, administration as a procedure has been streamlined to reduce the cost and, supposedly, provides more influence for the unsecured creditor.
Qualifying floating charge holders
The Act introduces the concepts of a "qualifying floating charge" ("QFC") and a "qualifying floating charge holder" ("QFCH"). The importance of these definitions is that a QFCH may appoint an administrator, either by application to the court or by a simple out of court filing procedure. The starting point for any secured lender, therefore, in considering its security position is to consider whether or not it is a QFCH. This is a two-stage test.
First, the floating charge must be a QFC, which it will be if it:
- states that paragraph 14 of the new Schedule B1 Insolvency Act 1986 applies to it; or
- purports to empower the holder to appoint an administrator; or
- purports to empower the holder to make an appointment, which appointment would be that of an administrative receiver.
As such, floating charges (over the whole, or substantially the whole, of a company's assets) created prior to the Act coming into force will be a QFC by virtue of the last limb of the test set out above.
Second, in order to be a holder of a QFC (i.e. a QFCH), the person must hold one or more debentures of the company secured by a QFC, or a number of QFCs, which relate to the whole or substantially the whole of the company's property; or by charges or other forms of security which together relate to the whole or substantially the whole of the company’s property and at least one of which is a QFC.
If the secured lender satisfies both these tests (which it would if it holds a typical debenture over all the assets of a company), then it will be a QFCH. If its QFC was created before 15 September 2003, then it will have the choice of whether to appoint an administrative receiver, or whether to appoint an administrator under the provisions of the new Schedule B1 of the Insolvency Act 1986. So how should it choose?
Administrative receivership v administration?
Advantages of administrative receivership
- An administrative receiver's primary duty is to the appointor rather than the general body of creditors, as is the case with an administrator. As such, secured lenders will be able to derive comfort and control from the fact that they are putting 'their man' in. In addition, an administrator is constrained by the new purpose of the administration (described in more detail in part 1 of this mini-series). As such, the administrator may feel obliged to follow a strategy which costs more than an administrative receivership would in the same circumstances. Administration expenses (including, also, capital gains tax liabilities incurred in the administration) are paid out of floating charge funds in priority to the floating charge holder. Therefore appointing an administrative receiver may preserve more of the floating charge recoveries for the holder of the charge.
- Although the Act has streamlined the procedure for appointing an administrator to allow out of court appointments, the process for appointing an administrative receiver is still less complex and so will remain a quicker and cheaper alternative. In particular, the out of court procedure for appointing an administrator requires a statutory declaration to be sworn (by the appointor) and documents to be filed at court. The statutory declaration must state, among other things, that the QFC is enforceable but no guidance has been given as to exactly what this means. It is a criminal offence to make a statutory declaration which is false and which the maker does not reasonably believe to be true.
- Where a secured lender's floating charge might be vulnerable under section 245 Insolvency Act 1986 (i.e. the charge has been taken, without fresh consideration, within 12 months of the onset of insolvency) the appointment of a receiver does not render a charge void under that provision. As such, provided no winding up petition has been presented against the company, the present view is that an administrative receiver is free to sell assets which are subject to a floating charge and pass the realisations to the appointing bank[1]. The administrator would not be able to do this, as his appointment would trigger section 245, thus potentially rendering the floating charge invalid under that provision.
Advantages of administration
- The administration moratorium might make administration a better enforcement route if there are other creditors (such as, for example, landlords or retention of title creditors) who want to distrain or repossess goods. In an administration, such creditors will be prevented from doing so by the statutory moratorium. Administrative receivership offers no similar protection. Distraining creditors might prevent an administrative receiver from selling the company's business and assets for the benefit of the secured lender.
- Where a company has assets in other jurisdictions, administration may be a preferable route. Administrators are deemed to be officers of the court (even, ironically, if they are appointed out of court) and they are automatically recognised in all EU jurisdictions apart from Denmark under the EC Regulation on Insolvency Proceedings.
- Given that an administrator owes his duty to all creditors, rather than to the secured lender alone, administration is generally perceived to be more creditor friendly and rescue focussed than administrative receivership. It may therefore be better from a public relations perspective for a secured lender to elect to place a company into administration.
- Under the new regime, administrators are permitted to make a distribution to both fixed and floating charge holders. This is a change from the old regime, where no such distributions were permitted.
In conclusion, whilst receivership remains a speedier and cheaper process, the new streamlined administration is less cumbersome and expensive than the old regime. Some of the old objections to administration have gone, making it a more attractive option, especially if the process needs the benefit of the moratorium or recognition within the EU.
A third option
There is another enforcement option worth considering if the secured lender is quite keen to choose administration but is reluctant to make its own appointment. That is to persuade the company or the directors to appoint an administrator, either by application to court or by out of court filing. Apart from the obvious public relations advantage of this option, there is another benefit. If a secured lender appoints an administrator and it subsequently transpires that the appointment is invalid for whatever reason, then the court can order the QFCH to indemnify the administrator for liability which arises solely by reason of the invalidity. If, instead, the company or directors make the appointment, first there is less that can go wrong with such an appointment, and second, the secured lender cannot be made to indemnify the administrator even if there is subsequently found to be an invalidity.
[1] Mace Builders (Glasgow) Limited v Lunn [1987] Ch 191
