Enterprise and insolvency
| by Patrick Hartigan 01 Nov 2003 Topic: Business, Business law, Insolvency |
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Patrick Hartigan explores the brave new world introduced by the insolvency provisions of the UK's Enterprise Act 2002 One-third of the Enterprise Act 2002 is devoted to insolvency law reform. Why is this? What is the connection between �enterprise� and �insolvency�? The reasoning goes something like this. The United States is the biggest, most successful economy in the world, and this is attributed to the enterprise of its people (its natural resources don�t do it any harm, but that is by the by). Americans are encouraged to set up in business, and if they fail, they are not maligned but encouraged to start again. If the UK follows the American model, so the argument goes, then the economy will thrive. The UK�s attitude to insolvency, rooted in the Victorian mindset of punishing those who fail to pay their debts, has to change. And so the Enterprise Act is an attempt to drive the UK into this new world of forgiving our debtors and providing them with an opportunity of continuing the commercial activity which stimulates the economy. This is how it works. Companies For a company which, though insolvent, has a business worth preserving, the new administration procedure provides a realistic opportunity of achieving that end. The process is quick and economical, and the formalities are minimal. The company may invite an insolvency practitioner to act as administrator. If that, practitioner consents to act and certifies that in his or her opinion, the purpose of the administration is reasonably likely to succeed, the company files the practitioner�s statement with the court, together with a formal notice of appointment of administrator, and the administrator is then in office. The holder of a floating charge on the company�s assets may also appoint an administrator. The power of floating charge-holders to appoint administrative receivers has been abolished, except for a few special types of activity, but the charge-holder can simply appoint an administrator instead. The charge-holder files with the court a notice of appointment of administrator, together with:
The appointment of the administrator takes effect as soon as those documents are filed. The administrator is charged with the responsibility of endeavouring to rescue the company as a going concern. If that does not prove possible, the administrator�s objective must be to achieve a better result for the creditors than would be likely in a liquidation. In any event, the administrator must seek the approval of the creditors to his or her proposals for the company at a meeting of creditors to be held within 10 weeks of the commencement of the administration. With the ring of protection provided by administration in place, a range of options is available to the company. For example, if the company�s problems are short-term, it may be possible to effect a re-financing, the administrator then withdrawing and handing the reins back to the directors. Probably a more common scenario would be for the administrator to sell the business as a going concern and then put in place a company voluntary arrangement for the proceeds to be distributed to creditors. There is also a new streamlined process available to move seamlessly from administration into creditors� voluntary liquidation. A little encouragement To encourage creditors to show more interest in insolvency proceedings, the Government has given up its right to preferential treatment for arrears of PAYE and VAT. Such claims were often very large, �scooping the pool� in many insolvencies. In giving up the Crown�s right of preference, the Government is not, however, willing to allow the whole of the benefit to pass to floating charge-holders, who in the main are banks. Therefore, where there are funds available which would normally go to a floating charge-holder, a proportion of them must be reserved for unsecured creditors. This is known as the prescribed part and is defined as follows:
Effective date All of the above provisions came into effect on 15 September 2003. Individuals The sole trader who fails will have less to fear from bankruptcy when the remaining parts of the act come into force on 1 April 2004. Whereas most bankrupts have had to suffer the disabilities of bankruptcy for three years, in future they will be discharged in one year, even earlier if the official receiver certifies that nothing untoward has been discovered. Thus, a failed entrepreneur can hope to get back in business in a relatively short period of time. For the minority of bankrupts who are deemed to have behaved irresponsibly a regime of �bankruptcy restrictions orders� comes into play. Where misconduct is believed to have taken place, the official receiver applies to the court, and the court may make a bankruptcy restrictions order which will apply the same restraints that traditionally applied to all undischarged bankrupts - for example, not being a company director and not being allowed to incur credit in excess of £250 (a figure expected to be increased shortly, possibly to £500), for a period between two and 15 years. The Individual Voluntary Arrangement (IVA) remains a popular alternative to bankruptcy, involving as it does no restrictions on the individual�s ability to trade. The opportunity to mount an IVA, even after bankruptcy, is to be extended by a new �fast track� procedure. If, on examination, the official receiver finds that a bankrupt may have a scheme worth consideration by creditors, the OR can act as the nominee in putting the scheme to the creditors. The costs are expected to be modest as there is, for example, no meeting of creditors - they vote by correspondence - and no modifications will be entertained. If creditors approve the IVA, the bankruptcy order is annulled, thereby enabling the insolvent to start another enterprise. Patrick Hartigan FCCA is author of The ICSA Insolvency Guide. The book is available from www.icsapublishing.co.uk at £24.95. | |