Corporate Rescue

Corporate rescue sometimes requires the sale of assets swiftly to achieve the best price available. How can the objectives of speed and efficiency be reconciled with procedures designed to ensure maximum consent, transparency and accountability in the Administration process?

Corporate rescue - Introduction:

• Corporate rescue culture under Enterprise Act 2002
• The purposes for creating an administration order
• Powers, duties and obligations of Administrator in the sale of assets of the company.
• Procedures involved in Administration process and how consent, transparency and accountability is ensured

Analysis

The Enterprise Act 2002 has a significant impact on how financial failure of a business is dealt with in the UK. The rescue culture is strengthened by streamlining the administration procedure which is court based. It also prevents lenders holding security over companies business and assets, including floating charges, from appointing an Administrative Receiver to realise assets to such an extent that it satisfies their debt. This was seen as UK's pro-creditor approach. This does not prevent the fixed charge holder from appointing a receiver however if an Administrator is appointed then such a receiver has to relinquish his office.

The previous insolvency regime did not provide enough transparency and accountability to the range of stakeholders especially to the creditors who have an interest in a company's affairs. The Administration is an important tool which can be used to give a breathing space for a company in financial difficulty so as to put together a rescue plan or provide better returns for creditors. To achieve this formalities have been reduced and administrations as well as Company Voluntary Arrangements have been made more accessible to the companies.

The government's intention was to deal with a company in financial trouble in a positive way when they introduced Administrations. In order to protect itself from the threat of creditors' action against it, the insolvent company usually initiates the procedure. The primary aim of an administration is to rescue the company as a going concern. The main thrust of the Enterprise Act 2002 is to restrict the use of Administrative Receiverships considerably. It is also intended to extend and streamline the administration procedure.

In the first instance the administrator of the company must attempt to rescue the company as a going concern unless it is not reasonably practicable or it is not in the interest of the creditors. If this is the case then the administrator must seek to achieve a better result for creditors as a whole than company were to wound up in a conventional way. If we take an example of MG Rovers the Administrators, KPMG, are desperately trying to rescue the company from its current financial situation by selling off its assets and trying to open up negotiations with Chinese company in order to either sell off the company as a going concern or to make better realisations of the assets for the benefits of the creditors as a whole. If none of the above options are found to be viable then they would seek to realise the property and make a distribution to secured or preferential creditors.

An administration order is able to save all or part of a company as a going concern. It can also support a company voluntary arrangement; agree to an arrangement as well as realising the company's assets for a higher value than would have been obtained in a winding up.

From the date of the Administration Order the Administrator takes charge of the company's affairs. The Administrator becomes an Agent of the company and Schedule I Insolvency Act 1986 (The Act) bestows certain powers on to him to deal with the day to day running of the company. Unless the debenture holder consents to the Administration of the company, the Court would not make an Administration Order. However, under the Enterprise Act 2002 a collective procedure would be in the interests of all creditors.

Section 14, of the Act, states that the Administrator has general power to do all such things as may be necessary for the management of the company's affairs, day to day activities and property of the company. The property of the company remains vested in the company and never becomes vested in the Administrator personally even when the company property is in his custody and control.

The purchaser of a company's property such as land should register a transfer of land by lodging an Office Copy of the Court Order which appoints the Administrator. However if the floating charge holder has that property as its security for debt then the Administrator either has to obtain a certificate clearly stating that the property which is being sold is free from a floating charge pursuant to section 15 of the Act. If no such certificate is available then it should be confirmed in the transfer document that the property disposed is no longer subject to floating charge. This will enable for there to be cancellation of any entry of that floating charge.

On the other hand, he may apply to the court to seek an order to dispose of the property which is subject to a fixed charge free from such a charge, then an office copy of the Court Order authorising disposal of the property must be lodged while registering the transfer of the property in order for the charge to be cancelled. All such transfer and the contracts for sale of the property should be in the company's name stating clearly in brackets that the company is in administration.

Under Insolvency Act 1986 Section 23 it was necessary to convene a meeting of creditors until then the Administrator had very restricted powers to sell individual assets. The selling of the assets while operating or running down the business, or to generate funds, was difficult. This was based on the principle that the Administrator should not dispose off any assets, in particular dispose off any properties, before the creditors have had an opportunity to consider it.

Before the Enterprise Act 2002 came into force the Administration procedure was slow, less flexible and difficult to access. The Government also claims that it wasn't as fair.

Also before, the liquidator could bring about legal proceedings without the permission of the creditors. The powers of floating charge holders before were greater as they were able to appoint a receiver.

Vanessa Finch evaluates in her article the potential contribution of recent reforms which have been implemented in an effort to further a rescue culture. Under the new insolvency regime the holder of qualifying floating charge would be prohibited from appointing an administrative receiver however, they would be able to appoint an administrator without recourse to the court. This new provision applies to any floating charge which is created on or after the date these new provision came into force.

It is interesting to note that this obviously leaves open for the holders of the floating charges, created before the new legislation came into force, to appoint an administrative receiver.

It should be noted that if a company enters into Administration then the benefits go to the unsecured creditors. Under new provisions the administrator has been given new powers to make distributions to secured and preferential creditor. A Special Fund, which an administrator can create, has been introduced exclusively for the benefit of unsecured creditors. In brief, share of the assets have to be ring fenced for the unsecured creditors to preserve their contractual rights under the new regime. It is not yet clear exactly how much will be kept aside for the unsecured creditors; my guess is that it depends upon the size of the company and the amount of creditors involved. However it is likely that 10% of the assets may be ring fenced for this purpose. The administrator has to make a decision whether the cost of making a distribution to unsecured creditors would be disproportionate to the benefits. The prescribed minimum amount has been set at 10,000.

Under new legislation, the main thrust is to restrict considerably the use that can be made of administrative receiverships and extend and streamline the administration procedure. The holder of a floating charge loses the right generally to appoint an administrative receiver under a floating charge. On the other hand an administrator can be appointed by a court order, by a floating charge holder or by the company or its directors. The main purpose of the administration is to rescue the company as a going concern.

According to Marion Simmons, Q C, if a lender holds a floating charge which came into force before 15 September 2003 then that charge holder retains its right to appoint an administrative receiver. The charge holder also gains the right to appoint an administrator and is not weighed down by the fact that the new provisions do ring-fence assets to certain extent in favour of unsecured creditors. In situations where an administrative receiver has been appointed then it prevents the appointment of an administrator.

Corporate rescue - Conclusion

The new changes in the Enterprise Act are based on the principle of equity and efficiency. The procedures involved in disposing of company's property can be time consuming. It is often difficult to keep accurate track of the costs incurred in realising the assets which are the subject of floating charge and costs of realising the assets generally. This is because often in the debenture document, assets which are subject to floating charges and assets which are subject to fixed charges are not distinguished clearly. Therefore the first task for the administrator to identify which assets are fixed assets and which assets are floating assets which may result in bitter arguments between the lender and the creditor both pulling the assets in the opposite direction. Of course the creditor would want the asset to be a floating charge asset and the lender tends to favour fixed charge. This could be very frustrating and hamper the objective of speed and efficiency. The administrator has to negotiate with both parties and get them to accept the best price he is able to obtain for the assets involved.

If the assets are bought by a buyer as a package then there is no separate consideration for assets which are subject to fixed and floating charge. Under new regime it is required that a valuation of these assets must be obtained before these can be sold off. This would most certainly give ammunition for arguments between fixed and floating charge holders.

To avoid such a situation the administrator should obtain consent by way of an agreement from both parties as to which valuers to appoint to value the assets. This could save valuable time.

It is vital that during the whole process the Administrator must report to the creditors as to what has been happening with the assets and the business of the company. If there is a Creditors Committee then this task would be easier as the Chairman of the Committee will keep all the creditors informed and generally ensure that the Administrator is carrying out his duties properly. In addition to this the cost of realising these assets are inevitably linked and would be difficult to separate and this could lead to friction between the lender and the creditors reducing the speed and efficiency expected in disposal of the assets. The net property available for distribution is after taking into account the debt secured by a fixed charge and any preferential claims. The remainder will be available for the floating charge holders.

The administrator is accountable to all creditors and other interested parties and not just fixed and floating charge holders. What is a reasonably practicable or a better result for company creditors as a whole will be a matter of commercial judgment and judgments will be open to challenge in court, according to Vanessa Finch in her article titled Re-Invigorating Corporate Rescue. Of course like anything else any uncertainty and actions which are vulnerable to legal actions are going to put the rescue efforts in jeopardy. The administrators have to use their commercial judgments and the courts would be very unwilling to question their judgment especially if the administrators argue that they made those decisions in good faith.

The act has reduced the powers of floating charge holders, such as banks, now the new act aims to get rid of administrative receivership completely and so such floating charge holders will now not be able to appoint an administrative receiver (apart from in certain exceptions such as capital market transaction etc)

The fact that administration is being favoured over an administrative receiver will increase the success of administration order because lenders will be able to see that the company can be saved, so they are less likely to enforce their security as long as a reasonable proposal can be put forward to the creditors.

The fact that a section of the company's net floating charge proceeds will be ring fenced and made available for distribution to the unsecured creditors and not to the floating charge holders, will further allow for Administration to succeed because the proceeds will be used to satisfy unsecured debts and thus the unsecured creditors are less likely to oppose the administration proposal. The act although is good news for unsecured creditors, will cause worry for secured creditors.

While disposing of the company's assets, if the company is still trading then, it is likely to incur Capital Gains Tax on its disposals. The changes in the Finance Act 2003 regarding a company's accounting period and the priority given by the Insolvency (Amendment)Rules 2003 to the payment of Corporation tax on capital gains in administrations requires careful consideration when deciding whether to proceed by way of administration or administrative receivership. In brief the objectives of speed and efficiency and the procedures involved in sale of assets of the company requires maximum co-operation from the fixed and floating charge holders. The commercial judgments of the Administrator and ability to make sound decisions are going to be vitally important in the efficient sale of assets and obtaining the maximum selling price for the business and assets of the company in administration. If the process involves application to the court all the time then of course the objective of speed is not going to be met and therefore it is vital to realise right at the start and have agreements regarding how the whole process is going to be handled by involving fixed and floating charge holders in it.

Bibliography

1. Department of Trade and Industry web site, Rover Manufacturing Group, Current News hot spot in media

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