Article - Companies

Enterprise Act 2002

Question

My company is presently suffering cash flow problems.  The company’s bank has a debenture over its assets.  The bank is considering appointing an Administrative Receiver.  I believe that the law has changed recently so can it still do that?

Answer

The Enterprise Act 2002, which came in to force on 15 September 2003 , brought significant changes which effect corporate insolvency law.  Whilst your bank’s debenture may still enable the bank to appoint an Administrative Receiver, there have been substantial changes relating to administration, administrative receivership and certain preferential claims.

The main changes are as follows:-

Administration

New law provides that there is now a single overriding purpose which will apply to all cases of administration which is to save as much of the company as possible.  The prime objective of the Administrator will be to rescue the company as a going concern.  If he cannot do this, he must achieve a better result for the creditors as a whole than would be likely if the company was wound up.  If he cannot do this either and the company cannot be saved, he can realise the property to make a distribution to secured or preferential creditors.

Under the old law, an Administrator had to be appointed by the Court.  Under the new law, holders of Floating Charges, the company or its Directors can appoint an Administrator out of Court providing they follow the correct procedure.

Administrative Receivership

Whilst your bank will most likely still be able to appoint an Administrative Receiver pursuant to the terms of its Charge, the new law provides that except in very limited circumstances, Administrative Receivers cannot be appointed by holders of Floating Charges created after 15 September 2003.

Preferential Claims

Under the old law, as preferential creditors, the Inland Revenue and HM Customs and Excise could claim its debts from an insolvent company ahead of secured creditors holding Floating Charges and unsecured creditors.  Whilst employees’ claims for wages and holiday pay had been and remain preferential claims, the new law has abolished the Crown’s preferential status which means that the Inland Revenue and HM Customs and Excise will rank as unsecured creditors when proving their claims.

In addition, a prescribed part of an insolvent company’s net property must now go to unsecured creditors.  A reserve fund must be set aside for unsecured creditors.  The fund will only apply where Floating Charges have been created after 15 September 2003 and will be 50% of an amount of the company’s net profit not exceeding £10,000 and 20% of an amount of the company’s net property over £10,000 with a maximum amount available to unsecured creditors of £600,000.

Article First Published: 21 December 2003

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The views on this website are not necessarily those of the Student Law Journal and it is not intended to provide legal advice.  Any legal problems should be specifically addressed to a solicitor.

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