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The Enterprise Act 2002

New Corporate and Individual Insolvency Reforms

The Enterprise Act 2002 (“the Act”)

The Enterprise Bill became an Act on 7 November 2002. Effective from 15 September 2003 and 1 April 2004 in respect of corporate and personal reforms, it represents the most significant changes to the UK insolvency regime since the introduction of the Insolvency Act itself in 1986. The principle areas of reform relate to the following:-

• Abolition of Administrative Receivership
• Out of Court Administration Procedure
• Abolition of Crown Preference Status
• New Bankruptcy Reforms
  Automatic 1 Year Discharge
  Bankruptcy Restriction Orders ( For bankrupts who have acted irresponsibily)
  New Family Home Reforms
  Post Bankruptcy Fast Track Individual Voluntary Arrangements

Abolition of Administrative Receivership

Arguably the most significant change to be brought about by the Act is the abolition of Administrative Receiverships in respect of those floating charges created after 15 September 2003 in favour of a new out of court streamlined Administration procedure. Exceptions to the new legislation are that Administrative Receivers may continue to be appointed by holders of floating charges created prior to 15 September 2003 and also in respect of certain large complex financial transactions in the capital markets area, certain government related fields such as utility companies, public private partnerships, housing associations, project finance and certain financial markets.

For the holders of floating charges created before the Act came into force, they will be able to choose to appoint either an Administrative Receiver or an Administrator, the latter through the newly introduced Administration procedure.

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Out of Court Administration Procedure

The purpose of the introduction of the new Administration procedure is to promote a rescue culture enabling those companies to pursue this option where historically they may have not have done so due to the prohibitive costs and complexities associated with it.

The new provisions have significantly reduced the pre appointment costs associated with the procedure and enable the company, its directors or holders of qualifying floating charges to seek the appointment of an Administrator out of court. Although, it will continue to be possible to seek the appointment of an Administrator through the existing court procedure, it is likely this will only be utilised in dealing with larger and more complex situations. Additionally, there will no longer be a requirement for the Applicant to submit a report from a suitably qualified Independent Insolvency Practitioner pursuant to Rule 2.2 of The Insolvency Rules 1986 to support the petition for an Administration Order.

When it is the intention of the company or its directors to appoint an Administrator out of court, they will be required to give 5 days written notice to any holders of qualifying floating charges of the proposed appointment, specifying who is intended to act as Administrator. At this time the chargeholder may apply to court to have the Administrator changed to that of the charge holder’s choice. In these circumstances the court is obliged to grant the floating chargeholder’s application unless it considers refusal is justified on the basis of the facts of the case in question.

Where it is the intention of a floating charge holder to seek the appointment of an Administrator, it must provide 2 days notice to any prior charge holder of its intention to do so. At this time, the prior charge holder may either simply consent to the nominated Administrator or seek to replace him with one of its own choosing.

Purpose of Administration

The Act provides that the Administrator should perform his functions with the objective and in order of priority as follows:-

1. Rescuing the company;
2. Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in Administration);
3. Realising property in order to make a distribution to one or more secured or preferential creditors.

Timescale for the Administration

Historically, the Administrator had 3 months in which to prepare proposals in respect of the conduct of the administration for presentation at a meeting of creditors. The Act shortens this period to 8 weeks, the meeting of creditors being held within a further 14 day period.

Administrations previously could continue until such time as its purpose had been achieved or it had become clear that it could not be achieved. However Administrations now automatically cease after 12 months from the date on which it came into effect unless in excess of 50% of the unsecured creditors agree to an extension for a further 6 months. At the end of 18 months if the purpose of the Administration has still not been completed any additional extensions must be sought by application to Court.

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Abolition of Crown Preference Status

For many years unsecured creditors had with some justification, complained about the preferential status of the Crown in insolvency proceedings. The Act reduces the Crown’s preferential status in relation to VAT and PAYE/NIC to that of unsecured status, ranking pari passu with the general body of creditors. These provisions became effective also on 15 September 2003. The effect of this is that funds previously distributed to preferential creditors only will in the first instance now be available to floating charge holders and unsecured creditors thereafter. The only creditors to retain a preferential status will relate to sums outstanding to employees in respect of arrears of wages to a maximum of £800 and holiday pay in its entireity.

In theory, the reduction of the Crown’s status as a creditor will enhance the security of floating charge holders as they will not, following the introduction of this new legislation, be subject to settlement of potentially substantial preferential creditor claims in priority to their own security. As a quid pro quo for the reduction in the Crown status, following negotiations held with representatives of a number of financial institutions it was agreed that an element of floating charge realisations known as a the “prescribed part” would be ring fenced and made available for distribution to unsecured creditors. The percentage of this “prescribed part” is as follows:-

• Where the net property is less than £10,000, 50% of that property.
• Where the property is at least £10,000, 50% of the first £10,000, plus 20% of the property which exceeds £10,000, up to a maximum prescribed part of £600,000.

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New Bankruptcy Reforms

The purpose of the Act is to introduce a rescue and entrepreneurial culture within the UK. As part of this, changes to the bankruptcy regime came in force from 1 April 2004. The new bankruptcy provisions contained within the Act are discussed below:-

Automatic Discharge Within 1 Year

Under the old legislation first time bankrupts were automatically discharged either 3 years or 2 years after the making of the Bankruptcy Order, the latter being in the event that the liabilities do not exceed £20,000 and a certificate of Summary Administration was requested and granted by the Court. The new Act reduces the length of bankruptcy significantly all bankrupts receiving their automatic discharge 1 year after the date of bankruptcy unless there is a court order suspending it. Discharge may be suspended on the grounds of failure of the Bankrupt to cooperate with the Trustee or that the Bankrupt is subject to a Bankruptcy Restriction Order (“BRO”), the latter of which is discussed below.

Bankruptcy Restriction Orders

Introduction of the Bankruptcy Restriction Order (“BRO”) is a civil sanction available for use against bankrupts where the Trustee considers that the bankrupt’s conduct has been irresponsible or reckless. As with Director’s Disqualification in corporate insolvency, the BRO will generally apply for a period of between 2 and 15 years, the length of which will be dependent upon the severity of the circumstances of each individual case.

The effect of a BRO being made against the bankrupt will be as follows:-

1. The bankrupt commits an offence if he is a director of a company or directly or indirectly takes part or is concerned with the promotion or management of a company without leave of court.
2. Unlike a discharged bankrupt those subject to a BRO would continue to be guilty of an offence under chapter 6 of the Insolvency Act 1986, such as concealment of property etc.
3. They may not obtain credit in excess of £250 without first disclosing that they are subject to a BRO and may trade only in their own name or that in which they were adjudged bankrupt.

The Family Home

Historically, upon the making of a bankruptcy order the property of the bankrupt vested in his Trustee with no time limits. The Act imposes a 3 year time limit on the Trustee in which to deal with the bankrupt’s interest in the home. If at the end of a 3 year period the Trustee has failed to realise the bankrupt’s interest, applied for an order for sale or possession, a charging order over the property or entered into an agreement with the bankrupt regarding the interest, the home will revert back to the bankrupt. Extensions to the 3 year period will be considered individually on their merits by application to Court.

Individual Voluntary Arrangements (“IVA”)

A new scheme is to be introduced in respect of post bankruptcy IVA’s that will run along the existing IVA system. The new fast track scheme will provide for the debtor’s proposal to be agreed with the Official Receiver and filed with court. In these circumstances no meeting of creditors will be called and the proposal itself will not be subject to modification. Upon approval of the IVA the Official Receiver will automatically become the Supervisor.

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