Enterprise Act 2002 Insolvency Aspects. slaughter and may. 16 December 2004

Transcription

1 Enterprise Act 2002 Insolvency Aspects slaughter and may 16 December 2004

2 contents Page 1. Introduction 1 2. Commencement 1 3. Principal Reforms 1 4. Prohibition of administrative receivership Capital Market exception Public-Private Partnership exception Utilities exception Project Finance exception Financial Market exception Special Administration Companies exception 3 5. Reform of administration Appointment out of court Power to make distributions Purpose of administration Effect of administration reform 4 6. Abolition of crown preference and introduction of the ringfenced fund 4 7. Bankruptcy 5 slaughter and may

3 enterprise act Introduction 1.1 This memorandum sets out a brief summary of the principal insolvency law reforms contained in the Enterprise Act 2002 (the Act ). 2. Commencement 2.1 The Act received the Royal Assent on 7 November The corporate insolvency provisions of the Act came into force on 15 September Principal Reforms 3.1 The principal reforms in the Act, which the Government has stated will not be retrospective, are: (a) (b) (c) (d) the prohibition of the appointment of an administrative receiver over a company s assets where the charge by which those assets are secured is entered into on or after 15 September 2003, subject to exceptions for certain fi nance transactions; the promotion of administration as the principal insolvency procedure and the streamlining of the administration procedure, including a mechanism for the appointment of administrators out of court, so that it may be used to enforce security; the abolition of Crown preference as of 15 September 2003 (limited PAYE, VAT and National Insurance debts); and where there is a fl oating charge creditor, a certain proportion of recoveries due to the fl oating charge holder where that charge was entered into on or after 15 September 2003 will be set aside for the benefi t of unsecured creditors. 4. Prohibition of administrative receivership 4.1 A secured creditor who holds a debenture comprising a fl oating charge which (whether combined with other fi xed charges or not) constitutes security over the whole or substantially the whole of a company s assets may appoint an administrative receiver over the assets of that company when contractually entitled to do so provided it was entered into prior to 15 September Debentures entered into on or after that date are subject to a prohibition on the appointment of administrative receivers and unless excepted from the prohibition no longer confer on the secured creditor the right to appoint an administrative receiver but instead confer the right to appoint an administrator either by application to court or by a new process which does not require an application to court, known as an appointment out of court. 1 slaugh ter and may

4 4.2 The Act provides for several exceptions to the general prohibition. The exceptions principally benefi t large fi nance transactions and public-private partnership ( PPP ) projects. These exceptions can be altered, withdrawn or new exceptions brought in by the Secretary of State by statutory instrument. It is important to note that whether a debenture has the benefi t of an exception or not will fall to be determined on the date the security is enforced. 4.3 Capital Market exception This exception is intended to except debentures entered into in connection with securitisations where the total debt incurred is at least 50 million and there is an issue of debt instruments which are to be rated, listed or traded. The arrangement must include either a grant of security to a trustee acting for the holders of the debt instruments or one party guaranteeing another party s performance obligations or one party providing security in respect of another party s performance obligations. The exception covers asset backed securitisations, whole business securitisations and conduit fi nancing securitisations. 4.4 Public-Private Partnership exception The PPP exception applies to debentures issued by companies solely engaged in facilitating a specifi c PPP project. There is no minimum requirement for indebtedness. However, the party providing the fi nance must have step-in rights whereby that party is conditionally entitled to assume sole or principal responsibility for carrying out the project. A project is a PPP project where the resources for the project are provided by private persons and public bodies or where the project is designed for the purpose of assisting a public body to discharge a function. Public bodies include state-owned industries, and bodies which fall within a class designated by the Secretary of State. It has been suggested, for example, that educational establishments will be designated public bodies for the purpose of the exception. The Secretary of State may also designate individual bodies as public bodies for these purposes. 4.5 Utilities exception The utilities exception applies to debentures issued by companies which are solely engaged in facilitating a specifi c utility project. As for the PPP exception, there is no minimum level of indebtedness. However, the party providing the fi nance must have step-in rights conditionally entitling that party to assume sole or principal responsibility for carrying out the project. A utilities project is a project designed wholly or mainly for the purpose of a regulated business. Regulated businesses include businesses involved in the telecoms, gas, electricity, water and railway industries and universal postal service providers. 2 slaugh ter and may

5 4.6 Project Finance exception The project fi nance exception applies to debentures issued by companies which are solely engaged in facilitating a specifi c fi nance project where the total debt incurred is at least 50 million. As for the PPP exception, the party providing the fi nance must have step-in rights conditionally entitling that party to assume sole or principal responsibility for carrying out the project. There is no restriction as to the nature of the project in the project fi nance exception. 4.7 Financial Market exception The fi nancial market exception applies to companies which are subject to market charges, system charges or collateral security charges in respect of trading in the fi nancial, foreign exchange, derivatives and commodities markets. Such companies are already subject to a separate insolvency regime under part VII of the Companies Act Special Administration Companies exception Companies subject to special administration regimes, water and sewerage companies, railway companies and National Air Traffi c Services Ltd, are excepted from the prohibition regardless of the nature of the transaction which gives rise to the charge. 5. Reform of administration 5.1 The administration procedure has been reformed in three key ways: a debenture holder is entitled to appoint an administrator, as are a company or its directors; an administrator has the power to make distributions to secured and preferential creditors; and the previous purposes of administration have been replaced by one universal purpose consisting of a cascade of three objectives. 5.2 Appointment out of court A holder of a qualifying fl oating charge is entitled to appoint an administrator out of court. A qualifying fl oating charge is one which, alone or in conjunction with other fi xed or fl oating charges, constitutes a charge over the whole or, substantially the whole of a company s undertaking and which permits the holder to appoint either an administrative receiver or an administrator. It is possible to appoint such an administrator whether or not the company is insolvent, provided that an event of default has occurred under the relevant debenture. The holder of a qualifying fl oating charge is also able to substitute his choice of administrator in place of an administrator appointed in or out of court by any other person prior to the appointment of that administrator and on an application to court, subject to the consent of the court. A debenture holder who has the right to appoint an administrative receiver retains the right to veto the appointment of an administrator by appointing an administrative receiver. 3 slaugh ter and may

6 5.3 Where a company is or is likely to become unable to pay its debts, the company or its directors may appoint an administrator out of court, subject to giving notice to any holder of a qualifying charge. Both out of court routes are subject to the supervision of the court and an administrator appointed out of court is an offi cer of the court. 5.4 Power to make distributions Administrators have the power to make distributions to secured and preferential creditors. This enables administration to be used as a more effective security enforcement mechanism. Administrators also have the power to make distributions to unsecured creditors where the administrator believes that this is likely to assist the achievement of the purposes of the administration. An administrator may apply to court for the power to make a distribution to unsecured creditors. Where an administrator elects to make a distribution mandatory set off applies in a similar manner as set off on liquidation under Rule Purpose of administration The previous menu of administration purposes has been replaced by a common purpose for all administrations consisting of a cascade of objectives. The fi rst of these is the rescue of the company (not the business). If this is not reasonably practicable or if the second objective would produce a better result for the company s creditors as a whole, then the second objective applies. The second objective is to achieve a better result for the company s creditors as a whole than would be possible on a winding up. Only if this is not reasonably practicable does the third objective of realising the company s property in order to make a distribution to one or more secured or preferential creditors apply. Where the third objective applies, many of the formal requirements of administration, such as creditors meetings and reporting requirements, can be dispensed with. 5.6 Effect of administration reform The reforms streamline the administration procedure to make it more effi cient than before. The adaptation of administration to permit it to be used as a method of enforcing security in many ways mimics administrative receivership, particularly where the administrator is satisfi ed that the third objective applies. 6. Abolition of crown preference and introduction of the ringfenced fund 6.1 Crown preference in respect of certain PAYE income tax, VAT and National Insurance liabilities was abolished on 15 September The abolition benefi ts fl oating charge and unsecured creditors, provided the fl oating charge was granted before the abolition came into effect. Other preferential creditors, principally employees in respect of wages and certain pension fund contributions, will retain their preferential status. 4 slaugh ter and may

7 6.2 Where a fl oating charge is granted on or after 15 September 2003 and is subsequently enforced, a prescribed part of the recoveries in respect of the assets subject to the charge will be ringfenced and set aside for the benefi t of unsecured creditors. The sum to be set aside will be 50% of recoveries up to 10,000 and 20% of recoveries in excess of 10,000 until the fund reaches a maximum value of 600, Bankruptcy 7.1 The Act also reforms personal bankruptcy law. The bankruptcy reforms came into force on 1 April The most signifi cant change is the introduction of a distinction between culpable and non-culpable bankrupts. Culpable bankrupts face a stiffer regime and may be subject to a Bankruptcy Restriction Order for up to fifteen years. Non-culpable bankrupts are generally discharged within a year, although in straightforward cases a bankruptcy may be concluded in six months or less. Slaughter and May (JEFR/TEP) 16 December, 2004 This memorandum sets out a summary of the insolvency provisions of the Enterprise Act 2002 and is not intended to contain definitive legal advice, which should be sought, as appropriate, in relation to any particular transaction. If legal advice is required, please refer to George Seligman or Sarah Paterson at Slaughter and May or your usual contact at the firm. Slaughter and May slaugh ter and may

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