New Administration Procedure Enterprise Act 2002

The UK Insolvency Law shows the distinctive characteristics in its long-term development and has a broad impact on common law countries. In 2002, the British government enacted the Enterprise Act 2002 that carried out a huge amendment on the previous Insolvency Act 1986.

Early in 1999, UK had brewed the Enterprise Act 2002. At that time, the government set up a Reform Commission about the mechanism of company rescue and business renaissance. In 2000, the reform commission issued a report that recommended a comprehensive and important amend to the United Kingdom Insolvency Law. Then the commission published white paper on enterprise act and related consultation paper in 2001. The report was discussed in the House of Commons in March 2002 and in the House of Lords in June. After a series of discussions, the act was approved by Queen in November 7, 2002. In the view of the specific content of the Enterprise Act 2002, it is a huge legal document involving multifaceted issues, which contains a total of 281 sections and 26 appendices. There is not a single theme in the act, but defined around the corporate economic, legal and social problems, such as bankruptcy, competition and consumer protection. The provisions related to the insolvency act which in part 10 of the Enterprise Act, a total of 24 sections and 8 appendices associated, are great amendments to the content related to the Insolvency Act 1986.

There have a total of 8 sections about the reform of corporate legal system on insolvency in the Enterprise Act 2002. Section 248 is the “Replacement of Part II of Insolvency Act 1986″ which substituted the provisions of administration procedure in Insolvency Act 1986. Its main purpose is to make the administration procedure operate more smoothly, easily and economically. And it also takes hard to remove the bureaucracy in the administration procedure. Section 249 is “Special administration regimes” that primarily define on the administration procedure apply in special company. Section 250 is “Prohibition of appointment of administrative receiver”. This section limits almost all of the administrative receivers apply the administrative receive procedure in bankruptcy cases, unless it is consistent with certain special situations under section 250. This section is almost equal to abolish the administrative receive procedure which defined in the Insolvency Act 1986. Section 251 is “Abolition of Crown preference”. This section which applies to company and individual insolvency cases abolishes the priority of the government creditors. Section 252 is “Unsecured creditors”. This section provides that the unsecured creditors can share the larger part of the company’s assets in the debt than before. Section 253 is “Liquidator’s powers” and section 254 is “Application of insolvency law to foreign company”. In the provisions of section 255 is “Application of law about company arrangement or administration to non-company” which can make the application of the provisions about company arrangement and administration procedures in the Insolvency Act 1986 and company reconcile procedure in section 425 of the Company Law 1985 to the industry associations, friendly societies and other entities in certain non-corporate form to the organization.

The part 10 of the Enterprise Act 2002 is not minor amend to the Insolvency Act 1986, but can be considered as fundamental amendments on many issues. For example, abolition of crown preference in the bankruptcy process, Prohibition of appointment almost all of the administrative receiver in the company’s bankruptcy cases and the administration procedures have also been fundamentally revised.

2. About administration procedure and Insolvency administrator

2.1 Administration procedure

When a company falls into a temporary financial difficulties or can not pay its debt because of other problems that do not serious, in order to protect the interests of the each parties and the interests of society as a whole, we should rescue such companies in first, rather than immediately asked its bankruptcy liquidation.

As a way to save the bankrupt company，administration procedure was first put forward by the Insolvency law in 1985. Its main content is to appoint an insolvency administrator, and take practical management measures by the insolvency administrator to achieve the normal operation of the company and reach the purpose of avoiding liquidation ultimately.

The administration procedure is a temporary measure which lays the foundations for the rescue of the company in essence. Such as freezing the interference of the creditors, convening a meeting of the creditors, advancing the most appropriate plan for rescuing company by the insolvency administrator, reaching a formal reconcile arrangements in company and its creditors and paying the creditors by selling the company assets.

2.2 Insolvency administrator

Insolvency administrator is the specialized agencies that full control of the bankrupt assets and take responsible for its custody, clearing, valuation, processing and distribution under the command and supervision of the court after the bankruptcy be declared.

According to the Enterprise Act 2002, the insolvency administrator is appointed by the court, those who enjoy the right of the floating charge of all or most of the bankrupt company’s assets, bankrupt companies and their directors. Once the insolvency administrator is appointed, the bankrupt company enters the administration procedure. Within the validity period of the procedure, the insolvency administrator who replaces the bankrupt company’s former managers will manage the bankrupt companies, and has the right to dispose of the company property. Debt of the bankrupt enterprises will be suspended all payments or moratorium. Except with the consent of the court or the insolvency administrator, the creditors of bankrupt companies are not allowed to take all of any claim the rights to the bankrupt company’s operations.

As an agent of the insolvent company, Insolvency administrator must do its utmost to rescue the company, and to maintain to continue the company operation. After the appointment of the insolvency administrator, he needs to depth research in the bankrupt company’s situation and must take out a concrete plan to save the company within a certain period of time after the administrator be appointed. Generally speaking, the insolvency administrator is qualified professional managers, usually being charged by lawyers or accountants dealing with insolvency affairs. Most of the administrators are the member of commercial recovery professional associations. The qualifications of the insolvency administrator of the United Kingdom are very strict, in accordance with the provisions of the current UK insolvency law, the man who has the qualifications to be an insolvency administrator in various kinds of the administration procedures is limited to the practitioners who has the qualification admitted by the insolvency act. Anyone who serves as an insolvency administrator does not have the qualifications required by the insolvency law may constitute a criminal act and be appropriately serious penalties.

The insolvency administrator is the most important organization in the procedure of insolvency administration. It manages the specific affairs in insolvency. The other organs are only taking a supporting or supervise role in the proceedings of administration procedure. Whether the administration procedure based on a fair, equitable and efficient condition is smoothly carrying on and ending is closely related to the activities of the insolvency administrator.

3. The administration mode before the Enterprise Act 2002

Before the Enterprise Act 2002, under the mode of “Administrative Receiver”, the secured creditor, that is Floating Charge Holder, has the right to appoint “administrative receiver” to administrate the insolvency company. Administrative receiver has the power to govern all types of property of the insolvency company and decided the company’s business. They are responsible only to the secured creditor, that is to say the administrative receiver just only meet the interests of the secured creditor who appointed them. They do not need to concern the interests of other creditors and whether the business of the difficult insolvency company is possible to be resumed, but also do not concerned with how to recover the debt and reduce the cost in maximum. Thus, the mode of “administrative receiver” is a fast and effective approach to the secured creditor, but lack of “fairness” and “transparency” to other creditors, while other creditors do not have right to question the cost of taking this mode. And this mode is also not consistent with the international collective solutions mode based on insolvency laws. Although the British Government encourage the creditors to adopt the made of “administration order” to manage the bankruptcy company’s administration, in reality very few cases using this mode because the law gives secured creditors the power to control the company which face bankruptcy, the secured creditor can designate “administrative receiver” at almost any stage.If the secured creditor appoint “administrative receiver”, other creditors do not have the right to change the decision of secured creditors. That is why the mode of “administration order” can not be widely used.

This mode of administrative receiver is not a collective debt clean-up procedures for the interests of all creditors, but a remedy action that taking for the interests of floating charge holder (appointee), because the primary obligation of the administrative receiver is dealing with the collateral for the appointee in the interests of the secured creditors. Generally speaking, the administrative receiver focused on the protection of security interests. To this end, the function of administrative receiver procedures in handling collective debt will be affected inevitably.

4. The modification of the administration procedure in the Enterprise Act 2002

In fact, the UK Insolvency Act 1986 had been accused by many people since the date of its publication. These criticisms considered that the act can not adapt to the rapidly changing of the British economic and social life. Such as lengthy and expensive of the bankruptcy proceedings, the kind of deep-seated distrust of the debtors (the attitude of creditors-centred) and the unsatisfied result of the administration receiver procedure and administration procedure (do not play a role in the rescue of the insolvency company). Therefore, the provisions in the company law 1989, the bankruptcy law 1994, the Rules of Civil Procedure 1998, the financial markets and the bankruptcy provisions 1999, and the Bankruptcy Act 2000 have been made a certain extent improvements of the bankruptcy law, but there are very limited modifications. What the real large-scale and comprehensive modifications are reflected in the Enterprise Act 2002.

First of all, the UK Enterprise Act 2002 changed the main mode of “administrative receiver” into the modes of insolvency administration. In the conditions of ensuring the secured creditor’s interests, the Enterprise Act 2002 limited the secured creditors to appoint “administrative receiver” and abolished the veto power of the secured creditors to enter the procedure of administration order (except in certain individual cases), so that all of the creditors had more right show their proposals in the proceedings of insolvency. At the same time, the Enterprise Act 2002 simplified the legal formalities of entering the procedure of administration order that made the creditors easier to adopt the procedure of administration order in the procedures of insolvency. These provisions expanded the rights of unsecured creditors, had more conducive to the protection of unsecured creditors and balanced secured the interests creditors and unsecured creditor.

Secondly, the Enterprise Act 2002 gave the secured creditor the special powers to apply “administration order” to the court without notice to other creditors. The Court appointed provisional administrator upon request, then the provisional administrator applied to the court to the official entry of “administration order” procedure or end the procedure within 14 days. These provisions administered the insolvency company mainly by transforming previous procedure of “administrative receiver” into procedure of “administration order”. The administration procedure is the rescue procedure for the interests of all creditors; it is from the company’s collective interests.

Third, the Enterprise Act 2002 also stipulated the new produce that the administration order applied by the secured creditors, the insolvency company and the directors of the company, and did not have the activities of the court. This new produce is simpler and faster compare with the procedure of administrative order in the UK Insolvency Act 1986. The Enterprise Act also provided the new duties of the insolvency administrator that the administrator should decrease the time to complete the procedure in accordance with the principles of rapid, efficient, and possible in the new administrative procedure.

At last, the Enterprise Act 2002 abolished the priority of the government creditors for the interests of the unsecured creditors, so the unsecured creditors can share the larger part of the company’s assets in the debt than before.

In short, the Enterprise Act 2002 changed the main mode of “administrative receiver” into the modes of insolvency administration, simplified the legal formalities to the entry of the administration order procedure, expanded the rights of the unsecured creditors and the effect of the company’s rescue regime and insolvency administrator in the proceedings of insolvency, and further improved the influence of the insolvency administrator regime in the Insolvency Law.

5. The success of the new administration procedure introduced by the Enterprise Act 2002

Why in a short period of time, that is, only 16 years after the large-scale modifications of insolvency law in 1986 administration procedure occurred on such a huge modification again? In my view, the promulgation of the Enterprise Act 2002 and its amendments to insolvency law is a sign of the accelerated change of modern social. The law that has important role in adjusting the life of changing economy must keep up with the times.

Before 1986, the aim of the legislation of the United Kingdom insolvency law is to protect the interests of creditors which did not has the provisions of the prevention regime in modern insolvency. Even if the regime of administrative receiver in the provisions of company law is not to serve for the rescue of the insolvency company, and the scope of the regime is limited to the protection of floating secured creditors. The legislation in 1986 developed and improved the regime of administrative receiver, and created the corporate administration procedure that exist in the current law.Practice shows that the implementation of the UK corporate administration procedure did not meet the expectations of the legislators. The very low rate of application of administration procedure compared with other procedures, especially compared with the regime of administrative receiver, made its establishment almost meaningless. Low rate of application means the prevention goals set in the administration procedure can not be achieved. Thus, the British Government demonstrated again to the problems in the corporate administration procedure since 1993, which made some modifications and continuous improvement of administration procedure.

The bankruptcy reform measures in the Enterprise Act 2002 major in continuing to expand the use of the idea of company rescue, simplifying the legal formalities of entering the procedure of “administration order” and strengthening the capacity and responsibility of the insolvency administrator. The provisions about corporate insolvency on part X of the Enterprise Act 2002 put stress on the company’s rescue under any possible. They also developed a series of new supporting legislation according to the Enterprise Act 2002 to encourage individuals to start businesses and reduce corporate bankruptcy and achieve the aim of animating and developing the British economy. These new modifications were designed in accordance with the principles of company rescue and benefit to the company and the creditors.

We could find this large-scale modification of administration procedure through organizing and categorizing the changes that relate to the insolvency law on part X in the Enterprise Act 2002 were succeed in the following four areas.

5.1 Consider the interests of the debtors, balance the interests of the debtors and the creditors

The early bankruptcy law was major in protecting the interests of the creditors, but without taking into account the characteristics of the status of the debtors. With the development of the free market economy, the idea of supremacy of the creditors began to receive the challenge of the concept of equal free market participators. Then, the law also began to consider the interests of the debtors on the basis of admitting the protection of the interests of the creditors. The Enterprise Act 2002 changed traditional values that simply to centre in protecting the interests of the creditors in the historical development of insolvency law in the United Kingdom. In the many insolvency laws in the world, the UK insolvency law is a typical representative of “Creditors centrism”, which imposed many negative measures to constrain the debtors but less positive measures to reduce the responsibility of them. This is not consistent with the important trend of the current insolvency law. Scholars have long claim that the enterprises is regarded as a connection point of different interests which the insolvency enterprise is not only to consider the interests of the creditors but also to take into account the interests of those who in connection with the insolvency enterprise, such as the debtors, employees, shareholders, victims of these tort. The insolvency of the enterprise is an event that inseparable with the common interests of every party to the many stakeholders, so it is not enough in the perspective of simply considering the interests of the creditors. Although the Enterprise Act 2002 did not fully reflect this idea, which like France putting the aim of protecting the interests of the public as its primary value target, it also significantly changed the traditional practices that simply to centre in protecting the interests of the creditors. For instance, “Prohibition of appointment of administrative receiver” in section 250 and “Abolition of Crown preference” in section 251 of the Enterprise Act 2002. These modifications are all permeated with the consideration of the interests of the debtors and the great constraints to the interests of the creditors. It is a significant modification of the values of the UK insolvency law.

5.2 Emphasis on the rescue and recovery of the insolvency enterprises

Although the enterprise administration regime has been numerous criticisms since the first construct of it in the United States, it is undeniable that the administration regime has enormous political and economic significance in the world. Do not say that many countries followed suit, the International Monetary Fund was also inspiring the idea that recommended the administration regime to resolve debt crises of sovereign nations from it. The administration procedure is an effective regime taken to protect the enterprises that suffer from the debt crisis. It represents the main development trend of the modern international insolvency law. The administration procedure can effectively avoid the premature dissolution by liquidation of the enterprises suffered from the debt crisis by the creditors. The procedure designs a buffer zone between the business difficulties and the final liquidation that giving the insolvency enterprises a chance to revive. The large-scale modifications of the administration procedure carried out in the Enterprise Act 2002 aim to make the procedure more convenient, efficient and easy to use. Such as the improvement of the administration procedure that made in section 248 and section 249 of the act. These modifications to the procedure which make the insolvency enterprises out of dissolution or bankruptcy and have the ability to repay the debts due to expire could revive the enterprises that have reached the brink of insolvency or the limits of insolvency. So the administration procedure can achieve the aim of economic stability and development by protecting the interests of the creditors of the insolvency enterprises, the public who invest the insolvency enterprises as well as the interests of the company employees. Encourage the insolvency enterprises to re-establish and recovery is the world trend of development of the modern insolvency law, more and more people has been waking up to the positive social significance that come into being by reviving the insolvency enterprises in the way of design of the legal regimes. The recent developments of the United Kingdom insolvency law are an expression of this legislative trend.

5.3 Reduce the direct state intervention, and enable the insolvency procedure has more flexible, convenient, and efficient

The existence and development of a country is premise on a certain based economy, which determines the government of any country must take the establishment of based economy that in favour of the existence and development of a country as their important functions. In addition, we always hope that it would be best to place the government intervention on the socio-economic development within a reasonable framework. Therefore, as a market economy mechanism of survival of the fittest, the bankruptcy of enterprises is also can not do without the government’s macro-control and appropriate intervention. In many respects of the bankruptcy, the government is not only the policy makers and the initiators of applying for insolvency, but also the specific organizers and the participants of the insolvency proceedings. Therefore, too many intervention of the government in the specific course of insolvency is a great obstacle to achieve the function of the insolvency regime. At the same time, in the course of the administrative intervention the government often has priority to protect the interests of the government and its relevant departments and ignores even infringes on the interests of the creditors which contrary to the principle of all of the creditors repaid equally on the insolvency law. There are a lot of provisions which are the performance of reducing the direct state intervention, emphasizing on the judicial external supervision based on party autonomy and then improving the flexibility and operational efficiency of the insolvency law in the Enterprise Act 2002. Such as the section 248 that reform to the administration procedure, the section 255 that limit to the rights of the debtors, the section 258 that the investigation of the receivers is no longer a mandatory obligations but a discretionary problem, the section 262 that a further limitation to the rights of the bankruptcy trustees and the section 266 to 269 that cancellation of the relevant official qualifications. On the other hand, in order to better adapt to the changes of the development of world economic and to the function of regulating the economic, the Enterprise Act 2002 has expanded the use of the insolvency law in the provisions of the section 254 and 255. The administration procedure introduced by the Enterprise Act 2002 changed the main insolvency mode of administrative receiver and reduced the direct intervention of the government that made the insolvency procedure more flexible, convenient, and efficient.

5.4 Achieve the aim of survival of the fittest corporate and optimize the use of social resources

The driving force of the emergence and existence of the insolvency regime is the redeployment of resources on the condition of market economy required to achieve orderly and fair. Liquidation is a debt paid back means for the purpose of the dissolution of the insolvency enterprises. If the insolvency enterprises are dismissed, the creditors also can not obtain the greatest benefit from it. But the administration procedure does not make the dissolution of the insolvency enterprises and also do not damage the interests of the creditors and other interested party at the same time, so it is the optimal way of the allocation of resources and more efficient in the insolvency procedures. If the insolvency law only set the provisions of liquidation regime, it means that the companies once run into the reasons for bankruptcy will be eliminated from competition no matter what conditions are. This approach injures the interests of those enterprises that insolvency due to accidental factors and also have enterprises competitiveness. The large-scale modifications to the administration procedure in the Enterprise Act 2002, such as “Prohibition of appointment of administrative receiver” in section 250 and “Application of law about company arrangement or administration to non-company” in section 255, can reduce the number of bankruptcies, reserve the enterprises and maintain employment which has a positive influence not only in financial income but also in social stability to the government and society. The new administration procedure introduced by the Enterprise Act 2002 not just consider the interests of the creditors but also the interests of the debtors, the employees, other interested parties and especially the continued development of the insolvency enterprises. It is conducive to the realization of survival of the fittest corporate, eliminate those enterprises that loss of competitive advantage and rescue the enterprises had prospective to revive. Thus, the procedure can avoid the imbalance of the social and economic, which caused by the exorbitant elimination rate of the enterprises, and the waste of the social resource.

6. Conclusion

The administration is a kind of prevent judicial regimes. Its basic structure is submitting an application by the interested parties, then rectifying the business and settling the claims and debts of the insolvency enterprises under the participation of the interested parties, and making the insolvency enterprises get out of the financial difficulties and regain the operation capacity. The modifications in the Enterprise Act 2002 perfected the company administration procedure: abolish the priority of the government creditors for the interests of the unsecured creditors, balance the interests of the debtors and the creditors, simply the procedure of the entry of administrative order which embody in the idea of company rescue, make the debts settled in time and fair, let the company rescue fast and fair and try best to rescue the insolvency company which had prospective to revive on the condition of achieve the survival of the fittest.