Administrative Receivership Research Articles

Expanding the Scope of the EU BRR Framework: An Administrative Receivership for the Banking Union

The global financial crisis of the early ‘00s prompted EU legislators to harmonize the regime for the management of bank crises and to establish a dedicated pillar within the scope of the European Banking Union to centrally manage credit institutions’ failures. Nonetheless, established policy approaches concerning the assessment of the “public interest” condition limit the effective use of resolution procedures to a minority of credit institutions able to meet the systemic importance threshold. In order to prevent the resulting renationalization of crisis management measures for the remaining banks, the scope of the EU BRR framework should be expanded through the establishment of a special bank administrative receivership (BAR) system managed by the SRB. The BAR should represent an alternative to the dichotomy between resolution and NIP, and it should leverage on the combined use of the Sale of Business and the Asset Separation tools, supplemented with DGSs’ bridge financing to realize a smooth transfer of quality assets to third party buyers. The regime should be open to failing credit institutions able to pass a new PIA test based not only on financial stability concerns, but also on an assessment of the value destruction associated with piecemeal liquidation.

The Enterprise Act 2002: Past, Present & Future

The administration procedure is designed to hold a business together while plans are formed either to put in place a financial restructuring to rescue the company, or to sell the business and assets to produce a better result for creditors than a liquidation. Before the Enterprise Act 2002 (hereafter 'EA 2002') came into force, administrative receivership was the preferred mode of debt enforcement against distressed companies by banks holding fixed and floating charges over substantially the entire estate of the debtor. This was seen as too detrimental to the interests of the unsecured creditors and businesses. The Insolvency Act 1986 as an alternative to receivership was the first legislation to introduce the administration procedure. The beauty of Administration as an insolvency modus operandi is that it comes with a moratorium on creditor enforcement actions thereby giving the company the necessary breathing space to allow the objectives of the procedure to be achieved. The EA 2002 practically re-wrote the law on administration by replacing the entirety of Pt II of the Insolvency Act 1986. Some commentators share the view that the EA 2002 revolutionised the UK insolvency regime. Mokal et al agrees, but argues that it has been a relatively quiet one. Vanessa Finch on the other hand is more optimistic, she believes that the EA 2002 is a sign that corporate and creditor practice in the UK has moved from a focus on ex post responses to corporate crises to one that increasingly involves influencing the way that corporate actors manage the risks of insolvency ex ante. The new administration procedure has received mixed to negative reviews by academics and professionals alike.

Employees' rights during insolvency

Purpose – This paper aims to provide an examination of the position employees find themselves during corporate insolvencies. The paper examines employees' rights under insolvency procedures such as administration, company voluntary arrangements (CVA), administrative receivership, pre-packs and liquidation, to establish whether the rescue goal can be affected by employees' claims. Priorities in liquidation are also widely examined to establish the status of employees under this procedure and their entitlements. Design/methodology/approach – Legal analysis. Findings – The law offers more protection to employees than unsecured creditors. In comparison to unsecured creditors and even floating charge security holders, employment claims stand in a highly enviable position during insolvency. Originality/value – The paper offers a wholesale assessment of the rights of employees during insolvency. There is a lacuna in research literature that addresses the issue of employment rights during insolvency.

Corporate Insolvency in the United Kingdom: The Impact of the Enterprise Act 2002

With effect from September 15, 2003, the Enterprise Act made significant changes to the governance of corporate rescue procedures in the United Kingdom which involved a shift away from a “concentrated creditor” model of governance towards a “dispersed creditor” model of governance which vests greater control rights in unsecured creditors collectively. These changes were motivated by fairness and efficiency concerns, notably the concern that the UK's administrative receivership procedure was not conducive to rescue outcomes and operated to the detriment of unsecured creditors. This article discusses the Enterprise Act reforms in the context of wider theoretical debates about the desirability (or otherwise) of secured creditor control of corporate rescue procedures. It then presents in summary form the findings of an empirical study carried out by the authors that sought to evaluate the impact of the Act by comparing the gross realizations, costs and net returns to creditors in a sample of 284 corporate insolvencies commenced before and after the law changed. Whilst we find that gross realizations have increased under the streamlined administration procedure introduced by the Act when compared with the old receivership procedure, we also find that costs have increased. These findings imply that secured creditor control of the insolvency procedure (as in receivership) may be no worse for unsecured creditors than control by dispersed unsecured creditors (as in administration) at least as regards returns.

The Information Content of Administration and Administrative Receivership Filings in the UK

This study investigates the stock price performance of all listed firms that filed for Administration and Administrative Receivership in the UK between 1996 and 2003. Using event study methodology, we find a significant negative market reaction to Administrative Receivership filings but not to Administration filings. The evidence points to some degree of anticipation by the market participants given the large incidence of pre-filing warnings (e.g., profit and liquidity warnings) in our sample. The results are consistent with a less lenient treatment of shareholders in Administrative Receivership compared to Administration.

The Harm Done by Administrative Receivership

Under the law as it existed in the UK before the coming into force of the Enterprise Act 2002, administrative receivership was the preferred mode of debt enforcement against distressed companies by banks holding fixed and floating charges over substantially the entire estate of the debtor. The debenture creating these charges reserves to the chargee the right to appoint an Insolvency Practitioner (IP) to manage the company and apply either its income, or the proceeds of sale of the company's business, towards the discharge of the secured debt. Perhaps the most distinctive feature of receivership is the fact that the receiver - while regarded as the debtor's agent - owes his primary (in some important respects, exclusive) obligations to the chargee. He may choose to deal with the company or its assets in a way that directly inflicts harm on junior claimants, as long as he acts in good faith in the chargee's interests. While security packages carrying the right to appoint an administrative receiver are held by a variety of creditors, banks and other financial institutions are by far the most important players in this respect, so it would be convenient to refer to creditors holding such global security generically as 'banks'. It is because administrative receivership was regarded as not giving troubled but essentially viable companies or businesses a sufficient chance to be rescued that the Enterprise Act has severely restricted its availability. In the White Paper preceding the Act, the Government noted 'widespread concern as to the extent to which . . . receivership as a procedure provides adequate incentives to maximise economic value' by helping out distressed but viable businesses. The ability of the floating charge holder to block initiation of the pre-Enterprise Act administration procedure by appointing a receiver was taken as an important reason for the low uptake of administration. This was regarded as undesirable because (even) the old administration procedure was a self-consciously 'rescue' -oriented mechanism. The White Paper also highlighted concern about whether receivership provided 'an acceptable level of transparency and accountability to the range of stakeholders with an interest in a company's affairs, particularly creditors.' This paper asks whether the Government was right to accept that receivership was inadequate both as a rescue mechanism and in providing transparency and accountability for junior claimants (viz., those ranking behind the security-holding bank in the distribution of value from the insolvent estate). These questions are important because the Government provided no evidence that this was in fact the case, and because several commentators have strenuously rejected such slurs on receivership. Also, if receivership was doing a good job in rescuing businesses, then the massive costs of consultation, legislation and displacement of familiar legal institutions and practices were and are entirely unjustified. What is more, the new administration procedure introduced by the Enterprise Act involves mechanisms of consultation and accountability to a variety of claimants which stand in stark contrast to the receiver's single-minded dedication to the bank's interests. Keeping that in mind, suppose that the law governing receivership was efficient in rescuing viable businesses and doing so cost-effectively. In that case, the switch to administration will increase the costs borne by the claimants as a group (as the administrator goes about complying with his more demanding duties to a broader range of stakeholders) while bringing (ex hypothesi) few additional benefits in terms of additional businesses saved from unnecessary liquidation.

Reforming the Governance of Corporate Rescue: The Enterprise Act 2002

English corporate insolvency law has been reshaped by the Enterprise Act 2002. The Act was intended to 'to facilitate company rescue and to produce better returns for creditors as a whole'. Administrative receivership, which placed control of insolvency proceedings in the hands of banks, is for most purposes being abolished. It is being replaced by a 'streamlined' administration procedure. Whilst it will still be possible for banks to control the appointment process, the administrator once in office owes duties to all creditors and must act in accordance with a statutory hierarchy of objectives. In this article, we seek to describe, and to evaluate, this new world of corporate rescue.

UK Corporate Rescue: Recent Developments — Changes to Administrative Receivership, Administration, and Company Voluntary Arrangements — The Insolvency Act 2000, The White Paper 2001, and the Enterprise Act 2002

This paper surveys the main effects of recent legislative changes to the corporate insolvency law of the United Kingdom, from the standpoint of their potential impact upon corporate rescue. The reforms, enacted in 2000 and 2002 and brought into force during 2003, have recast the law relating to company voluntary arrangements, administrations, and administrative receiverships. After considering the various deficiencies in the pre-existing law, which rendered each of these procedures in varying ways unsatisfactory for the purpose of addressing the problems of financially troubled companies, the paper examines the process by which the declared intentions of the government when introducing its reforming legislation were significantly altered during the course of enactment into law. While the outcome of this dialectical drama has been the bringing about of some worthwhile improvements in the refashioned administration procedure, this has been accompanied by a significant dilution of the government’s previously stated intentions with respect to the attenuation of the rights and powers of creditors holding security in the form of a floating charge. Consequently, the paper concludes that administrative receivership will retain a far greater practical significance than had been previously envisaged, while the opportunities made available to floating charge holders under the revised administration procedure provide a strong incentive for institutional lenders to continue to make use of this species of security. The author concludes that UK insolvency law has been unable to embrace the “American way” of corporate rescue, with debtor-in-possession as its core principle, but has instead opted for a “rescue” model in which creditor interests continue to assert a dominant influence.

Administrative Receivership and Administration--An Analysis

This paper argues that the English law of corporate reorganisations has been very significantly changed by the Enterprise Act 2002. The motivation for this change lies in the ways in which administrative receivership - the dominant reorganisation procedure under the old law - was destructive of social value (in terms of unnecessary job losses and other resource misallocations). Three such ways are identified, all linked with the fact that receivership ties the duties of the office-holder in charge of managing the distressed company to the interests of the debtor's main bank. This is undesirable: (a) The bank is usually oversecured and thus has little incentive, once receivership is underway, to ensure that distressed but essentially viable companies would not be wound up or their businesses not liquidated. (b) The bank also has the benefit of directors' guarantees, which weakens its incentives to ensure the maximisation of the value of the company's business even in those cases where its proprietary security over the debtor company's assets is insufficient to cover what it is owed. (c) The bank has little incentive in either of these cases to control the costs of receiver wastefulness or negligence. These problems are compounded by the fact that the market for the supply of banking services to SMEs is significantly monopolistic. The paper explains that in order to remedy these defects, Parliament has imposed upon the administrator the duty to attempt a company or business rescue (as appropriate), if either one is in the interests of the company's creditors as a group. This duty is subject to the rationality test and is objective at its core, requires the administrator to account for his decision about which statutory purpose is to be pursued, and can be expected to be open to fairly intrusive court review. The paper provides an understanding of company rescue consistent with the explicit text and legislative history of the statute, and discusses the importance to the administrator's decision about whether to attempt such a rescue of the quality of the company's pre-distress management. Finally, the mechanisms provided by the statute for an aggrieved party to hold the administrator to account are analysed. The paper highlights the importance of three factors: (a) Most administrators will be appointed by the company's main bank. (b) The Insolvency Practitioners who act as administrators would be the same individuals who have acted in the past as administrative receivers. (c) There has been a paucity of understanding amongst the professionals - lawyers and accountants alike - about the significance of the changes brought about by the Enterprise Act. The administrator's statutory duties to act in the interests of all the creditors as a group and to act with reasonable speed and efficiency are examined in the light of these observations.

The survival potential of companies placed into administrative receivership

Outlines the UK law on insovency and asks whether the financial ratios banks use to assess credit worthiness can discriminate between the companies placed in administrative receivership (AR) by their lending banks which can or cannot be rescued. Applies both linear discriminant analysis and logistic regression to samples of UK companies placed into AR in 1998, explains the methodology and shows broadly similar results from the two methods; and a predictive accuracy of 85‐90 per cent for the rescued companies and 55‐60 per cent for the failures. Analyses the key ratios for survival in more detail, looking at debtor turnover, the gearing ratio and the current ratio. Recogises the limitations of the study but sees it as a promising approach to predicting survivability.

Mann v Secretary of State for Employment

The interrelationship between insolvency, the rights of creditors, and the particular rights of creditors who are employees of the insolvent organisation is complex and controversial, even at the purely domestic level. The longstanding concern of the European Union for the welfare of employees, including employees of insolvent employers, has made for further complexity and controversy as courts struggle with the interpretation and application of legal principles which derive from two different legal systems. Insolvency law has properly been described as 'characterised by special procedures intended to weigh up the various interests involved, in particular those of the various classes of creditors, which implies that ... there are specific rules which may derogate, at least partially, from other provisions, of a general nature, including provisions of social law'.' By definition, the claims of the creditors of an insolvent debtor cannot be met in full and it is one of the chief tasks of the principles of insolvency, to establish a hierarchy of creditors in accordance with which the inadequate resources of the debtor are to be deployed. It is a principle of any system of insolvency that all creditors on the highest level are to be paid in full before any payment can be made to creditors on the next level down and so on until the money runs out. In principle, secured creditors, that is creditors who are entitled to look for payment to the proceeds of the sale of particular assets belonging to the debtor, will consume the lion's share of the debtor's assets, leaving scraps, if anything, to the unsecured creditors. The claims of the latter are often described as simply personal (i.e. against the person of the debtor alone and not protected by any property owned by the latter). A further distinction should be observed preferential creditors groups of unsecured creditors on whom statute has conferred priority over other unsecured creditors. In the UK, the groups so preferred are essentially the government (e.g. income tax, customs and excise and social security contributions) and employees (in respect of unpaid remuneration and accrued holiday remuneration).2 In the United Kingdom, there is a variety of insolvency regimes in which a debtor may be placed. Business debtors are most likely to be in the form of companies incorporated under the Companies Acts,3 and when insolvent and in the absence of agreement among all creditors to refrain from proceedings to enforce their claims, will be placed in liquidation or administrative receivership or

Rescuing Insolvent Companies via Administrative Receivership - Analysis of Qualitative Survey Data

The place of administrative receivership in UK insolvency is ambiguous. It is often cited as a corporate rescue vehicle yet remains, primarily, a legal remedy available to holders of debentures that create a floating charge. As such it is far more likely to serve the interests of one major creditor rather than creditors and stakeholders as a whole. This paper reviews qualitative survey data from a sample of medium and large sized companies undergoing administrative receivership during 1993. It tracks the outcomes of the receiverships and provides some tentative links between these and information regarding the pre and post receivership periods. The major finding of this research is of the link between lender awareness of problems and actions taken to avert crisis. Although all companies in the sample went into administrative receivership their potential for rehabilitation appears to have been improved by the efforts and actions in the pre receivership period.