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Cambridge - John Armour & Rizwaan Jameel Mokal - Reforming the Governance of Corporate Rescue | United Kingdom Insolvency Law | Receivership
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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, the authors seek to describe, and to evaluate, this new world of corporate rescue.
saveSave Cambridge - John Armour &amp;amp; Rizwaan Jameel Mokal - R... For Later
In Re A.H. Robins Company Incorporated, Debtor. Washburn & Kemp, Pc v. Committee of Dalkon Shield Claimants: Class Action United States of America Securities and Exchange Commission: Legal Representative, Future Tort A.H. Robins Company, Incorporated, Official Unsecured Creditors' Committee, Official Committee of Equity Security Holders Norman E. Oliver, Trustee, 846 F.2d 267, 4th Cir. (1988)
FInal Binani
Alberto Armstrong, as Liquidator of the Firm of Boysen & Company, Appt. v. Eduardo Fernandez, Juan Bautista Pacheco, and Genara Jusino, 208 U.S. 324 (1908)
f4mla_2007_dec_a
Ylarde vs. Enriquez, 78 Pra 527
In Re Rafael Amaro Compos A/K/A Rafael Amaro Campos and Mayme Amaro Compos A/K/A Mayme Amaro Campos, Debtors. Farmers Insurance Group and Vicki Herrera and Joseph Herrera, Jr. v. Rafael Amaro Compos A/K/A Rafael Amaro Campos and Mayme Amaro Compos A/K/A Mayme Amaro Campos, 768 F.2d 1155, 10th Cir. (1985)
10000014403
REFORMING THE GOVERNANCE OF CORPORATE RESCUE:
Working Paper No. 289
Faculty of Law and Centre for Business Research
Email: j.armour@cbr.cam.ac.uk
Telephone: +44 (0) 1223 332550
Faculty of Laws, UCL and
Telephone: +44 (0) 20 7679 1406
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.
JEL Codes: G33, G38, K22.
Key Words: corporate insolvency, corporate rescue, secured credit
We are grateful to John Argenti, Rodney Austin, Maria Carapeto, David Citron,
Look Chan Ho, Jeffrey Jowell, Alan Katz, Michael Mumford, Richard Nolan,
Dan Prentice and Adrian Walters for valuable discussion and comments on
earlier drafts. The views expressed and mistakes made are of course ours alone.
Further information about the ESRC Centre for Business Research can be found
at the following address: www.cbr.cam.ac.uk
English corporate insolvency law is being reshaped. The Enterprise Act 2002
(the Act), the relevant provisions of which came into force on 15 September
2003, brings the most significant changes to insolvency law for over fifteen
years. The Act is designed to to facilitate company rescue and to produce better
returns for creditors as a whole.1 It seeks to achieve this through three principal
changes. First, administrative receivership is for most purposes being abolished.
This procedure was widely regarded as giving an unhealthy amount of power to
creditors holding floating charges, who because of their secured status lacked
sufficient incentives to rescue failing companies.2 The second major departure
concerns the refashioning of the administration procedure. Central to the
scheme of the new legislation is the desire to capture the benefits of speed and
flexibility associated with the receivership mechanism yet at the same time to
foster accountability. Thus, entry to administration has been facilitated by
allowing out-of-court appointments, both by the holders of floating chargesa
sort of quid pro quo for the abolition of receivershipand by the directors of
the company. Once appointed, the administrator must act in accordance with a
statutory hierarchy of objectives and is required to give reasons justifying his
course of action. Thirdly, the Crowns preferential status in insolvency
proceedings has been abolished, and in its place a proportion of floating charge
recoveries will be ring fenced for the general unsecured creditors. The
abolition of administrative receivership is only prospective,3 and so the changes
will take many years to be fully effective. Thus their impact will be more in the
nature of a gradual, rather than a seismic, shift. It seems clear that as this
unfolds, the new administration procedure will become the primary route for
corporate rescue. In this article, we seek to describe, and to evaluate, this new
world of corporate rescue.
The principal advantages of administrative receivership were that the appointing
bank would typically have, in the course of its relationship with the debtor
company, have acquired good information about the quality of the troubled
companys management, and moreover that the procedure gave the bank the
power to act on this information without interference from other, less wellinformed parties.4 The drawback was, of course, that where the companys
assets were worth more than the bank was owed, nothing obliged the bank to do
anything to save the business. The new administration regime, by providing for
out-of-court appointment by a floating charge holder, is designed to capture
many of the benefits of the information acquired by banks about their
customers. However, the revised procedure is also designed to ensure that the
banks appointee is genuinely accountable to all creditors. The replacement of
receivership signals the end of a regime under which a single creditors
proprietary rights could govern the resolution of insolvency proceedings. In
administration, all creditors are subject to a statutory moratorium, and the
company is run by the administrator on behalf of all interested parties. The
complex tensions between the different varieties of creditor lead us to
emphasise the importance of the checks and balances in the new regime that
will shape the governance of companies in administration. This involves a
triumvirate, of creditor decision-making, delegation to the administrator subject
to heavily-specified duties, and, overseeing the tensions between the parties,
court oversight and enforcement. This shift will render corporate insolvency law
closer to company law, and further removed from property law. We suggest that
the success of the new regime will largely depend on the way in which the
courts approach their new role at the apex of the governance of corporate
The rest of the article is structured as follows. Part 2 discusses the perceived
failings of the old law that informed the process of reform. In Part 3, we
examine the process of entry to the new administration procedure. Part 4,
considers the governance of companies in administration, including creditor
voting, the administrators duties, standing to enforce these duties, and the
courts approach to reviewing the administrators decisions. In Part 5, the article
turns to the changes made by the Act to distributional matters. Part 6 concludes
with a tentative evaluation of the new insolvency regime.
2. Background to the Reforms
The Act was preceded by a Review of Company Rescue Mechanisms,5 the
principal recommendations of which were largely adopted by the government.
The White Paper, Productivity and Enterprise: Insolvency A Second Chance,6
explains the weaknesses of the previous law that it was hoped the new Act
would remedy. First, the government considered that the existing law did not do
enough to promote a rescue culture.7 This term refers to a legal and
institutional response to financial distress that is geared in the first instance to
attempting to save a troubled business, rather than simply to close it down and
distribute proceeds to creditors as quickly as possible.8 There was a perception
that the existing system was not doing enough to promote rescues. The
Insolvency Act 1986 had introduced two procedures that were geared towards
corporate rescueadministration and Company Voluntary Arrangementsthe
uptake of both of which had been disappointingly low.9 The White Paper
concluded that this was because secured creditors with relevant floating charges
were able to block a petition for administration or a proposed CVA by
appointing an administrative receiver (AR). By removing the secured creditors
right to appoint an AR, it concluded, the new Act would thereby increase the
number of administrations and CVAs, and consequently the number of
corporate rescues.10
Secondly, there was concern that the AR procedure was inefficient, in the sense
that it failed to maximise value for creditors.11 The problem with AR, well
known to practitioners and academics alike, is that there may be a divergence
between the interests of the appointing bank, to whom the receiver owes his
principal duties, and who will be secured, and the interests of the general
unsecured creditors.12 Specifically, overall value may be maximised in some
cases by continuing to trade the business for a limited period whilst a buyer is
found who will purchase the assets as a going concern. However, this will take
time and valuations will be uncertain. On the other hand, if the assets can be
sold on a break-up basis for more than the bank is owed, then the bank and its
appointee, the receiver, will prefer this option, even if it produces less returns
overall, as it is likely to be quicker and more certain. Similarly, there was a
concern that the availability of AR meant that when a bank was considering
whether to pull the plug on a distressed firm, it would tend to be too
precipitate in doing so, knowing that AR ensured that it would be able to recoup
its investment through a sale of the firms assets on a break-up basis.
The Governments third reason for proposing reform was that the AR procedure
was lacking in transparency and accountability to a range of groups who were
affected by the receivers decision-making, particularly unsecured creditors.13
The receiver, who was not an officer of the court, owed unsecured creditors few
duties and their information rights amounted to little more than an entitlement to
be told about what in most cases was a fait accompli. The replacement of AR
with a modified form of administration, under which the administrator, who is
an officer of and subject to the directions of the court, owes an explicit duty to
all creditors, it is hoped, will remedy this accountability deficit.
Finally, there was a concern that AR had become outdated, particularly in the
international context.14 Other jurisdictions have difficulty recognising AR as a
true insolvency proceeding, because of its inherent bias towards the interests
of one particular creditor. This is exemplified by the EC Regulation on
Insolvency Proceedings, which confers automatic recognition throughout EU
Member States on collective insolvency procedures, but does not recognise
AR as such a procedure.15
Under the new law, administrative receivership will no longer be an option for
most troubled companies.16 The primary insolvency procedure will instead be
the new streamlined administration regime. In common with the previous law,
this will involve the imposition of a moratorium on the enforcement of claims
and repossession of security, and the appointment of an administrator who will
take over the running of the company. The chief innovations will be the way in
which an appointment can be made, and the duties to which the administrator is
subject. We consider these in turn.
3. Entry to the New Administration Procedure
Under the old law, an administrator could only be appointed by an order of the
court, on a petition by the company, its directors or any creditor(s).17 It was
necessary to show that the company was, or was likely to become, unable to pay
its debts, and that an administration order was likely to achieve one or more of
the statutory purposes18which purpose(s) in particular would depend on those
that were specified in the petition.
This gateway is retained under the new law. In addition, it is now possible for a
company to enter administration out-of-court on the application of either the
company or its directors,19 or of the holder of a qualifying floating charge
(hereafter the QFCH).20 This is in essence a floating charge or package of
charges including a floating charge that together cover the whole or
substantially the whole of the companys property, and that is created by an
instrument reserving to its holder power to appoint an administrator. For court
applications, there will be a slight change in the threshold of proof for purpose
will be lowered to the court being satisfied that it is reasonably likely that the
purpose will be achieved.21 Where the appointment is made out-of-court, it will
suffice that the person appointed as administrator is willing to declare that he
thinks there is a reasonable likelihood of achieving the new statutory purpose.22
The rationale for granting expedited appointment rights to the companys
directors is straightforward. The companys directors are usually in the best
position to sense impending crisis. There is great value in providing incentives
sticks and carrots for them to take action at that point. The stick already
exists in the form of the wrongful trading provisions.23 One way of providing
the carrots would be to ensure that the directors who, for companies most
likely to become subject to administration, would also be significant
shareholders would have some hope of regaining control and residual
claimant status if they act at the earliest appropriate moment. The para 22
appointment mechanism, initiated by the company or its directors, would place
in their hands the selection of the administrator, and thereby give the board
more influence over the direction of proceedings than if the process is initiated
by a creditor. However, the board are often likely to be part of the problem for
the company. If we partition the causes of corporate financial distress into two
broad categories:24 management-related (to do with the incumbent managers
irrationalities, lack of ability, failures of strategy and deficiencies of
understanding, etc.),25 and management-unrelated (external shocks,
macroeconomic comparative disadvantages, inflation, over-regulation, delayed
payments, government policies like those on taxation, etc.),26 it is worth noting
that surveys of insolvency professionals routinely identify management-related
causes as being of the greatest importance in corporate failures.27 So for
example, one in two companies undergoing formal insolvency proceedings had
suffered distress in the past,28 yet the companys directors still did not prevent
insolvency.29 In such cases, an administrator brought in by the board would be
placed in the invidious position of having to replace his appointers. Of course, if
the board anticipates this, then the carrot will seem rather less juicy. In short,
whilst expedited appointment by the directors is a useful innovation, it cannot
be expected to be the main gateway to administration.
Nor, it seems, does the legislature assume that it will be. As between the
different modes of appointment, out-of-court appointment by the QFCH will
enjoy priority. If the company or its directors wish to appoint an administrator
out-of-court, they must first give five days notice to any QFCH,30 who may
then appoint an administrator themselves under para 14 in the interim. If an
administrator has been appointed under para 14, then the directors may not
appoint under para 22.31 Similarly, if an administration application has been
made to the court under para 11, any QFCH must be notified of the
application,32 and will then have the right to petition the court to have a specific
person appointed as administrator.33 Whilst applications to court and notices of
intention to appoint out-of-court by the directors must state that the company is,
or is likely to become, unable to pay its debts,34 this is not necessary where the
appointment is made by a QFCH.35
The privileged treatment accorded to the QFCH can be understood as the quid
pro quo for the loss of the entitlement to appoint an administrative receiver.
However, it appears that it is also underpinned by sound policy. Consider that
administration, as a rescue procedure, is intended to save a company in
trouble, or at least to preserve any going concern value that its business might
have. For a distressed company, the alacrity with which it is made subject to this
procedure might determine whether or not either of these objectives is met. Yet,
at the same time, to put a company into administration is a serious matter.36
The process is expensive, the company undergoes a hazardous decapitation with
its management replaced by an outsider, and the fact that it is in administration
might send quite adverse signals about its bargaining power and ultimate
viability to its counter-parties. Thus it is crucial that the decision to initiate
administration be taken at the right time and for the right reasons. We suggest
that the QFCH will usually be best placed to do this.
When a debtor appears to be on the verge of defaulting on its obligations,
distinguishing between management-related and management-unrelated causes
is crucial to achieving the correct balance between provoking useful assistance
from the administration procedure and unwittingly decapitating companies that
might resolve their difficulties themselves. Making this decision effectively
requires information about the management teams ability, and the expertise to
analyse it appropriately.37 The QFCH is, in most cases, likely to be the creditor
best placed, in terms of information and expertise, to make this decision.
Creditors taking extensive security packagestypically banksalmost
universally employ covenants requiring the provision of information by the
debtormanagement accounts and the like.38 The banks monitor the
performance of their debtors accounts at individual branches, and if the account
underperforms significantly, it is transferred to specialist central rescue units.39
There is also strong evidence that these units often prescribe appropriate
remedies for troubled firms, frequently encouraging the replacement of
members of debtors management teams, and further, that debtor companies
significantly improve their chances of being turned around if such changes are
made.40 Where these informal rescue processes are unsuccessful, then the
QFCH will be in a position to invoke administration proceedings.
Moreover, by giving the QFCH the right to commence administration
unilaterally, it is able to draw on its information and experience quickly, and
without the need to engage in costly and time-consuming negotiations with
other creditors, or to verify information to the court. Finally, there appears to be
little prospect of a QFCH using this power to put companies into administration
unnecessarily so as to benefit itself, or simply through negligence, because once
in administration, the QFCHs power to control the proceedings is substantially
reduced.41
Considerable power is devolved to the administrator, so as to allow flexibility in
achieving the procedures purposes. At the same time, the statutory framework
is designed to ensure that office-holder remains accountable to those with a
tangible interest, and that decision-making is transparent. The two principal
mechanisms by which such accountability is attained are the requirement that
the administrators proposals be voted upon by creditors, and secondly, the
administrators duties. In this section, we consider first the rationale for this
governance structure, and then examine each of these in detail.
4.1 Governance in Solvent Companies
The concentration of managerial power in the hands of specialist agentsin
healthy companies, the board of directorsis a fundamental feature of
corporate law.42 The rationale for this delegation is that it economises on the
considerable costs involved in having decisions made by the persons in whose
interests the decisions are made, owing both to lack of specialist expertise and
to the costs of resolving disagreements.43 As for healthy companies, so for sick:
whilst the creditors have become the residual claimants in respect of a
company that is factually insolvent, they too are unlikely to be well-versed in
the operation of its business, and so there is a continuing need for specialist
Delegating managerial power gives rise to so-called agency costscosts
caused by the fact that agents working on other peoples property will tend not
to exert themselves as hard as if the property were their own.45 Much of
substantive corporate law is concerned with the minimisation of the costs
arising from these conflicts of interest. There are two principal varieties. The
first is a shareholder-director conflict, arising where the ownership of the
companys shares is dispersed, and the board of directors are not themselves
significant shareholders. In this situation, the concern is with self-dealing
transactions and the like, and with giving the executives sufficient incentives to
exert themselves on the companys behalf. The second is a majority-minority
conflict, and arises where share ownership is concentrated. If one group of
shareholders has control, they may appoint themselves or their associates to the
board, and arrange for the company to be run in their interests, to the detriment
of the minority. Again, company law has a range of mechanisms for dealing
with this type of conflict.46
4.2 Governance in Administration
Displacement of the board
Where the company becomes factually insolvent,47 creditors displace
shareholders as residual claimantsin other words, they capture the benefit or
suffer the loss from any increase or decrease in the firms total value. At this
point, it no longer makes sense for the board of directors to manage the
company on behalf of the shareholders. Hence directors fiduciary duties are
modified, so that the interests of the company in which they are required to act
become the interests of the creditors.48 In itself, this is unlikely to be sufficient
to placate creditors. On the one hand, the shareholders are still responsible for
appointment and removal of directors,49 but the latter are expected to mediate
the conflicts that arise between creditors and shareholders interests. On the
other hand, the board will often have been responsible for the companys
financial difficulties, and their competence may be in doubt. The advantages of
the administration regime, which gives creditors of companies that are, or are
nearly, factually insolvent the opportunity to replace the board with a crisis
organ who is accountable to them rather than the shareholders, are therefore
readily explicable.
Of course, the board are also likely to be those who have the greatest knowledge
about the companys business and markets. Hence administration does not ipso
facto terminate the boards appointment, but rather gives control over their
appointment and removal,50 and the scope of their management jurisdiction to
the administrator.51 If the administrator takes the view that they are competent
but unfortunate, then he may allow them to remain in office and to exercise
managerial powers. The management structure is a flexible one that will support
a range of outcomesincluding day-to-day management being effected by the
administrator himself and the appointment of a new turnaround board. In
theory, it allows the administrator to decide whether or not the board are
competent, and to deal with them accordingly.
A possible weakness with the system is that the administrator himself is likely
to have been parachuted in at short notice, and so lack sufficient information
upon which to base a decision of this sort. However, as explained above, many
administration appointments will, under the new law, be made by the
companys bank, who will likely be the best-informed party as to the quality of
the companys management. As is commonly the case in receiverships under
the current law,52 the bank will be able to impart to the administrator whether or
not they have confidence in the management team. Moreover, if they do, then it
is unlikely that an appointment will have been made, as in this situation the
bank will usually have been willing to renegotiate beforehand.
The decisions about the composition and the power of the board are given to the
administrator, rather than directly to the creditors, for similar reasons that power
in a solvent company is vested in the board and not the shareholders directly
namely decision-making and expertise costs.53 In particular, the different
priority rankings and investment levels of different creditors meant that the
costs of referring decisions to creditors are likely to be very high.54 Thus the
administrator is given plenary powers in relation to the companys assets and
business. Para 59 provides that he has power to do everything necessary for
the management of the companys business and affairs,55 and Schedule 1 sets
out (without prejudice to the generality of para 59) a specific list of powers
exercisable by the administrator. In exercising these powers, he acts as agent of
the company,56 and any third party dealing with him in good faith need not be
concerned to enquire as to whether he is in fact acting within the scope of his
powers.57 Additionally, the administrator has statutory immunity from an action
in conversion by an owner if he seizes or disposes of chattels to which he
reasonably believes the company is entitled.58
Secured creditors rights of enforcement are also stayed by the moratorium, and
the administrator is given power to decide what shall happen to the collateral,
provided only that the secured creditors priority position is maintained. Thus
assets subject to fixed security or quasi-security may be sold, provided the
administrator persuades the court that this is likely to promote the purpose of
the administration, and the proceeds are held for the benefit of the secured
creditor.59 Assets subject to a floating charge may be dealt with by the
administrator as if it were not to subjectthat is, the charge is statutorily
decrystallised by the onset of administration.60
Administrator-creditor conflicts of interest
That said, the governance problems discussed in the context of solvent
companies have their analogues in insolvency.61 First, there will be a need to
ensure the accountability of the administrator to those with claims against the
companys assets. Most generally, the question here would be about the
administrators costs and his competence. Indeed, just as with solvent
companies, it is justifiable to refer very fundamental decisions about the
companys future to the general body of the creditors. Thus the first important
mechanism of governance in administration is the creditors meeting, to which
the administrator must refer his proposals for a vote.62 Correspondingly, the
administrators duties serve the purpose of keeping him accountable to the
creditors. A close analogy may be drawn here with the way in which directors
duties and shareholder voting rights operate to keep the boards of solvent
companies accountable.
Creditor-creditor conflicts of interest
However, the limitations of the analogy with solvent companies are reached
when it is seen that the more salient conflict of interest in administrations will
usually be that between secured (and preferential) creditors on the one hand and
unsecured creditors on the other. For example, a bank with a debenture covering
assets worth more than the outstanding indebtedness might simply wish to
realise its security and would not have strong incentives to allow the business to
continue to trade. In particular, it might be concerned that the collateral would
lose value because of changes in trading conditions. On the other hand,
unsecured creditors would wish the business to continue in the hope of
maximising their returns. This type of conflict would manifest itself mainly as a
question about what the administrator should seek to do, and how long he
should spend trying to do it.
Before the Enterprise Act 2002, English law resolved this conflict clearly in
favour of a secured creditor entitled to appoint an administrative receiver.
Through the exercise of its veto rights, if such a creditor wished, its own
appointee could always be controlling the insolvency proceedings, owing
fiduciary duties exclusively to that creditor. As we have seen,63 this led to
perverse incentives where the creditor was oversecured, with a tendency to
close businesses too quickly. The new administration regime is designed to
ameliorate this problem by requiring all creditors to participate in the same
procedure. This, of course, simply transfers the tensions to the mechanisms
within the procedure for resolving the conflicts between creditors.
Thus, a second role for the governance mechanisms considered in this section is
the mediation of conflicts between different creditors interests. Briefly, this
works, in relation to the creditors meeting, by limiting who can vote and what
they can vote upon, and in relation to the administrators duties, by defining a
statutory hierarchy of objectives in accordance with which the administrator
must act prior to the approval of proposals by the creditors meeting. These
mechanisms will now be considered in more detail.
4.3 Creditor Voting
Structure of Creditor Voting Procedures
The most basic mechanism for ensuring the accountability of the administrator
is the creditors meeting. As under the old law, the administrator is required to
circulate to creditors his proposals for how the company is to exit the
administration, and unless para 52(1) applies, must call a creditors meeting to
vote on the proposals. If the meeting accepts his proposals, these then become
the purposes that he must seek to achieve,64 and he may not subsequently
change them without the revisions being accepted by another creditors
meeting.65 If, however, the proposals are rejected, then the outcome is put in the
hands of the court, which may terminate the administration, or make such order
as it thinks appropriate.66
It is easy to see how a creditors meeting fosters accountability to the creditors.
More subtle, however, is the way in which the legislative framework is designed
to respond to the problems of the differing interests of claimants of different
priority rankings. By virtue of para 52(1), the obligation to put the proposals to
the creditors meeting does not apply if the administrator thinks either:
(a) that the company has sufficient property to enable each creditor of the
company to be paid in full,
(b) that the company has insufficient property to enable a distribution to be
made to unsecured creditors other than by virtue of section 176A(2)(a), or
(c) that neither of the objectives specified in paragraph 3(1)(a) and (b) can be
That is, if he thinks the company is solvent, or so hopelessly insolvent that there
will be no realisations for the unsecured creditors other than the ring-fenced
funds, or that it will not be possible to achieve a rescue or a better result for the
creditors than would have been obtained in liquidation.67 If para 52(1) applies, a
meeting must nevertheless be called if requested by creditors holding at least
10% of the value of the companys total debts.68
Para 52(1) should be understood in conjunction with the allocation of
entitlements to vote. A resolution in the creditors meeting is carried by a
majority in value of those voting, either in person or by proxy.69 In a mandatory
creditors meetingthat is, where the para 52(1) conditions are not satisfied
only unsecured creditors are entitled to vote.70 However, if in circumstances
where para 52(1) does apply and a meeting is requested under para 52(2),
secured creditors are entitled to vote the full value of their claims.71
Read together, the provisions concerning the calling of, and voting at, meetings
are designed to ensure that the voting is taken by the class who stand to gain or
lose most from the implementation of the proposals. When the company is
solvent, then it is not creditors, but members, who will be in this position.
Hence there is no mandatory meeting. Where the administrator is proposing an
outcome which is intended to generate a return for the unsecured creditors, then
it is they who will be principally affected, hence the logic of requiring a meeting
where only unsecured creditors vote. Moreover, the administrator is not
required to put his proposals to a creditor meeting if he thinks that there will be
no surplus for the unsecured creditors, beyond the ring-fenced fund, after
secured and preferential creditors have been paid, or if he thinks that neither
objective (a) nor (b) under para 3(1) could be achieved.72 The bottom line is
therefore that where the unsecured creditors have no tangible interest in the
companys assets, or where it is not possible to achieve more for them than
would be obtained in liquidation, then they drop out of the picture.73
Creditors interestsand decision-making rightsalso factor into the decision
when to terminate an appointment. An appointment of an administrator will
automatically come to an end after a period of one year.74 This may be extended
for a further six months with the approval of its creditors (unanimous approval
of secured creditors, plus 50% by value of the unsecured claims, if they have a
tangible interest)75 or for longer with the approval of the court. An
administration may also be ended on the application of the administrator or of a
creditor.76
Balancing the Interests of Secured Creditors
Three balancing features of the administration regime, and the structure of the
creditors meeting provisions in particular, are however designed to ensure that
secured (and preferential) creditors are not prejudiced by this
disenfranchisement. First, para 73 provides that no proposal of the
administrators may be accepted that would interfere with a secured creditors
ability to enforce their security, result in any preferential creditor being paid
otherwise than in priority to unsecured creditors, or result in one preferential
creditor being paid a smaller proportion than any other, unless the creditor in
question consents.77
The meaning of interference with a secured creditors right of enforcement
was recently considered, in the context of the identically-worded section 4(3) of
the Insolvency Act 1986, by Hart J in Swindon Town Properties Ltd v Swindon
Town Football Co Ltd.78 The case concerned a CVA proposed by a company in
administration. The claimant creditor, who had the benefit of a standard
debenture package, objected to the proposed arrangement on the basis that it
would result in funds being diverted to unsecured creditors that would otherwise
have been available for itself. His Lordship held that for the purposes of the
section, the secured creditors right to enforce had to be considered at the
point at which the administration moratorium came to an end. The secured
creditor would still retain the same formal legal entitlements as were the
arrangement not in existence. Thus they would be able, by enforcing, to
crystallise their floating charge and therefore to prevent the payments being
made to the unsecured creditors. There was no contravention of the section
notwithstanding that the arrangement may have made it more likely that the
creditor would have needed to rely upon its enforcement rights, and that the
functional context was that this was unpalatable because it would result in the
destruction of the companys business.
However, in the context of the new administration regime, it is unclear what
rights a qualifying floating charge holder will retain to enforce his security,
following the abolition of administrative receivership. Whilst he will still be
able to crystallise the charge for non-payment by the debtor, if the latter reenters administration then this will in effect forcibly de-crystallise the charge
again.79
Secondly, the position of secured creditors is protected by the less-than-absolute
nature of the moratorium. The stay is intended solely to be proceduralthat is,
affecting the rights of enforcement, but not the substantive rights to priority
against the collateral. Yet the ability to enforcein particular, to dictate the
manner and timing of enforcementmay significantly affect the value realised
on sale. Thus the statute provides for the overreaching of secured creditors
rights, with their automatic attachment to the proceeds of sale.80 Moreover,
creditors with fixed or quasi-security have the additional protection that their
collateral may not be sold without the consent of the court, and that the
administrator must ensure their rights of priority carry over at least to the
deemed market value of what has been sold.81 Additionally, secured creditors
are free to apply to the court to have the moratorium lifted, or indeed to ask the
administratorfor whom wrongful refusal will amount to an abuse of power.82
In all cases, the harm done to secured creditors through the suppression of their
proprietary rights must be weighed against the harm done to the companys
creditors as a whole by allowing enforcement.83 The scales are tipped firmly in
favour of secured creditors, such that it is only justifiable to harm their interests
in order to avoid a disproportionate harm to the interests of the general
creditors. Thus, where no better result than liquidation can be achieved, or the
general creditors have no tangible interest in the companys assets, then secured
creditors will surely be able to have the moratorium lifted as of right.
Relationship Between Creditor Voting and Administrators Duties
The creditors meeting functions to enable unsecured creditors to decide for
themselves what should be done with the company. In situations where a
creditors meeting has taken place, the administrators duties will focus
primarily on implementing the proposals agreed by the meeting. If the proposals
have been confirmed by the creditors, then it would seem that, akin to
ratification by a general meeting of directors actions, no challenge may be
brought on the basis of breach of duty by the administrator as regards the
selection of the objective to pursue. However, there are two sets of
circumstances under which the administrator will act without having had his
proposals approved by the meeting. Under such circumstances, the legislation
indicates a clear preference for ensuring that the administrator is rendered
accountable by the imposition of duties to the company, enforceable ex post,
rather than requiring court authorisation to act ex ante. In such cases, the
question of his compliance or otherwise with his duties will assume paramount
importance. It is worth considering each case in a little detail.
The first will pertain where para 52(1) applies, and the administrator does not
call a creditors meeting because he considers that the unsecured creditors have
no tangible interest or that neither objective (a) nor (b) may be achieved. In this
case, there will be no confirmation of his decision by the creditors meeting.
Nor, however, is there a requirement of court approval. It would appear that the
administrators decision to dispense with a creditors meeting may be open to
challenge by disgruntled creditors if any defects in his decision-making process
should come to light. It is likely that this situation will be a fairly common
occurrence under the new legislation.
Secondly, there will be situations where although the administrator is
undoubtedly required to call a creditors meeting, important decisions need to
be taken before the matter can come before the meeting. Companies in
administration may be losing considerable value from day to day, as the very
announcement of insolvency proceedings will provoke a precipitous decline in
the value of goodwill.84 As a consequence, the period for which potential buyers
are willing to make offers for the business as a going concern may be very
short. If administrator is permitted to sell the assets without first holding a
creditors meeting, then at first blush this seems to undermine the meetings
role, for there is nothing left for it to do. Yet not to permit such emergency
action might frustrate the objective of administration and lead to businesses
being closed unnecessarily.
This Catch-22 problem was litigated under the old administration regime,
where the principal question turned on whether the court had power to give
directions to the administrator authorising a sale before the creditors meeting
took place. The courts response was initially cautious, refusing to allow
administrators to take steps of such significance that they would render the
creditors meeting nugatory.85 However, this might not be in the creditors
interests if a sale was thereby stymied, and so practice evolved with a series of
decisions authorising sales under section 17(2)(a), in advance of creditors
meetings.86 The court thereby adopted the role of guardian pro tem of the
creditors interests.
However, in Re T&D Industries,87 Neuberger J pointed out the difficulties with
this approach. The court was not in a position to make a fully informed
assessment of the position, being called upon to decide largely on the basis of
information presented to it by the administrator. Rather than be forced back to
the position that the administrators hands should be tied, His Lordship adopted
a broader construction of (then) section 17(2)(a) of the Insolvency Act 1986,
finding that the court directions to which it referred were not permissive, but
rather restrictive. Moreover, the administrators general powers were broad
enough to encompass a sale, and the only question that arose was whether doing
this in advance of creditor approval would amount to an abuse of power on the
administrators part. The court would not sit in judgment on this issue ex parte.
Rather, a creditor would be free to challenge the administrators decision ex
post, but of course would give credit to his good faith assessment of the need for
an immediate sale. An administrator wishing to protect himself from challenge
would moreover be well advised to seek the consent of as many creditors as he
could reasonably contact, however informally, under the circumstances in
question. The equivalent provision under the new legislation, paragraph 68 of
Schedule B1, amends the old wording slightly to make clear that Neuberger Js
analysis in T&D was favoured by Parliament. Under paragraph 68(2), the
administrator is required to comply with directions given by the court if the
court chooses to do so, clearly implying that such directions are merely
restrictive of the otherwise general nature of the administrators powers under
paragraph 59.88
To recapitulate: in cases where the administrator is not directly accountable to
the creditors meeting, the new legislation reflects a conscious policy to opt, as
did the better interpretation of the old legislation, for accountability to be
rendered ex post through enforcement of the administrators duties, as opposed
to ex ante through court directions. This has the clear advantage, recognised in
Neuberger Js valuable analysis in T&D, of ensuring that decisions may be
taken quickly and by the party with the best informationthat is, the
administrator. If a challenge is brought, this may be done in due course after the
event, without delaying any possible rescue in real time. Where the new
legislation does, however, make a significant departure from its predecessor, is
by the advent of a more comprehensive code of duties of the administrator. Any
actions taken before the creditors meeting will fall to be judged accordingly.
We therefore turn now to the structure of these duties.
4.4 The Administrators Duties
A useful prism through which to understand the administrators duties is to see
the office-holder as the crisis organ of the company, taking over when the
board of directors can no longer successfully deal with the companys
difficulties. Like directors, administrators formally owe their duties to the
company for which they act, a point recently reaffirmed forcefully by the Court
of Appeal in Kyrris v Oldham.89 The content of the administrators duties are in
part prescribed by statute, supplemented by the standard fiduciary proscription
of conflicts of interest and a common law duty of care. Unlike directors, the
statute prescribes the purposes for which the administrator must act.
Duties of Skill and Care; Efficiency and Speed
The Enterprise Act imposes on the administrator a specific duty to be efficient
that is, the administrator is required to perform his functions as quickly and
efficiently as is reasonably practicable.90 However, it is hard to see that this
adds much, if anything, to the duty of care that the administrator undoubtedly
owes to the company at common law.91 In the traditional sense of the word, an
efficient person is one who is adequately skilled,92 which if this is the sense
in which the new paragraph 4 duty is to be understood, makes it
indistinguishable from the common law duty of care owed by a professional.
Even if efficiency is to be understood as meaning cost-effectiveness it is
hard to see how this would not have been covered by the common law duty
for surely to incur expenditure that it is reasonably practicable to avoid is
unlikely to be consistent with a duty to take care in the performance of the
administrators functions. The better view is that the new duty, as with its
common law analogue, is also owed to the company. Thus creditors and
members individual rights to enforce the new duty are granted merely in a
representative capacity.93
Loyalty and Proper Purposes
As we have seen, the administrators powers are extremely broad. Being a
fiduciary, these powers must of course be exercised subject to a duty of
loyalty.94 Moreover, just as a trustee must keep within the terms of his trust, and
a director must abide by the companys constitution, the administrators powers
must be exercised in accordance with decisions taken under the crisis
constitution of the company prescribed by the administration regime, and not
for an improper purpose. Namely, the administrator must act in accordance with
any decisions of the creditors meeting as to his proposals, and in the period
before a creditors meeting has met, in accordance with any direction given by
the court.95 In these respects, there is little change from the old law.
There have, however, been significant changes to the purposes for which an
administrator may act in advance of the creditors meeting. By virtue of para 3
of Sch B1, the administrator must, in short, exercise his powers in the interests
of the companys creditors as a whole and for a proper purpose. Under the new
law, the purpose of administration is defined as one of three objectives set out
in para 3.96 This is a difficult provision, almost Delphic in its complexity. At
the same time, it is probably the lynchpin of the new regime.97
Para 3(1) stipulates that the administrator of a company must perform his
functions with the objective of
(b) achieving a better result for the companys creditors as a whole than
would be likely if the company were wound up (without first being in
administration), or
(c) realising property in order to make a distribution to one or more secured
creditors or preferential creditors.
This section will proceed first to consider the scope and meaning of each of the
three objectives, and secondly, the way in which the administrator must select
How may each of the objectives be attained?
Objective (a), rescuing the company as a going concern, is somewhat
curiously worded, as it is the companys business, rather than the corporate
entity, which is or is not a going concern. This form of words was introduced
following an amendment tabled at the Lords Committee stage, designed to
clarify that the first objective would not be satisfied merely through the rescue
of an empty shell company.98 An administrator might achieve objective (a)
either by turning around the companys fortunes and restoring it to profitable
trading, or, more realistically, facilitating a reorganisation of its capital structure
through a CVA or a scheme of arrangement.99 The better view is that (a)
encompasses proposals that preserve a substantial part of the companys
business.100
Turning to objective (b), this is attained by achieving a better result for the
companys creditors as a whole than would be likely if the company were
wound up. The natural construction of the term better result is that it refers to
a better financial result.101 This implies a comparison of returns to creditors in
administration with their likely dividend in liquidation.102 Moreover, it would
seem preferable that the companys creditors as a whole be understood to
include both secured and unsecured creditors.103
Objective (b) is not mutually exclusive with objective (a), for both objectives
will be achieved if a rescue of the company yields more for creditors than they
might expect in liquidation. In contrast, objective (b) may be achieved
independently of objective (a) if the companys assets are sold so as to realise
more than they would raise in liquidation. This could occur if the administrator,
making use of the statutory moratorium, is able either to sell the business as a
going concern,104 or to continue to trade out existing contracts where the
business has no long-term viability.105 Moreover, it is plausible that a strategy
that does not involve any trading on might nevertheless be capable of
achieving objective (b). For example, if the costs of conducting a liquidation are
anticipated to be greater than those of an administration, then it would be
possible for the administrator to propose to cease trading and liquidate the assets
yet still to achieve objective (b).
Finally, the meaning of objective (c), realising property in order to make a
distribution to one or more secured creditors or preferential creditors, is largely
self-explanatory. In contrast to objectives (a) and (b), it is possible to achieve
objective (c) even if the company does not survive, and if the administration
does not achieve a better result for the companys creditors as a whole than
How is the administrator to select which objective to pursue?
The appropriate selection as between the statutory objectives is closely
prescribed by para 3. Under para 3(3),
The administrator must perform his functions with the objective specified
in sub-paragraph (1)(a) unless he thinks either(a) that it is not reasonably practicable to achieve that objective, or
(b) that the objective specified in sub-paragraph (1)(b) would
achieve a better result for the company's creditors as a whole.
Consequently, if neither head of para 3(3) is satisfied, the administrator is under
a duty to pursue objective (a), that is the rescue of the company as a going
concern. Failure to do so would, it appears, result in his acting for an improper
purpose. Conversely, where either head of para 3(3) is satisfied, a power is
conferred on the administrator to choose between the objectives set out in paras
3(1)(a) and 3(1)(b).
The scope of the power of selection conferred by para 3(3) must be read as
subject to the duty set out in para 3(2):106
Subject to sub-paragraph (4), the administrator of a company must
perform his functions in the interests of the company's creditors as a
The natural reading of the interests of the companys creditors as a whole in
para 3(2) would again seem to be their financial interests.107 As a consequence,
the para 3(2) duty would compel the administrator, when exercising a power of
selection under para 3(3), to pursue objective (b) where this would realise more
for the creditors than a reorganisation achieving objective (a).108 This reading is
buttressed by the fact that the somewhat inelegant drafting of para 3 is the result
of the insertion of para 3(3)(b) as a late amendment, motivated by the
Governments desire to clarify that company rescue was not to be pursued at the
expense of the companys creditors.109
Paras 3(3) is framed in subjective terms, referring to what the administrator
thinks. The early drafts of the Enterprise Bill did not contain this subjective
wording. Rather, the administrator was to be permitted to pursue objective (b)
where objective (a) was not reasonably practicable.110 The Governments
expressed intention was that the question of reasonable practicability should
be one for the administrators business judgment, and reviewable only on the
grounds that he had acted irrationally.111 However, there were doubts as to
whether the original wording would have had its intended effect, and the Bill
was amended to introduce the expressly subjective thinks to para 3(3).
However, whether deliberately or by oversight, no similar change was made to
para 3(2), rendering its objective wording more stark by contrast. The resulting
combination of subjective and objective language means that establishing
precisely what must be shown before an administrators choice of objective
could be challenged is a matter of some nicety.112 The options open to a court in
construing the interrelationship of these provisions will be considered in the
next section. First, however, attention must be paid to para 3(4), which governs
the administrators choice as between objectives (b) and (c).
Para 3(4) confers a power on the administrator to pursue objective (c) under the
The administrator may perform his functions with the objective specified
in sub-paragraph (1)(c) only if(a) he thinks that it is not reasonably practicable to achieve either of
the objectives specified in sub-paragraph (1)(a) and (b), and
(b) he does not unnecessarily harm the interests of the creditors of
Under para 3(4)(a), what matters is the administrators opinion as to whether a
company rescue or a better result for the creditors as a whole are reasonably
practicable. Moreover, by virtue of the saving provision in para 3(2), if the
administrator is permitted by para 3(4) to pursue objective (c), then he is no
longer subject to a general duty to perform his functions in the interests of the
creditors of the company as a whole.113 That said, he must avoid causing
unnecessary harm to the interests of the creditors as a whole, a form of words
that makes no concession to the administrators subjective opinions. Hence para
3(4) too involves a combination of subjective and objective wording.114
When will an administrator pursuing objective (c) be liable to challenge on the
basis that he lacked the power to do so under para 3(4)? A basic question will be
whether if the companys assets, realised in the most advantageous fashion, will
yield enough to pay the QFCH in full, after taking into account preferential
creditors and the ring-fenced funds. If notin which case the QFCH may be
said to be undersecuredthen it is difficult to see how a decision to realise the
assets for the benefit of the QFCH could be subject to challenge. The unsecured
creditors will receive nothing beyond the prescribed part however the
companys assets are dealt with, and so have nothing to lose from choosing a
mode of realisation that is in accordance with the interests of the QFCH. The
QFCHs realisations will, on the other hand, depend on the way in which the
assets are realised, and so it is submitted that under such circumstances the
interests of the creditors as a whole are in fact equated to those of the QFCH.
This reasoning is buttressed by the fact that the size of the recoveries for
preferential creditors, and in the ring-fenced fund, may also be affected by
choices that will affect the recoveries to the QFCH.
The more interesting case will be where the assets are, at least on one possible
mode of realisation, worth sufficient to yield a return to the unsecured creditors
after the QFCH has been paid in full. In such a case the QFCH may be said to
be oversecured. Clearly, there will be many such cases in which realising
property in order to make a distribution to the QFCH will be entirely compatible
with the interests of the creditors as a whole, and indeed may be said to achieve
objective (b).115 However, there will doubtless also be cases where a conflict
arises. For example, if an oversecured QFCH wants a quick sale, the
administrator might be said to have harmed the interests of the unsecured
creditors unnecessarily if he accedes to the QFCHs wishes, if this results in a
lower overall return than would have been achieved had the sale been delayed
and marketed more carefully.
Rationality and Reasons: Reconciling Subjective and Objective Language
The crucial question, given the administrators freedom to act, is the extent to
which the court may review his selection of an objective under paragraph 3 in
response to a challenge by a disaffected creditor or member of the company.
The legislative history makes clear that it was Parliaments intention to make
the administrators decisions reviewable only on the basis of irrationality.116
Yet this intention has been implemented through a provision which, as we have
seen, contains objective as well as subjective language. Moreover, we consider
it to be significant that the administrator is also required to give reasons for his
decision if he does not decide to pursue objective (a).117 How might a court
proceed when, as will inevitably happen, a challenge is brought? And how
should an office-holder proceed so as to protect himself against the possibility
of such challenge?
In order to make the clearest sense of paragraph 3, it is helpful to situate the role
of the administrator within a milieu of other fiduciaries and decision-makers
whose actions are subject to review by the courts. The degree to which courts
are willing to interfere with the decision-making of a fiduciary depends upon
the nature of his rolethus, it is a truism that a trustees actions will be more
closely scrutinised than those of a company director. We suggest that, on the
spectrum of fiduciary discretions, those exercised by the administrator fit
somewhere between those exercised by a director and those by a trustee.118
Understanding his role in this way, a sensible reconciliation of the provisions of
paragraph 3 would direct the administrator to take into account in his decision,
and explain in his reasons, matters that he would reasonably have thought
relevant and information that was reasonably available to him at the time.
Failure to do so might lead to his decision being susceptible to challenge. These
points will be developed seriatem.
Consider first a claim that the administrator failed to act in the interests of the
creditors as a whole, or harmed their interests unnecessarily. As an evidential
matter, the claimant would need to establish that some alternative course of
action was open to the administrator that would have produced a greater return
for the creditors as a whole tan the course actually pursued. However, it surely
cannot have been the intention of Parliament to subject office-holders to strict
liability if their chosen course of action turns out not to have been the best
available for the creditors. The better view is rather than the notions of acting
in the interests and necessity imply the selection of courses of action based on
the information reasonably available to the administrator at the time.119 Indeed,
his duty to act efficiently (which here means cost-effectively)120 will curtail the
extent to which he is able to expend resources on gathering information.
Provided that the administrator has not been negligent in gathering
informationtaking into account the circumstances surrounding his
appointmentand his actions on the basis of this information are in accordance
with the objective components of para 3, then he will not be acting for an
Now consider a claim that the administrator acted for an improper purpose in
selling the assets, where the office-holder asserts that he thought it was not
reasonably practicable to effect a rescue of the company. The grant of even a
subjective power to a fiduciary is always subject to certain restrictions. The
power must be exercised in good faith, and not for a collateral purpose.121
Moreover, it is assumed that the fiduciary will appraise himself of the relevant
question and direct his mind to answering it in a rational fashion. If it is shown
that the fiduciary fettered his discretion, did not actually exercise it, or acted
irrationallythat is, took a view that no reasonable decision-maker would have
donethen the decision may be open to challenge. The legislative history
suggests that it was the Governments intention leaves us in no doubt but that
the administrators most decision has been designed to be subject to a test of
Note also that the administrator is required, if he does not propose to pursue
objective (a), to explain in his proposals why not.122 If the administrator fails to
give reasons, his decision may be open to challenge on the basis that has not
demonstrated that he in fact exercised his judgment. Where reasons have been
given, it might be possible in extreme circumstances to infer bad faith from the
administrators actions, or to suggest that the administrator must have acted
irrationally, on the basis that no reasonable administrator could have thought
that a company rescue was not reasonably practicable.
It may, however, be possible to go further than this. If the administrators
statement of reasons suggests that important and relevant factors have not been
considered, could his decision be open to challenge on this ground? Such a rule,
stemming from the decision of the Court of Appeal in In re Hastings-Bass,123
has recently seen rapid development in relation at least to trustees. The rule in
Hastings-Bass124 has been interpreted as providing that,125
[W]here a trustee acts under a discretion given to him by the terms of the
trust, the court will interfere with his actions if it is clear that he would
not have acted as he did had he not failed to take into account
considerations which he ought not to have taken into account
Warner J went on to explain that in the application of the rule, three questions
arise:126
(1) What were the trustees under a duty to consider? (2) Did they fail to
consider it? (3) If so, what would they have done if they had considered
Note that the rule does not apply to any issue that may have affected a trustees
decisions, but simply issues which they were under a duty to consider and which
they did not. Ordinarily, however, the exercise of a fiduciary power is
understood as subjecting trustees to duties to inform themselves of matters
relevant to their decision, and must take into account all relevant, and no
irrelevant, factors.127
Were the Hastings-Bass principle to be applied to administrators, what would
be the relevant factors? Some insights may be drawn from the rules
application in Stannard v Fisons Pensions Trust Ltd.128 The case involved the
sale of a business as a going concern with consequent transfer of employees
from the vendors pension scheme to the purchasers. The trustees of the
vendors scheme were required to hand over to the purchasers pension trustees,
in right of the transferring employees, assets of such an amount as they, after
consulting the actuary, decided to be just and equitable. In making their
decision, the trustees relied on the most recent evaluation of the pension fund.
They failed to take into account a significant rise in the stock market between
the date at which the sale was agreed and that at which the assets were
transferred. Consequently, the employees concerned received pension benefits
at inferior levels than would have been the case if the assets transferred had
been of the correct, higher, value. The Court of Appeal set aside the trustees
decision. Not only were the trustees required to give consideration to the
current value of the trust fund and its implications, they also needed to know
the relevance of the value of the fund to the problem in hand. The Court held,
finally, that it might materially have affected the trustees' decision if they
had been properly informed as to the then current value of the fund and the
implications of its value.129
Were a similar analysis to be applied to the administrators decision, then in
seeking to decide on the practicability of different possible courses of action, he
should ascertain and compare the expected values of the companys assets (i) if
they were to be kept in the ownership of the company, or (ii) if (some of) the
assets were to be sold off as a functioning unit, and (iii) if they were to be
liquidated piecemeal for a distribution to (primarily) secured and preferential
creditors. He should compile predictions of cash flows, identify creditors (if
any) who might be persuaded to write down a part of their loans or to engage in
a debt-for-equity swap, estimate the level of confidence (if any) that important
creditors have in key members of the board of directors and ascertain the
sources (and amount) of possible funding that may be available for the
endeavour. Further, he would need to understand the significance of the
appropriate combinations of these factors for his decision about which objective
to pursue. In so doing, his duty would extend no further than to gather and
analyse such information as is reasonably available to him.130 Nevertheless, not
to secure all the relevant information reasonably available, or once in possession
of it, not to understand how this information affected his choice of objective,
would, if the Hastings-Bass principle is applicable, cause the administrator to
make a faulty decision in breach of his duty to act rationally.
Should the Hastings-Bass rule apply to the administrators decision about which
objective to pursue?131 Against this, analogies might be drawn with the way in
which courts have traditionally fought shy of becoming involved in reviewing
the conduct of boards of solvent companies. First, at the level of the definition
of duties, the orthodox view has been that save for cases where a director is
negligent in respect of the process of decision-making,132 or usurps the
constitutional powers of the general meeting,133 then the court will only
intervene if a decision was taken by the directors without regard to the interests
of the company and with a result that no reasonable director would have thought
would be in the companys interests.134 Secondly, at the level of enforcement,
courts activity has been restrained first by the rule in Foss v Harbottle,135 and
more recently the requirement that prejudice to shareholders resulting from
breaches of directors duties must be sufficiently severe as to be unfair.136 This
approach has been rationalised as a means of keeping the courts shadow out of
the boardroom. As Lord Wilberforce famously put it, there is no appeal on the
merits from a business decision.137 Courts lack expertise as to business
decisions, and there are other, less costly ways to regulate directors conduct
than through litigation: shareholder activism and the use of section 303 of the
Companies Act 1985, incentive pay, hostile takeovers (for public companies),
the proliferation of non-statutory corporate governance codes (again, for public
companies), and finally, public enforcement via the Company Directors
Disqualification Act 1986. Put together, this adds up to a relatively coherent
case for the use of private litigation as a means only of catching particularly
egregious cases of directorial misfeasance.
We consider that these analogies should be rejected for three reasons, which
together are compelling. First, the premise that directors decisions are not
reviewable is misguided.138 It is clear that the courts are gradually developing
a more intensive set of standards for scrutinising the adequacy of the systems
used for information-gathering prior to directorial decision-making, and the
scope of the consideration afforded to (ir)relevant factors.139 Secondly, and of
crucial importance, directors decisions are not subject to the clear and objective
statement of the purposes to be achieved set out in para 3 of Schedule B1.
Thirdly, whilst it is still true that trustees are subject to much more intensive
court control than directors, this begs the question, in relation to administrators,
as to where on the spectrum of fiduciaries they are best understood as being
positioned. Simply to assert that administrators make business decisions, and
that the courts are unwilling to scrutinise business decisions, is to over-simplify
the picture. The judiciary are of course capable of scrutinising business
decisionsthe problem is not one of capability, but of the cost involved in
adducing all the relevant evidence necessary for a decision to be made. Given
this cost, it is worth asking whether fiduciaries (of any hue) can be made
accountable to their principals by other, cheaper mechanisms. If so, then there is
sense in restricting the availability of challenge before the courts so as to
channel grievances towards the lower-cost mechanisms. For company
directors, a range of such mechanisms exist in the marketplacethe threat of
removal by the shareholders,140 monitoring activity by non-executive directors,
performance-related pay packages and for listed companies, the ever-present
background threat of a hostile takeover.
These market mechanisms do not, however, operate effectively in
administration. Rather, the administrator may, generally speaking, not be
removed without an order of the court.141 Quite the contrast, it seems that there
may be market mechanisms in play that would actively hinder the impartial
performance of the administrators duties. Given the structure of the rights to
commence administration,142 an overwhelming majority of administrators could
be expected to be appointed by the distressed companys bank. Whilst, as has
been discussed, there are good reasons both for the QFCH to be given the right
to appoint an administrator, and for it to be able to do so out of court, it should
be obvious the benefits from allowing this to happen come at a cost. In a
substantial proportion of cases, there would be a divergence of interests between
it and the other creditors. Problematically, insolvency practitioners would
rightly expect most of their work to come from the banks. They would thus
have strong incentives, in situations where the banks interests diverge from
those of other creditors of developing a reputation for favouring the former.143
Hence there may be a comparative advantage in having the administrators
decision-making subjected to review by the courts.
To recapitulate: the better view of paragraph 3 is that an administrator may be
acting outwith his powers, or for an improper purpose, if in making his decision
he has not taken into account all information reasonably available to him. As his
statement of reasons will be likely to form the basis of the evidence as to the
factors he has taken into account, there is a risk of such liability if the sum of
reasonably relevant information is not included in his statement.
A crucial factor will be whether or not the companys existing bankers are
willing to continue to support it during a period of trading on.144 If they are
not, then it will in many cases be impossible for the administrator to continue.
This will mean, subject to the point raised in the previous paragraph about costs,
that it is not possible to achieve a better return for the creditors as a whole than
in liquidationsimply because the only option practically open to the
administrator will be a break-up sale, also open to a liquidator. The banks
ability to determine the outcome of proceedings in this way will, however, be
limited by the existence of the administrators power to use floating charge
assets to fund the administration.145 Coupled with the recent judicial
retrenchment on the scope of fixed charges,146 this means that in most cases
there will be some floating charge assets that may be used to fund trading on, at
least for a limited period.
4.5 Enforcement of the Administrators Duties
In contrast to the plentiful attention received by the definition of the
administrators duties during the Enterprise Bills passage through Parliament,
the enforcement of these duties was little discussed. This is a pity, for the
provisions concerning standing to enforce are not a model of clarity, and the
remedial consequences are obscure in places.
Standing to enforce the administrators duties is governed by three provisions of
the new Sch B1. The first two of these are contained within para 74. First, under
para 74(1), any creditor or member of the company is given standing to apply to
the court claiming that the administrator has acted, is acting, or proposes to act
in a way that has caused or would cause unfair harm to the interests of the
applicant, whether alone or in common with some or all of the other creditors.
Under the old law, section 27 provided that the court had power to grant a
remedy to a creditor who demonstrated that the affairs of the company were
being or had been managed by the administrator in a way that was unfairly
prejudicial to the interests of the creditors or members generally, or to some
part of its creditors or members. As with section 459 of the Companies Act
1985, this provision was a vehicle that could be used for challenging breaches
of duty by the administrator, subject to the proviso that they were sufficiently
serious as to result in unfair prejudice.
The new regime reformulates unfair prejudice as unfair harm,147 ostensibly
to modernise the language.148 It is not thought that much will turn upon this
change in practice. Perhaps more significant is the loss of the constraint, present
under the old section 27 action, that the applicant need demonstrate that the
unfair prejudice resulted from the way the administrator had managed the
companys affairs.149 The new wording, requiring simply that the (unfair) harm
flow from an act or proposed act of the administrator would clearly be
competent to include decisions as to which of the statutory objectives to pursue.
The second relevant provision is para 74(2), which gives standing to any
creditor or member to apply to the court claiming that the administrator is not
performing his functions as quickly or efficiently as is reasonably practicable. In
response to a successful application of unfair harm, or tardiness or inefficiency,
the court has a general power, under para 74(3), to grant relief. However, para
74(4) specifies particular instances of the relief that may be granted, all of
which are directed to the ongoing regulation by the court of the administrators
This raises the question whether the court has jurisdiction under para 74 to
render the administrator personally liable to the company.
The third remedial provision, para 75, does however make specific provision for
personal liability. Under it, the official receiver, a liquidator, (subsequent)
administrator, or any creditor or contributory of the company may apply to the
court for an examination of the conduct of an existing, former or purported
administrator of the company in relation to alleged misfeasance. Para 75(3)
provides that the application must allege that the administrator has either
misapplied or retained, or otherwise become accountable for, corporate
property, or that he has breached some fiduciary or other duty (emphasis added)
in relation to the company, or that he has been guilty of some other misfeasance.
It would appear that these words are broad enough to encompass breach of any
of the duties described in section 4.4. The court then has remedial jurisdiction to
order the administrator to repay, restore or account for property or money
misapplied, or, more pertinently for present purposes, to order the administrator
to contribute a sum to the companys property by way of compensation for
misfeasance or breach of duty. This para would therefore appear to be the
primary route by which disgruntled unsecured creditors might be able to bring
actions against an administrator whom they consider has breached his duty to
act for proper purposes. However, there is an important temporal constraint on
action. If the administrator has completed his activities in relation to the
company, and the administration has come to an end, then under para 98 he will
receive a general discharge from liabilities accrued during the currency of his
appointment. An exception is made for an examination under para 75, but postdischarge, this procedure may only be commenced with the permission of the
court.151
An important remedial consideration is whether it may be possible to set aside a
sale of assets on the basis that the administrator acted in excess or abuse of his
powers, by reference to paragraph 3. Provided that the counterparty is in good
faith and gives value, there is no risk of transaction avoidance. So far as excess
of power is concerned, paragraph 59(3) provides that a person who deals with
the administrator of a company in good faith and for value need not inquire
whether the administrator is acting within his powers. Should the administrator
be taken to have abused his powers, then under general equitable principles, the
counterparty to a transaction will likewise only be liable if he is not a good faith
purchaser.152
The changes to the governance processes are of course not the only changes
brought about by the 2002 Act. It has also made significant changes to the way
in which the distribution of the returns from the companys assets is ordered
amongst claimants, to which we now turn.
5.1 Expenses of the Administration
The new law provides, as did the old, that certain liabilities and expenses
incurred by the administrator shall, upon his cessation of office, form charges
on the property in his custody immediately before his appointment ceased, and
payable in priority to any floating charge(s) in existence in respect of the
property.153 The charged sums will comprise, in order of priority, first, liabilities
under administration contracts and liabilities for wages and salary for work
done during the administration period, and secondly, the administrators
remuneration and any expenses properly incurred in the performance of his
functions.154
An innovation of the EA is the introduction of a formal expenses of the
administration regime.155 Under the old law, no formal provision was made in
the legislation for expenses of administration. Whilst contracts entered into by
the administrator were given priority on the cessation of his appointment,156
this did not on its terms extend to contracts adopted by the administrator save
for employment contracts. In Re Atlantic Computers,157 the Court of Appeal
considered the position as respects periodic payments under pre-administration
finance leases. Nicholls LJ considered that the court had a broad discretion to
treat payments made pursuant to such financing arrangements as expenses for
the purposes of s 19(4) where the administrator made use of assets to which the
counterparty had some proprietary entitlementse.g. ownership or security
interest of some variety.158 The discretionary nature of the old administration
expenses regime should be contrasted with the position in respect of liquidation
expenses, the scope of which, as explained by the House of Lords in Re
Toshoku Finance plc,159 is determined simply by the statutory list in rule 4.218
coupled with the benefit principle, which is no longer of a discretionary
character. The introduction in the new regime of a statutory list of expenses of
administration suggests that the Toshoku reasoning will now be applicable in
place of the discretionary approach to administration expenses used in Atlantic
Computers and based upon the open-ended framework under the old law.
5.2 Abolition of Crown Preference and Ring Fencing
Whilst much of the treatment of expenses and administration contracts may
pass through from the old law to the new, considerable changes have been
effected in respect of preferential creditors. First, the groups to whom
preferential status is accorded have been changed quite radically. Formerly,
Crown claims for VAT (via Customs and Excise) and PAYE and Social
Security deductions (via the Inland Revenue), were treated as preferential.
Section 251 of the 2002 Act has abolished the preferential status of these
claims. At the same time, section 252 of the Act has inserted a new section
176A to the Insolvency Act 1986, creating a carve out from floating charge
recoveries for unsecured creditors. Very loosely speaking, this provisionthe
genesis of which is probably traceable to the 10% fund suggested in the Cork
Reportcan be seen as a quid pro quo for the abolition of the Crowns
preferential status. It places an obligation on an insolvency office-holder to pay
a proportion of the companys net propertydefined as assets that would
otherwise be available to satisfy the claims of floating charge holdersand to
pay these over to unsecured creditors.160 The current the minimum net property
for the purposes of s 176A is set at 10,000, and that the proportions that should
be set aside should be 50% of net property up to 10,000, and 20% of any
amounts exceeding this up to a global maximum to be set aside of 600,000.161
5.3 Making Distributions in Administration
The Act modifies also the administration regime in other important, but less
clearly signalled, ways. Most notably, it provides machinery for the
administrator to make distributions to creditors.162 Where the administrator
makes, or proposes to make, a distribution to any class of creditors, the new
Insolvency Rules set out a detailed framework for such distributions.163 This
provides for the proof and quantification of claims,164 rules on set-off,165 and
perhaps most notably, the importation of the pari passu principle,166 which was
never a feature of the old administration regime. Although para 65(3) provides
that the administrator must seek the permission of the court if he wishes to make
a distribution to any group other than secured and preferential creditors, it
seems likely, given the provision made in the Rules for distributions to
unsecured creditors, that this permission would be granted as a matter of course
where it forms part of a proposal that has been agreed by the creditors meeting.
Moreover, para 66 provides that the administrator may make distributions
otherwise than in accordance with para 65 if he considers that this is likely to
assist in the achievement of the purpose of administration. If it is the case that
an administration will achieve greater returns for the unsecured creditors than a
liquidation, then it would appear that para 66 could be invoked if necessary.
The incorporation of the pari passu principle will mean that the common law
rule that there cannot be a valid contract that a mans property shall remain his
until his bankruptcy, and on the happening of that event shall go over to
someone else, and be taken away from his creditors,167 will apply in
administration. However, it is likely that it will need to do so in a slightly
modified form. There is, after all, a certain tension between a statutory
moratorium from which the exercise of self-help contractual remedies are
excluded,168 and a principle that strikes down terms in contractual agreements
that purport to limit the ambit of the companys interest in choses in action such
that they determine in insolvency.169
6. Conclusion: Transforming Insolvency Law?
The new administration procedure will be exceedingly flexible, capable of
being employed in similar fashion to the existing procedure, or to an
administrative receivership, or even, given the administrators powers to make
distributions,170 a liquidation. It seems likely, therefore, that the take-up rate of
the new procedure will be considerably higher than under the old lawas
desired by the Review Committee.171 What is not yet clear is how far the
development will go. Is it possible that administration might become the
primary insolvency procedure?
Clearly, the streamlined administration regime will be the sole insolvency
procedure used for reorganisations172 and going concern sales. However, it
could also be used for cases where the firm is to be closed and the assets sold
off piecemeal. The extent to which administration will be used for closure
cases will depend on the on the relative net recoveries that will be achieved in
administration and liquidation, and the position of the companys secured
creditors. The interesting case will be where closure is immediate, and the assets
are to be sold piecemeal, yet some recoveries will endure for the unsecured
creditors. Here, it may be that the administrator will be able to achieve objective
(b) even though the company has been closed, if the total expenses of
administration can be expected to be less than those in liquidation. The House
of Lords recent decision in Buchler v Talbot,173 establishing that liquidation
expenses do not rank ahead of floating charge recoveries, may make
administration more attractive to unsecured creditors and create a further
impetus towards using administration for what are in effect liquidations.
In conclusion, then, will the new regime be successful in achieving its twin
objectives of enhancing accountability and efficiency? In principle, it appears
that the administrators statutory statement of purposes provides a framework
within which he will be directed to work to maximise returns to the creditors as
a whole. This, therefore, looks like a clear solution to the problem of the lopsided incentives of the administrative receiver. However, the operationalisation
of the administrators duties will come at a price, the extent of which will
largely depend on the way in which the courts approach their new role in the
governance of rescue. It is to be hoped that practice will rapidly evolve towards
the administrator informally checking important preliminary decisions with
major creditors, and thereby ensuring as much direct accountability to creditors
as possible, whilst simultaneously shielding him from the possibility of
Hansard, HC Deb 10 April 2002, 53 (Ms Patricia Hewitt MP, Secretary of
State for Trade and Industry).
See, e.g., Insolvency Law and Practice: Report of the Review Committee
(Chair: Sir Kenneth Cork) (The Cork Report) Cmnd 8558 (1982), para 233;
HC Debs vol. 78, cols. 153-154 (30 April 1985) (Mr Brian Gould); HL Debs
vol. 459, col. 851 (7 Feb 1985) (Lord Bruce of Donnington); HC Debs vol. 298,
col. 299 (15 Jul 1997) (Austin Mitchell MP); HL Debs vol. 596, cols. 942-951
(26 Jan 1999); M. Grylls, Insolvency Reform: Does the UK Need to Retain the
Floating Charge? [1994] 9 JIBL 391; J.S. Ziegel, The Privately Appointed
Receiver and the Enforcement of Security Interests: Anomaly or Superior
Solution?, in J.S. Ziegel (ed.), Developments in International and Comparative
Corporate Insolvency Law (1994), 451; D. Milman and D.E.M. Mond, Security
and Corporate Rescue (1999); V. Finch, Corporate Insolvency Law: Principles
and Policies (CUP, 2002), 234-72; R.J. Mokal, Administration and
Administrative Receivership: An Analysis, forthcoming (2004) 57 Current
Legal Problems; Cf J. Armour and S. Frisby, Rethinking Receivership (2001)
21 Oxford Journal of Legal Studies 73.
For charges created after 15 September 2003 (Enterprise Act 2002
(Commencement No. 4 and Transitional Provisions and Savings) Order 2003,
SI 2003/2093).
This case is put in J Armour and S Frisby, Rethinking Receivership (2001)
The Insolvency Service, A Review of Company Rescue and Business
Reconstruction Mechanisms (London: TSO, 1999).
Cm 5234 (London: TSO, 2001) (henceforth InsolvencyA Second Chance).
See, e.g., Hansard, HL Deb 2 July 2002, Col 188 (Lord MacIntosh of
Haringey):
We want to put company rescue at the heart of insolvency procedures because
we want to save companies which have a decent chance of survival so that they
are not driven to the wall unnecessarily.
InsolvencyA Second Chance, 9.
Ibid. See also Hansard, HC Deb, 10 April 2002, Col 53 (Ms Patricia Hewitt
MP, Secretary of State for Trade and Industry).
Regulation 1346/2000 EC [2000] OJ L160/1, Annex A.
Insolvency Act 1986 (prior to 15 Sept 2003, henceforth old IA 1986), s 9(1).
Ibid. s 8(1).
Insolvency Act 1986, as amended by Enterprise Act 2002 (henceforth IA
1986), Sch B1, para 22.
Ibid. para 11.
Ibid. paras 18, 29. Giving such a declaration without reasonable grounds for
believing it to be true will constitute an offence.
Ibid. s 214. For an analysis, see R. Mokal, An Agency Cost Analysis of the
Wrongful Trading Provisions [2000] CLJ 335.
See generally V Finch, Corporate Insolvency Law (CUP, 2002), 126-40.
Ibid. at 259.
Ex hypothesi, this latter category excludes external factors which a
reasonably competent management would have anticipated and taken steps
effectively to deal with.
Finch at 126 n. 34, provides a useful summary. Perhaps this is to be expected:
insolvency practitioners clearly have an incentive to reinforce the suggestion of
their relative superiority over humdrum non-professional managers. This
might encourage their services to be resorted to more frequently and at an
earlier stage of the corporate distress cycle (and so perhaps for longer). Even if
that is the case (on which no position is taken here), it is probably true that, for
the reasons to be explained in the text below, management failings are the
primary cause of a significant proportion (perhaps the majority) of corporate
9th Survey at 2. Franks and Sussman report this figure to be just over one in
three; Cycle at 7 Table 2.
This comes (inevitably, since that is the main available source of information)
from the 2; note, however, that this seems to assume that managerial action
could have prevented insolvency.
IA 1986, Sch B1, para 26.
Ibid. para 25.
Ibid. para 12.
Ibid. para 36.
Ibid. paras 11(a), 27(2)(a).
Ibid. paras 16, 35(2).
In the matter of Colt Telecom Group Plc [2002] EWHC 2815, [25], per Jacob
See J Armour and S Frisby, Rethinking Receivership (2001) 21 Oxford
Journal of Legal Studies 73.
D Citron, The Incidence of Accounting-Based Covenants in UK Public Debt
Contracts: An Empirical Analysis, (1995) 25 Accounting and Business
Research 139, especially at 144-5; see also J Day and P Taylor [JIBL papers].
Firms sent to these units remain there for seven and a half months on average,
and up to seventy-five percent of these are turned around.
This summarises some of the evidence in Cycle.
See infra, section 4.
PL Davies, An Introduction to Company Law (Oxford: Clarendon Press,
2002), 9.
FH Easterbook and DR Fischel, The Economic Structure of Corporate Law
(Cambridge, MA: Harvard University Press, 1991), Chs.1-2. [Explain costs of
resolving disagreementshold outs and free riders.]
A companys bank is likely to be the only of its creditors that is capable of
fulfilling these desiderata. The fact that the bank was given decision-making
rights in receivership was therefore one of the srongest arguments in favour of
the old law: Armour and Firsby, supra n ??.
MC Jensen and WH Meckling, Theory of the Firm: Managerial Behaviour,
Agency Costs and Ownership Structure (1976) 3 Journal of Financial
Economics 305.
The most important being the right to petition the court for relief from unfair
prejudice under Companies Act 1985 s 459.
In other words, it becomes unable to pay its debts within the meaning of
section 123 of the Insolvency Act 1986.
Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 at 730; West Mercia
Safetywear Ltd v Dodd (1989) 4 BCC 30 at 33; Official Receiver v Stern (No 2)
[2001] EWCA Civ 1787 at [32], [2002] 1 BCLC 119 at 129-30.
See in particular Companies Act 1985 s 303. Whilst it is arguable that this
power would, in factually insolvent companies at least, theoretically only be
exercisable in the interests of the company (pace creditors) as a whole (see J
Armour, Avoidance of Transactions as a Fraud on Creditors at Common
Law in J Armour and HN Bennett, Vulnerable Transactions in Corporate
Insolvency (Hart, 2003)), it is difficult to imagine a court being able review such
a decision effectively.
IA 1986, Sch B1, para 61.
Ibid. para 64 (directors and officers unable to exercise any management
powers without consent of administrator).
See Armour and Frisby, supra n ??.
See supra, text to nn ??-??.
The administrator does, of course, have the power to call a creditors meeting,
or to refer a matter to the court for directions, where he considers it appropriate
to do so: para 62.
The administrators powers include anything which directors would have had
power to do (Polly Peck International plc v Henry [1999] 1 BCLC 407e.g.
appointing a trustee to employee pension scheme), but are not so limited
management of the companys business and affairs in para 59) is broader than
management of the companys business in art 70 of Table A.
Para 69.
Para 59(4).
IA 1986 s 234.
Or at least so much of them as represent the secured debt. If there is a
shortfall on sale, the administrator must make up from the fee assets the
difference, if any, between the actual sale price and the sale price which would
have been obtained from a sale at fair market value.
Para 70. Court consent is not required to deal with floating charge assets in
Supra, section ??.
IA 1986, Sch B1, para 51.
Supra, section 2.
If the meeting rejects the proposals, then under para 55, the court may either
terminate the administration, put the company into winding up, or make such
other order as it thinks fit. The better view is that this does not give the court
jurisdiction to impose proposals on the creditors.
Para 55(2).
IA 1986, Sch B1, para 49(2)(b). The circulated proposals must, if applicable,
give reasons why the administrator is choosing not to pursue either of the first
two statutory objectives prescribed by para 3. On para 3, see infra, section ??.
Para 52(2).
Insolvency Rules 1986 (as amended), r. 2.43.
Votes are calculated according to the amount of the creditors claim as at the
date at which the company entered administration (Insolvency Rules 1986, as
amended, r. 2.38). Secured creditors are not entitled to vote, except insofar as
their claim exceeds the value of their security (r. 2.40). Similar provisions limit
the rights of holders of negotiable instruments, and hire-purchase creditors (rr.
2.41-2).
Ibid. r. 2.40(2).
Ibid. para 52. This paragraph also contains a balancing mechanism designed
to protect shareholders: the administrator is not required to put proposals to the
creditors meeting if he thinks that the company will have sufficient assets to
pay all its creditors in full: para 52(1)(a).
This is subject to a countervailing safeguard: the meeting must nevertheless
be summoned if requested by creditors holding more than 10% in value of the
companys total debts: para 52(2).
That is, if no statement has been made under para 52(1)(b).
Paras 79, 81.
There is a second exception, for cases where such proposals are put as part of
a scheme of arrangement or CVA. In each case, however, the affected creditor
would have similar protection: the right to vote as a class under a scheme, and
under Insolvency Act 1986 s 4 for CVAs.
[2003] BPIR 253.
IA 1986, Sch B1, para 70. See supra, text to nn ??-??.
Paras 70-72.
Paras 71-72.
Para 43(2); See also old IA 1986 s 11(3); Barclays Mercantile Business
Finance Ltd v Sibec Developments Ltd [1993] BCLC 1077.
Re Atlantic Computer Systems plc [1990] BCC 859, 880-882.
G Meeks [paper about destruction of goodwill when insolvency proceedings
are announced]
Re Consumer and Industrial Press [1988] BCLC 177.
See, e.g., Re Montin Ltd [1999] 1 BCLC 663; Re Dana (UK) Ltd [1999] 2
BCLC 239.
[2000] 1 BCLC 471.
Re Transbus International Ltd [2004] EWHC 932 at[13].
[2003] EWCA Civ 1506.
IA 1986, Sch B1, para 4.
Re Charnley Davies (No.2) [1990] BCLC 760.
Oxford English Dictionary, 2nd ed. (1989), online version
IA 1986, Sch B1, para 74(2).
As Millett LJ explained in Bristol and West Building Society v Mothew [1998]
Ch 1 at 18: The distinguishing obligation of a fiduciary is the obligation of
Para 68.
IA 1986, Sch B1, para 111(1). This is referred to in the Explanatory Notes to
the Enterprise Act 2002 as a single overarching purpose: Explanatory Notes,
para 647.
Lord Hoffmann described this paragraph as the centrepiece of this part of
the Enterprise Bill. Hansard, HL Deb, 21 Oct 2002, Col 1103.
See Hansard, HL Committees, 29 July 2002, Cols 764-67 ; HL Deb 21 Oct
2002, Cols 1100-02. See also Explanatory Notes to the Enterprise Act 2002,
para 649.
Pursuant to Part I of the Insolvency Act 1986, or section 425 of the
Companies Act 1985, respectively.
However, the overlap with objective (b), discussed below, means that this
point is largely academic.
See Explanatory Notes to the Enterprise Act 2002, para 650. See also
Hansard, HL Deb, 21 October 2002, cols 1101-02.
The schedule is ambiguous as to whether the hypothetical winding up used
as a comparator is to be a compulsory or creditors voluntary liquidation. It is
submitted that to be safe, the administrator should use as a comparator
whichever form of liquidation he considers would be likely to yield the greatest
return to creditors.
If the phrase were construed as referring to the unsecured creditors alone,
then it might argued that para 3 legitmates the use of the moratorium in a purely
strategic fashion so as to extract compromises from secured creditors. It was
established in Barclays Mercantile Business Finance Ltd v Sibec Developments
Ltd ([1992] 1 WLR 1253) that for an administrator to refuse a secured creditors
request for delivery up of assets subject to his security, where those assets were
not necessary to the achievement of the purpose of administration, was an abuse
of power by the administrator. Under the old law, the most likely question
would be whether the retention of the property was necessary to obtain a more
advantageous realisation of the companys assets. The difference between
more advantageous realisation under the old law and better result for the
creditors under the new is that the former looks to the price fetched for sale of
the assets, whereas the latter looks to what the creditors ultimately end up with.
Ransom demands made to secured creditors will not increase the price at
which assets may be sold, making them an abuse of power under the old law.
Yet if creditors in para 3(1)(b) were to mean simply unsecured creditors, then
such demands might conceivably be compatible with achieving the purpose
under the new law. Such a radical change in the lawthat would amount in
effect to an expropriation of secured creditors in favour of unsecuredscannot
have been the intention of Parliament in passing the Enterprise Act 2002. Cf. the
position in winding-up: Insolvency Rules 1986, rr. 12.3, 13.12, as interpreted in
Tottenham Hostpur plc v Edennote plc [1995] 1 BCLC 65, 68-69.
Rescuing businesses is exactly the kind of outcome that the second
objective is intended to recover [sic]. If it is not reasonably practicable to
rescue the company, selling the constituent businesses as going concerns will
almost always be the next best thing the effect of the provision as drafted will
to cover and give priority to business rescues, per Lord McIntosh of Haringey,
the Minister responsible for steering the Enterprise Bill through the House of
Lords; Hansard, Committee, 29 July 2002: Column 768.
The lack of moratorium on secured claims would preclude these outcomes in
It might in theory be possible to argue that the para 3(3) power operates
independently of the para 3(2) duty, by distinguishing between a power to select
the objective towards which the administrators functions are to be performed,
and the manner of performance of those functions. However, such a distinction
would render irrelevant para 3(2)s express saving for the operation of para
3(4), which under specified circumstances confers on the administrator a power
to choose objective (c).
An alternative construction might distinguish between the objective
See Hansard, HL Deb, 21 October 2002, cols 1101-02.
See Enterprise Bill, as Amended in Standing Committee B on 16 May 2002,
Sch B1 para 3(1)(b).
This was emphasised several times in the legislative process; see e.g.
Hansard, Columns 569-70, 768, and 1105 (If necessary, we would expect the
courts to assess whether the office holder, in this case the administrator, has
been rational in his decision [about which objective to pursue]. We are not
seeking to apply any other test.).
The existence of the power to select depends, by virtue of para 3(3), upon
what the administrator thinks, whereas its exercise, under para 3(2), does not.
Read literally, the statutory wording therefore gives rise to an apparent
asymmetry, whereby it may be more difficult to challenge an administrators
decision to pursue objective (a) over (b) than vice versa. Proving that an
administrator should have pursued (b) where he in fact pursued (a) would
require a challenge to the administrators statement as to what he thought. Yet
an administrator pursuing (b) will naturally declare that he thinks one of the
conditions in para 3(3) is satisfied. So a claimant challenging a decision to
pursue objective (b) over objective (a) need not contradict the administrators
statement as to his own beliefs, but simply focus on whether or not objective (b)
was in fact in the interests of the creditors as a whole.
IA 1986, Sch B1, para 3(2).
Analogously with the choice between objectives (a) and (b), it will be more
difficult to allege that an administrator should have dropped down to objective
(c) than that he should not. The former will necessitate proof that he thought
that objectives (a) and (b) were not reasonably practicable, whereas the latter
may be made out by demonstrating that in so doing he unnecessarily harmed the
interests of the creditors as a whole. One possible reconciliation might be to
suggest that whilst para 3(4)(a) governs the selection of the objective towards
which the administrator must perform his functions, para 3(4)(b) relates to the
performance of those functions. However, this does violence to the opening
words of para 3(4), which provide that the administrator may only pursue
objective (c) if the conditions set out in sub-paras 3(4)(a) and (b) are both
For example, where, as happens in many receiverships, the assets of the
business are sold as a going concern, it can be argued that this will generate a
better result for the creditors as a whole than a piecemeal sale in liquidation.
Even if it is necessary to sell the companys assets on a break-up basis, it may
still be possible to achieve objective (b) if the costs of administration are lower
than those of liquidation. Where the company has granted charges to one or
more secured creditors, then a liquidation might involve the appointment of a
receiver in addition to a liquidator, with the total fees consequently being likely
to be more than by an administrator. Hence the net recoveries to creditors as a
whole will be likely to be more in administration.
See e.g. Hansard,10 April 2002 : Columns 569-70 (The word thinks in
those paragraphs means that the administrator will have to reach a considered
view [about which objective to pursue]. In such situations, the administrators
decision would be subject to a rationality test by which it would be challenged if
it could be shown that no reasonable administrator would have acted in such a
way in those circumstances); 29 July 2002 : Column 768 (The present
wording would mean that if the administrators view were then to be tested, it
would be subject to a rationality test that is, his decisions would be subject
to successful challenge if it could be shown that no reasonable administrator
would have acted in such a way in the particular circumstances of a case.), and
21 October 2002 : Column 1105 (If necessary, we would expect the courts to
assess whether the office holder, in this case the administrator, has been rational
in his decision. We are not seeking to apply any other test.).
IA 1986, Sch B1, para 49(2).
This spectrum can be understood as intersecting with another axis along
which discretions may be classified for the purposes of determining the extent
to which they are judicially reviewablethat is, the spectrum of public to
private decisions. Whilst trustees and directors are classified as private
decision-makers, the administrators status as an officer of the court (Sch B1,
para 5) may imbue his decisions with a more public character. However, this
point merely reinforces the one made in the textnamely, that the
administrators decisions should be subject to a more intensive standard of
review than those of company directors.
See Re Charnley Davies (No.2) [1990] BCC 605, ___.
Mokal, CLP.
Vatcher v Paull [1915] AC 372.
1975] Ch 75, 41 (Buckley LJ).
See, however, the comments by Jonathan Parker J in Green v Cobham
(unreported, 19 January 2000), who preferred not to refer to the principle
derived from In re Hastings-Bass as a rule.
Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, 1621. See also
e.g. Abacus Trust Co (Isle of Man) and Another v. Barr, [2].
Mettoy [1990] 1 WLR 1587, 1625.
Scott v National Trust [1998] 2 All ER 705, 717; Edge v Pensions
Ombudsman [2000] Ch 602, 627-28.
[1992] IRLR 27.
Per Dillon LJ; note that both parts of this statement were crucial to the
Courts actual decision.
In the present context, the administrators duties, as he goes about deciding
upon the correct objective, (i) not unnecessarily to harm creditors as a whole,
and (ii) to act in their interests as a whole, places upon him the obligation to
obtain all of the information reasonably available to him which bears upon the
question of how best to serve those interests and to protect them from
unnecessary harm. So for example, not to take into account reasonably
discoverable factors relevant to determining whether the continuation of the
company as a going concern (by preserving for its benefit the specific skills and
knowledge of the local market of its pre-distress shareholder-managers, say)
would result in better expected returns for its creditors than if the companys
business were to be sold off to another company (with little knowledge of and
enjoying no goodwill in the market), would be to ignore considerations relevant
to serving the creditors interests, and would thus constitute a breach of duty.
Jonathan Hilliard, while observing that we must take care here to heed
Fletcher Moulton LJs famous warning in Re Coomber [1911] 1 Ch 723, 728
that [f]iduciary relations are of many different types, argues that the rule
should apply to all fiduciaries since, inter alia, it is a solution to the general
problem of dealing with flawed decision making; see Re Hastings-Bass: Too
Good to be True? (16.12.02), available at <www.TrustsTaxEstates.com>. In
the context of the pre-Enterprise Act law, see also the interesting discussion of
the implications of the rule for administrators in I. Dawson, Administrators
Reprieve (2002) 5 Insolvency Lawyer 180.
Re Barings plc (No.5) [1999] 1 BCLC 433, 486-489. On the procedural
nature of the duty of care , see R Nolan, The Legal Control of Directors
Conflicts of Interest in the UK: Non-Executive Directors Following the Higgs
Report working paper, University of Cambridge.
Punt v Symons & Co Ltd [1903] 2 Ch 506; Hogg v Cramphorn Ltd [1967]
Ch 254; Howard Smith v Ampol Petroleum Ltd [1974] AC 821; Lee Panavision
Ltd v Lee Lighting Ltd [1992] BCLC 22; See L Sealy, Bona Fides and
Proper Purposes in Corporate Decisions (1989) 15 Monash University Law
Review 265.
Charterbridge Corp v Lloyds Bank Ltd [1970] Ch 62; Colin Gwyer &
Associates Ltd v London Wharf Ltd [2003] 2 BCLC 153 at [70]-[95].
See Rock Nominees Ltd v RCO (Holdings) Plc [2003] EWHC 936.
Howard Smith v Ampol Petroleum Ltd [1974] AC 821, ___.
It has been argued cogently that the development of the courts jurisdiction
to review directors decisions on the basis that they have acted for improper
purposes is both a genuine, and a desirable, innovation: see RC Nolan, in BAK
Rider (ed.), The Realm of Company Law (Kluwer, 1998).
Companies Act 1985 s 303.
IA 1986, Sch B1, para 88. See also ibid paras 90-97.
Supra section 3.
In the context of receivership, this problem is discussed by D. Milman and
D.E.M. Mond, Security and Corporate Rescue (1999).
[Refs to Committee Stage discussion about this point. ]
IA 1986, Sch B1, para 70.
Agnew v CIR [2001] 2 AC 710.
Ibid. para 74.
See Hansard, HL Debs, 2 Jul 2002, Col 84 (Lord McIntosh of Haringey).
Simply showing that such prejudice was caused by some act or omission of
his which did not amount to such management would not suffice: Re Charnley
Davies Ltd (No 2) [1990] BCLC 760, ___.
Namely, the order may (a) regulate the exercise of the administrators
functions; (b) require the administrator to do or not to do a specific thing; (c)
require a creditors meeting to be held for a specified purpose; (d) provide for
the appointment of the administrator to cease to have effect; or (e) make
Paras 75(6), 98(4)(b).
IA 1986, Sch B1, para 99. By a process of implication, the statutory charges
will therefore rank behind any fixed security or title retention claims in respect
[Check: does pursuing insolvency litigation count as an expense of
administration?]
Insolvency Rules (as amended), r. 2.67.
Old IA 1986 s 19(5).
[1992] Ch 505.
Ibid. at 525-31.
[2002] 1 WLR 671.
The provision will be inapplicable either if, where the companys net
property is below a minimum, the office-holder considers that it would be
disproportionately costly to set the funds aside, or, where the minimum value of
net property is exceeded, the court considers the exercise disproportionately
expensive (IA 1986 ss 176A(3), (5)). It may also be waived by a majority of
creditors voting in favour of a CVA or scheme of arrangement (s 176A(4)).
Insolvency Act 1986 (Prescribed Part) Order 2003, para 3.
IA 1986, Sch B1, para 65.
Insolvency Rules 1986 (as amended), Part 2, Chapter 10. See in particular r.
Insolvency Rules 1986 (as amended) rr. 2.72-2.80 (proof of claims), 2.812.94 (quantification).
Ibid. r. 2.85. The new set-off rule for administration differs in several
respects from rule 4.90, applicable in liquidation.
Ibid. r. 2.69.
Ex p Jay, In re Harrison (1880) 14 ChD 19, 26, per Cotton LJ.
Re Olympia & York Canary Wharf Ltd [1993] BCC 453, __ . An exception
to this is the landlords right of peaceable re-entry. However, this was
specifically included by the Insolvency Act 2000.
British Eagle International Airlines v. Compagnie Nationale Air France
[1975] 1 WLR 758; Money Markets International Stockbrokers Ltd v London
Stock Exchange Ltd [2002] 1 WLR 1150.
See supra, section 5.3.
See DTI, Productivity and Enterprise: InsolvencyA Second Chance, Cm
5234 (TSO, 2001), paras 2.1, 2.7.
Of course, many reorganisations are achieved outside of insolvency
procedures at all: see P. Kent, Corporate WorkoutsA UK Perspective (1997)
6 International Insolvency Review 165; J. Armour and S. Deakin, Norms in
Private Insolvency: The London Approach to the Resolution of Financial
Distress (2001) 1 Journal of Corporate Law Studies 21.
[2004] UKHL 9, [2004] 2 WLR 582.
Aghion, P. et al. (1993) A Proposal for Bankruptcy Reform in the UK
Insolvency Law & Practice 9: 103.
Armour, J. (2003), Avoidance of Transactions as a Fraud on Creditors at
Common Law in
Armour, J. and Bennett, H.N., Vulnerable
Transactions in Corporate Insolvency (Oxford: Hart Publishing), 281329.
Armour, J. and Deakin, S. (2001), Norms in Private Insolvency: The London
Approach to the Resolution of Financial Distress Journal of Corporate
Law Studies 1: 21.
Armour, J. and Frisby, S. Rethinking Receivership (2001) Oxford Journal of
Legal Studies 21: 73-102.
Association of Business Recovery Professionals (2003), 9th Survey of Business
Recovery in the UK (London: ABRP).
Citron, D. (1995), The Incidence of Accounting-based Covenants in UK Public
Debt Contracts: An Empirical Analysis Accounting and Business
Research 25: 139-150.
Davies, P.L. (2002), An Introduction to Company Law (Oxford: Clarendon
Dawson, I. (2002), Administrators Reprieve (2002) Insolvency Lawyer 5:
Day, J.F.S. and Taylor, P.J. (1995), Evidence on the Practice of UK Bankers in
Contracting for Medium-term Debt Journal of International Banking
Law 9: 394-401
Day, J.F.S. and Taylor, P.J. (1996), Loan Contracting by UK Corporate
Borrowers Journal of International Banking Law 8: 318-325
Easterbook, F.H. and Fischel, D.R. (1991), The Economic Structure of
Corporate Law (Cambridge, MA: Harvard University Press).
Finch, V. (2002), Corporate Insolvency Law: Principles and Policies,
(Cambridge: CUP).
Franks, J. and Sussman, O. (2000) The Cycle of Corporate Distress, Rescue
and Dissolution: A Study of Small and Medium-Size UK Companies,
IFA Working Paper 306.
Grylls, M. (1994), Insolvency Reform: Does the UK Need to Retain the
Floating Charge? Journal of International Banking Law 9: 391.
Hilliard, J. (2002), Re Hastings-Bass: Too Good to be True?, available at
<www.TrustsTaxEstates.com>.
Insolvency Law and Practice Review Committee (1982), Insolvency Law and
Practice: Report of the Review Committee (Chair: Sir Kenneth Cork)
(The Cork Report) Cmnd 8558 (London: HSMO, 1982).
Insolvency Service (1999), A Review of Company Rescue and Business
Reconstruction Mechanisms (London: TSO).
Insolvency Service (2001), Productivity and Enterprise: InsolvencyA Second
Chance (London: TSO).
Jensen, M.C. and Meckling, W.H. (1976), Theory of the Firm: Managerial
Behaviour, Agency Costs and Ownership Structure Journal of Financial
Economics 3: 305.
Kent, P. (1997), Corporate WorkoutsA UK Perspective International
Insolvency Review 6: 165
Milman, D. and Mond, D.E.M. (1999), Security and Corporate Rescue
(Manchester: Hodgsons).
Mokal, R.J. (2000), An Agency Cost Analysis of the Wrongful Trading
Provisions Cambridge Law Journal 335.
Mokal, R.J. (2004), Administration and Administrative Receivership: An
Analysis, forthcoming Current Legal Problems 57.
Nolan, R.C. (1998), The Proper Purpose Doctrine and Company Directors in
Rider, B.A.K. (ed.), The Realm of Company Law (London: Kluwer), 1.
Nolan, R.C. (2003), The Legal Control of Directors Conflicts of Interest in the
UK: Non-Executive Directors Following the Higgs Report working
paper, University of Cambridge.
Sealy, L.S. (1989), Bona Fides and Proper Purposes in Corporate
Decisions Monash University Law Review 15: 265.
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