Summary and implications

Almost exactly one year on from the Order* coming into force, many people remain unaware that it is no longer possible to appoint an administrative receiver over an overseas incorporated company.

Lenders and indeed insolvency practitioners should be aware that this is the case even when dealing with qualifying floating charges created before 15 September 2003 but alternative strategies, including administration, may be pursued to the same effect.

Administrative receivership

The general lack of awareness of the change is perhaps a good indicator that it has had limited effect in practice, mainly as the availability of administrative receivership has been so heavily restricted since the coming into force of the Enterprise Act 2002 (EA 2002).

Administrative receivership was an extremely popular route for lenders to take with defaulting borrowers for (generally speaking) the following reasons:

  • Administrative receivers can act, in the main, in the interests of those who appoint them rather than creditors as a whole;
  • Once in position they are able to block the appointment of administrators and the accompanying moratorium;
  • Like administrators they have a wide range of powers to sell assets.

The overall effect for lenders was that they could use administrative receivership to achieve a high rate of recovery, quickly and effectively. It was however seen as a draconian remedy with little regard being shown to other creditors, employees or indeed the potential for a business to carry on as a going concern in a restructured form.

Enterprise Act 2002

For the reasons detailed above it was decided to severely restrict the availability of administrative receivership through the EA 2002, the relevant part of which came into force on 15 September 2003.

The EA 2002 limited the right of qualifying floating charge holders (i.e. holders of a charge over all or substantially all of a company’s assets) to appoint administrative receivers to the following cases:

  • Where the qualifying floating charge was created before 15 September 2003; or
  • For qualifying floating charges created since then where the charge falls into one of the specific exceptions found in sections 72A to 72GA of the Insolvency Act 1986 (the Act).

The exceptions deal with specialist financings such as project finance and capital market arrangements where it was deemed to be in the public interest for administrative receivership to remain available.

Overseas incorporated companies

 

Even prior to the changes brought about by the EA 2002, the position regarding the availability of administrative receivership for overseas incorporated companies was not clear. The reason for this was that there was no definition of “company” in section 29 of the Act which deals with the appointment of administrative receivers.

It was not until the Re International Bulk Commodities [1993] Ch. 77; [1992] 3 W.L.R. 238 case where it was decided that “company” should include overseas incorporated companies, that administrative receivership became available to lenders with qualifying floating charges over foreign companies.

This ruling continued to apply even after the limitations to administrative receivership brought about by the EA 2002. Administrative receivership continued to be available for overseas incorporated companies under the exceptions in sections 72A to 72GA of the Act, or where the qualifying floating charge was created before 15 September 2003.

Change in law

The Order completely abolished the right of a holder of a qualifying floating charge over an overseas incorporated company to appoint an administrative receiver. This is the case even if one of the exceptions in the Act applies and has overturned the Re International Bulk Commodities case.

When the change in law came into force some commentators objected to the overturning of Re International Bulk Commodities. It was thought that changing the law on the availability of an insolvency process should not have been made via the backdoor and without consultation. Some were also of the opinion that the discrepancy in the availability of administrative receivership depending on whether a company was incorporated overseas or not went against the spirit of non-discrimination in EU law. The EC Regulation on Insolvency Proceedings having made UK insolvency proceedings available for overseas incorporated companies who have a centre of main interests (COMI) here.

Administration

The Order has not, however, affected a lender’s capacity to appoint an administrator over an overseas incorporated company which has its COMI here. The purpose of administration is three-fold in descending order:

  • The first purpose is to rescue the company as a going concern.
  • If the above cannot be achieved, then the second purpose is to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up, without first being in administration.
  • Only if the first two aims cannot be achieved will an administrator attempt to achieve the third purpose. This is to realise property in order to make a distribution to secured or preferential creditors (providing that doing so would not cause unnecessary harm to a company’s creditors as a whole).

In many cases, the third purpose of administration is the one that is achieved. In practice therefore appointing an administrator may not lead to a wholly different result than would be achieved with administrative receivership.