Where lenders are lending to and taking security from companies that may become subject to special administration regimes, the value of the security may be affected and enforcement options restricted. More companies are subject to these procedures than you might think. So, how do you identify whether your borrower is subject to one of these regimes? Should you place a lower value on your security? What are your enforcement rights? Might your borrower become affected after grant of the security?
Special administration regimes
Special administration procedures apply to certain companies that have some significance to matters such as the country’s infrastructure.
The overarching purpose of these special administration regimes is to ensure that the “protected” business continues and transfers to a third party or, for certain of the procedures, the company is rescued as a going concern. Both dovetail with the public policy need to ensure continuity of certain key services. However, this objective may be to the detriment of stakeholders such as creditors: a special administrator does not generally have a duty to act in creditors’ best interests.
For affected companies, there are also important restrictions on other types of insolvency procedure – whether “ordinary administration”, liquidation or receivership.
The sectors subject to special administration regimes comprise the rail, energy, water, PPP, air traffic, health and postal services. When lending to companies in these sectors, lenders need to consider special administration regimes as part of their due diligence.
In certain sectors, the range of companies that could be subject to the special regime is wide. This is particularly so for rail, energy and water, and the position for each is set out below. Given their relatively narrow application, this article does not consider the procedures for PPP companies and air traffic services companies further. Also, this article does not consider the position for health or postal services, as the legislation is currently going through Parliament. Therefore, detailed consideration would be premature.
Although the special procedures for the various sectors have many likenesses, there are important differences. This article does not try to set out the details applicable to each. Instead, it aims to alert lenders to the need to consider whether these regimes apply when dealing with companies in the relevant sectors, and to consider how such regimes may affect their position.
Which companies are affected?
The special railway administration regime applies to “protected railway companies”, which are private sector operators holding certain passenger licences, network licences, station licences and/or light maintenance depot licences. A search of the website for the Office of Rail Regulation (ORR) should identify the holders of these licences. The regime affects a fairly wide range of companies. Sometimes, the company may itself have overlooked whether it holds such a licence, for example where the licence is not central to its operations and/or relates to historical activity. Therefore, it is good practice to search the ORR website in relevant cases as part of a lender’s due diligence exercise.
The special regime relating to water applies to any company that holds an appointment as a water undertaker or sewage undertaker for an area of England and Wales. It also applies to any “qualified licence water supplier”. This is any company which holds a combined licence or a licence allowing it to introduce water into a water undertaker’s supply system where that introduction is designated as a strategic supply or collective strategic supply. The website for Ofwat (the regulator for the water and sewage industry) contains a list of holders of licences.
The special regime for “protected energy companies” applies to companies that hold a licence granted under section 6(1)(b) or (c) of the Electricity Act 1989 (transmission and distribution licences for electricity) and/or a licence granted under section 7 of the Gas Act 1986 (licensing of gas transporters). Similarly, the website for Ofgem (the Office of the Gas and Electricity Markets) lists the holders of these licences.
You should note that:
- A company will probably qualify even if it held one of these licences for a historical activity and the licence has not been formally revoked or cancelled.
- Even where a company does not qualify when the lender grants facilities/takes security, it may later become subject to the special regime if it gets an appropriate licence.
- These procedures can apply to unregistered (including foreign) companies.
- The Secretary of State/relevant authority can apply for a special administration order for a qualifying company on grounds other than insolvency. For example, contravention of the terms of its licensed activities.
The value of security granted by affected companies
The primary purpose of a special administration regime is to keep the business going and transfer it (or its protected parts) to a new owner, or, for energy and water companies, to rescue the company as a going concern. The special administrator is required to manage the company’s business in order to achieve this purpose.
However, creditors’ rights are secondary, and a special administrator does not have to act in their best interests. Creditor protections differ slightly from regime to regime. For example, under the rail and water procedures, the special administrator has to manage the company in order to achieve the purpose and in a manner that protects the interests of creditors. In a special energy administration, the administrator must exercise and perform his powers and duties in the manner that best protects the interests of creditors as a whole, so far as consistent with the objective of the administration. So, while there is some protection, creditors’ interests are unlikely to trump the purpose of rescuing or transferring the protected business.
If a special administration order is made, the Government may need to fund the administration (which itself could result in state aid issues). This funding would rank as an administration expense and so rank in priority to floating charge creditors. These administration expenses could be significant, given that ceasing to trade is not an alternative if the statutory purpose of transferring the business or relevant parts of it (or rescuing the company) is to be achieved.
Also, the usual provisions that allow an administrator to sell charged property are varied. For example, in railway administrations, an administrator can sell fixed charge assets as if the assets were not subject to security, provided that the administrator accounts to the fixed charge holder for the sum of the following:
- The net proceeds of the disposal.
- Where those proceeds are less than the amount the court determines to be the net realisations on a sale of the property or goods for the best price which is reasonably available on a sale which is consistent with the purposes of the railway administration order, such sums as may be required to make up the shortfall.
The effect of the italicised wording is that the sum payable to the secured creditor could well be less than would be payable in an ordinary administration. The regime for water contains similar provisions. In special energy administrations, the value for which the administrator must account to the secured creditor is “appropriate” rather than “market” value. This implies that you should measure the value by reference to the price available on a sale within the special administration regime.
The Government/relevant statutory body has step-in rights for certain of these companies, to avert the need for a formal insolvency regime. A lender should consider the existence and effect of these rights as part of its due diligence.
Restrictions on a secured creditor’s ability to enforce security
A secured creditor cannot prevent a company from going into special administration—or insist on its own choice of administrators when a special administration order is sought. Also, the secured creditor’s own remedies are curtailed. For example:
- Affected water companies cannot go into ordinary administration or liquidation. They cannot be wound up voluntarily. If a winding-up petition is presented, the court should make a special administration order if a winding-up order would have been made but for the statutory prohibition. There is no absolute bar on administrative receivership (if the debenture is old enough) or on other forms of receivership. However, a person wishing to enforce their security must first give 14 days’ notice to the Secretary of State and the relevant authority, which can during that period put the company into special administration.
- In contrast, protected railway companies can go into “normal” administration or liquidation, but not before the necessary notice has been given to the Secretary of State. A secured creditor who wishes to appoint “ordinary” administrators must give notice to the Secretary of State, who then has 14 days to apply for a railway administration order should he wish to do so. Only if he does not so apply can the court make an ordinary administration order on the secured creditor’s application. Equivalent notice must also be given before any form of receivership.
- For protected energy companies, the position is similar to that of protected railway companies.
Where time is of the essence, these notice periods may cause challenges, including operational ones—especially where an insolvency process is required because a company has simply run out of money. In these circumstances, it may help to consider options such as asking the Secretary of State to shorten the notice period (if possible), presenting an administration petition to trigger an interim moratorium and/or seeking interim relief. For example, when the Jarvis Group became insolvent in 2010, the prospective administrators were appointed as interim receivers and managers in respect of two protected railway companies. This was done (albeit with the Secretary of State’s consent) while awaiting a decision from the Secretary of State about whether he wished to apply for special railway administration orders.
Also, take care over the form of appointment. You cannot make out-of-court appointments for protected railway companies and water companies, for which an application to court in the old-fashioned way is required.
Please note that this article does not consider the regimes applicable to insurance companies and financial institutions.
Law stated as at 1 February 2011.