Administrative Receivership and Administration - An Analysis
This paper argues that the Enterprise Act 2002 has changed the way those dealing with distressed companies are required to behave much more significantly than most commentators realise. The motivation for this change lies in the ways in which administrative receivership is destructive of social value (in terms of unnecessary job losses and other resource misallocations). The paper identifies three such ways, all linked with the fact that receivership ties the office-holder’s duties to the interests of the debtor’s main bank. This is undesirable because the bank (a) is usually oversecured and thus has little incentive, once receivership is underway, to ensure that financially distressed companies would not needlessly be wound up or their businesses liquidated, (b) has the benefit of directors’ guarantees, which weakens its incentives to ensure the maximisation of the value of the company’s business even in those cases where its proprietary security is insufficient to cover what it is owed, and (c) has little incentive in either of these cases to control the costs of receiver wastefulness or negligence. These problems are compounded by the fact that the supply side of the market for banking services to SMEs is significantly monopolistic.
In order to remedy these defects, Parliament has now imposed upon the administrator the duty to attempt a company or business rescue, as appropriate, if either one is in the interests of the creditors as a group. This duty is an objective one, is subject to the rationality test, and requires the administrator to account for his decision about which objective (company or business rescue) is to be pursued. The paper provides an understanding of company rescue consistent with the explicit text and legislative history of the statute, and discusses the importance of the quality of the company’s pre-distress management to the administrator’s decision about whether to attempt such a rescue.
Finally, the mechanisms provided by the statue for an aggrieved party to hold the administrator to account are discussed. The paper highlights the importance of three factors. (a) Most administrators will be appointed by the company’s main bank. (b) The Insolvency Practitioners who act as administrators would be the same individuals who have acted in the past as administrative receivers. (c) There has been a paucity of understanding amongst the professionals, lawyers and accountants, about the significance of the changes brought about by the Enterprise Act. The administrator’s statutory duties to act in the interests of all the creditors as a group and to act with reasonable speed and efficiency are examined in the light of these observations.
Banking and Finance Law | Bankruptcy Law | Business Organizations Law | Commercial Law | Law and Economics | Property Law and Real Estate | Secured Transactions
Date of this Version
Riz Mokal, "Administrative Receivership and Administration - An Analysis" (May 16, 2006). bepress Legal Series. bepress Legal Series.Working Paper 1372.