In Search of a Rescue Regime: The Enterprise Act 2002
| DOI | http://doi.org/10.1111/j.1468-2230.2004.00485.x |
| Published date | 01 March 2004 |
| Author | Sandra Frisby |
| Date | 01 March 2004 |
LEGISLATION
In Search of a Rescue Regime:The Enterprise Act 2002
Sandra Frisby
n
INTRODUCTION
Part10 of the Enterprise Act 2002 heralds a new era of corporate insolvency law
for the United Kingdom. Driven by an assessment that the current regime is not
adequately rescue-orientated and, further, inequitable, the Act implements a
number of modi¢cations to that regime. These are intended to attain the goals of
a superior corporate rescue environment, a better return for creditors and a gen-
erally fairer system of insolvency distribution. The timing of these developments
is of note, as the latest statistics from the Insolvency Service show an increase in
the number of insolvency appointments for England and Wales during 2001,
1
although the reforms have been inspired by a series of consultations and reports
dating back to1999.
2
Corporate insolvency law was last comprehensively overhauled by the Insol-
vencyAct 1986, which (incompletely) implemented the recommendations of the
Cork Committee.
3
A perusal of the Cork Report demonstrates that the ideals of
equity, collectivity and corporate rescue are by no means recently espoused: in-
deed, they were cited as characteristics of a‘‘good modern insolvency law’’ by the
Committee,
4
and were major objectives of the reforming process.The Enterprise
Act pioneers no new dogma, therefore, but ratherseeks to applyan existing ideol-
ogy more e¡ectively. As is apparent from theWh ite Paper preceding the Act, its
main objectives are to promote, in no particular order, corporate rescue, collectiv-
ity, the maximisation of realisations from the corporate estate and overall fairness
as between creditors.
5
The main planks of the Act, upon which this note focuses, are the abolition of
administrative receivership, the reformation of the administration procedure, the
abolition of the Crown’s preferential status in insolvency and the institution of a
ring-fencedfund, taken from the proceeds of corporate assets subject to a £oating
charge, to be distributed amongst the company’s unsecured creditors. Each of
n
Norton RoseLecturer in Corporate and Financial Law, University of Nottingham.
1 See http://www.insolvency.gov.uk/information/stats/statistics.htm(last vis ited 5 Feb 2004).
2SeeA Review of Company Rescue and Business Reconstruction Mechanisms,The Insolvency Service
(London: HMSO, 1999); A Reviewof CompanyRescueand Business Reconstruction Mechanisms: Report
by the Review Group,The Insolvency Service (London: HMSO, 20 00); Productivity and Enterprise:
Insolvency ^ A Second Chance,The Insolvency Service,Cm 5234 (London: HMSO,20 01).
3SeeInsolvencyLaw and Practice:Report of the Review Committee Cmnd 8558 (London:HMSO,1982).
4ibid para.198.
5 Whether these objectives may in fact con£ict will be examined later.
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(2004) 67(2)MLR 247^272
these will be examined, but ¢rst it is worthwhile investigating the essence of the
aims of theAct in order better to evaluatetheir merits and theirchances of accom-
plishment under the new regime.
THE RESCUE IDEOLOGY
The task of this review is to explore ways in which the law and practice might be
further developed in order to enable rescues to be attempted where that course will
bene¢t those who have a stake in the company’sa¡airs. This means trying to ensure
that companies, which are viable in the long-term, survive. In terms of creditors,
this means trying to achieve higher recoveryrates.
6
Whilst it is di⁄cultto argue that ensuringthe survival of viable companies is any-
thing other than commendable, it is important to appreciate that the notion of
survival has various shades of meaning, as, indeed, does the notion of corporate
rescue.T here is room for debate as to wheth er every ¢nancially troubled company
should be thesubject of a rescue attempt and as towhat can properly bede¢ned as
a‘rescue outcome’.
As far as the ¢rst question is concerned, up until very recently the conviction
has been that insolvency law should address the question of rescue selectively. Ar-
genti,writing in 1976,advocated a Darwinian approach whereby a capitalist econ-
omy will acknowledge that a certain level of corporate demise is both inevitable
and necessary to the e⁄cient functioning of the market.
7
This position was en-
dorsed bythe Cork Committee, which identi¢ed inherent viability as a prerequi-
site to a rescue attempt,
8
and by the 1999 Review.
9
The Report which followed
the Review made the point explicitly:
Corporaterescue mechanisms are not inte ndedto maintain i ne⁄cient ¢rms thatare
not economically viabley
10
In other words, UK insolvency law should not undertake a ‘rescue as of right’
methodology
11
: not all lame ducks can, or should be rescued, and the appropriate
procedure for the genuinely doomed is immediate liquidation.
As to the second question, a distinctionexists between rescuing the company and
rescui ng the business of the company.The former, which might be described as ‘pure
rescue’, would involve the corporate entity emerging from the rehabilitation en-
deavour intact, so as to continue substantially the same operations, with the same
workforce and in the ownership of the same people.
12
The latter is perhaps most
6A Review of CompanyRescue and Business Reconstruction Mechanisms,The Insolvency Service (London:
HMSO,1999)(The 1999 Review).
7Corporate Collapse:The Causesand Symptoms (London: McGraw-Hill,1976),170.
8 Above n 3, para. 198.
9 Above n 6, para. 3(b).
10 A Review of Company Rescue and Business Reconstruction Mechanisms: Report by the Review Group,
The Insolvency Service (London:HMSO, 2000) (The 2000 Report),para. 24.
11 Which is, arguably, the underlying approachof the United States’Chapter 11regime.
12 The position can be considerably more complex than this rudimentary description, and many
‘pure’ rescues mayinvolve some job losses and alterations to the core activities.The critical point
is that the entity itself remains functional.
In Search of a Rescue Regime:The Enterprise Act 2002
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