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Insolvency practitioners and turnaround professionals
Corporate insolvency processes are not mere bodies of rules: they are elaborate procedures in which legal and administrative, formal and informal rules, policies and practices are put into effect by different actors. Those actors, in turn, have cultural, institutional, disciplinary and professional backgrounds which influence their work.1 They also operate under the influence of a variety of economic, career and other incentives and are subject to a host of constraints ranging from legal duties and professional obligations to client and own-firm expectations. The Cork Report, in an oft-quoted statement, urged that the success of any insolvency system is very largely dependent upon those who administer it,2 and socio-legal scholars have emphasised how insolvency law is not applied in a mechanical way but is manoeuvred around or manipulated by means of administrative structures ‘designed and imposed by dominant actors’.3
This chapter looks at how insolvency law and turnaround processes are made operational by those actors who dominate such procedures: the insolvency practitioners (IPs) and turnaround professionals (TPs). In accordance with the discussion in chapter 2, it will be asked whether present practitioner and professional regimes can be supported as efficient, expert,
1 On the roles of accountants and lawyers in insolvency see J. Flood and E. Skordaki,
Insolvency Practitioners and Big Corporate Insolvencies, ACCA Research Report 43 (ACCA, London, 1995). See also V. Finch, ‘Control and Co-ordination in Corporate Rescue’ (2005) 25 Legal Studies 374.
2See Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558, 1982) (‘Cork Report’) para. 732. The Government, moreover, saw insolvency practice as a key to the entire Cork reforms: see the account in B. G. Carruthers and T. C. Halliday, Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States
(Clarendon Press, Oxford, 1998) p. 437. On the emergence of the insolvency practitioner profession see ibid., chs. 8–11, and Flood and Skordaki, Insolvency Practitioners, ch. 3.
3See S. Wheeler, ‘Capital Fractionalised: The Role of Insolvency Practitioners in Asset Distribution’ in M. Cain and C. B. Harrington (eds.), Lawyers in a Post Modern World: Translation and Transgression (Open University Press, Buckingham, 1994) pp. 85–104; Wheeler, Reservation of Title Clauses (Oxford University Press, Oxford, 1991).
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fair and accountable. This will demand examinations of both the ways that these actors carry out their tasks and the ways that they are regulated.4
Insolvency practitioners
Four separate insolvency procedures for companies all involve IPs: Company Voluntary Arrangements (CVAs); administration orders; administrative receiverships;5 and liquidations. These all differ markedly in their characteristics and in their approaches to the balancing of interests.
CVAs are in essence agreements between companies, their shareholders and their creditors for the satisfaction of corporate debts or for schemes of arrangement of the companies’ affairs. Subject to protection for secured creditors6 and preferential creditors,7 the parties to the agreement are free to agree almost any terms. Party involvement in the agreement is, moreover, governed by statute: thus a proposal for a CVA needs the approval of 75 per cent of the company’s unsecured creditors and over 50 per cent of its shareholders.8 The CVA, if approved, is
4See Insolvency Regulation Working Party (IRWP), Insolvency Practitioner Regulation – Ten Years On (DTI, 1998) (‘IRWP Consultation Document’); IRWP, A Review of Insolvency Practitioner Regulation (DTI, 1999) (‘IRWP Review’). The IRWP had, as members, representatives of each of the professional bodies that authorise insolvency practitioners, as well as the DTI/BERR Insolvency Service, with the Association of Business Recovery Professionals (R3) (formerly the Society of Practitioners of Insolvency) in attendance. See further V. Finch, ‘Insolvency Practitioners: Regulation and Reform’ [1998] JBL 334.
5The Enterprise Act 2002 largely replaced the administrative receivership regime with the new administration process: see EA 2002 s. 250, Insolvency Act 1986 Sch. B1, s. 72A. See also ch. 8 below. The general prohibition on appointing administrative receivers that was introduced by the 2002 Act applies to holders of ‘qualifying floating charges’ (see now Insolvency Act 1986 s. 72A) but is subject to six exceptions relating to capital markets, public/private partnerships, utilities, project finance, certain financial markets and registered social landlords/housing authorities: see ss. 72B–72G of the IA 1986 Sch. 2A as modified by the IA 1986 (Amendment) (Administrative Receivership and Capital Market Arrangements) Order 2003 (SI 2003/1468). Transactions that predate the implementation of the EA 2002 (15 September 2003) will still allow holders of qualifying floating charges both to appoint administrative receivers and to block the appointment of an administrator.
6 See Insolvency Act 1986 s. 4(3). 7 Ibid., s. 4(4).
8Both percentages calculated in value. See Insolvency Rules 1986 rr. 1.17–1.20. On CVAs under the Insolvency Act 2000 and generally see ch. 11 below; S. Hill, ‘Company Voluntary Arrangements’ (1990) 6 IL&P 47; DTI/Insolvency Service, Company Voluntary Arrangements and Administration Orders: A Consultative Document (October 1993); Insolvency Service, Revised Proposals for a New Company Voluntary Arrangement Procedure (1995); J. Flood, R. Abbey, E. Skordaki and P. Aber, The Professional Restructuring of Corporate Rescue: Company Voluntary Arrangements and the London Approach, ACCA Research Report 45 (ACCA, London, 1995).
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binding on all those who were entitled to vote at the creditors’ meeting9 and the company may continue to trade. An IP will be involved in giving effect to the terms of the CVA10 but, in doing so, he or she can be seen to be implementing what is in essence a private contractual agreement insulated from public interest concerns.
Administration was originally provided for by the Insolvency Act 198611 but it was a formal procedure and required a court order. The reforms of the Enterprise Act 2002 inaugurated a new corporate administration regime, which will be discussed in chapter 9 below. In the ‘new’ administration procedures the rescue of the company as a going concern is the priority12 and the administrator has to sustain a company’s business while plans are made for its future.13 The administrator can thus be involved in the day-to-day management of the company as well as in formulating rescue plans. A company is protected from creditors’ demands when under an administration order and it can continue to trade14 but proposals for rescue have to be agreed by creditors.
The Cork Report15 anticipated that in rescue operations an administrator might take on board society’s interests and employment considerations when deciding whether to sustain a business. The Insolvency Act 1986, however, makes no mention of such factors and the administrator looks no further than to the interests of creditors viewed solely as creditors.
Administrative receivers (ARs) are appointed without court involvement by debenture holders who hold security over the whole (or
9Or would have been so entitled if they had notice of the meeting: Insolvency Act 1986 s. 5 (2)(b).
10The IP will in practice usually have been involved in the drawing up of the proposals. On the significance attached by major creditors to the professional reputation of the IP involved see D. Milman and F. Chittenden, Corporate Rescue: CVAs and the Challenge of Small Companies, ACCA Research Report 44 (ACCA, London, 1995). Note that the Insolvency Service expects authorisation of the first ‘voluntary arrangement practitioners’ in 2008 (via s. 389(a) Insolvency Act 1986) (re persons who are not IPs): see IS Annual Report 2006–7.
11See Insolvency Act 1986 ss. 8–27. CVAs were also introduced by the Insolvency Act 1986 ss. 1–7.
12See Insolvency Act 1986 Sch. B1, para. 3(1).
13See Insolvency Act 1986 s. 8(3) for the specific purposes for which an administration order can be made.
14On the moratorium see Insolvency Act 1986 Sch. B1, paras. 42–4; M. G. Bridge, ‘Company Administrators and Secured Creditors’ (1991) 107 LQR 394. See also ch. 9 below.
15Para. 498.
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substantially the whole) of the company’s assets.16 The IP acting as an AR has a central function of realising company assets in order to meet the claims of the debenture holder and, in so doing, he or she can continue the business and can sell it as a going concern. On such a sale the AR distributes funds received to the creditors in due order of priority. The responsibility of the receiver is to the creditor who requested the appointment and not to the company or other creditors.17 In essence this is, accordingly, a creditors’ remedy that does not demand that the AR pays any heed to the wishes or interests of the company or to its directors, shareholders, other creditors (other than minimal obligations to report) or the interests of employees or the broader public.
Liquidators are appointed in signification of the end of a company and are responsible for collecting-in the company’s assets, realising them and distributing the proceeds to the company’s creditors. If there is a surplus, this can go to the shareholders. In compulsory liquidation a winding-up petition is made to the court and, if granted, the court orders that the company be wound up. In a creditors’ voluntary liquidation the shareholders resolve initially to put the company into liquidation and the creditors effectively take control away from the shareholders at the subsequent creditors’ meeting when they appoint a liquidator.18 The IP, acting in both types of liquidation, looks to the interests of all creditors but also acts in the public interest in so far as he is under a duty to report directorial unfitness to the Disqualification Unit of the BERR’s Insolvency Service as part of the disqualification process of the Company Directors’ Disqualification Act 1986 (CDDA).19
16See Insolvency Act 1986 s. 29(2). But see note 5 above on the curtailment of administrative receivership by the Enterprise Act 2002 and see further ch. 8 below. On receivers generally see I. F. Fletcher, The Law of Insolvency (3rd edn, Sweet & Maxwell, London, 2002) ch. 14; Cork Report, ch. 8; R. M. Goode, Principles of Corporate Insolvency Law (3rd edn, Sweet & Maxwell, London, 2005) ch. 9; J. S. Ziegel, ‘The Privately Appointed Receiver and the Enforcement of Security Interests: Anomaly or Superior Solution?’ in Ziegel (ed.), Current Developments in International and Comparative Corporate Insolvency Law (Clarendon Press, Oxford, 1994).
17See Lathia v. Dronsfield Bros. Ltd [1987] BCLC 321.
18Insolvency Act 1986 ss. 99, 100, 166. On liquidation generally see ch. 13 below.
19See S. Wheeler, ‘Directors’ Disqualification: Insolvency Practitioners and the Decisionmaking Process’ (1995) 15 Legal Studies 283. On directors’ disqualification generally see ch. 16 below; A. Walters and M. Davis-White QC, Directors’ Disqualification and Bankruptcy Restrictions (Thomson/Sweet & Maxwell, London, 2005); V. Finch, ‘Disqualifying Directors: Issues of Rights, Privileges and Employment’ (1993) Ins. LJ 35; Finch, ‘Disqualification of Directors: A Plea for Competence’ (1990) 53 MLR 385.