Recasting the actors

The philosophical changes outlined earlier are matched by a recasting of the roles fulfilled by the various actors that are commonly concerned with troubled companies.128 The preceding discussion serves to outline how the major lenders to companies, the banks, have shifted their focus of attention. At the end of the 1980s it was easy for a floating-charge- holding bank to rely on the power to appoint an administrative receiver and to stand at a distance from a troubled company. It knew that it could intervene quickly at the right time and recover its debt. Today the position is different because of legal, procedural and cultural changes. The bank is far more likely to be aware of corporate troubles at an earlier stage than formerly and to intervene by exerting a considerable degree of scrutiny or influence over the company’s directors. It will often be concerned to use its voice rather than merely to exit when the company first encounters trouble. It will not be fatalistic about financial difficulties but will use its intensive care teams where possible to prevent troubles from developing to the point where they cannot be turned around. In redefining its role the bank will have constructed a flexible relationship with a healthy company that can slide seamlessly into another form when the company encounters trouble.

As for company directors, a shift towards preventative approaches to insolvency involves a change in role. It is to be expected that as banks move from debt collection to prevention and the monitoring of risk management, directors will be subjected to regimes of scrutiny and assessment that both come into effect at an earlier stage in corporate decline than formerly and involve a greater depth of review. Directors, accordingly, will be held to account more fully as this shift in approach strengthens. Their expertise, as well as their management and risk control systems, will be placed under the microscope. On an optimistic view, it might be argued that company directors stand to gain in such a regime as they will be offered new levels of assistance by banks and independent consultants. They will have moved away from the agonies of the former regime in which the troubled director would be inclined to pursue a lonely and secretive path through troubles – a progress accompanied by the fear that the bank would discover what was going on and call the show to a halt by appointing an administrative receiver. Under the new

128On the importance of actors see J. Black, ‘Enrolling Actors in Regulatory Processes: The Example of UK Financial Services Regulation’ [2003] PL 62; Finch, ‘Re-invigorating Corporate Rescue’.

system, the director has to operate in a highly transparent way but when troubles are met, he or she has allies who will step in to help.

Pessimists, however, will be inclined to turn this argument on its head. They will warn that if banks increasingly demand that dangers of insolvency should be dealt with through risk management systems that are auditable, this produces a number of dangers.129 It may make company directors inward-looking and inclined to see the banks as unwelcome overseers who are to be resisted rather than welcomed as allies. These directors, as a result, may become procedurally defensive and more concerned to create an acceptable record of their behaviour for bank scrutiny than to exercise proper business judgement.130 Such defensiveness may not merely chill entrepreneurial behaviour but may reduce the flow of useful information to the banks. It may devalue communications between debtors and creditors as these become ritualistic exercises in formal compliance and this may, in turn, render the banks less, not more, able than formerly to spot incipient difficulties or to help companies when they meet troubles. Within companies, information may, as a result, be organised in less and less useful ways because it becomes structured by needs to boxtick, defend and avoid blame rather than to meet business objectives.

Whether the optimists or pessimists are on firmer ground goes beyond the current discussion but much may depend on the skill of the banks in setting up monitoring and assistance regimes that enable them to audit but, at the same time, give directors the freedom and confidence to make and apply business judgements without undue fear or constraint. Much may also turn on the extent to which companies can successfully embed auditable risk management systems within the general processes of wealth creation and governance.

Turning to the role of the insolvency practitioner, one recent change has been a general reorientation of approach. There has developed, as noted in chapter 5, a growing culture of rescue friendliness and with this has come a new emphasis on the IP’s role in averting disaster. As one IP described the movement: ‘the emphasis has shifted from “pathology” to “preventative medicine”… “managing change” has become a critical new

129See Power, Risk Management of Everything, pp. 43–58.

130See C. Hood, ‘The Risk Game and the Blame Game’ (2002) 37 Government and Opposition 15.

discipline’.131 For IPs, however, the most dramatic change of recent years has been the replacing of administrative receivership with the post-Enterprise Act administration procedure. The post-Enterprise Act administration involves processes that are inclusive and which, with the departure of administrative receivership, oblige the IP to act in the interests of creditors of the company as a whole rather than in pursuit of the bank’s interests alone. These developments, when put together, involve a significant recasting of the IP’s role. The administrator in the ‘new’ administration procedure is given the difficult task of devising the best way forward while serving a variety of creditor interests and ensuring that a host of creditors’ voices are all respected in decisionand policy-making. A central, and newly acute, challenge will be to effect a balance between acting decisively in order to achieve the best outcome for the company and conducting deliberations in an open and accessible manner so that these are acceptable to all parties. The IP’s role has been moved in the direction of mediator as opposed to implementer or technician.

Unsecured creditors are the actors whose role perhaps changes least in the shift towards preventative approaches. That role, nevertheless, does change. For a start, unsecured creditors are given what amounts to a speaking part in the new regimes of corporate insolvency. Their voice has a new power in two respects. First, in the post-Enterprise Act administration process, they have a right to be listened to and the IP has a duty to heed their interests when deciding strategy.132 Second, their voice is given a potential role in the movement towards more open, transparent and accountable management that is driven by the new intensive care regimes run by the banks. When troubled managers, as never before, have to explain to banks and others how they are dealing with business partners, this stimulates the granting of access and influence to those unsecured creditors who have a continuing commercial relationship with the troubled company. The incentives of such creditors to use their voices may, furthermore, be increased by improvements in their potential returns through insolvency processes – as seen in the ring-fencing (or ‘prescribed part’) provisions of the Enterprise Act 2002.133

131See L. Hornan, ‘The Changing Face of Insolvency Practice’ (2005) (March) International Accountant 24 at 24.

132See paras. 3(2), 49, 51–7. See ch. 9 below.

133See Enterprise Act 2002 s. 252 (inserting a new s. 176A into the Insolvency Act 1986). This, as noted, provides that a prescribed part of funds otherwise available for distribution to holders of floating charges shall be retained for the benefit of unsecured creditors. See also Insolvency Act 1986 (Prescribed Part) Order 2003 (SI 2003/2097); ch. 3, pp. 108–10 above.