and deficiencies of understanding. It takes a considerable leap of faith to believe that such poor performers will be highly responsive to the messages received from monitoring banks. If a typical unsecured creditor was to be offered the choice of a larger share of the insolvency estate or better monitoring of management he or she might well opt for the former. The point can also be made that even if creditor concentration is present, the bank may only possess partial control over the firm since finance may have been raised by quasi-security devices such as hire purchase or retention of title arrangements. The claims of such finance suppliers will take precedence over the floating charge and the bank will have reduced de facto control over the firm’s assets.

A final difficulty concerns creditor concentration itself and how this is to be ensured. If levels of concentration are left to the market, it may or may not be (or remain) the case that the typical SME has only one main (bank) secured creditor. There is considerable evidence, as discussed in chapter 3, that credit arrangements are increasingly fragmenting for a number of reasons.126 It would, accordingly, be risky to design a regime of insolvency law on the continuing assumption of concentration. If, on the other hand, insolvency law is set up to offer firms an incentive to resort to only one main secured creditor, this would not be consistent with the provision of the flexible financing opportunities that firms need in order to respond efficiently to market changes. There may also be problems of ‘reverse agency costs’ in so far as the main creditor bank may chill the firm’s investment decisions – leading to valuable opportunities being forgone in favour of lower-risk alternatives.127

Expertise

The Insolvency Act 1986, as noted, provides that all receivers must be qualified insolvency practitioners within the meaning of Part XIII of the Act. The Act, in turn, responded to Cork’s view that persons performing as IPs must possess some minimal professional qualifications and be subjected to control.128 General issues relating to the expertise of IPs have been discussed in chapter 5 and will not be rehearsed here, save to note that some commentators have questioned whether the training and

126See Frisby, Insolvency Outcomes.

127See G. Triantis and R. Daniels, ‘The Role of Debt in Interactive Corporate Governance’ (1995) 83 Calif. L Rev. 1073 at 1090–1103.

128Cork Report, para. 756.

receiver owes the troubled company neither a duty of obedience nor a duty to provide information in relation to the management and conduct of its affairs.130 On selling assets, however, there is, as we have seen, legal accountability through the obligation to take reasonable steps to obtain a proper price and, during management, again, a duty of care is owed to the debtor company – though subject to a fiduciary duty to act in the interests of the debenture holder.131

Just as the troubled company has little input into the receiver’s decision-making, so the array of junior creditors is distanced from such processes. Cork responded to complaints on this front with proposals designed to create ‘a relationship of accountability’ between the receiver and the unsecured creditor.132 It has been suggested, however, that the resultant legislative steps did little to ensure meaningful participation rights: the requirement that there be a creditors’ committee, for instance, is designed to assist the receiver in discharging his functions but it contains no power to direct the receiver in relation to the carrying out of these functions.133 This contrasts with the stronger powers possessed by liquidation committees134 and meetings of creditors in administration.135 In any event, the Insolvency Service noted that ‘very few such committees are appointed’ and concluded that the framework for administrative receivership does not ‘provide a basis for accountability or properly aligned incentives in relation to the bulk of cases’.136

Turning to fairness, it can be argued that receivership operates in a manner that is procedurally and substantively unfair to non-appointing creditors and others. In substance it is a private procedure that allows enforcement of the appointor’s security rights to the potential detriment of other creditors, employees, the company and a range of stakeholders including suppliers and customers. Procedurally it is unfair because the interests of these parties may be affected by the receiver’s actions but

130Gomba Holdings UK and Others v. Homan and Bird [1986] 3 All ER 94.

131Armour and Frisby, ‘Rethinking Receivership’, p. 77.

132Cork Report, para. 481. See Insolvency Act 1986 s. 48(2) and Insolvency Rules 1986 rr. 3.9–3.15 on the calling of a meeting of the creditors. See further Armour and Frisby, ‘Rethinking Receivership’, p. 79.

133See Armour and Frisby, ‘Rethinking Receivership’; Ferran, ‘Duties of an Administrative Receiver’.

134Armour and Frisby, ‘Rethinking Receivership’; I. Grier and R. E. Floyd, Voluntary Liquidation and Receivership (3rd edn, Longman, London, 1991) p. 184.

135Insolvency Act 1986 Sch. B1, paras. 51–3. On administration see ch. 9 below.

136DTI/Insolvency Service, Insolvency – A Second Chance, p. 9.

there is no appropriate regime of access and input into decision-making for such potentially prejudiced parties. Indeed, in a climate of concern with corporate governance issues and stakeholder interests,137 the system of receivership could be said to raise serious governance considerations in that it allows a number of companies to be handed over and dealt with by one interested party with little or no concern for other claimants.138

It is clear, moreover, that there was particular concern about such unfairness in the lead up to the Enterprise Act 2002. The Insolvency Service noted in 2000 that a number of the respondents to its consultation were worried that the floating charge and administrative receivership placed too much power in the hands of one creditor and caused unfairness in so far as there was no incentive for the floating charge holder to consider the interests of any other party; the floating charge holder could take decisions having a significant impact on returns to other creditors without there being any requirement for their consent; the administrative receiver owed a duty of care to the floating charge holder and not to creditors in general; and, unlike in other procedures, the cost of administrative receivership would fall on unsecured and preferential creditors if there were surplus funds over and above those needed to discharge the secured creditor’s debt.139 On the last point, research by Franks and Sussman for the IS140 noted that the costs of receivership are significant and tend to be borne by the bank ‘only in the minority of cases in which they recover less than 100 per cent’, and that when the bank is paid in full ‘the junior creditors are effectively paying the cost of realising the bank’s security’. As for the quantum of such costs, the White Paper of 2001 noted that ‘unsecured creditors have no right to challenge the level of costs in a receivership, even though they have an identifiable financial interest where there are sufficient funds to pay the secured creditor in full’.141 That said, however, the more recent evidence

137See, for example, the Company Law Review Steering Group’s Consultation Documents:

Modern Company Law for a Competitive Economy: The Strategic Framework, URN 99/ 654 (February 1999) and Developing the Framework, URN 00/656 (March 2000).

138Milman and Mond, Security and Corporate Rescue, p. 48.

139See IS 2000, p. 15. See also Davies, ‘Employee Claims in Insolvency’, p. 150: ‘The promotion of rescues as distinct from the promotion of banks’ interests in rescues, requires the decision as to the best way of realising the company’s assets to be taken in the general interests of the company’s creditors and not by the agent of one particular type of creditor.’

140IS 2000, pp. 16–19. 141 DTI/Insolvency Service, Insolvency – A Second Chance, p. 9.

suggests that the costs of receivership tend to be lower than those of the ‘new’ administration to the extent that this compensates for any lower levels of recovery for creditors.142

Floating charge holders might argue that receivership is fair because they have paid for their right to appoint a receiver in so far as they have lowered interest rates in reflection of the easy enforcement and risk control that such a right gives them. The banks, furthermore, may suggest that they charge very low margins on secured loans while trade creditors’ gross profit margins may be anything up to 50 per cent, ‘so

the latter’s losses will be offset by the higher profits they made when the company was trading profitably and paying its debts’.143 It may be

responded, however, that many unsecured creditors are simply in no position to negotiate security arrangements, that typically they lack the bank’s knowledge of the company’s financial position, that markets often do not allow high profit margins, that the institution of receivership offers a ready means for the better placed banks to exploit their positions, and that the interest rates charged by the floating charge holders are excessively profitable because risks are loaded onto unsecured creditors.

The concerns of trade and expense creditors are reinforced by the work of Franks and Sussman which has found that bank rescues often lead to a rise in debts due to such creditors while the indebtedness to the bank decreases. Their 2000 research for the IS suggested that, during bank intensive care periods, the debt owed to the bank tends to contract (by averages, for the three banks involved in the study, of 34 per cent, 19 per cent and 45 per cent respectively where the ‘rescue’ is successful and the company returns to the branch, and by averages of 15 per cent and 8 per cent for Banks 1 and 2 where the company moves to a debt recovery unit) whilst trade credit expands modestly.144 Later figures, published in 2005, indicate that bank lending in periods of intensive bank support tends to contract by between 30.8 and 43.3 per cent while trade credit tends to grow by between 11.1 and 32.6 per cent.145

142See Frisby, Insolvency Outcomes; Armour, Hsu and Walters, Report for the Insolvency Service. Frisby argues that unsecured creditors are not prejudiced by the receiver’s prioritisation of his appointor’s welfare in the majority of cases: see Frisby, Returns to Creditors, 2007, p. 30.

143IS 2000, p. 18.

144IS 2000, p. 17. ‘If formal insolvency ensues the bank will recover anything between 60–80 per cent of its indebtedness whilst trade creditors will recover nothing’: ibid.

145Franks and Sussman, ‘Financial Distress and Bank Restructuring’, p. 85.