Society as a whole may also complain about the unfairness of receivership since this is a regime that does not aim to maximise overall social benefit: its purpose is merely to secure a return to the debenture holder. This would be an empty complaint if it could be argued with conviction that receivership brings overall benefits to society because, for example, debenture holder monitoring is generally effective in protecting interests across the range of corporate creditors and stakeholders. As we have seen, however, it is difficult to make out the case that such benefits are achieved. The Insolvency Service made the point in 2000 that a number of problems bedevil consumers of different insolvency regimes, notably the difficulty of assessing the impact of different insolvency procedures while making allowance for other factors such as the selection that takes place before a company enters a particular procedure and the stage in corporate decline at which resort is made to a procedure.146

Revising receivership

As far back as the Cork Committee’s deliberations, the institution of receivership was the focus of complaints: ‘mainly from or on behalf of ordinary unsecured creditors who are highly critical of the apparent lack of concern for their interest when the receiver has been appointed’.147 Cork noted such, and other, concerns148 but was unconvinced of the need for radical reform.149 The Committee took the view that it would be wrong to make the receiver specifically accountable to anyone, even the debenture holder, if that would involve a requirement to take instructions.150 The receiver, said Cork, owes fiduciary duties to the debenture holder and duties to the charge holder and company to exercise reasonable care to obtain proper prices for property and to preserve the goodwill of the business. Statutory obligations were also owed to preferential creditors. Cork’s overall view was that incidences of damage to third parties in receivership were few in number and it would be ‘wrong and

146IS 2000, p. 18. For studies comparing the performance of different regimes see Armour, Hsu and Walters, Report for the Insolvency Service; Frisby, Insolvency Outcomes; Franks and Sussman, ‘Financial Distress and Bank Restructuring’.

147Cork Report, para. 436. 148 Ibid., paras. 437–9.

149For a personal account of the benefits of receivership see K. Cork, Cork on Cork: Sir Kenneth Cork Takes Stock (Macmillan, London, 1988). On Cork’s ‘exaggerated representation of the virtues of receivership’ see McCormack, ‘Receiverships and the Rescue Culture’, p. 236.

150Cork Report, para. 444.

unhelpful’ to treat receivers as merely the nominees of appointors.151 Cork cautioned that if receivers had to have regard to a statutory list of matters and interests, ‘the effectiveness of the floating charge would be seriously weakened’152 since creditors would be driven to early enforcement of fixed securities, to greater use of hybrid forms of security (e.g. fixed charges on future book debts)153 and to direct enforcement of the security without the appointment of a receiver. None of these steps, the Committee urged, would advance the conduct of trade generally or the interests of unsecured creditors. Such a list of matters and interests to be considered might also increase opportunities for ‘expensive and delaying litigation’ without benefit to unsecured creditors.

As to the idea that statute law should make receivers accountable to all the creditors, secured and unsecured, Cork responded that this again would drive prospective lenders away from floating charges into other alternatives.154 If such difficulties were anticipated and receivers were bound to have regard to priorities inter se when looking to protected interests, this again would lead to unhelpful legal challenges, delays and expenses. Cork, accordingly, was unwilling to introduce any fundamental reform of the law to change receivers’ accountability and summarised:

It is an undoubted virtue in the eyes of those who appoint them, that receivers can act economically, swiftly and with little danger of successful challenge before the event. A statutory provision of the kind now under consideration offers potential detriment to the holders of floating charges without, it seems to us, any real advantage to anyone else.155

In the new millennium, however, matters were viewed differently and a consensus had developed that administrative receivership was questionable as a way to maximise economic value and was also inconsistent with those notions of collectivism that ought to operate when a company entered insolvency. In 2001 the Blair Government announced that, on grounds of both efficiency and equity, the time had come ‘to make changes which tip the balance firmly in favour of collective insolvency proceedings – proceedings in which all creditors participate, under

151 Ibid., para. 446. 152 Ibid., para. 447. 153 Ibid., para. 449.

154For arguments that the Enterprise Act 2002 has produced such a shift towards more complex and fragmented forms of credit see Armour, ‘Should We Redistribute in Insolvency?’; Armour, Hsu and Walters, Report for the Insolvency Service, p. iii; Frisby, Insolvency Outcomes.

155Cork Report, para. 451.

which a duty is owed to all creditors and in which all creditors may look to an office holder for an account of his dealings with a company’s assets’.156 The lack of fit between the collective approaches of international law and administrative receivership was also noted157 and the Government stated that it believed ‘that administrative receivership should cease to be a major insolvency procedure’.158

The Insolvency Service had proposed restricting the use of receivership and developing a more effective and flexible administration procedure and the Enterprise Act 2002 (EA) made the necessary changes. That Act made administration, rather than administrative receivership, the governmentally preferred procedure for attempting to rescue troubled companies. The EA prohibits (subject to stated exceptions) the use of administrative receivership by the holders of floating charges.159 Instead, the EA provides for the general enforcement of floating charges to be carried out through use of the administration process – a process in which the administrator differs from the traditional receiver in so far as he is charged to pursue his functions ‘in the interests of the company’s creditors as a whole’.160 The exceptions to the prohibition are not, however, trivial. Secured creditors holding charges created before 15 September 2003 retain, as noted, the right to appoint an administrative receiver and, in addition, a large range of specialist financing arrangements allow the possibility of administrative receivership.161

156DTI/Insolvency Service, Insolvency – A Second Chance, ch. 2, para. 2.3. On collectivisation improving the prospects of UK creditors in international insolvencies, see Editorial, ‘A Radical New Look for Insolvency Law’ (2002) 23 Co. Law. 1.

157The European Insolvency Regulation came into force on 31 May 2002 to provide for automatic recognition by all EU Member States of EU compliant collective proceedings: Council Regulation (EC) No. 1346/2000 (29 May 2000) on Insolvency Proceedings [2000] OJ L 160/1. Receivership was viewed by negotiators as non-compliant: see Armour, Hsu and Walters, Report for the Insolvency Service, p. 6.

158DTI/Insolvency Service, Insolvency – A Second Chance, p. 10. See also R3 Ninth Survey which noted the declining use of receivership over the years surveyed. Receivership accounted for 6.6 per cent of all insolvency proceedings in the Ninth Survey, 8.8 per cent in the Eighth (SPI) Survey and 14.4 per cent in the Seventh (SPI) Survey.

159Insolvency Act 1986, s. 72A.

160Ibid., Sch. B1, para. 3(2).

161These are itemised in ss. 72B–72G of Insolvency Act 1986, as supplemented by the Insolvency Act 1986 (Amendment) (Administrative Receivership and Capital Markets) Order 2003 (SI 2003/1468) and the Insolvency Act 1986 (Amendment) (Administrative Receivership and Urban Regeneration etc.) Order 2003 (SI 2003/1832). The six exceptions relate to capital market arrangements, public/private partnerships, utilities projects, project finance, certain financial market contracts and registered social landlords/housing authorities. The aim of these exceptions, however, is arguably to deliver the same outcome as was sought to be

The wisdom of moving away from receivership perhaps remains to be seen as the performance of the administration procedure becomes assessable over time. Cork’s fears perhaps hang in the air: that weakening floating charge holders’ powers and widening obligations to creditors will cause increased delays and expenses and will drive lenders to the early enforcement of fixed securities, to greater use of hybrid forms of securities and to direct enforcement of their security.162

Conclusions

Receivership has proved to be a contentious process and one that has

largely given way to the post-Enterprise Act 2002 administration procedure.163 This is not to say that the positions of the banks and other

traditional floating charge holders have been entirely weakened. Under the 2002 Act the holders of ‘qualifying’ floating charges are ‘fast tracked’ into administration in so far as they can apply out of court for an administration order164 without the need for a Rule 2.2 report.165 The

achieved through the Enterprise Act changes. Thus ‘the purpose of appointing an administrative receiver in capital market arrangements, public–private partnership projects, utility projects and financed project companies is to ensure the continuation of the income stream, protecting the provision of the public service or completion of the project. This results in the company continuing to trade and thereby the interests of the secured creditors and the ordinary unsecured creditors are catered for in a mutually beneficial way’: S. Leinster, ‘Policy Aims of the Enterprise Act’ (2003) Recovery (Autumn) 27 at 28. See also Feetum and Others v. Levy and Others [2005] BCC 484 regarding an (unsuccessful) attempt to uphold the appointment of an administrative receiver under the ‘project exception’ of s. 72E of the Insolvency Act 1986 as amended: see further G. Stewart, ‘Legal Update’ (2005) Recovery (Summer) 6, p. 7.

162Cork Report, paras. 449–50. It has been argued that the Enterprise Act 2002’s new scheme and virtual abolition of receivership effectively heralds the demise of the floating charge: see R. Mokal, ‘The Floating Charge – An Elegy’ in S. Worthington (ed.), Commercial Law and Commercial Practice (Hart, Oxford, 2003). For a contrary view arguing, inter alia, that the floating charge still facilitates ‘concentrated creditor control even without receivership’ see Armour, ‘Should We Redistribute in Insolvency?’, p. 215.

163In 2006 there were ‘barely’ 500 cases of receivership recorded: see D. Milman, ‘Corporate Insolvency Law: An End of Term Report’ (2007) Sweet & Maxwell’s Company Law Newsletter (August).

164See Insolvency Act 1986 Sch. B1, paras. 14–21.

165See Insolvency Rules 1986 r. 2.2. Under the ‘old’ administration procedures an application to the court for administration was invariably accompanied by an independent report from the proposed administrator: r. 2.2. These reports were not mandatory but tended to be viewed as carrying considerable weight: see Re Newport County Association Football Club Ltd [1987] BCC 635. See also Practice Note (Administration Order Applications: Independent Reports) [1994] 1 WLR 160 which attempted to cut the length and application (and thus the costs) of these reports.

banks, which routinely use floating charge security, have, moreover, been offered a sweetener for giving up receivership in so far as the 2002 Act abolishes the Crown’s status as preferential creditor.166 Banks may, nevertheless, be expected to object that the effect of the Enterprise Act 2002 changes is to force them to secure their investments increasingly on fixed assets, which will raise the cost of capital and reduce the flexibility of financing arrangements.

Receivership, it should be emphasised, is a process that can still operate for some time because of exemptions and pre-2003 floating charges.167 It is nevertheless viewable now as something of an anachronism and out of tune with modern, and international, endorsements of collectivism. Receivership was criticisable on a number of fronts, notably on grounds of fairness and accountability, but whether its replacement with administration will produce the efficiency losses that Cork associated with dispersed creditor obligations will, as noted, remain to be seen. It is, indeed, to the virtues and vices of the new administration procedure that we now turn.

166Enterprise Act 2002 s. 251. On preferential creditors see ch. 14 below.

167For evidence of continuing judicial support for the institution of receivership see

Brampton Manor (Leisure) v. McLean Ltd [2007] BCC 640; OBG Ltd v. Allan [2007] 2 WLR 920; Milman, ‘An End of Term Report’, p. 2.