Parliament established administration in pursuit of the survival of the enterprise and that the company’s survival was not a legitimate objective in view. Section 8(3)(a) of the 1986 Act stated explicitly that an administration order could be made for the purpose, inter alia, of ‘the survival of the company and the whole or any part of its undertaking as a going concern’. It seems, accordingly, hard to deny the legitimacy of shareholder interest in administration.

To summarise the discussion thus far, administration (between the Insolvency Act 1986 and the Enterprise Act 2002) was a procedure that was oriented towards rescue as well as asset realisation but it underperformed in a number of respects when assessed on efficiency, expertise, accountability and fairness counts. Whether the 2002 reforms corrected such underperformance and whether administration has been reformulated in an improved guise are matters to which we now turn.

The Enterprise Act reforms and the new administration

By 2000, the Insolvency Service Review Group had come firmly to the view that reform of administration was necessary – principally to remove its vulnerability to the actions of floating charge holders: ‘Our firmest recommendation is that the law should be changed to remove the right enjoyed by the holder of the floating charge to veto the making of an administration order, thus bringing the position in administration in line with that proposed for the moratorium in a CVA.’80 By July 2001, the Government had endorsed this proposal in its White Paper on Productivity and Enterprise81 and legislative steps followed when the Enterprise Act was passed in 2002. This Act came into force on 15 September 2003 and substituted the original Part II of the 1986 Act with a new Part II, the provisions of which are set out in a new Schedule B1 to the 1986 Act.82 The effect was to make administration

80IS 2000, p. 21.

81White Paper, Productivity and Enterprise: Insolvency – A Second Chance (Cm 5234, July 2001) para. 2.15.

82Hereafter references to Sch. B1 will be referred to as ‘para. …’. Note, however, that the ‘old’ administration procedure survives in relation to a number of categories of public utility company and to building societies: EA 2002 s. 249. It also survives where an administration order petition was presented to the court before 15 September 2003 (SI 2003/2039, art. 3(2)).

rather than administrative receivership the governmentally preferred procedure for attempting to rescue troubled companies.83 The new law prohibits (subject to stated exceptions) the use of administrative receivership by the holder of a qualifying floating charge (QFC).84 Instead, the EA provides for the general enforcement of floating charges to be carried out through use of the administration process. The EA streamlines administration by introducing an out-of-court appointment procedure85 and by abolishing the need for the administrator’s Rule 2.2 report.86 After the EA 2002 there are, accordingly, three methods by which an administrator can be appointed: by the court on the application of the company, its directors, one or more of the company’s creditors or a combination of these parties;87 out of court on the application of the holder of a qualifying floating charge;88 and out of court on the

83For HM Treasury proposals for a special insolvency regime for UK banks (made in the wake of the Northern Rock crisis) see: HM Treasury, Banking Reform – Protecting Depositors: A Discussion Paper (HM Treasury, London, 2007). See now the Banking (Special Provisions) Act 2008 (to be replaced: see Banking (No. 2) Bill (HL, 4 December 2008).

84Insolvency Act 1986 s. 72A. The general prohibition applicable to holders of ‘qualifying floating charges’ is subject to six exceptions relating to capital markets: see ss. 72B–72G of the IA 1986 and ch. 8 above. Transactions that predate the implementation of the EA 2002 will still allow holders of qualifying floating charges both to appoint administrative receivers and to block the appointment of an administrator.

85I.e. on the application of the holder of a qualifying floating charge (IA 1986 Sch. B1, paras. 14–21) and on the application of a company or a company’s directors (IA 1986 Sch. B1, paras. 22–34).

86See p. 370 above. Under the ‘old’ administration procedures an application to the court for administration was invariably accompanied by an independent report from the proposed administrator: Insolvency Rule 2.2. Note, however, that even though there is no longer a requirement to prepare a Rule 2.2 report, IPs are still under an obligation to make a statement that it is reasonably likely that ‘the purpose of the administration’ will be achieved (Sch. B1, paras. 18(3), 29(3), r. 2.33(2)(m), as applicable). See r. 2.33

for the list of matters the administrator is required to include regarding his proposals for the administration, some of which could be said to be ‘unrealistic’: H. Sims and N. Briggs, ‘Enterprise Act 2002 – Corporate Wrinkles’ (2004) 17 Insolvency Intelligence 49 at 50.

87IA 1986 Sch. B1, paras. 11–13. If the directors, company or secured creditor want to ensure that the administrator’s appointment will have extraterritorial effect under the EC Regulation on Insolvency Proceedings 2000 (1346/2000), they should use the courtapplication route: see G. Moss, ‘On the Edge of Non-Recognition? Appointment of Administrators under the Enterprise Act and the EC Regulation’ (2004) 17 Insolvency Intelligence 13.

88IA 1986 Sch. B1, paras. 14–21.

application of a company or a company’s directors.89 The court may only make an order (under paragraph 11) if it is satisfied that the company is or is likely to become unable to pay its debts (paragraph 11(a)) but this requirement does not apply in the case of applications to court or out-of- court applications by holders of qualifying floating charges.90 Inability, or likely inability, to pay debts is a prerequisite for out-of-court appointments by the company or by directors (under paragraph 22).91

The EA lays down the objectives to be pursued and the purpose of administration in paragraph 3 of the new Schedule B1 of the Insolvency Act 1986.92 Paragraph 3(1) states that the administrator of a company must perform his functions with the objective of (a) rescuing the company as a going concern, or (b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first going into administration) or (c) realising property in order to make a distribution to one or more secured or preferential creditors. The first stated objective is to rescue the company as a going concern.93 The administrator must act to pursue objective (a) unless he thinks either that it is not reasonably practicable to achieve that objective or that the objective set out in (b) would achieve a better result for the company’s creditors as a whole.94 The

89Ibid., paras. 22–34. Note that with regard to FSA-authorised companies the FSA’s written consent is needed. On IPs’ responsibilities under the Financial Services and Markets Act (FSMA) 2000 see further C. Rafferty and O. Gayle, ‘Financial Services and Markets Act 2000: Considerations for the IP’ (2007) Recovery (Summer) 35.

90IA 1986 Sch. B1, paras. 35(1)(a); 35(2)(a).

91See para. 27(2)(a) involving a statutory declaration as to the company’s inability to pay debts.

92I.e. EA 2002 s. 248 ‘substitutes’ the four statutory purposes for which an ‘old’ administration order could be obtained under the IA 1986 s. 8(3) with paragraph 3 of Sch. B1. The decision of DKLL Solicitors v. HMRC [2007] BCC 908 shows that the purpose of the administration is a self-standing test rather than a function of the wish of creditors, even if they control the voting at the creditors’ meeting at which the administrator’s proposals might come to be considered: see S. Frisby, ‘Judicial Sanction of Insolvency Pre-Packs? DKLL Solicitors v. HMRC Considered’ (2008) 27 Company Law Newsletter 1; S. Frieze, ‘Round-up of Some Recent Cases on Administration’ (2008) 21 Insolvency Intelligence 14.

93The Explanatory Notes to the Enterprise Act 2002 (ch. 40) refer to the ‘company and as much of its business as possible’ (para. 647). Rescuing the company as a going concern may also involve the creditors agreeing to a CVA or Scheme of Arrangement: see S. Elboz, ‘Exiting Administration – Railtrack and the Future’ (2002) IL&P 187, 189; R. Pedley, ‘The Enterprise Bill’ (2002) IL&P 123; M. Phillips and J. Goldring, ‘Rescue and Reconstruction’ (2002) Insolvency Intelligence 76 at 76.

94The administrator, in the absence of some special relationship, owes no general common law duty of care to (individual) unsecured creditors regarding the conduct of the administration: see Kyrris v. Oldham [2004] BCC 111, [2004] 1 BCLC 305. See further pp. 444–6 below.

objective set out in (c) is only to be pursued if he thinks that it is not reasonably practicable to achieve either (a) or (b) and the administrator does not unnecessarily harm the interests of the creditors of the company as a whole. Subject to the provisions governing the pursuit of (c), the administrator is to pursue his functions ‘in the interests of the company’s creditors as a whole’ (paragraph 3(2)). The effect of the above is that the administrator is not obliged to rescue the company at all costs.95 The tension between protecting the company and protecting the business is managed by paragraph 3(3) and notably by 3(3)(b), which stipulates that rescuing the company gives way to arrangements that would give a better result for the creditors as a whole. This gives primacy to saving the business where this gives the better result for creditors.96

The administrator acts as the company’s agent and has an impressive range of powers to assist him in doing ‘anything necessary or expedient for the management of the affairs, business and property of the company’.97 These powers are listed in Schedule 1 and in paragraphs 61–3 and 70–3 of Schedule B1 of the Insolvency Act 1986 and the administrator must use these statutory powers to aid his management of the company in accordance with any proposals which have been approved by a meeting of creditors or in accordance with any directions given by the court.98 As an officer of the court, the administrator is under a duty to act in good faith, with independence, impartiality and loyalty, and not to

95Compare with ‘the hierarchy of objectives’ found in para. 3 of Sch. B1 of the Enterprise Bill under which it ‘was clear that administration was first and foremost about rescuing the corporate entity’: see Phillips and Goldring, ‘Rescue and Reconstruction’, p. 76.

96As noted above, the Explanatory Notes to the Enterprise Act 2002 state that ‘rescuing the company as a going concern’ is intended to mean ‘the company and as much of its business as possible’ (para. 647). Rescuing the company alone/simply allowing the survival of the corporate shell will thus not satisfy this objective: see further Phillips and Goldring, ‘Rescue and Reconstruction’; S. Frisby, ‘In Search of a Rescue Regime: The Enterprise Act 2002’ (2004) 67 MLR 247, 262–3.

97See Sch. B1, para. 69; para. 59(1).

98See Sch. B1, para. 68. Administrators are under no obligation to dispose of assets in a particular manner but there is a duty to maximise realisations. Assets should therefore be the subject of a professional independent valuation and the prudent administrator would seek the views of the creditors’ committee, if there is one, where practicable to do so. See

Coyne and Hardy v. DRC Distribution Ltd and Foster [2008] BCC 612 where the Court of Appeal, inter alia, comprehensively analysed the actions of the administrators and set out guidelines as to what is expected of office holders when undertaking their work. According to Rimmer LJ, the administrators’ conduct ‘had the potential for disaster written all over it; and disaster is what happened. As the judge said, they “did not act expeditiously and with the robustness of purpose that one would have hoped for and which [one] is entitled to expect”.’

act dishonourably or unfairly.99 Also, as discussed below,100 the administrator must act rationally and thus, in exercising a discretion or discharging a duty, must act in the way that a reasonable administrator would act.101

The EA may shift English law in the direction of US Chapter 11 but it does not go the whole way. Administration involves handing control of the company to an outsider – the insolvency practitioner (IP) – and is thus not a debtor in possession (‘DIP’) system. Furthermore, unlike the US position, secured creditors cannot be ‘crammed down’ and compelled to accept a reorganisation plan against their wishes.102 Nor does the EA provide a US-style mechanism for financing companies in financial difficulties – a matter to be returned to below. As for timings, the EA limits the duration of the administration to twelve months.103

An important aspect of administration is that there is a moratorium, which frees the company temporarily from harassment by creditors.104 The moratorium available under the ‘new’ administration105 is

established in much the same form as found in the earlier provisions of the IA 1986106 and the pre-EA case law is thus relevant to the construc-

tion of the new provisions.107 In the post-EA administration process there are two types of moratoria – a moratorium for the period the company is in administration108 and an interim moratorium pending

99 Ex parte James (1874) 9 Ch App 609: see D. Milman, ‘The Administration Order Procedure’ (2002) 17 Company Law Newsletter 1 at 3. It is as yet unclear whether the administrator is to be deemed a ‘public authority’ for the purposes of the Human Rights Act 1998 s. 6: see further Lightman and Moss, Law of Administrators, pp. 236–41.

100See pp. 446–51 below. The administrator is both a statutory office holder and an agent of the company owing fiduciary obligations to it: see further Lightman and Moss, Law of Administrators, pp. 246–59.

101See Re Edennote Ltd [1996] 2 BCLC 389, 394–5 combined with Edge v. Pensions Ombudsman [2000] Ch 602, 627–31: cited in Lightman and Moss, Law of Administrators, p. 246 at note 94. On regulating the administrator’s conduct and rendering him liable see Sch. B1, paras. 74 and 75; Re Charnley Davies Ltd [1990] BCC 605 (regarding the scope of IA 1986 ss. 27 and 212 – the similar provisions relating to the ‘old’ administration) and discussions at pp. 444–51 below.

102See G. McCormack, ‘Super-priority New Financing and Corporate Rescue’ [2007] JBL 701; ch. 6 above.

103Subject to agreed extensions: see para. 76.

104See A. Keay and P. Walton, Insolvency Law: Corporate and Personal (2nd edn, Jordans, Bristol, 2008) p. 106.

105Sch. B1, paras. 42 and 43.

106IA 1986 ss. 10 and 11.

107See Lightman and Moss, Law of Administrators, p. 581. See also pp. 376–8 above.

108Para. 43.