wound up on grounds of public interest during the course of an administration.146

Evaluating administration

The introduction of a new administration procedure raises a host of questions concerning its value as a rescue process and its costeffectiveness, as well as its amenability to the exercise of expertise, its accountability and its fairness. It is now time to turn to these matters and, inter alia, to consider the findings of the valuable research that the Insolvency Service has undertaken or commissioned regarding different aspects of these matters.147

Administration and rescue: efficiency issues

Use, cost-effectiveness and returns to creditors

An aim of the EA was to promote the use of administration rather than receivership148 and this objective has been achieved. The number of annual administrations rose from 649 in 2002–3 to 2,661 in 2005–6 at a time when total numbers of corporate insolvencies dropped slightly (from 17,810 to 16,907) and this represented a rise in administration as the procedure employed in instances of insolvency from 3.6 per cent

to 15.7 per cent.149 Receiverships, in the same period, fell from 1,310 to 565.150 One reason for the popularity of the new procedure may

have been the new streamlined out-of-court route of entry into

146Ibid., para. 82(1)(a).

147See, notably, Insolvency Service, Enterprise Act 2002 – Corporate Insolvency Provisions: Evaluation Report (Insolvency Service, London, 2008) (‘Insolvency Service Evaluation, 2008’); S. Frisby, Interim Report to the Insolvency Service on Returns to Creditors from Preand Post-Enterprise Act Insolvency Procedures (Insolvency Service, London, 2007) (‘Frisby, Returns to Creditors, 2007’); J. Armour, A. Hsu and A. Walters, Report for the Insolvency Service: The Impact of the Enterprise Act 2002 on Realisations and Costs in Corporate Rescue Proceedings (Insolvency Service, London, 2006) (‘Armour, Hsu and Walters, 2006’); S. Frisby, Report to the Insolvency Service: Insolvency Outcomes

(Insolvency Service, London, 2006) (‘Frisby, Report, 2006’); A. Katz and M. Mumford,

Report to the Insolvency Service: Study of Administration Cases (Insolvency Service, London, 2006) (‘Katz and Mumford, 2006’).

148The EA was not retrospective and holders of qualifying floating charges (QFCs) created before 15 September 2003 can still appoint administrative receivers.

149And to 17.2 per cent in the first quarter of 2007: Insolvency Service Evaluation, 2008, p. 23.

150Ibid., p. 11. These figures are consistent with the findings of Katz and Mumford, 2006.

administration. This proved immediately attractive, especially in relation to smaller enterprises,151 so that, in 2003–4, 65.5 per cent of entries into administration were by this route compared to 29.8 per cent by court order.152 The EA also sought to speed up administrations by introducing a time limit of one year, creating defined exit routes153 and demanding that administrators complete their functions as quickly and efficiently as is reasonably practicable.154 Again, the objective seems to have been

achieved, with average durations of administration dropping from 438 days for pre-EA cases to 348 for post-EA cases.155

On whether the new procedure conduces to rescue, the Insolvency Service’s conclusion is that the overall outcomes of administrations, in terms of corporate and business rescue, appear to be largely unchanged from those associated with administrative receivership and there appear to be proportionately fewer ‘rescues’ than under the previous administration regime – though more in absolute numbers.156

As for the costs of administration, direct entry expenses may have been lowered but the overall average costs of the more collective processes of administration appear to be higher than for administrative receivership.157

The realisations in post-EA administrations have been found to be significantly higher than in pre-EA receivership cases – especially in instances where the corporate assets were worth more than the secured creditor was owed.158 This supports the view that the duty of the administrator to act in the interests of all the creditors is impacting on total realisations.159 The beneficial effects of such increases may, however, be enjoyed more by professionals than by creditors. Armour, Hsu and Walters found that the direct costs of administrations (primarily IP

151See N. Hood, ‘How the Enterprise Act is Helping to Preserve Businesses’ (2005) Recovery (Spring) 14 at 15: ‘the advisors of most cash-strapped SMEs shied away from going to court to get protection’.

152Frisby, Report, 2006. The instituting actions in 70.6 per cent of these cases were taken by directors, 10.6 per cent were taken by the company and 18.1 per cent by a charge holder.

153See Sch. B1, paras. 79, 80, 81, 82. 154 Sch. B1, para. 4.

155Frisby, Report, 2006; Insolvency Service Evaluation, 2008, p. 55.

156Insolvency Service Evaluation, 2008, p. 5 – though noting evidence of ‘liquidation substitution’ whereby administration is used in circumstances that formerly involved resort to liquidation (p. 6). This is consistent with Armour, Hsu and Walters, 2006. See further pp. 396–7 below.

157Insolvency Service Evaluation, 2008, Section 3.9.

158Armour, Hsu and Walters, 2006. 159 Ibid.

and legal fees) were significantly higher in post-EA administrations than in pre-EA receiverships and that this generally occurred when the senior charge holders were over-secured (and, it seems, lacking incentives to monitor professional costs).160 Such were these costs that the impact of increased recoveries in administrations had been negated by increased costs and fees so that there had been no resultant increase in returns to creditors.161 Frisby has issued updated research suggesting that returns to secured and preferential creditors have improved in post-EA administrations but ‘unsecured creditors do not yet appear to be benefiting from the Act’.162 Her figures show that, comparing post-EA administrations with pre-EA receiverships, average returns to secured creditors rose from 29.3 per cent to 34.6 per cent and unsecured creditors rose from 1.9 per cent to 2.8 per cent. Unsecured creditors’ returns from preand post-EA administrations, however, fell from 6.7 per cent to 2.8 per cent.163

The Insolvency Service responded to issues of process costs in late 2007 by issuing a consultation paper setting out proposals for streamlining insolvency procedures.164 Of the eight proposals involved, two may have a bearing on administration processes: first, to modernise and make more flexible the means of communication and the exchange of information between office holders and creditors165 and, second, to remove the

160Ibid.

161Ibid. Katz and Mumford, 2006, state at p. 49: ‘there appears at this stage to be no strong grounds for either celebrating or regretting the substitution of administration for administrative receivership’.

162Frisby, Returns to Creditors, 2007.

163Ibid., noted in the Insolvency Service Evaluation, 2008, p. 155. Frisby suggests that this drop may be due to ‘receivership substitution’ (use of administration in circumstances formerly using receivership), ‘liquidation substitution’ and the rise of pre-packaged administrations – where the price for a business is discounted.

164Insolvency Service, A Consultation Document on Changes to the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 to be made by a Legislative Reform Order for the Modernisation and Streamlining of Insolvency Procedures (IS, London, 2007). See further ch. 13 below.

165By, for example: introducing a provision requiring creditors to ‘opt in’ if they wish to receive information issued by the insolvency office holder during the conduct of the proceedings; updating insolvency legislation to make it explicit that communication can be effected electronically where the legislation requires it to be ‘in writing’; enabling insolvency office holders to provide information by sending a link to a website on which information is posted; and providing a legislative framework that will allow insolvency office holders to hold meetings which are required to be held as part of their conduct of insolvency cases through media other than meetings held at a physical venue. It is noteworthy here that, in Re Sporting Options plc [2005] BCC 88, the administrators were not allowed to serve notice of appointment and proposals to creditors by email: see further ‘Administrators: Electronic Communication with Creditors’ (2006) 19

requirement for any document in insolvency proceedings to be sworn by affidavit and to replace it with a less burdensome requirement. It remains to be seen whether, post-consultation, the above steps will be introduced in a form that significantly reduces the costs of administration.

Will administration continue as a popular insolvency process or will its expense and complexity prompt a revival of other procedures such as the Law of Property Act 1925 (LPA) receivership (which allows holders of charges over particular assets to appoint receivers)?166 For a large lender, administration involves not merely intricate procedural burdens (including notification requirements and the pressure imposed by a year’s deadline for completion) but also a duty on the administrator to act in the interests of creditors as a whole.167 There are, however, advantages of using the qualifying floating charge (QFC) and administrator route, and these include: a right to receive five days’ notice of any directors’ or company’s application to court for an administration order or out-of-court appointment; a right to at least two days’ notice of an intended appointment of an administrator by a junior holder of a QFC; and a right to apply for the appointment of their own nominee that will prevail over the nominating rights of non-QFC holders (for example, the company, its directors or its creditors). The administrator route also allows the QFC holder to apply for the appointment of an administrator when a winding-up order has been made and to benefit from the administrator’s significant legal powers as well as the statutory moratorium.

If resort is made to fixed security and the LPA route, the lender will be aware that, if an LPA receiver is appointed, they can be required to vacate office by a subsequently appointed administrator – and, on such appointment, the lender will not be able to act further to enforce their security

Insolvency Intelligence 15. The present terms of reference to the Insolvency Rules Committee include a direction to review and, if thought appropriate, recommend the modernisation of the Insolvency Rules to allow for the greater use of electronic disclosure. The Insolvency Service is undertaking a general restructuring of the Insolvency Rules 1986 and substantive changes are being made. The final implementation of the consolidation of insolvency secondary legislation and the restructuring of the Rules has been subject to delay and, at the time of writing, is expected on 1 October 2009. See G. Davis, ‘The Role of the Insolvency Rules Committee’ (2007) 20 Insolvency Intelligence 65; P. Bailey, ‘The Insolvency (Amendment) Rules 2005 – Yet More Changes for Insolvency Folk’ (2006) 19 Insolvency Intelligence 24.

166See L. Verrill, ‘The Use of LPA Receiverships’ (2007) 20 Insolvency Intelligence 160; R. Connell, ‘Enterprising Receivers’ (2003) Recovery (Spring) 20; ch. 8 above.

167On the confusions arising from the terms of the new administration see S. Gale, ‘Insolvency Law Post Enterprise Act: Does It Do What It Says on the Tin?’ (2007) Recovery (Autumn) 34.

without the consent of the administrator or the consent of the court. A receiver will lack the investigative powers of an administrator and will not have the protection of the moratorium against forfeiture, execution or legal proceedings. The LPA receiver, moreover, will become personally liable regarding contracts entered into (subject to the right of indemnity). A fixed, rather than floating, charge is needed to trigger the LPA route and this may involve difficulties, notably the risk that the charge may be deemed floating168 and the commercial reality that using a fixed charge may impede the company’s commercial responsiveness.

An attractive aspect of administration has been said to be its potential as a substitute for liquidation.169 When a company is put into administration and then into liquidation, the once customary creditors’ meeting is bypassed. This is because companies can now appoint an administrator without the need for a court order and then, instead of creditors appointing a liquidator, the company makes the appointment. In liquidation, the identity of the office bearer rests primarily with the general body of creditors but, in administration, the company can make the appointment and unsecured creditors will have little input into selection of the office holder. This difference in control is likely to be to the advantage of directors and IPs rather than unsecured creditors.170 On the incidence of ‘liquidation substitution’, research by Katz and Mumford, published in 2006,171 found that in 14 per cent of post-EA

168See the discussion of Spectrum Plus at pp. 411–15 below.

169See L. Linklater, ‘New Style Administration: A Substitute for Liquidation?’ (2005) 26 Co. Law. 129; A. Keay, ‘What Future for Liquidation in Light of the Enterprise Act

Reforms?’ [2005] JBL 143. The Lords’ decision in Buchler v. Talbot [2004] 2 AC 298 held that, in contrast with administration, the expenses of liquidation were not recoverable from property subject to a floating charge. This ensured the popularity of administra-

tion until the Compa nies20A06ct s. 128 2 r eversed B u ch l e r and inserted a new s. 17 into the Insolvency Act 1986, providing that if the company’s assets available to meet

the claims of unsecured creditors are not sufficient to meet the expenses of winding up, those expenses have priority to and are to be paid out of any property subject to a floating charge created by the company.

170In El-Ajou v. Dollar Land (Manhattan) Ltd [2007] BCC 953, however, it was stated that, in the absence of economic advantage through using the administration procedure, the court favoured liquidation over administration due to the visible independence of the liquidators from those concerned with the company. In Re Lafayette Electronics Europe Ltd [2007] BCC 890 the court, in deciding to appoint joint administrators as joint provisional liquidators, was influenced by the fact that the administrators were effectively in office, were up to speed with the affairs of the company and did not need paying for reading into the company’s plight. The Insolvency Service has warned practitioners of its expectation that liquidation will be the usual exit route where rescue is not possible.

171Katz and Mumford, 2006, p. 5.