the PIP system is that greater or lesser roles can be given to directors according to assessments of their powers of judgement and expertise that are carried out by an independent generalist familiar with insolvency situations.

Fairness and accountability

If expert judgements concerning responses to corporate distress are to merit approval, they have to be made fairly and accountably. Here the post-EA regime might be expected to score high marks as it places an independent officer of the court in control.343 It also sets up open procedures that are designed to allow reasonable input to creditors344 and which hold administrators to account through creditors’ meetings345 as well as through the imposition of a series of legal duties.346 Such creditors’ meetings allow unsecured creditors to hold administrators to account in a way that was not possible in administrative receivership. It should be noted, however, that accountability to the creditors’ meeting is avoided where the administrator acts without reference to such a meeting in accordance with the terms of Schedule B1, paragraph 52(1)347 or acts in advance of such a meeting – subject to any court directions given under paragraph 68(2) of Schedule B1. In the former instances (which would occur when the administrator thinks, for example, that there are insufficient funds for a distribution to unsecured creditors) there would be no requirement of court approval and aggrieved creditors would only be able to hold that administrator to account by commencing proceedings in court.348 Some practitioners have, as noted, voiced particular

343The administrator, as noted, is an officer of the court and thus subject to the ethical requirements of the rule in Ex parte James (1874) 9 Ch App 609: see D. Milman, ‘The Administration Order Procedure’ (2002) 17 Company Law Newsletter 1, 3.

344See Hahn, ‘Concentrated Ownership’.

345See Insolvency Act 1986 Sch. B1, paras. 51–7.

346See J. Armour and R. Mokal, ‘Reforming the Governance of Corporate Rescue: The Enterprise Act 2002’ [2005] LMCLQ 28. On accountability in the new administration process see further Brupbacher, ‘Functional Analysis’, pp. 126–38.

347Under which, as noted, an administrator is not obliged to call a creditors’ meeting if he thinks that creditors can be paid in full; there is insufficient property for a distribution to unsecured creditors; or that it will not be possible to rescue the company as a going concern or achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up.

348Sch. B1, para. 74 governs challenges to the administrator’s conduct of the company by creditors or members. Para. 75 allows misfeasance actions against administrators by, inter alia, a creditor and the company does not have to be in liquidation for such an action to be commenced.

worries about the process in which a company can be put into administration out of court and then be converted into a creditors’ voluntary liquidation.349 As one expressed the concern: ‘Companies are put into administration for no other reason than to take advantage of the opportunity to put them into liquidation later without holding a creditors’ meeting.’350 In such scenarios another worry is that only a liquidator has a complete set of powers for dealing with wrongful and fraudulent trading and that use of the administration route may inhibit investigation of directorial actions because the directors may appoint an administrator out of court to realise and distribute assets and exit administration – all without the need to hold a meeting of creditors.351

In the modern distressed debt market, moreover, it can be argued that there are numbers of actors who are not so much interested in rescue as a fast return. As John Verrill, former president of R3, has stated:

The modus operandi of the new-style entrants into the distressed debt market is that they fund the administrator and provide the stock. Normally under the old regime the administrator would have to show the court that he had the financial backing or funding to achieve the purpose for which he was seeking the order … Now if a floating charge holder wants to appoint an administrator, he can do so without the old checks and balances and no independent verification by the court. A company can now buy the debenture off a creditor who would otherwise

be whistling for the money and then say to the administrator: ‘Do you want the job or not?’352

A system of practitioner in possession, as found in administration, could, however, be supported as avoiding the danger of unfairness or bias that comes from shareholder manipulation and which has been said to be

349A mechanism for converting new-style administration to a CVL is found in Sch. B1, para. 83. Alternatively, in less complex cases, the IP may wish to take advantage of the ability to pay all creditors whilst the company is in ‘new’ administration rather than moving to liquidation: see further Todd, ‘Administration Post-Enterprise Act’. See pp. 396–7 above.

350Nick Hood of Begbies Traynor, quoted in Accountancy Age, 18 December 2003, p. 11. See also Linklater, ‘New Style Administration’. See pp. 396–7 above.

351At which meeting creditors would have had the opportunity to question the directors on the company’s demise. Administrators are entitled, however, to institute proceedings to have transactions at undervalue and preferences adjusted: IA 1986 ss. 238–9. The administration–liquidation route could, moreover, reduce costs and time and allow directors to have more input during the process: see further Keay, ‘What Future for Liquidation?’, pp. 152–5.

352Quoted in J. Robins, ‘The Enterprise Act Has Failed to Earn Respect’ (2005) Finance Week (25 May).

associated with DIP regimes – the risk that, where ownership is concentrated, shareholders will tend to encourage the management to engage in risky projects during troubled times since they are gambling with creditors’ money.353 Here there is a trade-off to be considered. A DIP regime might be expected to place rescue in the hands of directors – who are the parties with best knowledge of the business and its prospects – but it brings dangers of shareholder manipulation. A PIP system would be expected to involve lower levels of business-specific knowledge but greater resistance to such shareholder pressure.

In deciding whether DIP or PIP brings the preferable trade-off a number of considerations may be relevant. A first is the severity of the risks of bias through potential shareholder manipulation. On this point Hahn argues that concentration of ownership conduces to such manipulation but that, in the UK, the shareholding of listed corporations tends to be widely dispersed.354 If risks of manipulation tend to be low, this militates, according to Hahn, in favour of DIP rather than PIP as the fairer regime. Such an analysis, however, focuses on the relationship between manager-directors and shareholders and may understate the dangers of manipulation by other interests. In the case of many troubled UK companies there will be a degree of creditor concentration and creditor power (as where the company is in debt to a bank that holds a floating charge). This, as already indicated, may lead the bank to press those in charge of the company to develop and apply strategies that principally protect bank interests. On this count, it is arguable that, although administrator-IPs may not be immune to such pressures (a point made above), they are likely to be more resistant than the company’s directors, who will not only be predisposed to keeping their major creditors happy,355 but may well be conditioned by their troubled experiences to give way to bank pressure.

Even within PIP, however, it should be emphasised that the importance of eleventh-hour funding in rescue operations may enhance the banks’ already strong positions to manipulate. In times of corporate distress it is common for the banks to supply rescue funds under terms

353Ibid.; Scott, ‘Relational Theory’, p. 909.

354Hahn, ‘Concentrated Ownership’, p. 134. It should be emphasised, of course, that Hahn’s argument relates to listed corporations. Private companies would not offer the same dispersion of shareholding and, accordingly, risks of shareholder manipulation would be higher, and the attractions of DIP lower.

355Directors’ tendency to align their decision-making to the bank’s interests is likely to be the greater if the directors have also given the bank personal guarantees.

that give them very considerable powers to influence strategy.356 Covenants in restructured lending agreements will frequently impose restrictions on such matters as: operating activities (e.g. maximum outlays on administration); new investments (e.g. on levels and kinds of investment); dispositions of assets; payouts to shareholders; and financial activities (e.g. levels of borrowing; levels of working capital).357 When banks supply new rescue funds they may increase their equity share in the corporation and accordingly may exercise considerable power as shareholders as well as creditors. They may also negotiate representation on the board which allows them, for example, to put turnaround specialists in place and gives de facto, if not formal, influence over the strategy formulation process.358 The effect of such bank power is that, within the post-EA regime, the administrator is supposed to advert to the interests of creditors as a whole (a contrast with receivership) but, in doing so, will have to co-ordinate closely with the bank. There are dangers of both friction and manipulation (and hence of unfairness to some creditors) in such arrangements.

Turning to accountability through judicial oversight, this can be assessed by considering the courts’ role in shaping the administration regime. That shaping may involve the judges in influencing interactions between a variety of different actors by, for example, adjusting incentives to resort to law and detailing areas of expertise within which certain actors’ judgements will be deferred to. In order to explore the potential judicial role it is necessary, first, to outline the main ways in which the EA 2002 reforms allow the judges to impact on the new administration process and, second, to indicate how the judiciary might make best use of their potential impact in accordance with a co-ordination perspective that focuses on key rescue tasks.

The EA revises the involvement of the judiciary in the process of administration in a number of ways.359 In some respects, judicial supervision is weakened – as over the appointment process, where Schedule

356See e.g. J. Day and P. Taylor, ‘Financial Distress in Small Firms: The Role Played by Debt Covenants and Other Monitoring Devices’ [2001] Ins. Law. 97.

357See e.g. Gilson, ‘Bankruptcy, Boards, Banks and Blockholders’, p. 367.

358Ibid., pp. 380–5. See also D. Baird and R. Rasmussen, ‘The End of Bankruptcy’ (2003) 55 Stanford L Rev. 751, 784–5. On the role of turnaround specialists in insolvency see V. Finch, ‘Doctoring in the Shadows of Insolvency’ [2005] JBL 690 and ch. 5 above.

359On the role of the judiciary in relation to the ‘new’ administration see also Armour and Mokal, ‘Reforming the Governance of Corporate Rescue’; Finch, ‘Re-invigorating Rescue’ and ‘Control and Co-ordination in Corporate Rescue’.

B1, paragraphs 14 and 22 involve a dramatic shift to out-of-court activity. Holders of qualifying floating charges as well as the company and its directors are able to appoint an administrator without going to court by filing a notice of appointment accompanied by a statement from the identified administrator that he consents to the appointment and that, in his opinion, the purpose of the administration is reasonably likely to be achieved.360 The route to appointment of an administrator via court order is retained by paragraph 10 of Schedule B1 which requires an administration application to court by either the company, its directors or one or more creditors.361

On some issues, however, the courts are given new areas of judgement by the EA. Paragraph 13(1)(e) of Schedule B1 now empowers the court to treat an application for administration as a winding-up petition, carrying associated winding-up powers. The court is thus given a wide discretion to make the order it thinks most appropriate and it is likely to treat the application as a winding-up petition if the company is revealed to be hopelessly insolvent and the interests of creditors as a whole require an immediate investigation of its affairs by a liquidator and if this consideration outweighs any likely advantage to be achieved by realisation of assets in administration.362

Another area in which there is at least the potential for considerable judicial input is in reviewing the exercise of the administrator’s powers as deployed in pursuit of the Schedule B1 paragraph 3 objectives. As noted above, a central issue here is whether the administrator should act to rescue the company as a going concern (paragraph 3(1)(a)); to achieve a better result than on winding up for creditors as a whole (paragraph 3(1)(b)); or to realise property in order to make a distribution to one or more secured or preferential creditors (paragraph 3(1)(c)). Selecting between these objectives is governed by paragraph 3(3), which is phrased in subjective terms and, to repeat, states that the administrator must act to rescue the company as a going concern unless he thinks either that this

360The company or its directors will also need to declare that the company is or is likely to become unable to pay its debts as a precondition to the appointment of an administrator. This contrasts with the holder of the qualifying floating charge who is not required to demonstrate this inability or likely inability: see pp. 381–2 above. On inability to pay debts and definitions of insolvency see ch. 4 above.

361The company has to be or be likely to become unable to pay its debts and the court must be satisfied that the administration order is reasonably likely to achieve the purpose of administration: Sch. B1, para. 11(b).

362The court may also make an interim order to restrict the exercise of directorial powers or to make these subject to supervision by an IP or the court (paras. 13(3)(a) and (b)).

course is not reasonably practicable or that a better result for creditors as a whole can be achieved by pursuing the second of the listed objectives.363 Paragraph 3(2) overlays a general duty on the administrator to perform his functions in the interests of the company’s creditors as a whole.364 The administrator, moreover, is subject to a duty, under paragraph 4, to perform his functions as quickly and efficiently as is reasonably practicable. Under paragraph 74(1) a creditor or member can challenge the administrator by claiming that he is acting or has acted or proposes to act so as to harm their interests unfairly. Paragraph 74(2) allows the same parties to mount a challenge on the grounds that the administrator is not performing his functions as quickly or as efficiently as is reasonably practicable.365

Do these provisions offer the judges an opportunity to render administrators accountable through the exercise of energetic supervision? It would appear that the subjective phrasing of paragraph 3(3) (which was inserted late in the passage of the Enterprise Bill through Parliament) evidences a Government intention that administrators’ business judgements should not be interfered with lightly by the courts and not without evidence of irrationality.366 Both Lord Hoffmann and Sir Gavin Lightman have stated extrajudicially that such subjective phrasing

363On the use of ‘thinks’ see M. Simmons, ‘Some Reflections on Administrations, Crown Preference and Ring Fenced Sums in the Enterprise Act’ [2004] JBL 423, 426–8.

364For arguments that this means that administrators should act to maximise ‘total expected net recoveries’ see Armour and Mokal, ‘Reforming the Governance of Corporate Rescue’, pp. 46–7.

365As has been noted, misfeasance actions (by, inter alia, a creditor) can be brought against administrators (or purported administrators) under para. 75 and the company does not have to be in liquidation for such an action to be commenced. On administrators owing no general common law duty of care in relation to their conduct of the administration to unsecured creditors see Kyrris v. Oldham [2004] BCC 111 (CA) and on duties of care to the company see Re Charnley Davies Ltd (No. 2) [1990] BCLC 760 where Millett J noted that the distinction between ‘misconduct’ and ‘unfairly prejudicial management’ does not lie in the particular acts or omissions of which the complaint is made but in the nature of the complaint and the remedy necessary to meet it: p. 783. As noted above, there is, to date, a ‘conspicuous’ absence of case law where administrators have been sued for breach of duty: see Keay and Walton, Insolvency Law, p. 118. This situation is unlikely to pertain as administration takes over from administrative receivership and actions under para. 75 for breach of equitable or common law duties become more frequent.

366See Simmons, ‘Some Reflections’, pp. 427–8; Mokal and Armour, ‘New UK Corporate Rescue Procedure’, p. 138; HL Debates, 21 October 2002, vol. 391, col. 1101 (on the Government’s expectation that the courts will review the rationality of the administrator’s decision).

makes it virtually impossible for a court to interfere with the administrators’ commercial judgements provided that they are made in good faith,367 and, as noted above, the cases of Re Transbus International Ltd368 and Re Ballast plc369 support the view that the courts are content to defer to the judgements of administrators.

It should be noted, however, that the paragraph 3(2) duty to act in the interests of the company’s creditors as a whole is not similarly phrased in subjective terms – the obligation is to act objectively in pursuit of such interests, not in a manner that the administrator thinks is in the interests of creditors as a whole. The resultant tension between the subjectivity of paragraph 3(3) and the objectivity of paragraph 3(2) may open the way for judicial intervention. Thus a party challenging an administrator’s decision to act in pursuit of a better than winding-up result for creditors (under paragraph 3(1)(b)) rather than a going-concern rescue (paragraph 3(1)(a)) not only would be able to contest the administrator’s subjective estimation of what was reasonably practicable or in the interests of creditors as a whole but would be able to take issue on the grounds that the course chosen was not in fact in the interests of creditors as a whole.370 There is a similar combination of subjective and objective elements in paragraph 3(4) which empowers the administrator to realise property for distribution to secured or preferential creditors (paragraph 3(1)(c)) if he thinks it is not reasonably practicable to achieve either of the paragraph 3(1)(a) or 3(1)(b) objectives and ‘he does not unnecessarily harm the interests of the creditors of the company as a whole’ (paragraph 3(4)(b)).371 These provisions are liable to come into play when an administrator might have a choice of ways to realise assets, one of which involves a quick break-up sale, payment of the floating charge

367See Swain, ‘Move Towards a Stakeholder Society’; Editorial (2002) IL&P 121–2. See also Insolvency Service Guide, para. 4.1.6 and DTI Explanatory Notes, para. 648 which suggest that the court will only interfere if bad faith can be established or the decision was one that no reasonable administrator would have taken. On the facilitative attitude of the courts see Walters, ‘Corporate Restructuring under Sch. B1’.

368[2004] 1 WLR 2654, [2004] BCC 401. 369 [2005] 1 WLR 1928, [2005] BCC 96.

370Mokal and Armour, ‘New UK Corporate Rescue Procedure’, p 137.

371See Simmons, ‘Some Reflections’; Simmons, ‘Enterprise Act and Plain English’ (2004) 17 Insolvency Intelligence 76 (considering the use of the words ‘thinks’ and ‘harm’ in the statutory provisions). See also Unidare plc v. Cohen [2006] 2 WLR 974 and Lewison J’s reasoning (at p. 991) on the administrator’s ‘thinking’ apropos Sch. B1, para. 83, discussed by Lightman and Moss, Law of Administrators, pp. 251–2; L. C. Ho, ‘Connected Persons and Administrators’ Duty to Think: Unidare v. Cohen’ [2005] JIBLR 606.

holder’s debt and a low return to unsecured creditors, and the other of which involves greater delay, more considered marketing and a higher return to unsecured creditors after the debt secured by the floating charge has been paid.

The status of the administrator as an officer of the court372 means that, in addition to being expected to act fairly and honourably, the courts may potentially treat administrators’ activities as reviewable on the usual public law grounds of illegality, irrationality and procedural impropriety.373 As an alternative to judicial review on public law grounds, it has been argued that ‘the courts will draw on the case law providing substance to the rationality test in the context of other fiduciary relationships’.374

Even, accordingly, where the subjective phrasing of paragraph 3(3) is used, the administrator may be open to attack on ‘irrationality’ grounds where he fails to take a relevant consideration into account in making a decision or takes into account an irrelevant consideration. The potential role for the courts is, accordingly, to rule on whether, in considering different possible courses of action (for example, to aim for rescue as a going concern or to achieve a better than winding-up outcome; or to realise property and distribute to secured or preferential creditors), the administrator has taken relevant factors into account, has avoided reference to irrelevant factors and has avoided taking actions that are so unreasonable that no reasonable administrator would take them.375 For an administrator subject to such potential review, this means that care should be taken to make it clear on the record that all creditors’ interests

372Sch. B1, para. 5; Ex parte James (1874) 9 Ch App 609; D. Milman, ‘A Question of Honour’ [2000] Ins. Law. 247.

373See Lord Diplock in Council of Civil Service Unions v. Minister for the Civil Service

[1985] AC 374, 411–14. On the status of a decisionor policy-maker as ‘public’ for the purposes of judicial review see e.g. R v. Panel on Takeovers and Mergers ex parte Datafin plc [1987] QB 815; M. Beloff, ‘Judicial Review – 2001: A Prophetic Odyssey’ (1995) 58 MLR 143.

374See Mokal and Armour, ‘New UK Corporate Rescue Procedure’, pp. 137–8. The duty to act rationally has its roots in the law governing fiduciaries and can be seen as analogous to the public law concept of reasonableness: see Lightman and Moss, Law of Administrators, p. 246. Here the tests applied to trustees, according to the rule in Re Hasting-Bass [1975] Ch 25, are similar to those applied to public bodies according to

Associated Provincial Picture Houses Ltd v. Wednesbury Corporation [1948] 1 KB 223. On the rule in Hasting-Bass see Stannard v. Fisons Pensions Trust Ltd [1992] IRLR 27 (trustees were bound to give properly informed consideration to the value of a trust fund in calculating the just and equitable level of funds required to be transferred).

375Associated Provincial Picture Houses Ltd v. Wednesbury Corporation [1948] 1 KB 223.

have acted in a ccordance with their duty and have identifi ed the r

point. On one view, th e judges are likely to prove reluctant to en

380See R v. Independent Television Commission, ex parte TSW Broadcasting Ltd [1996] EMLR 291 (the House of Lords stated that courts would be most reluctant to secondguess regulatory bodies on substantive issues) but cf. Mercury Communications Ltd v.

Director General of Telecommunications [1996] 1 All ER 575 (HL) – criticised in A. McHarg, ‘Regulation as a Private Law Function’ [1995] PL 539. On judicial reluctance to second-guess decisions on budgetary allocation see R v. Cambridge Health Authority ex parte B [ 1 995 ] 2 A l l E R 12 9, 137 .

381See Insolvency Act 1986 s. 214(4)(a) and (b); see also ch. 16 below.

exercise of his functions or to vary procedures adopted. This can be seen as less dramatic than making a finding of wrongful trading which may involve a director in substantial personal liability and arguably a degree of stigma.382 For both these reasons, it might be contended that the courts will be more inclined to interfere with administrators’ actions under paragraph 74 challenges than they would be to second-guess directorial behaviour for the purposes of wrongful trading.

If, however, it is assumed, for the moment, that the courts will exert a degree of control over administrators, how might they best use that control to serve the interests of rescue? One way to do this would be to exercise their powers so as to enhance expertly and efficiently co-ordinated actions between the various actors involved in a rescue process – while, of course, protecting the legal interests of those actors and holding the ring fairly between them. When seeking to enhance such co-ordination, furthermore, the judges might have in mind the need for key rescue decisions and actions to be based on good information, to incorporate sound judgements and to be implemented in a timely fashion.

On the generation of a good information base, the judicial role is likely to come into play when the administrator’s duty to garner and consider information from different parties is placed at issue. That administrator will be obliged, inter alia, to take all relevant considerations into account when devising a policy or making a decision.383 The stance of the prorescue judiciary might be to insist that administrators make all reasonable attempts to secure inputs from all of those actors who are well placed to contribute information relevant to the pursuit of the administrator’s statutory objectives. The administrator, accordingly, would be obliged to consult with, and take into account, the representations of such parties as directors, banks, unsecured creditors and any others who can provide relevant information. Such a judicial stance might demand of administrators that they do more than provide an opportunity for various actors to participate in the administration process – it might call for administrators actively to take all reasonable steps to seek out relevant information and to consider this.

It has, however, been stressed above that inclusive processes involve considerable dangers of inefficiency and losses of expertise through stultification, delay and confusion. Bearing this in mind, the judges

382See ch. 16 below.

383See e.g. Associated Provincial Picture Houses v. Wednesbury Corporation [1948] 1 KB 223; Council of Civil Service Unions v. Minister for the Civil Service [1985] AC 374.

might make it clear in their decisions that administrators only have to seek out information and process it in so far as this is reasonable within the practical constraints of time and resourcing that they are faced with.384 In subjecting administrators to reasonableness-testing, accordingly, the judges should take the view that challenges to administrators’ decisions will only be successful where they have been shown clearly to have gone beyond the bounds of reasonableness (for example by refusing to receive inputs from parties where patently relevant information is involved). The general stance of the judiciary should be to ensure accountability and fairness through protecting the procedural rights of the various parties but, above all else, to further efficiency and expertise by shielding administrators from legal delays and second-guessing and to do so sufficiently to allow them to pursue their statutory objectives expeditiously. If this is not done the danger is that the administration process will prove generally too slow-moving and indecisive ever to serve the interests of rescue. The stance described may demand that the judges show a degree of deference to the administrators’ judgements on such matters as whether the need for action means that they should not carry out further investigations and consultations.

On the encouragement of sound judgements, this will, to a degree, be served by judicial actions to encourage expertise by ensuring that relevant information is considered and irrelevant matters are not taken into account. Closely related to the exclusion of irrelevancies is, moreover, protection against unfairness through bias and here it might be suggested that the judiciary should be ready to counter a number of predictable risks.

A first such risk is, as noted above, that banks holding qualifying floating charges and acting as potential suppliers of rescue funds will use their legal and financial muscle to induce administrators to act in their favour rather than in the interests of the body of creditors as a whole.385 Manipulation of this kind may occur through open negotiations between bank and administrator but a second risk may be that such influence, or ‘capture’, may occur in less visible ways – as where administrators adopt strategies that are excessively low risk and do so for fear of offending powerful actors, such as banks, who might contest their actions.

384See the references to reasonableness in the para. 4 duty to perform functions as quickly and efficiently as is reasonably practicable.

385That is on ‘he who pays the piper calls the tune’ principles: see Swain, ‘Move Towards a Stakeholder Society’.