to court, for the freedom to appoint a receiver to manage the debtor’s business and pay down the loan. The technique by which this is done is that the creditor is given by the debtor a power of attorney to act as the debtor’s agent in appointing a receiver, whose mandate it is to act in the interests of the creditor. Although owing fiduciary duties to the debtor company, and superseding the board of directors, the receiver’s fundamental duty is to act for the creditor. Such freedom is not granted to American secured creditors. English law, furthermore, grants a wide freedom to the creditor in the case of a demand loan to accelerate its repayment on very short notice. This has been defined as the time a debtor needs to obtain funds for repayment from a convenient place, as opposed to the time needed to apply elsewhere for alternative financing.51 Yet already the signs are that the high tide of secured creditors’ rights may have begun to ebb. The Insolvency Act 2000 allows for the grant to company directors, seeking a corporate voluntary arrangement, of a moratorium on the enforcement of secured creditors’ rights. As seen above, the Government has announced its intention to seek legislation preventing secured creditors, outside the capital markets, from appointing administrative receivers so as to block the more evenly balanced procedure of company administration.52 It is not unlikely that further erosion will follow.

Postscript

The law set out in this chapter has been modified in important respects by a statute, the Enterprise Act 2002, that has recently come into force as a result of a series of commencement orders. Briefly, it accomplishes three things.

First, with certain very important exceptions in the capital and private finance initiative markets,53 it prevents the chargee from acquiring by contract with the debtor the right to procure the appointment of an administrative receiver, who, as seen above, responds only to the needs of the chargee. This right, however, is substituted by a new, entrenched power to appoint out of court an adminstrator, an office holder who could previously only be appointed by a court order. This measure

51See for example Bank of Baroda v Panessar [1987] Ch 335.

52Modern Company Law for a Competitive Economy (June 2001).

53See ss. 72B--G of the Insolvency Act 1986 as added by s. 250 Enterprise Act 2002. There is also a saving for powers of appointment under existing debentures: s. 72A(4)(a) of the Insolvency Act 1986 as added by s. 250 Enterprise Act 2002.

places the chargee with the existing power to appoint an administrative receiver in the driving seat when it comes to the appointment of an administrator. As with the present regime of administrative receivership, there is no requirement that the debtor be insolvent within the meaning of the Insolvency Act 1986 for an appointment to be made by the chargee. The chargee, under the new provisions, must be the holder of a ‘qualifying floating charge’.54 Furthermore, the chargee with such a power, while not the only person with an out-of-court power of appointment, has the preferential right to make the appointment.55 It is only by the barest thread that the appointment of an administrator by the chargee can be called a collective procedure at all.

In contrast with the former statutory purposes of administration, the new system presents three compulsory purposes in descending order of choice. First, there is the rescue of the ‘company’. It is almost impossible to contemplate that the ‘company’, as opposed to the business, can be saved by the time that informal processes and rescues have been exhausted and the process of administration has begun. After so much talk of the rescue culture in the last twenty years or so, the stark truth is that corporate break-up and not salvation lies at the heart of the corporate insolvency regime in England.

The second statutory purpose, which comes into play when the first is ‘not reasonably practicable’, is that the administrator must strive for ‘a better result for the company’s creditors as a whole’ than would be likely on a liquidation. This points to an administrator exercising management powers that a liquidator does not have and to dealing with the company’s assets, encumbered and unencumbered alike, as a block in order to maximise their value. No doubt case law will clarify what is meant by ‘reasonably practicable’. How the administrator takes account of the welfare of the company’s creditors as a whole is not obvious, in that there is no true community of interest between secured and unsecured creditors, especially where in the majority of cases the secured creditor fails to recover in full from the enforcement process, the effect of which is that nothing is left to pass on to the preference and unsecured creditors. The length of the management process will be a key issue here. It is however unlikely that the administrator will have to deal with creditors in their various classes. Only in the event of this second purpose proving not to be reasonably practicable will the

54Schedule B1 Insolvency Act 1986 (as added by Enterprise Act 2002), para. 14.

55Ibid. para. 26(1).

administrator turn to the third purpose of making a distribution to one or more secured or preferential creditors. In a clear break from the past, the administrator is now firmly located in the business of making distributions, and chargee creditors making the appointment will hope and expect that the administrator will move quickly and smoothly to the execution of this third statutory purpose.

The second main feature of the Enterprise Act 2002 is that it abolishes Crown preference, a matter of particular importance in respect of unpaid VAT and PAYE deductions from the payroll.56 Thirdly, it creates a fund drawn from the assets of the insolvent party to be distributed among its unsecured general creditors.57 The amounts available for distribution are limited and will be drawn from assets of the company that would formerly have gone to the Crown as a preference creditor. The unsecured creditors will therefore, in respect of this fund, rank ahead of any floating chargee.

There is also the prospect of a major legislative change that goes to the very heart of the English law of security. The Law Commission’s recent Consultative Document on the Registration of Security Interests58 puts forward for consideration a reform of the law of secured credit that would largely remodel the law along the lines of Article 9 of the American Uniform Commercial Code. There is a very real prospect that these proposals will take effect as secondary legislation under the Companies Act, applicable in the first instance only to company borrowers, with the possibility of extension to individual and partnership borrowers at a later date by means of primary legislation.

Bibliography

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‘The Quistclose Trust in a World of Secured Transactions’, Oxford Journal of Legal Studies 12 (1992) 333 ff.

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Michael Bridge, Roderick A. Macdonald, Ralph L. Simmonds and Catharine Walsh, ‘Formalism, Functionalism, and Understanding the Law of Secured Transactions’, McGill LJ 44 (1999) 567 ff.

56S. 251 Enterprise Act 2002.

57S. 176A Insolvency Act 1986 as added by s. 252 Enterprise Act 2002.

58Registration of Security Interests: Company Charges and Property other than Land (No 164, 2002).

F. H. Buckley, ‘The Bankruptcy Priority Puzzle’, Virginia Law Review 72 (1986) 1393 ff.

E. Ferran, Company Law and Corporate Finance (1999).

A. Kronman and T. Jackson, ‘Secured Financing and Priorities Among Creditors’, Yale Law Journal 88 (1979) 1143 ff.

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