Vol 1 (2004) - Issue 3

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The New UK Corporate Rescue Procedure - The Administrator’s Duty to Act Rationally

Introduction

The corporate insolvency elements of the Enterprise Act 2002 attempt to revitalize the ‘rescue culture’ in the UK. At the core of the new administration regime introduced by the Act lies a statutory list of objectives available to the administrator, the Insolvency Practitioner presiding over the insolvency proceedings. The insolvency proceedings must be directed towards the pursuit of one of these objectives. As explained below, the list consists, roughly, of the attempt either to rescue the company, or (some of) its business as a going concern, or the liquidation of that business piecemeal for distribution to creditors. The aim of this paper is to consider the standard by which the administrator will be judged in making his choice about which of these objectives to pursue. In particular, how broad is his discretion to choose, and to what extent (if at all) is this discretion subject to legally binding requirements?

The statutory hierarchy

The statute presents the administrator with a hierarchy of possible objectives arranged in descending order of preference and a set of instructions about how he should decide which objective to pursue. He must in the first instance perform his functions with the objective of rescuing the company as a going concern (‘the first objective’). He may choose not to pursue this objective, however, if he thinks either that it is not reasonably practicable to achieve it, or that the pursuit of the objective next in the list would bring better returns to creditors as a whole (paragraph 3(3)(a) and (b) respectively). It is only if he thinks that these particular circumstances exist that he may descend a step through the statutory hierarchy and consider the next possible objective. Here, the administrator must perform his functions so as to achieve a better result for the creditors as a whole than would be likely if the company were to be wound up without the benefit of an intervening administration (‘the second objective’). This will most often be the case where the statutory moratorium available against secured creditors would allow (much of) the distressed company’s business to be sold as an operational unit, thus preserving any going concern value. However, the administrator may take a final step down the hierarchy if he thinks the achievement of neither of the first two objectives is reasonably practicable and he would not unnecessarily harm the interests of the company’s creditors as a whole in doing so (paragraph 3(4)(a) and (b) respectively). If these particular circumstances exist, the administrator may perform his functions with a view simply to realising the company’s property so as to make a distribution to secured or preferential creditors (‘the third objective’).
The issue considered in this paper is the extent to which a court may review the administrator’s decision as to which objective to pursue. At first sight, he seems to have been given a broad discretion in this process. The existence of any of the particular circumstances which need to be present before he may properly move down the statutory hierarchy is, as noted above, apparently established if he ‘thinks’ that it is.