Vol 1 (2004) - Issue 5

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The Harm Done by Administrative Receivership

Introduction

Under the law as it existed in the UK before the coming into force of the Enterprise Act 2002, administrative receivership was the preferred mode of debt enforcement against distressed companies by banks holding fixed and floating charges over substantially the entire estate of the debtor. The debenture creating these charges reserves to the chargee the right to appoint an Insolvency Practitioner (IP) to manage the company and apply either its income, or the proceeds of sale of the company’s business, towards the discharge of the secured debt. Perhaps the most distinctive feature of receivership is the fact that the receiver – while regarded as the debtor’s agent - owes his primary (in some important respects, exclusive) obligations to the chargee. He may choose to deal with the company or its assets in a way that directly inflicts harm on junior claimants, as long as he acts in good faith in the chargee’s interests. While security packages carrying the right to appoint an administrative receiver are held by a variety of creditors, banks and other financial institutions are by far the most important players in this respect, so it would be convenient to refer to creditors holding such global security generically as ‘banks’.

It is because administrative receivership was regarded as not giving troubled but essentially viable companies or businesses a sufficient chance to be rescued that the Enterprise Act has severely restricted its availability. In the White Paper preceding the Act, the Government noted ‘widespread concern as to the extent to which ... receivership as a procedure provides adequate incentives to maximize economic value’ by helping out distressed but viable businesses. The ability of the floating charge holder to block initiation of the pre-Enterprise Act administration procedure5 by appointing a receiver was taken as an important reason for the low uptake of administration. This was regarded as undesirable because (even) the old administration procedure was a selfconsciously ‘rescue’-oriented mechanism. The White Paper also highlighted concern about whether receivership provided ‘an acceptable level of transparency and accountability to the range of stakeholders with an interest in a company’s affairs, particularly creditors.’

This paper asks whether the Government was right to accept that receivership was inadequate both as a rescue mechanism and in providing transparency and accountability for junior claimants (viz., those ranking behind the security-holding bank in the distribution of value from the insolvent estate).