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Melanie Johnson MPEnterprise Act |
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I am pleased to be invited here to speak at the Clifford Chance conference on the Enterprise Act. It is important to be able to spread the good news widely, in particular to those who will have to work with the provisions. I am afraid I will only be able to speak for about 20 minutes, as I have to leave for another appointment. However, officials from The Insolvency Service - Steve Leinster and Paul Baker - will be on hand to answer any questions. KEY MESSAGES The Enterprise Act received Royal Assent on 7th November. The insolvency provisions in the Act will modernise the insolvency regime to make it more supportive of enterprise. In company insolvency we will move the focus strongly in favour of company rescue through restricting administrative receivership and streamlining the administration procedure. Abolition of the Crown's preferential right to recover unpaid taxes along with modernisation of the financial regime of The Insolvency Service will make up to £115 million available to estates. In individual insolvency we will reduce the duration of bankruptcy to a maximum of one year for the majority of bankrupts. This will allow a fresh start for those who have failed through no fault of their own. At the same time, we are introducing a new Bankruptcy Restrictions Order regime for the minority of bankrupts who abuse their creditors and the public. While I am here to talk about insolvency I should mention that the Act has a much wider scope. In addition to the insolvency provisions, it deals with competition and consumer affairs. The Act will create a strong, effective competition regime that tears down barriers to enterprise, thereby allowing new firms to enter markets and grow. We are therefore strengthening the competition regime by taking the politics out of competition decisions, making procedural improvements for business, and introducing criminal sanctions for individuals who operate cartels. Strong consumers drive innovation and enterprise, so we are strengthening consumer protection by extending the Stop Now Orders regime to protect consumers from traders who do not meet their legal obligations. BACKGROUND The insolvency provisions in the Enterprise Act are the latest in a long line of insolvency reforms, beginning with the Insolvency Act 1986. As you know, this Act introduced administration and Company Voluntary Arrangements - CVAs - and started the change of focus in insolvency law towards company rescue. However, despite the introduction of new procedures in the 1986 Act, take-up during the late 1980s and early 1990s was - while on an increasing trend - seen as disappointingly low. The Government's initial response was through the Insolvency Act 2000, which included the introduction of a moratorium for small companies in CVAs that stops creditors enforcing their rights while the proposed voluntary arrangement is put to creditors of such companies. I am pleased to be able to tell you that the new voluntary arrangement provisions will come into force on 1 January 2003 - not just for companies but for partnerships too - and the relevant statutory instruments are or soon will be on the HMSO website. COMPANY PROVISIONS IN THE ENTERPRISE ACT Even with this, our view is that, on the grounds of both equity and efficiency, the time has come to make changes that move the focus firmly in favour of collective insolvency proceedings that promote company rescue. Many lenders continue to use administrative receivership as the insolvency mechanism of choice. While administrative receivership has shown benefits - most notably in its speed, efficiency and flexibility, there has been widespread concern that it may not provide adequate incentives to maximise a company's value. Equally importantly, it does not provide transparency for the unsecured creditors. Finally, an administrative receiver, unlike an administrator, is predominantly answerable to his or her appointer- the floating charge-holder. In administration, the duty is to all creditors of a company. The role of an administrator is to find the best result for all creditors - often through rescuing the company. Additionally, creditors may challenge the decisions of the administrator by virtue of section 27. Therefore, in order to ensure that companies facing financial difficulties do not go to the wall unnecessarily, and to provide the best returns to all creditors, the Act prohibits the use of administrative receivership except in certain circumstances, such as capital market arrangements, public-private partnerships, project finance, and registered social landlords. At the same time, we are streamlining the administration process to give it the type of speed and flexibility that administrative receivership currently offers. While administration has been recognised as an important rescue procedure, it has been criticised as being slow, inflexible and expensive. Unlike administrative receivership, where a secured creditor may appoint a receiver very quickly, and the receiver may begin work equally quickly, an application for an administration must be made to court. Therefore, a key element of the streamlined administration procedure is the introduction of out-of-court entry routes. These will be available to qualifying floating charge-holders as well as to the company and its directors. They will be able to appoint an administrator of their choosing without the bureaucracy and costs of a court application. The qualifying floating charge-holder will be able to use this route without notice to the company while a company or its directors will need to notify any qualifying floating charge-holder. The out-of-court route may not be used if a winding-up petition has been presented or a winding-up order is in force. Additionally, the out-of-court route will not be available to a company if the directors have put the company into administration during the previous 12 months. A company appointing an administrator will need to demonstrate that it is, or is likely to become, unable to pay its debts and that notice has been given to the floating charge holders and any others entitled to notice. Other creditors can only apply for administration through the courts and will need to demonstrate that the company is, or is likely to become, unable to pay its debts. A notice identifying the administrator will be filed with the court, along with a statutory declaration. This removes the requirement for a Rule 2.2 Report - something that will significantly reduce the bureaucracy and costs currently associated with administration. In streamlining the administration process, the Act puts company rescue at its heart. But this will not mean simply saving the legal entity of a company - an "empty shell". Where rescue of a viable company as a going concern is clearly not a viable option or the following objective would provide a better result, the objective will be to achieve a better result for a company's creditors as a whole. Nevertheless, it is important to recognise that the duty to creditors as a whole will often be served in the long term through a rescue, and the Act ensures that this will be considered. Finally, where it is not reasonably practicable to achieve either of the first two, the objective will be to realise property to make a distribution to one or more secured or preferential creditors. However, even where there are insufficient funds to pay unsecured creditors, the administrator can only act if he or she does not unnecessarily harm their interests. The Act also provides clear and certain timescales to balance the need for successful completion with the requirement that cases are not drawn-out at the expense of companies and creditors. These timescales reflect the day-to-day necessities of administration and cover the time for the administrator to produce his proposals, to hold a creditors' meeting, in addition to an overall timescale during which an administration should be concluded of 12 months, although this may be extended by the creditors and/or the courts. We believe that these changes to the administration procedure will encourage wider use of the procedure as a rescue vehicle, and encourage smaller companies to make use of administration not simply as a last resort, but before their financial situation becomes terminal. They will ensure that administration is in the interests of all creditors, including floating charge-holders. Abolition of Crown Preference Another key reform in the Enterprise Act is the abolition of the Crown's preferential right to recover unpaid taxes. Preferential claims in insolvencies originated in the late 19th Century. Yet in recent years the trend in other jurisdictions has been towards restricting or abolishing Crown preference. We believe this approach is equitable and the Act provides for the abolition in the UK. Where the existence of floating charges is not relevant, for example, in individual insolvencies, the benefits of the abolition will flow automatically to unsecured creditors. However, where floating charges are possible, in the corporate sphere, we have provided for a prescribed part of a company's assets to be "ring-fenced" for unsecured creditors, to ensure they benefit. The prescribed part is designed to pass on to the unsecured creditors that part of the assets, which under the current regime, would go to the Crown. Individual Insolvency and the Financial Regime of The Insolvency Service Although the focus of this conference is on the effects the insolvency provisions in the Enterprise Act will have on companies, I feel that I should give a brief explanation of the individual insolvency provisions. To build a truly enterprising economy, insolvency law must support, rather than stifle, the development and growth of new businesses while at the same time, helping to reduce the stigma of failure. The Act will remove the "one-size-fits-all" approach that characterizes our current insolvency regime where all bankrupts are treated the same, regardless of conduct. Their assets are dealt with in the same way and in most cases they are discharged after the same amount of time. This approach results in the stigma associated with bankruptcy being applied equally to the unfortunate, the irresponsible, the reckless and the dishonest. A consequence of this stigma is that it creates a fear of failure amongst entrepreneurs. Entrepreneurs willing to take risks are essential to economic growth. In the UK 31.5 per cent of people say that fear of failure would prevent them from starting a business. This compares to a figure of only 21 per cent in the United States (Global Enterprise Monitor 2001 Executive Report). We feel the fear and consequences of failure should not be so disproportionate that they act as a disincentive to entrepreneurs. The reforms will encourage business start-ups and give confidence to those who have failed through no fault of their own to start again. Yet, at the same time, it is important that the measures strike a strong balance between the interests of debtors, creditors, companies and the public. To achieve this, the Act introduces a fairer system that takes into account individual circumstances. We are reducing the period before which a bankrupt is discharged from restrictions to a maximum of 12 months for the majority of bankrupts. We will also remove many irrelevant and outdated restrictions that currently apply to bankrupts. By way of a counterbalance we will introduce a new Bankruptcy Restrictions Order regime to take action against those whose behaviour poses a threat to the public and commercial interest. And it is important not to view bankruptcy as an easy option. Indeed, we firmly believe that bankruptcy should continue to be seen as a last resort. This is why trustees in bankruptcy will continue to be able to realise the same assets as now. To facilitate this, we are making it easier to do so by introducing income payments agreements and amending the procedure for applying for suspension of discharge to allow trustees in bankruptcy to apply where a bankrupt fails to co-operate. Where bankrupts are able to make a contribution from their income they will still be required to do so. And income payments orders and agreements will commonly extend beyond discharge to run for three years from the date of the Order or Agreement. These measures will apply to all bankrupts, both consumer and business. Modernisation of the financial regime of The Insolvency Service will bring increased transparency and simplicity to the fee structure of the Service, and changes to the Insolvency Service Account will ensure the maximum possible investment return goes to insolvent estates. Consultation In preparing the Act we consulted widely and had extensive discussions with many interested parties. We listened to their suggestions and concerns and have taken them on board wherever possible. The result has attracted wide support. The approach in the Act has been of interest in Europe. Officials sit on a best practice working group. The remit of the group is to look at the interaction between insolvency and entrepreneurship in member states. Several of the conclusions of the group are similar to those already reached by the Government and put in place through the Enterprise Act. Participation in groups such as this and involvement in other initiatives such as the UNCITRAL model law on insolvency puts the UK at the centre of international discussions on insolvency Over the next few months we will be finalising the secondary legislation necessary to implement the Act. Subject to Parliamentary approval of the necessary secondary legislation, the company and Crown preference provisions should come into force in the first quarter of the financial year 2003 while the individual and financial regime provisions should come into force early in the 2004 financial year. Information and guidance will be made available on the Insolvency Service web-site, as well as from other sources. I believe that the Enterprise Act will create an insolvency regime suitable for the 21st century. One with company rescue and the interests of all creditors at its heart. The provisions will ensure that our insolvency regime will be at the forefront of international insolvency practice. But the work is not finished. It is up to the users of the regime to ensure it is effective. Insolvency lawyers and insolvency practitioners will play an important role in achieving the best results for all parties. We have put in place a framework for the future. It is up to you to use it well. |
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Other speeches by Melanie Johnson MP
(the following are available from the archive) |
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