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Administration and Administrative Receivership - An Analysis


Riz Mokal


University College London (UCL) - Faculty of Laws; World Bank Global Initiative on insolvency and Creditor/Debtor Regimes; 3-4 South Square Chambers


Current Legal Problems, Vol. 57, 2004

Abstract:     
This paper argues that the English law of corporate reorganisations has been very significantly changed by the Enterprise Act 2002. The motivation for this change lies in the ways in which administrative receivership - the dominant reorganisation procedure under the old law - was destructive of social value (in terms of unnecessary job losses and other resource misallocations). Three such ways are identified, all linked with the fact that receivership ties the duties of the office-holder in charge of managing the distressed company to the interests of the debtor's main bank. This is undesirable: (a) The bank is usually oversecured and thus has little incentive, once receivership is underway, to ensure that distressed but essentially viable companies would not be wound up or their businesses not liquidated. (b) The bank also has the benefit of directors' guarantees, which weakens its incentives to ensure the maximisation of the value of the company's business even in those cases where its proprietary security over the debtor company's assets is insufficient to cover what it is owed. (c) The bank has little incentive in either of these cases to control the costs of receiver wastefulness or negligence. These problems are compounded by the fact that the market for the supply of banking services to SMEs is significantly monopolistic.

The paper explains that in order to remedy these defects, Parliament has imposed upon the administrator the duty to attempt a company or business rescue (as appropriate), if either one is in the interests of the company's creditors as a group. This duty is subject to the rationality test and is objective at its core, requires the administrator to account for his decision about which statutory purpose is to be pursued, and can be expected to be open to fairly intrusive court review. The paper provides an understanding of company rescue consistent with the explicit text and legislative history of the statute, and discusses the importance to the administrator's decision about whether to attempt such a rescue of the quality of the company's pre-distress management.

Finally, the mechanisms provided by the statute for an aggrieved party to hold the administrator to account are analysed. The paper highlights the importance of three factors: (a) Most administrators will be appointed by the company's main bank. (b) The Insolvency Practitioners who act as administrators would be the same individuals who have acted in the past as administrative receivers. (c) There has been a paucity of understanding amongst the professionals - lawyers and accountants alike - about the significance of the changes brought about by the Enterprise Act. The administrator's statutory duties to act in the interests of all the creditors as a group and to act with reasonable speed and efficiency are examined in the light of these observations.

Number of Pages in PDF File: 30

Keywords: Concentrated creditor, Company Voluntary Arrangement (CVA), financial and economic distress, company rescue as opposed to business rescue

JEL Classification: G21, G33, G34, K22, L14, K19

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Date posted: January 3, 2004  

Suggested Citation

Mokal, Riz, Administration and Administrative Receivership - An Analysis. Current Legal Problems, Vol. 57, 2004. Available at SSRN: http://ssrn.com/abstract=466701

Contact Information

Riz Mokal (Contact Author)
University College London (UCL) - Faculty of Laws ( email )
London WC1E OEG
United Kingdom
+44 - (0)20 - 7679 1406 (Phone)
+44 - (0)20 - 7679 1461 (Fax)
HOME PAGE: http://www.ucl.ac.uk/laws/
World Bank Global Initiative on insolvency and Creditor/Debtor Regimes
The World Bank
1818 H St NW
Washington, DC 20433
United States
3-4 South Square Chambers ( email )
3/4 South Square
Gray's Inn
London, WC1R 5HP
United Kingdom
HOME PAGE: http://www.southsquare.com/
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