The Harm Done by Administrative Receivership

11 Pages Posted: 26 Jul 2004

See all articles by Riz Mokal

Riz Mokal

South Square; University College London - Faculty of Laws; University of Aberdeen - School of Law

Date Written: June 2004

Abstract

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 maximise 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 procedure 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 self-consciously '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). These questions are important because the Government provided no evidence that this was in fact the case, and because several commentators have strenuously rejected such slurs on receivership. Also, if receivership was doing a good job in rescuing businesses, then the massive costs of consultation, legislation and displacement of familiar legal institutions and practices were and are entirely unjustified. What is more, the new administration procedure introduced by the Enterprise Act involves mechanisms of consultation and accountability to a variety of claimants which stand in stark contrast to the receiver's single-minded dedication to the bank's interests. Keeping that in mind, suppose that the law governing receivership was efficient in rescuing viable businesses and doing so cost-effectively. In that case, the switch to administration will increase the costs borne by the claimants as a group (as the administrator goes about complying with his more demanding duties to a broader range of stakeholders) while bringing (ex hypothesi) few additional benefits in terms of additional businesses saved from unnecessary liquidation.

JEL Classification: G33, G38, K11, K19, K22, K29

Suggested Citation

Mokal, Riz, The Harm Done by Administrative Receivership (June 2004). Available at SSRN: https://ssrn.com/abstract=568702 or http://dx.doi.org/10.2139/ssrn.568702

Riz Mokal (Contact Author)

South Square ( email )

3-4 South Square
Gray's Inn
London, WC1R 5HP
United Kingdom

HOME PAGE: http://southsquare.com/barristers/riz-mokal/

University College London - Faculty of Laws

Bentham House
4-8 Endsleigh Gardens
London, WC1E OEG
United Kingdom

HOME PAGE: http://www.ucl.ac.uk/laws/

University of Aberdeen - School of Law ( email )

Taylor Building
King's College
Aberdeen, Scotland AB24 3UB
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
667
Abstract Views
3,187
Rank
72,505
PlumX Metrics