ENTERPRISE ACT 2002 On September 2003 the Government introduced the latest stage of the Enterprise Act 2002. The Government hopes that the new corporate legislation will improve company survival rates and remove some of the advantages secured creditors have had over ordinary trade and expense creditors. The Act introduces three major changes to the insolvency regime affecting both corporate and individual insolvencies although the bankruptcy provisions do not come into force until 1 April 2004. 1. Abolition of Administrative Receiverships Floating charge holders did have the right to appoint administrative receivers to enforce their security. The Act abolishes this right except: a) the floating charge was created before 15 September 2003. b) the floating charge is granted in certain capital markets and project finance transactions. Prior to the Act, the floating chargeholder had the right to appoint a receiver to sell the assets and the remaining unsecured creditors had little or no say in the process. Under the new Act floating chargeholders will only be able to appoint an administrator whose duty will be to all creditors rather than the floating charge holder. One possible effect of the Act is that banks and lenders may take a more cautious attitude to lending and enforcing of security until the effects of the Act are known. The Act priorities the rescue of the company through insolvency and once an insolvency procedure is underway the Insolvency Practitioner focuses on maximising the realisations for creditors which is usually achieved by a sale of assets as a going concern or parts of the business. With the main objective being the rescue of the corporate shell this may well be achieved at the expense of creditors and employees who could have received benefits from the transferral of the profitable parts of the business. 2. Abolition of Crown Preference The Crown departments did retain preferential status for arrears of PAYE, NIC and VAT and various employee claims for unpaid salary and holiday pay. On insolvency, these claims had to be paid before any distribution to floating chargeholders or unsecured creditors were made. The Act abolishes Crown preferential claims for all but the employee claims. The loss of the Crown preferential status for payment may result in the Government departments being less lenient towards businesses who do not pay their taxes on the due date. If this does happen the effect will be to discourage enterprise as businesses suffer at the hands of the Crown’s tougher action. The abolition of Crown preference should provide a real benefit to unsecured creditors but in corporate insolvencies the floating chargeholders who are principally the banks and rank next in pecking order for distribution of assets could receive a windfall by the removal of the Crown preference. The Act, however provides for any Liquidator to make available a "prescribed part" of the company’s assets to be "ring fenced" for creditors. The prescribed part is 50% of the company’s net property of the first £10,000 and 20% of that part of the company’s nest value over £10,000 subject to a maximum of £600,000. However, this provision does not apply where the company’s net assets are below £10,000. The ‘prescribed part’ will only apply where there is no pre Enterprise Act floating charge holder. 3. Bankruptcy The Act reduces the length of most bankruptcies from 3 years to 12 months. The Act does give the Official Receiver the opportunity to investigate the causes of failure of all bankrupts and if the bankrupt is found to be irresponsible or feckless or otherwise culpable, the length of a bankruptcy could range from 2-15 years and a bankruptcy restrict order imposed. The restrictions will include acting as a director or taking part in the management of a company without the permission of the court. The Act looks to reduce the stigma attached to bankruptcy and the number of restrictions imposed on bankrupts. A bankrupt will be able to act as a JP and can act as a Member of Parliament unless a restriction order has been made against him. The bankrupt’s interest in his sole of principal home will revert automatically to the bankrupt after 3 years of the making of the bankruptcy order unless the trustee has in this period applied for an order for sale or possession of the home or for a charge to be registered for the benefit of the bankrupt estate. The trustee will now have to use it or lose it and will no longer be able to control the timing of any sale. Income Payment Agreements are to be introduced as an alternative to the current system of Income Payment Orders. The Payment Orders were designed to ensure that bankrupts, who were able to do so, made a contribution to their debts. The new agreements will be the same as current payment orders and can run up to a period of 3 years after the date of the bankruptcy order. At present, only a Licensed Insolvency Practitioner can act as nominee and supervisor with regards to individual voluntary arrangements. The new Act enables the Official Receiver to act in this respect after the making of a bankruptcy order. Where an undischarged bankrupt puts forward proposals for a voluntary arrangement and the Official Receiver believes the arrangement has a reasonable prospect of being approved, the case will then be ‘fast tracked’ where creditors will be asked to vote on the proposal, they will not be able to modify it as at present. There will be no creditors’ meetings and the proposal will either be accepted or rejected. If accepted the bankruptcy order will be annulled. Due to the period of bankruptcy being reduced to 12 months and the restrictions being reduced, it is hard to see why an individual will want to put forward an arrangement with creditors unless it prevents continuing a profession. With the level of consumer creditor seemingly forever increasing and with the new bankruptcy legislation being a quicker process it is likely that debtors may take the bankruptcy option to wipe out their debts. It is likely that the majority of their debts are to be credit cards or unsecured loans. This could result in credit card companies and loan companies becoming stricter with their procedures and credit checks making the genuine applicant suffer rejection or delays whilst further checks are carried out. This could have an effect on the economy as less credit would reduce growth and in effect enterprise with the Act is supposed to promote
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