In a two-part series, Registrar Stephen Baister examines changes to insolvency laws

The Enterprise Act 2002 (EA) received royal assent on 7 November 2002.

The Insolvency (Amendment) Rules 2003 (SI 03/1730) (IAR), which will give effect to its provisions, will come into force on 15 September 2003 and 1 April 2004.

The Act makes wide changes to competition law and consumer rights.

This article examines the principal parts of the Act which amend the Insolvency Act 1986 (IA).

Administration was introduced by the IA.

However, the procedure has been reformed by the EA.

Section 248 of the EA replaces part II of the IA with a statutory regime for administrations, details of which are in schedule B1 of the IA (as inserted by schedule 16 of the EA, which replaces sections 8-27).

The IAR substitute a new part 2 in the Insolvency Rules 1986, dealing with the rules governing the new forms of administration.

The regime allows an administrator to be appointed by the court or out of court.

It is no longer necessary to show that the administration is likely to achieve one of four specified objectives.

Instead, paragraph 3(1) of schedule B1 provides that the administrator must perform his functions with the objective of rescuing the company as a going concern; achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or realising property in order to make a distribution to one or more secured or preferential creditors.

Paragraphs 3(3) and (4) make it clear that the objectives rank in order of priority.

The administration reforms of the EA go hand in hand with the virtual abolition of administrative receivership.

Holders of 'qualifying floating charges' will no longer be able to block the appointment of an administrator but will instead, themselves, be able to seek the appointment of an administrator of their choice.

Court order

An administrator may still be appointed by order of the court.

The application may be made by:

- The company;

- The directors of the company;

- One or more creditors of the company;

- The justices' chief executive for a magistrates' court (in relation to a fine); or,

- Any combination of the above (paragraph 12(1)).

It is made by a new prescribed form of application (form 2.1B), rather than by petition, and must be supported by an affidavit containing:

- Details of the company's financial position (including assets and liabilities);

- Details of any security held;

- Details of any existing insolvency proceedings;

- Where more than one administrator is to be appointed, details of which functions are to be carried out by them jointly or separately (paragraph 100(2));

- Where the application is made by the holder of a qualifying floating charge, details to satisfy the court of the charge holder's entitlement to appoint an administrator;

- A statement as to the application of the EC Regulation on Insolvency Proceedings and whether the proceedings are main or territorial (rule 2.4);

- Any other relevant matters.

Notice of the making of the application must be given to:

- Any person who has appointed an administrative receiver;

- Any person who may be entitled to appoint one;

- The holder of any qualifying floating charge (paragraph 12(2)).

In addition, the application must be served on:

- Any administrative receiver who has been appointed;

- Any person who has presented a winding-up petition;

- Any liquidator appointed in main proceedings in a member state;

- The proposed administrator;

- The company (unless it is the applicant);

- The supervisor of a voluntary arrangement under part I of the IA (rule 2.6 of the IAR).

The application must also be supported by a written statement by the proposed administrator(s) (form 2.2B) stating that he consents to his appointment, that it is reasonably likely that the purpose of administration will be achieved and giving details of any prior professional relationship with the company (IAR rule 2.3(5)).

Before making an administration order, the court must be satisfied that the company is, or is likely to become, unable to pay its debts and that the administration order is reasonably likely to achieve the purpose of the administration (paragraph 11 of schedule B1).

On the hearing of the application, the court may:

- Make the administration order;

- Dismiss the application;

- Adjourn the hearing conditionally or unconditionally;

- Make an interim order;

- Treat the application as a winding-up petition and make any order it could make under section 125 of the IA;

- Make any other order it thinks appropriate (paragraph 13(1)).

Where a qualifying charge holder applies for an order (as opposed to appointing out of court), there is no obligation to satisfy the court that the company is, or is likely to become, unable to pay its debts, but the application must state that it is being made under paragraph 35 of schedule B1.

Out of court

The holder of a qualifying floating charge may appoint an administrator out of court (paragraphs 14-21 of schedule B1 IA, rules 2.15-2.19 of the IAR).

A floating charge 'qualifies' if it is created by an instrument which:

- States that paragraph 14 of schedule B1 applies to it;

- Purports to empower the holder to appoint an administrator;

- Purports to empower the holder to make an appointment of what would otherwise be an administrative receiver (paragraph 14(2)).

The appointment becomes effective when a notice of appointment, in the prescribed form, accompanied by the administrator's consent to act and a statement by him that, in his opinion, the purpose of the administration is likely to be achieved, have been filed in court.

Rule 2.19 makes provision for filing a notice of appointment by fax out of business hours.

Similar provisions (excluding appointments out of hours) are made for the appointment of an administrator by the company or its directors (paragraphs 22-34 and rules 2.20-2.26).

The effects of administration are set out in paragraphs 40-45 of schedule B1.

On the making of an administration order:

- Any petition to wind up the company (except in the public interest or under the Financial Services and Markets Act 2000) must be dismissed or (in the case of an appointment by the holder of a qualifying charge) suspended;

- Any administrative receiver must vacate office (paragraphs 40 and 41).

See Gazette [2003] 29 August, 36

Registrar Stephen Baister sits at the Royal Courts of Justice