UK: The Enterprise Act 2002 - What Difference Has It Made A Year On?

Last Updated: 14 February 2005
Article by Rick Munro

The corporate insolvency provisions of the Enterprise Act 2002 came into force in September 2003 and the personal insolvency provisions in April 2004. The emphasis, of course, was to encourage the entrepreneur through a number of measures including a reduction in the period of bankruptcy and the introduction of a fast and streamlined administration process to rescue struggling businesses.

Has the Enterprise Act 2002 made any difference so far? It would be unwise to read too much into the statistics from 2004 certainly for corporate insolvency with interest rates very low and consumer spending very high. 2004 was one of the quietest years for many years for corporate insolvency professionals, bad new for them but good news, of course, for the business sector generally. Corporate liquidations fell by around 11%, receiverships fell by about 7%. In contrast, administrations increased by over 46%. The primary objective of administration is of course the rescue of the business so is this not strong evidence that the rescue culture is going from strength to strength?

It is doubtful whether the increase in administrations has been driven by any significant change in approach or ethos by insolvency practitioners. The rescue culture had already been developing for a number of years before the introduction of the Enterprise Act. More likely, the increase in administrations is partly down to the new procedure being much quicker and cheaper than many other formal insolvency procedures and partly because of the House of Lords decision in the Leyland Daf case in March 2004.

In Leyland Daf the House of Lords inadvertently gave a further incentive, if any were needed, for insolvency practitioners to recommend administration over liquidation. Namely, where there is bank borrowing secured by a debenture the general costs and expenses of a liquidation are not to be paid from assets caught by the bank’s floating charge, for example book debts, but only from the so called "free assets" which, in reality, are often minimal or non-existent. We have seen and will probably continue to see a move away from liquidations to administrations but it is doubtful that this has been led by any significant change of policy or philosophy.

The trend in personal insolvency is very different. 2004 has seen a surge in bankruptcies. This is hardly surprising given that the period before discharge for most bankruptcies has been reduced from 3 years to 1 year and often less. Many people have taken advantage by petitioning for their own bankruptcy and effectively wiping the slate clean. There were approximately 29% more bankruptcies in 2004 than there were in 2003. The other reason for this increase is that in 2003 and the first half of 2004 attracted by low interest rates many individuals were taking on far too much debt by releasing equity in their homes through re-mortgaging and over spending on credit cards.

There has been an unwelcome development for many during 2004. A large number of old bankruptcy cases have been farmed out to private insolvency practitioners by the Protracted Realisations Unit ("PRU") of the Insolvency Service. Many of these are bankruptcies from the last recession in the early 1990s. The bankrupt’s home automatically vested in the Official Receiver at the time but no action was taken to realise it because there was little or no equity in the property. The PRU has mothballed these files for many years. Many bankrupts had wrongly assumed that their discharge from bankruptcy was the end of the matter when, in fact, their discharge had no effect on the vesting of the home in the Official Receiver. Consequently, many thousands of people around the country are facing applications by their Trustee in Bankruptcy to sell their home and to pay the proceeds to creditors.

2005 brings with it a six month decline month on month in property prices and disastrous Christmas trading for retailers. Faced with such conditions, it would be surprising if the decline in the number of corporate insolvencies were not reversed or at least arrested. We are likely to see a much greater proportion of these go into administration rather than liquidation which will become the procedure of choice in the vast majority of corporate insolvencies.

Overspending by many individuals last year and the fall in property prices suggests that the number of personal insolvencies will continue to increase during 2005.

In the commercial context it is doubtful the Enterprise Act has caused any radical change in approach by insolvency professionals. However, the reduction in the period of bankruptcy at a time of excessive consumer debt has seen a sharp increase in the number of individuals seeing it as an opportunity to wipe the slate clean. Perhaps there is something to be said for a tougher regime after all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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