UK: Insolvency Act Reform

Last Updated: 18 February 2000
Article by Gwen Griffiths

The Year 2000 is likely to see a new insolvency act. At the end of 1999 the DTI issued a consultation paper dealing with potential reforms and a new insolvency act was announced in the Queens speech. There are a number of clear themes which emerge from consultation paper and the proposed bill:

  • the promotion of corporate voluntary arrangements particularly for small to medium sized enterprises (“SMEs”);

  • a toughening of the regime for dealing with delinquent directors

  • where possible rescue rather than liquidation

  • potential limitation on bank’s rights particularly in relation to appointment of administrative receivers.

The majority of the proposed changes to existing law will be uncontroversial. The tightening of the regime against delinquent directors, for example, is a useful tightening of existing law. Similarly the majority of lenders have over the last few years embraced the rescue culture as, when rescues are correctly implemented, the returns to banks have tended to be better than receivership.

There are, however, a number of proposed changes that may become very controversial. It is possible, the draft bill leaves the question open, that banks may be required to give notice before appointment of an administrative receiver to allow company’s the possibility of promoting a corporate voluntary arrangement. It has been pointed out to the government that this is a “rogues charter” in that directors when faced with the possibility of losing their livelihood maybe tempted to move assets beyond the reach of receivers. If the notice periods for appointment of receivers are enacted then there is a significant chance that lenders will have to change their enforcement procedures and this will, at least theoretically, increase risk for lenders which may lead to increased interest rates to their business customers. However, the risk should not be overstated. Even if notice periods for appointment are enacted there may well be mechanisms created to avoid the need for giving notice with the result that bank documentation rather than procedures will need to be changed.

At this stage lenders should wait for further developments and in particular for the initial reading and committee stages of the draft bill.

RECEIVER DUTIES

Medford v Blake

This was a case about pig farming. More particularly and of more relevance to lenders was that the Court of Appeal reviewed the law relating to the duties owed by receivers. This case will impact on the costs of receiverships and the procedures receivers adopt.

Prior to Medford it was a generally accepted principal that a mortgagee and a receiver owed a duty to “take reasonable care to obtain a proper price” and a duty of good faith. That duty applies to the sale of the charged assets and cases had specifically provided that the mortgagee or receiver had a complete discretion as to when to sell, the duty to seek to obtain a proper price applied to the manner of sale only. It had previously also been decided by the courts that receivers owed duties of good faith. However, attempts in the courts up to Medford to widen receiver’s duties had been unsuccessful.

In this case the court held that a receivers primary duty is to manage and sell the charged assets to pay off the secured liabilities. Subject to that duty the receiver owes a duty to manage the charged assets with due diligence. Whilst due diligence does not require the receiver to carry on the business if it does “due diligence requires reasonable steps to be taken to try to do so effectively”.

This case imposes a relatively high standard of care on receivers if they decide to carry on trading the business over which they are appointed. In some cases this may result in receivers being very wary about carrying on trading where specialist knowledge is required unless they either employ a consultant or the company’s directors to assist. This has a cost implication for receiverships.

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