Introduction to the United Kingdoms Enterprise Act 2002

Introduction to the United Kingdoms Enterprise Act 2002

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A number of European countries have recently refined or are in the process of refining their insolvency legislation, and they are typically using the U.S. chapter 11 approach as a template for these reforms. The German Insolvency Act, introduced on Jan. 1, 1999, focuses on reorganization procedures; the United Kingdom brought into force the Enterprise Act 2002 on Sept. 15, 2003, and following the recent demise of Parmalat, the Italian government rushed through new legislation that is considerably more debtor-friendly than pre-existing statutes. It is anticipated that later this year, France will also introduce new legislation following the recent publication of a government paper on insolvency. In this article, we summarize the key elements of the Enterprise Act and its implications on various stakeholders.

The United Kingdom has historically been perceived as a creditor-friendly jurisdiction, particularly with respect to secured creditors. However, in recent years there has been a desire to focus on the rescue of a company and increase all creditors' participation in the restructuring process. This desire led to the development and passing of the Enterprise Act.

Part of the Enterprise Act sets out to modify the administration procedure under the Insolvency Act 1986, which has been viewed more as an enforcement process than as a rehabilitation tool. It calls for the eventual elimination of administrative receivership (except in certain situations) as an enforcement mechanism available to secured creditors with a "qualifying floating charge" and removes the effective "veto" that such a secured creditor had over any proposed administration order. These steps have reduced somewhat the leverage available to such secured creditors in an insolvency situation.

It is intended that the Enterprise Act will create greater accountability to all creditors, particularly unsecured creditors. As a result, the following reforms are envisaged:

  • The appointed administrator must not do anything to harm creditors overall and must act "quickly and efficiently."
  • Creditors have increased rights to challenge an administrator's actions.
  • Creditors will become more involved in the process at an earlier stage. This is similar to the chapter 11 approach, and it is likely that creditors' committees that were previously used on an ad hoc basis will have far more influence over the process.
Despite creating greater leverage for unsecured creditors, there is no provision in the Enterprise Act that provides for committee professionals to be paid out of the estate, as is the case in the United States under chapter 11. As a result, some of the intended involvement of unsecured creditors may remain a theoretical possibility rather than become a practical reality. The Enterprise Act does highlight the importance of the administrator and the court in overseeing the process.

Many similarities can be drawn between the Enterprise Act and chapter 11 of the Bankruptcy Code, which is intended to focus on preserving reorganization or going-concern value while providing all creditors with the opportunity to closely observe and participate in the process.


The objectives of an Administration Order under the Enterprise Act are as follows:

  1. Rescue the company as a going concern;
  2. Achieve a better result for the creditors as a whole than liquidation; or
  3. Realize property in order to make a distribution to the secured and/or preferential creditors.
The administrator must pursue the first objective unless he thinks that:
  • it is not reasonably practicable, or
  • an alternative approach will produce a better result for creditors as a whole.
The administrator may pursue the third objective if neither of the first two objectives are reasonably practicable, provided that his actions would not harm unnecessarily the interests of the creditors as a whole. However, this third course of action should be by exception only.

The objectives do not specify the exit alternatives from administration, namely company voluntary arrangement (CVA) or a scheme of arrangement, but such exit routes are commonly adopted as part of a strategy to achieve objective number two (a better result than liquidation). Such exit strategies, together with liquidation, are the current approaches usually used to exit administration. CVAs and Schemes of Arrangement are effectively the reorganization plan equivalents, typically providing for the compromise of creditor claims.

Commencement of Procedure

The procedure can be initiated either out of court or upon an application to the court. The out-of-court alternative (new under EA 2002) is available to either a secured creditor who holds a "qualifying floating charge" (the instrument historically used to appoint an administrative receiver) or the company or its directors.

Unsecured creditors must apply to the court, and their application must state that (1) the company is or is likely to become insolvent and (2) at least one of the three objectives (as outlined above) will be achieved. The company, the directors or one or more creditors (including a creditor who holds a "qualifying floating charge") can also apply to court to instigate proceedings. It is likely that the most common entry into administration will be the debtor instigating proceedings in court, along the lines of most chapter 11 filings.


A stay, or moratorium, takes effect from the date on which either an application is made to the court for the appointment of an administrator or when notice of appointment of the administrator is served in the out-of-court procedure. The moratorium stays all litigation and prevents the enforcement of judgments and of security without the leave of the court or the consent of the administrator.

This aspect is very similar to what happens under chapter 11. Both jurisdictions show a reluctance to lift the stay unless there are good reasons to do so. Lifting the stay can often obstruct the overriding objective of each procedure: i.e., the promotion of a rescue culture and preservation of going-concern value.


Unlike in the United States, directors of failed companies in the United Kingdom can be subject to wrongful trading actions and ultimately face civil proceedings (and even criminal ones when fraud is involved) if it is proven they continued to trade and incur credit when there was no reasonable prospect of the company avoiding insolvent liquidation. This exposure explains why management in the United Kingdom in distressed-company situations may seek what appears to be a creditor-friendly procedure, because once a company is in administration, control passes to the administrator. Although the executive powers of the directors cease, the exposure to personal liability for wrongful trading effectively ceases also. The directors have a statutory duty to assist the administrator in performing his duties, while an administrator has the power to appoint and remove directors. This control scenario is quite different from chapter 11, under which control typically remains with the debtor's management.


Unlike under chapter 11, an administrator does not have a statutory power to disclaim onerous contracts. Contracts can be terminated in an administration if the contract itself specifically provides for it. In the absence of such a termination provision, an administrator has to carefully consider whether or not to cause the company to ignore contractual obligations. If his actions are contested by a counterparty, a court would examine whether he acted ethically and fairly and whether his actions were in accordance with the purposes of the administration order.

Financing the Proceeding

A company in administration will usually look to its existing lenders for continued financing support. An administrator has the power to borrow and encumber assets. However, no special priority is given to post-administration lenders. The concepts of "priming" and "adequate protection" are not recognized in the United Kingdom. However, as case law evolves and administrators become more innovative, it is likely that equity in already secured assets may be pledged to secure financing in the administration, although it will rank behind the charge of the primary security-holder. With the introduction of the Enterprise Act, it is possible that the courts will be more open to innovative and commercial strategies, including a form of debtor-in-possession (DIP) financing, in order that the rescue culture can and will prevail.

Proposals to Creditors

The spirit of the Enterprise Act is to shorten the timetable for administration, placing the onus on the administrator to act quickly and efficiently. Within eight weeks of the administrator's appointment, he must (1) present his proposals for achieving the purposes of the administration order to the unsecured creditors and (2) hold an initial creditors' meeting within 10 weeks of his appointment. At the meeting, the creditors may accept the proposals, accept them with modifications or reject them. Acceptance of the proposals requires a simple majority in claim value of those unsecured creditors present in person or by proxy and voting. Secured creditors can vote with respect to any unsecured shortfall. The meeting can be dispensed with by the administrator if he expects that either all creditors will be paid in full or there will be nothing available to pay a dividend to unsecured creditors.

An administrator's proposals do not have to take a prescribed form, and there is no provision in the Enterprise Act for the creditors to "take control" of the procedure and present their own proposals. The administrator effectively retains "exclusivity" over the process. This contrasts with chapter 11, which provides that only the debtor may propose a reorganization plan during the first 120-day exclusivity period (unless extended), and any plan requires approval by two-thirds in amount and one-half in number of those voting in each distinct class of impaired creditors.

Exit Routes

The administration can terminate in a number of ways, the main ones being:

  • Automatic termination after one year (but this can be extended by the court or by consent of the creditors).
  • On the administrator's application where the purpose of the administration has been achieved.
  • On the administrator's application upon a determination that the purpose of the administration cannot be achieved, in which case the administrator will place the company directly into liquidation.
Under chapter 11, plan confirmation discharges the debtor's pre-existing obligations to claimants other than those provided for in the plan. In cases where a plan is not confirmed, it is typical for the court to order conversion to chapter 7 bankruptcy proceedings.

Inter-creditor Issues

The Enterprise Act, similar to the Insolvency Act 1986, is silent with respect to substantive consolidation and equitable subordination. As the capital structures of European companies become more dynamic and group structures become more complicated, it is likely that these areas will need to be addressed. Again, it is likely that case law will eventually drive these developments.


The Enterprise Act introduces a process that makes restructuring more attractive and may allow for greater creditor influence than contemplated by the prior statute. There will still be challenges to overcome. The fact that committee advisors will not be remunerated out of the estate has the practical impact of limiting exploration of the restructuring alternatives that are typically available in a chapter 11. Furthermore, it does not alleviate the issue of multiple stakeholders with different agendas.

Case law will undoubtedly influence how the new Administration Order evolves under the Enterprise Act. This means there is tremendous opportunity for innovative professionals and investors to shape the new approach.

It is expected that the introduction of the Enterprise Act should lead to more strategic, creditor-driven administrations, led, for example, by distressed investor groups. The new legislation will give unsecured creditors greater leverage, and it is envisaged that they will use this to force change.

Journal Date: 
Thursday, July 1, 2004