OCTOBER 2003 RECENT CHANGES IN THE UK AND EU LAW AND THEIR EFFECT ON YOUR BUSINESS In Short...Corporate Restructuring & Insolvency THE ENTERPRISE ACT 2002 — A qualifying floating charge is one which is created by CORPORATE INSOLVENCY PROVISIONS an instrument which expressly states that paragraph 14 of Schedule B1 applies to it or empowers the holder to appoint Background an administrative receiver or an administrator of the company. The corporate insolvency provisions of the Enterprise Act, The company will enter administration and the intended to promote a rescue culture, for which the administration will commence when the appointment of administration and CVA procedures were originally an administrator takes effect. introduced by IA 1986, came into force on 15 September If the company is already in liquidation, it may only 2003. enter administration upon an application by the liquidator The provisions contain substantial amendments to be or the holder of a qualifying floating charge. made to IA 1986, with the majority of the new provisions to be included in Schedules to the Act, including:- Purposes •A new administration régime; • Removal of the floating charge holder’s right to The Enterprise Act replaces the four statutory purposes for appoint an administrative receiver (except for certain which administration orders have been made with one, to capital markets arrangements and public/private rescue the company (i.e. not just the business). Where that is partnership projects where administrative not reasonably practicable, the administrator should receivership is preserved); perform his functions with the objective of achieving a • Abolition of Crown preference in all insolvencies. better result for the company’s creditors as a whole than would be likely if the company had been wound up (without first The New Administration Procedure being in administration). Where that is not reasonably practicable, the administrator’s objective must be to realize The existing provisions of IA 1986 (Sections 8 to 27) are property in order to make a distribution to one or more replaced by a new Schedule B 1, to IA 1986. secured or preferential creditors. Administrators may be appointed: • by the Court, upon the application of the company, Administrator’s duties its directors or liquidator, one or more of its creditors (including contingent and prospective creditors), the The administrator is an officer of the court and must holder of a qualifying floating charge (see below), exercise his functions in the interests of the company’s the justices’ chief executive for a Magistrates’ Court creditors as a whole. Where he can only reasonably realize or a combination of two or more of these parties; property for one or more secured or preferential creditors, • out of court by the holder of a qualifying floating he must ensure that he does not unnecessarily harm the charge; or interests of the company’s creditors as a whole. • out of court by the company or its directors. ©2003 Jones Day Gouldens. All rights reserved. Powers of the Court having been approved, or since the conclusion of any failed CVA; Where any party other than the holder of a qualifying floating • at least five business days’ written notice is given (or less charge applies to the Court for an administration order, it with the consent of the relevant parties) of their will only be made where the Court is satisfied that the company intention to do so to (i) any party entitled to appoint an is or is likely to become insolvent and that the order is administrative receiver; (ii) any party entitled to make a reasonably likely to achieve the purpose of administration. Paragraph 14 appointment; However, holders of a qualifying floating charge are only • there is filed at Court a copy of the relevant notice required to satisfy the Court that they are entitled to make an together with a statutory declaration that the company appointment. is or is likely to become unable to pay its debts. Once the company or its directors have complied with Out of Court appointments this obligation they may appoint an administrator out of court provided they do so not less than five and no more than ten The most radical amendment since the publication of the business days after the notice of intention to appoint is filed original White Paper on 31 July 2001, is the introduction of at Court. appointments of administrators out of court by the holder of In the event that a Paragraph 22 appointment is a floating charge or a company’s directors. subsequently found to be invalid, the Court may order the The holder of a qualifying floating charge may appoint appointors to indemnify the person appointed against an administrator of the company out of court: liabilities arising solely as a result of the defective appointment. • provided the floating charge is enforceable and neither a provisional liquidator nor an administrative receiver Prohibition of appointment of has already been appointed; Administrative Receivers • by giving not less than two business days’ notice to the holder of any prior ranking qualifying floating charge; No administrative receiver may be appointed in respect of • by filing at Court the requisite papers which will any qualifying floating charge, subject to certain prescribed comprise a notice of appointment and other formal exceptions (see below). prescribed documents. As stated, a qualifying floating charge is one created by The appointment takes effect as soon as all requisite an instrument to which Paragraph 14 of Schedule B1 is stated papers are filed at Court, whereupon a moratorium comes to apply, or which empowers the holder to appoint an into being so that no action may be taken against the company administrative receiver or administrator of the company. or its property (including steps to realize security) except with The exceptions are: the administrator’s consent or leave of the Court. • Capital markets arrangements; The notice of appointment must include a statutory • Public private partnerships; declaration by or on behalf of the appointor that it is entitled • Utility projects; to appoint an administrator and that the appointment has • Project finance; been in accordance with the Schedule. It must be • Financial markets contracts. accompanied by a statement by the administrator that he consents to act and that in his opinion the purpose of Abolition of Crown preference administration is “reasonably likely to be achieved”. In the event that the appointment is subsequently found The anticipated abolition of Crown preference has been to be invalid, the Court may order the appointor to indemnify achieved by deleting the relevant paragraphs of Schedule 6 to the person appointed against liability arising solely as a result IA 1986 which referred to Social Security contributions and of the defective appointment. debts due to HM Customs & Excise and the Inland Revenue. Under Paragraph 22 of Schedule B1, the company or its directors may appoint an administrator out of Court provided that: CORPORATE RESTRUCTURING •there is no outstanding petition for a winding up order or administration application and an administrative ■ Cenargo International Plc—Finding receiver is not already in office; transatlantic harmony — Eligibility for • more than 12 months have passed since any previous non-US companies to file for Chapter 11 out of court appointment by the company ceased to have effect or any CVA moratorium under the new As details of the on-going Cenargo restructuring have become Schedule A1 IA 1986 (introduced by the Insolvency Act available, the case provides useful insight into the ability for 2000) came to an end without a voluntary arrangement non-US companies to file for protection under Chapter 11 of 2 the US Bankruptcy Code, difficulties which can arise between This state of affairs indicated a breakdown in the comity conflicting jurisdictions and attempting to find harmony between the US and UK Courts which may often be taken for between the two. granted in large international restructurings. In due course, Cenargo, a freight and passenger ferry company, was both the New York Bankruptcy Judge made it clear that Lombard incorporated in and had its head office in England. Its and the proposed provisional liquidators should have consulted principal assets were shares in subsidiaries, which were mostly the New York Bankruptcy Court before taking any proceedings English companies. Cenargo had limited assets in the US. It in the UK, because the automatic stay under Chapter 11 had did not have commercial operations in the US but in June worldwide effect, pursuant to US private international law. 1998 had issued ship mortgage notes in respect of ships, under Therefore, so long as a non-US creditor had sufficient an indenture governed by New York law. As security for this connection with the US, it could be expected to observe the note issue, it had pledged its shares in an Isle of Man subsidiary stay even outside the UK. Indeed, the steps taken by Lombard to a New York Bank as Trustee for note holders. In addition, were unusually bold, since creditors outside the US system often in the Autumn of 2002 it had opened US bank accounts which take the view that defying the automatic stay under Chapter 11 enabled funding of US advisers. by taking local action may precipitate contempt proceedings On 16 January 2003, Cenargo filed for protection against their own operations in the US. pursuant to Chapter 11 in the Southern District of New York, Nevertheless, the New York Bankruptcy Judge did accept in the hope that the automatic stay which arises upon the that the worldwide automatic stay does not exist in a vacuum, filing of a petition would have global effect, including in but is inextricably linked with a jurisprudence that defers to the UK and, it was subsequently suggested, to enable the foreign jurisdiction or foreign law if the request for deference directors to remain in control.