A new Enterprise Bill is likely to come into force in April 2003 with two principal aims: to further enhance the rescue culture (i.e. to make the option of trying to rescue a business in difficulties more attractive than insolvency); and to remove the stigma from business failure, especially bankruptcy.
Prior to 1986, business failures in the UK were dealt with under somewhat draconian insolvency legislation. There were few options and little emphasis on recovery. Individuals could be made bankrupt (an ancient court process with Dickensian connotations) and companies could go into liquidation (either compulsory - a court process - or voluntarily).
The only other option for companies was receivership, a process initiated by a secured creditor, usually a bank (provided it held a floating charge). The creditor could appoint a receiver to dispose of company assets in order to recover its indebtedness. Crucially, most charges gave the receiver power to trade the company's business and the principal advantage of the receiver so doing was often that realisations were enhanced by selling the business as a going concern. Experts have debated for years whether this was a rescue process (saving a viable business) or an insolvency process (burying an ailing company).
The 1986 Insolvency Act was the first attempt to introduce a rescue culture into the UK. It was most successful in dealing with personal financial difficulties - the Individual Voluntary Arrangement (IVA) process has been widely used as an alternative to bankruptcy. Key has been the protection it offers against creditors taking precipitate action. Creditors, of course, have the opportunity to vote on whether or not to accept a proposal - a 75 per cent majority by value is required.
Although by no means unused, the Company Voluntary Arrangement (CVA) process has been less successful, largely because, contrarily, the legislation omitted to offer creditors the moratorium which helped to make the IVA process so successful. This was rectified in the 2000 Insolvency Act, which will take effect from January 2003. The other key factor is the extent to which companies have given charges over their assets in support of their borrowings. Clearly, the rights of the secured creditors must be considered, as their position may be compromised by a CVA.
The 1986 Act also introduced two further processes - administrative receivership: in practice, this is not dissimilar to the old receivership process and is still widely referred to as that; administration: a court process which can be very effective as a rescue tool because it includes a creditors' moratorium to provide breathing space for a reconstruction to be carried out. In some respects, it mirrors the US Chapter 11 process. However, in many cases it has been used as an alternative insolvency process, often because nobody was in a position to appoint a receiver.
Historically, the ethos in the US has been very different. The US legislation is designed to encourage entrepreneurs and to offer a second chance. Like UK administrations, the US Chapter 11 is a court process originating from a petition. The emphasis is on turnaround and recovery. The debtor remains in possession but is subject to heavy court supervision. Although there is a moratorium, creditors are closely involved in approving the plans. In contrast to the UK, the US process is administered by lawyers.
The new Enterprise Bill will continue to develop the rescue culture in the UK. Key initiatives suggested have included:
n A streamlined process for “honest” bankrupts. n Receivership will largely disappear, except for a continuing existence under pre-existing security arrangements.
n The pre-CVA moratorium will prevent a receivership appointment while the moratorium is in place.
The rate of failure of UK retail businesses is comparatively low, perhaps reflecting a real but often unsung level of co-operation between retailers and the various funders. The new regime may well further encourage this process, to the advantage of all.