1. The consultation document was released on 20 September 2023 and sought responses by 12 November. Some 75 written responses were received, many of them coming in after the deadline. Nonetheless, every response was acknowledged and read by officials in the Insolvency Service and distributed to the review group for their consideration.

2. In addition, 7 meetings were held in the regions to discuss the consultation document, together with 9 separate meetings in London with various specialist individuals and groups.

3. The written responses came from a wide range of sources, with most coming from law firms and law societies, accountants/IPs and their professional bodies and trade associations21. The majority of responses from these sources was generally in favour of the current regime and advised caution with regard to any significant change. A particular concern expressed by many in this group was how the Review related to the Insolvency Bill, with many suggesting that the main measures contained in the Bill ought to have waited until the Review had concluded. Whilst overall they contained few ideas for change, they were valuable for their discussions on the potential consequences of changes to the current system.

4. Some of the more innovative suggestions came from the three QCs who contributed.

5. The responses from the trade associations were also very useful. While not as sophisticated in their understanding of the law, they highlighted particular issues from a practical viewpoint. The submissions from those representing interests in the building industry were of note. They identified the problems faced by sub-contractors in the context of the insolvency of a main/head contractor.

6. In the regions we sought to meet with as wide a group of people as possible. We were particularly interested in hearing from business people who had been involved in the insolvency process in some way, either as a creditor or as a debtor. The meetings varied in attendance levels (with the smallest meeting being at Leeds, with 3 attendees and the largest in Guilford, with over 20), but over all they were a very useful exercise, in particular because of the practical experiences we were able to learn of. The points raised in the regional meetings will be covered in the appropriate parts of this summary.

7. Sections 3 and 4 of the consultation document discussed the state of the rescue culture in the UK and the role of the insolvency legislation in promoting it. Section 4 identified some possible reasons why businesses are not rescued when it may have been possible to do so and why the processes available may not be providing satisfactory returns to creditors. Those factors included: the veto over company rescue procedures held by secured creditors; difficulties in finding financing for rescues for companies in CVAs or administration; the proliferation of holders of secured interests; the reluctance of company management/directors to take timely action and seek advice; fear of failure; over-collaterisation; and the control of floating charge holders. The sections concluded by inviting views on:

the extent to which the above factors or any others may have caused an underdevelopment of the rescue culture in the UK

  8. Some responses questioned the assumption behind this statement and stated that the rescue culture in the UK was far from underdeveloped. One law society’s submission stated:

It is our view that the United Kingdom, far from lagging behind in developing a rescue culture has probably developed a far more satisfactory system than any other in the world, although we accept that it may need improvement.22

9. Similarly, the British Bankers’ Association (BBA) stated:

we believe that there is already a flourishing rescue culture in this country. We accept that it continues to evolve and that there must always be room for improvement. The review should not ignore, though, the extent to which the rescue culture has developed to the benefit of tens of thousands of businesses every year.

10. The other responses were varied in their views on the causes of any underdevelopment of the rescue culture. Many responses considered that directors and management’s failure to act, perhaps caused by the fear of failure, was the root cause.

11. This point was echoed in the regional meetings. Many company directors we met with stated that in times of trouble, it was very difficult to get reliable advice, which tended to delay any action until it was too late. Few directors we spoke to felt that talking to their bank at an early stage was a wise option. One turnaround operator we met went as far as to say that the bank should be the last one a company in trouble should turn to. There was also widespread mistrust of IPs in the groups we spoke to. Many business people felt that IPs were too fees driven and not genuinely committed to acting in the client company’s best interests.

12. The second most often cited factor was the power of the banks, derived from their floating charges. This issue tended to be raised by smaller business people and IPs from smaller firms (both by those who sent in written responses and those we heard from in the regional meetings), but a few of the other contributors were also concerned. They saw the power of the banks to appoint receivers as a major inhibitor of the rescue culture, because their control over the whole process once they called in the receivers and often at the expense of other interests, particularly unsecured creditors. One of the QCs put the position quite plainly:

The effective veto by Banks over secured creditors must be abolished. It gives the banks far too much control over the process. They decide whether or not administration will secure their interestswhere their interests or control might be compromised they do not hesitate to appoint receivers. Receivership is not a rescue or rehabilitation procedure.23

13. Unsurprisingly, this was not a view shared by the BBA or the majority of insolvency specialists that responded. On the contrary, many respondents felt that receivership was a very good rescue procedure and that the veto available to secured creditors with a floating charge was not commonly a hindrance to the rescue process. As another law society submission stated:

The English insolvency regime has always been extremely good at rescuing businesses. This is because of the quite extraordinary English inventions of the floating charge and the mechanism of administrative receivership.24

14. Moreover, some respondents considered that the banks these days were reluctant to exercise their powers to appoint a receiver and would only do so as a very last resort.

15. The quote in paragraph 13 highlights one of the main issues u
nderlying the rescue culture debate: the
rescue of companies v the rescue of businesses. All of the submissions that addressed the issue recognised the distinction.

16. Rescuing a business commonly involves the sale of the underlying enterprise to a new owner, whereas rescuing the company essentially involves the reorganisation of a company’s balance sheet in order to save it from creditor initiated terminal procedures. Company rescues frequently, but not always, retain the existing ownership and/ or management.

17. Opinions varied as to what the main rescue objective should be, but the majority of respondents favoured the rescue of businesses over companies. One reason why so many favoured the rescue of businesses was because business rescue was regarded as a quicker and less costly process, which usually involved a change of management. The change was seen as desirable, because many respondents considered that some fault on the part of the management was the principal cause of failure for most companies in the SME sector.

18. This view of the objective of rescues was not widely shared by the SME directors and managers we heard from during the consultation, for whom the end of the company usually meant the end of their livelihoods.

19. Many respondents did not see a lack of availability of finance as a particular concern. A typical view was that good rescue proposals for viable businesses would find finance.

20. The proliferation of lease financing, debt factoring and retention of title clauses was recognised as an issue which had the potential to undermine the development of the rescue culture. Many respondents recognised that an increase in the amount of creditors with secured interests in a company’s assets could make collective rescue action more difficult. This was seen as an issue, which could become more of a concern in the future, as companies are apparently relying less on banks as their sole or main source of financing.

21. With regard to retention of title clauses, while some respondents argued for their abolition, it was generally recognised that they were often the only means of security open to trade creditors, the parties who usually come off worst in the context of an insolvency.

22. The respondents who addressed the question of over-collaterisation were not convinced that this was a concern. The banks and their advisors submitted that the control exercised by floating charge holders did not bias lending in favour of collateral as opposed to a proper assessment of viability. The BBA strongly rejected the suggestion that banks lent only against collateral:

There is a perception running through the paper that banks are effectively pawnbrokers, lending only against security, or collateral. The truth is that banks principally lend against viability and cashflow. Collateral is taken as a contingency if things do not work out as planned.

  23. This view was not seriously challenged by any of the other respondents.

24. In addition, many respondents stated that the net value of assets typically covered by a floating charge was not significant – the real worth of a floating charge was the control it gave the holder in the event of a default by the borrower.

25. This section looked at CVAs, administration, administrative receivership, informal workouts and schemes of arrangement under section 425 of the Companies Act. It asked two questions:

Have the key strengths and weaknesses of the current system and of these procedures, insofar as they relate to company rescues, been identified?; and

To what extent might the complexity of the insolvency system or the inability of a company experiencing difficulties to understand the options open to it, result in fewer rescues and more liquidations?

26. With regard to the first question, most, but not all, respondents stated that the consultation document had identified the key strengths and weaknesses of the current system.

27. Several respondents took the opportunity to comment on the problems with CVAs, but acknowledged that most of the obstacles that inhibited the use of CVAs would be addressed in the Insolvency Bill. However, a number of respondents considered that CVAs were inherently flawed where they left the management who were responsible for the company’s troubles in place. Some company directors we spoke to in the regional meetings told us of their personal experiences with CVAs. Generally they were not positive. They said that there was a stigma attached to CVAs and had experienced unanticipated difficulties in gaining and keeping customers and suppliers as a result. One director told us that this problem disappeared when he liquidated the original company and set up the same business through a new company.

28. The BBA questioned the assertion in the consultation document that CVAs offered considerably better returns for creditors and recommended that we conduct some research on this point.

29. Other respondents took the opportunity to comment on the administration regime. One major accounting firm25 considered that the administration regime was a weak part of the system and wrote that it:

has failed to fulfil its potential and has now become a flawed tool[and] no longer perceived as an effective means of rescuing a company.

30. This was not a common view of administration. A significant number of respondents suggested that it could be the cornerstone of an improved rescue system. However, many respondents considered that administration was of limited use in the SME sector on the basis of the cost. One of the QCs26 thought that the perception that administration was time consuming and expensive was incorrect. He also considered, in contrast to the clear majority of respondents, that the emergence of informal workouts was: ..an extremely worrying trend, because, he wrote, they tended to be time consuming and therefore expensive and provided opportunities for unlicensed workout specialists of dubious quality.

31. The majority of respondents considered that informal workouts were a positive development in the SME sector, which ought to be encouraged. The BBA submission in particular, went into this issue in some depth, emphasising the largely behind-the-scenes role that the banks have in dealing with informal workouts. A similar view was expressed in a submission from the UK’s largest credit insurer27. It stated that it was actively involved in informal rescue procedures, which produced ..a very high level of satisfactory outcomes as compared with formal rescue procedures. A submission from a company specialising in company rescues and reconstruction, with considerable experience of informal workouts28, considered that there was an ..active and thriving.. informal workout culture in the UK. It asserted that informal workouts were less costly and generally produced greater benefits to the economy than any formal insolvency proceeding.

32. There were two distinct views expressed about administrative receivership. The first view, which was shared by a clear majority of the written responses, was that receivership was an effective vehicle for the preservation of viable businesses and was an integral part of the rescue culture in the UK. This was a firmly held view amongst the larger professional service firms29. Respondents in this group believed that banks took a responsible attitude to receivership and only acted to appoint receivers as a last resort. In this regard, some respondents noted that non-bank creditors that had floating charges were more likely to act precipitately, as they tended to be less focused on preserving a long term relationship with the debtor. They also considered that the floating charge holder’s ability to act quickly when necessary was an advantage not sh
ared by other procedures.

33. A number of respondents disagreed with the statement in paragraph 6(g) of the consultation document that:

An administrative receiver owes a duty of care to his/her appointor but little in the way of obligations to others.

34. Most respondents considered that the above quote understated the extent of the receiver’s obligations and referred to the recent Court of Appeal decision of Medforth v Blake in support. One respondent stated:

The Court of Appeal has recently clarified the position regarding receivers’ obligations to debtors…and concluded that the receiver has wider obligations than was previously though to be the case 30.

35. The SPI, referring to paragraph 6(g), stated that:

We do not believe that this is a correct statement of the law. There has been a succession of cases in which the courts have enumerated the duties owed by receivers to third parties, of which the most recent is the Court of Appeal decision in Medforth v Blake31.

36. The Medforth case was an appeal against a decision on the issue of whether a receiver and manager of a business owed a duty to the mortgagor (a pig farmer), above a duty of good faith, as to the manner in which he conducted the business. The receiver had run the pig farming business for four years but had not taken advantage of the substantial discounts that were available on bulk purchases of pig feed.

37. The Court of Appeal held that a receiver managing a mortgaged property owed a duty of good faith to the mortgagor; the extent of any additional duty depended on the facts and circumstances of each case; and if a receiver elected to carry on a business, he owed the mortgagor a duty to run the business with due diligence and this required that reasonable steps be taken in order to try to do so profitably.

38. The court emphasised that the duties with regard to running the business were a logical application of the longstanding duty to take reasonable care to obtain a proper price when selling. The court noted that a receiver’s duties towards the mortgagor and others interested in the mortgaged property were not inflexible – they depended on the particular facts of each case.

39. Some respondents asserted that the effect of this case was to remind receivers of their wider duties and that accordingly, this diluted the force of the criticism that receivership was not a collective procedure. This is arguably an overstatement of the effect of the Medforth decision.

40. A few submissions suggested that the duties of an administrative receiver should be codified in statute.

41. The submissions that were critical of administrative receivership considered that the process gave the banks too much control over the insolvency process to the detriment of the other interests. These submissions strongly favoured its abolition in favour of collective procedures, which they considered would, overall, produce better results for all creditors.

42. Many of the business people we met with at the regional meetings were concerned about the power of the floating charge holders. They were very sceptical about the banks’ contentions that receivers would only ever be appointed as a last resort and tended to be wary of their banks in times of difficulty. Some business people told us of personal experiences where the banks appeared to have acted very unreasonably. Many considered that banks were only adopting a more relationship driven style at the larger end of the market and that the banks did not have the same interest in the SME end of the market – with the result that in times of trouble, the banks would be looking to exit the relationship as quickly as possible, via receivership if necessary.

43. Relatively few respondents commented on Schemes of Arrangement under s 425 of the Companies Act. One respondent, Cadwalader,32 suggested that the proposed moratorium for CVAs should be made available in connection with a Scheme. It also stated that companies in the SME sector were regularly restructured through Schemes and that their use would increase if a moratorium was available. The Law Society of Scotland submitted that section 425 was clumsy and ought to be reviewed.

44. We received two submissions from trade associations involved in the construction industry33. They identified what they considered to be weaknesses in the present system – which is the consequences of receivership of a head/main contractor. When a main contractor goes into receivership many hundreds of sub-contractors could be affected, it was said, because of the practice of paying sub-contractors through the main contractor – if it goes into receivership, the secured creditor is able to intercept the funds destined for sub-contractors who are invariably unsecured creditors.

45. The submissions considered that the risk of receivership was particularly bad in the construction industry because of its highly cyclical nature and the fact that main contractors were commonly undercapitalised. The Constructors Liaison Group suggested that this problem could be solved by ring fencing payments destined for sub-contractors.

46. With regard to the second question posed in this section, few respondents thought that the present system was too complex34. Most considered that the range of options available was an advantage and that any confusion was cured by seeking expert advice. A typical view was that management’s failure to act in a timely manner was the main cause of failure.

47. However, a group of barristers we spoke with at Gray’s Inn35 considered that while the range of options available was quite good, there was no effective means of determining which procedure was best for each case, with the result that some companies ended up being dealt with in the wrong way. They also considered that there were no rescue procedures that were well suited for use by small companies because they were too expensive. Another respondent stated that rescues were hampered by: ..unnecessary complexity and a lack of transparency within the current systems.. 36

  48. The section dealing with international comparisons posed two questions:

Is the analytical framework described above, and the making of international comparisons more generally, useful in informing this review?; and

Are the differences highlighted likely to result in different rates of company rescue, and recovery rates for creditors?

  49. These questions generated a modest response. Most responses that addressed the questions considered that international comparisons were of marginal use, at best. A number of responses stated that there were far too many legal and cultural differences between countries for international comparisons to be of value. One of the submissions noted:

International comparisons are worthwhile, but are unlikely to provide a clear guide to the direction for English insolvency law reform. Jurisdictions which are apparently more rescue friendly may in fact be failing to address fundamental problems. Consider recent experience in Japan and the Far East.37

50. Caution was expressed about any moves towards a Chapter 11 system, because of the complexity and expense of the US procedure, which, as some respondents said, is not popular in the US with anyone except company management and lawyers.

51. The final part of this section considered finance for rescue and reconstruction and asked:

To what extent does a lack of finance prevent the rescue/reconstruction of firms which would otherwise be viable in the long term?

52. Many respondents considered that appropriate finance was fundamental to the
success of a rescue, particularly in the short term. A common view was that finance would always be available for the rescue of viable businesses.

53. However, some responses considered that the position of the bank was sometimes an obstacle for financing rescues, because of the bank, as the floating charge holder having the ultimate say over whether or not finance would be introduced. Commonly, banks are unwilling to allow additional finance to be introduced, which would rank ahead of their own debt. An outside financier, conversely, would not usually be willing to lend money to a troubled company unless it could be afforded the highest priority. Some respondents considered that unless the law in the UK was changed to allow for super priority financing, we were unlikely to see new financiers willing to lend to troubled companies.

54. Some responses touched on the issue of DIP38 financing at this point (but see the section on possible reforms for a comprehensive summary of this issue), stating that the lack of a mechanism for implementing DIP financing was a hindrance to rescue in some cases. This was identified as an area where the US experience could be useful.

55. This section identified the failure of directors and managers to respond in a timely manner to financial difficulty as a significant contributor to insolvency. The consultation document sought views on:

..the means by which the management and/or directors of companies might be encouraged to take early action in response to financial distress.

56. The responses uniformly recognised that management failure was a significant factor in most insolvencies. The reasons commonly suggested by respondents as to why managers and directors did not act in time, if at all, included: ignorance of the help available; mistrust of IPs; unrealistic optimism; fear of failure; fear of the bank withdrawing support; ignorance of the true state of the company’s affairs; and concern over the cost of advice. These were all factors referred to in the regional meetings, at which a number of directors spoke of the considerable pressure and stress they faced and the difficulty of getting good advice when their companies ran into trouble.

57. The BBA referred to the part that the banks currently play in encouraging directors to act. The development of bank monitoring systems has apparently been instrumental in allowing banks to contact managers at an early stage when their business are showing early signs of difficulty. In addition, the BBA noted:

Banks’ relationship managers also have an important role to play. Bank early warning systems and the involvement of in-house specialists are probably going to have one of the biggest impacts in improving business management practice. The use of managers who are specifically trained to focus on solving business problems face to face with owners of SMEs is something which should be an industry standard, although it may not be cost effective at the lower end of the market.

  58. Some respondents suggested that business people should be required to have some sort of elementary qualification before they could become company directors. The qualification would indicate that the holder had a basic understanding of company law and finance and was aware of his or her legal obligations as a director. There was some debate, particularly in the regional meetings, as to the effect that the requirement to hold a qualification would have, with a number of respondents warning that this could be a brake on enterprise. The directors we spoke to said that they would be willing to undertake some form of instruction providing it was not expensive or time consuming. Overall, support for this idea was moderate.

59. A different approach was suggested by some submissions, which urged greater use of the Company Directors Disqualification Act, stronger penalties for wrongful and reckless trading and the introduction of measures which ensured that directors were more aware of their statutory duties. One submission proposed, among other things, that a director sign an acknowledgement of his or her awareness of the relevant provisions of the Insolvency Act 1986 and also make an annual declaration of solvency39. No other submissions appeared to offer direct support for these sorts of measures, as measures of this type were considered to be likely to be a major disincentive to act as a company director.

60. This section posed two specific questions:

Should lending institutions encourage the acquisition of financial and management skills by, for example, offering reduced interest rates on borrowing to companies whose managers have acquired such skills? and

What steps should the professions take to ensure that the skills required to assist/promote rescue or recovery are readily available?

 61. The common response to the first question was that good management and financial skills were already taken into account by lending institutions when pricing loans but that the acquisition of a formal qualification, by itself, would not necessarily warrant an interest rate reduction. The comment from the Institute of Directors’ submission that: It is entirely up to the market to determine how such skills affect interest rates is representative of the view of almost all of the submissions that commented on this issue.

62. We are aware from the regional meetings that at least one bank provides free banking facilities to companies whose directors have completed recognised courses.

63. With regard to the second question, many of the respondents considered that the insolvency profession took sufficient steps to assist and promote rescue and recovery. It was noted that the SPI provides extensive training in this field40. The SPI in its own submission stated that more could be done by the legal and accountancy professions to make their members more aware of the fundamentals of insolvency and business rescue so that they are better able to guide their clients. The SPI suggested that this could be done by the inclusion of appropriate material in training courses and examination syllabuses. However, most submissions accepted that there needed to be a cultural change in attitudes to insolvency before directors would start seeking help earlier. This was recognised as something that would take time.

64. The clear majority of responses favoured the removal of the Crown Preference.

65. No respondents accepted the arguments in favour of the preference outlined in the consultation document. One of the QCs noted41:

If the crown were not connected to the government and the legislature, it is doubtful whether it would enjoy statutory preference. In fact, its special connection would suggest the opposite of preference: it is able to influence the law in such a way as to ensure the maximum ability to collect its debts in ways which are not open to ordinary trade creditors.

  66. Moreover, many respondents were critical of the attitude of the revenue departments when it came to collection procedures and voting practice on CVAs. People we spoke to at the regional meetings spoke of the generally uncooperative attitude of the revenue departments and had not seen any evidence of a commitment to support the rescue of companies. As a response from an accounting firm42 put it:

Neither HM Customs & Excise nor the Inland Revenue has shown great enthusiasm in supporting schemes of rescue. Very often their failure to take earlier action in collecting sums due to them has exacerbated a company’s financial problems. Both bodies should be required to improve their monitoring function and play a greater role in encouraging companies who are in default to take early professional advice from insolvency p
ractitioners.

 67. Many respondents also complained of the policy to only vote in favour of CVAs on the basis that the preferential creditors received 100p in the £. Doubt was also cast on the figures in the consultation document stating that Inland Revenue and HMC&E have supported 70-80% of proposals put to them in recent years.

68. However, some respondents were cautious about the implications of abolition of the preference, suggesting that the revenue authorities would adopt more stringent collection procedures. As one businessman in our consultation meeting in Manchester put it, if the preference went it would encourage the revenue departments to put the boot in even harder than usual. Some respondents suggested that the right to levy distraint should also be abolished in order to reduce the possibility of oppressive behaviour from the revenue authorities.

69. The Institute of Credit Management was in a small minority in recommending that the preference be retained. Instead, it emphasised that the revenue departments ought to be encouraged to vote for CVAs.

70. This section posed two questions:

Would increases in the proposed rates of payment to unsecured creditors in CVAs encourage more to be proposed and accepted? If so what more would need to be done to ensure that creditors benefited from removal or diminution of the Crown’s preferential status?

  Whilst recognising that their task is to maximise revenues could improvements be made to the policies and practice of the Customs and Excise and Inland Revenue, which would encourage such rescues?

  71. The responses generally agreed that increased rates of return to unsecured creditors would encourage more CVAs.

72. However, several responses43 considered that CVA proposals were rarely rejected solely because the estimated dividend is too low and that accordingly the removal of preference would not, of itself, encourage more CVAs to be accepted.

73. Most of the responses accepted that for unsecured creditors to benefit, the monies that would have gone to the Crown would have to be kept out of the hands of the floating chargeholder. Some submissions suggested a form of compromise, whereby a proportion of the former preference monies went to the floating chargeholder and the balance to secured creditors44. Freshfields, the lawyers, thought that the topic was very complex and suggested that a separate consultation may be necessary to adequately consider the issues.

74. As for the second question, every submission that responded to it said that the revenue departments could improve their practices in order to encourage rescues. The revenue departments were strongly criticised for being uncommercial and inconsistent in their collection practices. They received particularly strong criticism at the regional meetings. As noted above, the practice of requiring a payout of 100p in the £ in CVAs was identified as being unhelpful.

75. The BBA suggested that staff at the revenue departments should be better trained at collection practices and offered to facilitate such training. Moreover, the BBA said that it believed that the problem was more of Crown behaviour rather than the preference itself.

76. The section under this heading, after setting out arguments for or against the practice, asked if there were any other arguments for or against which should be considered as part of the review.

77. No submissions raised any significant new arguments, although there were several suggestions on how to reduce public concerns.

78. Overall, the majority of the submissions did not consider that legislation was necessary to prevent investigating accountants becoming administrative receivers. Many insisted that here was no actual conflict of interests, but accepted that there was a perception of conflict. Moreover, a number of submissions emphasised that often a receiver who had been the company’s investigating accountant acted more efficiently than a receiver who had not, which was in everyone’s interests.

79. The SPI referred to the Katz/Mumford study45 in support of its contention that the moral hazard argument is one of perception rather than reality (as did the BBA). The SPI stated:

The perceptionis based on misconceptions of the relationships between investigating accountants, recovery bankers and financially distressed corporate customers.

80. The SPI suggest that this could be dealt with by adopting guidelines for practitioners with regard to accepting appointments where the directors object. According to the SPI:

Before accepting appointment as receiver, the practitioner should be satisfied that such override is warranted in the circumstances of the case and may be required by his professional body to justify acceptance of the appointment as in accordance with its ethical guidance.

81. A number of submissions suggested that appointments should only be permitted with the directors’ consent.

82. This section was divided into two sub-sections, the first dealing with procedural innovations and the second on financial innovations.

83. The first sub-section, on procedural innovations, invited comment on the following ideas for change:

84. Opinions were uneven on this, but the majority did not favour the idea. Both views were summarised in the PricewaterhouseCoopers (PwC) response:

We have mixed feelings about a possible reduction of the majority required to approve a CVA. A lower majority would make it easier to obtain approval but would also potentially increase the size of the minority being bound against its will. We are not aware of many cases where a viable CVA has failed to obtain approval because those voting in favour are above 50% but below 75%.

85. Gabriel Moss QC was the only practitioner clearly in favour of a reduction to 50%, but with the safeguard of requiring court approval for a CVA.

86. Other submissions suggested a reduction, but not to 50%46, recognising that a simple majority was inappropriate given that the rights of the minority were effected.

87. Of the submissions that commented on this suggestion, the narrow majority was not in favour.

88. A number of submissions observed that the Insolvency Act 1986 provided for companies which are or are unlikely to be able to pay their debts to enter into administration. They therefore questioned why companies, which expected to be able to pay their debts, should want to enter into administration. As one law society’s submission47 put it:

It is true that there may be marginal cases where the directors may be in some doubt as to whether they can say that the company is likely to become insolvent, but we would prefer these few cases to be excluded from the administration mechanism, rather than allow companies which have entered into some kind of unprofitable contracts to seek a ring fencing of their assets.

89. The view in support of this idea was best expressed in the submission from Cadwalader, the US law firm, which argued that this would be a useful provision for a group of companies with a single, group wide bank facility but which had a:

..badly under-performing subsidiary, which is draining cash out of the group but which is able to meet its debts as they fall due (through the group facility) and is solvent on a balance sheet basis.

90. The submission also suggested that a company which had suffered a serious dislocation, such as the loss of a major customer, but was sol
vent for the time being or the solvent subsidiary of an insolvent parent should be able to enter administration. The submission recognised that protections needed to be built in to prevent abuse.

91. PwC thought that dropping the insolvency or likely insolvency requirement would make administration more of a reconstruction mechanism by removing any stigma it might have as an insolvency procedure.

92. This section provided two examples of how collective procedures could be enhanced: removal of the right of a floating charge holder to veto an administration; and ensuring that the enforcement of floating charge security is by way of a court appointed receiver with wider duties to all creditors.

93. A clear majority of respondents were opposed to the removal of the right of veto. One law society submission48 stated that an administration was unlikely to succeed if the floating charge holder was hostile because of likely problems with raising finance. A number of submissions suggested that this was unnecessary, as most bank floating charge holders are (we are informed) content with administration as long as they are comfortable with the choice of administrator.

94. The minority who supported the removal of the veto mounted some persuasive arguments. These included: Mr Justice Evans-Lombe who considered that our system: ..gives too great a precedence to the holder of a floating charge able to appoint an Administrative Receiver; Cadwaladers; and Mark Phillips QC, who thought that the solution was to abolish the floating charge and with it the power to appoint receivers. Rowe & Mawe thought that the removal of the veto power would encourage the floating charge holder to work with the debtor company to ensure the success of the administration. It also suggested the floating charge holder ought to be able to apply to the court if it could demonstrate that it would be materially prejudiced by the making of the administration order.

95. The proposal that the receiver be court appointed with wider duties to all creditors attracted modest support. Probably the strongest support for this idea was expressed in the paper by Profressor Milman and David Mond49, which formed part of the submission from Hodgson’s. The majority of submissions opposed the idea on the basis that it would place too many obligations on a receiver and would be a disincentive to act and would reduce a receiver’s autonomy and accordingly, his effectiveness. However, a number of submissions recommended that a receiver’s duties be codified.

96. Some submissions thought that the office of receiver should be abolished and replaced with a modified form of administration50.

97. This idea received little support. The following quote from the Insolvency Sub-Committee of the City of London Law Society’s submission summarises the concerns of those against:

We cannot believe that it is seriously being suggested that a company should not be capable of being put into liquidation except through some kind of an administration first. Apart from everything else, the burden on the courts would be quite intolerable. We doubt very much whether the very small number of cases that might then result in the business or the company being rescued, would justify the very considerable additional expense that would be incurred in terminating the existence of all the other companies.

98. The BBA was opposed to the idea but submitted that the current system incorporated an informal single gateway system as part of the initial consultation between a company and an insolvency practitioner.

99. PwC also suggested that we had a single gateway system in the administration procedure, which can either lead to rescue or liquidation. However, they considered that obliging all insolvent companies to pass through a single gateway system would be costly and time consuming.

100. Some submissions expressed cautious interest in the concept but thought that more work should be done on the idea before they could express a view.51

101. HLB Kidsons, the accountants, was in support and its submission sets out a suggested framework. This provides for a period of assessment, during which time the company would be subject to a moratorium, followed by a report to the court with a recommendation as to the most appropriate procedure. NCM Credit Management also advocated a similar procedure. No other submissions attempted to suggest a framework for a single gateway system.

102. The second sub-section of section 10 of the consultation document dealt with financing rescues. The ideas on which comment was sought were: disallowing fixed charges on book debts; allowing companies to raise funds by mortgage of assets covered by the floating charge; and super-priority financing.

103. The responses generally recognised that these ideas raised complex issues.

104. One respondent (Gabriel Moss QC) did not think any of the ideas in this section were desirable and considered that financing problems would be best resolved by providing tax incentives for the financing of companies in difficulty.

105. In a similar vein, the Freshfields submission questioned the need for these proposals.

106. Most submissions did not favour disallowing fixed charges over book debts. Very many considered that this measure would result in banks reducing their lending against book debts and would encourage debt factoring, a development which some respondents thought would inhibit rescues.

107. The SPI submission noted that its members did not agree that removal would actually improve funding available to a company and that the inability to take such a charge may reduce the banks’ willingness to provide overdraft funding. This point was repeated in the BBA submission52.

108. Nicholas Frome53 wrote that if the fixed charge over book debts were to go, debt factoring would boom and that because debt factoring was more expensive to administer, it would be more costly for the borrower. Mr Frome considered that:

..it is not necessary to remove the priority accorded to fixed charge holders under current law in order to promote the rescue culture in the UK and I believe that a flourishing DIP finance market will emerge if a DIP moratorium is introduced into UK law.

109. The barristers we spoke to at 3-4 South Square were in favour of disallowing the charge. They suggested that factoring arrangements could be limited also if they were classed as in substance fixed charges on book debts.

110. Ernst & Young took a slightly different view, stating that fixed charges over book debts were: ..essentially there to compete with preferential creditors.. and that if there were no preferences, there probably would be no need for the charge.

111. Mark Phillips QC considered that the charge ought to go because arguably it did not work, that it benefited only one creditor and that it strangled the rescue process. He considered that banks were usually adequately secured without the fixed charge on book debts.

112. This idea received little, if any, significant support, although a number of responses did not directly comment on this idea. This may have been, in part, because some submissions advocated the abolition of the floating charge which meant that there was no need to consider a 10% (or whatever) fund54.

113. The majority of submissions on this point were not in support. Generally, respondents in this group felt that the integrity of the floating charge ought to be respected. As with fixed charges on book debts, many respondents felt that the proposal would reduce the amount secured creditors w
ere prepared to lend. Some also noted that any reduction in the protection offered by the floating charge would hasten the trend towards asset based financing, which has been said to have a detrimental effect on the rescue culture.

114 .The submissions in support of the idea did not raise any issues which added to those covered in the consultation document.

  115. This idea prompted a range of views, demonstrating the complexity of the issues it raised. Many respondents supported the idea. Almost as many opposed it. Few (with some notable exceptions) demonstrated a grasp of how super priority would work.

116. The BBA simply said that it had: ..little experience of how it would work in practice but could not see why there would be a need for legislation provided uncharged assets were available and there was adequate control over management and assets during any moratorium.

117. In a similar vein, some respondents thought that any form of super priority should only be imposed by consent or with court approval.

118. The SPI wrote that it was: generally in favour of the concept..in the sense that new credit should be given priority to old unsecured liabilities. However, it considered super-priority should not be allowed on the basis that it overrode existing security rights: ..except to the extent that it would create a priority out of floating charge assets ahead of preferential creditors and the floating charge holder.

  119. The Freshfields submission warned of the possible effects of super priority financing on some types of structured financing arrangements.

120. The submission from Cadwalader contained some useful ideas. Its submission emphasised that while any super priority loans would have priority, they should not result in any prejudice to the secured lenders as compared to a liquidation. It stated that the court should have a central role in ensuring that any restructuring plan was viable and likely to succeed and that security given to new financiers should not prejudice existing secured creditors:

In making its order, the court will need to be satisfied, on the balance of probabilities, that the DIP financing is likely to result in increased recoveries for all creditors. It is impossible to predict with certainty whether the restructuring will be successful, but the court will need to be satisfied that there is a good likelihood that they will benefit.

121. The Cadwalader submission went on to advocate the abolition of the floating charge in favour of collective procedures.

122. Paragraph 10(i) of the consultation document proposed, as an alternative, that a company in administration or in a CVA be able to use a certain proportion of book debts which were subject to a fixed charge. This idea received reasonable support, but was subject to the same criticisms put forward with regard to the use of funds from a floating charge (the principal one being that lenders would simply discount the amount they lent against book debts).

123. The consultation process, whilst carried out over a relatively short period, was a highly productive exercise.

124. The written submissions were of generally a high standard, and the regional and specialist meetings were instructive. Those officials and members of the review group who were able to attend the meetings found them to be particularly informative and assisted them with gaining a ‘feel’ for the issues under review.

125. The responses, in many cases, clarified the issues which we sought feedback on and also referred our attention to other relevant issues. Some also identified areas where further research and consultation may be desirable.

126. A number of original ideas for change were also generated from the process, which had an influence on the review group’s views.

127. Overall, the responses to the consultation document played a significant role in assisting the review group in making its recommendations.

128. We are very grateful to all those individuals and organisations that considered the issues raised in the consultation document and took the trouble to either submit a written response or to meet with us.