Restructuring & Insolvency.

This article was prepared by lawyers from Freshfields Bruckhaus Deringer.

Contents

UK Enterprise Act 2002

UK Insolvency Act 2000 update

UK EU regulation on Insolvency Proceedings: first decisions

UK Registration of charges consultation paper

UK FSA guidance on insurance

UK Case summary

THAILAND Regulation of planners and plan administrators under the Thai Bankruptcy Act 

GERMANY Bankruptcy law change

UK

Enterprise Act 2002

The Enterprise Act 2002 received Royal Assent on 7 November 2002. It will introduce changes to both corporate and individual insolvency when brought into force. The main corporate insolvency changes that are expected to come into force at the beginning of the 2003/2004 financial year are set out below.

The introduction of a new administration regime where:

the existing four statutory purposes for which an administration order can be sought are replaced with a new single purpose. The single purpose is broken down into a hierarchy of objectives with the primary objective requiring the administrator to consider in all cases whether the company can be rescued as a going concern;

an administrator, for the first time, will be subject to a statutory duty to act in the interests of the company's creditors as a whole;

administrators can be appointed by an out-of-court procedure by the holders of certain floating charges and by the company's directors; and

administration will be subject to a time limit of 12 months, with the company's creditors having the right to extend that period by a further six months.

Restricting the ability of lenders to appoint an administrative receiver. Only the holders of pre-existing floating charges and financiers involved in capital markets and securitisation transactions (as specifically defined) involving liabilities exceeding pound sterling50m will have this power. Certain project finance and public private partnership projects in which the funding party has contractual step-in rights are also exempted.

The introduction of a delegated power to the secretary of state to extend certain insolvency proceedings, with modifications, to foreign companies, industrial and provident societies and friendly societies.

The abolition of crown preference and the introduction, in its place, of a requirement that a proportion of the company's net floating charge proceeds are ring fenced and made available to the company's unsecured creditors. The formula to be applied to calculate the level of realisations has yet to be finalised, but in recent parliamentary debate it was suggested that a tiered approach will be adopted with 50 per cent of the first pound sterling10,000 of realisations, 10 per cent of realisations up to pound sterling1m and 5 per cent of realisations in excess of pound sterling1m being made available to unsecured creditors.

UK

Insolvency Act 2000 update

The UK government has announced that the new small company voluntary arrangement moratorium provisions that were introduced by the Insolvency Act 2000, as well as the remaining provisions of the Insolvency Act 2000 not yet in force, will come into force on 1 January 2003.

These provisions are:

the new small company voluntary arrangement moratorium procedure;

technical improvements to both the existing company and individual voluntary arrangement procedures, so that non-notified creditors will be bound by the terms of an approved voluntary arrangement; and

modifications to who can be the nominee or supervisor of a voluntary arrangement.

A number of regulations and orders will bring the IA 2000 provisions into force including the Insolvency Act 1986 (Amendment) (No 3) Regulations 2002 (SI 2002 No 1990). These Regulations introduce three new eligibility criteria which make a company ineligible to obtain a moratorium if:

it is a party to a capital markets arrangement (as defined);

it is a project company of a public private partnership (PPP) project which includes step-in rights (as defined); or

it has incurred a liability of pound sterling10m under an agreement.

In addition, the holding company of a group of companies which is not a small or medium-sized group, as defined by the Companies Act 1985, is also excluded from the moratorium provisions.

UK

EU regulation on Insolvency Proceedings: first decisions

The first English court decisions on the application of the EU Regulation on Insolvency Proceedings have been decided. Both cases consider the interpretation of the concepts of centre of main interests and establishment, as set out in articles 3.1 and 3.2 of the Regulation.

In the first decision, Re Enron Directo SA Ch Div (Lightman J), 4 July 2002, an administration petition was presented in respect of a Spanish incorporated Enron company trading in Spain. The presumption that the main proceedings should be where the company's registered office is located was rebutted on evidence that the management decisions of the company were taken in London. Although this judgment is unreported, it highlights the uncertainty as to how courts will determine a company's centre of main interest.

In the second decision, an application was made by a company incorporated in Sweden, where its registered office was located, to restrain the presentation of a petition to wind up the company in England. The petitioning creditor had made numerous threats to commence winding-up proceedings in England. Although the petitioning creditor had indicated it was proposing to pursue insolvency proceedings in Sweden, it refused to give an undertaking not to pursue the winding-up proceedings in England.

It was held that under the Regulation the insolvency proceedings could only be brought in Sweden - not England. There was no force in the suggestion that the business premises of the company's UK subsidiary could rank as an establishment of the company for the purpose of article 3.2 of the Regulation.

UK

Registration of charges consultation paper

The Law Commission has recently published a consultation paper (no 164) called 'Registration of security interests, company charges and property other than land'.

After identifying a number of shortcomings in the current law, the paper proposes replacing the current system for registering security created by companies set out in part XII of the Companies Act 1985 with a system of electronic 'notice-filing'. Filing would be done electronically by completing an on-screen form, a 'financing statement', and the registry could be inspected online. Registry staff would not check the information submitted and it would not be necessary to lodge a copy of the charge itself with the registrar. Further, dual registering in both the specialist and companies registers would no longer be required.

Priority would be determined by the date of filing. A filed security would take priority over any earlier security that did not appear on the register and any subsequent security. The system would permit filing in advance of creation of the security. As an exception, however, a purchase money security interest would be given priority over other securities filed earlier.

With regard to which security should be registerable, the commission proposes that all types of security should be brought into the scheme including quasi-securities (such as hire purchases, conditional sales and retention of title arrangements). The exception would be possessory securities and shares.

Implications

In essence, timing will become more important than the nature of the security, or property, interests. Subject to limited exceptions the historic subtleties and distinctions between the various security interests would be abolished. The distinction between legal and equitable securities would in effect be abolished, as a subsequent legal security would be subordinated to a prior equitable one that has been registered.

The effect on floating charges is also significant. Unlike the present position, a subsequent fixed charge would be subordinated to a prior registered floating charge. In effect the chargor's licence to deal with its assets would be modified by removing its ability to grant a priority fixed security later. Third parties dealing with the company would not be affected, as under a related proposal purchasers of inventory or stock will take the stock free of any fixed or floating charge. Perhaps the only remaining impact would be on preferential claims, but with the abolition of Crown preference in the Enterprise Act 2002, this would be of limited importance. This may mean that the old debate on the distinctions between fixed and floating charges would cease to be meaningful.

Because registration could be effected before the security interest is granted, no debt would need to exist for a security to have priority. This would have implications for the doctrine of tacking. Under the new regime, a subsequent security holder could be subordinated to an earlier security over the same asset for advances made after the date of creation of the later charge. The economic implications of this are unclear. It may mean that once a company had been given a floating charge it would not be possible to obtain any further secured credit without the floating charge holder's consent.

It is envisaged that the changes will be introduced for companies first, which means that priorities in respect of securities by non-corporate entities remain determined by the old rules. The consultation paper considers the need to reform the registration regime for individuals too. The current regime set out in the Bills of Sale Acts is notoriously arcane and largely ineffective. However, by restricting the changes in the first instance to corporate entities, the Law Commission may have inadvertently allowed a personal property law regime to arise for corporations that is entirely different to that for individuals and other legal entities. In other jurisdictions notice-filing has been applied universally, and all security interests granted by all types of legal organisation are covered, so that a single personal property law operates rather than a variety of systems.

UK

FSA guidance on insurance

The Financial Services Authority (FSA) is consulting on proposed guidance on the identification of insurance contracts. At present, there is no statutory definition of insurance.

The purpose of the guidance is to set out the FSA's approach and the factors which it will take into account in deciding whether a particular contract is insurance. The guidance will help companies determine which contractual arrangements or schemes the FSA is likely to regard as insurance and which are liable to challenge if the provider of the scheme does not have the necessary authorisation or permission under the Financial Services and Markets Act 2000.

Thailand

Regulation of planners and plan administrators under the Thai Bankruptcy Act

The Ministry of Justice has introduced a regulation governing planners and plan administrators in reorganisation proceedings under the Thai Bankruptcy Act. The regulation applies to reorganisation cases filed from 16 August 2002 onwards.

Under the regulation, the Committee for the Consideration of Planners and Plan Administrators for Business Reorganisation was established. The Committee has the power to register and issue permits for planners and plan administrators and to order the suspension or revocation of a permit. Planners and plan administrators perform roles similar to those carried out by insolvency practitioners in English insolvencies.

Registration

To be appointed as a planner or a plan administrator in reorganisation proceedings, a person must be registered with the Committee. To be registered, applicants must lodge an application form, together with evidence of their qualifications, with the Committee, which must reach a decision on the application within 30 days of receipt, although this period may be extended for a further maximum of 30 days in special circumstances. In the absence of an extension, when the Committee does not issue its decision within 30 days, the application is deemed approved. Where approval is not granted, applicants have 30 days to appeal the decision to the Minister of Justice whose decision, to be given within 60 days, is final.

Permits to act as a planner or a plan administrator are valid for two and five years respectively and may be renewed. Once a permit has been granted the holder has the right to take appointments as a planner or plan administrator as and when they arise, provided the necessary security deposits have been paid (see below). A planner or plan administrator may be removed from the register in a number of circumstances, including on an application for removal, and for failure to renew the permit. The Business Reorganisation Office maintains the register of planners and plan administrators.

Security deposits

The regulation requires plan administrators to deposit, with the Business Reorganisation Office, security as compensation for damage which may arise from the performance of their duties.

Two forms of security are required:

general security of not less than Baht 500,000 (pound sterling7,500) which must be lodged when submitting an application for registration; and

security for each specific case that must be lodged before consenting to act on any particular case.

Security for specific cases is calculated on the value of the assets of the debtor being reorganised and varies between Baht 200,000 (pound sterling3,000) and Baht 10m (pound sterling148,000). In practice, the Business Reorganisation Office uses a gross asset value based on the debtor's balance sheet.

Germany

Bankruptcy law change

One of the features of German bankruptcy law, like certain other civil law jurisdictions, is the existence of a fixed period (21 days) within which directors must commence insolvency proceedings if the relevant insolvency trigger occurs.

To assist German companies that may be at financial risk following the recent floods in Germany, the German government has extended the period in which bankruptcy proceedings must be commenced. Any company that has been adversely affected by the floods now has until the end of 2002 to file for bankruptcy provided they are in serious negotiations to finance a reorganisation and, as a consequence, there are reasonable prospects that such a reorganisation will be successful.

UK

Case summary

Provisional liquidators' remuneration 

In Re Independent Insurance Co Ltd (in provisional liquidation) Ch Div (Ferris J), unreported 25 July 2002, it was held that provisional liquidators' remuneration should be fixed by the court with the assistance of judicial assessors, and not by an informal committee of creditors.

The information and opinions contained in this bulletin are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations.

[c] Freshfields Bruckhaus Deringer 2002

www.freshfields.com

Freshfields Bruckhaus Deringer

65 Fleet Street

London

EC4Y 1HS

UNITED KINGDOM

Tel: [phone]

Fax: [phone]

E-mail: [e-mail]

URL: www.freshfields.com

(c) Mondaq Ltd, 2002 - Tel. [phone] - http://www.mondaq.com