A Peep At A Rescue Culture Of Corporate Insolvency
Kenny Wiston
Introduction
When a company enters an insolvent state, the concerns over its potential dissolution extend beyond those of its creditors. Also at issue are matters of unemployment, the knock on effect on trading associates, public confidence and cumulatively, the economy.
As an alternative to the winding up of an insolvent company, in the UK, the court may be petitioned for an administration order by the company which is, or is likely to become, unable to pay its debts where there is a reasonable possibility that the company’s business undertaking or at least parts of that company’s undertaking may be made to survive its present financial difficulties, or that arrangements may be made with its creditors under which the survival of the company’s business undertaking may be achieved.
Administration order proceedings are broadly envisaged as a means of ensuring the continuance of the whole or part of a company’s business undertaking and the avoidance of the piecemeal disposal of its assets at depressed prices, so protecting the interests of the company’s shareholders and employees, and also safeguarding those of its creditors by requiring their approval of the proposals for the company’s future management and the application of its assets.
As opposed to placing insolvent companies on a conveyor belt towards dissolution, it is suggested that under certain circumstances it may be appropriate to attempt to save the company, or at the very least, its business. Thus, the ideology of rescue culture was born. This is a procedure with many aims, and the outcomes may be different for different companies – it could be a negotiated solution, a mandatory reorganisation, rescue, or a more efficient liquidation than might be otherwise achieved. All of these options are preferable to winding up.
In Indonesia, as a comparison, a company facing financial difficulties often ends up being forced into liquidation as an administration order procedure is not provided by the law. However, the existing Indonesian bankruptcy law permits companies to make voluntary arrangements and to seek a court order approving a debt repayment suspension, although few companies in Indonesia have sought such an order.
The Indonesian bankruptcy law clarifies the procedure in respect of debt repayment suspensions. This is more or less comparable to, but not equal to, an administration procedure under the UK insolvency regime. The debtor is required to present a compromise proposal for the approval of creditors and the court. An administrator is appointed to the debtor and has powers to disclaim contracts.
Nevertheless, one of the most important features of the administration procedure is the moratorium. The commencement of the administration procedure by the presentation of a petition for an administration order imposes a freeze on proceedings and executions against the company and its assets. This provides a breathing space for the company to make arrangements with its creditors and members for the rescheduling of its debts and the reorganisation and restructuring of its affairs.
Similarly, in Indonesia, the commencement of the suspension of debt repayment by the presentation of a petition for a suspension order imposes a freeze on proceedings or executions against the debtor. However, unlike in the moratorium of the UK administration procedure, the freeze is not total. The administrator does not replace the debtor. They are more or less like Siamese twins during the suspension of payments. The one cannot act without the other. The debtor is entitled to continue to manage its affairs, but may not take any actions in relation to such management or transfer any assets without the prior consent of the administrator. In particular, unauthorised liabilities incurred during this period may be disclaimed unless they benefit the debtor’s estate. In contrast, during the administration procedure, the administrator takes office and has wide powers to manage the company’s business and to deal with its assets. Whereas the suspension order in Indonesia is likely intended to give a breathing space to compromise and optimise the bankrupt’s estate rather than a corporate rescue, the administration order per se is intended for corporate rescue.
This article aims to introduce readers to the English rescue culture of corporate insolvency as it is believed that the administration order procedure is effective in saving insolvent companies as an alternative to the winding up and to give an overview of whether Indonesia should adopt this rescue culture considering the economic turmoil we have been experiencing.
Facilitating a Rescue Culture
As outlined above, the English rescue culture was conceived with the aim of supporting the economy. To achieve this end, it is not essential that the insolvent company itself be saved. A perfectly reasonable alternative may be to sell the business as a going concern. This would also satisfy the public utility by continuing the employment and economic activity associated with the company. Immediately therefore, one can see that rescue culture is not perfectly harmonious with the interests of an insolvent company’s directors. To facilitate rescue culture, the English Insolvency Act (IA) 1986 introduced the administration order and company voluntary arrangements (CVAs). Here, I would like to focus only on the administration procedure.
The administration order procedure was firstly introduced by the English Insolvency Act 1986 as a result of the Cork Committee’s report which highlighted advantages obtainable by a company with a floating charge. These are where a chargee can appoint a receiver and manager over the whole property and undertaking of a company as an alternative to winding up, so that the profitable parts of the business could be preserved for the benefit of the employees, the commercial community and the general public.
It was perceived that administration would fill the lacuna which existed under the old philosophy. Previously, the holder of a floating charge over substantially the whole of the company’s property, could appoint a ‘receiver and manager’ to realise the debt. This private remedy differed from liquidation because it did not always lead to the dissolution of the company. The lacuna appeared where there was no debenture holder of this kind. Liquidation was therefore the only option, thus removing any hope of rescue. It was felt that, in this event, the administrator would operate in a position analogous to the receiver and manager, and may even become a more appropriate alternative.
The Role of Administration
Administration is a state into which a company is put following an order of the court. An administrator is appointed to manage the company, with the aim of achieving one of the purposes for which the order was made. The most salient feature of an administration is the statutory moratorium. While this is in place, the company may not be wound up or placed under administrative receivership. In addition, the creditors may not enforce their security interests or take action against the company.
Petitioners and Grounds for Administration Orders
The persons who may petition the court to make an administration order in respect of a company are the company itself or any one or more of its creditors, and a joint petition may be presented by any two or more of those persons together.
According to the English practices, it would appear that a creditor or creditors may petition for an administration order only if he or they would be treated as creditors for the purpose of petitioning for a winding up order. It is expressly provided, however, that a creditor may petition, even though the debt owing to him is only contingent or prospective, and so a petition may be presented by a creditor whose debt is not payable until a future date, or is payable only on the fulfilment of a condition or contingency which has not yet happened or been fulfilled, such as the claim of a person to be reimbursed for a debt of the company which he has guaranteed if he discharges it himself.
Matters to be Proved
The court may make an administration order on a petition presented by one or more competent petitioners only if it is satisfied that the company is, or is likely to become, unable to pay its debts within the meaning of that expression for the purpose of the court making a winding up order, and the court considers that the making of an administration order would be likely to achieve one or more of four statutory purposes.
The Purposes to be Achieved by An Administration Order
The following are four alternative purposes for whose achievement the court may make an administration order :
(a) the survival of the company and the whole or part of its undertaking as a going concern;
(b) the approval of a voluntary arrangement with the company’s creditors by meeting of those creditors and the company’s members;
(c) the sanctioning by the court of a compromise or arrangement between the company and its creditors, or any class or classes of its creditors, together with or without its members or any class or classes of them;
(d) a more advantageous realisation of the company’s assets than would be effected in a winding up.
Effects on Creditors of the Moratorium
There are three consequences of the petition being presented and these come into effect immediately:
(1) no resolution may be passed or order made for the winding up of the company;
(2) no steps may be taken to enforce any security over the company’s property or to repossess goods in the company’s possession under any hire-purchase agreement except with the leave of the court and subject to such terms as the court may impose; and
(3) no other proceedings and no execution or other legal process may be commenced or continued and no distress may be levied against the company or its property except with the leave of the court and subject to such terms as the court may impose.
The reason for these orders, in particular the second, is to prevent creditors from “scooping the pool”, or taking steps to protect their interests, for example, repossessing goods subject to a hire-purchase agreement. By so acting those creditors would, in fact, make a collective solution to the problem more difficult. In Exchange Travel Agency Ltd v Triton Property Trust Plc the administrators of the company sought to restrain the landlord from occupying and re-letting the company’s premises, as they were under a lease agreement of fifteen years. The administrators argued that this was the enforcement of a security or a commencement of other legal process, which during a moratorium is only allowed with the leave of the court.
Another issue, that of how far the moratorium affects contractual rights of creditors can be seen in Re David Meek Plant Ltd. In this case the applicants (finance houses) sought leave of the court to repossess items which were let or sold to companies under the hire-purchase agreement and were then let out to customers. The hire purchase agreement contained provisions for automatic termination on events which included the presentation or drafting of a petition for an administration order. Before the administration order petition was presented, some finance companies terminated the hire-purchase agreements and sought to repossess their goods. But Some of them failed. After the order was made, some leasing creditors sought the administrator’s consent for repossession which was refused. The reason for this included the fact that the companies’ whole business was run with goods on hire-purchase and unless the administrators kept those goods, there would be no point in the administration.
However, there are certain circumstances where the creditors can exercise their limited rights. With the leave of the court they can enforce security over the company’s property, and may also (with the court’s leave) commence any other execution or legal process against the company or its property. In Re Atlantic Computer System Ltd (ACS) the creditors’ interests were protected by the court when it gave leave to the finance companies to terminate the leases and repossess the computers and to enforce the security.
The court reasoned that the moratorium and the power of the administrator to give or withhold consent was not intended to be used as a bargaining counter in a negotiation in which the administrator has regard only to the interests of the unsecured creditors. Negotiation between various parties, where leave is refused, would take place in a framework in which the funders would be asked to modify their proprietary rights without being able to rely on those rights. In deciding whether or not to grant leave, the court had to balance the loss to the security holder and loss to others, and where these were disproportionate as regards the latter the court would refuse leave, but the starting point in this balancing act was the protection of the interests of the security holder.
Protection of Creditors’ Interests
A creditor or member of the company may apply to the court, at any time when an administration order is in force, if he feels that the company’s affairs, business or property have been unfairly managed by the administrator. This is important, because the creditors’ rights of action are completely suspended, apart from this one form of relief. The court may, on such an application, make an order as it sees fit. This order may, among other things:
(a) regulate the future management by the administrator of the company’s affairs, business and property;
(b) require the administrator to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained he has omitted to do;
(c) require the summoning of a meeting of creditors or members for purpose of considering such matters as the court may direct;
(d) discharge the administration order and make such consequential provisions as the court thinks fit.
There followed a long list of guidelines of which the underlying principle is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights except to the extent that this may be unavoidable.
The Courts’ Attitude
The courts, when deciding on the correct balance between rescuing the company and protecting the creditors’ interests, should make their greatest effort in upholding the moratorium on enforcement of security and debts. Their concern is that the administrator, as he is expected to continue the business of the company, should be free to deal with the company’s assets without any interference from creditors trying to enforce their security interests.
Another aspect to this is that the court also has to balance the legitimate interests of the applicant and the legitimate interests of the other creditors of the company.
Discharge of the Administration Order
The administrator may apply to court at any time for the administration order to be discharged or to be varied so as to specify an additional purpose. The administrator must make an application for the discharge or variation of the administration order if it appears to him that the purpose, or each of the purposes, specified in the administration order either has been achieved or has become incapable of achievement or if he is required to do so by a meeting of the company’s creditors.
Conclusion
The purpose of administration, was to fill the gap in this area of law in order to enable more companies to enjoy wider options, rather than simply have to liquidate. In order for this to happen, certain limitations had to be put on the rights of the creditors so that the administrator and the procedures of the administration would be free to continue their roles.
Finally, you may decide whether the administration procedure should be introduced in Indonesia as a matter of urgency and whether this rescue culture fits our needs nowadays considering the continuous economic crisis.
