BusinessBusiness RecoveryNew law ‘disenfranchises’ creditors

New law 'disenfranchises' creditors

The Enterprise Act is 'disenfranchising ordinary creditors' and leaving them at the mercy of unscrupulous insolvency practitioners, experts warned this week.

Three months after it was passed, the Act is credited with making administration quicker, easier and cheaper because it removes the need to apply for a court order.

But experts say a loophole means that, when a firm is put into administration before liquidation, the once customary creditors’ meeting is bypassed. This meeting, they claim, is necessary for a straightforward liquidation.

Under the Act, instead of creditors appointing a liquidator to retrieve their money, the company makes the appointment. Lenders will lose the chance to influence how the claim is investigated and the assets disposed of.

The fear is that companies could appoint IPs that give them an easy ride, and that practitioners would go along with the situation because it guarantees them work.

Nick Hood, partner of Begbies Traynor, explained: ‘Companies are put into administration for no other reason than to take advantage of the opportunity to put them into liquidation later without holding a creditors’ meeting. I think this is a significant disenfranchisement of ordinary creditors.’

The technique has spawned a new piece of slang, with some practitioners talking openly about ‘liquidation administrations’. Hood claimed that elements in the profession were ‘rubbing their hands with glee’ at not having to win approval.

The DTI is understood to have written to IPs reminding them that this was not the intention of the Act.

Tony Supperstone, BDO national head of business recovery, said: ‘Practitioners have licences and if they are circumventing the Act and not acting properly then they will be brought to task.’

But Nick Wood of Grant Thornton said: ‘Some IPs are not very scrupulous and lost-cause firms are being put into administration for no reason. Administration gives directors breathing space in which to deal with the assets – possibly not to the benefit of creditors.’

There is no suggestion that the practice has become widespread, but Hood said that it wouldn’t be long before examples became public. If this happens, the government is expected to clamp down on the abuse.

THE ENTERPRISE ACT

  • Corporate insolvency provisions of the Enterprise Act came into force on 15 September this year;
  • streamlines administration procedures by removing the need for court orders;
  • attempts to encourage entrepreneurship by reducing bankruptcy period to 12 months; and
  • increases fairness by removing the preferential treatment of Crown creditors, such as the Inland Revenue and Customs & Excise.

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