Laws Governing Insolvency

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Introduction

 For the past few decades various administrations have been attempting to amend the laws governing insolvency so that they can serve the interests of the unsecured creditors. Several concerns have been raised regarding the degree to which the administration process serves the creditors needs and interests. Issues have particularly been raised on whether the process bestows an appropriate level of accountability and transparency to creditors.

The lack of accountability and improper coordination of incentives greatly affects reduction of costs and the maximization of recoveries. A critical examination on the degree of extent to which the administration process serves the interests of creditors will be presented.


Discussion

 Insolvency refers to the failure to settle an individuals debts. Hence, the status of insolvency occurs due to extending credit since when there is no credit, them there can be no debt in the first place. Credit has existed for a long period of time even prior to the emergence of various banking facilities. Banks, supplies and other monetary institutions extend great amounts of credits annually and the same case applies to investors within the monetary markets.

One key importance of credits is that they promote effective expansion and development of business ventures and increases profitability. The two fundamental types of credits are sale credit and the loan credit. Under loan credit, there is an advancement of funds regarding the payment terms while sale credit requires the disbursement of services and goods on the grounds of repaying at a later time period or date (Finch, 2002).


Creditors who have a form of security interest or any other asset belonging to the debtors can take possession of those assets in order to recover their dues. On the other hand, creditors with no security many resort to other means of recovering their dues for instance spending up the debt. The failure to recover their dues through every means possible necessitates insolvency proceedings, whereby a case is filed against a debtor.


It is possible for other creditors to follow a similar course, resulting to increased competition. Insolvency law plays a role of suspending the rights to provide for the collection of assets in an orderly way. European law differentiates corporate debtors from individual debtors. The differences between the laws governing individual insolvency and corporate insolvency have greatly been reduced by the Insolvency Act of 1986 and this has raised various concern issues (Slorach and Ellis, 2007).


Though the outcome of insolvency is liquidation, this is not the case with all companies. Businesses and companies can be saved by structural and organizational transformation through utilization of workouts initiated by the banks and the recently introduced voluntary agreements among companies. This culture is referred to as the rescue culture, which has advanced greatly over the current years. A mechanism through which debt could be enforced foe the debenture holder’s gain is known as administrative receivership.


This mechanism was also viewed as a form of rescuing companies and enabling them to recover profitability and productivity. Before the year 1986, there was no way through which an outside manager could be given the authority to manage a companys activities and take care of the assets for the creditors benefit. There was an insignificant role of the administrative receiver to creditors (Slorach, 2007).


Through the insolvency Act of 1986, a mechanism through which an outside manger could exercise authority towards the creditors benefit was enacted. Through this Act, the court was given the mandate of choosing a manager to control assets and administrate a company for the good of creditors. Administrative receivership was faced with several criticisms and most people felt that it put too much authority on a single creditor and this could lead to the downfall of businesses.


This is especially due to the fact that there were no incentives that could serve other creditors interests. This led to suggestions and recommendations of banning the administrative receivership. Various issues of concern have been raised regarding the degree to which the administrative procedure enables the provision of enough incentives to enable maximization of economic worth. There have also been issues on whether the level of accountability and transparency provided by the administrative process is adequate enough the serve the creditors interests.


Administrative receivership is the best mechanism that serves secured creditors though this is not the case with the unsecured creditors. The government thinks that it is the right to come up with amendments based on efficiency and equity for the interest of all creditors regardless of whether they are secured or not. Government made a decision that administrative receivership should be banned from being the sole mechanism through which insolvency proceedings can take place. It made a proposition on making restrictions on the power to select administrative receivers.


This led to the amendment of the Insolvency Act of 1986, adding a given set of provisions comprising the Enterprise Act of the year 2002. Additional provisions contained in the Enterprise Act of the year 2002 were the result of the changes. This led to the reduction of speed by which the appointed administrative receivers assumed the administration and the collection of assets. Various governments and federal states have attempted to lay great emphasis on the benefits, costs and merits associated with administration and administrative leadership.


A decision was made to amend the administration process in order to increase its accessibility and effectiveness. This will serve the interest of both the secured and the unsecured creditors. The aim of the government is to make sure that the interests of unsecured creditors are well served and catered for without posing a threat to the secured creditors. Several proposals have been made regarding the initiatives that the administration processes should take note of for the interest of both the secured and unsecured creditors. 


The first proposal is the need to streamline the administration process. There has been a gradual increase in the recognition of the administration as an essential aspect to since it provides a rescue plan for companies and organizations. Moreover, the administration has made attempts to give creditors much better returns compared to the possible liquidation outcome. For the administration to increase its effectiveness in future, streamlining is an essential requirement.


The other proposal is for the administrative process to lower the number of formalities present in the Insolvency Act. Provisions should be made for those holding a floating charge to receive an administrative command through a court petition that shows proves the holding of a floating charge. The provisions should enable the availability of a simple process for secured creditors to get back what is owed unto them in cases of a default business organization.


Various governments and federal states know that the power to choose an administrative receiver and the floating charge are fundamental aspects in specific enterprises within capital markets. Insolvency Act legalizes the appointment of administrative receivers to go on in cases where there is granting of floating charges in connection to the business enterprises (Newton, 2009).


Following the amendment of the Insolvency Act, a mechanism for handling the affairs of both insolvent individuals and companies was formulated. In the current insolvency legislation, all bankrupts are subjected to similar processes regardless of the facts relating to their individual cases. The amendment saw the introducing of Individual Voluntary Agreements in place of bankruptcy. In this case, debtors are able to come into an agreement or terms with the lenders and there is no need to involve the procedures of bankruptcy.


This alternative gave debtors an opportunity to negotiate with the creditors in order to come with an appropriate scheme of arrangement. This is especially beneficial to unsecured creditors who do not want to take part in the legal procedures associated with bankruptcy and insolvency proceedings. The number of Individual Voluntary Agreements has steadily risen over the previous years and in the year 2000 it has increases by almost five thousand cases.


The other amendment made to the Insolvency Act of 1986 was enacting of the Enterprise bill, which has several aspects relating to insolvency. One of the aspects is the provision for the discharging of non-culpable bankrupts from a large percentage of their debts and their consequent removal from constraints that are currently applicable to bankrupts following a maximum period of twelve months. The other aspect of the bell is the reduction of stigma associated with bankruptcy through attempt to lower the amount of constraints or restrictions that are a characteristic of bankrupts that are un-discharged.


The other aspect is provision of novel bankruptcy restriction orders whose purpose is to secure the public and business from those bankrupts with culpable conduct. Moreover, the bill gives authority to the formal receiver to take a supervisory role of individual voluntary arguments that may be initiated following the filing a bankruptcy order. The receiver is further given the mandate to conduct an investigation in secrecy to find out the reason behind the failure of all bankrupts when the need to do so arises.


The Enterprise Bill also provided for the streamlining of the administrative process, an integral process that is court-based in order to increase accessibility and efficiency to reduce unnecessary failure of both public and private enterprises. A constraint or restriction would also be made pertaining to the power of secured creditors to select or choose an administrative receiver. Finally, the bill provided for the removal of some preferential rights within the insolvencies (Robert, 1993).


The United Kingdom’s government has shown commitment in its attempts to make the country the best venue for conducting business activities. To achieve this objective, it is essential for each and every individual to have a chance of realizing their abilities, innovativeness, creativity and entrepreneurial ability. The sole responsibility of the official receiver is to perform an investigation which aims at finding out the main reason behind failure in majority of cases relating to bankruptcy. The number of cases amount to about 21, 000 per annum.


The eventual outcome of many cases is failure to take a solid action and minor administrative action following the initial few months. Discharging of majority of bankruptcy cases takes place three years following the order for bankruptcy. There is prohibition of the chance to rehabilitate for most insolvency cases in addition to the rising cost of the proceedings. The sanctions that are currently available to take care of dishonesty and misconduct issues are only the criminal sanctions. With the increasing number of requirements of the criminal sanctions available, there is an indication that only a small number of bankrupts have acted against the sanctions.


Concerns many arise among small enterprises concerning the increased cost of borrowing from secured creditors due to the constraints placed on the side of administrative leadership. The amendments of the administrative process should be viewed as beneficial to creditors due to the increased cost-effectiveness and flexibility. The amendments are there to make sure that there is appropriate maximization of market value within insolvent companies. Consequently this would result in enhanced creditor returns and maintenance of economical value (Newton, 2009).


If companies continue to depend on the existing insolvency legislation, both the secured and unsecured creditors will have a chance of determining the eventual result. It is important to note that the current form of legislation may fail to give mechanisms that are effective enough to save viable business enterprises. Hence, companies would not benefit by sticking to the current form of insolvency legislation. The most effective way through which the administrative process can work towards the interest of all creditors is through the introduction of novel legislation that can realize the desired objectives.


Through statutory means, it would be possible to come up with the most appropriate form of insolvency legislation for the benefit all the interested parties. Governments should come up with a novel procedure that enables the provision of debt relief for individuals are unable to gain access to the various forms of remedies available due to monetary constraints. Such individuals do not have huge amounts of debts and moreover, they do not have anything to give to their creditors in exchange for the loan. They have inadequate assets and low annual incomes and hence are not able to pay for the deposit needed in order to petition for bankruptcy (Robert, 1993).


New Zealand government came up with a novel reform bill on the Insolvency law. The bill provided for a voluntary administration process to replace bankruptcy. This procedure requires no assets following a concern raised regarding the inappropriateness of the some punitive constraints of bankruptcy accorded to individuals who do not have assets to present as security. Such individuals often become insolvent though it is never their fault. Hence, the no-asset provisions would provide such individuals with an opportunity to start all over again rather than being insolvent.


There have been attempts by the New Zealand government to raise public discussion forums with the aim of getting responses regarding the issues of controlling the insolvency practitioners and secondly giving priority to employees who are entitled to wages following a notice. It is evident that several insolvency practitioners have minimum experience in the entire liquidation process. Hence, there is need for the government to gain appropriate balance of the liquidation process and power in order for all the stakeholders involved in the entire insolvency procedure to be confident in the whole process (McCormack, 2008).


Wales, England and Scotland have also made reforms on the Insolvency law by incorporating the Enterprise Bill and giving a detailed interpretation of part 10 of the Insolvency Act. The provisions postulate din part 10 aim at rescuing a company or business in every way possible. To achieve this, it emphasizes on the need to restrict administrative receivership so that it can work towards the benefit of the administration and creditors as a whole. Through the act, the administrative process is streamlined making it easier to be released from the administration.


Administrators are also required to carry out their roles promptly and with increases efficiency. The amendments of the administrative process are intended to benefit the company in terms of rescuing it as well as benefiting the creditors through provision of a fair, prompt and objective insolvency procedure. The novel act bestowed new roles and objectives to the administration with the key objective being to save or rescue the company. In cases where it is impossible to rescue the company, it is the role of the administrator to attempt to attain better outcomes for the creditors.


When the two mentioned objectives can not be achieved, the administrator has the power to distribute or realize property to the creditors regardless of whether they are secured or not. Under the novel legislation, the administrator has to make explanation regarding the failure to achieve the first two objectives in instances where it necessitates the need for realizing property (Goode, 2005).


The administrative process needs to make sure that there is general accountability and coordination of incentives so as to effectively serve the unsecured creditors’ interests. It is worth noting that unsecured creditors do not have the ability and right to defy the amount of cost on the receivership side. Though the Insolvency Act of 1986 states that administrative receives are required to inform creditors on the costs and formation of creditors’ committee, it has proved to be practically inapplicable. This is the reason why majority of governments have opted to make changes and reform to the Insolvency Act of the 1986.


Through the reforms, creditors and debtors can make a pact regarding the settlement of payments and debts. This is in place of bankruptcy which has proved to lead to business downfall. Several proposals have been made regarding insolvency and several governments have taken the initiative of acting on the proposals and initiating the appropriate changes.


It is the role of the administrative process to ensure that neither the secured nor the unsecured creditors are threatened by the reforms made to the Insolvency Act. The act should further ensure that organizations and business enterprises and protected and secured from incurring loses or liquidation as a result of failure to pay debts. A procedure that ensures insolvency practitioners act according to the acceptable standards and principles should be enacted.


Conclusion

 

Following the various issues of concern raised regarding the extent to which administrative procedures are meeting the needs of creditors, several governments have resorted to making amendments on the Insolvency Act of 1986. Such amendments include the inclusion of the enterprise bill and the provision for creditors and debtors to come to terms regarding the terms of settling the debts.


It is therefore evident that different governments have taken the initiative of ensuring that the administrative procedures are fair to both the secured and unsecured creditors. The key objective is to rescue a business enterprise or organization and revive it back to optimal productivity and profitability.


References

 

Finch, V. (2002). Corporate Insolvency Law. Perspectives and principles. Cambridge University Press

 

Goode, R. M. (2005). Principles of Corporate Insolvency. Sweet and Maxwell

 

McCormack, G. (2008). Corporate rescue law- an Anglo-American perspective. Elgar Publishing

 

Newton, G. W. (2009). Bankruptcy and Insolvency Accounting. Practice and Procedure. Wiley and Sons

 

Robert B. (1993). A Raw Deal. New Law Journal

 

Sarleno, T. J. (2010). Executive Guide to Corporate Bankruptcy. Publisher Beard Books

 

Slorach, J. S., & Ellis, J. G. (2007). Business Law. Oxford University Press

 

Richard, C. (2006). Taking Security Law and Practice. Jordans

 

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