Administrative receivership is a privilege available to banks rather than to the mass of creditors. Banks are able to take out a floating charge (an unfixed charge, the exact amount of which is decided upon when everything has been worked out) over a company's assets to secure their lending. As soon as a company experiences financial difficulties, the bank can appoint an administrative receiver to recover and sell the assets. A receiver is often called in to a construction company at a time when the company has been been given funds to pass on to its subcontractors and suppliers.
The receiver does not owe any duties to the unsecured creditors, such as subcontractors. Its sole concern is to protect the interests of the financial institution that appointed it. Once the receiver has cleared out, the company (especially a construction company) is left with few assets and, in practice, is likely to go into liquidation.
The government has finally acknowledged the unfairness in the process. The Enterprise Bill proposes sweeping away the power of the banks to appoint administrative receivers (with the exception of certain transactions in the capital markets). However, it will not affect those banks that have imposed floating charges prior to the bill being enacted.
The bill has further good news for construction companies, especially for those at the end of the payment queue.
The crown has always had the right to be paid arrears of tax, national insurance and VAT before there is any distribution to holders of floating charges and unsecured creditors. This right will now go, with the exception of those situations where the government recovers outstanding wages and holiday pay on behalf of employees.
The Enterprise Bill proposes sweeping away the power of the banks to appoint administrative receivers
What will happen to those funds that would otherwise have gone to the government? At the second reading debate on the bill in the House of Lords in July, it was estimated that these amount to £115m annually. The benefit of this largess will be available for unsecured creditors. This is, however subject to two qualifications.
A holder of a floating charge that has registered before the bill is enacted will be able to recover money that could have otherwise have gone to the government. Where a floating charge is registered after enactment, a proportion of the company's assets will be ringfenced for unsecured creditors.
The bill now places the emphasis on company rescue, and therefore the aim is to encourage the use of administration. This procedure, which is already available, enables a company to hold creditors at bay while it tries to put itself on a better financial footing. At present, an administrator can only be appointed by the court.
The bill will make it easier for a company to go into administration by allowing directors and floating change holders to appoint the administrator, who will work in consultation with creditors.
It is difficult to envisage the rescue culture succeeding in construction, since there is often little to rescue. Liquidation, therefore, will in many cases be the only alternative. But if there are realistic prospects of rescue, unsecured creditors are likely to be better off.
Rudi Klein is a barrister and chief executive of the Specialist Engineering Contractors Group.