Permitted disclosure

Section 239: Consent

602.     Subsection (1) provides that disclosure will be permitted where the authority wishing to disclose the information obtains the necessary consent(s) that are detailed in the following subsections.

603.     Subsection (2) requires the consent to disclosure by the provider of the information, but applies only where the authority knows the identity of the person from whom it obtained the information. This recognises the possibility that it may not always be possible to identify the provider of particular pieces of information. Where the identity of the provider is known, the authority must satisfy itself that the provider was legally in possession of the information and that the provider consents to further disclosure before releasing the information.

604.     Subsections (3), (4) and (5) require the consent by the subject of the information. Where the information concerns the affairs of an individual, that individual must consent to further disclosure by the authority. Where the information relates to the business of an undertaking, subsection (5) requires consent to be given by a senior representative of the undertaking: for example, the company secretary or other director; a partner; or, in the case of an unincorporated body, a person in a position of management or control.

Section 240: Community obligations

605.     This section sets out the principle that disclosure may be made where it is necessary for the authority to disclose the information for the purpose of fulfilling any obligation under European Community law.

Section 241: Statutory functions

606.     This section enables public authorities holding information to disclose specified information to persons exercising specified statutory functions.

607.     Subsection (1) provides that a public authority that holds information to which the disclosure provisions in this Part apply may disclose that information for the purpose of facilitating the exercise by that public authority of any of its statutory functions.

608.     Subsection (2) provides that if information is disclosed under subsection (1) in circumstances in which it is not put into the public domain (for example where it is not published in the press), such information must not be further disclosed by the recipient of the information without the agreement of the public authority that disclosed the information to it, and disclosure may only be for the purpose of facilitating the exercise by the public authority that made the original disclosure of its statutory functions.

609.     Subsection (3) provides that specified information held by public authorities can be disclosed to any person for the purpose of facilitating the exercise of any function that that person has under this Act, any of the Acts specified in Schedule 15 or any secondary legislation specified by the Secretary of State by an order made for the purpose of this subsection.

610.     Subsection (4) provides that information disclosed to a person exercising a function under one of the Acts or pieces of legislation specified in subsection (3) can only be used for a purpose relating to that function.

611.     Subsection (5) provides that the term 'enactment' will be taken to refer to both primary and secondary legislation, including Scottish and Northern Ireland legislation.

612.      Subsection (6) empowers the Secretary of State to amend the lists of enactments in Schedule 15.

613.     Subsection (8) provides that statutory instruments made under subsection (6) will be subject to the negative Parliamentary procedure.

Section 242: Criminal proceedings

614.     This section permits disclosure for the purposes of criminal proceedings.

615.     Subsection (1) permits a public authority to disclose specified information to any person for the purposes of investigating whether there have been breaches of UK criminal law; assisting in the bringing or conducting of UK criminal proceedings; or deciding whether to commence or terminate such investigations or proceedings. Disclosure is not required to be for the purposes of specified statutory functions - information may be disclosed for the purpose of the enforcement of any enactment by way of criminal proceedings.

616.     Subsection (2) provides that information disclosed under this section can only be used for the purpose for which it is disclosed.

617.     Subsection (3) provides that a public authority may only make a disclosure under section 242 if it is satisfied that the disclosure is proportionate to what is sought to be achieved by it.

Section 243: Overseas disclosures

618.     This section specifies the circumstances under which information may be disclosed to overseas authorities.

619.     Subsections (1), (2) and (12) permit a public authority to disclose specified information to any overseas public authority (as defined in subsection (11)) for the purpose of any criminal investigations or proceedings, or for civil investigations or proceedings that relate to competition or consumer matters. Subsection (12) specifically provides that disclosure may be made for the purposes of overseas civil proceedings under legislation that is equivalent to the domestic infringements and Community infringements set out in Part 8 of the Act.

620.     Subsection (3) prevents the disclosure to any overseas authority of information that is held by any person or body that has been designated as an enforcer by the Secretary of State for the purposes of Part 8 of this Act under subsection 213(4). It also prevents the disclosure to any overseas authority of any competition information obtained under the Financial Services and Markets Act 2000 and certain sensitive commercial information (for example, information connected to market and merger investigations).

621.     Subsection (4) provides that the Secretary of State can prevent disclosure of information overseas if she thinks the proceedings or investigation for which the information has been requested would be more appropriately carried out by authorities in the UK or in another country. Subsection (5) requires the Secretary of State to take appropriate steps to bring any decision made by him under subsection (4) to the attention of persons likely to be affected by it.

622.     Subsection (6) sets out the considerations that a public authority must take into account when deciding whether to disclose information overseas, namely whether the reason for the request is sufficiently serious to justify disclosure; the existence of appropriate protection against self-incrimination in criminal proceedings and for personal data in the requesting country; and the existence of any mutual assistance agreements covering the information concerned with the requesting country.

623.     Subsection (7) states that protection against self-incrimination and of personal data will be appropriate if it corresponds to that provided in any part of the UK.

624.     Subsections (8) and (9) give the Secretary of State the power, by order (subject to the negative resolution procedure) to modify, add to, or remove any of the considerations in subsection (6).

625.     Subsection (10) prevents information that is disclosed to overseas authorities from being further disclosed (without the permission of the UK authority from whom the information came). This prevents the overseas authority from using the information for any purpose other than the purpose for which it is disclosed by the UK public authority and from further disclosing it to other bodies or authorities. Should they wish to use it for a different purpose than that originally specified, a further request to the UK authority would have to be made.

626.     It is accepted that subsection (10)(a) and (b) are essentially unenforceable as there are no sanctions that could be taken against an overseas authority that contravenes these conditions. However, it is envisaged that should an overseas authority breach these provisions it is unlikely that a UK authority would disclose any further information.

627.     Subsection (11) defines an overseas public authority. For the purpose of this Part, an overseas public authority is any organisation involved in the conduct of criminal investigations or proceedings, and also those organisations involved in the conduct of any civil investigations or proceedings related to the enforcement of competition or consumer legislation. In reality, this will probably include police and security forces together with national competition authorities and organisations with powers linked to consumer legislation (these could be public or private bodies).

Section 244: Specified information: considerations relevant to disclosure

628.     This section sets out further considerations to which public authorities must have regard before disclosing any specified information (whether under a power in Part 9 or elsewhere).

629.     Subsections (2) and (3) provide that, before disclosing the relevant information, a public authority must consider whether disclosure would be contrary to the public interest, and whether disclosure would cause significant harm to the interests of the business or individual to which it relates.

630.     Subsection (4) provides that, should the public authority consider that disclosure of particular information could significantly harm the interests of an individual or a business, then they must make a judgement as to the extent to which disclosure of that information is necessary.

Offences

Section 245: Offences

631.     This section sets out the circumstances in which the disclosure of information, or the use of information disclosed, constitutes an offence, and also specifies the sanctions that will apply if such an offence is committed.

632.     Subsection (1) explains that an offence is committed if specified information is disclosed in circumstances to which none of the relevant exceptions set out in this Part applies and whilst the individual who is the subject of the information is still alive or any undertaking to which the information relates continues to trade.

633.     Subsection (2) specifies that an offence is also committed if information is disclosed overseas despite a direction from the Secretary of State that it should not be.

634.     Subsection (3) extends the offence to include the use of information for a purpose not permitted under this Part.

635.     Subsection (4) specifies the maximum prison terms and fines for an offence under Part 9.

Schedule 14: Specified functions

636.     This Schedule specifies the Acts under which any information obtained by a public authority in connection with the exercise of any statutory function will be 'specified information' for the purposes of this Part.

Schedule 15: Enactments conferring functions

637.     This Schedule lists certain legislation under which statutory functions arise for the purpose of section 241. Information may only be passed to a public authority for the purpose of carrying out a statutory function that arises under the enactments listed in this Schedule.

PART 10: INSOLVENCY

638.     The provisions in the Act form part of the Government's ongoing strategy for dealing with the consequences of indebtedness and modernising the court's role in dealing with insolvency. In July 2001, the Government published its White Paper, 'Productivity and Enterprise: Insolvency - A Second Chance'. This built on an ongoing trend established by the Cork Report ¹ to promote a culture of company rescue, and continued through the introduction of Insolvency Acts of 1986 and 2000. The White paper also built on The Insolvency Service consultation paper, 'Bankruptcy - A Fresh Start', published in April 2000.

¹ Insolvency Law & Practice: Report of the Review Committee (Cork Report) (1982) CMND 8558

639.     The insolvency sections fall into four main sections: corporate insolvency; the abolition of Crown preference; individual insolvency (bankruptcy and individual voluntary arrangements) and the financial arrangements relating to the functions performed by the Secretary of State in relation to insolvency. These notes provide a general commentary on what the legislation seeks to achieve.

Companies etc.

640.     Changes to the existing corporate insolvency regime focus on restricting the use of administrative receivership and streamlining administration. The White Paper 'Productivity and Enterprise: Insolvency - A Second Chance' recognised that the administration procedure introduced by the Insolvency Act 1986 was seen as an important tool in providing companies in financial difficulties with a breathing space in which to put a rescue plan to creditors. However, it also recognised that the procedure could be improved.

641.     The existing provisions contained in Part II of the Insolvency Act 1986 allow the court to make an administration order in respect of a company that is in financial difficulties. Broadly speaking, the effect of such an order is to afford the company protection from its creditors whilst attempts are made to save the company or achieve a better result for creditors than would be achieved in a winding-up. However, in practice, in many cases where a company gets into financial difficulties, this will lead to the appointment of an administrative receiver by those providing financial support for the company (typically the company's bank), since they usually will have taken a floating charge over all the company's assets. The holder of a floating charge has an effective veto over the appointment of an administrator. Such a person must be given notice of any application for an administration order, and if he or she appoints an administrative receiver, the court must dismiss the application unless the appointor of the administrative receiver consents to the making of an administration order (see section 9(2)(a) and section 9(3) Insolvency Act 1986).

642.     An administrative receiver primarily owes duties to his or her appointor rather than the company's creditors as a whole (as to the duties owed by an administrative receiver see Medforth v Blake [1999] 2 BCLC 221). His or her primary function is to seek repayment of the debt owed to his or her appointor. An administrative receiver has no powers or duty to seek to put together a company rescue in the same way that an administrator has (an administrator, both under the old procedure and as amended by this Act, may put proposals to creditors for a Company Voluntary Arrangement (CVA) pursuant to Part I of the Insolvency Act 1986 or a scheme of arrangement pursuant to section 425 Companies Act 1985) (see sections 8(3) and 23 of the Insolvency Act 1986).

643.     The sections will alter the above provisions in the following way. First, the appointment of administrative receivers will be restricted to certain exceptions (existing arrangements and capital markets) and the Act seeks to provide that administrators will in future be appointed in situations that would have been dealt with through administrative receivership. Second, the procedure has been amended to streamline the process both in the provisions of the Act and the Rules made under section 411 Insolvency Act 1986 that seek to give effect to the provisions of the Act. Perhaps the most obvious of the measures is the introduction of the non-court routes into administration. The procedure has been amended to provide a single purpose made up of a hierarchy of three objectives and expressly to provide that the administrator must carry out his or her functions in the interests of all the creditors. It was recognised that the administration procedure as it stood prior to commencement of the relevant parts of this Act was to a degree cumbersome.

644.     Administration will continue to have many of the features of the current system. At Annex E there is a table of correspondence that will assist readers in identifying to what extent the provisions of the Insolvency Act 1986 are reflected in new Schedule B1.

Section 248 & Schedule 16: Replacement of Part II of Insolvency Act 1986

645.     In order to provide for the streamlining of administration, section 248 replaces Part II of the Insolvency Act 1986 with a new Schedule B1 - as set out in Schedule 16 of this Act. This will be inserted after Schedule A1 to the Insolvency Act 1986. The paragraphs referred to below are paragraphs in Schedule B1.

General effect of Section 248 and Schedule 16: Nature of administration

646.     In general terms, the effect of section 248 and Schedule 16 is as follows. Whether or not appointed by the court, an administrator is an officer of the court (as well as an agent of the company) and can only be appointed if qualified to act as an insolvency practitioner. An administrator may not be appointed if the company is already in administration. Generally, a company cannot go into administration if:

• a resolution for voluntary winding-up has been passed (see paragraph 8(1)(a)); or

• a winding-up order has been made (subject to an application by the liquidator or a floating charge holder) (see paragraph 8(1)(b)).

The purpose of administration

647.     In order to clarify the purpose of administration and to place greater emphasis on company rescue, paragraph 3 replaces the existing four statutory purposes under section 8(3) Insolvency Act 1986. Under a single overarching purpose, which will apply to all cases of administration, the administrator will be required, where he or she thinks it is reasonably practicable, to carry out his or her functions with the objective of rescuing the company as a going concern (rescuing the company in this context is intended to mean the company and as much of its business as possible). Where that is not reasonably practicable or that objective would not provide the best result for the company's creditors as a whole, the administrator may pursue the second objective referred to below. A hypothetical example of a reasonably practicable rescue might be:

Company A is operating at a profit and has excellent products, a loyal customer base and a healthy order book. However, major investment in a new IT system, which is late and over-budget, has knocked the company off its business plan, its cash flow has suffered and it is unable to pay its debts. The company has been placed in administration and the administrator has had an offer for its business that would provide sufficient funds to pay the secured creditors and give 35p in the pound for unsecured creditors. However, the administrator has determined that the problems are short-term and they can be resolved and will not have any ongoing effect. The company's bankers have given their support to the administrator's plans to continue trading, the company's business is profitable and the administrator is confident that the company can be rescued by trading its way out of its current financial difficulties, and provide 65p in the pound return for unsecured creditors within 12 months. The administrator puts his or her proposal to the creditors.

648.     An example of a case where a rescue would not be reasonably practicable is one where it is clear that the only viable options depend on the continuing support of the company's bankers. The administrator knows that this support will not be forthcoming and that there is no alternative means of financing the company. Whether a company rescue is a reasonably practicable option is a matter of commercial judgment and, on the basis of the case law in relation to similar decisions under the administration procedure prior to commencement of the relevant parts of this Act, it is envisaged that the courts will not seek to criticise the exercise of the administrator's commercial judgement, except in cases where bad faith can be established or the decision taken was one that no reasonable administrator would have taken. (As to the courts' attitude in relation to commercial matters, see for example, re: T&D Industries plc (in administration) [2000] 1 BCLC 471.)

649.     Company rescue is most likely to involve the creditors agreeing to the company entering a CVA or a scheme of arrangement under section 425 of the Companies Act 1985. For the purpose of these sections, a proposal that would result in a 'shell' company remaining would not be considered a rescue.

650.     If the administrator thinks that a company rescue is not reasonably practicable, or would not achieve the best result for the creditors as a whole, he or she will seek a better result for the creditors than on a winding-up. This might encompass situations where the company's individual businesses are broken up and sold to one or more buyers as going concerns in order to achieve this better result for creditors. Assets of the company may also be sold other than on a going concern basis. A hypothetical example might be:

Company B has good products, and a sound customer base. The company is making losses, its plant and machinery are outdated, and its overheads and debts have been rising for some time. The company has been placed in administration and the administrator has determined that there are no funds available to maintain its entire trading operation or invest in new machinery and it is therefore not reasonably practicable to rescue the company. The administrator has reviewed the company and determined that a sale of its businesses on a going concern basis would provide a better return than a break-up sale of its assets. The administrator markets the businesses and the best offer he or she receives would provide sufficient funds to pay the secured creditors and give 40p in the pound for unsecured creditors. The administrator reports to the creditors at a meeting and explains why it was not reasonably practicable to rescue the company.

651.     The purpose specified in paragraph 3(1)(c) deals mainly with those cases where the company is not viable and has no business that can be sold as a going concern. All that can be done is to sell the company's remaining assets in order to make a distribution to one or more secured or preferential creditors. A hypothetical example might be:

Company C is a service company whose business and reputation were built around its excellent standards of customer service. But a number of key personnel have recently left, the quality of the company's service and its reputation have suffered badly, customers have become dissatisfied and the company is no longer able to attract and retain business. It has been making losses for a number of months and is unable to pay its debts. The company is then placed in administration. The administrator reviews the company and concludes that its business is not viable and a sale is not possible. The administrator markets the company's assets and realises funds that are sufficient to make a part-payment to the secured creditors, and there are no funds available to pay unsecured creditors, except for those resulting from the operation of the ring-fence (see section 252). The administrator reports to the creditors and explains why it was not reasonably practicable to achieve either a company rescue or a better return for unsecured creditors.

652.     An administrator must have regard to the interests of all creditors. In situations under paragraph 3(1)(c) where there are insufficient funds to pay the unsecured creditors, the administrator may only act if he or she does not unnecessarily harm their interests.

Appointment of administrator

653.     Currently, administrators can only be appointed by court order (see section 8 Insolvency Act 1986, as originally enacted), and this route into administration has been retained. However, in order to speed up the process, paragraphs 14-34 set out provisions for the holders of floating charges and companies or their directors to appoint administrators without a court hearing. A diagram showing the out-of-court routes into administration is at Annex F.

General Restrictions

654.     Paragraphs 6-9 set out instances where the appointment of an administrator is not allowed. These restrictions are included for practical reasons, e.g. the administrator must be qualified to act as an insolvency practitioner; the company must not already be in administration; and the company must not be in liquidation, although the latter restriction can be overruled in certain cases. Paragraph 9 refers to certain types of companies in relation to which the administration procedure applies in a somewhat modified form (see section 422 of the Insolvency Act 1986 and section 360 of the Financial Services and Markets Act 2000), hence the unmodified provisions of Schedule B1 do not apply.

Appointment by court

655.     Paragraphs 10-13 set out the court route into administration. A company or its directors, or one or more creditors of a company (which could include a floating charge holder) can apply to court for an administration order (see paragraph 12). The court may only make an order if it is satisfied that the company is, or is likely to become, unable to pay its debts and that the order is reasonably likely to achieve an objective/the purpose of administration (see paragraph 11).

656.     Paragraph 12(2) provides that, once an administration application has been made, the applicant must notify, amongst others, anyone who has appointed, or is entitled to appoint, either an administrative receiver or an administrator. The application for administration cannot be withdrawn without the permission of the court (see paragraph 12(3)).

657.     On hearing an application for administration, the court may either make the order, dismiss the application or make any other order deemed appropriate, including treating the application as a winding-up petition or making an interim order (paragraph 13).

Appointment by the holder of a floating charge

658.     Paragraphs 14-21 set out the out-of-court route into administration for the holders of floating charges. Floating charge holders will be able to appoint an administrator of their choosing, provided that:

• the floating charge on which the appointment relies is enforceable (see paragraph 16). In this context, enforceable means that the floating charge holder is entitled to call in their security;

• he or she has given notice to the holder of any floating charge which has priority over his or her own floating charge (see paragraph 15);

• the company is not in liquidation (see paragraph 8(1)(a) and (b)) nor has a provisional liquidator been appointed (see paragraph 17(a)); and

• neither an administrative receiver (see paragraph 17(b)) nor administrator is already in office (see paragraph 7).

659.     Before the administrator takes office, the floating charge holder must file a notice of appointment with the court (see paragraph 18(1)) identifying the administrator and including a statement from the administrator consenting to the appointment (paragraph 18(3)). Attached to this will be a statutory declaration (paragraph 18(2)) by the floating charge holder stating that they have a qualifying floating charge - which may be one or more floating charges (together with other security) - over the whole or substantially the whole of the company's property and that this is or was enforceable on the date of the appointment (as to when the holder of a floating charge can appoint an administrator, see paragraph 14).