Payne The role of the court in debt restructuring December€¦ · 1 The role of the court in debt...
34
1 The role of the court in debt restructuring 1. Introduction Companies in financial distress face a number of options, including immediate liquidation, trading out of their difficulties, or a disposal of the assets or the business. Either of the latter options is likely to be preferable to liquidation, at least where the underlying business is sound and the company is merely financially, as opposed to economically, distressed. 1 A sale of the business to a new owner in an auction process will not always be possible or desirable, however, especially in times of financial crisis, where markets are illiquid, leading to a loss of value if assets are sold at ‘fire sale’ prices or, worse, if sales can only occur on a break-up basis. 2 In such circumstances, a restructuring of the company’s debts can allow the company, liberated from its debt burden, to return to its business activities. A debt restructuring can be beneficial for companies, who need to be able to reshape their capital structures if they are no longer fit for purpose. It can also be beneficial for creditors and other stakeholders in the company, if they allow a company to continue and flourish rather than fail. It is not a coincidence that in the post-crisis period there has been a focus in both the EU and the UK on reforming the law in order to promote more effective restructuring options for distressed but viable companies, and it is this form of corporate rescue that will be the focus of this paper. There are risks attached to restructuring, however, with the possibility of abuse and oppression of some parties by others during the process of restructuring. This raises the question whether and to what extent the law should be involved, and in particular what role the court should play in these issues. There are different approaches to this issue. The recent EU draft Directive regarding restructuring processes, and the EU Recommendation on which it is based, both aim to minimise court involvement. 3 1 For a discussion of the distinction between financial and economic distress see DG Baird, ‘Bankruptcy’s Uncontested Axioms’ (1998) 108 Yale Law Journal 573. 2 See eg A Shleifer and R Vishny, ‘Liquidation Values and Debt Capacity: A Market Equilibrium Approach’ (1992) 42 Journal of Finance 1343. There may also be other reasons to why sales will not be possible, such as where the transfer of crucial assets to a new entity is not feasible. Outside these scenarios, sales can have some advantages over restructuring as they avoid the need for potentially costly bargaining between the company and its stakeholders: D Baird, ‘The Uneasy Case for Corporate Reorganizations’ (1986) 15 Journal of Legal Studies 127. 3 Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures designed to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU, COM(2016) 723 final, 22 November 2016, recital 18 and Art 4(3); European Commission, Recommendation of 12 March 2014 on a new approach to business failure and insolvency, C (2014) 1500 final, Recommendation no 8.
Transcript of Payne The role of the court in debt restructuring December€¦ · 1 The role of the court in debt...
1
Theroleofthecourtindebtrestructuring
1. Introduction
Companiesinfinancialdistressfaceanumberofoptions,includingimmediateliquidation,tradingoutof
theirdifficulties,oradisposaloftheassetsorthebusiness.Eitherofthelatteroptionsislikelytobe
preferabletoliquidation,atleastwheretheunderlyingbusinessissoundandthecompanyismerely
financially,asopposedtoeconomically,distressed.1Asaleofthebusinesstoanewownerinanauction
processwillnotalwaysbepossibleordesirable,however,especiallyintimesoffinancialcrisis,where
marketsareilliquid,leadingtoalossofvalueifassetsaresoldat‘firesale’pricesor,worse,ifsalescan
onlyoccuronabreak-upbasis.2Insuchcircumstances,arestructuringofthecompany’sdebtscanallow
thecompany,liberatedfromitsdebtburden,toreturntoitsbusinessactivities.Adebtrestructuringcan
bebeneficialforcompanies,whoneedtobeabletoreshapetheircapitalstructuresiftheyarenolonger
fitforpurpose.Itcanalsobebeneficialforcreditorsandotherstakeholdersinthecompany,ifthey
allowacompanytocontinueandflourishratherthanfail.Itisnotacoincidencethatinthepost-crisis
periodtherehasbeenafocusinboththeEUandtheUKonreformingthelawinordertopromotemore
effectiverestructuringoptionsfordistressedbutviablecompanies,anditisthisformofcorporate
rescuethatwillbethefocusofthispaper.
Therearerisksattachedtorestructuring,however,withthepossibilityofabuseandoppressionofsome
partiesbyothersduringtheprocessofrestructuring.Thisraisesthequestionwhetherandtowhat
extentthelawshouldbeinvolved,andinparticularwhatrolethecourtshouldplayintheseissues.
Therearedifferentapproachestothisissue.TherecentEUdraftDirectiveregardingrestructuring
processes,andtheEURecommendationonwhichitisbased,bothaimtominimisecourtinvolvement.3
1ForadiscussionofthedistinctionbetweenfinancialandeconomicdistressseeDGBaird,‘Bankruptcy’sUncontestedAxioms’(1998)108YaleLawJournal573.2SeeegAShleiferandRVishny,‘LiquidationValuesandDebtCapacity:AMarketEquilibriumApproach’(1992)42JournalofFinance1343.Theremayalsobeotherreasonstowhysaleswillnotbepossible,suchaswherethetransferofcrucialassetstoanewentityisnotfeasible.Outsidethesescenarios,salescanhavesomeadvantagesoverrestructuringastheyavoidtheneedforpotentiallycostlybargainingbetweenthecompanyanditsstakeholders:DBaird,‘TheUneasyCaseforCorporateReorganizations’(1986)15JournalofLegalStudies127.3ProposalforaDirectiveoftheEuropeanParliamentandoftheCouncilonpreventiverestructuringframeworks,secondchanceandmeasuresdesignedtoincreasetheefficiencyofrestructuring,insolvencyanddischargeproceduresandamendingDirective2012/30/EU,COM(2016)723final,22November2016,recital18andArt4(3);EuropeanCommission,Recommendationof12March2014onanewapproachtobusinessfailureandinsolvency,C(2014)1500final,Recommendationno8.
2
TheEnglishdebtrestructuringoptionsincludesomewithminimalcourtinvolvement,suchasCompany
VoluntaryArrangements,andsomewithasignificantroleforthecourts,mostnotablyschemesof
arrangement.IntheUS,Chapter11reliesheavilyontheroleofthecourt.Therecentdebtrestructuring
reformproposalsoftheUKInsolvencyServiceenvisageanumberofchanges,but,ifintroduced,they
willundoubtedlyinvolveanincreasedroleforthecourtinordertoprovideprotectionagainstthe
additionalconstraintsoncreditorsrightsthatareproposed.4
Therearethreedifferentissueswhichraiseconcernsforcreditorsinadebtrestructuringandwhichwill
bediscussedinthispaper.Thefirstistheimpositionofarestructuringondissentingcreditors,which
introducesthepotentialforabuseofthedissentingminority,and,inparticular,ofwealthtransfers
betweencreditors.Secondistheimpositionofamoratoriumwhilearestructuringisnegotiated,which
mightleadtomisuseoftheprocessbymanagerswishingtopropupcompanieswhicharenotviable,or
mayallowmanagersofaviablebusinessto‘shakeoff’liabilitiesthatitiscapableofservicing.5Third,the
impositionofdebtor-in-possessionarrangementsthatprefertheprovidersofnewfinancetoexisting
creditorsinthisperiodraisesconcernsfortheexistingcreditorsregardingtheleveloftheirprotection.
Theroleofthecourtregardingoversightoftheseconstraintsoncreditors’rightsrequirescareful
thought.Thisoversightisalreadywelldevelopedinrelationtothefirstissue,particularlywherethe
restructuringtakesplacebywayofaschemeofarrangement.However,thecourthasrelativelylittle
roletoplayatpresentinthesecondandthirdissues,inpartbecausetheseissueshavenotbeen
significantlydevelopedintheUKtodate.Thismaybesettochange.TheInsolvencyService’sreform
proposalswould,ifimplemented,makesignificantchangestoallthreeareas,expandingtheextentto
whichdebtrestructuringproposalscanbeimposedondissentingcreditors,wideningandexpandingthe
reachofthemoratorium,andintroducingstatutorydebtor-in-possessionfinancingforthefirsttime.The
currentroleofthecourtiskeytoprotectingcreditorsinarestructuring,andifthesereformproposals
goahead,thecourt’srolewillneedtobefurtherdevelopedtodealwiththeadditionalconstraintson
creditors’rightsthatthesechangeswillentail.
4InsolvencyService,AReviewoftheCorporateInsolvencyFramework:aconsultationonoptionsforreform,May2016andseeInsolvencyService,SummaryofResponses–AReviewoftheCorporateInsolvencyframework,September2016.5SPaterson,‘Rethinkingtheroleofthelawofcorporatedistressinthetwenty-firstcentury’,LSELaw,SocietyandEconomyWorkingpapers27/2014,16.
3
2. Whyiscourtinterventionneededindebtrestructuring?
Althoughtherearemanyadvantagestodebtrestructuringthroughcontractualmeans,court
interventionmaybeneededtodealwithdifficultiesthatcanarise,particularlywherecreditorsseekto
disrupttherestructuringbyexercisingholduprightsorbyseekingtoenforcetheirclaimsinthisperiod.
Thecourt’sinterventionmaythereforebeneededtopromoteanagreementbetweentheparties,
althoughtheinvolvementofthecourtmaythenintroducedifficultiesofitsown.
Financialrestructuringisatitsheartaprivatematterbetweentheparties,whoneedtorenegotiatean
agreementwhichnolongerreflectstherisksagainstwhichtheyagreedterms.Thiscanbebeneficialto
theparties,andalsotothecompany,particularlywherethecompanyisfinanciallydistressedandthe
restructuringenablesthecompany,oratleastitsbusiness,tocontinue,unburdenedbythecrippling
debtthathadpreviouslyhungoverit.6Courtsdonotneedtobeinvolvedindebtrestructuring.Indeed,
untilrelativelyrecently,thelawplayedlittleornoroleinfacilitatingrestructuring.Instead,stakeholders
(creditors,andperhapsshareholders)bargainedforthereorganisationthattheywantedviaa
contractualworkout.Creditorscanagreeexanteonaproceduretoenableaprescribedmajorityof
creditorstobindotherstoanyreorganisationofacompany’sdebt,butifnosuchprocedureisinplace
anychangeinthescopeortermsofthedebtor’sliabilitieswillrequiretheconsentofallcreditorswhose
claimsaretobeaffected.
Giventhisinherentfeatureofcontractualworkouts,theyoperatebestwhenthelenderscomprisea
smallgroupoflike-mindedindividualsororganisations.Itiseasyforacontractualworkouttobe
disruptedbytheactionsofoneormorecreditors,even,potentially,asinglecreditorholdingavery
smallamountofthecompany’sdebt.Thiscanbedoneeitherthroughthecreditorrefusingitsconsent,
inordertoextractadditionalvaluefromthecompany(theexerciseofholduprights),orbythecreditor
seekingtoenforceitsdebtwhiletherestructuringisbeingnegotiated,andpotentiallypetitioningfor
thecompanytobewoundupifthedebtremainsunpaid.Theseformsofbehaviourcanallowindividual
creditorstodelayorevenpreventthesuccessfulagreementofacontractualworkout.Thismaywellbe
valuedestructiveforthecompanyconcerned,andmayhaveaneffectontheavailabilityandcostof
6SeeegReBluebrookLtd[2009]EWHC2114(Ch).
4
capitalforacompanyexante.7Furthermore,aprocessofprolongedinformalnegotiation,whilethe
debtorseekstosatisfytherequirementsofallcreditors,canbedisadvantageous,andindeedmaybe
completelyimpracticalifthedebtorisfacinganacuteliquiditycrisis.8
Thelawcanhelptodealwiththesedifficulties,andindeedthestatehasaninherentinterestingetting
involvedinthesemattersandseekingtopromoteanagreementbetweenthepartiesthattheyare
unabletoreachamongstthemselves,inordertopromoteeconomicgrowth.Therearethreeparticular
mechanismsthatthestatemayutilisetopromoteanagreement,namelyenablingtherestructuringto
beimposedondissentingcreditors,imposingsomeformofmoratorium,andfacilitatingdebtor-in-
possessionfinancing.Thesemechanismsareintroducedhereandwillbediscussedatmorelengthin
sections4-6.
First,todealwiththeholdoutproblem,thelawcanputinplacesomemechanismbywhichdissenting
creditorscanbeboundtotherestructuringplan.Thismechanismcouldbestructuredinvariousways.
Forinstance,itmightinvolvetherestructuringbeingimposedonlyondissentingcreditorsofaparticular
classifthemajorityofthatclassconsents,oralternativelyitmightallowtherestructuringtobeimposed
onwholeclassesofdissentingcreditors(orshareholders)insomecircumstances.
Second,todealwiththepossibilityofoneormorecreditorspetitioningforawindinguporotherwise
seekingtoasserttheircontractualrightsagainstthecompanyduringtheperiodofnegotiation,some
formofstaycanbeputinplace.Theneedforcreditorstobeconstrainedfromsuchactioniswell
understoodinthecontextofinsolvencylaw.9Astayoncreditoractionofthiskindcanpromotethe
survivalofthecompany,oritsbusiness,maximisingreturnsforcreditors,andbenefitingother
stakeholders,suchasemployees,whodependonthecontinuedoperationofthebusiness.Inthesame
waythatastayisregardedascentralininsolvencylaw,asameansofkeepingthebusinessandassets
togethersothattheycanbesoldforthehighestpossibleprice,astaycanalsoberegardedasbeneficial
asawayofkeepingthebusinessandassetstogetherlongenoughforareorganisationtobeeffected,
althoughsuchanoutcomeisalsolikelytorequireotherelementstobepresent,suchasthecontinued
7Ibid.8SChatterjee,USDhillon,andGGRamirez,‘ResolutionofFinancialDistress:DebtRestructurings’(1996)25FinancialManagement5.9SeeegTJackson,‘Bankruptcy,Non-bankruptcyEntitlements,andtheCreditors’bargain’(1982)91YaleLawJournal857;THJacksonandREScott,‘OntheNatureofbankruptcy:AnEssayonBankruptcySharingandtheCreditors’Bargain’(1989)75VirginiaLawReview155.
5
existenceofadequateworkingcapital,asdiscussedbelow.Atitssimplestthismightsimplypreventthe
creditorfromassertingitsdebtclaimagainthecompanyfortheperiodofnegotiation.Morevaluableis
likelytobeastayontheinitiationofinsolvencyproceedingsandotherlegalprocess,giventheimpactof
thecommencementofsuchproceedingsonthepositionofmanagers,oncounterparties,andonthe
company’sgoodwill.Thestaycouldevenbeextendedfurther,toincludeaconstraintontheabilityof
thecreditortoterminateitscontractwiththecompanyinthisperiod.Astaycanprovideacompany
withabreathingspacewithinwhichtotrytoconcludearestructuringagreementwithitscreditors.
Third,thelawcanfacilitatetheprovisionofnewfinanceinthisperiodbyprovidingthatsuchfinancehas
priorityoverexistingcreditors’claimssoastoovercomethedebtoverhangproblemthatcanotherwise
actasadeterrenttotheextensionofworkingcapitaltothecompany.Thisisanotherissuethatthe
partiescanarrangecontractuallybetweenthemselves,bywayofcontractualsubordination,withoutthe
law’sintervention.10Suchanarrangementcanalsobesubjecttodelayswhilenegotiationsoccur,and
theuseofholduprightstoextractvalue,andsotheinterventionofthelawcanbe,potentially,
beneficial.
ItisnotablethattheUSChapter11procedure,sometimesregardedasthegoldstandardofdebt
restructuringmechanisms,containsallthreeofthesefeatures,namelytheopportunityforthe
restructuringtobeimposedondissentingcreditors(acramdownwherebytherestructuringcanbe
imposedonawholedissentingclass),abroadstayofproceedingswhiletherestructuringisnegotiated,
andsuper-priorityfornewfinance.Moreover,the2016EuropeanCommissionProposalforaDirective
dealingwithrestructuring,andthe2014EURestructuringRecommendationonwhichitisbased,setout
minimumstandardsfortheframeworkswhichMemberStatesshouldhaveinplacetoenableto
efficientrestructuringofviablecompaniesandthesethreefeaturesareattheheartoftheseproposals.
Chapter11isacknowledgedtohavebeenanimportantinfluenceontheseproposals,althoughthe
scopeofthethreefeaturesisnotalwaysidenticaltotheequivalentprovisionsunderChapter11.11By
contrast,thispackageisnoticeablyabsentfromEnglishlawatpresent.Englishlawcontainsnospecific
10SeeReMaxwellCommunicationsCorporationplc(No2)[1994]1AllER737.11Seen3.Forexample,theDIPfinancingproposalsarenoticeablyweakerthanthoseunderChapter11.FordiscussionoftheEU’s2014RestructuringRecommendationseeHEidenmuellerandKvanZwieten,‘RestructuringtheEuropeanBusinessEnterprise:TheEUCommissionRecommendationonaNewApproachtoBusinessFailureandInsolvency’(2015)16EBOR625,632.
6
statutoryprovisionfordebtor-in-possessionfinancing12(althoughEnglishlawdoesnotactivelyprevent
suchprovisions)13andnosinglemechanismprovidestheopportunityfortherestructuringtobe
imposedonawholeclassofdissentingcreditorsormembersandhasthebenefitofastatutorystay.
Administrationprovidesastatutorystay,14butdoesnotallowtherestructuringtobeimposedon
dissentingcreditors,whileschemesofarrangementallowtherestructuringtobeimposedondissenting
creditors/memberswithinaclass(althoughnotonawholedissentingclass)butprovidesnostatutory
stay.15CompanyVoluntaryArrangementshaveanevenmorelimitedopportunitytoimposethe
restructuringondissenters,astheycannotbindsecuredorpreferentialcreditorswithouttheirconsent,
andnostatutorystayforanybutthetiniestcompanies.16Thelackofasinglemechanismofferingthe
benefitsofallthreeofthesefeatures,akintoUSChapter11,hasnotgoneunnoticed.TheMay2016
proposalsoftheInsolvencyServiceregardingrestructuringmechanismsrecommendedtheintroduction
ofpreciselythesethreedevicesintoEnglishlaw.
Theinterventionofthelawinthesethreewayscanbepotentiallybeneficialintermsoffacilitatinga
restructuringofthecompanywhichmayallowit,oratleastitsbusiness,tocontinue.These
interventionsbringwiththemthepossibilityofabuseormisuseoftherestructuringregimetothe
disadvantageofcreditors.Thisissueisdiscussednext.
3. Theneedtoprotectcreditors
Oncethelawstepsintoprovideoneormoreofthesefeatures,thisraisesthepossibilityofabuseor
misuseoftherestructuringregimetothedetrimentofcertainconstituencies.Potentiallydifferentforms12Ithasbeensuggestedthatsection19(5)andscheduleB1paragraph99oftheInsolvencyAct1986providesapotentialroutetopost-petitionfinancing:GMcCormack,‘Super-priorityNewFinancingandCorporateRescue’[2007]JBL701-732;VFinch,‘TheDynamicsofInsolvencyLaw:ThreeModelsofReform’[2009]LawandfinancialMarketsReview438-448,althoughthisoptionhasnotbeenfullyexplored.13Indeed,optionsforsuperprioritydoexist,forexample,inadministration,administratorshavestatutorypowersallowingthemtoborrowfundsandgrantsecurityoverthepropertyofacompany(InsolvencyAct1986,Sch1),andthecostsoffinancerankhighlyinthehierarchyofadministrationexpenses(InsolvencyRules1986,rule2.67).However,suchoptionsarerarelyusedinpractice,perhapsbecausenewfundinginadministrationsistypicallyprovidedbytheexistingfloatingchargeholder,whohasnoneedtovarytheirexistingsecurity,andanyassetsnotcoveredbythefloatingchargewillalreadybesubjecttofixedcharges.14InsolvencyAct1986,SchB1paras42-43.15SeeCompaniesAct2006,Part26,especiallys899(1)whichsetsouttheoptiontoimposetheschemeondissentingcreditors/shareholders.Thesedifficultiescanbesolvedtosomeextentbycombiningschemesandadministration,asoccurredinReBluebrookLtd[2009]EWHC2114(Ch)asthisallowsforadefactocramdownofawholedissentingclassandtheadditionofadministrationallowsaccesstoastatutorystayshouldthatberequired.16InsolvencyAct1986,PartIandSchA1.
7
ofabuseariseinresponsetothedifferentconstraintsoncreditors’rightsthatthelawcanimpose,
namelytheimpositionoftherestructuringondissentingcreditors,theimpositionofastayandthe
supportofDIPfinancing.Thissectionwillexaminetheformsofpotentialabuseandthenconsider
possibleresponseofthelawtothesedifficulties.
3.1 Potentialabuse
3.1.1Theimpositionoftherestructuringondissentingcreditors
Theabilityoftherestructuringtobeimposedonadissentinggroupleadstothepossibilityofabuseof
thatgroupbythemajorityandofwealthtransfersbetweencreditorsasaresultoftherestructuring
process.17
Awealthtransferwillnotarisemerelybecausecreditorsdissent.Therearemechanismsthatcanbeput
inplaceinordertoprotectdissentingcreditorsandiftheseoperateproperly,wealthtransfersshould
notoccur.Forexample,inschemesofarrangement,therearetwoprotectionsfordissentingcreditors:
thefactthatcreditorsmeetinclassesofthoseholdingthesamerights(andallclassesmustagreetothe
restructuring)andtheoversightofthecourttoensure,interalia,thattheclassesarecorrectly
constituted.Aslongastheclassesarecorrectlyconstitutedthenthereshouldnotbewealthtransfers
fromdissentingtoassentingcreditorssinceallthosewithinthesameclasswillgetthesamedeal.
However,onceitbecomespossibleforarestructuringtobeimposedonwholeclassesofdissenting
creditors,thepossibilityofwealthtransfersfromthedissentingcreditorstotheassentingcreditors
arises.Takeasimplescenarioofaheavilyindebtedcompanywhichisviablebutfinanciallydistressed.
Theseniorcreditorsmaydecidetorestructurethecompany’scapitalstructure,perhapsbywritingoff
theclaimsofthejuniorcreditors,orbytransferringthebusinessofthecompanyintoanewentityand
exchangingtheirdebtclaimsforequityinthenewcompany,leavingbehindboththejuniorcreditors
andtheequityholdersintheoldcompany.Insuchasituation,wealthtransfersfromthe(dissenting)
juniorcreditors(andshareholders)totheseniorcreditorsarepossible,andlikely.Whileacramdownof
17Variousproblemsflowfromwealthtransfersofthiskind.Oneisthataredistributionofwealthbetweenthe
creditorsmightbeproblematicintermsofinvestmentcosts.Itisdifficulttofullypredict,andthuspricein,
unconstrainedwealthtransfersexante,andconsequentlythecontrolofsuchoppressionexpostisimportantin
termsofthecostofcapitalforcompanies.
8
wholeclassesisnotpossibleusingaschemealong,suchanoutcomecanbedefactoachievedusinga
schemecombinedwithadministration,asoccurredinReBluebrookLtd.18
Thefactsofthiscaseillustratethepotentialforwealthtransferstooccur.BluebrookLtdandtwoofits
indirectsubsidiarieswerebalancesheetinsolvent.Ratherthangointoliquidationthreeschemesof
arrangementweredevisedbetweenthecompaniesandtheseniorlenders.Effectivelythebusinessof
thegroupwouldbetransferredtoanewcorporatestructureusingapre-packadministrationandthe
seniorlenderssubstitutedtheirdebtforsharesintherestructuredgroup.Thiswouldmeanthatthe
businessofthegroupcouldcontinue,unencumberedbyitsdebtburden.Thiswouldbebeneficialfor
theseniorlenders:asequityholdersinthenewstructuretheywouldbenefitifthecompanyflourished
asplanned.However,thejuniorlendersandtheshareholderswouldbeleftbehindincompanieswhose
assetshadallbeentransferredtothenewgroup,andcutofffromthepossibilityofparticipatinginany
futuregrowthinthebusiness.Ontheonehand,thisrestructuringmayberegardedasenablingthe
rescueofagroupthatwouldotherwisefail,butatthesametimethismightberegardedasan
inappropriatewealthtransferfromthejuniorcreditors(andshareholders)totheseniorlenders?The
juniorlenderscertainlyclaimeditwasthelatter:theysoughtthecourt’sinvolvement,toprotectthem
fromthisperceivedabuse.Thedesireforthecompanytocastofftheseliabilitiesisunderstandable,but
equallyitcanreadilybeappreciatedthattheremaybecircumstancesinwhichthisisinappropriateand
anabuseofthosebeingcutoutoftheopportunitytoparticipateinthecompany’sfuturegrowth.19
3.1.2Theimpositionofastay
Asregardstheimpositionofastay,thereisapotentialforthismechanismtobeusedbymanagersin
circumstancesinwhichthebusinessisnotviable,buttherestructuringisbeingusedasawayforthe
managerstopostponetheinevitable,dissipatingassetsthatwouldotherwisebeavailableforcreditors
intheprocess.Analternativeconcernmightbethatmanagersofaviablebusiness,inalignmentwith
theseniorcreditors,usetherestructuringto‘shakeoff’liabilitieswhichitiscapableofmeeting,iethe
restructuringmightpotentiallybeusedasameansofallowingunscrupulousmanagersandsenior
lenderstobenefitthemselvesattheexpenseofothers(forexample,imaginethescenarioinRe
BluebrookLtd,butwherethecompanyisnotfinanciallydistressed).Thismightbeasaresultofwriting
offsomeorallofexistingclaimsagainstthecompany,oralternativelyexcludingordiminishingequity
18[2009]EWHC2114(Ch).19Fordiscussionofhowthecourtrespondstothisscenariosee4.2.
9
claims(includingthosewithrightstoconverttheirclaimsintoequity)fromafuturestakeinthe“upside”
ofasuccessfulcompany.
3.1.3ThefacilitationofDIPfinancing
Theprovisionofsuper-priorityfornewfinanceinevitablyraisesissuesaboutthepositionofexisting
creditors.Thenewcreditorsarelikelytowantsomeassurancethattheywillberepaid.Ofcourse,if
thereareunencumberedassetsavailable,theycantakesecurityoverthem,butthisisunlikelytobethe
case.Mostlikely,thedesireofthenewcreditorsforsecuritywillneedtobeattheexpenseofexisting
securedcreditors,iefortheDIPfinancingtobevaluableitwillneedtoallowexistingsecuritytobe
overridden.ThelawtraditionallyseekstoprotectthosewithproprietaryrightsandDIPfinancing
thereforeinevitablyraisestheissueofhowtherightsoftheexistingsecuredcreditorsaretobe
balancedagainsttheneedforthecompanytosecureadequateworkingcapitalduringtheperiodof
restructuring.
3.2Thelaw’sresponse
Justasthelawcansolvethedifficultiesthatcanariseinacontractualworkoutscenariobyproviding
thesefeatures,thelawcanalsoacttoamelioratethedifficultiestowhichthesemechanismscangive
rise.Thereareanumberoftoolsthatthelawcanutiliseinthisregard,whicharenotmutuallyexclusive.
Thefirstistoplacelimitsontheextentofthisintervention.So,forexample,thelawmightprovidethat
anystayshouldgenerallyonlyoperateforacertain,relativelyshortspaceoftime,inordertolimitthe
abilityofmanagerstomisusethistooltokeepanon-viablebusinessinexistence.Secondthelawcanset
outtheprocesstobefollowed,andthisprocesscanincludemeasuresintendedtodeterabuse.So,for
instance,asinascheme,thelawmightrequirethatcreditorsshouldmeetinclassesofcreditorswith
similarrightswhendecidingwhethertheapprovetherestructuringplan.Courtscanperforman
importantroleinmediatingbetweenthesegroups.Theextentofthecourt’srolemaydependtosome
extentontheextentofthecramdownandstay.Thebroaderthecramdown,andthereforethegreater
theopportunityfordissentingcreditorstobebound,thegreaterthepotentialroleforthecourtin
protectingtheminorityfromabuse.Third,thelawcanputinplacesomeexternalpartytohave
oversightoftherestructuringinordertodealwiththeseconcernsaboutabuseandoppression.The
courtsareanobviouscandidateforthisrole,butitisalsopossibleforotheroptionstobeputinplace,
10
eitherinsteadoforalongsidethecourts,mostobviouslythismightinvolvetheuseofinsolvency
practitioners.
Ininsolvencyprocedures,suchasadministration,theappointmentofaninsolvencypractitioneris
crucialanditisthisperson,ratherthanthecourt,thatiscentraltotheprocess.Theinsolvency
practitioneroccupiesaveryparticularroleinsuchcircumstances,however,displacingthemanagersof
thecompany.Inrestructuring,therearegoodreasonstoleavethedirectorsinchargeofthecompany
whiletherestructuringtakesplace.Inparticular,directorsmaybeexpectedtoknowthecompanywell,
andhavegoodrelationshipswithexistingcreditorswhichwillbeusefulinthenegotiations.Inaddition,
leavingthedirectorsinchargeincentivisesthemtocommencearestructuringatanearlierstageand
thuspotentiallyincreasesthechanceofsuccess.Inarestructuringathirdpartyisneeded,notto
displacethedirectors,buttohaveoversightoftheprocessoftherestructuringtoensurethatabuseand
oppressionareavoided.Thequestionariseswhetheracourtoraninsolvencypractitionerisbestsuited
tothisrole.Therearesomedisadvantagestousingcourtstoperformthisoversightrole.Useofajudge
asanarbiterinsuchmattersisexpensiveandpotentiallytime-consuming.Theexpertiseofthecourt
maybeproblematicinjurisdictionswhichlackalevelofspecialisationwithinthejudiciary.Insolvency
practitionerscanpotentiallysolvetheseissues.However,amajorpotentialproblemwiththeuseof
insolvencypractitionersinthiscontextisaconcernaboutconflictofinterest.Itiscrucialforwhichever
externalbodyhasoversightoftherestructuringprocesstohavetheconfidenceofthestakeholdersand
forallparticipantstohaveconfidencethattheexternaloverseerisunbiased.Giventhatacrucial
elementoftheroleistomanagetheconflictsthatcanarisebetweenthedifferentstakeholdergroups,
thisperceivedlackofbiasiskeytotheirsatisfactoryperformanceofthisrole.Inthisregard,academic
commentatorshaveraisedthefactthatthereareinherentproblemsofconflictandbiasapparentinthe
roleofinsolvencypractitioners,whoarerepeatplayersinthemarket.20Aninsolvencypractitionerisa
“commercialanimalhuntingwork”21andthishasthepotentialtoimpactonthedecisionstheymake.
Muchwilldependonwhohascontroloftheappointmentdecision.Inothercontexts,weseethatthe
seniorlendersoftenhaveeffectivecontroloftheappointmentoftheinsolvencypractitionerasa
consequenceofcomplexprovisionsinplaceintheinter-creditorsagreements.22Furthermore,the
directorsmaybealignedwiththeseniorlenders,particularlyiftheyaretoreceiveequityinthe
20SeeegJArmourandRJMokal,‘ReformingtheGovernanceofCorporateRescue:TheEnterpriseAct’(2003)1LMCLQ28,36-37;VFinch,‘Insolvencypractitioners:TheAvenuesofAccountability’(2012)JBL645.21SPaterson(2014)JCLS359.22FordiscussionseeSaltriIIILtdvMDMezzanineSASicar[2012]EWHC3025[25]-[26].
11
restructuring.Iftheseniorlendersdejureordefactohavecontroloftheappointmentprocess,thenthis
createsrealconcernsabouttheroleoftheinsolvencypractitioner.Attheveryleastitimpactsonthe
perceptionthattheyareunbiased,andthuscanunderminetheirroleinthiscontext.Nosuchdoubts
attachtotheroleofthecourt.23Althoughtherearesomedisadvantagestoutilisingthecourtsinthis
context,therefore,itissuggestedthatthebenefitsoutweighthedisadvantages.
Onceitisdeterminedthatthecourtshouldhaveacentralroleinoverseeingthisprocess,thenatureof
thatrolestillneedstobedetermined,asthecourtcanpotentiallyfulfilanumberofdifferentroles.The
lightesttouchpositionwouldinvolvetheoptionofcreditorsorotherpartieshavetherighttoapplyto
courttochallengetherestructuringincertaincircumstances.Thecourt’srolewouldthusnotbea
mandatoryaspectoftherestructuring,andmaybeutilisedrelativelyrarely.24Thesecondwouldmake
thecourt’srolemandatorybutonlyattheendoftheprocess,bywayofadecisionwhethertosanction
therestructuring.25Thedownsideofsucharoleisthatbythatstagetherehavebeenmanysunkcostsin
therestructuringprocess,andthecourtmayonlyhaveablunttool(tosanction/notsanction)atthat
timewhichmaymeanthattheonlyoptionforcourtsfacingproblemsofoppressionistorefuseto
sanctionandforcompaniestothushavetostartthenegotiationsagain.Athirdoptionistorequirethe
court’sinvolvementbothatanearlystageintheprocessandatthesanctioningstage,muchashappens
inaschemeofarrangement,26enablingcourtoversightoftheplanbothatanearlystage,toprevent
oppressionofmembersandcreditorsatthatpoint(forexample,byensuringthattheyhavesufficient
informationabouttheplan,andsufficientnoticeofthemeetings,aswellasensuringthatmeetingsare
properlyconstituted)aswellashavingfinalsayastowhethertheplanshouldbesanctioned.
23Analternativeoptionwouldbetoputinplaceaneutralthirdparty(seeegHEidenmuellerandKvanZwieten,‘RestructuringtheEuropeanBusinessEnterprise:TheEUCommissionRecommendationonaNewApproachtoBusinessFailureandInsolvency’(2015)16EBOR625).Thedifficultywithsuchasuggestionisthatthiswouldbeaveryexpensiveoption,ifthethirdpartyisnotinarepeatgamewithanyplayer.24AnexampleofthiskindofroleinpracticeistherightofcreditorssubjecttoaCompanyVoluntaryArrangementtoapplytothecourttochallengetheCVAonthegroundofunfairprejudiceormaterialirregularity(seeInsolvencyAct1986,s6).Suchapplicationsarerare(foranexample,seePrudentialAssuranceCoLtdvPRGPowerhouseLtd[2007]EWHC1002(Ch)).25SeeegtheEuropeanCommission’sdraftDirectiveCOM(2016)723finalwhichenvisagesalimitedrolefor“judicialoradministrative”authorities(ienotnecessarilycourts)(Art4(3),namelytohaveoversightofanystay(Art6)andtoconfirmtherestructuringplanattheendoftheprocess.26ItisnotablethateventhoughtheEuropeanCommission’sRestructuringRecommendationpromotestheviewthatrestructuringshouldbeachievedwithminimalcourtinvolvement,inordertoreducecosts,itisacceptedthatcertainaspectsofitsproposedrestructuringregime(suchasthecramdownofdissentingcreditors)raisetheprospectoftherestructuringbeingusedoppressivelyandthatthecourthasacentralroleinprotectingminoritycreditorsagainstthiseventuality:recital19.
12
Thenatureofthecourt’srolewillpotentiallydifferaccordingtothenatureofthepotentialoppression.
Threedifferentformsofpotentialoppressionareidentifiedinthissection:(i)oppressionbythemajority
oftheminoritywherearestructuringcanbeimposedondissentingcreditors/members;(ii)misuseofa
moratoriumbydirectorstothedisadvantageofcreditors;and(iii)oppressionofexistingcreditorsasa
resultoftheapplicationandeffectofdebtor-in-possessionfinancing,particularlysuperpriorityoffered
tonewlendersinthisperiod.Ofthesethreeissues,thefirstisthemostfamiliartoEnglishcourtsat
present,asthisisanissuewithwhichthecourtsalreadyhavetograpple,mostobviouslyinschemesof
arrangementwheredissentingcreditors,includingsecuredandpreferentialcreditors,canbebound
wherethemajorityoftheirclassapprovethescheme,andwholedissentingclassesmaybedefacto
crammeddownwhereaschemeistwinnedwithadministration.Thenextsectionwilldiscusswhether
thecourtsareeffectiveatdealingwiththeissuesofpotentialoppressionthatariseinthisscenario,and
whetherthereforethecourtswillbeinapositiontodealwithdejurecramdownofwholeclassesifthe
InsolvencyService’sproposalsareintroduced.Thesecondandthirdissueshavenotbeensignificant
issuesfortheEnglishcourtstodate,butthiswillchangeiftheInsolvencyService’sproposalsare
effected.Theseissuesarediscussedinthefollowingsectionsandtheneedforthecourt’sintervention
toensurecreditorprotectionisassessed.
4. Roleofthecourtinpreventingoppressionoftheminority
Wherethelawallowsarestructuringtobeimposedondissentingstakeholders,thisraisesthepossibility
ofabuse,andinparticularofwealthtransfersfromtheminoritytothemajority.Thebroaderthescope
ofsuchimposition,potentiallythegreatertheneedforthecourtsinterventiontocontrolpotential
abuse.ThebroadestformofsuchimpositioninEnglishlawariseswhereaschemeiscombinedwith
administration,themajorbenefitofwhichistoenableadefactocramdownofwholeclassestobe
possible,asoccurredinReBluebrookLtd.27Indeed,thefactsofthiscaseillustratethechallengeforthe
courts,namelytheneedtorescueafinanciallydistressedcompanythatisencumberedwithhugedebts
ontheonehand,butwithoutthatrescuebeingattheexpenseofthejuniorcreditors,andshareholders.
27Schemesofarrangementalsolackastatutorystayandthetwinningofaschemewithadministrationcanalsobeusedasawayofaccessingthestatutorystayattachedtoadministration.However,ingeneralschemesaretwinnedwithapre-packadministration,andthisbenefitofadministrationcannotbesaidtobethemajoradvantageofthisstructure.
13
Thelawrequiresthecourt’sinvolvementattwopointsinorderforaschemetogoahead:atthe
conveningstageinordertoensurethat,interalia,thecreditorsandmembersaredividedintothe
correctclassestodecideonthescheme,andatthesanctioningstageinordertodecide,ultimately,
whethertheschemewillgoahead.AclearroleforthecourttoprotecttheminorityisbuiltintotheAct:
[p]arliamenthasrecognisedthatitisforthecourt…toholdtheringbetweenthedifferentinterests.”28
However,thelegislationcontainsfewdetailsastothecourt’sroleatthesetwostages,andmuchofthe
detailhasbeenlefttobedeterminedbythecourtsthemselves.Thissectionwillexaminethewayin
whichthecourtshavedevelopedtheirroleinschemesinordertodeterminewhethertheroleis
appropriateorneedstobere-thought.
4.1 Thecourt’sroleattheconveninghearing
Thefirstopportunityforthecourttoprotectcreditorsarisesfromtherequirementforthecourtto
orderthemeetingsofcreditorsandmemberstoconsiderthescheme.29Thecourtisnotconcernedwith
themeritsoftheschemeatthisstage.30Instead,theonlyissuesthataregenerallyappropriatetobe
consideredattheconveninghearingaretheproperclasscompositionoftheschememeetings,together
withanyotheressentialissuewhich,ifdecidedagainsttheschemecompany,wouldmeanthatthecourt
simplyhadnojurisdictionorwouldunquestionablyrefusetosanctionthescheme.
Thereisaroleforthecourtatthisstage,andrecentcaseshavedemonstratedawillingnessonthepart
ofthecourtstointervene,buttheroleisarelativelylimitedone.Inlargepartitinvolvesensuringthat
creditorsreceiveadequatenotice31andadequateinformation32inordertoenablethemtoattendthe
relevantmeetingsandtovoteonthescheme,andoversightoftheorganisationofcreditors(and
shareholders,ifappropriate)intothecorrectclasses.33Thereisnodoubtthatprovidingfullandaccurate
disclosuretocreditorsiscrucialtoenablethemtodecidewhethertoattendtheschememeetingsand
28ReBTRplc[2000]1BCLC740,748perChadwickLJ.29CompaniesAct2006,s896(1).30ReTelewestCommunicationsplc(No.1)[2004]EWHC924(Ch),[2005]1BCLC752,[14]perDavidRichardsJ.31Adequatenoticeisrequired,butwhatthismeansinpracticewillvary.InIndiahKiatInternationalFinanceCoBV[2016]EWHC246(Ch)SnowdenJstatedthat“Themorecomplexornovelascheme,andthelessconsultationthathastakenplacewithcreditorsasawholebeforehand,thelongerthenoticeshouldgenerallybeunlessthematterisofgreaturgencybecausethecompanyisinrealfinancialdistress”(at[]).32SeeCompaniesAct2006,s897.33FortherequirementforcreditorsandmemberstomeetinclassesseeCompaniesAct2006,s899(1).
14
howtovote.34Recentcaseshaveemphasisedthatthecourtisnotboundtoacceptatfacevaluebare
assertionsintheevidenceinrelationtoclasscompositionoranyothermatter:“thecompanyproposing
aschemeofarrangementhasadutytomakefullandfrankdisclosuretothecourtofallmaterialfacts
andmatterswhichmayberelevanttoanydecisionthatthecourtisaskedtomake.Thescheme
jurisdictioncanonlyworkproperlyandcommandrespectinternationallyifpartiesinvokingthe
jurisdictionexhibittheutmostcandourwiththecourt.”35Thecourtcanthereforehaveanimportantand
valuableroleinensuringthatcreditorsareprovidedwithadequateinformationinadvanceofclass
meetings,whichcanhelpthemtospotabuseandcanhelpthemtodeterminewhethertoopposethe
schemeattheconveninghearing.36
Arguably,however,thepredominantdevicethatcourtscanutilisetoprotectcreditorsatthisstageisto
ensurethattheyareinthecorrectclasses,andindeedthisisvitalifwewishtoavoidintra-creditor
wealthtransfers.Therequirementforcreditorsandmemberstomeetinclassesisoneofthe
mechanismsbywhichminoritiesareprotectedinascheme.Asdiscussedfurtherbelow,althoughthe
courthasdiscretiontosanctionascheme,thecourtcannotsanctionitunlessalloftheclasseshave
approvedit.37Meetinginclassesoflike-mindedcreditorsormembersisthereforeoneformof
protectionagainstintra-creditorwealthtransfers.Thelegislationdoesnotsetouthowclassesaretobe
determined,andthishasbeenlefttothecourtstodevelop.Thestartingpointistheclassicstatementof
BowenLJthatclassesshouldcomprisethose“whoserightsarenotsodissimilarastomakeitimpossible
forthemtoconsulttogetherwithaviewtotheircommoninterest”.38Thisstatementleavesalarge
amountofleeway,however,dependingonhowbroadlyornarrowlytheconceptof“interests”is
defined.Itiseasytoseethatthegreaterthenumberofclasses,themorepowerthisprovidesto
minorities,andbycontrastthefewertheclassesthemorelikelyitisthatschemeswillbeapproved,but
34Further,thecourtshaveemphasisedtheneedforcreditorstobeprovidedwithsufficientinformationtodecidewhethertoattendtheconveninghearing.InReVanGansewinkelGroepBV[2015]EWHC2151(Ch)SnowdenJnotedthatwheretheproponentsoftheschemewishtoraisetheissueofjurisdictionoftheschemeatthisfirsthearing,ratherthanatthesanctioninghearing,fairwarningofthatfactneedstobegiventothecreditorsinordertoenablethemtomakeaninformeddecisionaboutwhethertoattendthehearingtocontestthisissue.35IndiahKiatInternationalFinanceCompanyBV[2016]EWHC246(Ch),[39]-[40]perSnowdenJ.36Totheextentthatjurisdictionalissuesaretobedealtwithattheconveninghearing,creditorswillneedtoknowaboutthisinadvanceofthehearinginordertodeterminewhethertoturnupandopposetheschemeonthatbasis:ReVanGansewinkelGroepBV[2015]EWHC2151(Ch).ThismayrequirearedraftingofthePracticeStatementonthisissue(seePracticeStatement(ChD:SchemesofArrangementwithCreditors)[2002]1WLR1345).37SeeCompaniesAct2006,s899(1).38SovereignLifeAssuranceCovDodd[1892]2QB573,583perBowenLJ.
15
thegreaterthepossibilitythatwealthtransfersmayoccur.Thetrendinrecentyearshasbeentowards
fewer,larger,classes:“[i]fonegetstoopickyaboutpotentialdifferentclasses,onecouldendupwith
virtuallyasmanyclassesastherearemembersofaparticulargroup.”39Thisapproachdoesnotdeny
thattheremaybedifferentconstituencieswithinasinglebroadclassbutinsteadenvisagesthatthe
courtwilltakeaccountoftheseissues,togetherwithotherrelevantfactors,whendecidingwhetherto
sanctionthescheme,ieitshiftstheissueofprotectiontowardsthelater,sanctioninghearing.
Thisraisesthequestionwhetherthisshiftissupportable.Ontheplussidethisapproachprovidesthe
courtwithmaximumflexibilityatthesanctioningstage,andallowsthecourtstofocusontherealmerits
oftheschemeratherthanallowingthemtobeboggeddown,orfail,onthebasisof“unmeritorious,
technicalobjections.”40Onthedownside,thisflexibilitycomeswithariskthattherightsofmembers
andcreditorsmightnotbeprotected,andcourtsmaybereluctanttorejectaschemelateintheday,
particularlywherethealternativeissaidtobeliquidation.Inessence,whetherthisshiftinscrutiny
maintainscreditorprotectionwilldependonthelevelofscrutinythatthecourtsgivetoschemesatthe
sanctioningstage.Thisisdiscussedfurtherbelow.Evenifthelevelofscrutinyisappropriate,aseparate
issueiswhetherthisapproachincreasesthecostofschemes.
Inconsideringwhethercreditors/memberscanmeetasaclass,oneoftheissueswhichthecourtwill
consideristherelevantcomparator,whichwillenableittojudgethesimilarity/dissimilarityofcreditors’
andmembers’rights.Wherethecompanyisinsolvent,forexample,thestartingpointfordetermining
separateclasseswillbetherightsofcreditorsandmembersonwindingup.41Thistendstomeanthat
theclassesarerelativelylargeandfew.InReHawkInsurance,forexample,theCourtofAppealheld
thatalloftheunsecuredcreditorshadthesamerightsinawindingup(namelytosubmittheirclaims
andhavethemacceptedorrejected)andthereforetheyweretreatedascomprisingoneclass,despite
thefactthatsomehadvestedclaimsandsomehadcontingentclaims,incontrasttoArdenJatfirst
instancewhothoughtthatthevestedandcontingentunsecureddebtshouldcompriseseparate
39ReAngloAmericanInsuranceCoLtd[2001]1BCLC755,764perNourseJ.SeealsoReHawkInsuranceCoLtd[2001]EWCACiv241.Forrecentexamplessee:PublicJoint-StockCompanyCommercialBank“Privatbank”[2015]EWHC3299(Ch),ReCodereFinance(UK)Ltd[2015]EWHC3778(Ch),IndiahKiatInternationalFinanceCompanyBV[2016]EWHC246(Ch).40SeeGMoss,“Hawktriumphant:avindicationofthemodernapproachtoclassesinsection425schemes”(2002)InsolvencyIntelligence41,43.41SeeegReHawkInsuranceCoLtd[2001]EWCACiv241.Bycontrast,wherethecompanyissolvent,thiscomparatorisnotlikelytobeappropriate.InReBritishAviationInsuranceCoLtd[2005]EWHC1621(Ch),forexample,LewisonJheldthatinsuchcircumstancesthecorrectcomparatorwasacontinuingsolventrun-off.
16
classes.42Thisislikelytoleadtoamoreclasses,andthusmorepowerforminoritystakeholders,
includingshareholders.
Itmayseemsurprisingthataliquidationmeasureisadoptedinarestructuringschemesituation,where
therescueofthecompanyisbeingattempted,since,iftheparticularschemeinquestionisnot
successful,itislikelythatsomeotherformofrescuewillbeattempted.Accordingly,agoingconcern
valuationmightfelttobebemoreappropriate.Thiswouldbelikelytoresultinahighervaluation,and
thereforepotentiallymoreclasses,whichmighthelptoprotectcreditorsfromwealthtransfersas
discussedinthissection.Thisisanissuethatisalsorelevanttotheissueofcreditorprotectionatthe
sanctioningstageandisdiscussedinmoredetailthere.Thecourtsdoappeartobepreparedtopushthe
proponentsofschemesontherealityofclaimsthattheonlyalternativetoaproposedschemeis
liquidation.43Ifotherrescueoptionsareavailablethenthismaybereasontodoubttheliquidation
measureusedtodetermineclasscomposition,whichmighthavetheeffectofincreasingthenumberof
classes,andthuscreditorprotection,atthisfirstcourthearing.Alevelofscrutinyonthisissuemight
alsobeameansofaddressingtheconcernthatmanagersandseniorlendersofviablecompaniesmight
attempttousetherestructuringtoshakeoffliabilities.44
Thecourtcanthereforehaveavaluableroleatthisfirststage,inensuringthatcreditorshaveadequate
information,andensuringthatclassmeetingsareappropriatelyconstituted.Thislatterpoint,in
particular,canhaveanimportantfunctioninprotectingcreditorsfromwealthtransfers,butinrecent
yearsthecourtshavereducedtheirroleinthisregard,asdiscussedinthissection,andhaveinstead
shiftedthefocusofcreditorprotectiontothesanctioninghearing.Inaddition,thethreatofwealth
transferfacingthejuniorcreditorsinBluebrook,cannotbetackledusingthemechanismsdiscussed
here.ThejuniorcreditorswerenotpartiestotheschemesinBluebrook,sothequestionsofwhether
theyhadsufficientinformation,orofwhichclassestheyshouldbeparticipants,didnotarise.The
startingpositioninaschemeisthatonlythosewhoserightsarebeingaffectedbytheschemeneedto
bepartofit.Companiesdonotneedtoincludeallmembersand/orcreditorsinascheme,andare
42[2001]BCC57.43SeeegIndiahKiatInternationalFinanceCoBV[2016]EWHC246(Ch).44Notably,andincontrasttothecurrentpositioninEnglishschemes,theEURestructuringRecommendationenvisagesarestructuringonlybeingavailablewherethecompanyis“infinancialdifficultieswhenthereisalikelihoodofinsolvency”:RestructuringRecommendation,recommendation6(a)andrecital16.
17
generallyfreetodecidewithwhomtheyproposeanyparticularcompromiseorarrangement.45Itis
commonforcompaniestoexcludecertaincreditorsfromascheme,suchasthetradecreditors.Where
membersorcreditorsareexcludedfromascheme,theirrightsareunchangedbyit.Inasituation,such
asthatinBluebook,thejuniorcreditorswerebeingleftbehindintheoriginalgroupcompanies.Their
rightsagainstthosecompanieswereidenticalbeforeandaftertheschemesinformalterms,and
thereforetheirrightswereunaffectedbythescheme.Theviewcouldbetakenthatthetransferofthe
businessandassetsoftheoldgroupcompaniestothenewgroupstructurecouldberegardedas
impactingonthepositionofthejuniorcreditorsinamaterialsense.Nevertheless,thejudgein
Bluebrookagreedthattheexclusionofthejuniorcreditorsfromtheschemewasappropriateinthese
circumstances.Theissueofwhetherthejuniorcreditorshadbeentreatedunfairlyasaresultofthis
transferofthebusinessandassetstothenewgroupcompaniesviatheschemesdependedonwhether
thejuniorcreditorshadanyremainingeconomicinterestinthegroupbeforetheschemeoccurred;if
not,thenthetransferofthebusinessandassetsinthiswaycannotbesaidtoworsentheirposition.
However,thiswasamattertobedealtwithnotattheconveninghearingbutatthesanctioninghearing,
wherequestionsoffairnessaredecidedandthoseaffectedbyascheme,suchasthejuniorcreditorsin
Bluebrook,havetherighttoappear.46
Consequently,theconveningstageisnottoothlessasaprotectivedeviceforminorities,47andtheEU
Commission’sdesiretominimisecourtinvolvementinrestructuring,inparticularatanearlystageinthe
process,shouldberesisted.Nevertheless,thecourt’sprotectiveeffectattheconveninghearing,
certainlypost-HawkInsurance,isrelativelylimited,anditsusefulnessasamechanismtoprovide
meaningfulprotectionforcreditorsconcernedaboutwealthtransfersasaresultofacramdownacross
classes,isdoubtful.Instead,thetendencyhasbeentoencouragetheseissuestobedebatedand
consideredatthesanctioningstage.Asdiscussed,thiscanhaveadvantagesintermsofmaximisingthe
court’sflexibility,butthisthenrequiresthecourtstoexercisetheirscrutinyfunctionatthesanctioning
stageappropriately.
4.2 Thecourt’sroleatthesanctioninghearing
45ReBritish&CommonwealthHoldingsplc(No3)[1992]1WLR672.46SeeegMyTravelGroupplc[2004]EWCACiv1734.47SeeegIndiahKiatInternationalFinanceCoBV[2016]EWHC246(Ch)inwhichconcernsregarding,interalia,lackofnoticeanddeficienciesintheevidenceprovidedpromptedSnowdenJtograntadissentingcreditor’sapplicationforthehearingtobeadjourned,andtheschemedidnotsubsequentlyproceed.
18
Thecourtisconcernedwithtwodistinctissuesatthesanctioningstage.Thefirstispracticaland
procedural:doesithavejurisdictiontosanctiontheproposedscheme?Thecourtwillwishtoensure
thatthestatutoryprovisionshavebeencompliedwith,sothatthecorrectclassmeetingswereinfact
held,andeachclassapprovedtheschemebytherequisitestatutorymajority.48Thecourtwillalsobe
concernedtoensurethattheschemefallswithintheproperscopeofPart26oftheCompaniesAct
2006,sothat,forinstance,wherethecompanyinvolvedintheschemeisaforeigncompany,thecourt
willwanttodeterminewhetherthereisasufficientconnectionbetweentheschemeandEngland.49
Whilethisscrutinyisvaluable,itisthesecondlimbofthecourt’sroleatthesanctioningstagethatisthe
focuswhenconsideringtheavoidanceofoppressionviawealthtransfersforcreditorssuchasthejunior
creditorsinBluebrook,namelywhetherthecourtconsidersitappropriatetoexerciseitsdiscretionand
sanctionthescheme.
Thecourt’ssanctioningroleisnotarubber-stampingexercise.Themerefactthatthecourthas
jurisdictionandthatthestatutoryrequirementshavebeenfulfilled,andtheclassmeetingshave
approvedtheschemebytherequisitemajority,doesnotmeanthatthecourtwillnecessarilysanctionit.
Thefairnessoftheschemeisarelevantfactorhere.So,thecourtmightexamineissuessuchasthesize
oftheturnoutandwhethertheresultofthevotemighthavebeenaffectedbycollateralfactors,suchas
wheremembersorcreditorshavespecialinterests,distinctfromthoseoftheclassasawhole.50These
mattersareparticularlyimportantgiventhetendencytowardsfewerclasses,sothatclassesmightwell
containthosewhoserightsareidentical,butwhoseinterestintheoutcomeoftheschemediverge
considerably.Theseissuescanbetakenaccountofbythecourtatthesanctioningstageinorderto
determinewhetherthemajorityfairlyrepresentedtheclassonavoteinaschememeeting.Thiscan
operateasanimportantprotectivedeviceforminoritymembersandcreditors.Althoughwedon’t
observethecourtsfailingtosanctionschemes,thisfactmayunderplaytheroleofthecourt.Inpractice,
thereareanumberofwaysinwhichthecourtcanplayarole,perhapsbyprovidingaclearsteerof
48CompaniesAct2006,s899(1).Unlesstheserequirementsareinplacethecourtcannotsanctionthescheme.Therehavebeenrecommendationsforthistobeamended,sothatcourtscouldsanctionaschemedespitetechnicaldefectsofthiskind(CompanyLawReview,FinalReport,para13.7)butthegovernmenthasnotfollowedthesesuggestions.Theexplanationforthisappearstobeaconcerntoprotecttherightsofminoritycreditorsandshareholders:Hansard,HL,colGC326(28March2006)(LordGoldsmith).49SeeegReRodenstockGmbH[2011]EWHC1104(Ch)[addotherrefs].50ReBritishAviationInsuranceCoLtd[2005]EWHC1621(Ch).
19
difficultiesatanearlystage,suchthataschemedoesnotproceedtothesanctioninghearing,51or
possiblythedeficienciesarecorrectedbeforesanctioningissought,andtheveryclearsteersprovided
bythecourtastotherequirementsthatarenecessarybeforeaschememaybesanctionedmayactto
deterschemeswhichdonotfallwithintheseparameters.52
Theseissues,though,donotdirectlyaddresstheconcernsraisedbythejuniorcreditorsinBluebrook,
whowerenotpartiestotheschemeatall.However,thecourtcananddoestakeaccountofthirdparty
interestsatthesanctioningstage,anditwasdeterminedinBluebrookthatthesanctioninghearingwas
therighttimefortheconcernsofthejuniorcreditorstobeaired.Thejuniorcreditorsarenotleft
withoutaremedy:theyareabletoattendthesanctioninghearingandtoassertthattheschemeisnot
fairtothem.Theextenttowhichtheirconcernsaboutwealthtransfersareaddresseddepends,
however,onthewillingnessofthecourttotakeaccountoftheirconcernswhendeterminingwhetherto
sanctionthescheme.
TheapproachadoptedbytheEnglishcourtsatthispointistodeterminewhetherthejuniorcreditors
(andpresumablyanyonesubordinatedtothem,suchastheshareholders)haveanyremainingeconomic
interestremaininginthecompanyorgroup.Ingeneral,thefocusinEnglishcompanylawison
protectingtheinterestsoftheresidualclaimantatanygivenpointintime.So,forexample,directorsare
requiredtoacttopromotethesuccessofthecompany“forthebenefitofitsmembersasawhole”53
whenthecompanyissolvent,butmusttakeaccountofthecreditors’interestswhenthecompanyis
insolvent,orvergingoninsolvency.54Wherethecompanyisinsolvent,theshareholdershaveno
economicinterestleftinthecompanyandthereforetheyshouldnotbeabletoblockarestructuring
scheme,orbeabletoextractvaluefromtheseniorcreditorsasaresultofthisblockingpower.Similarly,
wherethesubordinatedcreditorsareclearlyoutofthemoney,theyshouldnothaveanabilitytoblock
thescheme.Inotherwords,thecurrentapproachofthecourtsiscorrectintacklingtheissueofthe
economicinterestofthedissentingclassasasanctioningstageissue,andbroadlydiscountingthe
dissentofthosewithoutaremainingeconomicinterestinthecompany.Conversely,wherethecreditors
andmembersdoretainaneconomicinterestthecourtwillbeabletotakeaccountoftheirviewsin
determiningwhethertosanctionthescheme,eveniftheyarenotpartiestoit(andthisisafurtherway
51IndiahKiatInternationalFinanceCoBV[2016]EWHC246(Ch).52ReVanGansewinkelGroepBV[2015]EWHC2151(Ch).53CompaniesAct2006,s.172(1).54WestMerciaSafetywearLtdvDodd[1988]BCLC250.
20
inwhichcourtscandealwiththeconcernaboutcompaniesshruggingofftheirliabilitiesattooearlya
stage).However,thisreliesonthecourtsbeingabletodiscernclearlywhetherthecreditorsormembers
inquestionhavearemainingeconomicinterest,andthisinturnreliesonaneffectivesystemof
valuation.
TheapproachoftheEnglishcourtstotheissueofvaluationisstillinitsinfancy.Thestartingpointfor
theEnglishcourtsindecidingwhethertosanctiontheschemeagainstthewishesofthejuniorcreditoris
toconsiderthecounterfactual,namelywhateachcreditorwouldgetifnorestructuringwereagreed.55
Thisisnecessarilyamoreconservativeapproachthatconsideringwhateachcreditorwouldreceiveif
therestructuringweretobesuccessful.Often,theviewisthatiftheschemedoesnotgoahead,the
company’sonlyalternativeisliquidation,andconsequentlyaliquidationvaluationisappliedtothe
companytodeterminewhetherthejuniorcreditors(andshareholders)haveanyremainingeconomic
interest.56Inthesameway,asdiscussed,whendeterminingclassesinschemesthecourtsalsotendto
concentrateonaliquidationmodelwhendeterminingthesimilarityordissimilarityofcreditorsrights
wherethecompanyisfinanciallydistressed.
Thisissueisimportantasitgoestothecentralquestionofwhatlevelofprotectioncreditorscanexpect
inarestructuring.Thecourt’scriteriaforinterventionatthesanctioningstageisbasedonafairness
criterion,butdeterminingwhatisfairinthiscontextdependstoalargeextentonthecourtsapproach
tothisissue.Agoingconcernvaluationshouldgenerallybehigherthanaliquidationvaluation.57An
approachthatusestheliquidationcomparatorwillprovidelessprotectionforjuniorcreditors
concernedaboutwealthtransfersascomparedtoagoingconcernvaluationwhichacknowledgesthat
therearelikelytobealternativestotheschemeotherthanliquidationinmanycases.
Indeed,formanycompaniesthealternativetoarestructuringviaaschemewillbeanadministration
saleofthebusinessandassetsasagoingconcern,orpossiblysomeotherformofreorganisation,rather
thanaliquidationsaleoftheassetsonabreak-upbasis.InBluebrookMannJdidvaluethecompanyon
55ReMarconiCorpplc[2003]EWHC1083(Ch).56AliquidationmethodologywasusedinReTeaCorporation[1904]1Ch12,ReTelewestCommunicationsPlc[2004]EWHC924,MyTravel.57 See M Crystal and R Mokal, “The Valuation of Distressed Companies- A Conceptual Framework” (2006) 3InternationalCorporateRescue63(Part1)and123(Part2);JWestbrook,“TheControlofWealthinBankruptcy”(2004)82(4)TexasLawReview795,811.
21
agoingconcernbasis.However,MannJ’sdecisiononthispointshouldbetreatedwithcare,sincethe
liquidationvaluationwasnotarguedbeforethecourt58and,moreover,thejudgedidnotstatethatthe
goingconcernbasiswasthecorrectvaluationmethodologytobeappliedwheneveradebtrestructuring
ofthiskindoccurs,merelythatitwasappropriateinthecasebeforehim.Itisunfortunatethatamore
rigorousdiscussionoftheseissuesdidnottakeplaceinBluebrook.Inasituationwherethecompanyis
onlyfinanciallydistressed,agoingconcernvaluationwillgenerallybemoreappropriatethana
liquidationvaluation.Thelatterwillbemostrelevantwherethecompanyiseconomicallydistressed.
Wheretheassetshaveahighervalueifkepttogetherasafunctioningunitthanifsoldoffpiecemeal,a
goingconcernvaluationwillmoreaccuratelyreflecttherealityofthesituation.59Thegoingconcern
approachwasthereforethecorrectapproachtoadoptinBluebrook,andshouldsimilarlybeusedinthe
futurewheretherestructuringinvolvesaneconomicallyviableentity.60
Thereisanopportunityherefortheseniorlenders(withwhomthemanagementofthebusinessbeing
reorganisedmaybealignediftheyarebeingofferedequityinthenewentity)topressforaliquidation
valuationwhichwillreducethepossibilitythatjuniorcreditorswillbejudgedtohaveanyremaining
economicinterestinthebusiness,andthereforemakeitmorelikelythattherestructuringcangoahead
withouttheirconsent.Thereisanotherpotentialeffectofsuchanargument,namelythatbeingtold
thatunlesstheschemeissanctionedthebusinesswillnecessarilyfailputssignificantpressureonthe
courtstosanctionthescheme.Courtsneedtobepreparedtoresistthispressureandtodetermine
whetherthisrhetoricisreallyjustified,inordertoprotecttheinterestsofjuniorcreditors(and
shareholders).Thereissomeevidencethatthecourtsarestartingtodothis.61
Evenoncethisissueisresolved,afurtherissuearisesinrelationtovaluationthatcanhaveanimportant
effectonthecourt’sabilitytoprotectminorities,namelyhowthegoingconcernvaluationistobe
determined.Oneoptionisamarketpricevaluationofthebusiness.Thisisarguablythemostaccurate
measureofacompany’sworthatagiventime.62Thebenefitofthisoptionisthatitcanbeestablished
58Counsel for theseniorcreditorsdidnotneedtoargue fora liquidationbasis forvaluation,because theothervaluationsweresufficienttojustifytheirarguments.59See,egJWestbrook,“TheControlofWealthinBankruptcy”(2004)82(4)TexasLawReview795.60Ithasbeenarguedthatthegoingconcernvaluationislikelytobethecorrectmethodologytoapplyinallthesedebt restructurings:MCrystalandRMokal, “TheValuationofDistressedCompanies-AConceptualFramework”(2006)3 InternationalCorporateRescue63(Part1)and123(Part2)whoargue,therefore,thatagoingconcernvalueshouldalsohavebeenadoptedinMyTravel.61ReVanGansewinkelGroepBV[2015]EWHC2151(Ch)perSnowdenJat[24].62SeeDGBaird,‘TheUneasyCaseforCorporateReorganizations’(1986)15JournalofLegalStudies127,136.
22
throughaproperlyconductedsalesprocessandthusavoidsthesubjectivityinherentintheothermajor
option,namelymarketvaluationopinionsprovidedbyavaluer.Suchmarketvaluationopinionsoften
leadtocostlyandlengthyvaluationfightswhicheachpartyhiringtheirownvaluertoprovideanopinion
thatsupportstheirposition.Thisisalsomessyanddifficultforthecourtstomediate,unlikeamarket
testingprocesswhichprovidesaclearbenchmarkforthecourt.Themarketvaluationapproachhas
manyadvantages,butcomeswithonesignificantproblemfromthepointofviewofjuniorcreditors,
namelythatifthemarketisdepressedatthetimeofthevaluationthenitmaybedifficulttoestablisha
genuineauctionprocessandthisislikelytoreducethevaluationandallowtheseniorlenderstorecover
morethantheydeserveoncemarketsrecover.Ifseniorlendersareabletotakeadvantageofa
temporarydipinmarketconditions,thenthisriskbecomesallthemoreconcerning.Cuttingoutthe
juniorcreditors(andshareholders)fromthepictureatthebottomofthemarketisthereforearisk.This
dangerwasrecognisedbyMannJinBluebrook.63Intheevent,thiswasnotanissueinBluebrook,asall
ofthevaluationsMannJlookedatfellwellshortoftheseniordebt,includingwherethemarket
valuationstrippedoutthe“alphafactor”sothatthevaluationwasnotlinkedtocurrentmarket
conditions.Itisanissueforthefuture,however.
Itissuggestedthatthecourtsaretherightbodytodeterminethisissueofvaluation64butthatamore
structuredapproachisneeded,andcourtswillneedtooverseethisprocesscarefullyinordertoensure
thatwealthtransfersdonotoccurbetweenstakeholders,particularlyfromtheseniortothejunior
lenders.
4.3 IntroducingadejurecramdownintoEnglishlaw
Combiningschemesandadministration,asinReBluebrook,allowedadefactocramdownofthejunior
creditors.Therearesomedisadvantagestohavingtoutilisethesecombinedmechanismstoachievethis
end,however.Inparticular,thiscompromisesolutionrequiresatransferofthebusinessofthecompany
orgroup,somethingwhichiscostlyandcumbersome,mayhavetaximplicationsandcanbeproblematic
ifthecreditoragreementsimposeconstraintsontheabilityofthecompanytotransfer.Itisnotablethat
theInsolvencyService’sMay2016proposalsenvisageadejurecramdownoptionwithinasingle
mechanism,whetherthatisachievedviaanadjustmenttoanexistingrestructuringmechanismorthe63ReBluebrook,[49].64CfSPaterson,‘BargaininginFinancialrestructuring:MarketNorms,legalrightsandregulatorystandards’(2014)JCLS333,whoarguesthatinsolvencypractitionersshouldplayamoreprominentroleinthisregard.
23
introductionofanewstandalonerestructuringplan.65Suchaninnovationistobewelcomed,butthis
wouldcementintoEnglishlawthemostsignificantopportunityforintra-creditorwealthtransfersto
takeplaceandthereforetheissueshighlightedabovewillneedtobetackled.
Thecourtshaveadevelopedroleinthisregard,andtheInsolvencyService’sproposalsenvisagethe
courthavingaverysimilarroleinrelationtoadejurecramdownasexistsinthedefactocramdowns
thatexistatpresent,bothoverseeingtheorganisationofcreditorsandmembersintoclasses,andthen,
determiningwhethertherestructuringshouldbesanctioned.Issuesofvaluationwillbekey.Thisisan
issueaboutwhichtheConsultationPaperhasrelativelylittletosay,66anditadherestotheliquidation
valuationastheminimumvaluationtestwhich,asdiscussed,willnotbeappropriateinall
circumstances.67TheInsolvencyService’sproposalsdonotadequatelyaddresstheconcernabout
wealthtransfers,therefore.ThisisanissuewhichrespondentstotheConsultationPaperhave
highlightedasacontentioustopic,withoveraquartersuggestingthatliquidationisnottheright
comparator,andthata‘nextbestalternative’valueshouldbeusedinstead.68Furtherclarityand
guidanceonthisissuewouldbevaluable.Consideringthecounterfactualistherightapproach,namely
whateachcreditorwouldgetifnorestructuringwereagreed,butthereshouldbeamovementaway
fromaliquidationvaluationinallcircumstances,towardssome“nextbestalternative”orequivalent
model,andthecourtsneedtobepreparedtochallengecompaniesandseniorlendersonthispoint.Itis
alsosuggestedthatamarketvaluationistherightapproach,forthereasonssetoutabove,althoughthis
needstobeutilisedwithsensitivitytotakeaccountofsituationswherethemarketisdepressed,andto
avoidseniorlenderstakingadvantageofsuddenandtemporarydipsinthemarketvaluationofa
company.
5. Roleofthecourtwhereastayisproposed
65InsolvencyService,ConsultationPaper,May2016.OneoptioncontemplatedbytheInsolvencyServiceisanamendmenttoCVAstomakethispossible(para.9.14).However,theConsultationPaperenvisagestheintroductionofvariouscreditorprotectionstoaccompanythiscramdownandtheseareverysimilartothosethatcurrentlyexistforschemes(creditorsgroupedintoclassestovoteontherestructuring,thesamemajorityapprovallevelasinascheme,twocourthearings,toapprovetheclassesandthentosanctiontheplan).Thesedon’tfitwithintheCVAmodelanditissuggestedthattheintroductionofadejurecramdownwouldbepreferableasanadjustmenttothecurrentschemejurisdiction,orasanewstandalonemechanism.66Paras9.33-9.35.67Para9.20.ThismaybecontrastedwiththeEUCommission’sproposalsinCOM(2016)723finalwhichadvocatetheuseofagoingconcernvaluationwhereacross-classcramdowntakesplace:Art13.68InsolvencyService,SummaryofResponses:AReviewoftheCorporateInsolvencyFramework,September2016,para4.10.
24
Asdiscussedinsection2,astayofsomekindcanbeverybeneficialtoacompanyundergoingadebt
restructuring,toprovideitwithabreathingspacewithinwhichtonegotiatethereorganisationwithits
creditors,buttheintroductionofanysuchstayneedstobebalancedwiththeneedtoprotectthose
whoserightsarebeingsuspended.Thereductionorremovalofcontractually-bargainedforrights
requiresjustification.Ifthemoratoriumresultsinarescueforacompany,thiswillgenerallybea
beneficialoutcomeforcreditors,comparedtoliquidation.If,however,directorsusethemoratoriumto
propupaneconomicallydistressedcompanyandthe“breathingspace”simplymeansthatthecompany
goesintoliquidationlater,andwithlessmoneyavailablefordistribution,thenthiswillbeproblematic.
Thecourthasarelativelylimitedroleinthiscontextatpresent,inlargepartbecauseastatutory
moratoriumonlyarisesintwocircumstances,namelyadministrationandveryCVAsofverysmall
companies;nogeneralrestructuringmoratoriumexistsinEnglishlawatpresent,althoughthe
InsolvencyService’s2016proposalsrecommenditsintroduction.69Iftheseproposalsareadopted,the
court’srolewillneedtoexpandsignificantly.
5.1Theroleofthecourtatpresent
Atpresent,astatutorystayattachestoadministration,andtoCVAswhentheseareusedtorestructure
thedebtsofverysmallcompanies.Ofthetwoscenariosinwhichastatutorystaycanarise,themost
significantinpracticeisthatattachingtoadministration.ThesmallcompanymoratoriuminCVAsis
naturallylimitedbytheverysmallsizeofcompaniesthatcanmakeuseofit,namelyacompanywhich
satisfiestwoormoreoftherequirementsforbeingasmallcompanyspecifiedinsection382(3)ofthe
CompaniesAct2006,andisnotacompanyexcludedfromeligibilityforamoratorium.70Furthermore,
nosuchmoratoriumwillariseunlessthetermsoftheCVAsoprovide,andinarecentstudyProfessors
FrisbyandWaltersfoundthatonly1%ofthosesmallcompaniesthatcouldhavemadeuseofsucha
moratoriumactuallychosetodoso.71Bycontrast,thestatutorystaythatarisesinadministrationisvery
significantinpractice.Thestatutorystaythatattachestoadministrationarisesautomatically.Itisa
moratoriumoninsolvencyproceedingsandonotherlegalprocess.Acreditorcanhoweverapplyto
69Fordiscussionsee5.2below.70InsolvencyAct1986,Sch1Aparas2-4.71AWaltersandSFrisby,“preliminaryReporttotheInsolvencyServiceintooutcomesincompanyvoluntaryarrangements”(2011)availableatssrn.com/abstract=1792402.ProfessorGoode’sinterpretationofthisstudyisthatthesmallcompanymoratoriumisa“deadletter”:RGoode,PrinciplesofCorporateInsolvencyLaw,4thedn,410.
25
courtforleavetoasserthislegalclaimsagainstthecompany,forexampletoasserthissecurityorto
repossesshisgoods.72Thecourtthereforehasakeyroleisensuringthatthestatutorystayisnot
operatedabusively,tothedetrimentofcreditors.73
Theonusisonthepersonseekingleave,andthecourtwillbalancethelegitimateinterestsofthat
individualagainsttheinterestsofalloftheothercreditorsofthecompany,indeterminingwhetherto
grantleaveand,ifso,whethertoimposetermsontheleave.74Thecourtwilltakeaccount,interalia,of
thepurposeforwhichtheadministrationorderwasmade,andwillseektofacilitatethatendbutthe
courtwillrelaxtheprohibitionwhereitwouldbeinequitablefortheprohibitiontoapply.Itisnota
strictmechanicalexercise.Thepersonseekingleavewillgenerallyneedtodemonstratelossofsome
kind,directorindirect,ifleaveisnotgranted,butthismaynotbesufficientfortheclaimtosucceedifa
substantiallygreaterlosswouldbecausedtoothers(theremainderofthecreditors,forexample)which
wouldbeoutofallproportiontothebenefitthatwouldbegainedbytheclaimant.Whilethecourtwill
rarelygrantleavewheretheclaimispurelymonetary,75thecourtispreparedtograntleaveinother
circumstances,forexampletoallowlandlordstoregaintheirpropertyfreefromtheshacklesofan
administrationorder.Thecourtisthereforeengagedinadifficultbalancingexercise,withtheprotection
ofthelegitimateinterestsoftheindividualcreditor,tobeweighedagainsttheinterestsofthemanyin
termsoftheoverallgoaloftheadministration.Thisisinevitablyadifficultmatter,callingforacareful
assessmentoftheinterestsandpositionoftheclaimant,ofthecompany,ofthepurposeofthe
administration,oftherelativelylikelihoodoflosstobothsidesshouldleavebegrantedorrefused,anda
numberofotherpertinentfactors.76
5.2Thedevelopmentofarestructuringmoratorium
InJune2009theInsolvencyServiceputforwardreformproposals,includingtheintroductionofawider
statutorymoratorium(fordebtrestructuringscarriedoutviaCVAsforlargecompaniesaswellassmall
72InsolvencyAct1986,SchB1para43.73ForthelistoffactorsthatthecourtwilltakeintoaccountinthisexerciseseeReAtlanticComputerSystemsplc[1992]Ch505,542-544perNichollsLJ.74RoyalTrustBankvBuchler[1989]BCLC130,135perPeterGibsonJ.75AESBarryLtdvTXUEuropeEnergy[2005]2BCLC22.76SeeegMagicalMarkingLtdvPhillips[2008]FSR36andFundingCorpBlockDiscountingLtdvLexiHoldingsplc[2008]2BCLC596forexamplesofsuccessfulapplications.
26
companies).77Theproposalsregardinganenhancedmoratoriumreceivedsubstantialsupportfrom
respondentstotheconsultationpaper,althoughmanyrespondentssuggestedthatthemoratorium
shouldbeextendedtoincludeschemesinthenextiterationoftheconsultationprocessinJuly2010.78
Thisdocumentdevelopedtheproposalsregardinganenhancedmoratorium,extendingitsproposalsto
encompassschemesandworkoutsaswellasCVAs.However,theInsolvencyServicesubsequently
reportedthattheresponsestothislatterconsultationdidnotsupporttheneedforurgentchange,and
reformplanswereshelved:“[it]isgenerallyfeltthattheexistingUKinsolvencyframeworkiscopingand
adaptingwelltothechallengesthatthecurrentroundofrestructuringsareposing,andtheurgencyof
thecaseforintroducinganewmoratoriumisnotfullymadeout.”79
Oneexplanationforthisisthedevelopmentofthedistresseddebtmarketwhichprovidescreditorswith
anoptiontoexitthecompanywithouttheneedtoenforcetheirdebtiftheynolongerwishtoremain
investedinthecompany.Anotherexplanationisthatcreditorscanagreeastandstillarrangement
amongstthemselves.Indeed,thisiscommoninrestructuringschemes.Thepossibilityofsuchan
arrangementisfacilitatedbythefactthatmanyschemesinvolveonlythefinancialcreditors(trade
creditorsbeingpaidinfullandthereforetheydon’tneedtobebroughtintothescheme).Thenumber
ofcreditorsthatneedtoagreetothestandstillisthereforereducedandthisisasophisticatedgroup
thatmaybeexpectedtoappreciatethatarescueviaaschemeislikelytobebetterforeveryonethan
liquidationshouldtheschemefail.80However,changesinthecreditmarketmeanthatitisnotalways
straightforwardtoidentifyallofthefinancialcreditorsorfortheirviewstobesufficientlyalignedto
guaranteeaconsensualarrangement.Thefactthatamoratoriumisinfactneededinaschemeis
evidencedbyrecentcaselawinwhichajudgeusedhiscasemanagementjurisdictionundertheUK’s
CivilProcedureRulestostayclaimsbroughtbycertaincreditorswhilethecompany’screditors
77 Insolvency Service,Encouraging Company Rescue- A consultation, June 2009. Both of these issues had beendiscussedonpreviousoccasions.TheissueoftheintroductionofDIPfinancingwasdiscussedwhenthechangestotheinsolvencyregimewereintroducedbytheEnterpriseAct2002andthelackofamoratoriumwasraisedbytheCorkReport in1982(ReportoftheInsolvencyLawReviewCommittee, InsolvencyLawandPractice (Cmnd8558,1982))andbytheCompanyLawReviewin2001(CompanyLawReview,ModernCompanyLawforaCompetitiveEconomy-FinalReport,URN01/943,2001).78InsolvencyService,EncouragingCompanyRescue-SummaryofResponses,November2009,paras24-26.SeealsoInsolvencyService,ProposalsforaRestructuringMoratorium-AConsultation,July2010.79InsolvencyService,ProposalsforaRestructuringMoratorium-SummaryofResponses,May2011,5.80AnalternativeexplanationisthatthedevelopmentofthedistresseddebtmarketintheUKinthelastdecadeorsomeansthatfinancialcreditorswhonolongerwishtoremaininvestedinacompanycanexitwithoutneedingtogothroughtheprocessofenforcementoftheirclaimagainstthecompany.
27
consideredascheme.81Tellingly,theMay2016InsolvencyServiceproposalsdoincludearestructuring
moratoriumaspartofthecorepackageofmeasures,82andamajorityofrespondentstothe
consultationpaperthoughtthatamoratoriumwouldpromotebusinessrescue.83TheInsolvencyService
thereforeproposesamoratoriumthatwillactasasinglegatewaytodifferentformsofrestructuring
includingacompromisewithcreditors,acontractual/consensualworkout,aCVA,administrationora
schemeofarrangement,andwillcoversbothinitialnegotiations,aimedatdevelopingaproposal,and,if
needed,thetimerequiredforcreditorapprovalofastatutoryproposal.84
Theeffectoftheproposedmoratoriumwouldbebroadlythesameasthatwhichexistsin
administration,namelyamoratoriumoninsolvencyproceedingsandonotherlegalprocess85butwith
oneimportantextension.IncontrasttotheUSChapter11regime,86themoratoriumintheUKhasnot,
todate,extendedtoageneralpreventionofcustomersandsuppliersterminatingtheircontractswith
thecompanyonthegroundsofinsolvencyalone,althoughsomelimitedinroadshavebeenmadeinto
creditors’rightsinthisregard.87 TheInsolvencyService’s2016proposalsrecognisethevalueoftheUS
approach,andexpandthescopeoftheproposedmoratoriumbeyondtheparametersofthestaythat
attachestoadministrationatpresent,althoughtheambitoftheproposalsismorelimitedthanChapter
11.88Inparticular,theproposalssuggestthatcompaniesshouldhavetherighttodesignatesome
contractsasessentialcontractsanditwouldthennotbepossibleforthesecontractstobeterminated
orvariedduringthemoratorium.89Thisproposalispotentiallyvaluable,andrecognisesthefactthatthe
81BluecrestMercantileNVvVietnamShipbuildingIndustryGroup[2013]EWHC1146(Comm).Thejudgeheldthatsuchastaywaspossibleonacasebycasebasis,provided,amongotherthings,thattheschemeisreasonablylikelytosucceed.82ItisnotablethattheEURestructuringRecommendationalsoincludesacourt-orderedstayofenforcementactionasoneofits“minimumstandards”:recommendations6(c),10-14.83InsolvencyService,SummaryofResponses,September2016,para2.1.84InsolvencyService,May2016,part7.85InsolvencyService,May2016,para7.10.86SeeChapter11,s365(e).FordiscussionseeLehmanBrothersFinancingIncvBNYCorporateTrusteeServicesLtd422BR407(BankrSDNY2011).87Forexample,theInsolvencyAct1986wasamendedon1October2015toensurethecontinuityofsupplyofutilitiesandITgoodsandservicestoinsolventbusinesses:TheInsolvency(ProtectionofEssentialSupplies)Order2015SI2015No.989.Seealsos233oftheInsolvencyAct1986,whichprovidesthatwherearequestismadebyanadministratorforsuppliesofgas,water,electricityandcommunicationsservices,theutilitysuppliermaynot,asaconditionofsupply,requirethepaymentofchargesincurredbythecompanyinrespectofsuppliesprovidedpriortotheadministration.88ThiswasnotafeatureofthemoratoriumproposedbytheInsolvencyServiceinitsJune2009Consultationpaper.ItisnotablethattheEUCommission’sproposalforaDirectivealsocontainsproposalsinthisregard:COM(2016)723final,Art7.89Seepart8oftheInsolvencyService’sConsultationPaper.
28
withdrawalofvitalservicescanreducethechanceofasuccessfulbusinessrescueandthatthis
knowledgemayleadsomesupplierstodemand“ransom”paymentsattheexpenseofothercreditors.It
does,however,raisethepossibilityofabusebythecompany,designatingawidevarietyofcontractsas
“essential”inordertopreventtheirterminationinthisperiod.
Theproposalsenvisageanumberofprotectionsforcreditors.Thecourt’sinvolvementwillbeacrucial
elementofthisprotection,butthereareotherstoo.Thereareimportantconstraintssuggestedonthe
wayinwhichthestaywouldoperate.Forinstance,amaximumofthreemonthsissuggested.90The
intentionistoprovidedirectorswithabriefrespiteinwhichtonegotiatetherestructuring,butforthese
issuesnottodragonindefinitely.
Inorderforthemoratoriumtocommence,directorsneedtoproposeasupervisor,andwillneedto
ensurethatthecompanymeetseligibilityandqualifyingconditions.Thedirectorscanthenfilethe
relevantdocumentswiththecourtandwiththeregistrarofcompanies.91Theseconditionsareintended
toensurethatitisnotmisusedbydirectors.Oneconcernraisedaboutpotentialmisuseofthis
procedureisthatitmaybeusedbydirectorsofhealthycompaniesto‘shakeoff’liabilities
inappropriately.Thisisaddressedviaaneligibilityconditionthatthecompanyisalreadyinfinancial
difficultyof“imminently”willbe,92inordertopreventsuchrestructuringsbeingusedattooearlya
stage.Theothermajorconcernisthatdirectorsofunviablebusinessesmayusethebreathingspaceto
propupacompanythatcanneverberescued.TheInsolvencyService’sattemptstoaddressthisvia
qualifyingconditionswhichincludethecompanybeingabletoshowthatitislikelytohavesufficient
fundstocarryonitsbusinessduringthemoratorium,meetingcurrentobligationsasandwhentheyfall
dueaswellasanynewobligationsthatareincurred.Thisistoensurethatexistingcreditorsareno
worseoffasaresultofthemoratorium.93Afurtherprotectionistheappointmentofasupervisor(such
asaninsolvencypractitioner).Oncommencementofthemoratorium,thesupervisorwillneedtobe
satisfiedthatthecompanyiseligible.Thesupervisorwillbeexpectedtobasetheirassessmenton
evidencerequestedfromandpreparedbythedirectors.Forthedurationofthemoratoriumthe
90Para7.35.Anextensionofthisperiodispossiblebutwouldrequiretheconsentofthecreditors(allsecuredcreditorsand50%oftheunsecuredcreditors):para7.36.91Ibid,para7.14.92Para7.18.TheprecisemeaningofthistermisunclearintheConsultationPaper.93Para7.22.
29
supervisor’srolewillbetoensurethatthequalifyingconditionscontinuetobemet.Iftheyarenotmet
thesupervisorwillmakethecreditorsawareandreportittocourt.94
Thecourthasanimportantroleinthisproposedprocess.Themoratoriumwouldonlycommencewhen
therelevantdocumentsarefiledwiththecourt,95andcreditorswouldhavetherighttoapplytocourtto
challengethemoratorium.96TheInsolvencyServiceproposalssuggestthiswouldonlybepossibleinthe
first28daysofthemoratorium,butitisn’tclearwhycreditorsshouldnotbeabletoapplyatanypoint
tochallengeit.Theinfringementofcreditorrightsissignificant,andprovidingthemwiththe
opportunitytochallengethemoratoriumincourtthroughoutitsexistencewouldbeapotentially
valuableprotection.Presumablythefactorsthatthecourtwouldtakeintoaccountatthispointwould
bewhetherthecompanyhadsatisfiedthequalifyingandeligibilityrequirements,aswellasthekindof
balancingprocessbetweenindividualcreditorsandthecreditorsasawholethatiscurrentlyundertaken
whenacreditorseeksleavetobringproceedingsdespitetheexistenceofamoratoriumfollowingan
administrationorder.
Where,however,thecompanyproposestodesignateacontractasessential(suchthatthecreditor
cannotthenterminateitorvaryitduringthemoratorium),thisadditionalimpositiononcreditorrights
requiresagreaterlevelofcourtoversighttoensurethatcreditorsareappropriatelyprotected.Thiswill
involveasignificantconstraintoncreditors’freedomofcontract.Provisionswhichentitleacounterparty
toterminateacontractwiththecompanyinsuchcircumstances(so-calledipsofactoclauses)are
common.Theseclausesformpartofthecommercialbargainwhichcompany’ssuppliersandcustomers
negotiatewiththecompanyandarevalidandenforceableinEnglishlawatpresent.Theyarepotentially
problematicforcompaniesseekingtoreorganisethemselves,astheyallowcustomersandsuppliersto
walkawayatatimewhenthecompanyismostdependentontheircontinuedcustom,ortousethis
powerfulleverasamechanismforextractingsignificantbenefitsfromthecompanytothepotential
detrimentofotherstakeholders,particularlyjuniorlenderswhocanseetheirholdingssqueezedout.97
Consequently,constraintsonthecreditors’abilitytowalkawaycanbevaluableifaregimeisseekingto
maximisethepotentialforarehabilitativerescueofthecompany.IntheUS,forexample,theChapter
94Para7.43.95Thisdoesnotenvisagearequirementforacourthearing:para7.15.96Para7.25.97ThisisnotgenerallyregardedasproblematicinEnglishlaw,seeegLeylandDafLtdvAutomotiveProductsplc[1993]BCC389inwhichtheCourtofAppealheldthattherewasnothingobjectionableaboutacreditorusingitsbargainingpowertoholdanadministrator“toransom”.
30
11moratoriumrendersunenforceablecontractualprovisionsthatgiveacounterpartytherightto
terminateanexecutorycontract,ormodifyrightsorobligationsthereunder.98Constrainingcreditors’
abilitytoutilisesuchclausesiscontroversialintheUK,however,becauseitisantitheticaltothenotion
offreedomofcontract,anditisnotablethattheInsolvencyService’s2009restructuringmoratorium
proposalsdidnotincludeprovisionstothiseffect.
TheInsolvencyService’sproposalsarealittledifferentfromtheUSversion,asnotallcreditorsand
suppliersarepreventedfromterminating,onlythosewhoseservicesaredeemedessential,whichafter
allaretheprimaryfocusforconcernregardingipsofactoclauses.Further,theinvalidationofsuch
clausesisnotautomatic,ontheentryonthemoratorium,butwillrequirethedebtortodesignatethe
relevantcontractasessentialandtojustifythatdesignationinthedocumentsfiledwithcourtto
commencethemoratorium.99Theproposalsbuildinasafeguardforthesupplier,asthesupplierwould
havetherighttochallengethedesignationinwhichcasethecourtwouldberequiredtoapprovethe
application.100However,thissafeguardisreducedsomewhatsincetheburdenseemstobecastonthe
suppliertoprovidean“objectivejustification”astowhythesupplyshouldnotbedesignatedas
essential.Thisisanissuewhichrequiresclarification.101Constrainingtheuseofipsofactoclauses,and
preventingvitalcreditorsfromterminatingtheircontractswiththecompanyintheperiodof
restructuringcanhaveclearbenefitsasameansofpromotingrehabilitativerescue,butitcomesata
costtoindividualcreditorsfreedomofcontract.Someinfringementofthoserightscanbejustified,but
onlyifsuitableprotectionsareputinplace.Thesemightincludeassurancesfromthecompanythatits
futureobligationsinrelationtoanycontractsthatcannotbeterminatedwillbeperformedinfull.Any
paymentsfordamagesthatresultfromthedebtor’sdefaultandforfutureperformanceundersucha
contractshouldbetreatedinthesamewayascostsinadministration,namelytheyshouldberepaid
firstbythecompanyasanexpenseoftheprocess.102Itisalsonotablethattherewillneedtobecarve-
outsfromthisprovisionforcertainfinancialcontracts.Mostdevelopedlegalsystemsgrantcertain
financialcontractsspecialprotectionfrominsolvencylawsinordertoprovidecertaintyandliquidityin
9811USC§365(e)(1),365(e)(2).99ThiscanalleviatetheuncertaintythatissometimesseeninChapter11reorganisationsasthepartieswaittoseewhichunexpiredexecutorycontractswillbeadopted,andwhichrejected,bythetrustee100Para8.13.101Itisnotablethat69%ofrespondentstotheConsultationPaperdidnotagreethattheproposalsasdraftedofferedsufficientsafeguardsforsuppliers:InsolvencyService,Summaryofresponses,para3.7.102SeeInsolvencyService,May2016,para7.46asregardsthesuggestedtreatmentofcostsincurredduringareorganisation.Itissuggestedherethatdamagesetcarisingfromthesecontractsshouldbetreatedassuchacost.
31
themarketplaceandtoreduceoreliminatesystemicrisk,103andasimilarcarve-outhere,inparticular
forfundingorhedgingarrangements.104
Thecourthasanimportantpotentialroletoplay,anditsexistingroleinthestaythatattachesto
administrationatpresent,setoutin5.1,demonstratesthatthecourtisabletoconductacareful
balanceoftheinterestsandpositionofthedebtorandcreditors.Thecurrentproposalsofthe
InsolvencyServicedonotcurrentlygetthedebtor-creditorbalancequiterightinthisregard.Greater
protectionisneededforcreditors,viaincreasedcourtoversight,bothgenerallyduringthemoratorium,
suchastheabilitytoapplytocourttochallengeamoratoriumthroughoutthemoratoriumperiod,and
morespecificallywherethecontractisdeemedtobeanessentialcontractbythecompany.
6. TheroleofthecourtinDIPfinancing
Companiescontinuetorequirefinancingduringtheperiodthatdebtrestructuringistakingplace,and
securingsuchfinancingcanincreasethecompany’schanceofsurvival.Itcanbedifficulttoattractnew
financinginthisperiod,andforthisreasonsomejurisdictionshaveincludedadvantageoustreatmentof
lenderswhoprovidefinanceinthisperiod(sometimescalledDIPlending).Forexample,inChapter11if
thedebtorcandemonstratethatfinancingcouldnotbeprocuredonanyotherbasis,thecourtcan,
subjecttocertainlimitations,authorisethedebtortogranttheDIPlenderalienthathaspriorityover
pre-bankruptcysecuredcreditorsandaclaimwithsuper-priorityoveradministrativeexpensesincurred
duringChapter11andoverallotherclaims.105DIPloansmaybeprovidedbyexistinglendersorbynew
thirdpartylenders.
Incontrasttootherregimes,suchastheUS,theUKlacksabroadandlong-establishedmarketin
specialistrescuefinance.NostatutoryprovisionspresentlyexistintheUKwhichspecificallyrelateto
thisissue,106butneitherdoesUKlawactivelypreventsuchprovisions.Indeed,optionsforsuperpriority
103ThespecialprotectioncurrentlygrantedtofinancialcontractsunderEnglishlawmaybeseeninPartVIIofCompaniesAct1989,theFinancialMarketsandServices(SettlementFinality)Regulations2001,FinancialCollateralArrangements(No2)Regulations.104Chapter11providessafeharbourprovisionsforcertainfinancialcontracts,whichprotectaqualifyingcounterparty’scontractualrighttoterminatethosecontractsfromtheautomaticstayin§365(e)(1).10511USC§507(b).106 Ithasbeensuggestedthatsection19(5)andscheduleB1paragraph99oftheInsolvencyAct1986providesapotential route to post-petition financing: GMcCormack, ‘Super-priority New Financing and Corporate Rescue’
32
doexist,forexample,inadministration,administratorshavestatutorypowersallowingthemtoborrow
fundsandgrantsecurity107overthepropertyofacompany,andthecostsoffinancerankhighlyinthe
hierarchyofadministrationexpenses.108However,suchoptionsarerarelyusedinpractice.109The
introductionofDIPfinancingisbynomeansastraightforwardissue,however,giventheneedtobalance
theinterestsofthedebtorsandnewlenderswiththoseofexistingcreditors.Inparticular,the
introductionofsuchprovisionsmightdissuadesomelendersfromprovidingfinanceforcompaniesin
thefirstplace.Reforminthisareawillunfortunatelynotbemerelyacaseofcopyingtheprovisionsthat
havebeensuccessfulinotherjurisdictions.WhatworksintheUS,forexample,inunlikelytobe
successfulintheUKgiventhedifferentlegalframeworks(theUSisgenerallyregardedasmoredebtor-
friendlythantheUK),thedifferentnatureofthecourtsystemsanddistinctionsinprevailingbusiness
culturesandpractice.
TheInsolvencyService’sproposalsinJune2009includedproposalsfortheintroductionofaformofDIP
financing.110Theseproposalsprovedproblematic.Respondents raisedparticularconcernsastohowthe
rightsofexistingsecuredlenderswouldbeprotectedandwhattheeffectsoftheproposalswouldbeon
broaderlendingtobusinessesingeneral.Thelackofanyguidanceastowhatmightconstitute
“adequateprotection”whenputtingsuper-priorityfundinginplacewasspecificallyhighlighted.
Accordingly,theDIPfinancingproposalsdidnotappearinthe nextiterationoftheconsultationprocess
inJuly2010.111TheywerehoweverbroughtbackontotheagendabytheInsolvencyServiceinMay
2016.
[2007]JBL701-732;VFinch,‘TheDynamicsofInsolvencyLaw:ThreeModelsofReform’[2009]LawandfinancialMarketsReview438-448,althoughthisoptionhasnotbeenfullyexplored.107InsolvencyAct1986,Sch1.108InsolvencyRules1986,rule2.67.109Ithasbeensuggestedthatthisisbecausenewfundinginadministrationsistypicallyprovidedbytheexistingfloatingchargeholder,whohasnoneedtovarytheirexistingsecurity,andanyassetsnotcoveredbythefloatingchargewillalreadybesubjecttofixedcharges.110 InsolvencyService,EncouragingCompanyRescue-A consultation, June2009. Bothof these issueshadbeendiscussedonpreviousoccasions.TheissueoftheintroductionofDIPfinancingwasdiscussedwhenthechangestotheinsolvencyregimewereintroducedbytheEnterpriseAct2002andthelackofamoratoriumwasraisedbytheCorkReport in1982(ReportoftheInsolvencyLawReviewCommittee, InsolvencyLawandPractice (Cmnd8558,1982))andbytheCompanyLawReviewin2001(CompanyLawReview,ModernCompanyLawforaCompetitiveEconomy-FinalReport,URN01/943,2001).111InsolvencyService,ProposalsforaRestructuringMoratorium-AConsultation,July2010.
33
TheInsolvencyServiceputforwardanumberofoptions,manyofwhichhavebeenadvanced
previously.112Theseincludesuper-priorityforrescuefinanceinadministrationexpenses,somethingthat
wasproposedinthe2009ConsultationPaperandwhichwasgenerallyfelttobelikelytohaveamodest
impactgiventhatadministrationexpensesaregenerallydischargedinfull.Anothersuggestionisthe
abilitytooverridenegativepledgeclausesincertaincircumstancesinordertoenableadistressed
companytograntsecurityfornewfinance.The2016ConsultationPaperoffersasanalternativeoption
theabilityofthecompanytograntsecuritytonewlendersovercompanypropertyalreadysubjectto
charges,wherethatnewsecuritymightrankasanadditionalbutsubordinatechargeontheproperty,or
possiblyasafirstchargeontheproperty(wheretheexistingholderdoesnotobject),and,further,
wheretheassetsagainstwhichthenewchargeissecuredproveinsufficienttodischargetheamount
owed,anyshortfallwouldrankabovepreferentialandfloatingchargeholders.Thedevilwithallsuch
proposalsisgenerallyinthedetail,somethingwhichislargelyabsentintheConsultationpaper,andthe
needtodemonstratethatexistingcreditorsareprotected.Themajorconcernhereisthesituationis
whichexistingsecurityisoverridden.IftheintroductionofDIPfinancingistobemeaningful,itislikely
thatthiswillbeneeded,inordertopersuadenewcreditorstoinvestinthecompanywhoseassetsare
alreadyencumbered.Yet,thisraisesrealconcernsabouttheprotectionisexistingsecurityholders,and
thepossibilitythaterodingtheirprotectionwillactasadisincentiveforthemtoinvestinthefirstplace
or,morelikely,itwillhavetheeffectofraisingthecostofborrowingforcompanies.
TheUSChapter11provisionsincludeasignificantroleforthecourtinensuringthatexistingcreditors
areappropriatelyprotectediftheDIPfinancingprovisionsareutilised.113Ifthecompanyalready
hassecureddebt,toborrowfundssecuredbyalienequalorseniortotheexistinglender(oftencalled
"priming"theexistinglender),thecompanywilleitherneedtheexistinglendertoconsentorwillhave
toconvincetheBankruptcyCourtthattheexistinglender’slienpositionwillbe"adequately
protected".114ItwouldbeimportanttobuildinasimilarroleforthecourtinEnglishlawwerethese
provisionstobeintroduced.Inpracticethisseemstobeunlikelytooccur.Indeed,theresponsestothe
ConsultationPapersuggestthatitisunlikelythattheseproposalswillbeadvanced.Oftherespondents
112InsolvencyService,May2016,part10.113Forexample,thecompanymustseektheapprovaloftheBankruptcyCourtfortheDIPfinancing:11USC§364.Ifthecompanyalreadyhassecureddebt,toborrowfundssecuredbyalienequalorseniortotheexistinglender(oftencalled"priming"theexistinglender),thecompanyeitherwillneedtheexistinglendertoconsentorwillhavetoconvincetheBankruptcyCourtthattheexistinglender’slienpositionwillbe"adequatelyprotected":11USC§364(d).11411USC§364(d).
34
totheConsultationPaperwhocommentedonrescuefinance,73%disagreedwiththeproposals.115
Manyrespondentshighlightedthefactthatalackofrescuefinancerarelypreventsbusinessrescue,and
thataslongasabusinessistrulyviable,thereisnoshortageoffundingavailable.
7. Conclusion
Thelawcanhaveanimportantroleinfacilitatingsuccessfulcorporaterescuesbyconstrainingcreditors’
rightsinvariousways.Thelawalsoneedstoacttoamelioratetheconsequentialcreditorabuseand
oppressionthatcanarise,however.Thecourthasacentralroleinthisregard.Themaindangerfacing
creditorsatpresentarisesfromthefactthatrestructuringscanbeimposedondissentingcreditors.The
courtshavedevelopedsuccessfulmechanismsfortacklingthepotentialoppressionofminoritycreditors
thatcanariseasaresult,butmoreattentionneedstobegiventotheissueofvaluation,andthecourts
needtobevigilantsoastoensurethatrestructuringsarenotusedinappropriatelyasameansof
transferringwealthfromthejuniorcreditors,andshareholders,totheseniorlenders.Theother
concernsraisedbythispaper,namelyissuesarisingfromamoratoriumimposedduringrestructuring
andfromDIPfinancingoptions,raisefewerconcernsforcreditorsatpresentgiventheunderdeveloped
natureofEnglishlawonthesetopics.ThiswillchangeiftheInsolvencyService’sproposalsare
implemented,atwhichpointthecourt’sroleinprotectingcreditorsfrompossibleabusewillneedtobe
expandedinordertoensurethatcreditors,particularlyminoritycreditors,areprotectedappropriately
duringtherestructuringprocess.
115InsolvencyService,SummaryofResponses,para5.2.
