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.
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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).
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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.
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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.
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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.
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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.
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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.
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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,
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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].
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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.
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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.
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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.
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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”.
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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.
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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).
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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.