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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.

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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.

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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.

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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.