Debt Restructuring and Notions of Fairness

We think of fairness as an intuitive concept, confident that, as the colloquial expression goes, ‘we will know it when we see it’. Substantive unfairness is usually associated with some sort of imbalance: between how one person is treated compared with another; between effort put in and reward gained; between what we legitimately expect and what we get; between how losses fall on the weak and upon the strong.  Procedural unfairness, too, reflects this sense of an uneven playing field:  between the rights which different parties have to participate in a process; between how favoured and unfavoured parties are treated; between the rights of those in a powerful bargaining position and the rights of everyone else.  But not every case of imbalance will be unfair, and many factors may vindicate the situation. Closer examination reveals a slippery concept, which eludes a single definition applicable to all contexts, and which suffers from various levels of abstraction, unless it is applied to a real situation.

In a recent paper I argue that if we rely on our intuition we face three risks.  First, we risk generalising from one situation to another when the situations ought properly to be differentiated from each other.  Secondly, to the extent that we suggest reform to address a fairness concern, that reform may be only weakly related to the real fairness issues in the particular context.  Finally, when we weigh fairness concerns against other considerations, we may have a poorly defined idea of what it is that we are putting in the balance.  Specifically, in the paper I argue that our repeated failure to identify systematically our fairness concerns in different types of debt restructuring in English law has led us into all three of these traps.   Drawing broadly on scholarship from diverse fields such as moral and political philosophy, biological sciences, psychology, organisation theory, group theory and economics, my paper seeks to unpack the principles and the procedural demands which are bound up in some measure in our intuitive sense of what is fair. It seeks to apply them in a rigorous way to three different types of debt restructuring: the restructuring of a small or medium sized enterprise, the restructuring of a large corporate, and the restructuring of a financial institution in English law.  In each case, a fairly typical scenario is described to ground the analysis, which reveals repeated failure to distinguish one type of restructuring case from another, to identify accurately where the fairness concerns are lurking, and to decide what we are putting in the fairness bucket of the trade-off scales.

My analysis concentrates exclusively on fairness.  It does not consider the trade-off between fairness and other objectives (such as sustaining the putatively unfair situation because another, fairer outcome would cost more than the benefits it would deliver, or would provide the wrong incentives for some of the stakeholders), or utilitarian objections (because a situation which differentiates between classes of stakeholders in its approach to the fairness of the case would make the stakeholders worse off overall), or arguments that what we might consider to be questions of fairness  should properly be reinterpreted as economic questions.  In short, its objective is not to argue that fairness per se should prevail over other considerations, but rather to explore, as an initial question, the quality of fairness in each of the situations with which it is concerned.

Sarah Paterson is an Assistant Professor of Corporate Insolvency at the London School of Economics.