Selective Corporate Restructuring Strategy
In a new paper, ‘Selective Corporate Restructuring Strategy’, we engage with a fundamental, but under-theorized fact: that frequently in modern corporate restructuring only selected creditors are impaired by the restructuring plan, and those creditors which are impaired are treated unevenly. This contrasts with the foundational idea of corporate insolvency as a collective process, in which individual creditors’ rights of enforcement are suspended for the good of the general body of creditors; in which all creditors participate; and in which the proceeds of realization of the assets are distributed pari passu in accordance with the distributional order of priorities prescribed by corporate insolvency law.
We do not regard all selective corporate restructuring strategies as illegitimate. A debtor at an early point on the ‘demise curve’ may face a specific problem which, if successfully resolved, may prevent the debtor descending into general default. Examples of such problems may include product liability problems; labour costs; an over-leveraged financial capital structure; or an over-rented leasehold estate. Debtors at this point on the demise curve may have good reasons to limit their restructuring to the specific issue at hand, avoid engaging creditors more widely, and offer superior deals to certain creditors within an impaired class who have a better commercial negotiating position than others. Indeed, we suggest that both selective strategies (engaging with selected creditors rather than engaging with all creditors in the restructuring negotiation) and differential treatment of creditors of the same rank reduce the risk of general default and increase the prospect of a sustainable restructuring.
It is no surprise to us then that both UK and US restructuring law provide mechanisms which facilitate selective and differential strategies. But this descriptive claim begs normative questions about the boundaries within which a debtor ought to be able to utilize these tools.
To explore the normative questions, we analyse how selective and differential strategies can be operationalised in three UK restructuring procedures: Part 26 schemes of arrangement; Part 26A restructuring plans; and company voluntary arrangements (CVAs). Where relevant, we draw comparisons with US Chapter 11 as we go. We focus on the UK and the US because each of these jurisdictions adopts a different approach to selectivity and differential treatment, so that in our view together they provide a relatively complete picture of the principal design choices. We find that UK courts recognise the debtor’s ability to compromise only selected creditors or classes of creditor in Part 26 schemes of arrangement; Part 26A restructuring plans; and CVAs. We note statutory authority to leave a class unimpaired in US Chapter 11 along with multiple other mechanisms which can be used to achieve selective treatment. And in both jurisdictions, we find multiple mechanisms to achieve differential treatment within otherwise similarly situated classes.
We find that in Part 26 schemes of arrangement and Part 26A restructuring plans, the UK courts have moved towards a quasi-inquisitorial approach in which they undertake a holistic review both of which creditors are included in the plan and which are excluded, and of the differential treatment, even if no specific objection is raised on the issue. We contrast this with the UK CVA where no court review is undertaken absent a specific challenge, and an adversarial approach is adopted where a challenge is forthcoming. In US Chapter 11, we find that the debtor faces the threat of costly and time-consuming court inquiry into selective and differential treatment in the event of a non-consensual plan but has much less to fear by way of investigation if the plan is supported by each voting class. Our core contention is that selectivity and differentiation is best regulated by the threat of independent review against a set of relevant criteria. Insofar as independent review is concerned, we raise concerns with UK CVAs and, to a more limited extent, with consensual US Chapter 11 plans. We develop a suggested set of relevant criteria for distinguishing legitimate and illegitimate selective and differential strategies, review the extent to which these criteria are used when court review of such strategies is undertaken, and conclude with some limited suggestions for reform.
Sarah Paterson is Professor of Law at the London School of Economics Law School.
Adrian Walters is Professor of Law at the Chicago-Kent College of Law at the Illinois Institute of Technology.
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