Asset Sales and Secured Creditor Control in Restructuring: A Comparison of the UK,US and Canadian Models

The primary insolvency restructuring mechanism in the UK is administration under the Insolvency Act 1986, as amended by the Enterprise Act 2002. In an administration, an insolvency professional known as an administrator, who is accountable to the insolvent company's creditors as a whole, is appointed to oversee the restructuring. The administration process was designed to rehabilitate distressed but viable companies and businesses and to maximize creditors' recoveries. Increasingly, however, insolvent companies are using this process to sell substantially all of their assets through pre‐packaged administrations or ‘pre‐packs’. In a pre‐pack, the insolvent company and its senior creditors negotiate the terms of the sale prior to initiating administration proceedings and appointing an administrator. The administrator then implements the deal, often with little or no input from junior creditors or other stakeholders. Both the US Bankruptcy Code and the Companies' Creditors Arrangement Act in Canada permit insolvent companies to sell substantially all of their assets under the auspices of the restructuring legislation. This article compares pre‐packs with these US and Canadian processes, arguing that they are all functionally equivalent in that they facilitate quick realizations for secured creditors by bypassing traditional restructuring processes. This analysis suggests that pre‐packs may give too much control over the restructuring process to secured creditors, encouraging rent‐seeking and other value‐destructive behaviours that undermine the fundamental goals of insolvency law. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd.     

Corporate assets as a trust: for whom are corporate officers trustees in insolvency? the role of incentives in maintaining the trust

Uncertainty is a constant theme when corporations are in financial distress. Yet any successful restructuring of an insolvent corporation requires numerous stakeholders, including creditors, employees and suppliers, repose some degree of trust in those corporate officers who are trying to continue to operate the firm while restructuring it into a viable entity. This article looks at the issue of the positive and negative incentives that can be generated for corporate officers and directors from both their continuing control of corporate assets and their potential personal liability arising from corporate activity both before and after the corporation became insolvent. The potential role these incentives can play in providing a basis for the trust needed to meet the other governance challenges that arise in a restructuring is reviewed in the context of recent developments in Canada concerning the duties of corporate directors to creditors during insolvency. Also reviewed is the role of directors' insurance and indemnification in altering the incentives' effects on directors' behavior. Finally a critical appraisal is given of the present legal regime's provision for compromise of claims against corporate officers during restructuring, as well as the proposal to amend the law to allow complete exoneration of corporate directors from certain liabilities on insolvency. The article urges caution in altering the effects of incentives that may create the necessary basis for trust in the distressed corporation's officers amongst those stakeholders whose co‐operation is crucial to restructuring. Copyright © 2003 John Wiley & Sons, Ltd.     

Ethics <Emphasis Type="Italic">versus</Emphasis> Ethos in US and UK Megabanking

Company law in the US and UK fails to acknowledge that authorities’ propensity to rescue giant banks from the consequences of insolvency creates an implicit contract that assigns taxpayers a coerced and badly structured equity stake in too-big-to-fail institutions. The entrenched managerial norm of maximizing stockholder value abuses this stake. It does so by lending an undeserved moral legitimacy to efforts by TBTF managers to take on dangerous levels of tail risk because their bank’s deep downside is effectively eliminated by the prospect of unlimited taxpayer support. Conventional tools of prudential regulation constrain but do not de-legitimate this behavior. To accomplish that end, this paper calls for: (1) a formal recognition of the fiduciary duties and dividends that TBTF firms owe to taxpayers and (2) criminalizing aggressive pursuit of safety-net subsidies as a form of public endangerment.     

The ancillary insolvency proceeding

The main legal acts on International Insolvency Law (the European Regulation, the UNCITRAL Model Act and the European Convention on Certain International Aspects of Bankruptcy) lay down several local proceedings with substantive effects as regards the debtor, the distribution of proceeds and the ranking of claims. These—full—proceedings are characterized by a high degree of unpredictability and prove to be inadequate for creditors. These are the reasons why, as an immediate solution, the existing insolvency rules should be reinterpreted according to a certain logic of the market. However, such revision would only partially and provisionally solve the inconveniences of the current model. The true and ‘unsolvable’ problem is that even though the full local proceeding is based on international assistance, it alters the substantive insolvency rules. Therefore, in future it would be necessary to create a truly ancillary proceeding. Such a proceeding would not have any substantive effect as regards the debtor, the creditors and third parties, nor would it require any kind of distribution of proceeds and ranking of claims. However, this proceeding would enable to provide procedural assistance to foreign courts and procedural protection to local creditors. Copyright © 2010 John Wiley & Sons, Ltd.     

Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality

Materiality is an elusive, but fundamentally important concept in corporate reporting of all kinds—not only in traditional financial reporting, but in sustainability and integrated reporting as well. In the end, materiality is entity‐specific and based on judgment. Moreover, it is a judgment that should ultimately be made by a company's board of directors, which makes materiality as much a governance as a reporting issue. Whether a given ESG issue is material is in large part a function of the corporate stakeholders, or “audiences,” that the company's board of directors deems to be “significant”—that is, important to the company's ability to create value over the short, medium, and long term. The identification of such audiences—together with the time frames the board uses to evaluate the impact of the company's decisions on these audiences—provides the basis for determining the sustainability issues that corporate management must focus on for performance and reporting purposes. To help ensure that decisions about materiality receive the attention they deserve, the authors propose that corporate boards articulate their views in an annual “Statement of Significant Audiences and Materiality.” Contrary to the prevailing belief that the fiduciary duty of the board is to place shareholders’ interests first, nothing precludes corporate boards from issuing such a statement. Recent research, including the compilation of legal memos on fiduciary duty and nonfinancial reporting for all G20 countries, makes it clear that the board's fiduciary duty is to “the corporation itself.” In exercising this duty, directors have full discretion, under the business judgment rule and other authorities, to decide which audiences, along with the company's shareholders, should be deemed significant.     

Officers’ fiduciary duties and acquisition outcomes

Using a Delaware case law that recognized officers’ distinct fiduciary duties for the first time in 2009, I examine the effect of officers' fiduciary duties (OFDs) on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement-period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.     

Conflict,collaboration, fuzzy jurisdictions and partial settlements. Accountants,lawyers and insolvency practice during the late 19th century

Inter-professional conflict over insolvency work in Victorian England and Wales is often considered a formative instance of jurisdictional competition between accountants and lawyers. The paper explores this episode in the context of Abbott's theory of The System of Professions. It is shown that the Bankruptcy Act, 1869 disturbed inter-professional relations and unleashed competition between accountants and lawyers for insolvency work. However, the resultant hostility was substantially conducted through the professional media and did not engage unified occupational communities. In everyday practice accountants and lawyers maintained relations of mutual dependency rather than conflict. Some elements of a jurisdictional settlement between accountants and lawyers over bankruptcy work was achieved during the 1870s and 1880s through an intellectual division of labour, judicial decision making and organisational change. However, these forms of settlement seldom proved conclusive and statutory changes effectively perpetuated inter-professional competition for insolvency work into the 20th century.     

The Australian insolvency regime revisited: a precis of the next leap forward

Australian corporate insolvency laws contained within Chapter 5 of the Corporations Act are currently being reviewed with respect to four principal areas identified by Australian Government Treasury. The four themes of review include employee ‘benefit’ enhancements; seeking to deter misconduct of company officers; rules around insolvency practitioner disclosure with respect to their remuneration and related independence issues; and some minor proposed changes to the voluntary administration procedure, widely regarded as requiring only minor adjustment. At this time, the draft legislation is not available for general release and is being discussed within the Australian Government appointed Insolvency Law Advisory Group. The next steps are public comment for review of draft legislation and then operation of the legislative change. These are expected to occur in 2007. This paper seeks to outline the likely issues associated with the expected reforms of the Australian insolvency regime. Copyright © 2006 John Wiley & Sons, Ltd.     

Cross-border insolvency law in India: Are the principles of comity of courts and inherent common law jurisdiction relevant?

Deliberations are in the final stages for enacting a cross-border insolvency law in India based on the UNCITRAL Model Law on Cross Border Insolvency 1997 (‘Model Law’). The cross-border insolvency regime in India will provide an avenue for recognising foreign insolvency proceedings in India. Although it is a matter of time before India adopts the Model Law, it is important to examine whether there remains an independent basis in addition to the Model Law for recognising and providing assistance to cross-border insolvency proceedings in India. This is crucial on account of the following reasons: first, the Model Law does not provide that it is the exclusive pathway for foreign creditors to seek remedies under domestic law. The Model Law, as reflected in Article 7, was intended by its drafters to be an additional gateway to those provided under local laws. The proposed Indian law in Article 5 of Draft Part Z of the Insolvency and Bankruptcy Code 2016 also does not depart expressly from this principle. Second, there may be instances where neither the ‘Centre of Main Interests’ nor an establishment of a corporate debtor is situated in India; therefore, assistance and cooperation in respect of such cross-border insolvency proceeding can only be based on the inherent common law jurisdiction, if available. Third, the cross-border insolvency framework in India will be premised on the requirement for reciprocity and, therefore, countries that do not meet the reciprocity requirement may find it beneficial if such an independent basis for recognition exists in India. This article argues that foreign representatives should be encouraged to explore the possibility of seeking assistance from the commercial courts in India under the common law principles governing cross-border insolvency and that the courts in India should be open to this possibility.     

Debtholders’ Demand for Conservatism: Evidence from Changes in Directors’ Fiduciary Duties

Debtholders’ demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors, we predict and find that firms subject to the ruling significantly increased their accounting conservatism. In addition, our results suggest that the increase in conservatism is more pronounced in near insolvent Delaware firms with stronger boards, confirming that the court ruling takes effect through the channel of the board of directors. Our results are robust to using alternative measures of conservatism and near insolvency status, and controlling for potential confounding factors and other stakeholders’ demand for conservatism. Overall, our study provides empirical evidence to support the causal relation between debtholders’ demand and accounting conservatism previously suggested in the literature, and offers some insights into the role of the board of directors in financial reporting.     

From subordination to parity: an international comparison of equity securities law claims in insolvency proceedings

Securities law claims in insolvency proceedings raise important questions of allocation of risk and remedies. In the ordinary course of business, equity claims come last in the hierarchy of claims during insolvency. What is less clear is whether this should encompass claims arising from the violation of public statutes designed to protect equity investors. Discerning the optimal allocation of risk is a complex challenge if one is trying to maximize the simultaneous advancement of securities law and insolvency law public policy goals. From a securities law perspective, there must be confidence in meaningful remedies for capital markets violations if investors are to continue to invest. From an insolvency perspective, creditors make their pricing and credit availability choices based on certainty regarding their claims and shifting those priorities may affect the availability of credit. The critical question is the nature of the claim advanced by the securities holder and whether subordination of securities law claims gives rise to inappropriate incentives for corporate officers within the insolvency law regime. A comparative analysis reveals that the U.S. has provided a limited statutory exception to complete subordination through the fair funds provision of the Sarbanes-Oxley Act by allowing SEC claims for penalties and disgorgement to rank equally with unsecured claims even though the funds are distributed to shareholders. The U.K. and Australian schemes permit shareholders to claim directly as unsecured creditors for fraudulent acts and misrepresentation by the issuer. In contrast, Canadian law is underdeveloped in its treatment of such claims. The paper canvasses the policy options available to reconcile securities law and insolvency law claims, including a discussion of the appropriate gatekeeping role for regulatory authorities and the courts, and the need for a framework that offers fair and expeditious resolution of such claims. If the public policy goal of both securities law and insolvency law is to foster efficient and cost-effective capital markets, it seems that the systems need to be better reconciled than currently. The paper also examines the codified response to the time and resources consumed in various common law tracing claims by customers in a securities firm insolvency. Copyright © 2007 John Wiley & Sons, Ltd.     

Dutch corporate insolvency law: On the brink of a revolution?

The Dutch Bankruptcy Code (DBC) has not changed fundamentally over the more than 110 years of its existence, at least as far as corporate insolvency proceedings are concerned. On 1 November 2007, however, a committee of insolvency experts presented a draft for an entirely new code to the Ministry of Justice. Whether this new code will gain the force of law and whether this will happen within the near future remains uncertain but the proposals will in any event dominate discussions on insolvency law in the Netherlands for the foreseeable future. The main goal behind many of the proposals is improving the ability to successfully restructure companies that experience financial difficulties. To this end the proposals include various measures that would weaken the position of (secured) creditors. The proposals include widening the scope of the cooling-off period during which secured creditors are unable to enforce their security by granting the administrator a right of use of assets subject to security interests. The ability to rely on early termination clauses in contracts is also reduced during the cooling-off period. The position of secured creditors is further weakened by a proposal to grant the right to sell assets that are subject to security interests to the administrator if he continues the business. Under the current bankruptcy code, secured creditors can largely ignore insolvency proceedings, there is no general stay on enforcement and, early termination clauses in contracts are generally thought to be valid and enforceable during insolvency proceedings. Although banks have already argued that weakening the position of secured creditors will limit the ability to restructure companies, it seems safe to assume that the relatively comfortable position that secured creditors currently enjoy during insolvency proceedings in the Netherlands will be under fire due to the proposals for a new bankruptcy code. Copyright © 2008 John Wiley & Sons, Ltd.     

A case of constitutional apples and oranges: a functional comparison of pension priority and benefit guarantees in U.S., U.K. and Canadian insolvency and pension law regimes

Canada's insolvency law reform increased the priority granted to employer‐sponsored pension claims. The article compares the treatment of such claims in the U.S., the U.K. and Canada. A comparison of the legislative provisions concerning pension funding shortfalls from contribution arrears or economic underperformance in relation to the assumptions used for investment income or liability valuations finds that insolvency law has been used to address contribution arrears, but risks from economic underperformance have been addressed by pension benefit insurance. Post‐insolvency priority for contribution arrears provides appropriate incentives to discourage pre‐insolvency preferences for payments to other creditors, while shortfalls from economic underperformance do not involve issues of preference between creditors. The absence of any insolvency rationale for changing priority for shortfalls from economic underperformance and the likely disparity between the assets available to satisfy clams and the much larger amounts of such shortfalls makes the use of insolvency law to address this risk much less effective than insurance. Canada, however, has not adopted the insurance policy instrument used in the U.S. and U.K. to mitigate the impact of pension funding shortfalls. The constitutional inability of Canada to legislate in respect of matters of pension regulation that would allow it to control the well‐known insurance problems of moral hazard and adverse selection may explain why it has only chosen to adopt an insolvency policy instrument. However, a change in priorities in insolvency may generate incentives for secured creditors that either undermine or reinforce this policy choice. Secured creditors could attempt to circumvent the new priority scheme through private arrangements with the debtor or to increase their monitoring activities to ensure the debtor is current in its pension contributions. Secured creditors choices will be influenced by the bankruptcy courts' interpretation of the preference provisions in the insolvency legislation. Copyright © 2009 John Wiley & Sons, Ltd.     

Maritime cross‐border insolvency in China

Due to the high degree of mobility of ships and the special operational structures of shipping companies, it is difficult to harmonise the cross‐border insolvency regime with the maritime law regime governing ships. One of the typical examples is the recent bankruptcy of Hanjin Shipping Co Ltd. Chinese creditors were heavily affected by the bankruptcy of Hanjin. However, Hanjin never filed an application to have its Korean insolvency proceeding recognised in the People's Republic of China (PRC). Nor did it commence any ancillary insolvency application under the Enterprise Bankruptcy Law of the PRC. Taking Hanjin's bankruptcy as an example, this article examines the current statutory regime of cross‐border insolvency in the PRC in detail and analyses the approach adopted by the Chinese courts to resolve the conflicts that arise between the cross‐border insolvency and maritime law regimes.     

Harmonisation of European Insolvency Law and the Need to Tackle Two Common Problems: Common Pool and Anticommons

Insolvency law has finally become a field of law for which harmonisation at a European level is considered both important and feasible. In deciding upon the content of such harmonised rules, there will need to be a common understanding about the goals of insolvency law and, therefore, a European debate on bankruptcy theory. Bankruptcy theory, and most notably the influential creditors' bargain theory, has long viewed insolvency law as a set of rules for overcoming common pool problems. Bankruptcy theory thus far has almost completely overlooked anticommons problems. Anticommons present themselves in a situation in which there are several owners or entitled parties, and each of the parties has it within its power to block the use by others. Should anticommons behaviour in insolvency procedures go unchecked, creditors as a whole will be harmed. Insolvency is a collective process, and this process may not be sabotaged by a single party. Four typical insolvency issues, each identified by INSOL Europe as a candidate for harmonisation at a European level, are discussed, analysing them in terms of common pool problems and anticommons: preferences, reorganisation/composition plans, claim validation and insolvency of a group of companies. Copyright © 2012 John Wiley & Sons, Ltd.     

A new statutory director’s duty for Australia — a ‘duty’ to be concerned about employee entitlements in the insolvent corporation

Australia has introduced legislation that is aimed at preventing a person from entering into agreements or conducting transactions with the intention of defeating the recovery of employee entitlements. It is essentially aimed at directors and their behaviour in the pre‐appointment period. This paper discusses the history leading up to such a legislative move and the likely benign impact now that the Corporations Act in Australia prohibits such behaviour. Further, the paper argues that mooted changes to the legislation giving employees a ‘maximum priority’ ahead of secured creditors is unnecessary. Copyright © 2003 John Wiley & Sons, Ltd.     

The Use of Noncourt‐Based Corporate Rescue: Does the Australian Voluntary Administration Procedure Provide a Model for China?

In the recent international history of insolvency law reform, the reform of corporate rescue and restructuring has been an ongoing project. In China, the enactment of the Enterprise Bankruptcy Law 2006 saw the introduction of a bankruptcy reorganisation procedure that incorporates the debtor‐in‐possession model found in Chapter 11 of the US Bankruptcy Code. However, the Chinese corporate rescue procedure has been significantly underused due in part to various drawbacks associated with this court‐based and highly politicalised process. This paper explores the possibility of reforming China's current corporate rescue regime by drawing upon the Australian voluntary administration procedure. Found in Part 5.3A of the Corporations Act 2001 (Cth), this procedure was designed to provide a relatively swift, inexpensive and flexible corporate rescue mechanism for companies in financial distress. It comprises a noncourt based mechanism under the control of one or more professionally qualified private administrators. It is interesting to note that the UK also moved away from exclusive reliance upon court‐based administration procedures following the passage of the Enterprise Act 2002. This moved the UK closer to the Australian practitioner‐dominated approach to corporate rescue. This paper argues that the addition of a voluntary administration‐style procedure to China's current corporate rescue regime may be needed as China develops its market economy based on the rule of law. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd     

The effectiveness and efficiency of corporate insolvency law—part two

Little empirical research has been done in the Netherlands (or internationally) into the effect of corporate insolvency proceedings. The Dutch legislature has made several attempts in the past decades to revise the current Dutch Bankruptcy Act (Faillissementswet) of 1893, while almost nothing is known about the effectiveness and efficiency of the Dutch corporate insolvency law. I have studied the effectiveness of the current Dutch insolvency law and of European Directive 2001/23/EC which is incorporated in this law, on the basis of theoretical and large‐scale empirical research. The study concerned all 4167 of the corporate insolvencies that ended in 2004. In the first part of this Article (International Insolvency Review, Volume 17, 3, Winter 2008, pp. 189–209), the research results showed that the Dutch Bankruptcy Act achieved the goals set on it only to a limited degree and that the informal restructuring procedure is of great social importance. In this second part, I concentrate on the conditions imposed by European Directive 2001/23/EC on the European national legislatures to protect employees' rights: automatic transfer of employment contracts in the event of transfers as part of insolvency proceedings, together with measures to prevent misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in this European Directive. The study shows that, in the Netherlands, not applying automatic transfer of employment contracts when an undertaking or business is transferred as part of an insolvency proceeding does not result in large‐scale misuse of insolvency law. It appears that automatic transfer of employment contracts outside insolvency proceedings can actually impede the informal restructuring of financially unsound companies. These surprising results are interesting for corporate insolvency proceedings worldwide. Copyright © 2009 John Wiley & Sons, Ltd.     

The Crisis of Companies from an Italian Perspective: Reorganization and Fresh Money

Today, the role of fresh money in the reorganization of companies is a central matter in the Italian crisis law. The analysis comes from the recent reforms of the Italian Bankruptcy Law, aimed at revitalizing the pre‐insolvency procedures for overcoming the crisis of companies. These reforms draw inspiration from Chapter 11 of the U.S. Bankruptcy Code. In particular, three new rules have been introduced in the Italian Bankruptcy Law in order to facilitate the obtaining of credit by companies in crisis. These rules recognize priority in reimbursement for claims related to financing. Their target is to incentivize those (not only banks) who want to grant new finance to enterprises in crisis. The target is so important for the legislator that the rules permit the discrimination of companies' creditors on the basis of a judicial valuation of the conditions required for priority by the law in specific cases. The traditional and important principle of equal treatment of unsecured creditors is even more neglected. But the specific meaning of the rules and their inclusion in a sort of company crisis law in time of crisis induce to confine the forms of credit to which the rules refer to and to limit the space for extensive interpretations or applications by analogy. Copyright © 2016 INSOL International and John Wiley & Sons, Ltd.     

The Shifting of Directors' Duties in the Vicinity of Insolvency

Directors are obviously critical to the management of companies, and perhaps even more so when a company is in financial difficulties. This paper examines the position of directors when their company is in the vicinity of insolvency. It provides an analytical exposition of the law that exists in common law jurisdictions where, in the vicinity of insolvency, there is a shift in the nature of the duties of its directors, namely, directors have to take into account the interest of the creditors when exercising their powers and discharging their duties. The paper endeavours to identify and discuss the main problems that exist with this shift in the nature of duties so that if other jurisdictions do consider implementing it, they are aware of the drawbacks and may be able to address them. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd