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Journal of Corporate Law Studies

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Of rights and rescue: a curious confluence?

Sandra Frisby

To cite this article: Sandra Frisby (2019): Of rights and rescue: a curious confluence?, Journal ofCorporate Law Studies, DOI: 10.1080/14735970.2019.1615165

To link to this article: https://doi.org/10.1080/14735970.2019.1615165

Published online: 20 Aug 2019.

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Of rights and rescue: a curious confluence?Sandra Frisby

School of Law, University of Nottingham, Nottingham, UK

ABSTRACTThis article considers the recent proposals for the reform of corporaterehabilitation procedures. It examines the impetus for reform, the mainfeatures of the proposals and the underlying corporate insolvency landscapein the UK. The article attempts to determine whether the proposals aresufficiently robust in terms of balancing the interests of corporate creditorsand the potential for corporate rescue, and how corporate creditors mightrespond if they consider that their rights are unduly or unfairly relegated. Italso questions the utility of the proposed reforms for companies of all sizes,and whether there are omissions in terms of realising their objectives.

ARTICLE HISTORY Received 18 December 2018; Accepted 22 March 2019

KEYWORDS Corporate insolvency; reform; corporate rescue; creditors’ rights

Introduction

Corporate insolvency sometimes generates enormous media interest, and2018 was a vintage year in this respect. The demise of Carillion plc dominatedheadlines in January, and a series of high profile retail insolvencies took up thebaton from February onwards.1 Reports of this nature tend to focus on theplight of an assortment of what may be termed ‘insolvency stakeholders’. Pro-minent amongst the ‘victims’ are the employees and trading partners of insol-vent companies, and, most often in relation to retail insolvencies, customerswho have paid for goods or services which will not be supplied.2 Of course,the gamut of insolvency stakeholders extends far beyond these two factions,and beyond those who might claim the status of ‘creditor’,3 encompassing

© 2019 Informa UK Limited, trading as Taylor & Francis Group

CONTACT Sandra Frisby Sandra.frisby@nottingham.ac.uk School of Law, University of Notting-ham, University Park, Nottingham NG7 2RD, UK

1Prominent corporate casualties include Toys’R’Us, Maplins, Poundworld and House of Fraser. For anabsorbing insight into this aspect of the retail sector see: <www.retailresearch.org/whosegonebust.php> accessed 26 September 2018.2This particular group will most commonly comprise ‘consumers’, and this particular problem has beenconsidered in some detail by the Law Commission. See Law Commission, Consumer Prepayments on Retai-ler Insolvency (Law Com No 368, 2016).3This much was recognised by the Cork Committee in 1982: see Insolvency Law and Practice: Report of theReview Committee (Cmnd 8558, 1982) para 198(i) (hereinafter The Cork Report).

JOURNAL OF CORPORATE LAW STUDIEShttps://doi.org/10.1080/14735970.2019.1615165

even the insolvent corporation itself.4 This last might appear a curious prop-osition, but finds long-standing acknowledgement in the ideology of corpor-ate rescue.5

Serendipitously, 2018 also saw the most recent contribution of the UK gov-ernment to that ideology. Following consultations in 20166 and the spring of2018,7 reform initiatives were announced in August 20188 and accompanied,if not by a drum roll, by the arguably bold assertion that:

Taken together, these reforms will ensure more companies can be rescued orrestructured; that stewardship and transparency are strengthened in our largecompanies; and that returns to creditors in insolvency, including small suppliersand pension funds, are likely to be higher.9

It is with the first and third of these claims that this article is concerned. It isnot proposed to evaluate the reform proposals in the abstract, nor inminute detail, but rather to explore the relationship between stakeholder‘rights’10 and corporate rescue procedures and strategies. A pivotal featureof that relationship,11 which manifests itself in numerous statutory provisionsand judicial authorities, is that rights existing prior to the onset of formal insol-vency may be suspended or modified12 once insolvency intervenes. This is inmany respects defensible, both as a matter of legal principle, policy and prac-ticality, but equally it is an outcome individual rightholders would prefer toavoid and, indeed, may be able to avoid by pressing into service, prior tothe onset of insolvency, rules of property and contract law. This apparenttension raises interesting questions, both for the integrity of the present insol-vency framework and for the future direction of travel as contemplated by thereform agenda.

Insolvency law: purposes, procedures and players

Purposes

Modern UK insolvency law originates from the recommendations of the CorkReport, which catalogues the ‘aims’ of a ‘good modern insolvency law’.13

4And so, of course, its shareholders.5This point will be amplified below at p 4.6‘A Review of the Corporate Insolvency Framework: A Consultation on Options for Reform’ (The InsolvencyService, February 2016) (hereinafter Consultation).7‘Insolvency and Corporate Governance’ (Department for Business, Energy and Industrial Strategy, March2018).8‘Insolvency and Corporate Governance: Government Response’ (Department for Business, Energy andIndustrial Strategy, 26 August 2018) (hereinafter Government Response).9Government Response (n 8) ii (foreword from Kelly Tolhurst MP, Minister for Small Business, Consumersand Corporate Responsibility).10The nature of such rights will be explored in further detail below.11A feature not exclusive to ‘rescue’ scenarios but common to insolvency procedures generally.12Or wholly frustrated.13See The Cork Report (n 3).

2 S. FRISBY

Corporate insolvency law regimes are designed to address numerous issuesgenerated by one commercial exigency: a company may find that its liabilitiesoutweigh its assets to such an extent that the continuation of normal businessoperations becomes unsustainable. This position may be recognised andacted upon ‘internally’ by the company’s owners or management,14 or byparties external to the company, most often those owed money by thecompany and who have lost confidence in its ability to discharge thedebt.15 In such circumstances, insolvency law seeks to avoid the adverse con-sequences of leaving matters to be resolved privately by individual creditoraction16 (or, indeed, of inaction by the company’s management). RoyGoode puts the matter thus:

The primary purpose of insolvency law is to replace the free-for-all attendantupon the pursuit of individual claims by different creditors with a statutoryregime in which creditors’ rights and remedies are suspended, wholly or inpart, and a mechanism is provided for the orderly collection and realisation ofassets and the distribution of the net realisations of the assets among creditorsin accordance with the statutory scheme of distribution.17

This ‘primary purpose’ is a starting point. Overlying it are a series of further‘sub-purposes’, which speak in more detail to the ‘values’ (or ‘principles’) tobe entrenched in the regime and the outcomes it seeks to achieve.18 It isnot proposed to discuss the ideologies of insolvency regimes here,19 but toexplore the quest to enhance the corporate rescue environment in the UKand the impetus behind it.20 However, it is worth noting at this point onecentral characteristic of most insolvency regimes, as explained by Goode,above. In effect, they disable, to a greater or lesser extent, the enforcementof individual rights against the insolvent company and replace those enforce-ment opportunities with a statutory scheme that imposes (broadly speaking)collectivity.21 And this intervention is seen to be justified in the interests of thegreater good.

14Who may, particularly in the case of small companies, be the same people.15I.e. corporate creditors.16Through the exercise of contractual rights or judicial process.17Roy Goode, Principles of Corporate Insolvency Law (4th edn, Sweet & Maxwell 2011) para 1-08. This‘common pool’ problem is the subject of extensive commentary, far too extensive to cover here, butsee Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty First Century’ (2016) 36 OJLS697 for a useful exposition.

18For a detailed account of this matter see Goode (n 17) paras 2-02–2-06, ch 3. Finch and Milman helpfullydistinguish between the ‘tasks’ of insolvency law and its ‘broader objectives’, and offer an excellentanalysis of these matters. See Finch and Milman, Corporate Insolvency Law: Perspectives and Principles(3rd edn, Cambridge University Press 2017), especially 24–25, ch 2.

19For enlightening insights, see Goode (n 17); Finch and Milman (n 18); Mokal, Corporate Insolvency Law:Theory and Application (Oxford University Press 2005); Keay and Walton, Insolvency Law: Corporate andPersonal (LexisNexis 2017).

20See Government Response (n 8).21See Goode (n 17) para 2–08; Finch and Milman (n 18) 27. See also Jackson, The Logic and Limits of Bank-ruptcy Law (Beard Books 2001).

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Procedures

Insolvency law seeks to achieve its various objectives through the medium ofinsolvency procedures, each of which has its own statutory framework. In theUK there are five such procedures: winding up by the court,22 creditors volun-tary winding up,23 administration,24 administrative receivership25 and thecompany voluntary arrangement (CVA).26 Broadly speaking, the twowinding up, or liquidation, procedures are perceived as ‘terminal’: acompany entering liquidation will not survive the procedure, and, once itsassets have been realised and distributed to its creditors, dissolutionfollows. Administration and the CVA are designed to offer a brighter prospectfor the company itself and are perceived as ‘rescue’ procedures.27 Both wereintroduced by the Insolvency Act 1986 on the recommendations of theCork Committee;28 both have undergone reform in attempts to increasetheir usage and to render them more effective as rescue mechanisms.29 Theuse of administrative receivership was heavily restricted by the introductionof s 72A of the Insolvency Act 1986, which prohibits floating chargeholdersfrom appointing an administrative receiver:30 the procedure is nowadaysbarely used31 and will not be considered further here, except to note that itwas, perhaps ironically, the inspiration for the administration procedure.32

It is, however, naïve to assume that UK insolvency procedures can be clus-tered so straightforwardly according to ‘purpose’, with the two forms of liqui-dation accomplishing euthanasia of the company and administration and theCVA directed towards its rehabilitation. The statutory scheme of adminis-tration itself acknowledges this in schedule B1, para 3 of the Insolvency Act1986, which provides that:

22Insolvency Act 1986, pt 4, ch 6.23Insolvency Act 1986, pt 4, ch 4.24Insolvency Act 1986, pt 2, sch B1.25Insolvency Act 1986, pt 3.26Insolvency Act 1986, pt 1.27There is a (probably imperfect) analogy here between the terminal and rescue orientations of the UnitedStates’ ch 7 and ch 11 procedures.

28See The Cork Report (n 3).29For the CVA see ‘Encouraging Company Rescue – A Consultation’ (Insolvency Service, June 2009) and‘Proposals for a Restructuring Moratorium – A Consultation’ (Insolvency Service, July 2010), which ledto the introduction of sch A1 of the Insolvency Act 1986. For administration see ‘Productivity and Enter-prise: Insolvency – A Second Chance’ (Insolvency Service, July 2001), which led to the introduction, viathe Enterprise Act 2002, of sch B1 of the Insolvency Act 1986.

30Except in relation to in certain specialised transactions: see Insolvency Act 1986, ss 72B-72G. Nor does theprohibition apply to a floating chargeholder whose charge was created before 15 September 2003: seeInsolvency Act 1986, s 72A(4).

31See below, Table 1.32See The Cork Report (n 3) paras 495-497. The prohibition on the appointment of administrative receiverswas prompted, in part, by the perception that the administration procedure was (a) fairer and moreinclusive, (b) more rescue-orientated and (c) underused precisely because a floating chargeholdercould appoint an administrative receiver: see Productivity and Enterprise (n 29) paras 2.2–2.5.

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3(1) The administrator of a company must perform his functions with the objec-tive of –

(a) rescuing the company as a going concern, or(b) achieving a better result for the company’s creditors as a whole than wouldbe likely if the company were wound up (without first being in administration),or,(c) realising property in order to make a distribution to one or more secured orpreferential creditors.

Only para 3(1)(a) explicitly directs the administrator to attempt a rescue. Para-graph 3(1)(c) is directed towards a realisation strategy which tends to corre-spond to the ‘purpose’ of the liquidation procedures, not least because anextensive realisation of property would leave the company without theresources to resume its business once the process is complete. Paragraph 3(1)(b) is somewhat ambivalent: at first blush it appears to contemplate anoutcome other than rescue33 but, as will be seen,34 pursuit of this objectivemay result in the survival of the company’s business, if not of the companyitself. Moreover, to the extent that para 3 fixes a hierarchy of objectives, itappears that the rescue objective in para 3(1)(a) is not at the apex, as para 3(3)contemplates that the administrator should pursue some other objective if hethinks that rescue is not reasonably practicable or that the company’s creditorsas a whole would be better served by the pursuit of some other strategy.35

Indeed, empirical research bears out the proposition that ideology and leg-islative ambition must perforce yield to commercial reality and the pragma-tism (and, arguably, the ingenuity) of insolvency practitioners. The author’ssurvey of administrations recorded that 56% of post-Enterprise Act yearadministrations in the sample36 resulted in a break-up sale of corporateassets,37 most often because the company in question had travelled so fardown the route of decline that there was no possibility of mounting arescue attempt. This is interesting because, as will be seen below,38 successfulrescue initiatives cannot rely on legislative coercion of insolvency stake-holders: such stakeholders must be persuaded to co-operate, not least byrefraining from attempting to exercise pre-insolvency rights. As far as theCVA is concerned, the same point can be made. Although outwardly

33It is offered as an alternative to the rescue directed para 3(a).34At p 14 below.35See Frisby, ‘In Pursuit of a Rescue Regime’ [2004] MLR 247, 262–263: Frisby, ‘Insolvency Law and Insol-vency Practice: Principles and Pragmatism Diverge?’ (2011) 64 Current Legal Problems 349, 361-362;Lightman and Moss, The Law of Receivers and Administrators of Companies (6th edn, Sweet &Maxwell 2017).

36Comprising 710 companies. See Frisby, ‘Report to the Insolvency Service on Insolvency Outcomes’ (2006)<https://webarchive.nationalarchives.gov.uk/20100516004930/http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/research/corpdocs/InsolvencyOutcomes.pdf> accessed 25 November 2018.

37A number of insolvency practitioners at the time observed that the term ‘liquistration’ had entered intoeveryday parlance.

38At pp 28–29.

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rescue-orientated, the procedure may be used to effect a more orderly (andvalue-maximising) wind down of its corporate subject.39 Thus any taxonomyof insolvency procedures based on ostensible purpose should be treated withcaution.

It is also worth noting that, although not a formal insolvency procedure, thepart 26 scheme of arrangement40 has been employed as a rescue tool. It is notproposed to discuss this procedure in detail,41 but a few observations pertinentto the theme of this article may be made. Firstly, the proposed ‘flexible restruc-turing plan’ as described in the Government Response42 appears to be some-thing of an amalgam of the part 26 scheme of arrangement and chapter 11of the US Bankruptcy Code, and it also appears to comprise many of the fea-tures of the European Union’s ‘Restructuring Plan’, an element of its Preventa-tive Restructuring Framework.43 Secondly, the scheme of arrangement is theonly procedure which requires the involvement of the court:44 this may be sig-nificant in terms of stakeholder perceptions of fairness, democracy and collec-tivity. Thirdly, there has been a notable incidence of ‘COMI shifting’45 in recentyears, the impetus for which has been the availability under UK law of thescheme of arrangement.46 However one views this tendency towards forumshopping,47 it demonstrates the willingness of corporations to engage in migra-tionary tactics where their interests may be best served and, perhaps, the easewith which such tactics may be deployed.48 This, in turn, may be of at least per-ipheral relevance to the aspirations driving the reform agenda.

39See Walters and Frisby, ‘Preliminary Report to the Insolvency Service on Company Voluntary Arrange-ments’ (2006) 41-45 <www.researchgate.net/publication/228177942_Preliminary_Report_to_the_UK_Insolvency_Service_into_Outcomes_in_Company_Voluntary_Arrangements> accessed 15 November2018; Walton, Umfreville and Jacobs, ‘Company Voluntary Arrangements: Evaluating Success andFailure’ (2018) 12, 56–57 <www.icaew.com/-/media/corporate/files/technical/insolvency/publications/cvas-evaluating-success-and-failure.ashx> accessed 15 November 2018.

40Companies Act 2006, pt 26.41For a comprehensive account see Pilkington, Schemes of Arrangement in Corporate Restructuring (2ndedn, Sweet and Maxwell 2017). See also Payne, ‘The Role of the Court in Debt Restructuring’ (2018)77 CLJ 124.

42See Government Response (n 8) para 5.114. The restructuring plan is discussed further below, at p 24onwards.

43See Directive 2012/30/EU (2016/0359).44See Companies Act 2006, ss 896, 899, 900.45Whereby a company incorporated in one State (re)arranges its affairs so as to establish a connection withanother State sufficient to persuade the courts of that state of their jurisdiction over the matter in ques-tion. The term ‘COMI shifting’ is used in a very general sense here.

46See, for example, La Seda de Barcelona SA [2010] EWHC 1364 (Ch); Re Rodenstock GmbH [2011] EWHC1104; Primacom Holdings GmbH v Credit Agricole [2011] EWHC 3746 (Ch); Re Magyar Telecom BV [2013]EWHC 3800 (Ch); Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch); Re Noble Group Ltd [2018]EWHC 2911 (Ch), [2018] EWHC 3092 (Ch). See also Re Stripes US Holdings Inc [2018] EWHC 2018, althoughnote that the use of the scheme here was part of a broader restructuring effort under ch 11 in the US.

47For an interesting discussion see McCormack, ‘Bankruptcy Forum Shopping: The UK and the US asVenues of Choice for Foreign Companies’ (2014) 63 ICLQ 815.

48Migration has also been used in order to execute a pre-packaged administration in the case of theDamovo (a company incorporated in Luxembourg) and, controversially, in the Wind Hellas case: seeRe Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch).

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Players

The insolvency of a company affects a wide range of parties. Those owedmoney by the company (its creditors) face the prospect of partial or totalnon-payment, the company’s employees face the prospect of unemployment,its trading partners face the loss of a supplier or consumer of goods or ser-vices, and the community in which the company operates may face allmanner of disadvantageous aftershocks. In extreme cases, national econom-ies may face short-term or long-term impairment.49 And, of course, the share-holders of an insolvent corporation will usually see their investment50 wipedout. As Finch and Milman put it:

… parties with formal legal rights never bear the complete costs of a businessfailure.51

One could devise various taxonomies in relation to these players,52 butthis article is principally concerned with the effects of formal insolvency53

on those players who do possess formal legal rights. For the most part,such players will comprise corporate creditors, and it is worth notingthat the category of ‘creditors’ is hardly ever homogenous. Whilst allcreditors have a legal right to the discharge of their debt, pre-insolvencyjockeying for priority will see some in a better position than others inthis respect.

Priority is achieved through the use of contract and property law. Verybriefly, lenders to a company may bargain for a security interest over corpor-ate assets as a condition of the loan54 which, in the event of the company’sinsolvency, affords the lender a priority claim over any assets comprised inthe security. Retention of title of title clauses, whilst not strictly speaking secur-ity interests,55 afford priority over those assets to which they pertain becausethe supplier/seller of the assets continues to own them.56 Moreover, contractsaffording a company possession (and use) of an asset belonging to a creditorare routinely encountered in the corporate world, in the form of, for example,hire-purchase agreements, chattel leases, sale and leaseback arrangements

49One need look no further than the collapse of Lehman Brothers and the subsequent global financialcrisis.

50Which, in the case of owner-managed companies, will be more than financial.51Finch and Milman (n 18) 32. See also Goode (n 17) para 2.14.52For example, ‘internal’ and ‘external’, financial and non-financial, directly affected and indirectly affected.53I.e. where an insolvency procedure is commenced in relation to the company.54Typically the security interest will take the form of a package of company charges, both fixed andfloating. There is a voluminous amount of literature on this subject, but for detailed and exceptionallyclear accounts see Calnan, Taking Security (4th edn, LexisNexis 2018); Beale and others, The Law of Secur-ity and Title Based Financing (3rd edn, Oxford University Press 2018).

55See Clough Mill v Martin [1985] 1 WLR 111. See also Goode, Goode on Proprietary Rights and Insolvency inSales Transactions (3rd edn, Sweet & Maxwell 2009) ch 5.

56Assuming the asset in question has not been substantially modified or sold by the buyer company: seeGoode (n 55).

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and conditional sale agreements. So too are receivables financing agree-ments, whereby companies assign their debts to a financier in return for anadvance of funds.57

The creditors described above may be more or less experienced in theuse of contractual drafting techniques that may afford priority in the firstplace and protect it in the second. This may prove important whengauging the potential of any attempt to rescue a company through themedium of an insolvency procedure, a point to be explored later.Further, in certain circumstances, bargaining for property rights confersan advantage additional to priority: it offers the creditor a degree ofcontrol over the company in both the pre- and post-insolvency period.This is clearest in the case of those institutional lenders who extractcompany charges; they are repeat players, they are almost invariably themore ‘powerful’ party in the relationship and they have the resourcesnecessary to devise and exercise de facto control rights through theirlending agreements.58 Floating chargeholders enjoy procedural control,the efficacy of which is facilitated by their de facto control. Such charge-holders, through their statutory power to appoint an administrator,59 arein a position to direct the fate of a borrower as far as entry into an insol-vency procedure is concerned. This power, when coupled with the charge-holder’s ability to monitor their borrowers’ financial position, placeschargeholders in a highly advantageous position and one which is also rel-evant to any desire to enhance rescue prospects.

Finally, one highly significant player in any formal insolvency is the presid-ing insolvency practitioner,60 whether he is acting in the capacity of liquidator,administrator or nominee or supervisor of a CVA. The precise nature of thepractitioner’s legal obligations will vary according to the capacity in whichhe or she acts, but any duty paradigm must, in this context, be projectedonto the intensely commercial backdrop underlying any corporate insolvency.Further, it is likely that, in many formal insolvencies, and certainly in the vastmajority of administrations and CVAs, an insolvency practitioner will havebeen involved in an assessment of the corporate casualty prior to the com-mencement of formal proceedings.61 In such circumstances, commercial

57Such agreements may take the form of invoice discounting or factoring, the main difference betweenthe two being that a factoring agreement provides for the financier to take control of collection of thedebts in question. This description is basic in the extreme: for a thorough treatment see Mills, Ruddy andDavidson, Salinger on Factoring (5th edn, Sweet & Maxwell 2016).

58See, for example, the use of debt covenants: Schmidt, ‘The Economics of Covenants as a Means ofEfficient Creditor Protection’ (2006) 7 EBOR 89.

59Insolvency Act 1986, sch B1, para 14.60At present, the UK does not offer a formal ‘debtor-in-possession’ regime so that the involvement of aqualified insolvency practitioner is required: see, on the qualification requirements, Insolvency Act1986, pt 13. On the proposed reforms, see below at pp 15, 25.

61In a process generally known as the Independent Business Review (IBR): see Armour and Frisby, ‘Rethink-ing Receivership’ (2001) 21 OJLS 73; Finch and Milman (n 18) 180–189, 253.

8 S. FRISBY

considerations are predominant and drive the practitioner’s recommen-dations62 as to what is possible within the legal framework. When it comesto any potential rescue initiative, this pre-insolvency period, and the prac-titioner’s assessment of what is possible, is likely to prove critical.

The insolvency landscape and the impetus for reform

Table 1 charts the number of insolvencies by procedure between 1987 and2018.63 Further commentary on these figures is available on the InsolvencyService website, some of which is particularly relevant here. Firstly, it wouldappear that the general trend for corporate insolvencies has, until veryrecently, been downward. The ostensibly sharp rise in the number ofCVLs in 2016 and 2017 is largely accounted for by ‘two “bulk insolvencyevents”’.64 Secondly, the most commonly occurring ‘types’ of insolvencyprocedure are liquidations. According to the Insolvency Service:

Nearly 3 out of every 4 enterprise insolvencies were through creditors’ voluntaryliquidations (CVLs), Administration were used by 1 in 11 enterprises enteringinsolvency while company voluntary arrangements (CVAs) accounted for onlyabout 1 in 50 of all enterprise insolvencies in 2017.65

This suggests that the level of ‘rescue’ attempted through the medium ofan insolvency procedure is relatively low, compounded by the fact thatnot all administrations or CVAs are directed at achieving a rescue, asnoted above. Thirdly, most insolvency procedures are commenced inrelation to small enterprises, although such enterprises, along with verylarge enterprises, are less likely to enter formal insolvency.66 This is attrib-uted to the fact that:

… larger enterprises could restructure outside of insolvency in the first instance,while smaller enterprises may have the flexibility to respond more quickly andavoid insolvency.67

For larger enterprises this is no doubt accurate, although there is no obviousmethod of estimating the level of ‘turnaround’ activity in the UK, not least

62Which will usually be made to the company’s management or one of its major creditors.63The figures are taken from the Insolvency Service Official Statistics. See <www.gov.uk/government/collections/insolvency-service-official-statistics> accessed 8 November 2018.

64I.e. ‘large numbers of connected companies entering insolvency following changes to claimable expenserules’: see Insolvency Service, ‘Insolvency Statistics October – December 2017’, <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/675931/Insolvency_Statistics_-_web.pdf> accessed 1 March 2019.

65The Insolvency Service, ‘Corporate Insolvencies by size, age and location, 2015–2017’ 5 <www.gov.uk/government/statistics/corporate-insolvencies-by-size-age-and-location-2015-to-2017> accessed 25November 2018. Note that the term ‘enterprise’ here is used to denote those entities that do not fallinto the category of bulk insolvencies.

66ibid 10: the criteria for ‘small’ includes the number of employees and turnover.67ibid.

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because there is an incentive to muffle publicity in specific cases in order toavoid a value-sapping loss of confidence.68 In terms of smaller enterprises afurther observation is that many such companies may be able to avoid insolvencysimply because they remain able, in an era of historically low interest rates, toservice the interest payable on their borrowings, although less able to repaythe capital. In other words, they are ‘zombies’, and their survival has nothing todo with quick responses. However, R369 has reported a decline in the estimatednumber of zombie businesses in the UK70 and an OECD Working Paper hasranked the UK’s insolvency and restructuring framework as the most effectiveat tackling the drawbacks associated with the zombie phenomenon.71

Whatever one makes of the trends, the numbers themselves do not seemto be driving the reform agenda. Rather, both the 2016 Consultation72 and the2018 Government Response73 were propelled with at least half an eye to risingin the World Bank Doing Business rankings,74 and this much is either explicit orthinly veiled in both. Sajid Javid, the then Secretary of State for the Depart-ment of Business, Innovation and Skills,75 noted in the Executive Summaryto the Consultation:

Table 1. Insolvency procedures 1987–2018.

68The subject of ‘turnaround’ is too broad to discuss here, but see generally Olivares-Caminal and others,Debt Restructuring (2nd edn, OUP 2016).

69The Association of Business Recovery Professionals.70‘UK ‘zombie business’ numbers drop to record low’ <www.r3.org.uk/media/documents/policy/research_reports/bus_distress_index/Wave_24_-_January_2018.pdf> accessed 5 November 2018.

71MA McGowan, D Andrews and V Millot, ‘Insolvency Regimes, Zombie Firms and Capital Reallocation’(2017) OECD Economics Department Working Papers No 1399 <https://doi.org/10.1787/5a16beda-en> accessed 15 November 2018

72Consultation (n 6).73Government Response (n 8).74See <http://www.doingbusiness.org/en/rankings> accessed 15 November 2018.75Now the Department for Business, Energy and Industrial Strategy.

10 S. FRISBY

Many of the basic insolvency procedures have remained largely unchangedsince 2004, since when there has been a global financial crisis, so this providesan opportunity to assess whether they are still fit for purpose. Additionally, in theConservative party 2015 election manifesto, this Government committed itselfto being in the top five in the world, and number one in Europe, in the WorldBank’s annual Doing Business Report.76

At present neither of these ambitions has been realised. The most recent rank-ings place the UK tenth in the league tables and third in Europe (behindDenmark and Norway, in fourth and eighth places respectively).77 The Govern-ment Response does not repeat the manifesto commitment but neverthelesssignals a mindfulness of the rankings in the language of the Foreword:

These reforms will contribute to a business environment in the UK that remainsopen, fair and attractive and ensure that the actions of a few do not underminethe reputation of the UK as the best place to do business and the place wherebusiness is done best.78

Now, no doubt an aspiration to enhance the business environment of theirstate is a given as far as governments are concerned, and for all sorts ofreasons. One might, however, suspect that, in the UK, a significant pressurein this regard is Brexit, although neither the Insolvency and Corporate Govern-ance document79nor the Government Response mention it. Given the mobilityof corporations and the incentives for them to migrate if a particular statedoes not offer a favourable environment, the likelihood that Brexit has notpermeated the consciousness of those behind the reform agenda is probablysmall. Certainly, there are already signs that (outward) migration is takingplace because of Brexit: in Re Euroclear plc80 the court sanctioned a schemeof arrangement under which all the shares in Euroclear plc, an unlistedEnglish company, were transferred to Euroclear Holdings SA, a Belgiancompany. The motivation was to offer a more stable operating environment,given the uncertainties associated with Brexit and the fact that the Belgiancompany would be in a better position to achieve the aim of harmonisationin European financial markets.

In terms of achieving government ambitions in the specific arena of cor-porate rescue, there is, to be fair, a sense that these are not entirely motiv-ated by chasing the World Bank Rankings. However, such markedly narrowan objective might in this regard prove to be a fool’s errand, in that legislat-ing to this end will not necessarily lead to upward travel in the rankings and,more importantly, may not necessarily prove conducive to the insolvency

76Consultation (n 6) para 2.4.77Above n 74.78Government Response (n 8) (emphasis added). Reference to the World Bank methodology is also made inpara 5.3 of the Government Response.

79Above n 7.80[2018] 11 WLUK 273.

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landscape as described above. Almost prophetically, Gerard McCormackoffered an insightful and lively critique of the manifesto commitmentshortly after it was made, and in the specific context of insolvency lawreform. In particular, he questioned the robustness of the methodologyunderpinning the rankings generally, that relating more specifically to thecriteria of ‘Resolving Insolvency’, and the failure to take a more nuanced,and perhaps less blunt-tool, approach to determining how each state’slaws actually operate and deliver in relation to that criteria. McCormack con-cludes that:

Boosting the relative position of the UK in the world appears to be a nobleaspiration. But a high position in the World Bank Doing Business project maynot be a true test of the global virility and strength of a particular economy.81

His account, and the criticisms therein, make compelling reading. In thecriteria of resolving insolvency the UK currently ranks fourteenth.82 Inter-rogating the validity of this assessment is beyond the scope of thisarticle, but it is worth noting that it is based on scores assigned acrossa series of indices, leading to an overall score (the ‘Strength of InsolvencyFramework Index’).83 One component of this index is the ReorganisationProceedings Index, of obvious relevance here, which examines threemain areas, all of them predicated upon the existence of a ‘reorganisationplan’. The first is who votes on the plan, with the highest score awarded toregimes where only creditors whose rights are affected are permitted tovote. The second is how classes are constructed under the plan,whether each class votes separately, and whether equal treatment isafforded to creditors within each class, the highest score being awardedwhere all three features are present. The third questions whether dissent-ing creditors receive as much under the reorganisation plan as they wouldreceive on a liquidation of the company, with the highest score awardedwhere the answer is ‘yes’.84

Trying to map these criteria onto the existing insolvency framework in theUK might appear straightforward if one takes the scheme of arrangement asthe relevant ‘reorganisation plan’.85 However, they do not project quite astidily onto the administration or CVA regimes. Equally, according to theWorld Bank methodology, there are three other indices which attract

81McCormack, ‘World Bank “Doing Business” Project: Should Insolvency Lawyers Take It Seriously?’ [2015]28 Insolv Int 119.

82Behind Japan (at the top of the ‘league table’), Finland, the United States, Germany, Norway, Denmark,the Netherlands, Belgium, Slovenia, Puerto Rica (US), the Republic of Korea, Iceland and Canada. Seeabove, n 74.

83See <http://www.doingbusiness.org/en/methodology/resolving-insolvency> accessed 15 November2018.

84ibid.85See above, at p 4.

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‘marks’, these relating to the commencement of proceedings, the manage-ment of the debtor’s assets and creditor participation.86 Therefore, takingan holistic view, the Resolving Insolvency criteria must be read alongsidethe potential to score highly in all other criteria, including, perhaps impor-tantly here, the Getting Credit criteria, which measures, inter alia, the strengthof legal rights, almost exclusively in the context of secured debt. Two pointscan be made here. Firstly, McCormack questions whether, in this context, asystem that does not incorporate some or other version of article 9 of theUS Commercial Code can ever score highly,87 and, of course, the UK doesnot.88 Secondly, the strength of legal rights index calls for secured creditorsto be paid first, and notably ahead of employees and taxation authorities.89

Thus, the announcement in the 2018 budget that the Crown’s preference ininsolvency is to be restored from April 2020 may come as something of adampener in this context.90

Whether or not the reform proposals will lead to the UK ascendant in theDoing Business rankings is impossible to predict, and, indeed, it is submittedthat this particular aspiration is not one that should be at the helm of the leg-islature’s philosophy when devising reforms. This is not to suggest that theproposed reforms are undesirable or unnecessary, but rather that theyshould be based on an assessment of the current insolvency landscape,whether more could be done to foster a thriving and economically justifiablerescue culture and, perhaps most tellingly, how the various insolvency playersare likely to respond to any reforms. It is to these matters that the discussionnow turns.

The reforms: some observations

The Government Response envisages three basic planks of reform in the ‘cor-porate rescue’ context. The first is the introduction of a moratorium, thesecond a prohibition on termination clauses in contracts for the supply ofgoods and services where termination is triggered by the insolvency of thecounterparty and the third the introduction of a ‘new restructuringvehicle’.91 Now, it may considered be premature to investigate these three

86See n 83 above. Note the apparent amendment to the methodology, which does not now appear toconsider the question of returns to creditors: see McCormack (n 81) 120.

87McCormack (n 81) 122.88Notwithstanding the exertions of the Secured Transactions Law Reform Project: see <https://securedtransactionslawreformproject.org/> accessed 15 November 2018.

89See <www.doingbusiness.org/en/methodology/getting-credit> accessed 15 November 2018.90See ‘Budget 2018: Protecting Your Taxes in Insolvency’ (HM Treasury) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752136/Insolvency_web.pdf>accessed 15 November 2018. The Crown will be a ‘secondary preferential creditor’: see Insolvency Act1986, s 175(1B). See also in this regard the proposed increase to the ceiling of the prescribed part to£800,000: Insolvency Act 1986, s 176A; Government Response (n 8) para 1.83.

91Government Response (n 8) 11.

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proposals as it will not be until draft legislation is available that their specificshape and content becomes clear; in other words, one might expect the devilto be in the detail, and there may be some particular detail that will proveworthy of further comment. However, with a promise that legislation willfollow as soon as parliamentary time permits,92 it seems that there is a clearcommitment to see this reform process through. There is therefore room tooffer an overview of the main features of the proposals and to exploresome of the questions raised by them.

A relevant preliminary point is that the Response does not spend much, ifany time in scrutinising the more intricate, but nevertheless fundamentalissue of what is actually meant by ‘rescue’, although the word is used through-out the response. Specifically, there are a number of references to ‘businessrescue’, but only one to ‘corporate rescue’.93 In legal (and practical) termsthere may be a significant distinction between the two. The natural connota-tion of ‘corporate’ rescue is that the subject corporate entity survives the inter-vention, which in turn has implications for that entity’s shareholders as theyretain their residual stake in it. Business rescue, on the other hand, maylead to a different outcome: all, or part of a company’s business94 may bethe subject of a rescue if it is transferred to a new legal entity or individual.This leaves the shareholders of the original company as residual claimantsto whatever remains (which would include the consideration for the business)which, in reality, is likely to amount to nothing.

This distinction is of considerable vintage.95 As noted in the Cork Report:

In the case of an insolvent company, society has no interest in the preservationor rehabilitation of the company as such, though it may have a legitimateconcern in the preservation of the commercial enterprise.96

However, in terms of outcome, it may be more imagined than real where thecorporate business is sold to an existing shareholder, a matter to be con-sidered later. For present purposes, it would appear that the three main pro-posals are directed at a ‘pure’ rescue outcome: i.e. one in which the originalcompany emerges intact from the procedure, albeit with a modified capitalstructure which may leave its original shareholders worse off to a greater orlesser extent.97

92Whenever that might be! See ibid para 5.4.93In the foreword to the response, ibid 3. There are, however, other references to the ‘rescue of thecompany’ so it may simply be that the terms are being used interchangeably.

94I.e. the commercial activity it undertakes.95For a useful discussion see Finch and Milman (n 18) 197–19896The Cork Report (n 3) para 193.97This may be the case where the restructuring plan encompasses a debt for equity swap, so diluting thevalue of the original equity.

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A further observation is that the Response, in relation to all three proposals,is alive to the necessity of balancing the impetus for rescue against the rightsof creditors. In relation to the moratorium, it is noted that:

… the proposal strikes the right balance between providing the best opportu-nity to rescue a financially distressed but viable company while also safeguard-ing creditors’ interests during that process.98

The precise nature of the balancing mechanisms in each case will be con-sidered below, along with the question of their ‘novelty’: as will be contended,creditors in particular may be more receptive to ‘new’ (albeit only temporary)incursions on their rights if any accompanying balances have a familiar ring tothem.

The moratorium

The introduction of a moratorium with a clearly defined and streamlined entryprocess should reduce the cost of restructuring and will be accessible to compa-nies of any size. This will aid company rescue by giving companies time andspace to consider available options when it is most needed.99

This moratorium is not an unadulterated debtor-in-possession initiative asthere will be a requirement for supervision in the form of a monitor.100 TheResponse determines, in a clear concession to creditor factions amongstrespondents to the 2016 Consultation, that, initially at least, only qualifiedinsolvency practitioners will be able to act as monitor.101 The monitor’smain tasks will be: to assess whether a company is eligible for entry into amoratorium; to assess whether qualifying conditions are and continue to besatisfied at the commencement of and during the moratorium; to terminatethe moratorium if qualifying conditions are no longer met; and to sanctionasset disposals outside the ordinary course of business and any grants ofnew security over corporate assets during the moratorium.102

Entry into the moratorium will be initiated by the filing of papers with thecourt, and in this respect the role of the monitor is significant in that there area number of eligibility criteria and qualifying conditions. The former deter-mines whether a company can enter a moratorium and the latter applyboth at the commencement of and during the moratorium. The monitormust confirm that these are met when filing his or her consent to act.Perhaps the most controversial of these criteria is the eligibility ‘test’ that

98Government Response (n 8) para 5.15.99ibid para 5.13. It is proposed that the sch A1 Moratorium will be abolished – para 5.14.100ibid 5.25. The term monitor is preferred so as to avoid any confusion with the supervisor of a CVA,

although in relation to entry into the moratorium reference is perhaps rather ambiguously made tothe ‘supervisor’ (see para 5.19).

101ibid para 5.63, although qualification requirements are to be prescribed by regulations and so, if appro-priate, can be more easily amended to allow for a broader range of candidates.

102ibid para 5.65.

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the company must not be insolvent.103 There are two rationales behind thisexclusion. The first is to guard against abuse of the moratorium by corporatedirectors seeking to delay the commencement of an insolvency procedure(although, as the initial duration of the moratorium is set at 28 days, subject toextension,104 buying so little time might seem barely worth the trouble). Thesecond is to encourage directors to take remedial action in a timely fashion.This latter is perhaps more persuasive, although it is arguable that the proposedeligibility marker, that the company will become insolvent if action is nottaken,105 may be somewhat difficult to apply in practice. Directors will have tofile at the point at which insolvency is inevitable, but before it has occurred,and this is a challenging call: however, to the extent that itwill persuadedirectorsto seek advice at anearly stage it is demonstrably justified,unless the costs of pro-curing such advice are excessive. The obvious source of advice would be a pro-spective monitor, and in this respect the pre-commencement involvement ofinsolvency practitioners noted above106 is likely to apply asmuch to themorator-ium procedure as to existing insolvency procedures.

One crucial question, not addressed in the Government Response, is what isactually meant by ‘insolvent’ in this context. Obviously it cannot mean that thecompany is the subject of an insolvency procedure, but equally it does notappear that the test will be whether the company is unable to pay itsdebts,107 or is likely to become unable to pay its debts.108 There will haveto be some clarification on this issue if the moratorium is to be a viableoption, and herein lies something of a dilemma. Any statutory definition of‘insolvent’, unless it is one that radically departs from the orthodox under-standing of the term, will almost inevitably operate to exclude a significantproportion of financially troubled companies, many of which might benefitfrom a moratorium without their being any real prospect of abuse.109

However, where a company has previously been in administration or a CVAin the preceding 12 months it will be ineligible for a moratorium, althoughwhere it is, or has been, the subject of a winding-up petition the moratoriumwill still be available, although in these circumstances permission must besought from the court.110 Quite how these two criteria will interact is an

103ibid para 5.28.104ibid para 5.49: the moratorium may be extended by a further 28 days if the monitor confirms that the

qualifying conditions are met. Further extension will require the consent of more than 50% by value ofsecured creditors and more than 50% by value of unsecured creditors; court approval may be soughtwhere seeking consent is impracticable: para 5.55.

105ibid para 5.29.106At p 8.107See Insolvency Act 1986, ss 122(1)(f), 123.108Insolvency Act 1986, sch B1, para 11. See also Government Response (n 8) para 5.26.109If the (in)ability to pay debts is to be of any relevance, the very broad definition of the term ‘debt’ in r

14.1 of the Insolvency Rules 2016 compounds this conclusion.110Government Response (n 8) paras 5.22, 5.23. A company will, however, be ineligible if the winding-up

petition is sought on the grounds of public interest.

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interesting question, as a previous or contemporaneous winding-up petitionmay be a clear signal of ‘factual’ (and possibly ‘legal’) insolvency.

The first qualifying condition is that, on the balance of probabilities, arescue of the company is more likely than not.111 Again, it is suggestedthat there will need to be some refinement of this criteria if it is to proveworkable in terms of achieving the Government’s objective. As notedabove, the term ‘rescue’ has different meanings across a spectrum, butthere are reasonably clear signals in both the 2016 Consultation and the Gov-ernment Response that what is contemplated is a rescue of the corporateentity itself. The Consultation suggested that the purpose of imposing qua-lifying conditions:

… is to ensure that a company applying for a moratorium has the prospect ofexiting the moratorium or other insolvency procedure as a going concern, andcreditors are prepared to support the restructuring of the company’s debts.112

Given that the monitor has to confirm that the qualifying conditions are met,there should be absolute clarity as to what they actually require, both as amatter law and of commercial reality, if the integrity of the moratorium isto be sustained and the achievement of its objectives facilitated.

A further qualifying condition of entry into the moratorium, and one clearlydirected at creditor protection, is that the company must be able to meet itsexisting obligations as they fall due, along with any new obligations incurredduring the course of the moratorium, and the monitor is to determinewhether this condition is satisfied.113 Moreover, directors of the companywill remain potentially liable for wrongful trading during the course of themoratorium if the company subsequently enters liquidation.114 These ‘safe-guards’ are important, particularly for those parties who are not creditors atthe time the moratorium commences but advance credit to the companyduring it. The monitor must give notice of the moratorium to all known credi-tors and register the company’s entry into it at Companies House,115 but thereis no suggestion that the registrar will be under an obligation to arrangeofficial notification of this document.116 Therefore it is possible that newtrading partners will enter into contracts with a company without actually

111ibid para 5.32.112Consultation (n 6) para 7.21. The relevant qualifying condition in the consultation was framed as a

‘reasonable prospect that a compromise or arrangement can be agreed with [the company’s] creditors’:ibid para 7.23. However, the Government Response acknowledges that a rescue outcome may notalways be possible: (n 8) para 5.50.

113Government Response (n 8) paras 5.33, 5.34.114ibid para 5.43. For wrongful trading see Insolvency Act 1986, s 214.115ibid para 5.19.116Official notification requires that the issue or receipt of certain prescribed documents be publicised

through a notice in the relevant Gazette: see Companies Act 2006, s 1116. For documents subject tothe official notification requirement see ss 1064, 1077, 1078.

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knowing that it is the subject of a moratorium,117 and the requirement of ade-quate funding for the moratorium period is a necessary protection.118

Further comfort for those advancing credit during the moratorium lies inthe ‘super-priority’ status afforded to such debts: should the rescue attemptfail and the company slide into an insolvency procedure, liabilities incurredduring the moratorium will take priority not only over pre-moratoriumdebts, but also the expenses of the subsequent insolvency procedure.119

The priority position, as envisaged, is slightly complicated by the introductionof a hierarchy in relation to super-priority status itself, with liabilities to thosesupplying goods or services who have been prevented from relying on a ter-mination clause in the contract of supply120 at the top, followed by all othercosts except the monitor’s fee, which ranks at the bottom.121

However, this position may be viewed as something of a double-edgedsword, particularly by floating chargeholders. The Response suggests thatunpaid moratorium costs are likely to be ‘limited’ as a result of the monitor’sobligation to ensure that the qualifying condition of ability to pay debts asthey fall due is satisfied during the course of the moratorium.122 If this con-dition, or, indeed, any of the qualifying conditions, is not satisfied themonitor is obliged to immediately commence termination of the moratoriumand to notify the court, the creditors and the company.123 Whether the view ofthe Response is plausible is perhaps questionable. Obviously, much dependsupon how closely the monitor scrutinises the company’s financial positionduring the moratorium, but it might be unrealistic to expect him or her, atany given time, to be able to make a call that the company was unable tomeet its obligations, at least not without some investigation.124 Further, fora company of any size transactional volume and speed is likely to be signifi-cant, and a precise timeline, from the point that the monitor determines thatthe company cannot meet its obligations to the formal termination of themoratorium, is difficult to estimate. It is not, therefore, inconceivable that acompany, and especially a large company, might incur quite significant mor-atorium costs between these two points.

From the perspective of floating chargeholders this is not a palatable prop-osition. If the moratorium is terminated they may not benefit from the super-

117Whether there will be any requirement for directors to disclose the fact of the moratorium when incur-ring new credit remains to be seen: this would not appear to be a matter for the monitor.

118This matter is discussed further below at p 18.119Government Response (n 8) para 5.79120As to which see below at p 23.121Above n 119.122Government Response (n 8) para 5.81.123ibid para 5.67. The monitor will be able to require directors to furnish him or her with any information

he or she might reasonably require to assess whether the company continues to comply with the qua-lifying conditions: para 5.66.

124Which may prove a costly exercise: the monitor’s fees are a matter of contractual agreement betweenthe company and the monitor: ibid para 5.73.

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priority afforded to moratorium costs (as they may not have advancedadditional credit during the moratorium). On termination they, and all othercreditors, are free to enforce their debts125 but it is overwhelmingly likelythat the termination of a moratorium will be immediately succeeded by aformal insolvency procedure. At that point, a further moratorium com-mence126 and, if the procedure is administration, this second moratoriumwill bind the chargeholder.127 This leaves the floating chargeholder in apotentially precarious position as realisations from property subject to thecharge will be available first to meet the expenses of the moratorium,second to meet the expenses of the administration,128 third to discharge pre-ferential debts129 and fourth to furnish the prescribed part.130 This possibilitymay, it is submitted, render chargeholders somewhat wary of the moratorium.

The potential to challenge the moratorium is, however, available to allcreditors, again a clear indication that the Response recognises the necessityto balance its desire to facilitate rescue with adequate protections for credi-tors. There will be no time-limit for creditor challenges, so that a challengecan be mounted at any time during the moratorium, and the grounds for chal-lenge are ineligibility for a moratorium, a failure to comply with qualifyingconditions or unfair prejudice to creditors.131 This may appear reasonablystraightforward, and the Response envisages a legislative approach basedon the same principles as currently pertain to creditors’ applications to liftthe administration moratorium.132 There are, though, certain issues raisedby this contention.

Firstly, challenges on the basis of ineligibility or non-compliance with qua-lifying conditions are likely to be rare. As noted above, eligibility will depend inthe first instance on the solvency of the company, and few creditors will be ina position to produce evidence of insolvency (with the possible exception ofinstitutional lenders). The same can be said of the qualifying condition thatthe company is able to meet its obligations. A challenge to the conditionthat a rescue of the company is, on the balance of probabilities, more likelythan not, may be problematic as the monitor will already have confirmedthat this is the case. More tantalising is the prospect of challenges on thebasis of unfair prejudice, and here there may be room to question the assump-tion that the judicial approach taken to applications to lift the administration

125ibid para 5.68.126The initial maximum length of which will not be affected by the preceding moratorium: ibid paras 5.57,

5.58.127Insolvency Act 1986, sch B1, para 43(2).128ibid s 175(1); Insolvency Rules 2016, r 3.51.129ibid, and see the restoration of the Crown’s preferential status, above at p 13.130ibid s 176A, and note the higher ceiling for the prescribed part referred to above at n 90.131Government Response (n 8) para 5.39.132ibid para 5.40. See also Insolvency Act 1986, sch B1, para 43.

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moratorium will project neatly onto a framework for challenges to thismoratorium.

The broad approach to such applications is one of balancing the interestsof the applicant with those of other stakeholders in the administration, to beassessed against the backdrop of the purpose of the administration. In ReAtlantic Computer Systems plc Nicholls LJ observed:

The metaphor employed here, for want of a better, is that of scales and weights… It must be kept in mind that the exercise under s. 11 is not a mechanical one;each case calls for an exercise in judicial judgment, in which the court seeks togive effect to the purpose of the statutory provisions, having regard to theparties’ interests and all the circumstances of the case. As already noted, thepurpose of the prohibition is to enable or assist the company to achieve theobject for which the administration order was made. The purpose of thepower to give leave is to enable the court to relax the prohibition where itwould be inequitable for the prohibition to apply.133

Presumably, challenges to the new moratorium are to proceed along thesame lines: the applicant will be seeking to enforce security, repossess prop-erty in the company’s possession, exercise forfeiture rights by way of peace-able re-entry, institute some legal process or, indeed, commence aninsolvency procedure.134 So far so good. However, the duration of the newmoratorium is, initially at least, very short.135 In such circumstances, it is diffi-cult to see why it would be ‘inequitable for the prohibition to apply’.136 Anyextension beyond 56 days will require the consent of a bare majority ofboth secured and unsecured creditors by value, which, if achieved, may tiltthe balance in favour of dismissing a challenge. Whilst, as noted in AtlanticComputers, great weight would normally be given to holders of proprietaryrights,137 if a majority of the holders of those rights have consented to anextension a dissenting secured creditor may face an uphill battle to persuadea court that the moratorium should be lifted in his or her favour.

Further, the language of ‘unfair prejudice’ in the Response may prove animperfect fit in the context of a challenge to the moratorium. It has neverbeen explicitly employed in the context of challenges to the administrationmoratorium: its nearest counterpart in administration is the notion of ‘unfairharm’ in para 74 of schedule B1 of the Insolvency Act 1984 and relates to chal-lenges to the conduct of the administrator. However, it is clear that ‘unfairprejudice’, the term used in s 27 of the Insolvency Act 1986, the predecessorto para 74, and ‘unfair harm’ are substantively distinct.138 The meaning of

133[1990] BCC 859, 880. The case remains the leading authority on the administration moratorium.134See Insolvency Act 1986, sch B1, para 43.135See above n 104.136It is tempting to ask for answers on a postcard.137Above, n 133.138Re Lehman Brothers International (Europe) [2008] EWHC 2869.

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‘unfair prejudice’ has been most extensively litigated under s 994 of the Com-panies Act 2006 (and its predecessor s 459 of the Companies Act 1985) andrelies heavily on a close interrogation of the facts of each case. Whilst thisaccords to some extent with the fact-sensitive approach advocated in AtlanticComputers, it arguably fails to capture the idea of ‘balance’ inherent in thatapproach. This matter should, perhaps, be revisited with a view to explainingmore precisely the grounds for a challenge to the new moratorium.

The prohibition on termination rights

When a business enters an insolvency procedure, it can trigger the use of a ter-mination clause by a supplier, even if their invoices are being paid on time and infull. This can severely impede any chance of business rescue.139

The 2016 Consultation drew on research commissioned by R3 to bolster theargument that the ability to terminate executory contracts on the insolvencyof the counterparty can scupper a rescue and, further, offer the party with ter-mination rights an unfair advantage through the concomitant opportunity todemand ransom payments.140 This problem is not new and, indeed, wasaddressed, in a slightly different context, by the Cork Committee with its rec-ommendation regarding supplies of ‘public utilities’.141 The recommendationthat supplies of utilities should be continued during an insolvency procedureat the request of the presiding office-holder was enacted in s 233 of the Insol-vency Act 1986. The supplier is entitled to stipulate that the office-holder, as acondition of making post-commencement supplies, personally guaranteespayment for those supplies, but may not make the continuation of suppliescontingent upon payment of pre-commencement debts. The section wasextended to encompass supplies relating to communications and informationtechnology.142

The Consultation considered that the current law did not go far enough andproposed that a company in insolvency (or its office-holder) should be ableto designate further examples of ‘essential supplies’, and should be able torequire the continuation of such supplies through an application tocourt.143 Responses to the consultation were largely in consensus over theproblems that might arise in relation to the question of which, how andwhy supplies were to be designated ‘essential’. The Government Responsesolves this problem by the simple expedient of prohibiting the enforcement

139Consultation (n 6) para 8.1.140See R3, ‘Members Survey: Termination Clauses’ (2013) <https://www.r3.org.uk/media/documents/

policy/research_reports/R3_Membership_Survey_Termination_Clauses_09_August_2013.pdf>accessed 5 November 2018.

141See The Cork Report (n 3) ch 33.142See the Insolvency (Protection of Essential Supplies) Order 2015, inserting s 233A into the 1986 Act.143Consultation (n 6) paras 8.11–8.16.

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of insolvency-triggered termination clauses altogether where the companyhas entered a formal insolvency procedure, the new moratorium or the pro-posed restructuring plan. The outcome is that:

Suppliers will have to continue to fulfil their commitments under their contractwith the debtor company. This will help businesses trade through the rescue andrestructuring process, permitting a degree of stability in their operations so thatrescue will be more likely.144

Of the three main reform proposals, this is arguably the most significant interms of incursions into rights. It strikes at the principle party autonomy, aprinciple endorsed by the Supreme Court in a slightly different, but notentirely dissimilar context:

… party autonomy is at the heart of English commercial law. Plainly there arelimits to party autonomy in the field with which this appeal is concerned, notleast because the interests of third party creditors will be involved. But, asLord Neuberger stressed [in the Court of Appeal] it is desirable that, so far aspossible, the courts give effect to contractual terms which parties haveagreed.145

Of course, Lord Collins prefaced this observation by noting that statute hasmade inroads into this fundamental principle, and this is precisely what theGovernment Response is proposing, so the proposal is worthy of furtherconsideration.

Firstly, whilst the Response makes frequent reference to ‘ipso factoclauses’, it is clear that only those clauses which allow one party to termi-nate an executory contract on the insolvency of the counterparty are inissue.146 Secondly, it is only where termination is predicated upon entryinto a formal insolvency procedure, the new moratorium or the restructur-ing plan that the clause will be unenforceable. Termination will still be per-mitted on other grounds, including a default in payment during theprocedure, moratorium or restructuring plan, the expiration of a fixedterm, or the giving of notice as provided for in the terms of the contract.147

Thirdly, certain as yet unspecified exemptions are contemplated, largely inthe area of financial products and services.148 Fourthly, the prohibition willapply to licences, although not to licences issued by public authorities (onthe basis that there may be considerations of public policy requiring therevocation of such licences).149

144Government Response (n 8) para 5.98.145Belmont Park Investment Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38 [103] (Lord Collins).146So this proposal is more the functional equivalent of §365e of the US Bankruptcy Code. It does not go as

far as §561c.147See Government Response (n 8) paras 5.99, 5.100. The opportunity to draft around the prohibition is

therefore present.148ibid para 5.102.149ibid para 5.104.

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The Response notes that the potential for significant prejudice to suppliersfrom this proposal is likely to be very small. In particular, supplies made duringan insolvency procedure, a moratorium or within a restructuring plan willenjoy priority status as far as payment is concerned.150 The issue here iswhether such suppliers will have the same degree of confidence that therewill be sufficient free assets to meet their post-commencement claims: thecontinued expansion of the types of claim that constitute expenses of the pro-cedure may yet bring some unpleasant surprises, as illustrated by Goldacre(Offices) Ltd v Nortel Networks UK Ltd (in administration) and Bloom v PensionsRegulator.151 An even starker example can be found in Re Doonin Plant Ltd,152

where two remediation notices in respect of unlawfully deposited waste wereissued under the Environmental Protection Act 1990. One notice was issuedprior to the commencement of liquidation, the other after it. It was heldthat the clean-up costs, anticipated to fall between £2.3 and £3.7 m, wereexpenses of the procedure. Realisations from the company’s assets amountedto £635,000, leaving a significant shortfall even in relation to those creditorsenjoying priority status.

A safety net for the company’s contracting partners is found in a right to chal-lenge the prohibition on the basis of ‘undue financial hardship’.153 The substanceof this ground is somewhat opaque. The Response notes that the threshold forcourt exemption of the prohibition is set ‘purposefully high’,154 and that:

The court, in considering any such application, will consider whether or not inbeing compelled to continue supply, that supplier would be more likely thannot to enter an insolvency procedure as a consequence. In addition, the courtwill also have to consider if exempting the supplier from the obligation tosupply is reasonable in the circumstances, having regard to the effect of non-supply on the debtor company and its prospects of rescue.155

If ‘undue financial hardship’ equates to the imminence of formal insolvencytriggered by the requirement to continue supply, then it is submitted thatthe threshold is almost insurmountable. As payment for any post-commence-ment supplies will attract super-priority status, it will be extraordinarily diffi-cult for a supplier to demonstrate the causative link between its precarioussolvency and the inability to exercise termination rights. In terms of thesecond limb for consideration, there is some resemblance to the approachused by the courts in determining whether or not to lift the administration

150ibid para 5.106.151[2009] EWHC 3389 (Ch) (business rates); [2011] EWCA Civ 1124 (contributions under a Financial Support

Directive). Note, however, that the decision of the Court of Appeal was overturned by the SupremeCourt (Bloom v Pensions Regulator [2013] UKSC 52) on the basis that the contributions were provabledebts.

152[2018] CSOH 89.153Government Response (n 8) para 5.107.154ibid para 5.109.155ibid para 5.108.

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moratorium,156 so that a court would be required to balance the interests of thesupplier against the prospects of rescue if the supplywere notmade. It appears,however, that these two limbs are cumulative, which leads to the disconcertingconclusion that, even where a supplier could demonstrate imminent insol-vency as a result of the compulsion to continue supplies, a court might never-theless be asked to prioritise the rescue prospects of the debtor company.

Such an approach may lead the courts into some muddy legal waters. Thetest of balance employed in the context of lifting the moratorium has causedfew difficulties, generated little controversy and has led to demonstrably fairoutcomes.157 Where, however, a court is called upon to assess whether onecompany should be driven towards insolvency in order that another’s pro-spects of revitalisation be enhanced, new territory beckons. Of course, andas noted above,158 the precise parameters of this proposal will not becomeclear until draft legislation becomes available. For present purposes159 it issuggested that a little more thought needs to be devoted to the issue of ter-mination clauses, not least when the proposed prohibition is so broad.

The flexible restructuring plan

This proposal will be considered in outline only, with attention paid to its morenovel aspects. The restructuring plan is modelled on the existing scheme ofarrangement160 and will be available to companies of all sizes, but with thesame exclusions as those that currently operate in relation to the CVA smallcompany moratorium.161 Companies that are already subject to an insolvencyprocedure will be able to use the restructuring plan and there will be nofinancial entry criteria.162 In line with the scheme of arrangement, there willbe a two stage process, the first being the presentation of the restructuringplan to corporate creditors, shareholders and the court, that plan specifyingthe division into classes of creditors and shareholders. The first courthearing will examine this division, and any challenges to it, before confirmingthat a vote on the proposal may proceed.163 A 75%majority (by value) of eachclass will be required.164

156See above, p 20. Presumably an action of this nature would not of itself fall under the various moratoriain insolvency procedures, but it might be thought prudent to make specific provision in this regard.

157See, for example, Innovate Logistics Ltd v Sunberry Properties Ltd [2008] EWCA Civ 1261; Re SSRL Realis-ations Ltd (in administration) [2015] EWHC 2590; BAE Systems Pensions Fund Trustees Ltd v Bowmer andKirkland Ltd [2017] EWHC 1200 (TCC).

158See pp 13–14.159See the further discussion below, at p 32.160See above, pp 6–7.161Government Response (n 8) para 5.129. See Insolvency Act 1986, sch A1 for the exclusions.162Government Response (n 8) para 5.132.163ibid para 5.135. It is noted that the courts have developed significant experience of examining the div-

ision of parties into classes through the scheme of arrangement procedure: para 5.151.164ibid para 5.153.

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A second hearing will take place once the requisite voting thresholdshave been met, and, if relevant, there has been compliance with the rulesrelating to a cross-crass cram down,165 and the court will there determinewhether or not to confirm the plan.166 There will be no formal supervisionof the implementation of the restructuring plan: a full-blown debtor-in-posses-sion regime is contemplated, although the option to appoint an individual (orindividuals) with the specific role of overseeing implementation will be avail-able.167 Once a plan is confirmed, all pre-existing rights against the companyare extinguished and replaced with those rights conferred by the plan. Pre-existing rights will not be resurrected should the plan fail and the companysubsequently enter an insolvency procedure.168 Whether it might be possibleto avoid this result by virtue of a term in the plan itself is an interesting ques-tion, as this tactic was upheld in the context of a CVA in Re SHB RealisationsLtd.169

The most eye-catching feature of the restructuring plan is the cross-classcram down. There have been numerous debates, discussions and delibera-tions on the question of whether the UK should align its insolvency lawsmore closely with chapter 11 of the Bankruptcy Code.170 Whilst the prohibi-tion on termination clauses is a move in that direction, the adoption of across-class cram down is a weightier step. Support for the introduction ofcross-class cram down was sought in the 2016 Consultation171 and dulyfollowed:

The Government agrees with the majority of respondents that a procedure thatallows for the cross-class cram down of dissenting classes of creditors, subject tosafeguards, would be a useful addition to the UK’s business rescue tools. Theintroduction of such provisions will help the UK maintain its position as aleading global restructuring hub.

The utility of a cross-class cram down has become apparent over time, as theprovision of debt finance, particularly at the institutional level, has becomemore and more fragmented. The mechanism solves the kind of hold-out pro-blems that may decelerate, or altogether thwart, negotiations aimed at restruc-turing or refinancing, and the simple fact of its availability may be enough to

165See below.166Government Response (n 8) para 5.138. There is no prescription as regards the content of the plan, so

that the company may propose whatever terms it thinks fit: para 5.140. Nor are there limits on the dur-ation of the plan: para 5.142.

167ibid para 5.139. This may prove useful, particularly as a method of reassuring creditors.168ibid para 5.143.169[2018] EWHC 402 (Ch).170Note that Singapore has beaten the UK to the punch in this respect: for an excellent account of the

issues when ‘borrowing’ from the laws of other jurisdictions see McCormack and Wan, ‘TransplantingChapter 11 of the US Bankruptcy Code into Singapore’s restructuring and Insolvency Laws: Opportu-nities and Challenges’ (2018) JCLS <www.tandfonline.com/doi/full/10.1080/14735970.2018.1491680>accessed 15 November 2018.

171Above n 6.

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smooth and facilitate such negotiations.172 It allows the court to confirm arestructuring plan against the wishes of a particular class, so bindingmembers of that class. There are, however, safeguards: in the US version ofthe cross-class cram down the absolute priority rule applies,173 so that theclaims of any given class must be satisfied in full before the claims of a juniorclass may be satisfied. In other words, the rule prevents queue-jumpingthrough the medium of a restructuring plan and a cross-class cram down.

The Government Response, whilst paying lip service to the absolute priorityrule, notes its drawbacks174 and proposes an exception to its application inthe form of a two stage test which allows the court to confirm a non-compli-ant plan where it is (a) necessary to achieve the aims of the restructuring and(b) just and equitable in the circumstances.175 However, at least one class ofimpaired creditors176 must vote in favour of the plan before the court canconfirm a cross-class cram down.177 These provisions are aimed at injectingflexibility into the restructuring plan whilst at the same time offering adequatesafeguards to all creditors. The question of valuation of the assets of acompany proposing a restructuring plan is a critical element in determiningthe legitimacy of the plan itself, as it will, in the first instance, identify thoseclasses of creditors who are impaired and, in the second, be central to the fair-ness of the cross-class cram down.

The issue here the basis of a valuation, a complex point. Briefly, taking theentirety of the corporate estate as a starting point, its value may vary accord-ing to a variety of factors. In this context, it is likely that, were the company tofind itself in liquidation, its estate would be valued at a lower figure than if itwere in administration, and it is with this question that the GovernmentResponse pluckily battles.178 The outcome179 is a ‘next best alternative’ test.In essence, there will have to be a determination of the company’s likely des-tination if a restructuring plan cannot be agreed which, in most cases, wouldbe administration but, in a minority, might be liquidation. Valuation will thenbe carried out on the basis of whichever of the two procedures is the morelikely. Again, flexibility and balance are the benchmarks:

The Government’s chosen approach is intended to achieve the best possiblebalance between protecting creditors’ interests and avoiding disputes. In prac-tice the Government believes that in many cases the process of dialogue and

172There is a massive amount of commentary on this matter, too voluminous to catalogue here. A usefulstarting point is Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements and the Creditors’ Bargain’ (1982)92 Yale Law Journal 857.

173§ 1129(b)(2), Bankruptcy Code.174Government Response (n 8) para 5.160, citing the UNCITRAL Legislative Guide, the European Law Insti-

tute and the American Bankruptcy Institute in support.175ibid para 5.164176I.e. those who will not receive full payment under the plan.177Government Response (n 8) para 5.167.178ibid paras 5.169–5.176.179Which may prove an equally strenuous battle for the Parliamentary draftsmen and draftswomen.

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negotiation between the company and its creditors will serve to narrow differ-ences on the perceived value of the company to the point where such chal-lenges can be avoided.180

Is this an overly optimistic assessment? On the one hand the adoption of a‘next best alternative’ test may, as the Response envisages, operate at thenegotiation stage to ease the hold-out problem noted above. On the other,it may represent an additional ground for disagreement over the questionof where the value breaks, albeit in the admittedly unusual circumstancesthat there is some debate over whether administration or liquidation wouldbe the outcome where a plan cannot unanimously be agreed. In the finalanalysis, this is probably an evidentiary issue and, should the stage of courtinvolvement be reached, not an altogether unfamiliar exercise.181

This whistle-stop survey of the three major proposals for reform raises afew questions, many that may be answered once draft legislation becomesavailable. It also serves to set the scene for a discussion of their potentialreception by a variety of stakeholders, but most especially those withformal legal rights, in relation to the financially troubled company. The nextsection proceeds along these lines.

The rescue quest and its impact

Examining rescue and its ideals

Companies fall into insolvency for all sorts of reasons. Poor management,deteriorating demand for products or services and failures to respondquickly to changing market conditions are reasons internal to the company.Sudden and unforeseeable economic shocks, such as the loss of a major cus-tomer, or indeed, the unforeseeable failure of a major customer,182 arereasons external to the company. Whether the causes of a failure are internal,external or a combination of both, the rescue ideology, especially as it hasdeveloped in the UK, has never espoused the philosophy of rescue forrescue’s sake, as echoed in the opening words of the 2016 Consultation:

An efficient and effective insolvency regime is central to the promotion of enter-prise and helps to create a business environment that supports growth andemployment by ensuring that distressed, yet viable, businesses can berescued quickly and efficiently. Where businesses cannot be rescued the insol-vency regime should provide procedures for liquidating businesses and return-ing funds to creditors.183

180Government Response (n 8) para 5.176181See Payne (n 41).182Carillion is a case in point, although whether its demise should have been anticipated is a debatable

point.183Consultation (n 6) 4.

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The key point here is the matter of viability. This may seem something of atruism, but the point is sometimes overlooked in determining whetherpursuit of rescue outcomes is always either necessary or desirable. Incertain circumstances intervention in pursuit of rescue has proved irresistible:an obvious example is the actions of the UK Government during the bankingcrisis to inject public money into a number of failing banks.184 This is,however, an extraordinarily unusual event, and the contention that anentity is ‘too big to fail’would probably find few advocates today. In determin-ing what is ‘viable’ in this context, the distinction between financial distressand economic distress is sometimes employed, and there is a vast catalogueof scholarship in this area.185

The question of viability is central to the issue of the appropriate responseto corporate failure but it is a difficult concept to pin down. Insolvencysystems tend to be reactive in nature, and are not generally equipped toundertake the mission of identifying which corporations are viable, and somight be suitable candidates for rescue: this assessment is usually left toone or more of the various insolvency stakeholders. The proposed restructur-ing plan, as outlined above, is a classic example of this paradigm: the decisionon whether or not a company can be restructured is left to those entitled tovote on the plan, albeit with the court acting as monitor of procedural andsubstantive fairness. As long as complete and accurate information is pro-vided, this is probably a sensible approach, as the voting parties may betrusted to act in what they perceive to be their own interests.

Whether or not the restructuring of a company will be in the interests of itscreditors is, therefore, left to the creditors. This will be determined by individ-ual creditors on the basis of what is offered under the plan, what concessionswill have to be made and, perhaps most importantly, an estimation of thevalue to each individual creditor of the continued existence of thecompany. This last may be the decisive factor, and a number of considerationswill drive the assessment, including whether or not the creditor can ‘replace’the company (as supplier, borrower, recipient of supplies, service provider,and so on) and, crucially, whether the company is expected to survive intothe medium- to long-term. The more experienced and sophisticated the credi-tor, the better placed it will be to make accurate forecasts, particularly on thequestion of the viability of the restructured company.

Leaving aside the effectiveness of restructuring activity outside of a formalprocedure,186 the process described above is probably as close a model to

184For a fascinating account of the process and its costs see Federico Mor, ‘Bank Rescues of 2007–2009:Outcomes and Costs’ (Briefing Paper No 5478, House of Commons Library, October 2018) <https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05748#fullreport> accessed 4 Novem-ber 2018.

185For a useful summary see Kahl, ‘Financial Distress, Economic Distress and Dynamic Bankruptcy’ (2002)57 Journal of Finance 135.

186Which is an unknown quantity, but likely to be substantial.

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rescue Utopia as it is possible to get, simply because it is, for the most part,consensual. Where rights are suspended or modified, it is because theholders of those rights have agreed to their suspension or modification.However, and as the restructuring plan proposal acknowledges, a perfect con-sensus may not be possible, and unanimity unachievable, as different credi-tors will be offered more or less value from a restructuring plan. Those whosee themselves as net losers from the plan may choose not to support itand in these circumstances the greater good requires that an element of com-pulsion be entrenched in the regime. In terms of the restructuring plan, thiselement is found in the voting thresholds in the first instance and in thecross-class cram down mechanism in the second.

This is justifiable in the abstract. Not only is it democratic, but decision-making power is allocated to those most directly affected and thereforewith incentives to make informed decisions. It is also important to note thatrestructuring will allow benefits to flow to constituents external to thedecision-making process itself, including the employees of the subjectcompany, its customers and perhaps beyond to the community or themarket in which it operates.187 Moreover, even those creditors compelledto submit to a restructuring plan may not necessarily be worse off as aresult. They will simply recover less than they might have hoped for by enga-ging in hold-out tactics, and as long as their recovery is higher than, or thesame as would have resulted from, the next-best alternative it is difficult toobject to this construct.

As a corollary, the more coercive a rescue regime becomes the less it canbe so readily supported, particularly by those subject to it, or who may findthemselves subject to it. Where rights are radically modified, or suspendedfor significant periods, one has to look more closely at the beneficiaries ofthese modifications or suspensions and the degree of prejudice to rightsholders. This is not only in pursuit of ‘fair’ outcomes, but also so as not toprejudice the very environment it is sought to promote. Repeat players whoperceive a potential disadvantage generated by a legal framework mayhave scope to adjust their behaviour so as to avoid the disadvantage. Andone player is likely to learn from another where avoidance tactics prove suc-cessful, leading to a ripple effect that may have adverse consequences. Thereshould, therefore, be appropriate safeguards built into more coercive regimesif those potentially subject to them are not tempted to seek routes aroundthem.

One further observation regarding rescue ideologies and rescue regimes isthis. To the extent that a rescue is attempted, and fails, this may be attributedto bad luck or an unfortunate turn of events, but also to the fact that therescue strategy was overly optimistic or even entirely unrealistic from the

187See above, p 7.

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outset. Where repeat players see rescue attempts in relation to different com-panies fail, a sense of disenchantment may develop. An even greater chal-lenge to the reputation of the rescue ideology are cases of ‘recidivism’: acompany undergoes a rescue procedure, emerges intact and, often onlyshortly thereafter, descends into insolvency once again. In other words, theintegrity of any reforms will ultimately depend on perceptions of theirsuccess and the extent to which those affected by them have been protectedagainst all but the absolutely necessary adversities. The question of balance isonce again the critical one.

The current state of affairs and what to take from it

Perhaps curiously, the Government Response does not make reference to thesuccess or otherwise of the existing (ostensibly) rescue-orientated proceduresin terms of actually delivering rescue outcomes. A few observations may bemade here, most notably that the level of corporate rescue achievedthrough administration is probably extremely low, although the level ofbusiness rescue is likely considerably higher.188 As far as CVAs are concerned,a recent empirical study of the entire population of CVAs commenced in 2013demonstrates a survival rate of 14.9% of the 552 companies in question.189

CVAs were, however, almost exclusively the territory of small companies inthe R3 study, although only 1.6% of companies eligible to use the moratoriumprocedure did so.190 The position may be different in more recent years, as theuse of CVAs has become more common in the retail sector.191

In relation to business rescue, the use of the pre-pack strategy continues todeliver rescue outcomes.192 This was acknowledged in the 2016 Consultation,193

but concerns over the recidivism rate, particularly amongst connected-partypre-packs, remain and may cast some doubts over the ability of the pre-packto deliver long-term rescue outcomes. The Graham Review into pre-pack admin-istration observes that one weakness of the pre-pack is that:

The insolvency practitioner has no legal requirement to look at the future viabi-lity of the new business emerging from a pre-pack sale. His/her only legal

188Contemporary empirical evidence on this matter is currently unavailable, but for historical findings seeFrisby (n 36).

189Walton, Umfreville and Jacobs, ‘Company Voluntary Arrangements: Evaluating Success and Failure’ (R32018) <www.icaew.com/-/media/corporate/files/technical/insolvency/publications/cvas-evaluating-success-and-failure.ashx> accessed 4 November 2018. Note that 16.5% of the CVAs studied wereongoing at the time of the Report.

190ibid 15.191See above, n 1.192See Walton, Umfreville and Wilson, ‘Final Report to the Graham Review’ available at: <https://assets.

publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/317403/Report_to_the_Insolvency_Service_on_Pre-Pack_Administrations_-_Res… .docx> accessed 4 November2018.

193Consultation (n 6) para 11.3.

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responsibility is to the creditors of the old business. However both public per-ception and our research suggest that future viability, especially in the case ofconnected party pre-packs, is a concern for both transferring suppliers andnew ones.194

The significance of future viability was noted above, and the Graham Reviewreports that just over 25% of the pre-packs in a sample of 500 taking place in2010 had entered a further insolvency procedure within three years of theoriginal sale.195 The Review’s solution to this issue was to target connectedparty sales in particular and to recommend the establishment of a ‘pre-packpool’ of independent experts to which a connected party purchaser could(voluntarily) submit details of the proposed pre-pack.196 More pertinent tothe question of viability was the further recommendation that it would beopen to a connected party purchaser to draw up a ‘viability review’ in relationto the prospects of ‘Newco’ after the pre-pack. The review would include infor-mation on how it is proposed that Newco will survive in the year following thepre-pack and what is to be done ‘differently’ following the pre-pack to ensurethat survival. If produced, this review would be attached to the administrator’sSIP 16 statement.197 If not produced, the statement will reflect this fact.

Use of the pre-pack pool has been disappointing.198 There is currently noway of gauging howmany viability reviews have been produced, but it is a fairassumption that the number is very low, and, if correct, this has some interest-ing implications. From the perspective of the connected party purchaser, oneincentive to produce a viability review would be to signal to creditors that,notwithstanding losses suffered in the administration, they could have confi-dence in the new entity as a potential trading partner. From the perspective ofthe regulator, a further beneficial effect of the production of a viability reviewwould be to focus the mind of the purchaser on the question of whether thepre-pack was a good idea at all. High failure rates of connected party pre-packs are likely symptomatic of the unviable state of the business: the pre-pack itself ensures that Newco is able to take the reins of the business freeof most, if not all of the liabilities of Oldco, and yet cannot capitalise on thisexceptional advantage. If connected party purchasers are unwilling orunable to turn their minds to the question of future viability, does this haveanything to tell us in relation to the reform proposals?

194Teresa Graham CBE, ‘Graham Review into Pre-pack Administration’ (June 2014) para 3.14 <www.gov.uk/government/publications/graham-review-into-pre-pack-administration> accessed 4 November2018.

195ibid para 7.40.196See Jones, ‘The Pre Pack Pool: Is It Working?’ (2017) 10 CRI 138; Vaccari, ‘Pre-pack pool: Is It Worth It?’

[2018] ICCLR 1.197SIP (Statement of Insolvency Practice) 16 statements are to be drawn up and submitted to all creditors

in an administration which has executed a pre-pack sale. Whilst the submission of a SIP 16 statement isnot a statutory obligation, failure to submit may have significant regulatory consequences.

198See Vaccari (n 196). See also ‘Pre-pack Pool Annual Review’ (May 2018) <www.prepackpool.co.uk/uploads/files/documents/Pre-pack-Pool-Annual-Review-2017.pdf> accessed 15 November 2018.

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A preliminary point is that, notwithstanding the Government Response’sposition that the reforms will be relevant to companies of all sizes,199 thisseems overly optimistic, particularly as regards the moratorium and theflexible restructuring plan. As noted earlier, if the moratorium is not availableto insolvent companies a significant number of potential candidates will beruled out, and, it is suggested, a disproportionate number of small companies.The possibility of investigating methods of incentivising directors of SMEs torecognise the signs of distress and respond to them at a point early enough toensure an optimal outcome is somewhat brushed aside in the Response, andthis may be an oversight. There is an increasing recognition that a ‘one-size-fits-all’ approach may not be appropriate:

Formal insolvency regimes for businesses are typically designed with the com-plexity and sophistication of large companies in mind. They assume that thebusiness liabilities and debts of a company debtor are clearly separated fromthe personal liabilities of the company’s owners and managers. They may alsoassume the presence of an extensive estate of significant value and the activeengagement of interested stakeholders, particularly creditors. They usually pre-suppose the active involvement of courts and the engagement of an insolvencyrepresentative for administration of the insolvency estate. In addition, they mayimpose various filing requirements, including to file audited balance sheets, andrigid procedural steps for liquidation or reorganization… Formal insolvencyregimes for businesses are thus complex, lengthy and expensive for smalldebtors.200

Whether a ‘think small first’ approach might yield dividends in the field of cor-porate rescue is certainly something to which the mind of the legislaturemight usefully turn. It is submitted that the reality is that neither the morator-ium nor the flexible restructuring plan are likely to be of much use to SMEs,particularly in their current form. There is probably no harm in the proposedabolition of the schedule A1 moratorium201 given that it is so infrequentlyused,202 but the eligibility test of solvency will almost certainly rule out theavailability of the moratorium in the SME sector unless a notable seachange in the approach of directors of such companies occurs. As far as therestructuring plan goes, the likelihood that it will prove to be overly expensiveand cumbersome for SMEs to make use of is overwhelming.

The prohibition on the enforcement of termination clauses is another storyaltogether. Certainly, in many cases these may be used in a manner that sup-presses optimal outcomes, including rescue outcomes. Indeed, in the contextof such clauses in hire purchase and chattel lease agreements, the courts have

199Government Response (n 8) 5.187–5.189.200UNCITRAL Working Group V (Insolvency Law), ‘Insolvency of Micro, Small and Medium-Sized Enter-

prises’ (2018) paras 19, 20. See also the excellent treatment in Davis and others, Micro, Small andMedium Enterprise Insolvency (OUP 2018).

201See above, n 99.202See above, n 189.

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pushed the boundaries of property and contract law to prevent opportunisticreliance in the insolvency context through the medium of an equitable juris-diction to grant relief from forfeiture.203 However, it is worth questioningwhether the reform proposal, as it stands, goes too far. The potential exemp-tion on the basis of undue financial hardship may not prove an adequateenough safeguard as currently framed, particularly when one considers thatit will apply in all insolvency procedures, many of which will not be directedto a rescue outcome at all and which may last for a considerable length oftime. The proposal may turn out to be counter-productive if suppliers ofgoods and services modify their contracting practices to sidestep the prohibi-tion altogether, perhaps by offering supplies on a much more short-termbasis, which will inevitably increase transaction costs. Further, there isperhaps something slightly unpalatable in the idea that one party could beforced into a potentially long-term relationship with another party who is,by definition, insolvent. Whether it is universally fair to require that firstparty to ‘take one for the team’ is debateable.

Conclusion

The facilitation of corporate rescue is more than a noble ideal, it also makes agood deal of commercial sense and could work to the benefit of UK plc in thelong term. However, care should be taken to ensure that the rescue ideal isnot promoted too strenuously and to such an extent that it excessivelyimpinges on the rights of insolvency stakeholders, and corporate creditorsin particular. Such creditors might legitimately contend that prioritising cor-porate rescue at all costs damages the foundational principles underlyingthe creditor/member bargain: why on earth should we prioritise the interestsof shareholders, if to do so would damage the interests of creditors? Theformer may have enjoyed the upside of the company’s earning capacityover many years whilst at the same time enjoying the privilege of limited liab-ility and the attendant fact that the risk of insolvency is externalised.

More worryingly, the possibility that creditors may respond in a detrimen-tally defensive manner if their rights are further downgraded should not bedismissed. There is ample evidence to suggest that at least some creditors,particularly powerful institutional creditors, will be in a position to offsetadditional risks by changing the terms of their agreements, or even the waythey transact.204 Interfering with rights may have an impact that goes farbeyond individual transactions and may threaten the legislative aims thatprompted the interference in the first place. In fairness, the Government

203See Transag Haulage v Leyland DAF [1994] 2 BCLC 88; Michael Gerson v On-Demand Finance plc [2000] 4All ER 734.

204See, for example, Akintola, ‘What is Left of the Floating Charge? An Empirical Outlook’ (2015) 30 BJIB &FL 404.

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Response recognises this danger and has attempted to build adequate safe-guards into the reform proposals. The proposals do, however, raise questionswhich may yet be answered when draft legislation is produced. And, perhaps,there are omissions in the approach that might usefully be addressed, in par-ticular the issue of how to ensure that directors of SMEs in particular areequipped to recognise the risk of insolvency and incentivised to address itat the earliest possible moment. As so perceptively noted over 20 years ago:

If rescue is defined as the avoidance of distress and failure, then managing com-panies can be thought of as constantly and repeatedly rescuing them.205

In the final analysis such an approach might not see the UK rise in the WorldBank Rankings, but it might nevertheless make for, at the very least, a smallimprovement in terms of the financial stability of companies of all sizes.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Dr Sandra Frisby, Associate Professor and Reader in Company and Commercial Law,University of Nottingham.

205Belcher, Corporate Rescue (Sweet & Maxwell 1997) 236.

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