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1. Corporate rescue – the new

orientation of insolvency law

INTRODUCTION
In the modern legal regime for corporate insolvency there are two basic
routes which can be followed in dealing with a company that is failing:
liquidation and corporate rescue. Both provide a collective way of
settling the fate of the company when the claimants cannot resolve the
company’s financial troubles through private negotiations. Yet they pro-
vide two distinct paths to address the financial difficulties of a business.
Liquidation serves the basic purpose of winding up an ailing company
through an orderly collection and realisation of assets for the benefit of
the claimants. The net value that is gathered through this collective debt
collection process is then distributed among claimants according to a
statutory system of priorities. On the other hand, corporate rescue
procedures provide an alternative to the immediate liquidation of the
ailing company, seeking to provide companies in financial difficulty with
a period of respite in which compromises and rescue arrangements can
be made. But, what exactly do we mean when we use the term ‘corporate
rescue’? What values and purposes does it serve? How can a rescue be
achieved? What conceptual, legal and practical problems arise in relation
to corporate rescue?
This introductory chapter will offer a brief overview of the above
issues in order to provide the contextual background to the use of
‘pre-packs’ as a corporate rescue strategy. This chapter is divided into six
sections. After these introductory remarks, sections 2 and 3 provide
essential definitions for the purposes of this book. Section 4 reviews
theories underpinning the goals of insolvency law and corporate rescue,
examining how the various and competing goals that underlie the
insolvency system could be effectively served. Section 5 considers
different approaches to retaining the going-concern value in businesses
that are in financial distress and the unique features of pre-pack restruc-
turing. The last section reflects on the challenges in corporate rescue, and

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4 Comparative insolvency law

points out what causes controversy comes from in the case of the
pre-pack rescue approach.

THE CONCEPT OF CORPORATE RESCUE

The term ‘corporate rescue’ is understood in very different ways by
policy-makers, judges and scholars. These differences often stem from
the divergent standpoints regarding the approaches and purposes of
rescue actions in response to companies’ financial troubles. First, cor-
porate rescue can be premised on (contractually agreed) informal mech-
anisms as well as on formal collective legal proceedings. Professor
Belcher defined the term ‘corporate rescue’ as ‘a major intervention
necessary to avert eventual failure of the company’.1 Such a broad
definition encompasses any drastic remedial action to a company at a
time of corporate crisis, including both the informal and formal strategic
rescue responses.2 In contrast, a narrow definition of the term uses it to
cover only the operation of legal proceedings, which offer facilitating
mechanisms for rescuing financially distressed companies. Furthermore,
the term may be defined differently as a way to reflect the various
outcomes of rescue activities. Corporate rescue, or ‘corporate reorganisa-
tion’ in North American terminology, may be regarded as an alternative
to immediate liquidation of the company, with the aim to prevent the
death of the company. In the UK, the scope of rescue is wider, including
both a turnaround of the company and alternatively preserving the core of
a company’s business. Underlining such differences is the distinction
between ‘company rescue’ and ‘business rescue’.
Company rescue works towards the restoration of a company in
difficulty, which leads to the preservation of the legal entity itself so that
the company can continue operations after reorganisation. In contrast,
business rescue implies the termination of the old company, but the actual
business and its activities will remain as a cohesive, productive unit under
new ownership. This happens where a company is insolvent but success-
ful steps are taken to retain the business as an operational enterprise, to
sustain the employment of groups of workers and to ensure the survival
of some economic activity.3 Company rescue often involves changes in
the management of the company and is usually achieved through

1
A Belcher, Corporate Rescue (Sweet and Maxwell, London 1997), 12.
2
Ibid., 12.
3
V Finch, Corporate Insolvency Law: Perspectives and Principles (2nd
edn, CUP, Cambridge 2009), 188.

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Corporate rescue 5

reorganising methods such as refinancing, debt composition or re-

scheduling, downsizing activities, and making redundant part of the
workforce to offer temporary relief.4 Business rescue is commonly
achieved through the sale of the company’s assets and business as a
going concern, which, as commonly believed, could generate more value
than assets being sold in a piecemeal fashion.
For the purposes of this book, the term ‘corporate rescue’ will refer to
collective strategic rescue proceedings under a legal framework designed
to facilitate either the preservation of the distressed company itself or the
rescue of its underlying business by transferring it to a new owner. It
should be clarified that rescue outcomes can be achieved not only
through rescue-oriented proceedings but also through a liquidation pro-
cedure. As mentioned earlier, the liquidation procedure is oriented to the
winding-up of the company by ceasing its operations, realising its assets
and paying off its debts and liabilities.5 In the process of realising its
assets, a result that amounts to a rescue may be achieved where the
company’s assets are sold in the form of a complete takeover or a bulk
sale of the assets, which involves the sale of the entire business, including
goodwill and other intangibles.6 Nevertheless, despite the rescue out-
comes, the liquidation procedure is not recognised as part of corporate
rescue proceedings in the sense used here since its goal is different. The
distinctive feature of a rescue procedure is that it is designed to capture
the going-concern surplus in corporate restructurings and insolvency, in
general. The going-concern surplus can be obtained if the business and
assets are preserved as an operating unit, surviving either through a
successful company turnaround or reorganisation, or through a going-
concern sale, where the whole or substantial business and assets of the
ailing company are preserved.

4
J Armour, A Hsu, and A Walters, The Impact of the Enterprise Act 2002
on Realisations and Costs in Corporate Rescue Proceedings (2006) Report to
The Insolvency Service <[Link]
[Link].6853&rep=rep1&type=pdf> accessed 30 July 2015, 2.
5
G McCormack, Corporate Rescue Law: An Anglo-American Perspective
(Edward Elgar, Cheltenham 2008), 3.
6
J Armour, ‘The Law and Economics of Corporate Insolvency: A Review’
(2001) ESRC Centre for Business Research, University of Cambridge,
Working Paper No. 197 <[Link]
Juristen/armour_2001_corporate%[Link]> accessed 30 July 2015, 4.

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6 Comparative insolvency law

THE SURPLUS OF GOING-CONCERN VALUE

It is commonly acknowledged that the rationale of corporate rescue is to
capture the surplus of going-concern value of the assets of the ailing
company, in that the value of a company’s business operations is likely to
be far greater than the scrap value of its assets.7 As has been noted: ‘[w]e
have a going-concern surplus (the thing the law of corporate reorganis-
ations exists to preserve) only to the extent that there are assets that are
worth more if located within an existing firm. If all the assets can be used
as well elsewhere, the firm has no value as a going concern.’8 The
expression ‘going-concern value’ is contrasted with piecemeal liquidation
value, which is referred to as the value realised when the parts of the
business and assets are broken up and sold off separately. The going-
concern value could be measured by estimating the income stream that
the assets would generate if they were kept together, taking into account
the risk of reorganisation failure and comparing it to the amount that the
assets would realise if they were sold off separately.9
But what are the sources of going-concern surplus that exceed their
piecemeal liquidation value? In other words, where does the additional
value come from? Traditional thinking places the source of going-
concern surplus in the intangibles associated with the running of the
business, such as goodwill and intellectual property. It follows that
salvaging a company’s going-concern value can be achieved by holding
together a ‘bundle’ of intangible assets (patents, accounts receivable,
customer lists and orders, etc.) and employees, and outsourcing most
manufacturing activities. Nevertheless, this assertion has been challenged
in the wake of the tremendous change in fundamental forces at work in
the economy, brought on especially by the decline of heavy industry,
technological advances, easier access to capital and credit markets,
globalisation and the birth of a service-based economy. The premise of
the going-concern value in the traditional sense has also been questioned
by the argument that if the intangible assets are the only source of the
going-concern surplus, most failed companies may be said to have no

7
McCormack, Corporate Rescue Law: An Anglo-American Perspective, 3.
8
DG Baird and RK Rasmussen, ‘The End of Bankruptcy’ (2002) 55
Stanford Law Review 751, 758.
9
See DG Baird and TH Jackson, ‘Corporate Reorganisation and the
Treatment of Diverse Ownership Interests: A Comment of Adequate Protection
of Secured Creditors in Bankruptcy’ (1984) 51 University of Chicago Law
Review 97, 109. See also TH Jackson, The Logic and Limits of Bankruptcy Law
(Harvard University Press, Harvard 1986), 184.

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Corporate rescue 7

going-concern surplus, as their failure is usually due to their lack of

valuable intangible assets, having neither a sound business strategy nor a
good reputation.10
The basis of the modern economy has transformed from the trad-
itional manufacturing activity to the information-based economy, in
which the most valuable resource may be human capital and relationship
networks.11 It is argued that going-concern value resides principally in
various relationships ‘among people, among assets, and between
peoples[sic] and assets’.12 Costs incurred in creating most of these
necessary relationships will inevitably be lost if the business is scattered
to the wind through a piecemeal sale of assets,13 and starting a business
from scratch is expensive and time consuming and entails a large degree
of entrepreneurial risk.14 These points have been well made by the legal
department of the International Monetary Fund:

in the modern economy, the degree to which an enterprise’s value can be

maximised through liquidation of its assets has been significantly reduced. In
circumstances where the value of a company is increasingly based on
technical know-how and goodwill rather than on its physical assets, preserva-
tion of the enterprise’s human resources and business relations may be critical
for creditors wishing to maximise the value of their claims.15

DIVERSE THEORIES OF INSOLVENCY LAW AND THE

GOALS OF CORPORATE RESCUE
Although it has been commonly recognised that corporate rescue is
concerned with how to capture and maximise the going-concern surplus
of distressed companies and how to distribute it among corporate

10
See DG Baird and RK Rasmussen, ‘Chapter 11 at Twilight’ (2003) 56
Stanford Law Review 673, and Baird and Rasmussen, ‘The End of Bankruptcy’,
751.
11
McCormack, Corporate Rescue Law: An Anglo-American Perspective, 7.
12
L Lopucki, ‘The Nature of the Bankrupt Firm: A Reply to Baird and
Rasmussen’s The End of Bankruptcy’ (2003) 56 Stanford Law Review 645, 652.
13
McCormack, Corporate Rescue Law: An Anglo-American Perspective,
4–5.
14
H Miller and S Waisman, ‘Does Chapter 11 Reorganisation Remain a
Viable Option for Distressed Businesses for the Twenty-First Century?’ (2004)
78 American Bankruptcy Law Journal 153, 192–3.
15
Legal Department of International Monetary Fund, Orderly & Effective
Insolvency Procedures: Key Issues (1999) <[Link]
orderly/> accessed 30 July 2015.

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8 Comparative insolvency law

constituents, different standpoints have been taken on the ways and

means of realising this maximisation and whose interests should be
protected. In order to reflect these different points of view, it is important
to understand the diverse normative theories and hypotheses about the
appropriate objectives and purposes of corporate insolvency law.
The modern debate began in the US during the 1980s over the question
whether insolvency law does – or should – seek only to maximise the
returns to pay creditors of an insolvent company, or whether other goals
do or should matter; such as preserving jobs, rehabilitating troubled
companies and protecting the interests of local communities.16 Among
the competing views on the goals or values that insolvency law should
reflect, on one side, there is a ‘market and assets’ camp focusing on the
assets of the debtor and value maximisation for creditors. On the opposite
side is the ‘enterprise and forum’ camp, which argues that preserving an
enterprise is to the benefit of many more interests than merely those of
the owners and creditors, and the function of bankruptcy procedures is to
establish a forum where all the interests which may be affected by the
business failure can be heard.17

The Creditors’ Bargain Theory

The creditors’ bargain theory was advanced and developed by Professor

Thomas Jackson with Douglas Baird and Robert Scott.18 The classical
argument it propounded is that corporate insolvency law, at its core a
collective debt collection mechanism, should be concerned only with the
maximisation of creditors’ returns and creditors’ distribution questions.19

16
Armour, The Law and Economics of Corporate Insolvency: A Review, 8.
17
A Flessner, ‘Philosophies of Business Bankruptcy Law: An International
Overview’ in JS Ziegel (ed) Current Developments in International and Com-
parative Corporate Insolvency Law (OUP, Oxford 1994), 13–24.
18
See TH Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements, and the
Creditors’ Bargain’ (1982) 91 Yale Law Journal 857; also Jackson, The Logic
and Limits of Bankruptcy Law; DG Baird and TH Jackson, ‘Bargaining After the
Fall and the Contours of the Absolute Priority Rule’ (1988) 55 University of
Chicago Law Review 738; Baird and Jackson, ‘Corporate Reorganizations and
the Treatment of Diverse Ownership Interests: A Comment on Adequate Protec-
tion of Secured Creditors in Bankruptcy’; T Jackson and R Scott, ‘An Essay on
Bankruptcy Sharing and the Creditors’ Bargain’ (1989) 75 Virginia Law Review
155.
19
For the description of the common pool problem, see Jackson, The Logic
and Limits of Bankruptcy Law, 11–12; and Baird and Jackson, ‘Corporate

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Corporate rescue 9

First, it views insolvency law as a collectivised debt collection mech-

anism and as a response to the ‘common pool’ problem.20 To prevent the
destruction of value caused by individual creditor actions against assets,
interested persons need to act collectively.21 The collectivist compulsory
system of insolvency law is justified on the grounds of a hypothetical
bargain assumption that were company creditors free to agree on forms
of enforcement of their claims on insolvency, they would agree to
collectivist arrangements rather than procedures of individual action or
partial collectivism.22
Second, the cornerstone of the creditors’ bargain theory is the norm-
ative claim that pre-insolvent entitlements should not be impaired in the
collective insolvency process.23 Through a hypothetical bargain that
focuses on the key bankruptcy objective of maximising the welfare of the
group through collectivisation, the creditors agree to act as a group under
a regime replicating their non-bankruptcy collection rights.24 Bankruptcy
law should change a substantive non-bankruptcy rule only when doing so
preserves the value of assets for the group of investors holding rights in
them.25 Third, the broad concerns regarding business failures and social
welfare are not bankruptcy problems at all but ‘that of the bulk of laws
outside of bankruptcy’.26 As it is accepted here that bankruptcy law is
primarily concerned with recognising non-bankruptcy entitlements and
ensuring a deployment of assets that is in the interests of all those with
rights to the assets under state law, it follows that the problems brought

Reorganizations and the Treatment of Diverse Ownership Interests: A Comment

on Adequate Protection of Secured Creditors in Bankruptcy’, 103–5.
20
Jackson, The Logic and Limits of Bankruptcy Law, 9–11.
21
Baird and Jackson, ‘Corporate Reorganizations and the Treatment of
Diverse Ownership Interests: A Comment on Adequate Protection of Secured
Creditors in Bankruptcy’, 106.
22
Jackson sees bankruptcy as ‘a system designed to mirror the agreement
one would expect the creditors to form among themselves were they to negotiate
such an agreement from an ex ante position’. See T Jackson, ‘Bankruptcy,
Non-Bankruptcy Entitlements, and the Creditors’ Bargain’ (1982) 91 Yale Law
Journal 857, 860.
23
Jackson and Scott, ‘An Essay on Bankruptcy Sharing and the Creditors’
Bargain’, 159.
24
‘A central premise underlying the creditors’ bargain theory is that a
system of state law entitlements (including priorities among secured and un-
secured creditors) is already in place.’ Ibid., 159.
25
Baird and Jackson, ‘Corporate Reorganizations and the Treatment of
Diverse Ownership Interests: A Comment on Adequate Protection of Secured
Creditors in Bankruptcy’, 100.
26
Ibid., 103.

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10 Comparative insolvency law

by business failures are not bankruptcy problems. Bankruptcy proceed-

ings should not be the place to implement a policy that society does not
enforce outside of bankruptcy and that is unrelated to the preservation of
assets for the firm’s investor group.27 It follows from the above argu-
ments under this theory that the protection of the non-creditor interests of
other victims of corporate misfortune, such as employees, managers,
suppliers and the community at large ought not to be a concern of
insolvency law.28
The creditor wealth maximisation argument has been highly influential
and has been put into legislative effect in many jurisdictions.29 However,
this normative theory has been subject to extensive criticism by a number
of schools of thought. Major concerns have focused on challenging the
claim that insolvency is simply a debt collection process for the benefit
of creditors and that the only legitimate goal of insolvency law is creditor
wealth maximisation. The creditor wealth approach considers only hypo-
thetical contract creditors, which is only one group of victims suffering
from the company’s financial distress, and this, it has been said, fails to
take account of the wide range of other stakeholders (for instance,
employees, dependent suppliers, regular customers and the local com-
munity at large) that the corporate insolvency may have an impact on.30
It is criticised that the creditor wealth maximisation view focuses only on

27
Ibid., 102.
28
Jackson, The Logic and Limits of Bankruptcy Law, 25. See also Baird and
Jackson, ‘Corporate Reorganizations and the Treatment of Diverse Ownership
Interests: A Comment on Adequate Protection of Secured Creditors in Bank-
ruptcy’, 103. It recognises these problems as general problems, not as bankruptcy
problems. Therefore: ‘Social reform should be brought about through a broad
changes in the substantive law rather than through ad hoc modifications of rights
in bankruptcy.’
29
Such as the German Insolvency Code of 1994. The English insolvency
law also provides some support for this argument. The interests of creditors take
primacy over the interests of all other groups when the company seems to be in
financial distress. It can also be seen from the shift of the directors’ fiduciary
duty of loyalty to the creditors of the company in the ‘twilight’ period and the
administrator’s duty to act in the interests of creditors as a whole. See Finch,
Corporate Insolvency Law: Perspectives and Principles, 29 and Armour, ‘The
Law and Economics of Corporate Insolvency: A Review’.
30
DR Korobkin, ‘Contractarianism and the Normative Foundations of
Bankruptcy Law’ (1993) 71 Texas Law Review 541, 555. See also E Warren,
‘Bankruptcy Policy’ (1987) 54 University of Chicago Law Review 775, 787–8.

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Corporate rescue 11

economic value and is incapable of recognising non-economic value

aspects, such as moral, political, social and personal considerations.31
Rejecting the view that bankruptcy law is merely a response to the
problem of collecting debt, Professor Korobkin presents a value-based
account which views bankruptcy law as ‘a response to the many aspects
of financial distress – moral, political, personal, social, and economic –
and, in particular, to the grievances of those who are affected by financial
distress’.32 Because the participants’ varied grievances typically reflect
conflicting and fundamentally incommensurable values, bankruptcy law
has a distinct function to provide a forum for an ongoing debate in which
these diverse values can be expressed and sometimes recognised.33
Moreover, the idea that a troubled company constitutes a mere pool of
assets is also challenged. It is claimed that the company is not purely a
lifeless pool of assets but an enterprise with personality:

Unlike mere property, a corporation, whether in or out of bankruptcy, has

potential. A corporation can continue as an enterprise: as an enterprise, it can
change its personality and, perhaps more importantly, whether the corporation
continues and how it changes its personality affects people in ways that are
not only economic.34

Professor Elizabeth Warren has criticised the creditors’ bargain theory for
facilitating the externalisation of costs. She noted that many of the social
costs incurred in the creation of a firm were borne by those parties who
are not creditors and who have no formal rights to the assets of the
business, such as employees, communities, suppliers, customers and
others. When the firm failed, those parties were left with the costs as the
parties with formal legal rights against the debtor never completely
internalise the full costs of a business failure.35 Therefore it is argued that
insolvency law should look beyond pre-insolvency rights and recognise
the interests of parties who lack formal legal rights in the pre-insolvency

31
See DR Korobkin, ‘Rehabilitating Values: A Jurisprudence of Bank-
ruptcy’ (1991) 91 Columbia Law Review 717, 762. Korobkin, ‘Contractarianism
and the Normative Foundations of Bankruptcy Law’, 581. Korobkin pointed out
that ‘the problem of collecting debt is a complex one, implicating moral,
political, personal, social, as well as economic values’.
32
See Korobkin, ‘Rehabilitating Values: A Jurisprudence of Bankruptcy’,
721.
33
Ibid., 721–2.
34
Ibid., 745.
35
E Warren, ‘Bankruptcy Policy Making in an Imperfect World’ (1993) 92
Michigan Law Review 336, 356.

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12 Comparative insolvency law

scenarios as the protection insolvency law gives to these parties is

derivative in nature and limited in scope.36

A Broad-based Contractarian Model

In his later work, Professor Donald Korobkin offered an alternative

contractarian model, insisting on his proposition that the main purpose of
bankruptcy law is to exist as a distinct system that deals with the general
problems of financial distress, and not to specifically address the problem
of recovering debt.37 Instead of viewing insolvency law as the set of rules
that contractual creditors would agree to from behind the veil of
ignorance,38 Korobkin considered bankruptcy legislation to be ‘the prod-
uct of social exigency, moral conflict, and political compromise’.39 He
propounded a normative framework for bankruptcy law based on a
hypothetical bargain struck by the representatives of all interests that
might be affected by a company’s decline.40 There should be some
‘normative foundations’ of bankruptcy law on which conflicting parties
develop their arguments. The normative principles will prescribe limits
on how bankruptcy law should alter the rights, authority and practical
leverage of persons in financial distress, and offer a justified standpoint
for evaluating which legal, political and personal advantages ought to be
preserved and which ought to be modified.41
By constructing a hypothetical ‘initial status quo’ for the choice of the
normative principles, Korobkin asserted that the parties would choose

36
Ibid.
37
See Korobkin, ‘Contractarianism and the Normative Foundations of
Bankruptcy Law’.
38
The ‘veil of ignorance’ is a position in which: ‘no one knows his place in
society, his class position or social status; nor does he know his fortune in the
distribution of natural assets and abilities, his intelligence and strength, and the
like. Nor, again, does anyone know his conception of the good, the particulars of
his rational plan of life, or even the special features of his psychology such as his
aversion to risk or liability to optimism or pessimism.’ See Korobkin ibid., 564
referring to Rawls’ famous concept, utilised as an important building block of his
theory of justice. See further J Rawls, A Theory of Justice (Harvard University
Press, Harvard 1971).
39
Korobkin, ‘Contractarianism and the Normative Foundations of Bank-
ruptcy Law’, 543.
40
McCormack, Corporate Rescue Law: An Anglo-American Perspective,
28.
41
Korobkin, ‘Contractarianism and the Normative Foundations of Bank-
ruptcy Law’, 551.

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Corporate rescue 13

two principles to govern insolvencies: (1) the ‘principle of inclusion’ and

(2) the ‘principle of rational planning’.42 The principle of inclusion
emphasises that all affected parties would be eligible to press their
demands in the context of financial distress, although this does not speak
to all parties whose particular demands should ultimately be recognised
or denied.43 The ‘principle of rational planning’ has two essential
ingredients: (1) the insolvency law must be broadly effective, promoting
as many aims as possible; (2) when it is not possible to achieve all the
aims, it must work to achieve the aims that are most important.44 On this
model, the bargainers all know they may be affected by the insolvency,
but no one knows if he will be: a debtor; an unsecured creditor whether
contractual or involuntary; a secured creditor; an ordinary employee; a
member of the community that is otherwise unconnected to the debtor
company; or somebody in a different kind of relationship.45 Therefore,
the bargainers would prefer a principle that is ‘somehow capable of
maximising their welfare whichever positions they happened to occupy in
varying contexts’.46 But if no principle can guarantee the best outcome
for all parties under all circumstances, then ‘as a matter of self-interest
under conditions of radical uncertainty, they would want a principle that
had the effect of mitigating, at least to some degree, the hardship
experienced by persons in the worst-off positions’.47 Those in the
worst-off position are ‘relatively powerless in promoting their aims’ and
since they ‘have the most to lose if their aims are frustrated’, are the most
vulnerable.48 Therefore, the principle of rational planning is to maximally
satisfy the aims of parties as a whole by virtue of protecting the most
vulnerable parties in the context of financial distress over those who are
less vulnerable.
The contractarian approach has been subjected to extensive criticism. It
has been said that ex ante hypothetical bargain theories of insolvency law
are open to the objection that they amount to little more than an argument
that thoughtful, interested, objective and neutral law makers would come

42
Ibid., 575–89.
43
Ibid., 575.
44
Ibid., 581.
45
McCormack, Corporate Rescue Law: An Anglo-American Perspective,
28.
46
See Korobkin, ‘Contractarianism and the Normative Foundations of
Bankruptcy Law’, 578.
47
Ibid., 579.
48
Ibid., 584.

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14 Comparative insolvency law

to the proponent’s conclusions about insolvency.49 By constructing a

hypothetical original position in which the various players act in an
economically rational manner according to a single set of criteria, the
contractarian approach is unable to recognise the complex realities of
business life and the many possible considerations the decision-makers
may take into account in the matrix of circumstances.50 Furthermore, the
value-based account does not in itself explain clearly important distribu-
tional issues, such as how to judge trade-offs between fairness or justice
and wealth creation, and neither does it provide a working standard to
measure this. It is further argued that the contractarian approach fails to
explain how agreements can be reached behind the veil as to who in a
potential insolvency is most vulnerable and thus should enjoy priority of
protection over those occupying less threatened positions.51

The Team Production Theory

A team production theory of corporate reorganisation law has been

recently developed by Professor Lynn LoPucki.52 It is based on
the original team production theory of the corporation introduced by
Margaret Blair and Lynn Stout in 1999,53 in which the interests of
corporation are understood as ‘a joint welfare function of all the
individuals who make firm-specific investments and agree to participate
in the extra-contractual, internal mediation process within the firm’.54
The team membership may include: stockholders; company managers;
other employees; suppliers; creditors; customers; local governments;
regulatory agencies and others.55 In order to share all the costs and
benefits of incorporation, and because of the impossibility of reaching
that effect through direct contracts in some circumstances, team members

49
See McCormack, Corporate Rescue Law: An Anglo-American Perspec-
tive, 29–30 referring to CW Mooney ‘A Normative Theory of Bankruptcy Law’,
whose comments were framed with particular reference to Korobkin’s theory.
50
McCormack, Corporate Rescue Law: An Anglo-American Perspective,
30.
51
See Finch, Corporate Insolvency Law: Perspectives and Principles,
39–40.
52
LoPucki, ‘A Team Production Theory of Bankruptcy Reorganisation’
(2004) 557 Vanderbilt Law Review 741.
53
MM Blair and LA Stout, ‘A Team Production Theory of Corporate Law’
(1999) 85 Virginia Law Review 247.
54
Ibid., 288.
55
LoPucki, ‘A Team Production Theory of Bankruptcy Reorganisation’,
749.

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Corporate rescue 15

can delegate an independent authority group – the board of directors – to

divide profit and loss among them, based on each member’s contributions
to the team.56 Under the team production theory, corporate reorganisation
is viewed not as a regulation imposed by government but instead as ‘a
contract term by which creditors and shareholders agree to subordinate
their legal rights to the preservation of the going concern’.57 The
preservation of the corporate entity is an independent value that partially
accounts for the choice of reorganisation over liquidation.58
By leaving the board of directors in full control, while at the same time
limiting creditors and shareholders to their bankruptcy entitlements, the
team production contract has, in effect, granted the non-legally enforce-
able entitlements of team member priority over the legally enforceable
claims of creditors and the interests of shareholders.59 Professor LoPucki
asserts that this treatment is appropriate because honouring team produc-
tion entitlements is efficient as those entitlements are payable under the
team production contract and the team production contract is the bargain
actually struck by team members. This is not only to reward past
contributions, but also to incentivise future contribution to the team
effort.60 The calculation of the benefits of reorganisation must also take
into account distributions to all team members instead of only those to
creditors and shareholders.
In a nutshell, the team production theory attempts to offer a justifica-
tion of corporate reorganisation by adopting the new contractarian theory
of the public corporation introduced by Professors Blair and Stout in
1999 to the bankruptcy reorganisation regime. Nevertheless, critical
questions remain unresolved. The theory relies on an independent board
of directors, acting as fiduciaries, to divide profit and loss among them
based on the team members’ respective contributions to the team. But it
remains debatable whether the directors will do ‘the right thing’, given
that the theory is based on a ‘wholesale grant of unfettered power to
directors’.61 It is asserted that directors would function less like dis-
interested trustees and more like representatives in a legislature who are
expected to vigorously defend the interests of the particular constituents

56
Blair and Stout, ‘A Team Production Theory of Corporate Law’, 749–50.
57
LoPucki, ‘A Team Production Theory of Bankruptcy Reorganisation’,
743.
58
Ibid., 769.
59
Ibid., 758.
60
Ibid., 750.
61
Ibid., 778.

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16 Comparative insolvency law

who elect them.62 It is explicitly accepted that team members trust

directors not because they think directors will do a good job, but because
team members lack better alternatives.63

The Multiple Values/Eclectic Approach

Professor Elisabeth Warren considers that the creditors’ bargain theory, as

a single, unified theory of bankruptcy, is more of an intellectual view of
bankruptcy than a complex one and runs a great risk of providing
answers that, while quite sensible within confined, abstract schemes, will
not work in a complex real-life corporate environment.64 She has offered
a ‘dirty, complex, elastic, interconnected view of bankruptcy’ from which
outcomes cannot be predicted, and nor can all the factors relevant to a
policy decision be fully articulated.65 She explained what she has offered
is ‘a comprehensive statement about the various and competing goals that
underlie the bankruptcy system’ so as to provide useful assistance to the
legislative and judicial decision-making.66
Warren describes bankruptcy as a collection system that determines:
the value of a failing business; how to distribute that value among parties
whom the failure affects; and the extent to which affected parties can
externalise the costs of failure to others who did not deal with the debtor.
This system, according to her, is aimed toward four principal goals:

(1) to enhance the value of the failing debtor; (2) to distribute value according
to multiple normative principles; (3) to internalise the costs of the business
failure to the parties dealing with the debtor; and (4) to create reliance on
private monitoring.67

62
See Blair and Stout, ‘A Team Production Theory of Corporate Law’,
footnote 136 at p 302.
63
LoPucki, ‘A Team Production Theory of Bankruptcy Reorganisation’,
778.
64
Warren, ‘Bankruptcy Policy Making in an Imperfect World’, 813.
65
Ibid., 811.
66
‘I have not offered a single-rationale policy that compels solutions in a
particular case. I have not given any answers to specific statutory issues. I have
only identified normative considerations that may drive legislative and judicial
decisions.’ Ibid., 795–6.
67
Warren, ‘Bankruptcy Policy Making in an Imperfect World’, 343–4.

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Corporate rescue 17

Unlike in the creditors’ bargain theory where pre-insolvency entitlements

should never be impaired to accomplish purely distributional goals,68
Warren asserts bankruptcy law can alter the interested parties’ non-
bankruptcy rights because bankruptcy and non-bankruptcy rights laws
deal with different kinds of default. Non-bankruptcy law provides a
collection scheme that copes with the single default where only one
creditor complains about repayment. On the other hand, the bankruptcy
collection scheme concentrates on the debtor’s widespread default and
the collapse of every creditor’s prospects for repayment.69 The policy
issues involved in the two scenarios present critical differences and thus
different distributive schemes ought to be adopted.70
Warren listed a series of distributive rationales of bankruptcy law, such
as favouring creditors but also pointed out that the distributive goals may
conflict with each other. She asserted that it is difficult or even
impossible to provide a consistent answer to questions such as how to
reallocate the resources and how to solve the conflict between the
different distributive goals.
With regard to the question of whose interests bankruptcy should
serve, Professor Warren views bankruptcy as ‘an attempt to reckon with a
debtor’s multiple defaults and to distribute the consequences among a
number of different actors’.71 Although bankruptcy encompasses a num-
ber of competing and sometimes conflicting values in this distribution, no
one value, she asserted, should dominate so that bankruptcy policy can be
a composite of factors that offers a better answer to the question ‘how
shall the losses be distributed?’72 In her view, however, the insolvency
regime only protects the interests of parties without formal legal rights in
an indirect fashion, largely through provisions that permit businesses to
reorganise instead of being shut down by a few anxious creditors.73

68
Jackson and Scott, ‘An Essay on Bankruptcy Sharing and the Creditors’
Bargain’, 159.
69
Warren noticed that there are: ‘two prototypes of default: first, the single
default where only one creditor complains about repayment and the remaining
creditors are evidently (even if only temporarily) content with their repayment
prospects; and second, the debtor’s widespread default and collapse in which
every creditors’ prospects for payment are sharply diminished.’ See Warren,
‘Bankruptcy Policy Making in an Imperfect World’, 781.
70
Ibid., 782.
71
Ibid., 777.
72
Ibid.
73
Warren, ‘Bankruptcy Policy Making in an Imperfect World’, 355–6.

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18 Comparative insolvency law

The Explicit Values Approach to Insolvency Law

The aforementioned debate is primarily American. Similar debates on the

objectives of corporate insolvency and the values of corporate rescue
have also taken place in the UK. UK bankruptcy legislation has been
rather creditor-oriented with an unforgiving attitude toward unpaid debt
and credit. A liquidation culture prevailed in England until 1986, when
deep recessions caused Parliament to reassess this position.74 In the Cork
Report75 which was published in 1982, the Review Committee suggested
that the aims of a good modern insolvency law should include those that:

(i) recognise the effects of insolvency are not limited to the private interests of
the insolvent and his creditors, but that other interests of society or other
groups in society are vitally affected by the insolvency and its outcome, and
to ensure that these public interests are recognised and safeguarded;
(j) provide means for the preservation of viable commercial enterprises
capable of making a useful contribution to the economic life of the country;76

It emphasised the social and personal detriment caused by shutdowns and

wholesale redundancy77 and the benefits to the country’s economic life of
preserving viable commercial enterprises, because corporate failure was
usually accompanied by wider repercussions falling not only upon
intimately connected parties such as directors, shareholders and employ-
ees, but also on other interests, such as suppliers.78

74
PR Wood, Principles of International Insolvency (2nd edn, Sweet and
Maxwell 2007), 175.
75
Kenneth Cork and Insolvency Law Review Committee, Insolvency Law
and Practice: Report of the Review Committee (Cmnd 8558, 1982). The Cork
Committee, the chairman of which was the late Sir Kenneth Cork, was appointed
in 1977 with wide-ranging terms of reference covering corporate and individual
insolvency. Its report led to a government White Paper in 1984 – A Revised
Framework for Insolvency Law (Cmnd 9175, 1984), setting out an intention to
implement the bulk, but not all, of the Committee’s recommendations. This
eventually led to the Insolvency Act 1986.
76
Cork and Committee, Insolvency Law and Practice: Report of the Review
Committee, 54–5. There were (a) to (l) aspects contained in the aims of a good
modern insolvency law.
77
IF Fletcher, ‘UK Corporate Rescue: Recent Developments – Changes to
Administrative Receivership, Administration, and Company Voluntary Arrange-
ments – the Insolvency Act 2000, the White Paper 2001, and the Enterprise Act
2002’ (2004) 5 European Business Organization Law Review 119, 122.
78
Cork and Committee, Insolvency Law and Practice: Report of the Review
Committee, 56.

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Corporate rescue 19

Professor Sir Roy Goode also suggests that corporate insolvency law
should have four overriding objectives: (1) to rescue the debtor company
where this is practicable; (2) to maximise the return to creditors as a
whole where the company itself cannot be saved; (3) to establish a fair
and equitable system for the ranking of claims and the distribution of
assets among creditors, involving a limited redistribution of rights; and
(4) to provide a mechanism by which the causes of failure can be
identified and to disqualify those guilty of mismanagement by depriving
them of their right to be involved in the management of other com-
panies.79 Nevertheless, given that the role of insolvency law is ‘not to
affect pre-bankruptcy the substance of entitlements but rather to organise
a collective regime designed to ensure the preservation of those entitle-
ments to the maximum extent possible’, according to Professor Goode, it
is only to this extent that the rehabilitation of an insolvent business is a
legitimate function of corporate insolvency law.80
Professor Finch also believes that the key tasks of corporate insolvency
law among other things should include: (1) facilitating the recovery of
companies in times of financial crisis and stimulating the rehabilitation of
insolvent companies and businesses as going concerns; (2) balancing the
interests of different groupings and protecting the interests of the public
and of employees in the face of financial failures or management
malpractices; and (3) dissolving companies when necessary.81 In looking
for the appropriate measure of insolvency law, more specifically, with
regard to the objectives and their trade-off against each other associated
with the openness concerning the objectives of corporate insolvency law,
Finch borrows from Gerald Frug’s well-known analysis of the strategies
for attempting to legitimate corporate and bureaucratic power, and offers
the so-called explicit values approach to measuring insolvency law.82 The
explicit values approach ‘takes on board the public and private, the
procedural and substantive and the contractarian and democratic dimen-
sions of insolvency’.83 She advocates that the legitimacy of the processes
and principles of insolvency law can be tested by reference to four
benchmarks, namely efficiency, expertise, accountability and fairness: (1)
‘Efficiency’ looks to securing democratically mandated ends at lowest
cost; (2) ‘Expertise’ refers to the allocation of decision and policy

79
See R Goode, Principles of Corporate Insolvency Law (3rd edn, Sweet
and Maxwell 2005), 39.
80
Ibid., 39.
81
Finch, Corporate Insolvency Law: Perspectives and Principles, 27.
82
Ibid., 64.
83
Ibid.

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20 Comparative insolvency law

functions to properly competent persons; (3) ‘Accountability’ looks to the

control of insolvency participants by democratic bodies or courts or
through the openness of processes and their amenability to representa-
tions; and (4) ‘Fairness’ considers issues of justice and propensities to
respect the interests of affected parties by allowing such parties access to,
and respect within, decision and policy processes.84
Nevertheless, in cases where the four values themselves have conflicts,
Professor Finch’s explicit values approach did not provide any further
standards for determining preferences among them in the details. There is
no clear answer on whether particular trade-offs between them are
desirable or not. It is suggested that the merits of particular trade-offs
may only be argued for in particular contexts and cannot be preordained
according to set rules.85 Mokal has argued that Finch’s understanding of
the ‘benchmark’ concepts lacks consistency and that she is unable to
provide a satisfactory account of their relationship inter se. According to
him, ‘expertise’ and ‘accountability’ have no separate standing of their
own, and should be absorbed within ‘efficiency’.86 Fairness and effi-
ciency cannot be traded off against each other, as efficiency in itself does
not provide a goal that any area of the law should aim at. The failure to
distinguish between the diverse nature of her otherwise well-argued
benchmarks considerably weakens Finch’s approach.87

Summary of Findings

This section reviewed the diverse normative theories and hypotheses

about the appropriate objectives and purposes of corporate insolvency
law. The creditor wealth maximisation argument promoted by the classi-
cal creditors’ bargain theory has been widely criticised for its failing to
take account of the wide range of stakeholders beyond a company’s
contract creditors that the corporate insolvency may have an impact on.
Different standpoints have been taken on the goals of corporate insol-
vency law and whose interests should be protected. However, there is no
consensus as to how various and competing goals that underlie the
insolvency system should be prioritised and served, nor is there a
working standard to determine preferences among them. As a result,

84
Ibid., 56.
85
Ibid., 65.
86
RJ Mokal, ‘On Fairness and Efficiency’ (2003) 66 Modern Law Review
452.
87
Ibid.

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Corporate rescue 21

critical questions, such as how to judge if trade-offs between different

goals are desirable or not, remain unresolved.

APPROACHES TO RESCUE
With the rise in insolvency activity that was seen in the past recessions
and the growing popularity of corporate rescues, a variety of rescue
mechanisms have been developed within and outside insolvency law,
generally falling into two categories: informal and formal rescue strat-
egies. Informal rescues, also referred to as ‘private restructurings’ or
‘workouts’,88 are a non-judicial process through which a distressed
company and its significant creditors89 attempt to reach an agreement to
restructure and adjust the company’s debt obligations without court
intervention. Formal rescues, on the other hand, involve the use of legal
procedures designed under insolvency legislation where the compromises
and arrangements for restructuring are made under the supervision of the
court or a formal legal structure.

Informal Rescues

Informal rescues are contractually based in nature and in themselves do

not demand any sort of statutory intervention. A general advantage of
private workouts is that they provide the debtor company and its creditors
with a more flexible environment in which to negotiate the resolution of
a company’s financial difficulties than under insolvency procedures.
Publicity concerning corporate failures is likely to be minimal, thus
avoiding significant jeopardy to the goodwill and reputation of the
company by the negative reactions of customers and the market. The
private route allows the sale of the business to be completed in good time
and with a low level of disruption from publicity, both of which are
essential to preserve the value of the business. In formal insolvency
procedures, the complex legal institutional constraints are likely to

88
Workout was defined as ‘borrower’s efforts to negotiate with its lenders
for a restructuring of its debts outside of bankruptcy or other court proceedings’.
MS Kirschner et al., ‘Prepackaged Bankruptcy Plans: The Deleveraging Tool of
the ’90s in the Wake of Old and Tax Concerns’ (1991) 21 Seton Hall Law Review
643, at note 7.
89
For instance, financial creditors such as banks, or major trade creditors
and bondholders.

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22 Comparative insolvency law

produce more prolonged and often hostile litigation, which can have a
significantly negative impact on the realisable value of the company’s
business.
Furthermore, the contractual basis of informal rescue action also
means that the terms of restructuring can be easily altered and adjusted
during negotiations in a way that formal procedures do not allow without
a valid approval mechanism.90 Private workouts are commonly negotiated
between a small group of leaders and the debtor out of the public eye. In
addition, cooperation among a number of major creditors involved in a
negotiation can be more readily achieved than aligning the diverse
incentives of all conflicting claimholder classes as attempted under the
insolvency procedures.
While noting the merits, the demerits of informal rescues are also
obvious. A fundamental difficulty for the contract-based mechanism is
the need to secure a consensus; usually the agreement of all parties
whose rights are affected. Informal rescues are based on the contractual
variation of existing rights by way of compromise, waiver or deferment
of debts or alteration of priorities. They can only bind parties to the
contract, therefore any dissenting creditors have the power to halt
informal rescues by triggering formal insolvency procedures. This ren-
ders the informal rescue a fragile device which is dependent on a high
degree of cooperation among a disparate range of parties.91 Another
concern with the informal approach is its potential to prejudice the
interests of less well-placed creditors, for there may be an absence of
investigative powers and a lack of inquiry into the role the directors
played in bringing a company to the brink of disaster.92
The ‘London Approach’, developed in the 1970s and designed to
secure the cooperation of financial support for companies with liquidity
problems,93 has been successful in resolving financial distress with large
UK companies, especially for the large multi-bank financed companies.94
The British Bankers Association defined the ‘London Approach’ as ‘a
non statutory and informal framework introduced with the support of the
Bank of England for dealing with temporary support operations mounted

90
Finch, Corporate Insolvency Law: Perspectives and Principles, 208.
91
D Brown, Corporate Rescue: Insolvency Law in Practice (Wiley Series in
Commercial Law, J Wiley, New York 1996), 10. Finch, Corporate Insolvency
Law: Perspectives and Principles, 209–10.
92
Finch, Corporate Insolvency Law: Perspectives and Principles, 209.
93
Goode, Principles of Corporate Insolvency Law, para.10-04.
94
Ibid., para.10-135.

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Corporate rescue 23

by banks and other lenders to a company or group in financial difficul-

ties, pending a possible restructuring’.95 The rescue work is organised on
a contractual basis, through which the potentially conflicting problems of
company creditors are resolved through voluntary cooperation and
coordination between the participating parties96 without having to resort
to statutory backing.97
The process generally involves four phases. At the initial stage of the
process, the participating parties should agree among themselves to an
informal ‘standstill’, which typically last for several months and is
sufficient to prevent all relevant creditors from taking any steps to
enforce their claims against the debtor company. Secondly, a team of
accountants appointed by the banks will investigate the company’s
financial condition and produce an independent review of the company’s
economic viability and long-term prospects.98 Their conclusion will be
acted on by a collective decision-making process in which the main
creditors work together to reach a joint view on what should be done
with the company.99 Thirdly, to promote cooperation among the relevant
creditors, a lead bank, typically the bank with a floating charge over the
company’s assets, is normally designated to organise the gathering and
distribution of the information relevant to the rescue, negotiate with the
other banks and coordinate their dealings with the distressed company.100
And finally, where negotiations are successful, an agreed business plan
for the company is put into effect and is monitored.101 One or more
committees representative of the main creditor classes will normally be

95
British Bankers’ Association, ‘London Approach’ (16/02/2004) previously
available at <[Link] ac-
cessed 9 November 2007.
96
Particularly the banks and other financial institution creditors.
97
Goode, Principles of Corporate Insolvency Law, para.10-135.
98
INSOL International, ‘Statement of Principles for a Global Approach to
Multi-Creditor Workouts’ (Report) (2000), 2–3. And Goode, Principles of
Corporate Insolvency Law, para.10-135.
99
One of the crucial tasks is to safeguard a sound information flow,
including information-gathering and dissemination, among the participating
parties so that the action taken is coordinated in a cooperative manner.
100
Creditor committees reduce information asymmetries that would endan-
ger trust and cooperation between creditors and the debtor. See also P Brierley
and G Vilieghe, ‘Corporate Workouts, the London Approach and Financial
Stability’ (1999) 7 Financial Stability Review 168, 174; Finch, Corporate
Insolvency Law: Perspectives and Principles, 221.
101
Finch, Corporate Insolvency Law: Perspectives and Principles, 220.

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24 Comparative insolvency law

established to assist the lead bank’s coordination work and more import-
antly, to act as a provisional sounding board towards the evaluation of
proposals for corporate debt restructuring and then the negotiation and
implementation of the restructuring plan.102
The relative informality provided by the London Approach allows
security interests to be adjusted, a process that may prove far less
complex and expensive than receivership where a number of banks are
involved.103 The approach relies on consensus, persuasion and banking
collegiality in order to reconcile the interests of different creditors to a
company in difficulty.104 Like general private restructuring agreements,
rescue attempts in the London Approach typically involve creditors
compromising existing rights and priority through debt-equity swaps; and
postponing the date for repayments or reducing the interest rate on
corporate debt, or parts of it, often accompanied by management
changes, asset sales and securing new finance and new or increased
director guarantees. In this context, the banks may agree to provide new
funding, especially where fresh loans and attendant liquidity are neces-
sary for the debtor’s continued survival. Such additional funding is
normally accorded priority over existing loans requisite creditors.105
It has been questioned how far the lead bank can, or has the standing
to, intervene in the absence of regulatory powers.106 The operation of
such voluntary collective action depends heavily on the lead lender
discharging their coordination role effectively, as well as intensive

102
J Armour and SF Deakin, ‘Norms in Private Insolvency Procedures: The
‘London Approach’ to the Resolution of Financial Distress’ (2000) ESRC Centre
for Business Research, University of Cambridge, Working Paper No. 173
<[Link] accessed 30 July 2015, 38–9.
Such committees are often advised and assisted by professional advisers for
better commercial decision-making.
103
Finch, Corporate Insolvency Law: Perspectives and Principles, 219.
104
Ibid., 219–20.
105
The traditional domination of bank debt in financing large UK debtors is
identified as one of the fundamental backgrounds of the prevalence of the
London Approach. See further Armour and Deakin, ‘Norms in Private Insolvency
Procedures: The ‘London Approach’ to the Resolution of Financial Distress’, 38.
106
Brown, Corporate Rescue: Insolvency Law in Practice, para.1.31. It
becomes even more difficult for banks to coordinate given the increasing
complexity of financial structures where hedge funds and private equity groups
grew explosively in power and influence in recent years. This dramatically
reduces the ability of the banks to pressure such parties into agreeing a rescue
plan. See further V Finch, ‘The Dynamics of Insolvency Law: Three Models of
Reform’, (2009) 3 Law and Financial Markets Review, 438.

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Corporate rescue 25

cooperation among the disparate range of interested parties. It has been

argued that the main difficulty of the London Approach is the lack of any
formal moratorium and the need for unanimity of support from relevant
creditors.107 In addition, it is pointed out that, while this framework
seems successful in large multi-bank corporate rescues, it might be less
appropriate for the bulk of companies in distress where there may be
only one bank and many non-financial institution creditors.108 Moreover,
corporate financing practice has developed dramatically and therefore the
marketplace in which the London Approach was developed has changed
dramatically.109 Professor Finch has summarised the difficulties facing
the London Approach as follows:

[m]odes of financing are becoming more fragmented and creditors’ co-

ordination is proving more difficult as bank creditors are joined by bond
holders, secondary debt traders, joint venture partners, special creditor and
supplier groups and intermediate investors. The globalisation of financial
markets and the emergence of markets for distressed corporate debt also put
strains on the London Approach.110

Formal Rescues

The statutory rescue procedures respond to the inherent and severe

coordination problems and the holdout risks associated with the informal
route. Essentially they offer a collective way in which all the affected
parties are participating equally and treated according to the size and
seniority of their credits. A formal procedure, such as Chapter 11 of the
US Bankruptcy Code or the UK Administration, normally involve a
moratorium on the enforcement of a wide range of creditors’ rights and
so creates a more sustainable space within which a rescue can be
organised.111 Insolvency legislation also provides various mechanisms

107
Finch, Corporate Insolvency Law: Perspectives and Principles, 223.
108
Brown, Corporate Rescue: Insolvency Law in Practice, para.1.31. The
complexity of the company’s capital structure and the heterogeneity of the
financial claims could generate severe holdout problems.
109
Armour and Deakin, ‘Norms in Private Insolvency Procedures: The
‘London Approach’ to the Resolution of Financial Distress’, 31–3.
110
V Finch, ‘The Recasting of Insolvency Law’ (2005) 68 Modern Law
Review 713, 727. The sheer involvement of a greater number and diversity of
players is likely to mitigate against the rapid, informed and cheap negotiation of
rescues by a stable group of parties. See further Finch, Corporate Insolvency
Law: Perspectives and Principles, 225.
111
Ibid., 210.

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26 Comparative insolvency law

whereby compromises and arrangements can be made under the super-

vision of the court or a formal legal structure, one objective of which is
to ensure that minority dissenters are eventually bound.112
In the UK, corporate rescue procedures were first introduced through
the administration order procedure and company voluntary arrangements
(CVA) in the Insolvency Act 1985 and were re-enacted in the Insolvency
Act 1986 (IA 1986), as recommended by the Cork Committee Report on
Insolvency Law and Practice. The original administration model was not
a complete rescue procedure, and its main effect was to impose a
moratorium on the enforcement of creditors’ claims. The Enterprise Act
2002 (EA 2002) introduced a streamlined administration model to
replace the original procedure. Under the new regime, the administration
may function either as a gateway to winding up, a CVA or a scheme of
arrangements, or as a stand-alone procedure, which may lead directly to
dissolution. The administrator is required to first consider rescuing the
company as a going concern, unless in the administrator’s view, that is
not reasonably practical and/or it is not in the interests of creditors as a
whole.
American Chapter 11, commonly referred to as ‘reorganisation’, aims
at promoting the economically viable company to recovery and maintain-
ing the business as a going concern.113 By granting an automatic stay to
prevent creditors from collecting their claims or enforcing their liens,
incumbent management is allowed to retain control of the company and
is granted the exclusive right to propose a plan of reorganisation within
120 days after the Chapter 11 filing date.114

112
For instance, a creditors’ meeting will be convened within a practically
reasonable period; the reorganisation plan needs to be accepted by the majority
of the allowed claims. Under English administration procedure, the administra-
tor’s proposals are passed when support is obtained from a majority in value of
those present and voting creditors, either in person or by proxy. In the US, claims
and interests are dealt with by classes, specifying unimpaired and impaired
classes. A plan is deemed to be accepted when at least two-thirds of votes and
more than one-half in number of allowed claims of each voting class of creditors,
and two-thirds in amount of the shares for a class of equity interests, have
accepted it.
113
It is said that the motive for introducing the Chapter 11 procedure was to
increase the possibility that the company would emerge as a going concern from
the reorganisation process. See J Franks and W Torous, ‘Lessons from a
Comparison of US and UK Insolvency Codes’ (1992) 8 Oxford Review of
Economic Policy 70, 75.
114
The court may grant extension of this exclusive period up to 18 months
after the petition date. Plan negotiations typically are conducted primarily

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Corporate rescue 27

Both countries take a view that corporate rescues can be justified by

the fact that assets used by a going concern company are more valuable
than if the company was liquidated piecemeal, but the legal rescue
procedures in the two jurisdictions are very different in terms of
orientation and institutional arrangements. For an administration proced-
ure, the rescue of the ailing company or the whole or part of its
undertaking as a going concern is preferred, but it is not an overriding
objective. The decision on which statutory purpose should be pursued is
made by an outside insolvency practitioner who acts as the administrator.
In contrast, the overriding objective of a Chapter 11 case, at least in
theory, is the formulation and confirmation of a reorganisation plan
agreed between creditors and shareholders. As already mentioned, incum-
bent management may remain in office and run the business as usual
during the reorganisation process and are in charge of proposing a
reorganisation plan.115
Accordingly, statutory rescue procedures are designed as a collective
and inclusive rescue process under which all the parties-in-interests are
equally participating and treated according to the size and seniority of
their credits. In order to provide adequate protection for various groups
of creditors, as well as checks and balances on the conflicting incentives
among different stakeholders, the legal proceedings often involve
complicated documentary accountability requirements and rounds of
negotiations to conclude the approval of the rescue plan. This renders the
formal approach a complex proceeding that is lengthy and costly, often
eventually leading to unnecessary or premature corporate liquidations.
The wider economic disruption generated gives claimholders the incen-
tive to look for alternative restructuring strategies.

between the debtor and one or more official committees appointed shortly after
the filing of debtor’s bankruptcy petition, although any party in interest may seek
to participate in negotiations. Once the debtor reaches agreement with its major
constituencies on a plan that appears to have the necessary support to be
confirmed, the plan will be filed with the bankruptcy court. See MD Plevin et al.,
‘Pre-Packaged Asbestos Bankruptcies: A Flawed Solution’ (2008) 44 South Texas
Law Review 883, 886.
115
Though the existing management can run the business in the ordinary
way, court approval will be required for substantial asset sales, section 361 of the
US Bankruptcy Code. For the relative merits of the US DIP model and the
British PIP model, see D Hahn, ‘Concentrated Ownership and Control of
Corporate Reorganisations’ (2004) 4 Journal of Corporate Law Studies 117; V
Finch, ‘Control and Co-ordination in Corporate Rescue’ (2005) 25 Legal Studies
374.

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28 Comparative insolvency law

Pre-pack: A Combined Form of Rescue Strategy

The ‘pre-pack’ process is commonly seen as a hybrid form of corporate

rescue combining the advantages of private restructuring with some of
the properties of the formal procedure. Pre-packaged bankruptcies were
first introduced in US insolvency practice. They provided a feasible
option for financially distressed companies, which allowed them to avoid
the significant expense and relatively complicated negotiation process
under traditional US Chapter 11 proceedings. A ‘pre-packaged’ Chapter
11 describes the procedure of devising a plan of reorganisation and
soliciting acceptance of such a plan prior to the commencement of a
bankruptcy case.116 By doing so, an agreement is often drawn up as
means of finding a compromise solution to satisfy the claims of large
financial creditors. The claims of other creditors (particularly ordinary
employees and trade creditors) may be left unimpaired to be paid in full
under the restructuring plan.117 By leaving them unimpaired, the com-
pany avoids negotiating with a diverse and potentially most fractious
creditor group thereby avoiding a serious holdout problem.
The holdout problem can be further minimised by filing for protection
under a formal procedure,118 which has the legal power to bind dissenting
creditors to the restructuring terms accepted by the majority of voting
creditors,119 that is, two-thirds in amount and more than one-half in
number of those voting. This can greatly reduce the time spent in
bankruptcy, because the principal remaining tasks are the approval of the
disclosure statement and confirmation of the plan by the court.120

116
Kirschner et al., ‘Prepackaged Bankruptcy Plans: The Deleveraging Tool
of the ’90s in the Wake of Old and Tax Concerns’, footnote 8 at p 644. In
contrast to pre-packaged cases, there are also pre-negotiated cases, where some
debtors negotiated the terms of their representatives prior to bankruptcy, but did
not solicit usable votes prior to filing or did not solicit them from all impaired
creditor classes. See T Eisenberg and LM LoPucki, ‘Shopping for Judges: An
Empirical Analysis of Venue Choice in Large Chapter 11 Reorganizations’
(1999) 84 Cornell Law Review 967, 976.
117
TJ Salerno and CD Hansen, ‘A Prepackaged Bankruptcy Strategy’ (1991)
12 Journal of Business Strategy 36.
118
Such as the UK administration procedure or the US Chapter 11 reorgan-
isation.
119
KA Mayr, ‘Enforcing Prepackaged Restructurings of Foreign Debtors
under the U.S. Bankruptcy Code’ (2006) 14 American Bankruptcy Institute Law
Review 469, 497.
120
E Tashjian et al., ‘Prepacks: An Empirical Analysis of Prepackaged
Bankruptcies’ (1996) 40 Journal of Financial Economics 135, 138.

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Corporate rescue 29

Similarly on the UK insolvency scene, there has been a considerable

increase in the number of pre-packs in recent years.121 The percentage of
administrations going through a pre-pack procedure has increased from
approximately 25 per cent in 2011 to 29 per cent in 2012.122 Although
the pre-pack strategy can be traced to other forms of insolvency
proceedings such as liquidation and administrative receivership, there is a
growing trend of utilising the administration procedure to implement a
pre-agreed arrangement, especially after the increase in the use of
administration by the EA 2002. A pre-pack administration therefore
refers to the situation where arrangements for the sale of an insolvent
business have been negotiated with prospective purchasers and agreed by
the major creditors123 prior to the commencement of the administration
procedure, with the sale being completed almost immediately after the
appointment of an administrator.
The popularity of pre-pack restructuring in the UK and the US has
been recognised by other jurisdictions in Europe and these are countries
starting to introduce their own versions of pre-pack procedures, such as
the Accelerated Financial Safeguard procedure (Procédure de Sauvegarde
Financière Accélérée) in France124 and the new Protective Shield Pro-
ceedings (Schutzschirmverfahren) in Germany.125 Despite the gradual

121
Frisby’s research samples of administration and receivership cases
between September 2001 and September 2004 showed that there were 222
administration cases and 118 pre-packaged administration samples. Of the 118
administration pre-packs, 40 cases (33.9 per cent) were pre-Enterprise Act 2002
and 78 (66.1 per cent) were post-Enterprise Act 2002 cases. S Frisby, ‘A
Preliminary Analysis of Pre-Packaged Administrations’ (Report) (R3: The
Association of Business Recovery Professionals 2007), 15.
122
The Insolvency Service, 2012 Annual Review of Insolvency Practitioner
Regulation (June 2013), 4.
123
This study uses the expression ‘major creditors’ as shorthand for the
parties that could exert some degree of influence on the disposal process,
including the senior secured bank creditors, significant trade creditors or bond-
holders.
124
The ‘accelerated financial safeguard procedure’ was created by the
Banking and financial regulation law as of 22 October 2010, Loi de Régulation
Bancaire et Financière, No. 2010-1249, JORF No. 0247, 23 October 2010
(Articles 57 and 58) and was codified in Article L.628-1 and L.628-7 of French
Commercial Code.
125
The ‘Protective Shield Proceedings’ was introduced by the ‘Act for the
Further Facilitation of the Reorganization of Companies’ (Gesetz zur weiteren
Erleichterung der Sanierung von Unternehmen) enacted on 7 December 2011
and now is contained in Section 270b of the German Insolvency Code.

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30 Comparative insolvency law

recognition of the efficacy and efficiency of pre-pack practice in maxim-

ising the going-concern value of distressed businesses, the rescue-
oriented rules offered in different jurisdictions differ as to how far they
can go in seeking to promote a more cooperative and risk-taking attitude
among different parties from their respective standpoints. The differences
in their institutional arrangements governing insolvency and corporate
rescue reflect the differences in their culture, economic environment and
political constraints.

MODERN CORPORATE RESCUE CHALLENGES

As explained earlier, corporate rescues are very different in orientation
from many aspects of the liquidation process. Liquidation is commonly
viewed as essentially involving foreclosure and a piecemeal sale of the
business’s assets, while the heart of a rescue process is seen as involving
the continuation of the business. Rather than relatively static distribution
proceedings in a strict order of priority, corporate rescues are more of a
negotiating and thus bargaining proceedings focusing on ongoing com-
mercial viability. They are accompanied by the uncertainty of the
valuation on the financially distressed company.126
Theoretically, the rescue process is all about preserving the so-called
going concern surplus in those businesses that are financially distressed
but still economically viable, and identifying and liquidating those
economically distressed ones in a timely manner. However, it is empiric-
ally difficult to distinguish between financial and economic distress. It is
often not obvious whether a troubled company with financial difficulty is
still economically viable or not and the judgement varies with different
parties due to their possession of information about the company and
their private interests. Furthermore, the process is accompanied by
significant uncertainty with regard to what the value of the company
turns out to be.
The future prospects for the turnaround of the company may well
depend on: the severity of its liquidity crisis; the outcome of negotiations
for support from its senior financial creditors; the economic viability of
the business; and the reaction of the market to the company’s financial
trouble. Therefore, the key concerns in the furtherance of the rescue
process in a world of uncertainty refer to the true value of the business,
and the likelihood of the successful recovery ‘turn[s] importantly upon

126
DG Baird and DS Bernstein, ‘Absolute Priority, Valuation Uncertainty,
and the Reorganization Bargain’ (2006) 115 Yale Law Journal 1930.

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Corporate rescue 31

evaluation of risk and a willingness to accept risk’.127 This dynamic

nature makes the corporate rescue process even more complex and
demanding. On the one hand, it needs to accommodate different stake-
holders with dispersed interests bargaining with each other; on the other
hand, it calls for trust among those participants as well as compromise,
and possibly even necessary sacrifice from some stakeholders, in order to
reach the successful rescue outcomes.
As we have seen, corporate rescue includes formal activities provided
by legislation and informal activities. The key challenge to efficient
negotiation in the informal rescue process is the creditor coordination
problem, especially for companies with a large number of creditors and
complex debt structures (often a mix of public, private and bank debt).
These companies are likely to suffer from creditor holdout problems, in
which a minority of claimholders refuse to accept a restructuring plan,
and are better off restructuring under the less stringent voting require-
ments of statutory procedure. Formal rules for a collective rescue
procedure, on the other hand, are designed to reduce information
asymmetries and wasteful strategic behaviour and to promote cooperation
in order to facilitate the achievement of the most efficient outcome. For
this reason the automatic stay provision and the voting rules under a
statutory rescue procedure are devised to overcome the holdout problems.
Formal rescue-oriented proceedings have their advantages in providing
a forum for structured negotiations among competing and diverse inter-
ests to avoid the unnecessary collapse of businesses in the chaos of
financial distress. Nevertheless, the role of insolvency law is primarily,
although not merely, a response to the problem of collecting debts. The
formal rules in this context impose considerable limits on departing from
the pre-insolvency entitlements of claimholders and on how far they can
go in response to the substantial obstacles caused by the inherent
uncertainty in the progression of rescue work.
Pre-pack restructuring is a hybrid form of corporate rescue and it does
present an innovative approach to overcome the holdout problem in
informal workouts by providing a formal procedure to solidify the
outcome of private negotiations. Yet pre-pack rescue also face challenges
in capturing the going concern surplus in an uncertain state of corporate
distress. In particular, how should the competing interests and various
goals that underlie the insolvency system (e.g. fairness or justice and
wealth creation) be prioritised when a trade-off is inevitable? This

127
JL Westbrook, ‘The Control of Wealth in Bankruptcy’ (2004) 82 Texas
Law Review 795, 805.

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32 Comparative insolvency law

problem could be more acute in a pre-pack restructuring, where trade-

offs are often pre-determined and market-led, but not always in line with
the statutory objectives of a particular insolvency law. These challenges
are key to the successful use and completion of pre-pack arrangements
and they are extensively discussed in subsequent chapters.

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