insol cape town · 2018. 3. 29. · insol academics’ group meeting cape town, south africa 17-18...
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INSOL Cape TownINSOL INTERNATIONAL
ANNUAL REGIONAL CONFERENCE
ACADEMICS’ GROUP MEETING
17 – 18 March 2007
Meeting Room 1.63 & 1.64
Cape Town International Convention CentreCape Town, South Africa
Photograph courtesy of South African Tourism
ASD
INSOL ACADEMICS’ GROUP MEETING
CONTENTS
Meeting Programme and Curriculum Vitae
Session A Dealing with insolvent estates: comparative perspectives (including the liquidator’s duty to get in all the insolvent’s property; vulnerable transactions; claims against negligent or fraudulent directors and managers;exempt property)
Session B The treatment of corporate groups in insolvency (with particular reference to multi-national groups of companies)
Session C Paths to salvation: rescue procedures for special categories of debtor
Session D Adventures in Cross-Border Insolvency(i) The UNCITRAL Model Law and other influences(ii) The quest for global principles of cooperation in international insolvency cases
Plenary Discussion Session: The Future Activities of the Academics’ Group
INSOL ACADEMICS’ GROUP MEETING
ASD
INSOL Academics’ Group Meeting Cape Town, South Africa 17-18 March 2007 PROGRAMME Saturday 17 March
8.30 a.m. – 9.00 a.m. Continental Breakfast – Meeting Room 1.63 & 1.64
9.00 a.m. – 9.15 a.m. Opening and Chairman’s welcome Professor Ian Fletcher, UCL
Gareth Hughes, Ernst & Young LLP,
INSOL Executive Committee
9.15 a.m. – 6.00 p.m. Working sessions - Meeting Room 1.63 & 1.64
(interspersed by morning and afternoon refreshment breaks, and delegate lunch)
9.15 a.m. – 10.45 a.m. Session A – Dealing with insolvent estates:
comparative perspectives (including the liquidator’s duty to get in all the insolvent’s
property; vulnerable transactions; claims against
negligent or fraudulent directors and managers; exempt property)
Professor Harry Rajak, University of Connecticut School of Law and Donna McKenzie Skene, Senior
Lecturer, University of Aberdeen “Proposal for a
Comparative Study on Determining the Debtor's Estate”
Professor Lee Steyn, University of KwaZulu-Natal
“Sale of an insolvent person’s home”
10.45 a.m. – 11.00 a.m. Coffee Break
11.00 a.m. – 12.15 p.m. Session A (continued)
Professor Leonie Stander, North-West University
“Piercing the veneer of the trust: liability of trustees of a business trust for fraudulent trading”
Professor Reinout Vriesendorp, Tilburg University
“The treatment of assetless estates: Dutch perspectives and comparative reflections”
Sulette Lombard, University of Pretoria “Claims against negligent or fraudulent directors:
proposed amendments to South African legislation”
12.15 p.m. – 1.00 p.m. Session B – The treatment of corporate groups in
insolvency (with particular reference to multi-national groups of companies)
Dr. Irit Mevorach, University of Nottingham
“Determining the proper venue for multinational corporate groups’ insolvencies”
Dr David Morrison, Queensland University, Dr Colin Anderson and Ms Jenny Dickfos, Griffith University
“The insolvency implications for corporate groups in
Australia: recent events and initiatives”
1.00 p.m. – 2.00 p.m. Lunch - Meeting Room 1.61
2.00 p.m. – 3.00 p.m. Session B (continued)
Professor Janis Sarra, University of British Columbia
“Maidun’s Challenge: the treatment of corporate groups in insolvency”
3.00 p.m. – 3.15 p.m. Coffee Break
3.15 p.m. – 4.15 p.m. Session C – Paths to salvation: rescue procedures
for special categories of debtor
Professor Anneli Loubser, University of South Africa
“Comparative approaches to business rescues: the
treatment of unincorporated businesses”
Professor Adrian Walters, Nottingham Trent University
“Comparative analysis of corporate rescue
proceedings: Lessons from the UK”
4.15 p.m. – 5.30 p.m. Plenary Discussion Session: The Future Activities
of the Academics’ Group
Including:
- Structure and organization of the Group
- The Brisbane Initiative (2005): progress report
- EBRD Principles Project: opportunities for feedback
- Plans for future meetings
5.30 p.m. – 5.45 p.m. Summing up and closure of Day One
Sunday 18 March
8.30 a.m. – 9.00 a.m. Continental Breakfast – Meeting Room 1.63 & 1.64
9.00 a.m. – 9.15 a.m. Welcome Back - Meeting Room 1.63 & 1.64
Professor Ian Fletcher, UCL
9.15 a.m. – 10.15 a.m. Session C (continued)
Professor Stephanie Ben-Ishai, Osgood Hall Law
School, York University “Access to the consumer bankruptcy process:
comparative perspectives”
Professor Andre Boraine, University of Pretoria
“Debt relief measures for consumer debtors in South
African law”
10.15 a.m. – 10.30 a.m. Coffee Break
10.30 a.m. – 12.30 p.m. Session D – Adventures in Cross-Border Insolvency
(i) The UNCITRAL Model Law and other influences
Dr. Paul Omar, University of Sussex
“1849 and All That: comparative reflections on the genesis of section 426 and the provision of
international judicial assistance”
(ii) The quest for global principles of cooperation in international insolvency cases
Professor Bob Wessels, Vrije University Amsterdam, St. John's University, School of Law New York
“The quest for global principles of cooperation in
international insolvency cases: A Contribution from
Europe”
Professor Ian Fletcher, University College London
“Challenge and Opportunity: the ALI Global Principles Project”
Professor Ted Janger, Brooklyn Law School, New York “Thoughts about the harmonization of choice of law
principles”
12.30 p.m. – 12.45 p.m. Conclusion of Meeting
1.00 p.m. – 2.00 p.m. Lunch - Meeting Room 1.61
ASD
INSOL INTERNATIONAL
ACADEMICS’ MEETING – Cape Town 2007
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CURRICULUM VITAE
Colin Anderson
Griffith Business School
Dr Colin Anderson is a senior lecturer at the Griffith Business School,at the Gold Coast Campus of Griffith University. Colin has a strongresearch and teaching interest in the area of insolvency law generallyand in particular in the role of the legal system in allowing companyrescue procedures for insolvent entities. Colin has published several
articles and books in his area of interest. Colin is a member of the Institute of CharteredAccountants in Australia as well as a Fellow of the Taxation Institute of Australia.
Colin is editor of the Insolvency Law Journal.
Stephanie Ben-Ishai
Osgood Hall Law School, York University
Professor Ben-Ishai teaches contracts, bankruptcy, commercial law(LLM program) and a seminar in corporate governance. She haspublished widely and made numerous Canadian and internationalconference presentations with respect to her research interests, whichinclude all aspects of business and personal bankruptcy, corporate
governance and commercial law. Professor Ben-Ishai’s recent research has been funded bySSHRC, the Insolvency Institute of Canada, the Schulich Program on Financial Services, theIndustry Canada Insolvency Research Initiative, a Borden Ladner Gervais ResearchFellowship, and the Foundation for Legal Research. She has served as General Editor of theBanking and Finance Law Review, Secretary of the Canadian Law and Economics Association,Member of the Personal Property Security Law Sub-Committee, Canadian Bar Association ofOntario, Academic Reporter for the Insolvency Institute of Canada Income Tax Task Force,Member of the International Academy for Commercial and Consumer Law, and AcademicDirector of the Osgoode Masters in Banking and Finance Law. Professor Ben-Ishai has actedas a consultant to governments, SROs, and the Law Commission of Canada on commercialand corporate law and policy. She is a past winner of the American Bankruptcy Institute Medalof Excellence and Fulbright and SSHRC fellowships. Before entering academics, ProfessorBen-Ishai practised with the Insolvency and Restructuring Group at Osler, Hoskin and HarcourtLLP, and also clerked for three judges at the Court of Appeal for Ontario.
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André Boraine
University of Pretoria
After completion of the LLB degree and qualifying as an attorney andconveyancer, André Boraine was appointed as a fulltime seniorlecturer in the Department of Mercantile Law at the University ofPretoria in 1985. He went on to obtain an LLM in property law (cum laude) from the University of the Witwatersrand in 1997
and an LLD followed towards theend of 1994.
With effect from 1 January 1995 he was promoted to the position of associate professor and tothe rank of full professor with effect from 1 January 1997. He became the head of theDepartment of Procedural Law as from 1 September 1999. He also served as deputy-dean for 7 years.
Over the years he has been teaching a variety of law subjects at both undergraduate andpostgraduate levels, and involved himself with the practical legal training of candidate attorneysand insolvency practitioners as well.
His current research interests include insolvency law as well as the law of civil procedure andaspects of property law. He has published widely, and regularly presents papers at local andforeign conferences.
Jennifer Dickfos
Griffith University
Having graduated from the Qld Institute of Technology with a B. Bus – Accounting I have spent the majority of my professional lifeemployed as an academic on a part-time or full-time basis inaccounting and law faculties at the Queensland University ofTechnology, and Griffith University. However, professionally, I have
also been employed in practice as a tax accountant, auditor and as a research officer with theAustralian Taxation Office. I have completed undergraduate degrees in law and accountingfrom the Qld University of Technology where I was a dual university medallist, as well as aMaster of Laws by Research from the Qld University of Technology. I am currently completinga PHD in Law at the University of Queensland. My thesis concerns an evaluation of corporategroup regulation. . I am currently an associate of the Australian Society of CPAs and a fellowof the Australian Institute of Taxation.
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Ian Fletcher
University College London
Ian Fletcher is the Professor of International Commercial Law atUniversity College London. Previously, he was Professor ofCommercial Law at Queen Mary, University of London and Director ofthe Centre for Commercial Law Studies from 1994 -2000. A graduateof Cambridge University, he undertook postgraduate studies at Tulane
University, U.S.A. He was called to the Bar by Lincoln’s Inn in 1971, of which he was elected aBencher in 2003, and currently practices from 3/4 South Square, Gray’s Inn.
Professor Fletcher’s principal scholarly interests are in the fields of Bankruptcy and InsolvencyLaw, Commercial Law, European Community Law, Conflict of Laws and Comparative Law. Heis the author of numerous books and articles including The Law of Insolvency (1990; 3rdedition 2002); and Insolvency in Private International Law (1999, 2nd edition 2005). He is amember of the American Law Institute and of the Insolvency Lawyers’ Association, and is anInternational Fellow of the American College of Bankruptcy. He has been the Editor in Chief ofthe INSOL International Insolvency Review since 1992, and a Specialist Editor of Palmer’sCompany Law since 1987. He is one of the joint authors and editors of The EC Regulation onInsolvency Proceedings, A Commentary and Annotated Guide (Oxford University Press, 2002).
Ted Janger
Brooklyn Law School
Professor Janger joined the faculty in 1998, after teaching at theWashington University School of Law in St. Louis and the Ohio StateUniversity College of Law. In the Fall of 2004, in addition to teachingat Brooklyn Law School, he served as the Robert Zinman Scholar-in-Residence at the American Bankruptcy Institute in Washington, D.C.
In the Spring of 2005 he served as a Visiting Professor of Law at the University ofPennsylvania School of Law. Professor Janger has written extensively on bankruptcy,commercial law, and data privacy. His recent writings include “The Myth of the RationalBorrower: Behaviorism, Rationality and the Misguided Reform of Bankruptcy Law,” 84 Tex. L.Rev. 1481 (2006) (co-author: S. Block-Lieb), “Notification of Security Breaches,” 105 Mich. L.Rev. xxx (2007) (co-author: P.M. Schwartz) (forthcoming), and “Genetic Information, Privacyand Insolvency,” 33 J. L. Med. & Ethics 79 (2005). Other articles have appeared in the ArizonaLaw Review, Cardozo Law Review, Iowa Law Review, Hastings Law Review, Minnesota LawReview, and William and Mary Law Review. His legal scholarship received national recognitionwhen his article, “Crystals and Mud in Bankruptcy Law: Judicial Competence and StatutoryDesign,” published in the Arizona Law Review, was chosen for presentation at theStanford/Yale Junior Faculty Forum. Prior to teaching, Professor Janger was an associate withthe firm of Wilmer, Cutler & Pickering in Washington, specializing in bankruptcy and litigation,and was Law Clerk to Judge Irving L. Goldberg of the United States Court of Appeals for theFifth Circuit. He is the past-chair of the AALS Section on Commercial and Consumer Law. Heis also a member of the Board of Directors of the Coalition for Debtor Education.
INSOL ACADEMICS’ GROUP MEETING
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Sulette Lombard
University of Pretoria
Sulette Lombard completed the degrees BLC (with distinction) andLLB (with distinction) at the University of Pretoria in 1991 and 1993respectively, and the degree LLM at UNISA in 1995. In 1997 she wasappointed as a lecturer in the Department of Mercantile Law at theFaculty of Law, University of Pretoria. Sulette is currently a Senior
Lecturer in the department, and specialises in corporate law. Sulette regularly publishes in thefield of corporate law, and recently completed her LLD thesis under the title “Directors’ Dutiesto Creditors” in 2006.
Anneli Loubser
University of South Africa
Completed BA (Law) and LLB degrees at the University of Pretoriaand an LLM in Corporate Law at the University of South Africa(UNISA). Practised as Attorney, Notary and Conveyancer of the HighCourt of South Africa for several years.
Presently associate professor in the Department of Mercantile Law at UNISA, teaching mostlypostgraduate courses in corporate law. Member of the Litigation Committee of the FinancialServices Board of South Africa.
Author of the chapter on South African corporate rescue in Corporate Rescue An Overview ofRecent Developments by K G Broc and R Parry (eds) 2 ed (2006) and articles published inaccredited and international journals.
Donna McKenzie Skene
University of Aberdeen
Donna is currently a senior lecturer in law at the University ofAberdeen teaching and researching mainly in domestic andinternational insolvency law and related fields. She chaired theScottish Executive’s Working Group on Debt Relief which reported inJune 2005 and provided technical consultancy services for the Scottish
Executive in relation to the bankruptcy aspects of the Bankruptcy and Diligence etc (Scotland)Act 2006. She sits on the Insolvency Solicitors’ Committee of the Law Society of Scotland andR3’s Scottish Technical Committee. She is a qualified solicitor and is currently the Examiner inCommercial Law and Convener of the Exam Board of the Law Society of Scotland.
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Irit Mevorach
University of Nottingham
Irit Mevorach read Law at Tel Aviv University, Israel, where shegraduated in 1997 with distinction, and was subsequently admitted tothe Israeli Bar. For several years Irit practiced law in one of Israel’sleading law firms specializing in corporate and insolvency law. Duringthat time Irit obtained her LLM in commercial law from Tel Aviv
University. She received her Ph.D in cross-border insolvency from University College London in2006. She joined the School of Law of the University of Nottingham as a Lecturer in September2006. Irit’s teaching and research interests are in the areas of company law, insolvency law andcommercial conflict of laws, with her primary research interests being in international insolvencyand corporate groups. Irit has published articles in several international journals one of whichhas won the 2005 gold medal prize for research in international insolvency from the InternationalInsolvency Institute. Irit has worked as a consultant for the European Bank for Reconstructionand Development, and is taking active part in the UNCITRAL work in the area of insolvency,both as an invited speaker to an expert colloquium and as a member of the UK delegation toUNCITRAL working Group V (insolvency law).
Paul Omar
University of Sussex
Paul J. Omar was educated in Malaysia and the United Kingdom. Heobtained his LLB at the University of Exeter in 1989 and was called tothe Bar of England and Wales at Gray’s Inn in October 1990. Hespent his first six months in chambers at 1 Crown Office Row (RodgerBell QC), followed by a recognised stage with Gide Loyrette Nouel in
Paris. He was admitted as an Advocate and Solicitor of the High Court of Malaya in December1991 following a period of recognised pupillage at Azman Davidson and Co, a firm ofadvocates and solicitors in Kuala Lumpur, Malaysia. After a further period of practice with GideLoyrette Nouel as an avocat étranger, he returned to academic life and completed two degreesat Sussex University. A masters degree in International Commercial Law was obtained in 1996with a dissertation focusing on a comparison of French and British insolvency laws. A laterDPhil on the topic of the European Insolvency Convention (later Regulation) was obtained in2002. While reading for the doctorate, he also spent time in France on a stage with BorlooSaigne et Associés, specialists in corporate insolvency law. Following this, he began tutoring atSussex University and later obtained a lectureship at the University of Wales Swansea. He hasnow returned to a position at the University of Sussex.
His research interests are in the corporate field, particularly insolvency law, especially in itscomparative and international dimensions.
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Harry Rajak
University of Connecticut School of Law
Harry Rajak is visiting professor of law in the University ofConnecticut School of Law and professor emeritus in the Sussex Law School; formerly the joint editor of Insolvency Law and Practiceand a consultant at Lovells, solicitors, Harry Rajak was a member of the United Kingdom DTI/Treasury Review of Company Rescue
and Business Reconstruction Mechanisms, and he has been a consultant and author onstudies of the bankruptcy laws for the World Bank and of a number of foreign jurisdictions,including South Africa. He has written widely on Company Law, Corporate Insolvency andCommercial Law issues.
Janis Sarra
University of British Columbia
Dr. Sarra is Associate Dean and Associate Professor of Law,University of British Columbia Faculty of Law, Vancouver British Columbia, and Director of the National Centre for Business Law. In 2004, she was awarded title of DistinguishedUniversity Scholar for her work in corporate and securities law.
Dr. Sarra is one of two INSOL Scholars for 2006-2007.
Dr. Sarra teaches commercial insolvency law, corporate and securities law, contract law andlaw and economics at the UBC Faculty of Law. She was a commercial and labour arbitratorprior to joining the Faculty of Law in 2000, and is a member of the Bar in Ontario. Dr. Sarrapreviously taught advanced corporate law at the Faculty of Law University of Toronto andtaught at the Faculty of Business Ryerson University. She is a Senator of the University ofBritish Columbia. Dr. Sarra is a member of the European Corporate Governance Institute, TheInsolvency Institute of Canada, the American Bankruptcy Institute, INSOL Academics Forum,the International Insolvency Institute, the Canadian Bar Association and the Canadian andAmerican Law and Economics Associations, and researches and writes in the areas ofcorporate, securities law and commercial insolvency law. She previously sat on the Board ofDirectors for the Canadian Association of Insolvency and Restructuring Professionals as anoutside director and was a director of the Canadian Insolvency Foundation.
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INSOL ACADEMICS’ GROUP MEETING
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Leonie Stander
North West University
Anita Leonie Stander is a professor of Law at the North-WestUniversity (Potchefstroom Campus), South Africa. She obtained thefollowing degrees: B. Iuris (PU for CHE); LL.B (PU for CHE); LL.M(UNISA) and LL.D (PU for CHE). Prof Stander’s field of researchspecialisation is primarily in the law of insolvency and, to a lesser
degree, in insurance law. The topics of both her Master’s degree and doctorate dealt withinsolvency law. Prof Stander has published approximately 45 peer-reviewed articles, casenotes and chronicles. In 2000 she received the award “Best First Contribution in the Journalfor Juridical Science” from the society “Die Vereniging van Moritz Bobbertz Penninghouers”.Prof Stander has already delivered one doctoral student and twenty four (24) Masters’ degreestudents. She is currently supervisor to another two doctorate and two Masters’ degreestudents. She also teaches two courses in the LLM degree in Import and Export Law. ProfStander has participated in a number of national and international conferences, seminars,colloquia and workshops. She is currently involved in the following three projects: (1) Tradeand Development (Insurance against the risk of loss or damage in the process of exporting);(2) Trade and Development (Securing payment of the purchase price of products and goodsexported to other countries); (3) Environmental Law and Development (Insuring your liabilityagainst environmental claims).
Lee Steyn
University of KwaZulu-Natal
Lee Steyn is an Associate Professor in the Faculty of Law at HowardCollege, University of KwaZulu-Natal, in South Africa. She has taughtfor many years in contract law and insolvency law, in bothundergraduate and postgraduate programmes. She is an Advocate ofthe High Court of South Africa. She has a number of publications in contract and insolvency and her research interests include human rights issues in insolvency law.
Reinout Vriesendorp
Tilburg University
Reinout Vriesendorp is professor of Civil and Commercial Law andone of the researchers/directors of the Tilburg Center for CompanyLaw at Tilburg University in the Netherlands since 1992. Before hewas a lawyer (admitted to the Bar of the Supreme Court in TheHague, working in the The Hague and New York offices of the firm) in
the lawfirm of (nowadays called) De Brauw Blackstone Westbroek (1985-1992) and associateteacher/researcher Roman Law at Groningen University (1982-1985), where he also graduatedin Law and defended his Ph.D thesis on “Retention of title”. He is member of the editorialboard of the Dutch Insolvency Law Review (Tijdschrift voor Insolventierecht) since its inceptionin 1995 and member of the editorial board of International Insolvency Review andcommentator in the well-known Dutch Student Law Review “Ars Aequi”.
He is one of the teachers and directors of the joint professional insolvency law course requiredfor INSOLAD members. Vriesendorp is substitute-judge in the Court of Appeals in Amsterdam(insolvency chamber) and member of the Governmental Committee preparing a revisedInsolvency Act for the Netherlands. He is academic member of INSOL International and INSOLEurope since 1997.
Adrian Walters
Nottingham Trent University
Adrian Walters is a graduate of the University of Cambridge and aqualified solicitor in England and Wales. He is currently Geldards LLPProfessor of Corporate and Insolvency Law at Nottingham LawSchool,Nottingham Trent University (UK). He is a member of theInsolvency Lawyers’ Association’s Academic Advisory Group (UK)
and the academic member of the UK Department of Trade’s Insolvency Service PolicyEvaluation Group. He has published widely on bankruptcy law and company law.
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Bob Wessels
Vrije University Amsterdam, St. John’s University, New York
Bob Wessels is Professor of Commercial Law Vrije University,Amsterdam, the Netherlands and Distinguished Adjunct Professor ofInternational and Comparative Law, St. John’s University, New York,USA. In the field of insolvency law his affiliations include being thefounder and first chief-editor (1995-1997) of ‘Tijdschrift voor
Insolventierecht’ (Dutch Insolvency Law Review), Member of the Netherlands Royal Committeeto advice on the renewal of the Netherlands Bankruptcy Act, Member of the Core Group of theAcademic Wing of Insol Europe, Director of the Board of the International Insolvency Institute(III), International Fellow of the American College of Bankruptcy and member of the AmericanLaw Institute.
In recent years he was Visiting Professor at Universities in Frankfurt (Germany) and Liége (Belgium).
He published hundreds of articles and twenty-five books (in Dutch) on all topics of civil andcommercial law and he is co-editor and author of ‘Tekst & Commentaar Insolventierecht’ (Textand Commentaries Insolvency Law, 5th ed., 2006) and of Wessels ‘Insolventierecht’(Insolvency Law) (10 Volumes) (1999 – 2003). In the second edition of this series, to appear asof 2006, Vol. X on International Insolvency Law (670 pp., written in English; Kluwer, 2006, ISBN90 41 12602 3) was published.
His other English publications include:- Business and Bankruptcy Law in the Netherlands; Selected Essays, The Hague-London-
Boston (1999);- Current Topics on International Insolvency Law, Kluwer, Deventer, 2004- Gabriel Moss and Bob Wessels (eds.), EU Banking and Insurance Insolvency. An Annotated
Guide and comments on the implementation of EC Directives 17/2001 and 24/2001 in EUMember States, Oxford University Press, 2006.
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Session A – Dealing with insolventestates: comparative perspectives(including the liquidator’s duty to getin all the insolvent’s property;vulnerable transactions; claimsagainst negligent or fraudulent directors and managers; exempt property)
Professor Harry Rajak, University of Connecticut School of Law and Donna McKenzie Skene, Senior Lecturer, University of Aberdeen
“Proposal for a Comparative Study on Determining the Debtor’s Estate”
Professor Lee Steyn, University of KwaZulu-Natal“Sale of an insolvent person’s home”
Professor Leonie Stander, North-West University“Piercing the veneer of the trust: liability of trustees of a business trust for fraudulent trading”
Professor Reinout Vriesendorp, Tilburg University“The treatment of assetless estates: Dutch perspectives and comparative reflections”
Sulette Lombard, University of Pretoria“Claims against negligent or fraudulent directors: proposed amendments to South African legislation”
Photograph courtesy of South African Tourism
ASD
A. The Insolvent Estate
Prof Leonie Stander
North-West University
(Potchefstroom Campus)
Piercing the veneer of the trust
• Liability of trustees of a business trust
for fraudulent trading
– Introduction
• Parker case
– Family business
» Business trust
» “as before”
» Antagonism of court
Piercing the veneer of the trust
• The trust
– Accumulation of assets and liabilities
• Separate entity
– Not legal persona
» Property trust
» Assets vest in trustee(s)
» Beneficiaries
» Trustees act jointly
Land Bank v Parker
• Facts:
– Trust deed: 3 trustees• Husband and wife only
– Loans
» Sequestration
» Appeal
» No locus standi
» While only 2 trustees
» BUT
Parker case: Obiter
• Duty of trustee
– Separation: Control from enjoyment
• Secure independent judgment
– Care, diligence, skill
» Manages affairs of another
» Breach of trust
Turquand
• Outsiders may assume
• Not bound to inquire
– Useful Role in Trust Law• Trust deeds complex
– Close identity of interests
– Between trustee-beneficiaries
» Inference of implied/express authority
» More readily drawn
Piercing the Corporate Veil
• Particularly family trusts
• As business trusts
– Functional separation lacking
• For protection
• But “as before”
• Core idea debased
• Extend company law principles
– Trust mere cover
» Assets belong to trustee
Consequences
• Badenhorst case (SCA) (divorce)
– Husband full control of assets of trust
• Factors
– Seldom consulted co-trustee
– Discharge co-trustee
– No regard trust assets & own assets
• Alter ego
• Assets in redistribution order
Consequences
• Thorpe case (SCA)
– Warning
• Cannot enjoy advantage of trust
• And cry foul
Conclusion
• Insolvency & Sequestration
– Assets used in satisfaction of debts
• Beneficiaries no recourse
• Insolvent estate
– Liable restitutionary remedy?
Session B – The treatment ofcorporate groups in insolvency (with particular reference to multi-national groups of companies)
Dr. Irit Mevorach, University of Nottingham“Determining the proper venue for multinational corporate groups’ insolvencies”
Dr David Morrison, Queensland University, Dr Colin Anderson and Ms Jenny Dickfos, Griffith University
“The insolvency implications for corporate groups in Australia: recent events and initiatives”
Professor Janis Sarra, University of British Columbia“Maidun’s Challenge: the treatment of corporate groups in insolvency”
Photograph courtesy of South African Tourism
ASD
1
DRAFT
Determining the proper venue for multinational corporate groups’ insolvencies
Irit Mevorach*
I Introduction
Promoting key insolvency goals in the context of insolvency within multinational corporate groups
(MCGs) heavily relies on the adoption of a global approach to handling such proceedings. This is
particularly pronounced in respect of maintaining fair and efficient international insolvency regime,
but also in enhancing certainty and predictability and preventing forum shopping1. A ‘global
approach’ in this context implies taking a worldwide perspective over the MCG insolvency which
may also involve a disregard of the corporate form to a certain extent. In other words, it suggests a
‘groupwide’ concept. In appropriate cases (crucially when dealing with an integrated MCG or any
integrated part thereof) a centralized process could be the most effective way forward for an
insolvent MCG. This may imply handling the insolvency proceedings of the various entities from a
single jurisdiction and under a single legal regime. Consequently, reducing costs of parallel
proceedings, and facilitating the coordination of a global sale of assets or the orchestration of
reorganization on a group scale. Furthermore, even when subsidiaries were significantly
independent and a local process is both efficient and fair it may still be beneficial for the various
proceedings to be supervised and coordinated from a single jurisdiction2. Which ever is the case, it
should be emphasized that handling (or supervising) the insolvency proceedings from a single
jurisdiction does not necessarily entail substantive consolidation of the insolvency estates3. In fact,
in most scenarios ‘a consolidation of the cases’ (consolidating the procedural aspect of the
insolvency rather than the actual entities) would be the necessary and sufficient mechanism needed
to facilitate the insolvency process. Thus, a joint administration of the affiliated companies’
proceedings can be held. A particular court presides over all the cases and one office holder (or a
bundle of joint administrators) can be appointed for the various debtors. However, crucially each
company remains separate in the course of insolvency, and creditors recover their claims from the
particular entity to which they belong4.
Taking such a ‘global approach’ to cases of MCG insolvency not only implies taking an enterprise-
law point of view in this respect (as opposed to strict adherence to ‘entity law’) but also that the
‘enterprise’ has a single common geographical locus and that such a locus may be identified.
Evidently, determining the ‘home country’ of the corporate group as such (namely the proper venue
from which the ‘group insolvency process’ could be jointly handled, or supervised) is a
fundamental challenge to the application of a ‘global approach’ in this sort of cases. Crucially, as
any such definition should be able to accommodate a variety of situations and possible scenarios
and at the same time support the fulfilment of the insolvency goals (e.g., maintain cost-efficiency
and predictability and prevent forum shopping). Indeed, it has been argued by a major opponent to
any universalist approach to international insolvencies in general5 that the Achilles’ heel of
universalism is the difficulty to apply it to MCGs, in particular the indeterminacy of the home
country issue in this regard. Arguably, ‘the greatest uncertainty as to the meaning of ‘home
country’ results from the fact that most large firms are not single entities, but corporate groups’6.
Hence, it is argued that the test for determining the proper jurisdiction for MCG insolvencies is
greatly uncertain. It continues to (convincingly) claim that to date, ‘no court or commentator has
addressed directly the critical question of whether the home country… is determined once for the
* School of Law, University of Nottingham.
2
entire corporate group, separately for each member of the group, or for the financially distressed
entities of the group as a whole’7. Generally, the need to identify a ‘home country’ for the debtor
under a universalist approach (as the jurisdiction that will govern the worldwide process) makes the
resulting system (according to this view) very uncertain and unpredictable8.
Evidently, prima facie there is no ready-made ‘home country’ concept of an MCG. Thus far, cross-
border insolvency models have not provided an answer for the question of proper jurisdiction in
cases of international corporate groups. The EU Regulation9 and the UNCITRAL Model Law
10 do
not deal explicitly with the issue of corporate groups11
. The ALI Principles12
do allow for a
subsidiary to open insolvency proceedings in the parent’s jurisdiction, yet this place does not
necessarily reflect the proper venue of the group, and it is only provided as an option for the
subsidiary13
. Hence, the proper venue for MCG insolvency, which is invoked by the application of
a ‘global approach’ to such cases - this place within which proceedings could be centralized (or
supervised), has to be thoroughly considered. It is the aim of this paper to address this issue and
consequently to suggest the criteria for identifying this potential locus while specifying any
limitations it may hold. It will be done by first delineating the evaluation method of the possible
alternatives for the proper venue and subsequently discussing those alternatives. Other questions
pertinent to international groups in insolvency such as the appropriate remedies that should be
available during the insolvency process itself are outside the scope of this paper. However, before
venturing forth, another preliminary issue must be addressed. That is, the nature and definition of
the corporate group with which we are dealing and for which a ‘home country’ (or ‘proper venue’)
needs to be identified. Obviously, this should be clarified in order to come up with a competent
(and relevant) test for the proper venue. Later on, we will also discuss particular circumstances in
which a single venue for the MCG insolvency can not be located or where the test provided is
impractical or inappropriate and perhaps alternative tests for identifying the venue need to be
applied.
II Defining the subject matter- the MCG in insolvency and the scenario of integration
We have referred above to ‘an MCG’ and ‘an integrated MCG’, however the meanings of these two
terms for the purpose of this paper need further clarification, before embarking on the quest for the
proper forum for the MCG. With respect to the meaning of an MCG, it should be considered
whether we are going to have as our subject matter only ‘equity based’ groups, or whether we
should include other business structures as well, and thus embrace a broad definition for an
international group. Furthermore, what do we mean by integrated MCGs? which is supposedly the
specific attribute of an MCG that dictates whether identification of a proper venue in the insolvency
of group members’ case will be a relevant issue. In addition, we should also refer to the question of
what parts of the group will we look at when choosing the place in which to handle the
proceedings.
The multinational corporate group (MCG)
Worldwide business operations via affiliates may take various legal forms. These can be classified
into a number of principal types14
. ‘Equity-based’ forms of multinational enterprises may occur in
the classic ‘pyramid’ form of ownership that crosses borders15
, or alternatively as transnational
mergers in which two or more parent firms integrate their business operations and jointly hold a
limited liability company16
. Additional example could take the form of cross- shareholding groups
coupled with coordinated management17
. ‘Contractual-based’ forms of MCGs emphasize
contractual linkages between foreign companies or international ‘network organizations’18
. Such
3
structures can be achieved via the establishment of distribution franchise alliances, by licensing
production rights as part of a production franchise package19
, or by establishing an international
consortium20
. Another typical form of MCGs is the ‘international joint venture’ between companies
from more than one country. In these cases, two or more parent undertakings (or controlling
entities) cooperate to pursue a commonly commercial activity. The parents are linked via the joint
venture (which they either own or with which they have a contractual linkage) and typically share
the control over it21
. Another type of MCG form is the ‘informal alliances’ that lack clear legal
structure (for instance, when a bundle of companies cross-hold each other's shares, however, this is
done in a way which does not make any of them a subsidiary22
). Finally, multinational enterprises
may be partly or wholly state-owned, or they may be structured as supranational forms of
international business. Such types of supranational entities can be part of a group in which the top
company can be supranational as well or a national one23
. To summarize, firms may subdivide their
economic activities among separate entities operating in different countries in a variety of legal
patterns (such as networks and other type of interrelations) rather than exclusively relying on the
basic equity based 'pyramid' form.
Evidently, all these various structures involve a number of undertakings that are linked in some
form or another. As a result, a degree of coordination or of mutual involvement may potentially
occur in any of the above legal patterns. Thus, for instance, parent and subsidiaries (linked by
equity) may altogether operate a single business, or parents may be significantly involved in the
management of the subsidiaries. Crucially however, this may also apply where an international
business is carried on by means of contract, where there may still emerge a relationship of control
or coordination24
.
Indeed, economists have suggested that transnational businesses may be linked by contract rather
than equity and may be organized with a high degree of decentralization. The vital link can thus be
control (as well as common ownership) or coordination even when it is exerted over autonomous
action centres25
. The OECD Guidelines26
provide a broad definition to multinational enterprises
(while observing that they usually consist of separate entities established in a number of countries).
It puts focus on coordination rather than control as the possible manifestation of linkage between
separate entities, and suggests that the amount of influence and control over affiliates may differ
between enterprises with different degrees of autonomy enjoyed by affiliates27
.
It is suggested here that for our purposes (namely, international insolvency of corporate groups with
a focus on the issue of a ‘proper venue’ for a centralized process), a lenient approach to the
phenomenon of an MCG should be adopted as a starting point. Indeed, any of the above mentioned
legal forms may bring about an insolvency scenario of multiple debtors (if the enterprise or any part
thereof collapses) which are linked and therefore may require the application of a worldwide
perspective to the group’s insolvency. Furthermore, it would be of limited practical value to apply
such a centralized approach as was mentioned in the Introduction only to certain sorts of group
structures (for instance the equity based ones). Such a ‘limited’ approach will permit certain MCGs
to evade legal consequences (in the context of insolvency) as well as prohibit certain MCGs from
the benefits a global model may propose, if there operational structure is different than the ‘basic’
traditional one. Hence, a limited method that applies only to a restricted version of the MCG will
lack generality and will be deemed useless.
The MCG should therefore be defined (in the present context) as: “any enterprise comprised of a
number of undertakings28
situated or established in more than one country and which are in fact
mutually connected either by common ownership or via other links so that they may co-ordinate
their businesses”. ‘Ownership’ should receive a broad definition including the various legal forms
indicated above. It includes both parent-subsidiary relationship and affiliates linked via a common
individual shareholder (or a number of shareholders)29
. In addition, the group can consist of directly
4
owned subsidiaries as well as multi-tiered groups. Furthermore, holdings structures can range from
a full ownership to partly owned subsidiaries. ‘Other links’ may be performed via contracts or
cross-shareholdings as explained above. Finally, the MCG may occur in a variety of sizes and
dimensions. It can range from a large business enterprise with operations that span the entire globe
to small sized groups30
. Thus, the definition of the MCG will include all groups’ sizes and will not
be limited only to the large organizations.
Our starting point is a very wide one which encompasses nearly any possible structure that supports
a group operation. However, whereas different structural mechanisms may bring about the need to
link between connected companies, it is only when the multinational enterprise is functionally
integrated (on any part thereof) that assigning a single venue becomes necessary31
.
The integration factor of MCGs
When considering the application of a centralized approach to the MCG insolvency, it becomes
clear that it should be specifically directed at those MCGs in which the various components
comprising the group are significantly linked. Accordingly, the need to identify a proper venue is
particularly pronounced in the case of an ‘integrated’ MCG. More specifically, the term Integrated
MCG refers to those worldwide enterprises that were managed as a group, jointly operating a
coordinated single business or even centrally controlled business. The case of an MCG in which the
various components were inter-linked resulting with financial and administrative interdependence is
also included under this term32
. However, this does not necessitate that the entities are commingled
or very highly inter-dependant (this can be referred to as strongly integrated MCGs). On the other
hand, it excludes pure conglomerates or other diversified groups, where the enterprise does not
collectively carry out a common business33
. Typically, control will not be exercised, and an
integrated group will not emerge, where companies restrict their activities to investment return
distinctive from the corporation’s main line of business34
.
Integrated MCGs may be hierarchically structured with skills and senior decision-takers
concentrated around the parent company35
. Alternatively, they can operate in a more decentralized
manner. As was explained elsewhere36
, when a firm becomes multinational the division of
responsibilities and tasks between the headquarters, regional offices and affiliates may change. In
cases where the need to coordinate the global activities is important the locus of decision taking
remains in the centre, though the role of the head office may change. Instead of the ultimate policy-
maker and directing ‘brain’ the headquarters will act as coordinator and identifier of new business
opportunities and the creator of task force networks within the firm37
. Where the managements of
local units need a great deal of local information the locus of decision taking may be largely
decentralized to regional offices and/or local affiliates. Nevertheless, even this later case in which
the group is managed through a decentralised operational mechanism can fall under our definitions
of integrated MCG if the group components, for instance, are interlinked.
As mentioned above, for such an enterprise (or any part thereof) that was integrated and insolvent,
identifying a common venue for the insolvency process will be advantageous and will facilitate an
efficient joint administration of the group insolvency. If the group was conducted as an integrated
one in the ordinary course of business profitable 'cross-entity' insolvency solutions are very likely
to be attainable and thus it would be beneficial to operate a joint insolvency process. Whether for
the purpose of liquidation or reorganization, it will often be beneficial to link between the separate
entities, their assets and businesses “mimicking” the MCG’s 'real' way of conducting the business
in its ‘golden days’ and its operational links. This linkage in the course of the insolvency procedure
will broaden the opportunities available to the stakeholders. Yet, for the decentralized groups,
where subsidiaries were significantly independent, cost efficiency and fairness considerations may
5
suggest that it is more sensible to have local proceedings for each component, while a single
instance has a coordinating role over the entire group proceedings38
.
Finally, we should clarify which parts of the integrated group will be included in our joint
insolvency process and within which we will need to locate the proper forum. Insolvency should
receive here a broad interpretation, taking into account the special characteristic of a group and the
integration between the relevant members. In fact, integration and insolvency are inter- dependant.
The solvency of a particular entity may be very much contingent upon the financial situation of
other group members, to the extent that it is an integrated group. The financial state of a member of
a group may jeopardize the financial survival of other affiliates. Liquidation of a particular
component may have a damaging effect upon the reputation of the rest of the group. It may also
affect the financial viability of the others resulting with a 'domino affect' leading to a total
shutdown. Therefore, the insolvent group to which we are referring comprises all those entities that
are insolvent or on the verge of insolvency or may enter insolvency following the insolvency of
other group members.
In sum, our subject matter is any sort of MCG, within which we will look for the insolvent
integrated parts (for the purpose of centralization and consolidation). Non- integrated parts of the
group or truly solvent entities will be excluded, at least initially, subject to new information being
revealed. It should be remembered that an insolvency case is dynamic and further in the process it
may appear beneficial to tighten the linkage between the insolvencies.
III The sort of venue we are looking for
After setting the context in terms of defining the sorts of corporate groups we are interested in, we
can now proceed to explore the main goal of the present study – what will constitute the proper
venue (or the ‘home country’) of the MCG in distress. It will be assumed that a ‘global approach’ to
insolvencies within MCG (especially for integrated MCG) is a necessity39
, hence we are not dealing
here with the justification of such an approach in general and the potential clash it may have with
entity-doctrine (the need to respect the corporate form). Rather, I ask what sort of place can serve as
the proper venue in which insolvency proceeding of an integrated MCG could be handled.
Evaluating such a location should rely on its correspondence to the basic insolvency goals (that is,
cost-efficiency, fairness and predictability and prevention of forum shopping) an insolvency regime
should aspire for. Compliance with those very same goals is also the main justification for the
adequacy of a global approach to these cases40
. Indeed, the test for the chosen forum and the right
approach to be taken for its identification should fit with these goals, as it is a component of the
broader idea of adopting a global approach to such insolvencies.
‘One would be more than enough’: looking for a single venue
The goal of enhancing economic efficiency dictates that the approach taken with regard to the
proper venue would be to locate ‘one insolvency forum’ for the group as a whole, rather than
looking for the centre of gravity (or any other relevant test) of each entity separately. The latter
approach, currently taken under the EU Regulation (in the lack of specific rules for corporate
groups)41
may ‘arbitrarily’ result with efficient joint administration, when all companies involved
share a mutual COMI42
. However, if the goal is to enable joint proceedings to be taken place in the
appropriate cases, courts should consider the entire group scenario and aim at identifying a single
venue where possible, and not count on such haphazardly results. Similarly, we would aim at
6
investigating the entire group at once, avoiding successive filing by those entities that entered
insolvency as a result of the situation of other members.
It can be argued that there is an intervention here with the corporate form, as we are looking at the
group as an ‘entity’ for the purpose of identifying a venue for insolvency proceedings. However, it
should be emphasized that this does not in itself constitute ‘lifting the veil’, not in the common
scenario at least. As mentioned earlier, when the companies are not intermingled, the idea- and the
ultimate purpose of the process of forum identification- is to consolidate the cases procedurally for
coordination purposes, leaving the corporate form of each entity intact43
.
This will also accord with the concept of applying a vigorous use of the “doing of business” or
“presence” criteria of jurisdiction44
(here in the context of insolvency proceedings for an MCG).
Indeed, it has been suggested, with regard to jurisdiction over holding companies in countries
where their subsidiaries operate and vice versa (whether creditors of a subsidiary can sue in the
home country of the parent) that referring to each company separately or relying on a pure agency
relationship might not be the ideal solution45
. Similarly, a more flexible test should be applied to the
case of relationship between affiliate companies in the context of handling insolvency of an MCG.
The focus here should be on the economic reality of the relationship between the parent and
subsidiaries rather than looking at each company separately.
A fair and predictable centre
Certain dimensions of the goal of promoting fairness, particularly those aspects bearing on the
administration and location of proceedings (in the context of international insolvency) demand that
the designated forum will accord with creditors’ expectations. Indeed, creditors' expectations are
fundamental to the issue of international jurisdiction in which to handle cross-border insolvencies46
.
Clearly, creditors should be able to foresee where the insolvency of a company is going to take
place and calculate their risk accordingly47
. In addition, substantial legal rights (such as the ranking
of claims) might be affected by changing the location of the insolvency proceedings of a particular
group member48
. However, as in a group scenario there are various clusters of creditors involved,
different creditors may have different interests and different expectations regarding the location in
which a certain member's insolvency will be handled. A global look is therefore essential in order
to evaluate all relevant interests and expectations. It could be conceptualized that the genuine
expectations of creditors should fit with and stem from the way the MCG was actually structured
and managed. Examining the way the group was operating and the way creditors were doing
business with the corporation is therefore a key factor in assessing and balancing their various
expectations with regard to the location of insolvency. Furthermore, more often than not, a
thorough examination of the facts pertaining to an integrated group's insolvency may reveal that it
was indeed clear even to ‘locally oriented’ creditors (of local subsidiaries) that they dealt with a
member which was part of a group. In addition, meeting creditors’ expectation in this way should
go hand in hand with the goal of producing clear and predictable rules. Thus, the designated venue
should also be a place easy to identify and to predict especially so that the different creditors (e.g.,
those that belong to different components of the group) are likely to arrive at the same conclusion.
A real vs. ‘surreal’ centre
Preventing forum shopping demands that the chosen venue will be the place with the strongest
connection to the MCG; namely, there should be a real nexus between the group as a whole and the
proper venue to handle the joint process. This way parties will find it more difficult to ‘elude’ the
7
proper jurisdiction and to choose a different but more favourable one when commencing insolvency
proceedings. Otherwise, with a careful planning an MCG may succeed in avoiding unfavourable
jurisdictions or subject certain subsidiaries to particular insolvency regimes, albeit these subsidiaries
being in reality closely connected to the rest of the group and operating elsewhere. When the system
provides for an easy separation of related companies within an MCG, debtors and creditors will be
bound to engage in jurisdictional quarrels regarding the appropriate location. Yet, it should be borne
in mind that both debtors and creditors may nevertheless be engaged in manipulation of the forum,
no matter how accurate the test would be at reflecting the economic reality of the business. Hence,
the approach taken for identifying the forum should attempt at tackling such manipulations.
To summarize, the venue we are looking for will reflect the centre of the integrated insolvent group,
applying a global perspective, examining the group scenario as a whole. The MCG should have a
genuine connection to the venue, reflecting the way the group was operating and dealt with its
stakeholders in the ordinary course of business. At the same time, it is our objective to design a
clear test for determining the venue that could be easily applied and conveniently identified by
relevant parties.
IV ‘Meet the candidates’: Alternatives for a proper venue
Thus far, three main factors (or tests) were proposed and used in cases of international insolvency
of single debtors to determine issues of international jurisdiction49
. That is, the debtor’s place of
incorporation50
, the debtor’s centre of main interests (COMI)51
and the location of “principal
assets”52
. Evidently, the COMI test is the most prominent one and was therefore incorporated into
existing models for cross-border insolvencies of single debtors53
.
However, the place of incorporation still retains a role in issues related to cross-border insolvency.
Thus, under English law, for instance, a foreign dissolution of a company is recognized when the
dissolution has taken place under the law of the country of incorporation54
. Under the EU
Regulation it is presumed that the company’s place of registered office is the COMI55
. Similarly,
the Model Law adopts this presumption when designating the country of “main proceedings”56
.
However, the presumption can be rebutted under the EU regulation if there is a proof that the COMI
is located in some other Member State57
. Thus, it is accepted under these regimes that such
formalities as the place of incorporation are not determinative in ascertaining the venue for the
insolvency process, but rather functional realities are key factors58
. Basing the decision regarding
jurisdiction merely on these criteria is regarded as insufficient and it is recognized that it can
encourage forum shopping by parties initiating insolvency proceedings59
. Nevertheless, it was
recently emphasized by the ECJ in the Eurofood case60
, that substantial evidence is needed in order
to rebut the presumption of incorporation61
. Earlier EU Regulation cases showed that judges tend to
give lesser weight to the incorporation presumption. For instance, in the case of Ci4net.com62
incorporation was only one of many factors that were considered. It was not regarded as a decisive
or predominant factor in determining the COMI63
. In any case, as has been commented by professor
LoPucki64
‘bankruptcy havens’65
, in which companies chose to incorporate but hold no significant
business, still play a role in multinational insolvencies66
. Indeed, this was criticized as encouraging
forum shopping, using these ‘bankruptcy havens’ as ‘rubber stamps’ to confirm foreign plans or to
take control over bankruptcy cases although there is at the most a nominal headquarters in the
‘haven’67
. It is certainly expected that bankruptcy heavens will gradually lose their practical value,
as the ‘new’ functional test for ascertaining jurisdiction will be embraced by more and more states.
8
Another rather weak basis for determining jurisdiction (the principal jurisdiction for the insolvent
company) is the assets-based test (or any test based on amount of activities). Assets and activities
may be spread among countries with none of them having a clear majority. In addition, as was
indicated elsewhere68
some assets could be of mobile nature and even be outside the boundaries of
any country69
. The need to measure and weigh between quantities entails high level of complexity
which makes the test a lot less predicted and prone to manipulations. It will be difficult to identify
the place in which most of the assets reside, and to predict in advance what will be the evaluation of
a future court in this regard. Hence, this test can not accord with the need to meet creditors’
expectations and avoid manipulations of creditors and debtors in choosing a preferable forum to
open insolvency proceedings70
.
So far we have considered those tests in the context of a single debtor. However, when dealing with
a group scenario applying either the incorporation test or the assets-based test to determine the
proper venue is even less suitable than in the single debtor case. The place of incorporation may be
different for each entity comprising the group, since we are dealing with a multinational enterprise
whose entities are spread among various countries. Keep in mind that our goal here is to find a
single focus-point of the entire group. As aforesaid, a major feature of a desirable venue for
handling a group’s insolvency is that it will have the strongest connection to the group as a whole.
However, MCGs are not incorporated as such in a particular country so there is no single country
that can be identified as the place of incorporation of the group71
. A possible adaptation of the
incorporation test to the group scenario could suggest the place of incorporation of the parent of the
MCG as the proper venue for the proceedings. However, this could clearly be rejected as it may
lead to a completely preposterous situation in which for instance a number of European companies
in default are supervised by a Cayman Island court due only to the fact that the parent holding
company was incorporated there.
Similarly, group’s members may each have its own principal asset or operation location so that no
one single location can be identified for the group as a whole. Alternatively, trying to identify a
single place as the centre of gravity by summing up the entire group’s assets or operations and the
proportionate part located within the various entities is also very problematic. It will be difficult to
do such a calculation of quantity or value of assets or operations where for instance the entities
comprising the group were handling a variety of different operations (e.g., a group of companies
that develop IT security mechanism and include both software developing for consumers, software
development for industries and hardware development) and accordingly owned different sorts of
assets or had different kinds of activities. The need to evaluate very different types of operations
makes the process even less predictable.
As mentioned in the beginning of this section, the COMI test is the concept underlying major
existing models for single debtors72
. It is based on the idea that the proposed place for opening
proceedings should be the one to which the debtor is substantially linked73
. Hence, as aforesaid,
incorporation is only a presumption, and the mere presence of assets in a particular country is
insufficient74
. In essence, this suggests that courts should look for the centre of the actual main
interests of the debtor; however, the exact meaning of such a centre is somewhat vague. Indeed, the
EU Regulation does not define what the COMI of a company is. Prima facie, a COMI could be
identified according to operations (or assets) or otherwise it could be based on aspects of
management.
However, both the Report Virgos/Schmit and the Recitals to the EU Regulation75
stress that the
COMI should be the place where the debtor conducts the administration of his business on a regular
basis and that it should be ascertainable by third parties76
. Interpretations of the COMI concept
embedded in the Model Law have also suggested that it directs courts to consider the country where
the debtor’s headquarters are located as the country of main insolvency proceedings77
. The rationale
9
underlying the incorporation presumption discussed above is also derived from the (not necessarily
correct) assumption that normally the registered office of the company will accord with the actual
head-office78
. However, as the idea is to look for actual place of main interests and not to be
satisfied with a place of incorporation, if the actual headquarters are located in a different place than
the registered office then the former will prevail79
. Therefore, it seems that in essence, these models
seek to look for the real place from which the business of the debtor was managed- an operational
headquarters rather than a façade of headquarters, such that can be ascertainable by third parties. A
real top-tier management is supposed to be in the chosen venue along with the central
administration of the debtor.
It will be suggested herewith that the idea of a COMI for a single debtor- in its common
interpretation as referring to the operational headquarters of the company - could be extrapolated to
the case of an integrated MCG. As will be argued, such an approach will normally direct the
proceedings to the most proper venue when dealing with an MCG80
, facilitating the achievement of
the main insolvency goals.
V The location of the group’s operational headquarters as the definitive factor of the location
of its single COMI
Since our aim is to identify a single location and preferably place all proceedings of the group’s
members (which are under insolvency) there, it is suggested to use the concept of a COMI for a
debtor in the MCG scenario as well. That is, to identify the COMI of the group as a whole and to
use this location as the proper venue for handling (or supervising) the MCG’s insolvency
proceedings.
Using the ‘headquarters criterion’ (or the main place of administration of the debtor’s affairs) in the
group case will enable identification of the place of command and control of the entire integrated
centralized group (we will address the scenario of decentralized groups within the next section)81
.
In ‘centralized integrated groups’ we refer to those cases where the entire enterprise was actually
controlled from a single place in the normal course of business. Since this situation is a matter of
economic reality, its identification derives inter alia from the way the creditors dealt with the
entities comprising the group82
. It is also plausible to assume that using this definition the group's
COMI can be ascertainable by stakeholders that dealt with this sort of enterprise. Evidently, even to
‘locally oriented’ creditors (of local subsidiaries) it may have been clear that they dealt with a
member which was part of a group. They may have negotiated with a holding company located
elsewhere, or their contracts may have been subjected to the laws under which the parent company
was operating. They may have supplied products to other members of the group or had other
dealings with the various parts of the business. They may have received a guarantee from the parent
company, and so on.
Accordingly, it is proposed that the COMI of an MCG should be at the place where the high level
decision making with regard to the enterprise was performed, namely at the state from which the
business (as a whole) was actually controlled and managed. Subsidiaries are generally directed and
managed from headquarters of the group enterprise. The headquarters may be viewed as the brain
and nerve centre, while the subsidiaries as the limbs83
. The headquarters thus reflect the ‘meeting
point’ for the various entities.
Senior decision-takers may typically be concentrated around the parent (the holding company)84
,
though this is not always the case. The parent can be situated in one place while the operational
headquarters of the group are located elsewhere85
. Moreover, the parent entity may be in fact just a
holding company with no significant operations or workforce. In such cases it is ill-advised to treat
10
the centre of this specific entity as if it holds the strongest connection to the entire group86
. It should
be also emphasized that the headquarters we are looking for are not necessarily those located at an
ultimate parent company. When a debtor or a group of debtors file for insolvency the first step to
take is to identify the integrated collapsing MCG to which they belong (which may also have on top
of it other entities not integrated with it or not under insolvency) and only then to locate the COMI
of this specific group87
. Nevertheless, it should be reminded that the approach we take here is not of
the ‘one size fits all’ type and alternative solutions are needed to answer the demands of the
particular scenario. Thus, for instance, not always should the headquarters’ location be the place in
which all proceedings of all subsidiaries are to be handled, as will be elaborated in the next
section88
.
Relevant circumstantial pieces may assist in locating the operational headquarters of the group.
This includes, the whereabouts of principal top executives (in the ordinary course of business of the
group); whether this management directed the employees and had the authority to direct or
coordinate the global business (the various activities of the group companies throughout the world);
whether the registered office or another head office is actually the address of principal executive
offices or whether it is only a “post box”, and whether the majority of the administration functions
of the companies were conducted from this place; whether the group represented to creditors a
certain venue as the head office of the group; the location where executive meetings were taking
place, and where the financial affairs were directed. This is by no means an exhaustive list, but it
presents several aspects that can usually hold in the identification of place of central control over an
integrated group.
In addition, the other tests for venue mentioned above89
may reinforce a decision to locate an
insolvency process of a group in a particular place. Thus, if the bulk of assets of the various
constituent companies of a group (and/or the subsidiaries themselves) are also located where the
headquarters are, and/or the parent or other companies were incorporated in that country- these
should be relevant factors for a decision on the proper venue, although they will be ‘lower level’
tests, inferior to the operational headquarters criterion. In case the tests contradict one another the
‘operational headquarters’ should prevail. Thus, in a case such as BCCI90
, where factors point out to
different directions (in BCCI the parent company was incorporated in Luxemburg with a ‘brass
plate’ headquarters there, the group’s assets were spread around the world and operational
headquarters were based in London) the country of principal proceedings should be that in which
the actual headquarters were located91
. It would not be accurate to assert then that the BCCI case
demonstrates the impossibility to identify a single ‘home country’ for a distressed corporate
group92
, but rather it shows that there should be a clearer standard for an acceptable centre. In most
cases, once adopting a clear criterion a single centre will be revealed93
.
A close inspection of recent cases involving MCGs reveals that proceedings of the various entities
comprising the group at hand were actually placed in the jurisdiction in which the management and
control of the group was situated. In Crisscross94
, for instance, the actual headquarters of the group
were located in England. The English High Court placed all the companies under insolvency in
England based on the finding that each of the separate companies had its COMI there, although
subsidiaries were incorporated in different countries. In Re Parmalat Hungary/Slovakia95
the
Hungarian court based his decision to open main proceedings against the Slovakian subsidiary of
the Hungarian parent company in Hungary mainly on the fact that the financial affairs of the
subsidiary were directed from Hungary and the main decisions were taken from there96
. In the case
of Bramalea, a United States- Canadian group of companies97
, Canada was the jurisdiction
supervising the reorganization. Although the day-to-day operations of U.S. affiliates were carried
out and managed locally, large strategic decisions were likely dealt in Toronto, where the group’s
head office was located98
.
11
This experience shows a tendency of courts to place insolvency proceedings of related companies at
the state in which they were all ultimately managed. It correlates with the idea of looking for the
centre of main administration of a debtor and it provides the opportunity to place all the proceedings
of the group’s members in one place which reflects a connection to the group as a whole.
On the other hand, the recent ECJ judgment in Eurofood99
implies a different approach. The ECJ
was more concerned at looking at factors relating to the particular subsidiary than at locating a place
common for the entire group at the place of main decision making. It seems that at the core of this
decision lies an ‘entity’ approach (strict adherence to the notion of separation between companies
comprising groups), thus the interrelations among group members receive little consideration.
Though the court has not disqualified ‘parental control’ over a subsidiary as a relevant factor in
determining the proper jurisdiction, the focus was on the whereabouts of the registered office and
operations of the particular subsidiary100
.
We have indicated that the test suggested should be ascertainable by stakeholders that dealt with the
sort of enterprise at hand (namely, integrated MCGs).The headquarters criterion can comply with
this demand as well as with the goal of fairness (particularly meeting creditors’ expectations
regarding the jurisdiction) as it is a rather simple and objective test101
. Indeed, one may assume that
the place of main decision making is relatively easy to identify. It will therefore render the outcome
regarding jurisdiction relatively certain and predictable102
. It does not involve the need to
quantitatively ‘weigh’ between amounts of operations or assets in different states (as is the case if
adopting a 'place of principal operations' test)103
. As such, it would be fairly straight-forward for
companies (comprising a group) to recognize this location, as they are obviously aware of the
location of the group’s real headquarters. Furthermore, legal regimes could ensure that the
information is available to creditors, ex-ante, casting a duty upon companies and their auditors to
proclaim the information in business documents104
. Parties that dealt with the group in its ordinary
course of business are also likely to know the whereabouts of the group’s headquarters either
because they were actively interacting with the group headquarters (for instance, negotiated a deal
with the management) or as a general knowledge one is expected to have when dealing with
integrated centralized entities105
. Conversely, creditors or other stakeholders of the corporate group
are less likely to know where the various companies comprising it were incorporated or to evaluate
where the main activities or assets of the group are located. Finally, when courts are determining the
venue issue they can make use of simple evidence related to the organizational structure of the
group (rather than engaging in sophisticated calculations etc.) to identify the place of command and
control over the group106
.
Nevertheless, as was mentioned above, any test for the proper venue is susceptible to
manipulations, even if it is based on substantial factors (looking for a strong and true connection to
the jurisdiction). Debtors, anticipating a collapse (and knowing that a single location will be
designated as the centre from which subsequent proceedings will be handled) may displace the
group’s centre to a different location with a preferable jurisdiction. Alternatively, they may use
successive filings. Namely, manipulating the order in which the group members file insolvency
petitions. For instance, by sequencing the filings of the MCG’s members in a way that the parent
will come last, debtors can promote the chances of having the entire process already running in a
location different than the group’s centre (presuming that the group headquarters was where the
parent was operating)107
. The complex structure of a corporate group could assist debtors to cherry
pick those jurisdictions which are debtor-friendly108
. This sort of manipulations has been
demonstrated in recent cases. In the case of Cenargo, the companies opened bank accounts in the
U.S. at the eve of bankruptcy109
. In Eurofood proceedings were opened in Ireland in an attempt to
prevent the company’s centre of main interests being moved by its parent to Italy110
. In the case of
BCCI111
the group’s headquarters were moved from London to Abu Dhabi shortly before filing
bankruptcy112
. Furthermore, both creditors and debtors can attempt manipulating the forum by
12
presenting a biased account to the courts regarding the issues pertaining to the identification of the
group’s centre113
. A rule of immediate recognition as provided in the EU Regulation arguably
increases the problem, since the first to open proceedings captures the entire process into this
insolvency114
. It might be hence that a court opening insolvency proceeding relies on incomplete
information taking a certain view which could consequently be completely in the wrong direction.
Eventually, the case will be dealt in an improper place while failing to achieve the goal of having
the insolvency handled in the proper jurisdiction115.
However, the approach suggested here for the identification of the proper venue is capable of
overcoming these drawbacks. Indeed, an additional merit of the ‘head-office criterion’ is that it is
not formalistic (as is the registered office or incorporation test116
), but rather based on functional
realities of the business. It can disregard strategic planning (such as incorporating group members in
different states to avoid or to purposely subject them to specific jurisdictions) by looking for the
place from which the business was actually managed. Hence, it can prevent many of the more overt
techniques of forum shopping. In addition, courts can draw a distinction between a cynical attempt
to move the centre shortly before insolvency proceedings are commenced and a restructuring of the
enterprise for sound commercial reasons before insolvency proceedings. As was stated in the case
of Ci4net.com117
(an EU Regulation case) with regard to alteration of a debtor’s COMI, an
‘artificial’ change of the company’s centre would not be regarded as altering the COMI for the
purpose of the Regulation, whereas a real move of the centre could118
. Hence, the place identified as
the proper jurisdiction to handle the MCG insolvency process should be the centre of the group for
a set amount of time prior to the insolvency119
. This emphasizes the idea of actual operating
headquarters (the real centre of control), rather than a façade of headquarters. Additionally, in order
to resolve situations where there was more than one such place within this period of time it can be
presumed that the venue in which the centre was residing longer is the proper venue120
. However,
the reasons for the change should be closely inspected and if it is apparent that the centre was
genuinely placed at the new jurisdiction (though this was for a shorter period, as the company
entered insolvency) this place could be designated as the proper venue. Demands set upon debtors
with regard to notifications and representations towards creditors on the whereabouts of the centre
of the group can further assist in preventing manipulation of the forum121
. Finally, the idea of
determining the proper venue while taking into account the entire group situation and preferably
placing all affiliates under one insolvency regime122
will also assist in overcoming the downsides of
successive filings by debtors as mentioned above.
Notwithstanding the above, a proper approach should incorporate means of correcting error. That is,
it should be possible to transfer the proceedings to another more appropriate forum as new facts and
evidence may reveal, in order to overcome manipulations and to accommodate changes in the
insolvency scenario123. It will enable to remedy situations in which it can be shown that the court
was presented with incomplete information in the first place as mentioned above. However, such
power given to the insolvency courts should be carefully used bearing in mind that if proceedings
are passed on to another state it would implicate on the legal regime applied to the case124, and that
it may involve significant additional costs. In appropriate circumstances, especially when local
proceedings are already underway to a significant extent this change can only involve subjecting the
local proceeding to the supervision of the principal process rather than altering the locus of the
proceeding.
In sum, the place from which the group affairs were managed and controlled reflects most suitably
the heart and core of the integrated centralized enterprise, its centre and meeting point. Hence, it can
be regarded as the place of strongest connection to the group as such. It would also be the easiest to
identify (and to predict) as the future jurisdiction for insolvency proceedings of the integrated
group. It would also accord with the true way in which the business has been operated prior to its
fall. Therefore, this is an efficacious test that can fulfil the various goals of a global approach.
13
VI Limitations to the ‘head-office’ criterion
As was evident from our discussion above on MCG operational structures125
, the scene of MCG
insolvency is very much diversified. Therefore, it is ill advised to treat the MCG as a single and
unique scenario. Rather, it may take many forms and shapes. Therefore, it is necessary to ascertain
when the tools and tests proposed (particularly our ‘head-office’ criterion) are appropriate and when
they are less so.
A.’ balance of connections’
There may be a particular scenario in which although the head office of an MCG is in a certain
country and it is real and operational, all other connecting factors point out to a single and different
place than that of the headquarters. In this situation the nexus to each of the two jurisdictions may
be actually equal, even when looking at the group and its stakeholders as a whole.
In such scenarios, discretion should be given to the relevant courts to either defer to the proximate
jurisdiction to which the group has many connections and transfer the process there126
, or decide on
a parallel process, conducting insolvency proceedings in both countries (if there is no agreement
providing one court with the authority)127
.
To illustrate, if all the subsidiaries of a group are incorporated in France, the bulk of assets is there
and all creditors are there, however the operational headquarters is in Germany, then there is a case
to look at France as an appropriate venue for the group’s insolvency as well, as the German
headquarters are in fact ‘isolated’ (although not a façade) and as all other factors lead to France. It is
a scenario very different than the cases where the constituent companies are spread in a number of
countries; assets are located in various places and so on. Then, the headquarters, as aforesaid, are
the best factor connecting the group to a single venue.
The case of Maxwell128
may demonstrate a scenario of such a ‘balance of connecting factors’. The
Maxwell group had most of its important subsidiaries located and managed in the U.S. but on the
other hand the parent company was incorporated in the U.K. and the U.K. was the financial and
governance centre of the entire group129
. Indeed, from the point of view of the relevant courts, both
the American and the U.K. court believed they had an interest in handling the case130
. Although it
can be convincingly argued that the English court should have been the designated venue131
there is
also a strong case in favour of the U.S. jurisdiction132
. Eventually, the case was conducted using
‘parallel’ process and a successful inter-court collaboration133
. In such instances the idea of direct
communication can assist in preventing jurisdictional ‘battles’ and jointly agree on the suitable way
to administer the case134
.
B. Decentralized groups
In certain circumstances, although an enterprise is integrated it may have a decentralized
operational structure, with self-standing units of decision-takers135
. It is suggested here that the
headquarters criterion can also fit with this scenario only now the proper venue may assume a
somewhat different role. Looking at the head-office’s location now as the centre of coordination
(rather than centre of control) the principal insolvency process should be located there. Local
insolvency proceedings against local subsidiaries can then be opened in the place of the regional
head-office or main management of the particular subsidiary (the subsidiary’s separate COMIs). As
explained previously, in the ‘coordinated groups’ the head office coordinates the entire operation
14
(whereas in the centralized MCGs the head-office is the ultimate policy-maker and directing
‘brain’)136
. Hence, though the role of the headquarters is operationally different it still reflects the
meeting point of the various companies and the most significant connection the group as a whole
has to a particular place. Here as well, the headquarters test (in its specific characteristic as
coordinator and supervisor) will accord with the way the business was actually operating and thus
will correspond with creditors’ expectations regarding the venue137
. As a result it will achieve the
goals of certainty and predictability and assist in preventing forum shopping138
.
It should be mentioned that in a case of a non-integrated MCGs, where the companies were
completely autonomous, a holding company will typically not control or coordinate the group (or a
particular member of the group which operated on a separate autonomous basis). However, in these
types of cases global means (such as designating a single venue for a group’s insolvency process)
will not be necessary and appropriate to begin with139
.
C. Where there is no single centre of control or coordination
In certain scenarios of MCGs, a single centre of control or coordination for the entire group is
missing at the time of insolvency. For instance, if subsidiaries (a bundle of sister companies) are
under insolvency; however the parent who controlled the group is truly solvent and not part of the
process (or it is an individual shareholder who controlled the group) the centre of command and
control may be actually ‘outside’ the insolvency process. Similarly, in organizational structures
where the integrated group is divided between two sub-groups those who control the group chose to
operate it via two centres located in two different states. Thus, instead of having one ‘head’ and
‘brain’ controlling the entire group (in its ordinary course of business), there are in fact two heads
for the enterprise140
. This ‘twin holding’ structure suggests that there is no single operational
headquarters controlling or coordinating the group but rather two. Hence, in such scenarios, the
headquarters criterion may not be useful for locating the appropriate venue to handle the insolvency
proceedings against the group.
Nevertheless, if such groups were integrated, a unified approach will be beneficial and it will be
advantageous to place the related companies’ insolvencies in a single place or to have them all
coordinated by a supervisory authority. Since it may be impossible to locate a single head office for
this purpose, an alternative ‘second best’ tests to locate a centre should be provided for such MCGs.
Here the other tests for venue mentioned above may become of merit. That is, the location of the
group’s main assets and operations and the place of incorporation of the various subsidiaries141
. It
might be possible to point to one of the affiliate’s locations as the place with the major volume of
assets and activities and/or a place where most companies are incorporated. However, as these are
problematic tests especially when applied to the group case142
, it might be impossible to locate a
centre in such cases. Nonetheless, a certain degree of unification can be achieved while conducting
parallel proceedings143
.
VI Conclusions
The question of the ‘appropriate venue’ is essential when applying a global approach to
insolvencies within MCGs which strives to fulfil insolvency goals by linking between the allegedly
disjointed. Thus, it should provide with an appropriate test for ascertaining the locus of control or
coordination of an MCG from which proceedings should be handled or supervised. Although
several such tests were suggested previously in consideration of a single multinational debtor it is
increasingly accepted that the idea of Centre of Main Interest is the most appropriate one for the
single debtor case. Implementing the concept of COMI to the MCG scenario through the use of the
15
‘head-office’ test as the embodiment of COMI we can end up with the best efficacious test for
identifying the proper venue. However, we must also realise its limitations and accommodate those
specific cases when this test might not be practical or appropriate, at least not to its full extent.
Therefore, our global ‘groupwide’ approach must also provide the courts with discretion to rectify
any error that might emerge from implementing the head-office test. This could be achieved by
enabling courts to defer the proceedings to an alternative place that represents in those
circumstances a stronger nexus for the group as a whole. It is also realised here that in some specific
scenarios the whole idea of a single venue is unattainable and therefore other means need to come
into effect.
1 See I. Mevorach, “The road to a suitable and comprehensive global approach to insolvencies within multinational
corporate groups” [2006] 15(5) JBLP 455 at p. 463-464, 466-530. 2 Id., at p. 466-530. See also I. Mevorach, “Centralizing insolvencies of pan-European corporate groups: a creditor's
dream or nightmare?” JBL 468 [2006]. 3 Combining the assets and liabilities of the affiliates in the course of insolvency (for the circumstances in which it
would be justified to apply such a mechanism see Mevorach, note 1 above, at p. 487-494, 505-514). 4 This tool is available in several national laws. In Canada and the U.S., for example, it is counted as essential that
corporate groups will be subjected to a joint administration (procedural consolidation) when a financially distressed
group seeks to reorganize itself (see P.I. Blumberg, The Law of Corporate Groups: Problems in the Bankruptcy or
Reorganization of Parent and subsidiary Corporations, Including the Law of Corporate Guarantees (1985, Supp.
1992), at p. 402-405 (on procedural consolidation in the United States); Jacob S. Ziegel, “Corporate Groups and
Crossborder Insolvencies: A Canada- United States Perspective” 7 Fordham J. Corp. & Fin. L. (2002), at p. 367, 376
(explaining that procedural consolidation “is almost de rigueur” in Canada and US corporate groups’ reorganizations). 5 See e.g. Lynn M. LoPucki, "Cooperation in International Bankruptcy: A Post-Universalist Approach" [1999] 84
Cornell L. Rev. 696 [hereinafter: LoPucki, Cooperation]; Lynn M. LoPucki, “Universalism Unravels” [2005] 79 Am.
Bankr. L. J. 143 [hereinafter: LoPucki, Universalism]. 6 LoPucki, Cooperation, note 5 above, at p. 716.
7 Id., p. 716-717. See also LoPucki, Universalism, note 5 above, at p. 143-144.
8 Lynn M. LoPucki, "Cooperation in International Bankruptcy: A Post-Universalist Approach" [1999] 84 Cornell L.
Rev. 696 at p. 713-718, 751. 9 Council Regulation No. 1346/2000 on Insolvency Proceedings [http://www.europa.eu.int/eur-lex] [hereinafter: EU
Regulation]. 10
U.N. Comm’n on Int’l Trade Law (UNCITRAL), UNCITRAL Model Law on Cross-Border Insolvency with Guide to
enactment, U.N. Sales No. E.99.V.3 (http://www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf) [hereinafter:
Model Law or UNCITRAL Model Law interchangeably]. 11
However, the topic of corporate groups in insolvency is currently under consideration by UNCITRAL working group
V (insolvency law) (see United Nations (2006), A/CN.9/596, Insolvency law: possible future work, Note by the
Secretariat http://daccessdds.un.org/doc/UNDOC/GEN/V06/517/90/PDF/V0651790.pdf?OpenElement). 12
The American Law Institute, Transnational Insolvency: Cooperation among the NAFTA Countries [2003]
[hereinafter: ALI Principles]. 13
See note 86 below, and accompanying text. 14
See e.g. P.T. Muchlinski, Multinational Enterprises and the Law (1999), at p. 61-80. See also Phillip I. Blumberg,
The Multinational Challenge to Corporation Law: the search for a new corporate personality (1993), p. 244-253; Janet
Dine, The Governance of Corporate Groups (2000), at p. 39- 42. 15
Typical of US and UK held multinational enterprises (Muchlinski, note 14 above, p. 65-66). 16
This is especially common in Europe (Id., at p. 66-69). A transnational merger can emerge by the creation of a twin
holding company locating in each home state, based on joint shareholding by the founding parent companies, and the
transfer of operating activities to subsidiaries that may be jointly or separately owned and controlled by the holding
companies (Id.). See for instance the case of the Unilever group in J. Keir, “Legal Problems in the Management of a
Group of Companies” in Schmitthoff C.M. and Wooldridge F. (Eds.), Groups of Companies (1991). 17
Develop permissive, ed in Japan (Muchlinski, note 14 above, at p. 69-70). 18
As such associations were described by Teubner (see e.g. G. Teubner, “The many-headed Hydra: networks as higher
order collective actors” in J. McCahery, S. Picciotto and C. Scott (Eds.), Corporate Control and Accountability
(Clarendon Press, 1993) at p. 41). 19
Muchlinski, note 14 above, at p. 62-64. 20
Most often used for specific, large scale international construction or engineering projects (Id., at p. 64-65). 21
Although, it may be that one of the parents exercises dominant influence over the venture (Id., at p. 72-73). 22
For example, each holds 30% of each other's shares (Id., at p. 74).
16
23
See the initiatives within the EC: the Statute for a European company (SE) (Council Regulation (EC) No 2157/2001,
OJ L 294/1, 10.11.2001) and Council Regulation (EEC) 2137/85 of 25 July 1985 on the European Economic Interest
Grouping (EEIG) // 1985 OJ L 199/1. 24
Muchlinski, note 14 above, at p. 62 and p. 81. 25
See e.g., J.H. Dunning, Multinational Enterprises and the Global Economy (Wokingham, Addison-Wesley
Publishing Co, 1993), at p. 3; N. Hood and S. Young, The Economics of Multinational Enterprise (London, Longman,
1979), at p. 3; R. Caves, Multinational Enterprises and Economic Analysis (Cambridge University Press, 2nd
ed, 1996),
at p. 1; Teubner, note 18 above. 26
OECD Guidelines for Multinational Enterprises 27 June 2000 (http://www.oecd.org/dataoecd/56/36/1922428.pdf). 27
See Id., “Concepts and Principles” at p. 3. The guidelines do not provide a precise definition of multinational
enterprises, yet it states that such enterprises: “…usually comprise companies or other entities established in more than
one country and so linked that they may co-ordinate their operations in various ways. While one or more of these
entities may be able to exercise a significant influence over the activities of others, their degree of autonomy within the
enterprise may vary from one multinational enterprise to another. Ownership may be private, state or mixed”. 28
This may not necessarily be companies per se but also other forms of business such as partnerships. 29
However, the position of individual shareholders is outside the scope of this work. 30
See Muscat, A., The Liability of the Holding Company for the Debts of its Insolvent Subsidiary (1996), at p. 3, 15,
448-449) showing that the use of the corporate group structure is not limited to the large business enterprises, although
in the case of the smallest private business enterprise the typical form of organization is the single independent
company. 31
We will need though to look at other parts of the MCG (that were not necessarily integrated with the rest) for other
issues pertaining to its insolvency, such as the issue of group liability - where the question is whether one member
should be responsible for the debts of another (see Mevorach, note 1 above, at p. 515-519). However, this is outside the
scope of this paper. 32
See e.g. Blumberg, Bankruptcy (note 4 above), p. 696- 699 (Professor Blumberg provides a useful ‘checklist’ for
analyzing corporate groups when dealing with the question of the legal consequences arising in their insolvency). 33
In conglomerate groups that operate diversified businesses the group structure may be used for various reasons other
than the imposition of a single business strategy; however this sort of enterprises may in fact operate in an integrated
way through financial and administrative interdependence, and therefore the term ‘pure conglomerate’ (see Blumberg,
note 14 above, at p. 144-145). 34
See Blumberg, note 4 above, p. 432 35
Muchlinski, note 14 above, at p. 60. 36
See Dunning, note 25 above, at p. 223. 37
See Muchlinski, note 14 above, at p. 59. 38
See section I above. 39
See Mevorach, note 1 above. 40
See section I above. 41
See note 9 and accompanying text. 42
That is, the centre of main interests of the debtor company, which is the test adopted in the Regulation for
ascertaining international jurisdiction (Article 3(1) of the EU Regulation). 43
See note 4 and accompanying text. 44
Compare for instance to the traditional view in English law of the "doing of business" test with regard to bankruptcy
proceedings (of an individual debtor) was expressed in Re Brauch ([1978] CH 316, [1978] 1 ALL E.R. 1004, [1977] 3
W.L.R. 354. It has been held there, that in order to establish that the debtor had 'carried on business in England', within
S 4(1) of the English Bankruptcy Act 1914 (now repealed), it was not sufficient to show that he had been running his
company's business in England, even if he was the sole beneficial shareholder and in complete control. Rather, the court
needs to find that he had been carrying on personally a business of his own in England independently of that of the
companies (albeit his modus operandi involved the use of the companies as vehicles for achieving his business
objectives). 45
See P.T. Muchlinski, "Corporations in International Litigation: Problems of Jurisdiction and the United Kingdom
Asbestos Cases" [2001] 50 ICLQ I; Lawrence P. Kessel "Trends in the Approach to the Corporate Entity Problem in
Civil Litigation" [1953] 41 Georgetown L.J. 525, at p. 526-532; J.J. Fawcett, "Jurisdiction and Subsidiaries" [1985]
J.B.L. 16; John K. Rothpletz, "Ownership of a Subsidiary as a basis for jurisdiction" [1965] 20 New York University
Intramural Law Review 127. Certain legal systems have asserted the right to extend their law exterritorialy on the basis
of the economic unity of the MCG (see for example Article 10 of the Argentinean Draft Code of Private International
Law. The full text of the Code can be found in 24 ILM 269 [1985]). In American law there is a strong tendency towards
the application of enterprise law to the problem of jurisdiction over foreign components (see Blumberg, The Law of
Corporate Groups: Procedural Problems in the Law of Parent and Subsidiary Corporations (1983 supp. 1992), at chs. 3
to 5). This is consistent with the assertion of ‘long arm’ jurisdiction in the United States and the constitutional guarantee
of ‘due process’ which requires only certain ‘minimum contacts’ with the forum (International Shoe Co v Washington
326 US 310 (1945); see also A. Bell, Forum Shopping and Venue in Transnational Litigation (2003(, at p. 6, 7 and 11).
17
46
The EU Regulation applying the idea of having one centre for single debtor worldwide insolvency stresses that a
major factor in determining where the main proceedings of the debtor should be taking place is third party expectations.
Recital (13) (taken from the Report Virgos/Schmit (1996) [hereinafter: Report Virgos/Schmit]) explains that the centre
of main interests is the place where the debtor conducts the administration of his interests on a regular basis and is
therefore ascertainable by third parties. See also I.F.Fletcher, "The European Union Regulation on Insolvency
Proceedings" [2003] INSOL INTERNATIONAL, Cross-Border Insolvency, 15, at p. 27-28; Bob Wessels,
"International Jurisdiction to Open Insolvency Proceedings in Europe, In Particular Against (Groups of) Companies"
Working Papers Series, Institute for Law and Finance, Johann Wolfgang Goethe University
(http://www.iiiglobal.org/country/european_union/InternJurisdictionCompanies.pdf), at p. 4-6; The importance of
meeting third parties’ legitimate expectations with regard to jurisdiction to open insolvency proceeding was also
expressed in several EU Regulation cases, see e.g. Geveran Trading Co Ltd v Skjevesland [2003] B.C.C. 209; Daisytek-
ISA Ltd, Re [2003] B.C.C. 562 (Ch D); Re Parmalat Hungary/Slovakia, Municipality Court of Fejer, 14 June, 2004;
Ci4Net.com. Inc [2005] B.C.C. 277 (Ch D); Eurofood IFSC Limited [2004] B.C.C. 383. Both the preliminary opinion,
by an advocate General attached to the European Court of Justice in the case of Eurofood (Eurofood IFSC Ltd (C-
341/04) [2005] B.C.C. 1021 (AGO), at paras. 106-126) and the ECJ decision in the case (Eurofood IFSC Ltd (Case C-
341/04) [2006] B.C.C. 397, paras. 33-37) emphasized the significance of the requirements of transparency and
ascertainability by creditors of the COMI. 47
See Id. 48
Since presently there is no prospect of achieving unification of domestic insolvency laws the application of a
particular legal regime on the entire estate may affect legal rights of creditors. 49
Needless to say that none was offered in the context of groups of companies as the concept of a centre for a group has
not been applied before. 50
Or the ‘registered office’ (this term is used, for instance, in the EU Regulation (Article 3(1)) and in the Model Law
(Article 16(3)). 51
The concept originated in the EU Regulation as the test for ascertaining international jurisdiction (see note 42 above).
The Model Law and the ALI Principles followed and adopted this concept. This already means a widespread use of the
COMI concept, within and outside Europe, as the Model Law has already been recognised and adopted by a substantial
number of countries around the world (including recently the US and the UK). 52
For a summary and explanation of each of these factors see Lynn M. LoPucki, Courting Failure How Competition for
Big Cases Is Corrupting the Bankruptcy Courts (2005), at p. 217-221. As explained there each of these tests has been
considered in various times and places as the most appropriate basis for international jurisdiction (Prof. LoPucki also
distinguishes between “headquarters” and “administrative employees and operations”. We will consider these as part of
the ‘centre of main interests’ test). 53
See note 51 above. However, COMI does not escape from its own inherent difficulties of definition and application
(see also text accompanying notes 72-74 below). 54
I.F.Fletcher, The Law of Insolvency (3rd
Edn. 2002), at p. 811. See also LoPucki, note 52 above, at p. 196; Liza
Perkins, A Defence of Pure Universalism in Cross-Border Corporate Insolvencies [2000] 32 N.Y.U. J. INT’L. L. & Pol.
787, at p. 815 (proposing place of incorporation to determine debtors’ home countries). 55
Article 3(1) and Article 3(2) of the EU Regulation. 56
See the definitions of “foreign main proceeding” and “foreign non-main proceeding” in Article 2 of the Model Law. 57
Article 3(1) and Article 3(2) of the EU Regulation. See Fletcher, note 46 above, at p. 27-31. 58
See Fletcher, note 46 above, at p. 25. 59
The American National Bankruptcy Review Commission, for instance, recommended deleting place of incorporation
as a sufficient basis for venue in domestic bankruptcy cases (National Bankr. Rev. Comm’n, Bankruptcy: The Next
Twenty Years [1997], 770, 783. See also LoPucki, note 52 above, at p. 80). With regard to international insolvencies it
was commented that it makes little sense to subject an insolvency process to the laws of a particular country (merely
because the company registered there) even though the actual commercial life of the company was centred elsewhere
(see Jay L. Westbrook, “Theory and Pragmatism in Global Insolvencies: Choice of Law and Choice of Forum” [1991]
65 Am. Bankr. L.J. 457, 486). Under the EU Regulation and the Model Law the fact of incorporation is also not a
relevant link for the purpose of opening a secondary or “non main” proceedings (see I.F.Flecther, “The Challenge of
Change: First Experience of Life under the EC Regulation on Insolvency Proceedings in the UK”, Annual Review of
Insolvency Law, 2003 (Toronto, Carswell, 2004), 431, at p. 443). 60
Eurofood IFSC Ltd (Case C-341/04) [2006] B.C.C. 397 61
The exemplifying scenario given is that of a ‘letterbox’ company not carrying out any business in the country of the
registered office (see id., at para 34-35). 62
Ci4Net.com. Inc [2005] B.C.C. 277 (Ch D). 63
See also Richard Tett, Nicola Spence, "COMI: PRESUMPTION, WHAT PRESUMPTION" Insolv. Int. 2004, 17(9),
139-141. See also the case of Enron Directo (Enron Directo SA, Re (England Ch D, 4 July, 2002) (unreported)) and the
case of Re Brac (Brac Rent-A-Car Inc [2003] B.C.C. 248) in which proceedings where opened in the UK for non-UK
companies. 64
LoPucki, note 52 above, at p. 193-200.
18
65
Such as Bermuda and the Cayman Islands. 66
Thus, it is explained, in the case of ICO Global Communications, for instance, the English court recognized a US
reorganization plan of an essentially English corporation although it had little presence in the US, mainly because the
plan was also approved by the Cayman Islands and Bermudan courts in which several companies of the ICO group were
incorporated (LoPucki, note 52 above, at p. 197-199). 67
Id., at p. 198-199. 68
See LoPucki, Cooperation, note 5 above, at p. 716. 69
Id., and see the example given there of assets which were leases in satellites orbiting the earth. 70
Also the more so, it is an insufficient basis for asserting worldwide jurisdiction if the debtor has only some assets in
the country, even though it is only a small portion of the debtor’s estate. Indeed, the attitude of the American
bankruptcy court in the case of Cenargo (In re Cenargo International Plc 294 B.R. 571 (Bankr. S.D.N.Y. 2003))
agreeing to open proceedings against this essentially English group based on the fact that the debtor had only a bank
account in the country was much criticized (see Susan Moore, “Cenargo: A Tale of two courts, comity and (alleged!)
contempt!”, January 2004 (http://www.iiiglobal.org/members/committee_c/cenargo.PDF); Shandro, Sandy and Tett,
Richard, "The Cenargo Case: A Tale of Conflict, Greed Contempt, comity and Costs", Insol World- Fourth Quarter
2003, 33-35; LoPucki, note 52 above, at p. 189, 191-193, 204-205). 71
It is possible though to create a supranational entity formed under laws adopted by regional organizations of states,
such as the SE and the EEIG (forms adopted by the European Community; see note 23 above). Such supranational
entities may be the lead or the head company of a European group; however each entity comprising the group may be
registered in a different state. Consequently, there will not be a specific place in which all group members should be
incorporated. 72
See note 51 above. 73
See Fletcher, note 46 above, at p. 25-26. 74
It is also not enough in order to open a secondary process (see Report Vigros/Schmit, which indicates that an
‘establishment’ requires a certain amount of organisation and stability. Hence, few assets in the country will not suffice
for an international jurisdiction. See also Fletcher, note 59 above, at p. 431, 441). 75
These are the two main instruments for interpreting the EU Regulation. 76
Report Virgos/Schmit; Recital 13 of the EU Regulation. See also Virgos, The 1995 European Community
Convention on Insolvency Proceedings: an Insider’s View, in: Forum International, no. 25, March 1998, p. 13, noting
with regard to the need that the place will be ascertainable to third parties that ‘the place where the debtor conducts the
administration of his business and centralizes the management of his affairs (e.g., contractual and economic activities
with third parties) satisfies this requirement; not the place where the assets, whatever their value, are located, not the
place where the goods are manufactured (e.g., the place of industrial establishment, etc.)’. 77
See Memorandum from Jay L. Westbrook to the National Bankruptcy Review Commission (July 29, 1997, in
National Bankr. Rev. Comm’n, Bankruptcy: The Next Twenty Years [1997], app. E-1 at 7, referring to “the centre of its
main interests” as “a concept taken from the European Union Convention on Insolvency and akin to concepts like
‘principal place of business’ or ‘chief executive office’” (Professor Westbrook was co-leader of the U.S. delegation that
negotiated the Model Law). 78
See Report Virgos/Schmit. 79
See e.g. the decision in Enron Directo (Enron Directo SA, Re (England Ch D, 4 July, 2002) (unreported)). The
English court in this case asserted jurisdiction upon a Spanish incorporated company since the actual head office of the
company was in England. As appeared from the evidence provided, the entire principal executive, strategic and
administrative decisions in relation to the finance and operations of the company were conducted in London. 80
Subject to certain limitations, as will be elaborated in section VI. 81
As well as other specific circumstances that may suggest alternative solutions in terms of jurisdiction. 82
See section III above. 83
See C. Tugendhat, The Multinationals (1971) at p. 22, 23. 84
See Muchlinski, note 14 above, at p. 60; Muscat, note 30 above, at p. 56-57. 85
In the case of Crisscross for instance, the actual headquarters of the group were in London at the place of
incorporation of one of the group’s subsidiaries but not of the parent company (Crisscross Telecommunications Group,
Re (unreported, 20 May 2003) (Ch D)). In the case of BCCI the parent company was situated in Luxemburg whereas
the actual headquarters were apparently in London (see Re Bank of Credit & Commerce International S.A. (No.10)
[1997] 2 W.L.R. 172 (Ch. 1996); see also note 90 below and accompanying text). 86
In this regard, the ALI Principles’ recommendation that subsidiaries will be allowed to file for insolvency in the
parent’s home country (ALI Principles, Procedural Principle 23) is insufficient to tackle the ‘home country’ issue. See
also LoPucki, note 52 above, at p. 230 compellingly arguing that the ALI recommendation in this regard will enhance
forum shopping. 87
See, for instance, the case of Brac (Brac Rent-A-Car Inc, Re [2003] EWHC (Ch) 128; [2003] B.C.C. 248) where the
European operations were in a virtually independent cluster. See also Collins & Aikman corporation group [2005]
EWHC 1754 (Ch D) in which after the filing of chapter 11 proceedings against the ultimate parent located in the US,
the European operations were controlled via headquarters in the UK.
19
88
Section VI below. 89
See section IV above. 90
Re Bank of Credit & Commerce International S.A. (No.10) [1997] 2 W.L.R. 172 (Ch. 1996). 91
Indeed, commentators expressed the opinion that England was the actual centre of interests of the BCCI group
although the main proceedings against the group took place in Luxembourg (see e.g., Fletcher, note 46 above, at p. 37). 92
An opinion expressed in LoPucki, Cooperation, note 5 above, at p. 713-715. 93
Except for certain specific scenarios, as will be discussed in the next section. 94
Re Crisscross Telecommunications Group, Re (unreported, 20 May 2003), Ch.D. 95
Re Parmalat Hungary/Slovakia, Municipality Court of Fejer, 14 June, 2004. 96
It also examined whether the designated forum was ascertainable by third parties. Proceedings of affiliated companies
were also placed at the location of main decision making in other EU Regulation cases, such as Daisytek (Daisytek-
ISA Ltd, Re [2003] B.C.C. 562 (Ch D)); Cirio Del Monte (Cirio del Monte (Italian court of Rome, August, 2003)
(unreported)); Hettlage-Austraia (Amtsgericht (Munich) (Hettlage-Austria) (Unreported, May 4, 2004) (Germany));
Collins & Aikman corporation group [2005] EWHC 1754 (Ch). 97
An unreported case in the Ontario Court of Justice (for a description and discussion of the case see R. Gordon
Marantz, “The Reorganization of a Complex Corporate Entity: The Bramalea Story” in Case Studies in Recent
Canadian Insolvency Reorganizations 1 (Jacob S. Ziegel ed., 1997)). 98
See id., at p. 17-18. 99
Eurofood IFSC Ltd (Case C-341/04) [2006] B.C.C. 397. 100
Id., at paras. 26-37. 101
Hence, it will actually fulfil the norm established by the ECJ in Eurofood that the COMI should be grounded on
factors which are both objective and ascertainable by third parties (Eurofood IFSC Ltd (Case C-341/04) [2006] B.C.C.
397, at para. 34). 102
This was identified as an important characteristic of a designated forum (see section III above). 103
See section IV above. 104
It may also incorporate statements and prohibitions on any actions taken by the company or its affiliates which may
result in the alteration of the above location to another jurisdiction or the position of the company within the group. A
lack of adequate representation regarding the MCG’s centre’s whereabouts or adequate notification regarding
alterations in this location should result with the debtor being prevented from arguing that a certain place was indeed its
proper centre. See the decision in Ci4net.com in which the judge was not prepared to accept that the COMI moved inter
alia since little or no contact was made by the companies to inform its creditors of the alleged change (Ci4Net.com. Inc
[2005] B.C.C. 277 (Ch D); GLOBALTURNAROUND, “US company fails to escape Euro Regulation”, July 2004, issue
54, p. 1). 105
And the requirement to indicate this in business documents (Id.) will also assist in ensuring that stakeholders would
possess this knowledge. 106
This too will be facilitated by casting duty upon companies to provide such information in business documents (Id.). 107
See LoPucki, Cooperation, note 5 above, at p. 722-723. See also LoPucki, note 52 above, at p. 226-230. 108
See GLOBALTURNAROUND, "The new European pastime", March 2004, issue 50, p. 6. 109
In re Cenargo International Plc 294 B.R. 571 (Bankr. S.D.N.Y. 2003). 110
Eurofood IFSC Limited [2004] B.C.C. 383. 111
Re Bank of Credit & Commerce International S.A. (No.10) [1997] 2 W.L.R. 172 (Ch. 1996). 112
See Richard Donkin, “Troubled BCCI Shifts Base to Abu Dhabi”, Financial Times (London), Sept. 20, 1990, p. 34. 113
In Eurofood, for instance, each of the parties presented to the corresponding court a ‘story’ showing evidence why
the COMI of the subsidiary was located in the particular location, convincing the court that it should assert jurisdiction
over that company’s insolvency (Eurofood IFSC Limited [2004] B.C.C. 383; Eurofood IFSC, Re (Trib (I) 19 February
2004 [2004] I.L.Pr.14)). 114
Once COMI is established, all other jurisdictions are bound by it, and any challenge can only be made via the
original court. 115
See the ECJ judgment in Eurofood stating that main insolvency proceedings opened by a court of a Member State
must be recognised by the courts of other Member States, without the latter being able to review the jurisdiction of the
court of the opening State (Eurofood IFSC Ltd (Case C-341/04) [2006] B.C.C. 397, at paras. 38-44). 116
See section IV above. 117
Ci4net.com Inc & Anor [2005] B.C.C. 277. 118
See also Tett, note 63 above, at p. 139-141. 119
In Ci4net.com mentioned above the judge stressed that the COMI must have some degree of permanence (it should
not move around with the location of the directors). Certainly, moving the centre of main interests after lodging a
request to open insolvency proceedings (but before the proceedings are opened) should not affect the decision regarding
the appropriate jurisdiction. As was explained by the ECJ in the case of Staubitz-Schreiber, a transfer of jurisdiction
from the court originally seised to a court of another Member State on the basis of the debtor moving its centre after
submitting the request would be contrary to the objectives persued by the Regulation, mainely the intention to avoid
20
incentives for the parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain
a more favourable legal position (Staubitz-Schreiber (Case C-1/04) [2006] (http://curia.eu.int). 120
Resembling the English rule that resolves a jurisdictional dilema which arises when the debtor’s residential address
or business address (or for a company- the ‘registered office’) has changed from one insolvency district to another
within a six months period prior to the presentation of insolvency petition. The insolvency rules provide that the court
within whose jurisdiction the debtor has been resident for the longest time prevails even if it is not the current address at
the time of filing (Insolvency Rules 1986, rr.6.9(4), 6.40(2)(c). See also Fletcher, note 48 above, at p. 131-132. 121
See note 104 above and accompanying text. 122
See section III above. 123
For instance, certain entities may join the process at a later stage despite efforts to place the entire group under
insolvency at once. 124
This is not the case in a domestic setting. 125
See section II above. 126
This would be especially beneficial if in addition most of the creditors are in that second country and it is thus more
convenient to handle proceedings there. 127
However linking between the proceedings to gain the advantages of a coordinated process, via means of cooperation
and communication (agreeing on protocols or communicating directly between courts) mutual recognition, access and
relief (see Mevorach, note 1 above, at p. 471-473). 128
Maxwell Communication Corp., 170 B.R. 800 (Bankr. S.D.N.Y. 1994); Maxwell Communication Corp., [1993] 1
W.L.R. 1402 (Ch. 1993). 129
See also Ziegel, note 4 above, at p. 379. 130
Id. 131
See Jay Lawrence Westbrook, “The Lessons of Maxwell Communication” [1996] 64 Fordham L. Rev. 2531, 2538. 132
Note 128-129 above and accompanying text. See also LoPucki, note 52 above, at p. 219. 133
See Ziegel, note 4 above, at p. 379. 134
See e.g. the use of such tool in the case of Cenargo (In re Cenargo International Plc 294 B.R. 571 (Bankr. S.D.N.Y.
2003)). There, the ‘battle’ over jurisdiction has been solved by the respective judges holding a conference call in which
they agreed a number of key jurisdictional differences (Insolv. Int. 2003, 16 (6), 47-48 (NOTICEBOARD- Co-operation
Between Courts); Susan Moore, “Cenargo: A Tale of two courts, comity and (aleged!) comtempt!”, January 2004
(http://www.iiiglobal.org/members/committee_c/cenargo.PDF)). Ultimately, a joint administration took place in the UK
enabling successful rehabilitation of many companies in the group (see GLOBALTURNAROUND, “Cenargo: The shape
of things to come” January 2004, issue 48, at p.10, 11). 135
Section II above. 136
Id. 137
See section III above. 138
Similarly to the centralized groups scenarios (see section V above). 139
See section II above. 140
See note 16 above. 141
See section IV above. 142
See Id. 143
See note 127 above.
1
The Insolvency Implications for Corporate Groups in Australia – recent events and initiatives
Jenny Dickfos, Dr Colin Anderson1 and Dr David Morrison2
Introduction
The regulation of most aspects of corporations is governed in Australia by the
Corporations Act 2001(Cth). This single enactment provides for the regulation of
corporate insolvency within Chapter 5. In relation to corporate groups, the
Corporations Act generally applies an entity approach that results in each company
being treated as a distinct legal entity, consistent with the separate legal entity
principle, common shareholders notwithstanding. However, recent proposed
amendments to Chapter 5 recognize, albeit to a very limited extent, an enterprise
approach when dealing with the insolvency of a company/s in a corporate group. Over
one year after the Parliamentary Secretary to the Treasurer,3 announced that the
Australian Government will proceed with an integrated package of reforms to
improve the operation of Australia’s insolvency law4, an exposure draft providing a
draft Bill has been released. This release details a package of technical amendments to
the Corporations Act with the primary purpose of enhancing the efficiency and cost
effectiveness of the voluntary administration process.5 Included within this is a set of
proposals impacting upon the treatment of corporate groups in insolvency.6
This paper examines the very limited way that the Act provides for corporate groups
in the insolvency processes outlined in Chapter 5 of the Corporations Act. The paper
reviews the attempts by insolvency practitioners to deal with the reality of corporate
groups when one or more of the individual entities within the group are insolvent. It
also critically evaluates proposals for reform of the impacting legislation via the
exposure draft (Corporations Amendment (Insolvency) Bill) announced by the
1 Jenny Dickfos and Colin Anderson - Griffith Business School, Griffith University, Australia 2 David Morrison - TC Beirne School of Law, University of Queensland, Australia 3 The Hon Chrs Pearce MP 4 The announcement of the intention was made on 12 October 2005 and is available at
http://parlsec.treasurer.gov.au/cjp/content/pressreleases/2005/032.asp 5 Available at http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=1186 6 Part 4 – Facilitating pooling in external administration
2
Government.7 The evaluation involves introductory comparisons with other
jurisdiction’s attempts to deal with similar issues. Suggestions are made as to how the
proposed amendments might be made more effective consistent with the stated aims
of the legislation.
Background
It is relatively common in Australia for businesses to be conducted through a
corporate group structure.8 Despite this common practice the legislation recognises
corporate groups in a limited way.9 Chapter 5 contains essentially all of the corporate
insolvency provisions and only attempts to deal with the corporate group situation in
Sections 588V – 588X. These sections prohibit a holding company from allowing a
subsidiary to trade whilst it is insolvent. If there is a contravention of the prohibition
then the holding company is potentially liable for the debts incurred by the subsidiary.
The traditional insolvency procedure used in Australia was liquidation, either
commenced voluntarily by the debtor company10 or ordered by the court usually on
application by a creditor11. Since 1993 a company may enter into voluntary
administration12 where an administrator is appointed13 to control the company for a
short period with a view to either saving as much of the business of the company as is
possible or if not to obtaining a better return than in liquidation14. The administration
procedure involves an independent administrator reviewing the company’s activities
7 13 November 2006 8 See Ramsay, I., and Stapledon G., Corporate Groups in Australia Centre for Corporate Law and Securities Regulation, University of Melbourne 1998, Available online at
http://cclsr.law.unimelb.edu.au/research-papers/CorporateGroupsResearchReport.pdf
and Companies and Securities Advisory Committee (CASAC) Corporate Groups Final Report, May
2000 Available online at
http://www.camac.gov.au/camac/camac.nsf/byHeadline/PDFFinal+Reports+2000/$file/Corporate_Gro
ups,_May_2000.pdf 9 The main area where the group is recognised is in relation to the accounting requirements which
require financial reporting of the whole enterprise in consolidated accounts where the accounting
standards mandate consolidated reports: s295. There is also recognition of consolidated groups under
taxation legislation but this does not impact on the corporate law. 10 See generally Part 5.5 of Chapter 5 Corporations Act 2001 (Cth) 11 See generally Part5.4 of Chapter 5 Corporations Act 2001 (Cth) 12 See generally Part5.3A of Chapter 5 Corporations Act 2001 (Cth) 13 The appointment is usually made by the board of directors (s436A) but may also be made by a
liquidator or provisional liquidator already appointed (s436B) or a charge holder having a charge over
the whole or substantially the whole of the assets where the charge holder has a right to appoint a
receiver (s436C) 14 Section 435A sets out the aims of the Part 5.3A
3
and reporting to creditors at a second meeting held normally within 28 days of
appointment.15 At that meeting the creditors decide whether to continue the company
(pursuant to a deed of company arrangement) or liquidate the company.16
At all times during any insolvency procedure, either a liquidator or an administrator is
appointed in relation to the particular company.17 Both appointed liquidators and
administrators are considered to be officers of the company18 and as officers owe a
variety of duties to that company. These duties exist at both common law and within
the Corporations Act.19 There are also specific requirements that the administrator or
liquidator must fulfil with respect to their particular function.
Importantly, the duty to company necessarily manifests itself into consideration of the
company’s creditors where insolvency exists as distinct from the duty being one to
focus upon members as residual claimants when the company is solvent. Implicitly
therefore the appointment of the liquidator or administrator is one that is specific to
the company and the duties and obligations apply to that company. Therefore where
the particular company sits within a group of companies then the separate legal entity
principle applies such that the interests of other companies (and their creditors) are
not relevant.
It follows that there is a risk of an insolvency practitioner being in breach of their duty
to the (insolvent) company if they act to benefit the creditors of another company at
the expense of the creditors of the company to which they are appointed. This
limitation results in an inability to readily deal with the group company situation
where there are some companies in a group with a greater amount of assets relative to
the debts than those of others in the group. Another circumstance that is not
uncommon in insolvency is the lack of proper accounting as amongst the companies
such that the directors do not treat them as separate entities . As a result, it may be that
15 See generally the requirements to report to creditors and hold the second meeting in s 439A 16 Section 439C 17 See the recent statement by Goldberg J in in the Matter of Ansett Australia Ltd (ACN 004 209 410)
(2006) 24 ACLC 386 at [112] that “ although the Administrators are administrators of all the
companies in the Ansett Group they are not excused from acting in the interests of the creditors of each
of the companies.” 18 See the definition of officer in s9. 19 See Part 2D.1 of Chapter 2 Corporations Act 2001 (Cth)
4
it is either too expensive or too complex to determine the transactions that have
occurred within each entity in the group and therefore it is not possible to reconstruct
the accounts and the history of the events that lead to the insolvency event. In this
type of situation there is a fundamental difficulty in fulfilling the duty to the creditors
of a particular company because either the assets and/or the creditors are not able to
be identified nor “attached” to a particular entity to follow through with the
requirements of the Corporations Act.
Practitioner use of the Corporations Act regarding insolvent corporate groups
Attempts have been made by insolvency practitioners to utilise existing Corporations
Act provisions to achieve aggregation or “pooling” of the assets of companies in
either liquidation or under Part 5.3A.20 Prior to discussing how these provisions have
been utilised it is significant to note that there is no direct power in the court to
authorise the pooling of assets.21 The legislation does give powers to the court to
sanction situations where effectively the creditors agree22 to have a pooling
arrangement put in place. Several cases23 have identified six statutory procedural
means by which consolidation of a corporate group in insolvency might be effected.
These are now listed:
1. Scheme of arrangement: Part 5.1 Corporations Act 2001 between each
company and its creditors. This requires approval by a majority of creditors
representing at least 75% of total debts and claims of the companies and the
approval of the court. As has been pointed out “This course is sure, but would
involve not inconsiderable costs in calling fresh meetings of creditors and
making a two stage application to the court” 24
20 “Pooling” is the term commonly used to identify the aggregation of the assets of a corporate group such that they would in total be available to meet all of the corporate group’s obligations. The law as it
currently stands in Australia does not specifically allow for the pooling of assets in the event of
insolvency. 21 Re the Black Stump Enterprises Pty Ltd and Associated Companies (2005) 228 ALR 591 at [16] per
Young CJ. However in the same case Bryson JA was less certain of the position when he stated “It is
not clear to me that the court has any such power. I do not have a clear view to the contrary effect, that
is, there is no such power” at [41]. The views of Young CJ were referred to with approval by Barrett J
in Whittingham re Hunter Valley Gravel Supplies Ltd & Ors [2006] NSWSC 1070 at [20] 22 Or at least the requisite majority agree. 23 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79 and Dean-Willcocks &
Anor re Alpha Telecom (Aust) Pty Limited[2004] NSWSC 738; Re The Black Stump Enterprises Pty
Ltd (2005) 53 ACSR 684 at [10] –[11]; Re Charter Travel Co Ltd; Re CTC Package Holidays Pty Ltd
(1997) 25 ACSR 337
5
2. Compromise between Liquidator and creditors: s477(1)(c)25 This
power only requires court approval where the liquidator intends to
compromise a debt greater than $20,000 or where the liquidator intends to
enter into a long term commitment of greater than 3 months. There has been
doubt cast on this approach in at least one English case.26 In Australia it has
not found great support in the courts and it has also been pointed out that it is
not possible to utilise s51127 in the case of a voluntary winding up to force a
pooling on creditors who do not agree to become parties to the compromise.28
3. Arrangements between Liquidator and creditors: s510. Such
arrangements are required to be sanctioned by a special resolution of company
shareholders as well as by a resolution of the creditors. Even so, the Court may
vary or set aside the arrangement where an appeal is made to the Court (within
a period of 3 weeks) by any creditor or shareholder. One difficulty with this
section is that it applies only in a voluntary winding up. Further any
dissentient (non-voting) creditor must be paid pari passu with the voting
creditors.29 Another practical limitation is that this requires the approval of
shareholders who may be reluctant to approve the arrangement unless they
obtain some benefit from it. The court may order one meeting of creditors if
the affairs of the companies are intertwined but has historically been reluctant
to do so.30
4. Court Orders: s447A. This provision provides a wide power to the
court to make such order as it thinks fit about the operation Part 5.3A in
relation to a particular company.31 Although this section specifically applies to
a company in voluntary administration (or one under a subsequent deed of
24 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79 at 83 per Young J 25 This is also applicable in a voluntary winding up by virtue of s506(1)(b) Corporations Act . However
it must be noted that the extension of the power to a voluntary winding up does not confer any power
on the court to approve such an arrangement unless it is agreed to by that creditor. 26 Re Trix Ltd [1970] 1 WLR 1421 27 The provision allows a liquidator to make application to the Court for the determination of court powers and other matters that may arise in a voluntary winding up 28 Barrett J in Re The Black Stump Enterprises (2005) 228 ALR 591 at 593; see also Re Dean-
Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 50 ACSR 15 29 Re Switch Telecommunications Pty Ltd (2000) 35 ACSR 172 at 181 30 Re Switch Telecommunications Pty Ltd (2000) 35 ACSR 172 at 183 31 See generally Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270; 34 ACSR 250
6
company arrangement), it has been held to extend to situations where a
company has entered into a voluntary liquidation following a voluntary
administration.32 An example of the use of this section is the Soluble
Solutions case33 where Young J was prepared to use s447A to deem that a
resolution passed by the creditors in the statutory meetings of each company
approving the pooling of the assets was valid for all purposes and should be
acted upon by the liquidator.
5. A Deed of Company Arrangement that pools the assets of two or more
companies as an outcome of a voluntary administration.34 As a possible
outcome of a voluntary administration, the creditors may vote for a deed of
company arrangement. The Corporations Act places very few requirements in
respect of a deed since it is intended that the creditors should be free to
structure the arrangement to suit.35 Therefore it is possible to have the deed
include provisions that effectively pool the assets of a number of companies.36
Provided the deed is approved separately by the creditors of each company
and that the individual creditors are no worse off than they would be in a
winding up, it is likely that the arrangement will be valid. Clearly this can only
apply following a voluntary administration and so is not possible pursuant to
the liquidation process. However it may be possible for a liquidator to appoint
an administrator in appropriate circumstances under s436B to achieve this
result.
6. The unanimous assent of all creditors, as well as, where contributory
interests exist, the unanimous assent of such interests of the companies being
wound up.37 This principle applies to shareholders where the company is
operating normally and its extension to an insolvent company is based on the
view that the creditors’ rights in the insolvency process are private rights that
32 Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (2004) 50 ACSR 15 33 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79 at 65 34 under Division 10 of Part 5.3A 35 See Explanatory Memorandum Corporate Law Reform Bill 1992(Cth) at [739] 36 Mentha v GE Capital Ltd (1998) 27 ACSR 696 37 by Barrett J in Re The Black Stump Enterprises Pty Ltd (2005) 53 ACSR 684 at [13]
7
creditors may waive or vary by contract.38 In these circumstances the court
may give directions to “re-assure” the liquidator that the creditors have
modified their rights so as to give effect to the pooling.39
None of the above provisions canvassed, however, specifically authorise pooling of
assets and liabilities within an insolvent corporate group. Rather these “solutions”
around the lack of ability to pool place reliance on authority given by the court for the
particular procedure that is applied for. The perceived need to reform therefore arises
from a call for certainty and consistency with respect to pooling and is one that has
long been promulgated by judicial comment40 and law reform submissions and
proposals
The need for reform
Suggestions for reform in this area have existed for nearly twenty years in the
Australian institutional framework. In 1998 the Australian Law Reform Commission
in its General Insolvency Inquiry (the Harmer Report)41 recommended the use of
court-ordered pooling in two situations. First, “where it would appear justifiable to
make one company liable for the debts of a related company”42 regarding the actions
of the related company in the management of the insolvent company; to what extent
those actions contributed to the winding up of the insolvent company; and the conduct
of the related company towards the insolvent company’s creditors.
Second the Commission recognised the administrative need to make one company
liable for the debts of a related company where both companies’ businesses had been
intermingled.43 The Commission’s proposal sought to balance administrative
38 United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 17 ACSR 697 39 The Black Stump Enterprises Pty Ltd (2005) 53 ACSR 684 at [13] 40 Justice Young in Re Charter Travel co Ltd; Re CTC Package Holidays Pty Ltd (1997) 25 ACSR
337 at 339 when referring to the above procedural means stated: “I should note that whilst the courts
can continue to deal with these sort of problems on a case to case basis, the time may shortly be coming
where it would be a great saving for the Corporations Law itself to make provision for liquidators to
consolidate in appropriate cases. One can see, both from the BCCI litigation and from the Maxwell corporate collapse, that it is not uncommon for people of commerce to be involved in a group of
companies incorporated in different places with little care taken to document which company is
contracting with whom.” 41 Australian Law Reform Commission General Insolvency Inquiry Report No 45 42 Australian Law Reform Commission General Insolvency Inquiry Report No 45 Vol 1 para 855 43 Ibid
8
efficiency with an equitable distribution of the insolvent companies’ pooled property
such that no secured creditors rights were affected having regard to the extent that
unsecured creditors of the companies could be advantaged or disadvantaged, the court
retained the power to order no or an unequal distribution of pooled property to pooled
creditors.
The strength of pooling as a recognised tool in dealing with the insolvency of group
companies was supported by the Companies and Securities Advisory Committee
(CASAC) in its Corporate Groups Final Report in May 2000.44 The CASAC report
recommended court ordered pooling based on the (abovementioned) Harmer Report
draft provision, as well as the existing New Zealand pooling provisions. CASAC
endorsed pooling on the basis that were a pooling order to be made that it did not
affect the rights of external secured creditors. In circumstances where the secured
creditors’ security interest proved insufficient, the report recommended that the
remaining debt be claimable against the pooled assets of the group as an unsecured
creditor consistent with the claim a secured creditor may make in a single company
liquidation.45 CASAC recognised the effectiveness of pooling orders as a means of
reducing complexities within group insolvencies; assisting in international
insolvencies in jurisdictions that allow pooling orders and as enhancing returns to
unsecured creditors.46 In the light of these advantages, and in addition to court-
ordered pooling, CASAC recommended that liquidators be permitted to pool the
unsecured assets and liabilities of two or more group companies in liquidation where
prior unanimous approval of all unsecured creditors of those companies was
obtained.47
CASAC did not recommend that the use of pooling orders be limited to company
liquidation, recommending instead that for corporate group reconstructions
“administrators should be permitted to pool the administration of several companies
where no creditor who attends the creditors’ meetings votes against the proposal or
the court otherwise approves.”48
44 Companies & Securities Advisory Committee Corporate Groups Final Report May 2000 para 6.95 45 Id. Para 6.93 46 Id. Para 6.94 47 Id. Para 6.85
9
Four years later, the concept of pooling was further developed and refined by the
Corporations and Markets Advisory Committee49 (CAMAC) with respect to
Voluntary Administrations (VA) in its Rehabilitating large and complex enterprises
in financial difficulties Report 2004. CAMAC considered that pooling might assist
the rehabilitation process, including circumstances where a number of companies are
in financial difficulty and there is sufficient community interest in the matter and
where the business affairs of the corporate group are sufficiently intermingled so as to
make a combined administration more effective.50
In CAMAC’s view, creditors within a pooled administration would be treated as one
class, with voting rights determinable on number and value on a single deed of
company arrangement.51 As recommended previously, pooling would not alter the
rights of external secured creditors. CAMAC recommended differential rates of return
to creditors within a deed of company arrangement where, considered appropriate and
just, allowing for an aggrieved creditor to object to the deed.52 CAMAC expanded
their recommended pooling remedy to expressly permit solvent group companies to
be included in the pooled group administration and also allowed for administrators (or
directors where the group was solvent) to proceed with a pooled VA subject to
creditor objection.
Ambit of the Current Proposals
The current reform proposals with respect to asset pooling in group company
insolvency are contained in Part 4 of the draft Corporations Amendment (Insolvency)
Bill 2007.53 The recommendations agree, to a significant degree, with the previous
suggestions of the Australian Law Reform Commission, CASAC and CAMAC,
however, the Bill falls short of adopting all of the previous recommendations.
48 Id. Para 5.71-5.80 and Recommendation 20 49 CAMAC replaces CASAC as of 11 March 2002 pursuant to the Financial Services Reform Act 2001 50 Corporations and Markets Advisory Committee Rehabilitating large and complex enterprises in
financial difficulties Report 2004 Para 6.2 51 Ibid 52 Ibid 53 Available at http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=1186
10
The key features of the proposed model pursuant to Part 4 of the draft bill differing
from the previously proposed reforms are:
Meaning of the term “Group”
The term “Group” is undefined, except to emphasise that it is not limited to holding,
subsidiary or related companies.54 Therefore there is recognition that companies
eligible for a pooling determination may be operating as single economic entities such
that administrators may consider “companies that jointly or singly own or operate
particular property that is or was used, or for use, in connection with a business, a
scheme, or an undertaking, carried on jointly” as forming part of a group eligible for
a pooling determination.55 Thus, it is enough to be joined into the pooling if:
• There is a business, scheme or undertaking that is carried on jointly; and
• The relevant company owns or is a part owner of, or operates any property
that is used in that business scheme or undertaking.
The separate entity principle remains intact and the draft Bill does not seek to use
pooling to result in the corporate group to be regarded as a single enterprise (and itself
a separate legal entity) and therefore companies subject to a pooling determination do
not lose their individual legal status. Rather once a pooling determination comes into
force:
(a) Each company in the group is taken to be jointly and severally liable for
each debt payable by, and each claim against, each other company in the
group; and
(b) Each debt payable by a company or companies in the group to any other
company or companies in the group is extinguished56
This means that there is no need for any one company to formally assume the
liabilities of the other companies within the group. It remains to be seen whether this
administrative drafting convenience is significant in practice.
54 Proposed section 442V Corporations Amendment (Insolvency) Bill 2007 states that a group of 2 or
more companies need not be associated with each other in any way (other than a way described in
proposed sub-sections 442G(1)(b) or 442H(1)(b) 55 Proposed sections 442G (Administrator), 442H (Deed Administrator) Corporations Amendment
(Insolvency) Bill 2007
11
Similarly, there is not a single deed of company arrangement to be entered. Rather,
the pooling proposals are encompassed within each company’s own deed of
arrangement57 With each creditor’s claim being recognised as jointly and severally
recoverable against every company within the group, so that each claim is admissible
under the deed of company arrangement for every company within the group and the
deeds of company arrangement are binding on the creditors.58 The pooling
determination comes into force once all companies within the group execute the deeds
of company arrangement.59 The legislation is unclear however as to when the pooling
determination comes into force if companies within the group have already executed
deeds of company arrangement as s442P(3) presupposes that the pooling
determination is already in force and gives the administrator 10 days to vary the deeds
to give effect to the determination.
Although the draft Bill recognises the holding of consolidated meetings of creditors of
the group as a more effective means of administering and communicating with the
group, the single entity status of each company within the group is maintained as
resolutions passed at a consolidated meeting are deemed to have been passed by the
creditors of each of the companies within the group.60
Exclusion of Solvent Companies
Pooling under either proposed Division 8A (where group companies have entered into
voluntary administration61) or proposed Division 8 (where group companies are being
liquidated62) excludes solvent companies. In this respect the draft Bill has rejected
CAMAC’s recommendation 41 that “solvent group companies should be permitted to
enter into an administration with other group companies where at least one of those
companies satisfies the voluntary administration prerequisite.”63 CAMAC considered
that in certain circumstances where the affairs of the solvent group company are so
56 See proposed sub-section s442G(3)(a) s442H(2)(a) Corporations Amendment (Insolvency) Bill 2007 57 Proposed section 442H Corporations Amendment (Insolvency) Bill2007 58 Proposed section 442S Corporations Amendment (Insolvency) Bill 2007 59 Proposed sub-section 442G(2) Corporations Amendment (Insolvency) Bill 2007 60 Proposed section 442Q Corporations Amendment (Insolvenc) Bill 2007 61 Proposed sub section442G(1)(a) & s442H(1)(a) Corporations Amendment (Insolvenc) Bill 2007 62 Proposed sub section 572(1)(a) Corporations Amendment (Insolvenc) Bill 2007 63 Op cit CAMAC Rehabilitating large and complex enterprises Report 2004 para 6.4.2
12
intertwined with those of other group companies, for example, where the solvent
group company relies on information technology or other logistical or financial
support from an insolvent group company then pooling within the voluntary
administration may be beneficial.
The draft Bill’s explanatory memorandum argues that this potential benefit is
outweighed by the need to protect the interests of the solvent company’s
shareholders64 This approach shows how reluctant the government is to deal with the
broader issue of corporate groups in a more holistic manner at this time. It is
suggested that the proposal is a pragmatic solution to a procedural issue without
attempting to deal with the more fundamental factors that may cause the problems to
arise in the first place.
The Proposed Pooling Process
Under Voluntary Administration
As stated previously, under the current law it is possible for pooling arrangements to
be approved by creditors as part of a deed of company arrangement. Proposed
Division 8A does not absolve this power.65 Rather, it affirms that before an
administrator makes a determination to pool, written notice of the proposed pooling,
must be made to as many of the companies’ creditors within the group as is
reasonably practicable.66 Rather than convene creditor’s meetings67 seeking approval
of the pooling determination, the administrator may then proceed with the pooling
determination unless one or more creditors object. This streamlines the approval
process while still ensuring that creditors are fully informed and have adequate means
to challenge any pooling proposal.68 Practical problems with respect to the convening
of meetings and the resolutions to be passed are thereby avoided.69 However it
requires only one creditor to object to affect this process.
64 Explanatory Memorandum to Part 4 Facilitating Pooling in External Administration Corporations
Amendment (Insolvency) Bill 2007 page 53 65 Proposed section 442R Corporations Amendment (Insolvency)I Bill 2007 66 Proposed section 442K(1) & (2) Corporations Amendment (Insolvency) I Bill 2007 67 Opcit CASAC Corporate Groups: Final Report (May 2000) Recommendation 20 68Opcit.CAMAC Rehabilitating large and complex enterprises para 6.4 69 Hoser,P. Examining the Legal and Practical Implications of Pooling Paper presented as part of
Insolvency Law Accelerator Masterclass Brisbane, 12th May 2005 identified such problems as which
13
External secured creditors rights are unaffected by the proposed pooling
determinations unless the secured creditor surrenders their security to the
administrator for the benefit of creditors of the companies in the group generally.70
The debt is then no longer secured and is recoverable jointly and severally from all
companies within the group.
Notice of the proposed pooling determination given under proposed section 442K is
comprehensive: including a written statement inviting unsecured creditors to object;
giving creditors the rationale for the administrator’s decision to choose pooling; the
likely returns if the proposed determination is made or not; and the extent to which
particular creditors and particular companies within the group are likely to be
disadvantaged by the making of the proposed determination.
Justification of the administrator’s decision to pool may involve complex and difficult
investigations encompassing:
(1) Listing of external creditors and debtors of the companies within the
pooling group;
(2) An apportionment of each company’s assets within the pooling group; and
(3) The number and amount of formal and informal intercompany loans within
the group with such loans being extinguished if a pooling determination is
made.
The proposal argues that the notification requirements under proposed Division 8A
are not more onerous on administrators as this type of analysis is currently undertaken
by those administrators seeking creditor approval of a Deed of Company
Arrangement where pooling of group companies’ assets is included.71 However, it is
not possible for the administrator under clause 442K of the draft Bill to provide to
creditors written notice of an Internet site where creditors may view a copy of the
creditors may vote in relation to which company for the relevant majority to be obtained where
interlocked companies exist. 70 See Proposed s 442G(6)&(7) s442H(5) & (6)Corporations Amendment (Insolvency) Bill specifically
excludes secured creditors unless an intra-group debt 71Opcit. Hoser, P Examining the legal and practical aspects of “pooling” in insolvency contexts
14
proposed determination.72 This a rather strange omission which may just be an
oversight in the proposals given the recognition of this method in relation to pooling
in liquidation and the general move towards this form of notification.
If any creditors object to the making of the proposed determination,73 then it may only
proceed if in the opinion of the Court it is just and equitable to do so.74 The
administrator may apply to the Court for an order approving a pooling determination
in such circumstances but must inform the creditors of the companies within the
group of such an application.75 Such notice may be given by notifying creditors of the
website address where creditors can view a copy of the application.76
When the issue is brought to the Court by the administrator, the court may approve
the determination by the administrator if it is “just and equitable” to do so. The
matters which the Court can take into consideration in determining this are open-
ended and include such factors as:
(1) The extent to which a company in the group and its officers or employees
were involved in the management or operations of any of the other
companies in the group;
(2) The conduct of a company and its officers or employees within the group
towards the creditors of any of the other companies in the group;
(3) The extent to which the circumstances giving rise to the administration of
any of the companies in the group are directly or indirectly attributable to
the acts or omissions of any of the other companies in the group or their
officers or employees;
(4) The extent to which the activities and business of the companies in the
group have been intermingled;
72 Compare proposed s 442K with the notification requirements to creditors in proposed s 442L(4)
Corporations Amendment (Insolvency)Bill 2007 73 And the prescribed form to be used by the creditor if objecting is included within the original notice:
proposed section 442K(3)(a) Corporations Amendment (Insolvency) Bill 2007 74 Proposed section 442K(5) Corporations Amendment (Insolvency) Bill 2007 Requires the creditor’s
objection to the proposed determination to be given on the prescribed form, within the prescribed
period and in the prescribed manner as detailed under s442K(3) Corporations Amendment (Insolvency)
Bill 2007 75 Proposed sub-section 442L (4) & (5) Corporations Amendment (Insolvency) Bill 2007 76 Proposed sub-section 442L(4)(b) Corporations Amendment (Insolvency) Bill 2007
15
(5) The extent to which creditors of any of the companies in the group may be
advantaged or disadvantaged by the making of the order; and
(6) Any other relevant matters
The above factors are similar to the New Zealand provision, (although the New
Zealand provision does not include ((5 )above) that empowers New Zealand courts to
make pooling orders in respect of related companies once one of those companies is
placed into liquidation77 and echoes those factors that the Harmer Report originally
identified as justification for court-ordered pooling.78 New Zealand case law suggests
in relation to the corresponding provision in that jurisdiction that costs savings are
indirectly taken into account, as “other relevant matters”, as if no pooling
determinations are made and separate legal proceedings are pursued the cost and
length of the liquidation may considerably increase and thereby deplete funds
otherwise available for creditors.79
The court’s power to approve a pooling determination regardless of a creditor/s
objection rests on whether the exercise of this power is “just and equitable”.
Although Vaisey J in Re Serene Shoes Ltd 80
could not differentiate between the terms
“just and equitable” and “just and beneficial” it is considered that the former phrase is
distinct from the latter term. The expression “just and beneficial”, used in s51181
(Corporations Act) appears to take into consideration elements of cost and efficiency
of function. Justice Young82 considered that if “the court can summarily solve the
difficulty that has arisen in the liquidation by an order under the section in a cheap
and efficient manner …. …It is “just and beneficial” to exercise the power”.
In contrast whether it is “just and equitable” to make a pooling determination takes
into account the relative positions of the unsecured creditors within the group of
companies vis-à-vis themselves, (as outlined in factor (5) above), and the respective
77 See s271(1)(b) Companies Act 1993 (New Zealand) However the application for pooling in New
Zealand can be lodged by not only the liquidator but a creditor or shareholder 78 Opcit Harmer Report para 855 79 See Re Dalhoff and King Holdings Ltd (1991) 5 NZCLC 66,959 and Re Pacific Syndicates (NA)
Limited (1989) 4 NZCLC 64,757 at 64,768 80 [1958] 3 All ER 316 at 317 81 Section 511 Corporations Act 2001 (Cth) allows the Court to determine a particular question or
exercise all or any of the Court’s winding up powers if satisfied to do so would be just and beneficial 82 Dean Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79 at 81
16
shareholders of those companies given the management practices of those companies;
the degree of intermingling of business and management between companies; and the
creditors knowledge thereof. The term just and equitable is used in the corresponding
New Zealand provisions and Farrar83 has suggested that the term provides the court
with the “widest discretion to effect a result which accords with common notions of
fairness in all the circumstances”.
The ambit of the proposed determination is flexible. Both the administrator and the
court have the power to modify the general effect of the determination to exclude
certain companies or debts from the pooling determination.84 However once made the
pooling determination is irrevocable, although the court has the power to vary a
pooling determination made on the grounds it is just and equitable to do so. 85 As part
of such just and equitable grounds it is considered that the court will take into account
the effect on unsecured creditors of any variation in available assets in the proposed
pool arising from such variation.86
Pooling Process
Under Liquidation
Proposed Division 8 of the draft Corporations Amendment (Insolvency) Bill 2007
deals with pooling within liquidation. The proposed provisions follow closely the
above model of pooling within a voluntary administration and to that end will not be
discussed further. However, in contrast to the position under voluntary administration
83 Farrar J., CORPORATE GOVERNANCE; Theories, Principles and Practice (2nd ed) Oxford
University Press 2005 at 264 referring to Casey J., in Re Home Loans Funds (NZ) Ltd (1983) 1 NZCLC
95073 84 Proposed s 442G(1)(d), 442H(1) (d), and 442MCorporations Amendment (Insolvency) Bill 2007 if it
is considered just and equitable to do so. Caluse 442M gives the Court power to make ancillary orders
such as exempting specific claims from the determination or transferring property between companies
within the group 85 Proposed section 442N Corporations Amendment (Insolvency) Bill 2007. It would appear in making
an assessment of whether it is just and equitable to vary the pooling determination the court would have
regard to the same factors disclosed in proposed sub section 442L(3) which empowers the court on just
and equitable grounds to make an order approval the pooling determination contrary to a creditor/s
objection thereto 86 Opcit. CAMAC Rehabilitating large and complex enterprises Report 2004 para 6.4.3. CAMAC had
previously denied the court the power to vary any pooling proposal as it considered this would lead to indefinite delays and complications as variations could lead to the available assets in the proposed pool
differing from what was originally described to creditors of all companies within the group
necessitating those creditors to have a further right to object to the proposed pooling.
17
where a court order can only be obtained after a proposal by the administrator has
been objected to by a creditor, there are two separate methods of pooling available in
a liquidation: voluntary pooling and court ordered pooling.
As previously discussed where a liquidator proposes voluntary pooling written notice
of the proposed determination must be made to all eligible unsecured creditors of the
companies within the group.87 Eligible unsecured creditors specifically exclude
another company within the group.88 If one eligible unsecured creditor objects to the
making of such a pooling determination in the prescribed form and within the
prescribed time then the pooling cannot proceed.89
A Court ordered pooling can only be made on the application of the liquidator/s of the
companies within the group, however this application can be made without a creditor
having previously objected to the making of the determination.90 The Court will then
consider if it is just and equitable to make such an order on the basis of the very same
factors previously disclosed with respect to court approved pooling determinations
under voluntary administration.91
The same breadth of power given to the administrator is given to the liquidator when
making the pooling determination so long as the liquidator can justify such
determination on the grounds of it being just and equitable.92 The pooling
determinations are aimed to be flexible and reflect the specific circumstances of the
companies in the particular pooling group.93 The court retains the power to vary any
pooling determination on the application of the liquidator94 or the application of a
creditor of the group,95 but will only do so on just and equitable grounds.
87 Proposed section 574 Corporations Amendment (Insolvency) Bill 2007 88 Proposed section 571 Corporations Amendment (Insolvency) Bill 2007 89 Proposed sub-section 574(4) Corporations Amendment (Insolvency) Bill 2007 90 Proposed sub-section 576(8) Corporations Amendment (Insolvency) Bill 2007 91 Proposed sub-section 576(9) Corporations Amendment (Insolvency) Bill 2007 92 Proposed sub-section572(1)(d) CAI Bill 2007 93 Explanatory Memorandum to Part 4 – Facilitating Pooling in External Administration Corporations
Amendment (Insolvency) Bill 2001 para 4.251 94 Proposed section 575 Corporations Amendment (Insolvency) Billl 2007 95 Proposed s576 (12)(b) Corporations Amendment (Insolvency) Bill 2007
18
Similarly the Court has wide ancillary powers that it can exercise when making a
pooling determination,96 including the power to provide for different returns for
different classes of creditors, but not the power to alter the order or priority of debts
applicable under s556, 560 and 561 Corporations Act 2001.
Protection of Administrator/Liquidator
The pooling determination process will obviate the need in some cases for
administrators to apply to the court for directions under s447D and for liquidators
under s479(3) or s511 Corporations Act 2001. For example in Mentha v GE Capital
Ltd (1998) 16 ACLC 1032 the administrators sought a direction that it was proper for
them to execute and give effect to three deeds, the effect of which was to transfer their
assets to one company, and for that company to assume all the liabilities of the other
companies within the group. Similarly in Re Charter Travel Co Ltd 97 the court made
orders on the application of the liquidators under s479 that a combined meeting of
known creditors of each of the companies within the group be convened together with
the relevant administrative directions for conducting such a meeting.
By making a pooling determination under proposed sections 442G or 442H
(administrator) or 572 (liquidator) as long as the administrator or liquidator
respectively does so with due care and in good faith for the benefit of the creditors of
companies in the group as a whole, the administrator/liquidator is statutorily protected
from being in breach of duty (statutory or fiduciary) owed to a company in the group
or creditor of a company in the group. It appears that there is no need for the
administrator/ liquidator to establish that it is “just and equitable” to put the proposal,
according to the criteria that the court must have regard to when making its
determination to order the pooling. This may be reasonable having considering that
any creditor may object to the administrator’s or liquidator’s proposal.
Comparability of Overseas Provisions
96 Proposed section 577 Corporations Amendment (Insolvency) Bill 2007
19
The Australian proposals clearly draw heavily on the New Zealand provision98 that
have been in place for some time. The proposal for Australia is different from the
New Zealand regime in some important respects. It is also useful to make some
comparisons with the position in the United States because there is no US provision
that covers the issue, the approach taken in that jurisdiction provides an interesting
contrast against the proposed Australian approach.
The New Zealand Provisions
In New Zealand the court may make an order that provides for the pooling of
insolvent related companies and in addition may make contribution orders where a
related company is in liquidation.99 The order is dependent on companies being
“related companies”. In s2(3)100 the term “related companies” is defined to include the
holding subsidiary relationship but also includes where there is a majority of shares
held by the other company or other related companies as well as the position where
“the business of the companies” has been carried on in a way that the separate
business of that company (or a substantial part of it) is not “readily identifiable”.
The Australian proposal on the other hand identifies the companies subject to the
possible pooling in terms of the operation of or ownership (or co-ownership) of assets
used in a joint business. In New Zealand it is possible for a liquidator creditor or
shareholder to make the application to the court for the order. Unlike the Australian
proposal there is no opportunity for the New Zealand liquidator to pool assets without
obtaining a court order. The application in Australia may only be made by the
liquidator.
Under s271101 there are two broad classes of orders that may be made. The first is a
contribution order that requires a company to pay to the liquidator of another
97 (1997) 25 ACSR 337 98 Section 271 Companies Act 1993 NZ 99 At the time of preparing this paper there is no equivalent scheme to voluntary administration in
operation in New Zealand although one has been prepared it is not yet in force and hence will not be
discussed here. Those proposals do include a provision for pooling see ss239AEQ-239AEW
Companies Act 1993( NZ) 100 Companies Act 1993 (NZ) 101 Specifically under s271(1)(a)
20
company that is related to it, the whole or part of the any or all of the claims made in
the liquidation. This type of order has been specifically rejected in the Australian
proposal.
The second possible s271 order allows the liquidation of two or more related
companies as if they were one company (on such terms as the court imposes). This is
closer to the Australian proposal however the Australian proposal is not for a joint
liquidation. The New Zealand provisions are less directive of the type of order that the
court may make and in that sense seem more flexible than those under the Australian
proposal.
These orders may be made whenever it is considered “just and equitable” by the
court. This phrase is expanded upon in s272 which sets out factors that the court must
have regard to. The matters to be considered are different for a contribution order
from those for a pooling order. There does not appear to be extensive case law on
these provisions but case law indicates that the court will scrutinise these factors
closely prior to making any pooling order.102
The United States Approach
As indicated above, the comparison with the United States is useful in the context of
reasoning for pooling from another jurisdiction. The institutional factor that looms
large in United States company bankruptcy is the fact that it is court centred.
In Australia with respect to both voluntary administration and voluntary liquidation
there is limited court involvement and even in court ordered liquidation there is
usually limited involvement by the court. This means that the need to seek court
sanction to deal with corporate groups is more problematic in the Australian context.
What follows then is a different perspective between the two countries with respect to
group companies and liquidation .
102 See Re Dalhoff & King Ltd (1991) 5 NZCLC 66 959
21
In Australia the focus is on procedural issues103 – how can the administrator
/liquidator achieve the pooling outcome? The US approach on the other hand is more
fundamental requiring the substantive consolidation104 of bankruptcy estates, (as
pooling is called there), that flows from “tests that were more focused on the familiar
alter-ego/veil-piercing factors employed in tort cases”105. In other words the question
of pooling is based upon whether there has been some abuse of the corporate form or
structure. This is a more soundly based foundation than appears to be underlying the
Australian proposals, the latter seeming to stem from a purely pragmatic approach of
whether it helps the insolvency practitioner perform her or his function. The US
approach on the other hand is an equitable remedy that must be justified within the
equitable power of the court106.
There is debate as to the exact limits of the circumstances where consolidation will be
ordered in the US, however it appears that it will occur if the assets and liabilities of
the debtor are so scrambled that separating post petition is prohibitive and hurts all
creditors107. Consolidation will also occur if prior to the petition, the entities proposed
to be consolidated disregarded their separateness so significantly that their creditors
relied on the breakdown and treated them as one legal entity.108 This latter test is more
controversial with some commentators suggesting the test cannot be fulfilled109and
that a more reasonable approach is to require only that there is substantial identity
between the so called separate entities and that a consolidation will avoid harm or
realize benefits in the bankruptcy. Once this is established the onus shifts to any
objecting creditor to show that they relied on the separateness of the entity and will be
prejudiced by the consolidation110
103 perhaps one exception being Goldberg J , in the Matter of Ansett Australia Ltd (ACN 004 209 410)
(2006) 24 ACLC 386 104 Procedural consolidation being merely the joint administration of several bankruptcy cases by the
one judge 105 Amera S., and Kolod A., “Substantive Consolidation: Getting Back to Basics” 14 1 American
Bankruptcy Institute Law Review 1 106 This power may be inherent in the court or it can be established under section 105 of the
Bankruptcy Code 1978(US) 107 In re Owens Corning 419 F.3rd 195, 211 (3rd Cir. 2005) 108 Ibid 109 Amera S., and Kolod A op cit 110 Drabkin v Midland-Ross Corp(In re Auto-Train Corp Inc) 810 F. 2d 270 (D.C. Cir 1987)
22
In Australia, Goldberg J111 took the view that the test in re Owens Corning in the US
were “principles appropriate to apply within the context of the proper approach to
pooling in the Australian jurisdiction”. The “just and equitable” basis112 for the court
to make an order to pool the administration or liquidation will probably enable the
court to look beyond these types of factors and move it more towards the so called
Auto Train test which Goldberg J rejected
Some Conclusions with respect to the Australian Proposals.
The attempt to provide a specific procedure in the legislative framework for pooling
will no doubt be welcomed by insolvency practitioners as it places them in a more
certain position when they are attempting to deal with issues surrounding corporate
groups. It will enable creditors to unanimously approve a pooling proposal, or failing
that to assist with obtaining court approval. However it seems that the proposals
generally represent a limited attempt on behalf of the government to deal with the
more significant issues of corporate groups.
It is recognised that the pooling proposals are part of insolvency reforms and that
corporate group issues extend beyond insolvency and wider consultation is necessary
to make more fundamental change, however the narrow scope of the proposed
legislation leaves more to be done in the future if the economic reality of corporate
groups is to be dealt with meaningfully in the legislation.
Particularly within the insolvency context, the failure by the insolvency reform
proposals to include any form of contribution order is a disappointment. The fact that
only companies in voluntary administration or in liquidation are able to be part of the
process suggests that creditors could potentially be disadvantaged where (to the extent
that it is commercially possible) assets are available in a solvent company that is part
of the group.
111 in the Matter of Ansett Australia Ltd (ACN 004 209 410) (2006) 24 ACLC 386 at [99]
23
The New Zealand experience shows that at least some form of provision might be
written to enable a contribution order to be made from companies that are part of the
group but not in liquidation or administration and that it need not require fundamental
changes to the position of shareholders.
The proposal appears to be predicated on making the least disruptive change to the
insolvency procedures that is possible and this is evidenced by the pooling
determination being to the effect that each of the companies in the pool are taken to be
jointly and severally liable for each debt payable by each other company in the group
with inter-company debts extinguished. One issue that appears to be left open is the
determination of the date where the liabilities will arise for the other companies in the
pool. Under proposed section 579 it is made clear that if a debt or a claim becomes
one that is “pooled” then it is admissible to proof against the company. This enables
the debts to be dealt with as ordinary unsecured debts in the winding up in terms of
priority. It is possible that that ancillary orders might be made and this may be
something that is dealt with in the order or determination itself. However no provision
makes this clear in the proposal. If “time” is meant to be prior to the commencement
of winding up, it is possible to foresee set off issues that will arise where for example
a third party is a debtor of one company in the group and a creditor of another. When
the liabilities are pooled it may result in set off becoming available and advantaging
one creditor. On the other hand if liabilities arise only after the pooling order or
determination is made, then presumably set off will not be applicable.
Although no definition of corporate groups is provided, the proposal places limits on
when companies may be placed in the pool. This is done in a quite specific but
somewhat indirect way. In the New Zealand legislation the circumstances of being a
related company include where the activity is carried on in a way that the separate
business of each company is not readily identifiable. This is similar to the tests
identified in US courts. In contrast the Australian proposal sets out more specific
requirements relating to owning or operating property that is used in a joint
undertaking. We suggest that a more general statement of principle will better serve
112 See proposed sub section 442L(3) in relation to administration and 576(9) in respect of a liquidation
24
the overall purpose of the proposed legislation. Whilst the specific requirements may
cover a wide variety of situations, particular unanticipated circumstances may cause
difficulty and result in the pooling provisions not being able to be utilised. For
example, if a company in the “group” has only a contractual link to the others so it
owns no “property” or if the records are such that it is not possible to find which
company actually owned or operated the property, doubts may arise as to whether the
provisions apply.
The proposals seem certain to be adopted largely in their current form with only
relatively minor amendment. The support for the proposals from the insolvency
profession is understandably strong given the helpful position it places practitioners
in. This does not mean though that the legislation should be seen as the end point in
dealing with corporate groups. There is room for wider reform so that the law is more
effective in dealing with the economic reality and it is hoped that these will occur
sooner rather than later.
The Insolvency Implications
for Corporate Groups in
Australia – recent events and
initiatives
The Insolvency Implications for
Corporate Groups in Australia – recent
events and initiatives
Jenny Dickfos –Griffith University, Australia
Dr Colin AndersonGriffith University, Australia
Dr David MorrisonUniversity of Queensland, Australia
The Insolvency Implications for
Corporate Groups in Australia – recent
events and initiatives
• Introduction;
• Background to the Australian treatment of corporate
groups;
• Current attempts to deal with insolvent corporate
groups;
• The calls for reform;
• Ambit of the current proposals for reform;
• The pooling proposal;
• Comparison with other approaches and evaluation;
• Concluding Remarks and Questions;
Background to the Australian
treatment of corporate groups
• Corporate groups relatively common
• Corporations Act provisions based on entity
approach.
– Exception in insolvency for insolvent trading of
a subsidiary – s588V
– Insolvency appointments made to individual
companies
Current attempts to deal with
insolvent corporate groups
• Because no express provision enablingpractitioners to deal with groups indirect
approaches have been used:
– Schemes of Arrangement;
– Compromise between liquidator and creditors;
– Arrangement between liquidator and creditors;
– Court order under s447A;
– A Deed of Company Arrangement;
– Unanimous Assent of Creditors.
The calls for reform
• There has been a recognition for some timethat existing provisions were unsatisfactory.
• A number of reports have suggested
reforms:
– Harmer Report 1988;
– CASAC Corporate Groups Final Report 2000;
– CAMAC Rehabilitating large and complex
enterprises in financial difficulties 2004
Ambit of the current
proposals for reform
• A draft bill titled Corporations Amendment(Insolvency) Bill 2007 released for discussionin November 2006.
• As part of a number of changes it proposes alegislative pooling process.
• Does not define “group” companies but setsout that pooling is available inter alia if thereis– Joint undertaking ,scheme or business; and
– Company owns ,part owns or operates propertyused.
Ambit of the current
proposals for reform
• If triggered pooling does not group assets
nor treat the insolvency procedure as one
but:
– Makes each pooled company jointly and
severally liable for each debt of or claim against
each other company; and
– Extinguishes inter-company debts.
The pooling proposal
• Pooling is available both in voluntaryadministration and liquidation
• In a VA
– administrator may give written notice to
creditors of proposal.
– will proceed unless one or more creditors
object.
– If objection made, administrator may apply to
court for order. Court may make order if ‘just
and equitable’ to do so
The pooling proposal
• In a liquidation:
– Liquidator may apply to court for an order; or
– Liquidator may make a determination by giving
written notice to unsecured creditors other than
another company in the group.
• In both cases Court orders if just and
equitable and factors listed to determine that
issue.
Comparison with other
approaches and evaluation
• New Zealand Provisions –s271-272Companies Act 1993:– Pooling by way of a court order for related
companies;
– Related companies defined to include wherebusiness of individual companies not readilyidentifiable;
– Creditors or shareholders can make application aswell as liquidator;
– Allows for contribution orders from a company notbeing wound up;
– Allows for orders to treat liquidation of two or morecompanies as one liquidation
Comparison with other
approaches and evaluation
• US approach – court approach based on
notion of justification for lifting the corporateveil
• Australian focus appears to be on
procedural issues
Comparison with other
approaches and evaluation
• Pooling proposals are not a comprehensive
response to issues of corporate groups
• Only part of wider insolvency changes
• Only available where all companies in VA or all
in liquidation so no contribution orders available
• Limited to pooling liabilities rather than assets
• Definition of groups lacking in general principle
• Pragmatic limited approach rather than
comprehensive reform
Concluding Remarks and Questions
• Questions or Comments?
ASD
Session C – Paths to salvation:rescue procedures for specialcategories of debtor
Professor Anneli Loubser, University of South Africa“Comparative approaches to business rescues: the treatment of unincorporated businesses”
Professor Adrian Walters, Nottingham Trent University“Comparative analysis of corporate rescue proceedings: Lessons from the UK”
Professor Stephanie Ben-Ishai, Osgood Hall Law School, York University“Access to the consumer bankruptcy process: comparative perspectives”
Professor Andre Boraine, University of Pretoria“Debt relief measures for consumer debtors in South African law”
Photograph courtesy of South African Tourism
ASD
1
Comparative approaches to business rescues: the treatment of unincorporated businesses
Anneli Loubser
1 Introduction One of the grounds on which judicial management, South Africa’s only formal and dedicated business rescue procedure, has been criticised, is that it applies only to companies. The provisions regulating judicial management are contained in the Companies Act1 and the wording makes it very clear that its use is restricted to companies. The reason for this is to be found in the history of judicial management. When it was introduced into our legal system by the Companies Act of 1926, the Minister of Justice who guided the legislation through Parliament explained that judicial management was intended for the rescue of businesses that were important to the economy of South Africa.2 It was therefore assumed, and was probably true at the time, that no unincorporated business could be important or big enough to be worth saving. The relevant provisions did not, however, limit judicial management to larger companies and it thus applied to all companies, irrespective of their size.3 The situation remained the same when the Companies Act 61 of 1973 replaced the 1926 Act. On the other hand, it is true that judicial management is regarded by many South African commentators as being too costly and cumbersome, even for smaller companies, let alone for even smaller unincorporated businesses.4 This is largely due to the involvement of the High Court that must be approached at least twice (once for the provisional and then for the final order) and the compulsory appointment of both a provisional and a final judicial manager. 2 Rescue procedures for other business forms The Close Corporations Act of 19845 created a new and simpler incorporated business form for small businesses in South Africa, with membership limited to ten members who, subject to a few very specific exceptions, must all be natural persons.6 Although judicial management does not apply to close corporations either, the Close Corporations Act itself provides an uncomplicated and fairly inexpensive rescue procedure for close corporations. This is in the form of a composition that is tied to liquidation in that the offer of composition may only be made after commencement of liquidation and the appointment of a provisional (or final) liquidator.7 Section 72(11) specifically allows the offeror of a composition that has been accepted by the required majority of creditors and provides for this, to apply to court for the winding-up order in respect of the close corporation to be set aside, which will enable the close corporation to resume its business operations.
The other available business forms, namely partnerships, business trusts and sole proprietorships, do not enjoy legal personality and the first two are, in fact, prohibited from acquiring legal personality by the Companies Act. Section 31 of the Act stipulates that an association of persons formed for the purpose of carrying on any business and with the object of the acquisition of gain, will not be recognized as a body corporate unless registered as a company under the Act or formed in terms of another Act. The insolvency of these businesses is therefore regulated by the Insolvency Act of 1936 that primarily regulates the insolvency and sequestration of the estate of a natural person.8
2
In terms of the Insolvency Act, if the estate of a partnership is sequestrated, the estate of each individual partner must also be sequestrated simultaneously.9 Although the estates of the partnership and the respective partners must be administered separately,10 some debts of the individual partners’ estates can be paid out of the partnership estate,11 and there is therefore no absolute separation. The respective estates of a business trust and its trustee(s) are separated by section 12 of the Trust Property Control Act12 in terms of which the trust assets do not form part of the trustee’s personal estate. This means that in the case of sequestration of the trustee’s estate the trust property will not be included in the trustee’s insolvent estate and vice versa, unless, of course, the trustee has allowed trust assets to mix with his or her personal assets to such an extent that it can no longer be identified as trust property.13 Although the Insolvency Act therefore applies to certain businesses where the estate of the business is administered separately, the Act does not make provision for any business rescue procedure. The closest thing to a business rescue found in the Insolvency Act of 1936 is the section 119 composition with creditors. As in the case of the composition procedure for close corporations, this composition is also dependent on insolvency. However, in the case of a composition in terms of section 119, a final sequestration order must have been issued and the first meeting of creditors must have taken place.14 If the offer of composition is accepted by the prescribed majority of creditors, it becomes binding on all unsecured creditors.15 An insolvent may, on the basis of an accepted composition, immediately apply to court for rehabilitation if the composition provides for payment of at least 50 cents in the Rand. However, although the composition may contain a condition that any property in the insolvent estate shall be restored to the insolvent, it may not be made subject to the rehabilitation of the insolvent as the court has an unfettered discretion in deciding whether to grant rehabilitation.16 A partnership automatically dissolves on sequestration of its estate, but there is some authority that a composition by a partnership is possible and that the partnership can then be reinvested with its assets.17 This is probably not correct, however, especially as section 128 of the Insolvency Act of 1936 clearly states that a partnership whose estate has been sequestrated cannot be rehabilitated.18 It must therefore be accepted that the section 119 composition is available only to a businesses conducted as a single proprietorship or a business trust, keeping in mind that they run the risk of a court refusing to allow immediate rehabilitation. For a partnership the only remedy seems to be a common-law compromise that is entered into before sequestration. The problem with that is that a common-law compromise is contractual in nature and requires the approval of all the concurrent creditors to be effective.19 Strangely enough, although the Insolvency Act of 1936 does not contain a business rescue procedure as such, it stipulates in section 38(5) that a trustee in the sequestrated estate of an employer may not terminate the contracts of service of employees unless he has consulted with the employees or their legitimate representatives. In section 38(6) the Act then specifies that these consultations must be aimed at reaching consensus on appropriate measures to save or rescue the business or part of it. The three examples of possible rescue measures mentioned in this section are a compromise in terms of section 311 of the Companies Act of 1973 (and therefore available only to companies), a sale of the whole or part of the business or a transfer of the business in terms of section 197A of the Labour Relations Act of 1995. The latter section applies to the transfer of a business as a going concern if the employer is insolvent or if a scheme of arrangement or compromise is being entered into to avoid sequestration or winding-up and provides that all existing contracts of employment are automatically transferred to the new owner of the business.
3
3 Current developments in South Africa
When Cabinet in March 200320 approved the principle of a consolidated Insolvency and Business Recovery Act that would cover all debtors, whether incorporated or not, it seemed that the strict division in insolvency law between corporations and other debtors would eventually disappear. This also meant that whatever business rescue procedure replaced judicial management, would then apply to all businesses irrespective of the form in which they were run. This, however, now appears not to be the plan. The new Companies Draft Bill containing the legislation that will eventually be enacted to replace the current Companies Act of 1973, will no longer regulate the liquidation of insolvent companies once a new consolidated Insolvency Act comes into effect. The corporate rescue procedure that will replace judicial management, however, will remain in the new Companies Act and, by definition, again apply only to companies. Furthermore, the Department of Trade and Industry intends phasing out the close corporation as a business form, eventually repealing it after a period of ten years when, it is hoped, the new company form that will be simpler and cheaper to register and to run, will make the close corporation obsolete. This will not make the partnership, business trust or sole proprietorship obsolete, however, and it is quite possible that if the close corporation is abolished, there might even be an increase in the number of partnerships. The question therefore arises: are we missing an opportunity to improve our legal system through creating one rescue regime appropriate for and applicable to all businesses or is our present system of using the form of business to determine the rescue procedure (if any), the better option. This is not just an academic question but one of great importance, especially for developing countries like South Africa, where it has been shown that small to medium businesses are the most important creators of employment opportunities. With an unemployment rate of about 26% that is expected to rise to 32,5% in 2007,21 we cannot afford to disregard the smaller, unincorporated businesses. 4 Comparative approaches
It is clear, when studying rescue procedures in other jurisdictions, that the problem of dealing with smaller businesses in distress is not unique to South Africa. This issue has come under the spotlight in many jurisdictions, particularly in those where there is only one universal rescue procedure for all businesses, irrespective of their form or size. The problem lies in creating a balance between an uncomplicated and fairly inexpensive rescue procedure that would be suitable for the smaller business, on the one hand, but, on the other hand, guarding against making it so easy and unsupervised that it would be open to abuse, particularly by big corporations that are entrusted with huge amounts of investors’ funds.22 4.1 United States
Probably the best example of a rescue procedure available to all businesses in whatever form or size, is found in the American system. Reorganizations in terms of Chapter 11 of the U.S. Bankruptcy Code23 may be commenced by or against any entity that falls within the definition of a debtor as formulated for purposes of this chapter.24 Subject to a few very specific exceptions, the definition of a debtor for Chapter 11 includes any individual, partnership or corporation that resides or has a domicile, place of business or property in the United States.25 The definition of a corporation includes, among others, a business trust and unincorporated company or association.26 Although Chapter 11 is therefore not limited to persons who are engaged in business, it seems to be accepted that this Chapter is primarily intended for businesses in some form or the other.27 On the other hand, Chapter 13 of the Code provides for a plan that is confirmed by the court and in terms of which the future income of the debtor will be utilised for payment of his debts. This is specifically limited to individuals with a regular income who owe less than the stated amounts of
4
secured and unsecured debts, including sole proprietors.28 Although a sole proprietor is allowed to continue operating his business, he is generally not entitled to a discharge before all payments under the plan have been completed.29 In spite of the fact that the Chapter 11 reorganization is regarded by many as the model rescue procedure because it does not entail as much involvement by the courts as in many other systems, is fairly easy for the debtor to initiate and does not require the (usually costly) appointment of a trustee to take charge of the business or estate in all cases, it was still believed by critics in the United States to be unsuitable for smaller businesses in particular, because it was too expensive and too slow.30 As a result, Congress considered adding a chapter to the Bankruptcy Code specifically regulating the reorganisation of small businesses.31 This solution was rejected, however, as it was strongly opposed by commentators who regarded it as an unnecessary complication of the Code.32 Instead, the Code was amended in 199433 to offer small business debtors the possibility of special treatment that would speed up the process and save costs. However, this procedure was not successful as few debtors elected to use it, due to the fact that the saving in costs was not substantial enough to compensate for the pressure of having less time to file a plan.34 In its report published in 1997, the National Bankruptcy Review Commission35 severely criticised Chapter 11 in general, but particularly in respect of small businesses where the procedure was declared to involve too much delay, high costs and a high failure rate. In spite of these problems the Commission decided that small business cases should continue to be regulated by Chapter 11 of the Bankruptcy Code.36 As a result, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that was signed into law on 20 April 2005, contains provisions aimed at making Chapter 11 reorganizations more efficient and to decrease delays and costs in small business cases.37 Time does not allow me to go into any detail regarding these amendments, but it is important to note that a small business no longer has the choice whether to receive the special treatment or not.38
4.2 Australia More or less during the same period, almost the exact opposite process took place in Australia, where voluntary administration is the rescue procedure in terms of Part 5.3A of the Corporations Act of 2001 for companies incorporated or taken to be incorporated under the Act. This procedure was specifically designed to be informal and thus cost-effective, fast and uncomplicated.39 Then in September 2002, the Corporations and Markets Advisory Committee were requested by the Parliamentary Secretary to the Treasurer to investigate whether voluntary administration was appropriate for large corporate rehabilitation cases because it had been suggested by some commentators that voluntary administration was more suitable for small to medium companies.40 The Committee eventually came to the conclusion that voluntary administration was fundamentally sound and there was no reason to introduce an additional or substitute corporate rescue procedure (possibly based on Chapter 11, as had been proposed from some quarters) for large and complex (or other) enterprises.41 This is a perfect illustration of the problems faced by a system designed to be as effective as possible – almost invariably there are doubts whether things are not being made too easy for the directors of large enterprises who may be tempted to abuse the process. It is noteworthy that compulsory liquidation in terms of the Corporations Act applies not only to companies but also to certain other bodies (the so-called Part 5.7 bodies), although only under certain specified circumstances. Included in this group is a partnership, association or other body (whether a body corporate or not) that consists of more than five members.42 4.3 England
5
In England the two business rescue procedures, namely administration and company voluntary arrangements, although regulated in the Insolvency Act 1986, both initially applied only to companies.43 Administration and company voluntary arrangements were subsequently made applicable to insolvent partnerships by way of the Insolvent Partnerships Order 199444 but substantial amendments had to be made to adapt the procedures to these particular forms of business. As far as individuals are concerned, a very similar procedure exists in the form of individual voluntary arrangements.45 The provisions regulating the administration procedure were, however, criticised as being cumbersome and expensive, partly because it could only be initiated by an order of court, and was therefore particularly unsuitable for small to medium-sized companies.46 As a result, the Enterprise Act 2002 with effect from 15 September 2003 completely replaced those provisions of the Insolvency Act 1986 regulating the administration procedure. Administration is now regulated by the provisions contained in Schedule B1 to the Insolvency Act 1986 as inserted by the Enterprise Act 2002.
Company voluntary arrangements were also found not to be as effective as expected because there was no provision for a moratorium preventing creditors from enforcing their claims while the proposal was still being considered. In most cases voluntary arrangements therefore had to be executed in combination with administration, which substantially increased the costs and made it unattractive for smaller companies in particular.47 A short moratorium for small companies was thus introduced by the Insolvency Act of 2000. Small companies are defined by reference to section 247(3) of the Companies Act 1985 (section 382(3) of the Companies Act 2006 once it is in force) with reference to turnover, assets and number of employees. Of course, every time the provisions regulating administration or company voluntary arrangements are amended, it becomes necessary to adapt them for partnerships as well.48 This has made it extremely complicated and difficult to keep up with developments in English law! It also illustrates the pitfalls of enacting a rescue procedure for one type of business and then making it applicable to another form at a later stage. 4.4 Other countries in brief There are many other examples of how various countries attempt to include as many business forms as possible in their business rescue procedures. One of them is Belgium where the rescue procedure, termed judicial composition, is contained in its own dedicated Act.49 Because it is not tied to companies or individuals as a result of being included in an Act dealing with those entities in other respects, it could be made applicable to all traders, irrespective of whether they are natural or legal persons.50 An individual trader is defined in section 1 of the Commercial Code as any person whose main or supplementary profession is the performance of commercial acts.51 However, some critics believe that the flexibility given to debtors by the Act, which was unavoidable given its wide application to all traders, is the reason why the procedure has not been successful in reducing the number of insolvency cases.52 The German Insolvency Code53 is another example of legislation where all debtors are included. There is only one insolvency procedure that applies to the estate of any natural or legal person engaged in business.54 The outcome may be either reorganisation or liquidation or a combination of both, depending on the plan approved by the creditors. Although the legislation does not favour one outcome over the other, liquidation and the subsequent disposal of a business as a going concern, rather than its reorganisation, continue to be the proceeding favoured by insolvency practitioners in
6
Germany.55 Whether this legislation can be regarded as the ultimate solution, will largely depend on one’s definition of a successful rescue. 5 Conclusion It is abundantly clear that there is no easy answer to the question of how best to deal with the unincorporated, and usually small, enterprise. Looking at the existing evidence it seems that no legal system has as yet found the perfect solution. However, a few guidelines can be drawn from the experience of others:
A rescue procedure designed for a specific type or form of business, particularly a corporate rescue procedure, is not easy to adapt to another form of business and could entail rewriting most of the original provisions. In such a case it is probably better to have a parallel set of provisions for other forms of business.
A rescue procedure designed for all forms and types of business entity will invariably be (or be regarded as) too easy and thus open to abuse by big corporations, or too complicated and/or expensive for smaller businesses.
It is almost impossible to create a rescue procedure that will suit all business debtors. Even in the most successful procedure, special provisions invariably need to be made for smaller businesses.
In South Africa where we not only have big, medium and small businesses but micro businesses as well, it will not be realistic or possible to group all businesses and traders together and attempt to create one piece of legislation to regulate the rescue of all of them. One must accept that in South Africa and in most developing countries, certain businesses, although of some importance to the wider economy, are so interwoven with their owners, that rescuing one necessarily involves rescuing the other. The solution in these cases would be to amend the insolvency provisions for individuals to provide an effective alternative to sequestration and would result in the equivalent of a rescue.
1 Act 61 of 1973 in sections 427-440. 2 Union of South Africa House of Assembly Debates of 25 February 1926, Vol 6, Columns 1138-1139.
3 In some earlier decisions the courts refused to place private companies under judicial management, arguing that it was
not intended for small companies, but as there was nothing in the legislation substantiating this view, it was not
generally accepted: Anneli Loubser ‘Judicial Management as a Business Rescue Procedure in South African Corporate
Law’ (2004) 16 137 at 149. 4 Pieter Kloppers “Judicial Management Reform – Steps to Initiate a Business Rescue” (2001) 13 SA Merc LJ 359 at
371; Harry Rajak & Johan Henning “Business Rescue for South Africa” (1999) 11 SALJ 262 at 268-269. 5 Act 69 of 1984 that came into operation on 1 January 1985.
6 Section 29 of the Close Corporations Act 1984. A legal person is allowed, subject to some specific conditions, to be a member only in an official capacity as trustee of a testamentary trust or a trust inter vivos, or as the duly appointed legal
representative of a member who is insolvent, deceased, mentally disordered or otherwise unable or incompetent to
manage his or her own affairs. 7 Section 72 of the Close Corporations Act. The offer must be made to the liquidator of the close corporation. 8 Section 2 of the Insolvency Act 24 of 1936 defines a debtor as a person or a partnership or the estate of a person or
partnership that is a debtor in the usual sense of the word except a body corporate, company or other association of
persons that may be placed in liquidation in terms of the Companies Act. 9 Section 13(1) of the Insolvency Act 1936. 10 Separate trustees’ accounts must be framed for each estate (s 92(5) of the Insolvency Act 1936) and creditors of the
partnership may not prove their claims against the estate of a partner or vice versa (s 49(1) of the Insolvency Act 1936).
7
11 Income tax and interest payable by the partners’ estates may be claimed from the partnership estate (s 49(2) of the
Insolvency Act 1936) and if a partner’s estate is unable to fully meet the costs of sequestration, the costs must be paid
from the partnership’s estate (s 13(2) of the Insolvency Act 1936). 12 Act 57 of 1988. 13 Peter Havenga (gen ed) General Principles of Commercial Law 5 ed (2004) 412-413; ML Bende et al
Entrepreneurial Law 3 ed (2003) 349. 14
Section 119(1) of the Insolvency Act 1936. 15
Section 120(1) of the Insolvency Act 1936. 16
Section 119(7) of the Insolvency Act 1936; Robert Sharrock, Kathleen van der Linde & Alastair Smith Hockly’s
Insolvency Law 8 ed (2006) (Sharrock et al Hockly’s) at 189. 17
Sharrock et al Hockly’s op cit note 16 at 207. The view of the writers is that it is probably a new partnership that is
created, and thus not a composition in the real sense. 18
See also Catherine Smith The Law of Insolvency 3 ed (1988) at 282 who regards such a composition as impossible
because the partnership no longer exists to enter into the composition. 19
Sharrock et al Hockley’s op cit note 16 at 187. 20
Cabinet Statement of 5 March 2003 reported at www.gcis.gov.za/media/cabinet. 21
According to Statistics South Africa the unemployment rate stood at 25,6% in March 2006, counting only people
actively seeking employment (www.statssa.gov.za), but it is generally believed that if all unemployed persons are taken
into account the figure would be at least 40% (26 March 2004 Pretoria News at 7). The expected increase was reported
in the Sunday Times of 4 February 2007 based on figures supplied by Statistics South Africa, including an official rate
of unemployment of 26,9% for 2006. 22 Michael Steiner AThe Insolvency Bill 2000: Rescue Culture in the New Millennium@ (2000) JIBL 61 at 62, in a
discussion of the company voluntary arrangement procedure, expressed the view that it was almost impossible to
reconcile the desire for a relatively cheap and straightforward moratorium regime with the need to prevent unscrupulous
company directors from abusing it, because the latter required some form of supervision, thereby causing extra costs. 23 Title 11, United States Code. 24 Sections 301 (voluntary cases) and 303(a) (involuntary cases) respectively, of the Bankruptcy Code. 25
Section 109 (d) read with section 101(41) of the Bankruptcy Code. 26 Section 101(9)(A) of the Bankruptcy Code. 27 David G Epstein Bankruptcy and Related Law in a Nutshell 6 ed (2002) at 403. 28 Section 109(e) read with section 1304 of the Bankruptcy Code which provide that an individual who is self-employed
and incurs trade credit in the production of income (i.e. a sole proprietor) is regarded as ‘engaged in business’ and is
specifically authorised to continue operating his business. 29 Section 1328. 30 Thomas E Carlson & Jennifer Frasier Hayes “The Small Business Provisions of the 2005 Bankruptcy Amendments”
(Carlson & Hayes “Small Business Provisions”) (2005) 79 American Bankruptcy Law Journal 645. 31 Small businesses were defined in section 101(51C) with reference to the total amount of their debts (not exceeding $2
million), and not, as is more usual, with reference to turnover, number of employees etcetera. 32 Carlson & Hayes “Small Business Provisions” op cit note 30 at 645-646. 33 By the Bankruptcy Reform Act of 1994. 34 Carlson & Hayes “Small Business Provisions” op cit note 30 at 646. 35 National Bankruptcy Review Commission Final Report, Bankruptcy: The Next Twenty Years (1997) available at
http://govinfo.library.unt.edu/nbrc/. 36
Carlson & Hayes “Small Business Provisions” op cit note 30 at 651. 37 Carlson & Hayes “Small Business Provisions” op cit note 30 at 645. 38
Carlson & Hayes “Small Business Provisions” op cit note 30 at 679. 39 The Australian Law Reform Commission General Insolvency Inquiry, 1988 (ALRC 45), (generally known as the
Harmer Report) at 29. 40 Australian Government Corporations and Markets Advisory Committee Rehabilitating large and complex enterprises
in financial difficulties (2004) at 2. 41 Ibid at 5-6. 42 Section 9 of the Corporations Act of 2001. 43 This is in spite of the recommendation in paragraph 499 of the Cork Report that, although the proposals for
administration were designed primarily with the corporate debtor in mind, the procedure could also be used to good
effect in the case of other forms of business. Insolvency procedures for individuals, including individual voluntary
arrangements, are found in a completely different part of the Insolvency Act 1986. 44 Statutory Instrument 2421 of 1994, par 6(1) with the relevant provisions modified as set out in Schedule 2 to the
Order. 45 Regulated by sections 252-263 of the Insolvency Act of 1986. Sections 263A-263G also provide for a fast-track
voluntary arrangement for undischarged bankrupts. 46 Ian F Fletcher The Law of Insolvency 3 ed (2002) at 515; Ian S Grier & Richard E Floyd Corporate Recovery:
Administrations and Voluntary Arrangements (1995) at 6.
8
47 Len Sealy & David Milman Annotated Guide to the Insolvency Legislation 7 ed (2004) at 20. 48 By various statutory instruments such as the Insolvent Partnerships (Amendment)(No 2) Order (S.I. 2002/2708) that
made the necessary amendments flowing from the Insolvency Act of 2000. 49 Judicial Composition Act (Wet betreffende het Gerechtelijk Akkoord) of 17 July 1997. 50 Section 2 of the Judicial Composition Act. 51 Sections 2 and 3 of the Commercial Code contain an exhaustive list of such commercial acts, including the purchase
of merchandise for resale or renting, the purchase of a business, or operating any business in manufacturing, public or
private works, supply or transport. 52 Jo François & Dirk Vercruysse “Knelpunten inzake het Gerechtelijk Akkoord” in H. Braeckmans et al (eds)
Curatoren en Vereffenaars: Actuele Ontwikkelingen (2006) at 83-85. 53 The Insolvenzordnung came into effect on 1 January 1999 and replaced both the previous Bankruptcy Act
(Konkursordnung) of 1877 and the Composition Act (Vergleichsordnung) of 1935. 54 Section 11(1) of the Insolvency Code. Consumer insolvency is regulated by sections 304-314 providing for an out-of-
court settlement with creditors and if that fails, an application to court to start insolvency proceedings with the
possibility of an eventual release of existing debts. 55
Franz Aleth “Germany” in Law Business Research Insolvency & Restructuring 2003 (2002) 128 at 134.
Comparative Analysis of Corporate Rescue
Proceedings: Lessons from the UK?
John Armour(Cambridge University)
Audrey Hsu(National University of Taiwan)
Adrian Walters(Nottingham Trent University)
Introduction
• International consensus:
– Socio-economic benefits of formalrescue/reorganization procedures.
– Preference for collective procedures (egUNCITRAL Model Law; EIR).
– Benchmarking (eg IMF, World Bank etc).
• But limited empirical data on howrescue procedures actually function.
Developing a comparative empirical
agenda?
• Benefits:
– Enrich understanding/enhance debate.
– Evidence base for policy makers.
• Problems:
– Comparability.
– Multiple variables.
• Possibilities?
– ‘in country’ and ‘cross country’comparisons.
Our research
• ‘In country’ comparison of UK receivership(AR) and administration (admin).
• Context:
– Academic & policy debates about the merits ofsecured creditor control:
• Perverse incentives/bias against continuation.
• Information/monitoring benefits.
– UK’s Enterprise Act 2002: legislative change onpaper transferring control rights from secured tounsecured creditors.
– Policy evaluation.
Hypotheses
• Initial hypotheses informed by theory &interview data:
– H1: Realisations in admin likely to begreater than in AR because of wider legalaccountability (esp. where secured creditoris ‘oversecured’).
– H2: Costs in admin likely to be greater thanin AR (defensive practice + compliance).
Data description
• Hand-constructed dataset drawn from randomsample of 500 cases from the index in LondonGazette:– 250 AR, pre 09/03; 250 admin, post 09/03.
– Excluded if not completed by 01.02.06.
• Data hand-collected from reports submitted toCompanies House by insolvency practitioners.
• Supplemented with financial and accounting datafrom FAME database.
• Cases with missing values in variables of interestexcluded.
• Result - 348 cases:– 153 ARs (pre 09/03).
– 195 admins (post 09/03).
Findings
• ARs on average took nearly twice aslong as admins (in line with prediction).
• Using three measures, realisations inadmins on average significantly higher(in the statistical sense) than in ARs:
– Mean total realisations as % of estimatedfirm value: Admin 98%; AR 78%.
– Mean total realisations + net tradingreceipts as % of estimated firm value:Admin 103%; AR 77%.
Findings
• Using two measures, direct costs on average
significantly higher (in the statistical sense) than in
ARs:
– Mean remuneration costs as a % of estimated firm value:
Admin 29%; AR 16%.
– Mean total direct costs as a % of estimated firm value:
Admin 49%; AR 28%.
• Net returns to creditors:
– Increased realisations being eaten up by increased costs.
– Little difference in secured creditor recovery rate.
• Results most pronounced in cases where secured
creditors were ‘oversecured’.
Implications
• Functional equivalence of AR and admin?
– Greater accountability may encourageadministrators to ‘work harder’ to generaterecoveries but
– Secured creditors may be better controllers ofcosts than dispersed unsecured creditors.
• Caveats:– Results may reflect transitioning.
– Results don’t take into account additionalrealisations/costs in cases where AR or admin issucceeded by a liquidation procedure.
Lessons/Possibilities?
• Step changes ‘on paper’ may not be
reflected on the ground.
• Could functional comparison of ‘secured
creditor’ versus ‘unsecured creditor’
governance be widened to include other
jurisdictions that have such procedures?
• Other possibilities for comparative
empirical analysis?
1
INSOL Academics’ Group Meeting – Cape Town – 17-18 March 2007
Comparative Analysis of Corporate Rescue Proceedings: Lessons from the
United Kingdom?
John Armour (Faculty of Law and Centre for Business Research,
Cambridge University).
Audrey Hsu (National University of Taiwan; formerly Centre for Business
Research, Cambridge University).
Adrian Walters (Nottingham Trent University).
Outline
The headline news in global corporate bankruptcy law and practice in recent
years has been the growth of the so-called “rescue culture”. There is now a
broad international consensus around the socio-economic benefits of formal
rescue/reorganization procedures and the need for national bankruptcy law
systems to adopt such procedures as alternatives to piecemeal liquidation
procedures and as a necessary complement to informal consensual restructuring
and turnaround processes. This is so much so that provision of a formal
rescue/reorganization procedure is now a key benchmark of the international
respectability of a country’s bankruptcy laws (International Monetary Fund, 1999;
United Nations Commission on International Trade Law, 2004; World Bank,
2005). In this climate, it is important not only to understand the technical legal
differences between formal procedures in different countries, such as whether a
procedure is ‘manager-displacing’ or ‘manager driven’ (Armour et al, 2002; Hahn,
2004: 121-127), but also to demonstrate and compare empirically how different
procedures, notionally oriented towards similar goals, actually function.
At present, systematic empirical data on the comparative functioning of formal
corporate rescue procedures is lacking. The need for such data is pressing for a
number of reasons. In particular, it would enrich understanding and enhance
academic debate whilst also providing a critical evidence base for policy makers
within national governments and international institutions. Moreover, it may
prompt further questioning of the utility of sweeping descriptive categorizations of
national bankruptcy regimes as either ‘pro-debtor’ or ‘pro-creditor’.
To be sure, the pursuit of a functional-empirical comparative agenda in the
context of corporate rescue would be afflicted by the usual problems that afflict
any comparative endeavour, most notably methodological concerns about the
true comparability of legal phenomena and the multiplication of structural,
cultural and institutional variables that inevitably arises when two or more legal
systems are compared. One problem is that terms such as ‘liquidation’,
‘reorganization’ and ‘rehabilitation’ do not have agreed global meanings.
Nevertheless, we believe that there may be scope to develop theoretically-
informed functional-empirical comparisons of formal rescue procedures both
within individual countries having more than one such procedure (‘in country’
comparisons) and transnationally (‘cross country’ comparisons).
One fruitful line of comparative enquiry prompted by recent theoretical literature
in the field of law and finance concerns the governance of financially distressed
firms and, in particular, the extent to which it is desirable to vest control rights
over such firms in secured creditors. Secured creditors in the United States have
in recent years been exerting ever-increasing influence over financially distressed
companies (Baird and Rasmussen, 2002; Skeel, 2004). This has lead to a lively
debate over the desirability of secured creditor control. Supporters point to the
benefits that a concentrated creditor can bring to the governance of companies
2
generally in terms of controlling the management (Baird and Rasmussen, 2002)
and lowering the monitoring costs of investors and other stakeholders (Armour
and Frisby, 2001). Some go further and argue that it is undesirable for
bankruptcy law to impose formal collective proceedings which impede secured
creditor control, and that companies should be free to contract ex ante over how
control rights will be allocated in the event of default (Rasmussen, 1992;
Schwartz, 1998). The United Kingdom is sometimes cited as an example of a
legal system where such contracting was made possible because of the
availability (hitherto) of our administrative (floating charge) receivership
procedure (Schwartz, 1998; Westbrook, 2004).
Opponents of secured creditor control, in stark contrast, argue that the vesting of
control rights in secured creditors is highly undesirable (Lopucki, 1999;
Westbrook, 2004). The principal concern is that concentrated senior creditors,
such as banks, may exploit their control to pursue their own interests at the
expense of other stakeholders, notably unsecured creditors. In particular, it is
often claimed that procedures controlled by secured creditors are generally biased
against firm continuance and in favour of piecemeal liquidation and thus
consistently fail to capture going concern value. The prevailing international
trend appears to be on the side of the opponents, ie a strong preference for
collective formal rescue proceedings in which control rights are vested
(principally) in unsecured creditors. This is clearly reflected by global and
regional initiatives in the context of cross-border insolvency such as the
UNCITRAL Model Law and the European Insolvency Regulation.
The United Kingdom provides a natural venue for an ‘in country’ functional-
empirical comparison of two formal procedures: (i) administrative receivership, in
which control rights are vested in secured creditors and (ii) administration, in
which control rights are vested in unsecured creditors. Until recently, control in
UK corporate bankruptcies lay firmly in the hands of secured creditors. A creditor
holding a floating charge had the right to appoint an administrative receiver, who
had plenary powers to manage the debtor company and yet owed fiduciary duties
exclusively to the secured creditor. It was widely thought that this receivership
system led to excessive piecemeal liquidations and inflated bankruptcy costs on
the theory that secured creditors lacked proper incentives to maximize recoveries
and minimize costs in cases where the company’s assets were worth more than
the face value of the senior debt (Insolvency Service, 2001; Mokal, 2004). The
further implication was that, in failing to maximize firm value, secured creditor
control reduced recoveries for unsecured creditors. In response to these
concerns, the UK’s Enterprise Act 2002 effected a prima facie transformation of
the governance of corporate bankruptcies, shifting power from secured to
unsecured creditors. This was achieved by abolishing the secured creditor’s right
to appoint a receiver. Under the legal regime now in place, they may instead
appoint an administrator, who owes fiduciary duties to all the creditors, and must
put proposals concerning how the company’s assets are to be managed and
deployed to a vote of the unsecured creditors.
In our presentation we will briefly summarize the results of the first systematic
empirical comparison of the UK’s old and new corporate bankruptcy regimes. We
analyzed a hand-coded sample of 348 bankruptcy cases, comprising 153
administrative receiverships from 2001-2003 and 195 administrations from 2003
and 2004, after the change in the law. We sought to measure recoveries (ie the
value of asset realizations) and direct bankruptcy costs across the two sub-
samples and to compare the net return to creditors. We find robust evidence
that, as compared with administrative receivership, the post-Enterprise Act
administration procedure has tended to generate both higher gross recoveries
and higher direct costs. As a result, there is no overall change in net recoveries
3
which implies at least as regards returns to unsecured creditors that secured
creditor control of bankruptcy proceedings (through administrative receivership)
is functionally equivalent to unsecured creditor control (through administration).
A tentative lesson that can be drawn is that a step change in the
legal/governance regime may not necessarily lead to a step change on the
ground. A wider implication is that out-of-court debt enforcement by secured
creditors is no more or less efficient in terms of preserving firm value than formal
bankruptcy proceedings. This is consistent with broader studies which have
suggested that variables such as the legal origin of commercial/bankruptcy laws
and per capita income (as a measure of national wealth) are more powerful
determinants of the efficiency of a country’s debt enforcement and bankruptcy
procedures than the legal configuration of such procedures, including how control
rights are allocated (Djankov et al, 2006).
It may be possible to add a ‘cross country’ dimension if our study could be
replicated in other jurisdictions that have both a receivership and a collective
procedure (eg Australia, which has receivership and voluntary administration;
New Zealand, which has receivership and has recently introduced voluntary
administration; and Canada, which has receivership and two statutory
reorganization procedures). Other possibilities that could be considered for
comparative empirical analysis are (i) the functioning of ‘debtor in possession’
and management-displacing collective procedures; (ii) the relationship between
patterns of corporate finance in given countries and the configuration of their
legal regimes for managing multiple default; and (iii) the relationship between
formal insolvency procedures and informal restructuring and turnaround
processes.
References
Armour, J. and Frisby, S. (2001), ‘Rethinking Receivership’ 21 Oxford Journal of
Legal Studies 73-102.
Armour, J., Cheffins, B., Skeel, D.A., Jr. (2002), ‘Corporate Ownership Structure
and the Evolution of Bankruptcy Law: Lessons from the United Kingdom’
55 Vanderbilt Law Review 1699-1785.
Baird, D.G. and Rasmussen, R. (2002), ‘The End of Insolvency’ 55 Stanford Law
Review 751-789.
Djankov, S., Hart, O., McLeish, C., Shleifer, A. (2006), ‘Debt Enforcement Around
the World’, National Bureau of Economic Research Working Paper No.
12807 available at http://www.nber.org/papers/w12807.
Hahn, D. (2004), ‘Concentrated Ownership and Control of Corporate
Reorganisations’ 4 Journal of Corporate Law Studies 117-154.
Insolvency Service (2001), Insolvency—A Second Chance, Cm 5234 (London:
DTI).
International Monetary Fund (1999), Orderly & Effective Insolvency Procedures
available at http://www.imf.org/external/pubs/ft/orderly.
Lopucki, L.M. (1999), ‘Contract Bankruptcy: A Reply to Alan Schwartz’ 109 Yale
Law Journal 317-342.
4
Mokal, R.J. (2004), ‘Administration and Administrative Receivership: An Analysis’
57 Current Legal Problems 355-392.
Rasmussen, R. (1992), ‘Debtor’s Choice: A Menu Approach to Corporate
Bankruptcy’ 71 Texas Law Review 51-121.
Schwartz, A. (1998), ‘A Contract Theory Approach to Business Bankruptcy’ 107
Yale Law Journal 1807-1851.
Skeel, D.A., Jr. (2004), ‘The Past, Present and Future of Debtor-in-Possession
Financing’ 25 Cardozo Law Review 1905-1934.
United Nations Commission on International Trade Law (2004), Legislative Guide
on Insolvency Law available at
http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/2004Guide.h
tml
Westbrook, J.L. (2004), ‘The Control of Wealth in Bankruptcy’ 82 Texas Law
Review 795-862.
World Bank (2005), Principles and Guidelines for Effective Insolvency and
Creditor Rights Systems available at
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/LAWANDJUSTICE/G
ILD/0,,contentMDK:20774193~pagePK:64065425~piPK:162156~theSiteP
K:215006,00.html
The Impact of the Enterprise Act 2002 on Realisations and
Costs in Corporate Rescue Proceedings
A Report Prepared for the Insolvency Service by
John Armour,* Audrey Hsu,** and Adrian Walters***
December 2006
* University Senior Lecturer, Faculty of Law and Research Associate, Centre for Business Research, University of Cambridge; Research Associate, European Corporate Governance Institute. ** Associate Professor, Department of Accounting, National Taiwan University; formerly Research Fellow, Centre for Business Research, Cambridge University. *** Geldards LLP Professor of Corporate and Insolvency Law, Nottingham Trent University; Solicitor of the Supreme Court; Academic Representative, DTI Insolvency Service Evaluation Group.
We are most grateful to the Insolvency Service for funding this research, and to Sandra Frisby for providing access to her dataset of company failures for the purpose of identification of completed cases. We thank Douglas Baird, Sandra Frisby, Alan Katz, Michael Mumford, Robert Rasmussen and Jay Westbrook for helpful comments on earlier versions of this work, and participants at the First Conference on Empirical Legal Studies, held at the University of Texas in October 2006, for helpful discussions following a presentation of the findings. Remaining errors are solely the authors’ responsibility.
The Impact of the Enterprise Act 2002 on Realisations and
Costs in Corporate Rescue Proceedings
Contents Executive Summary ..................................................................................................... iii 1. Introduction............................................................................................................1 2. Background to the Enterprise Act 2002.................................................................1
2.1 The old law ....................................................................................................2 2.2 Criticisms of the old law................................................................................5 2.3 The Enterprise Act 2002 reforms...................................................................7 2.4 Analysis........................................................................................................10 2.5 Initial hypotheses .........................................................................................12 2.6 Empirical research .......................................................................................13
3. Qualitative research: interview data.....................................................................14
3.1 Interview subjects and methodology ...........................................................14 3.2 Impact of the Enterprise Act on choice of insolvency proceedings.............16 3.3 Impact of the Enterprise Act on conduct of rescue proceedings .................22 3.4 Impact of the Enterprise Act on costs of rescue proceedings ......................25 3.5 Summary and refined hypotheses ................................................................28
4. Quantitative data: description and methodology .................................................30
4.1 Measuring gross realisations........................................................................33 4.2 Measuring direct costs .................................................................................35 4.3 Creditors’ net recoveries ..............................................................................38
5. Results..................................................................................................................38
5.1 Summary statistics .......................................................................................38 5.2 Multivariate analysis....................................................................................45 5.3 Multivariate analysis: decomposition to under- and over-secured cases.....50 5.4 Robustness checks .......................................................................................53 5.5 Limitations and future research ...................................................................63
6. Conclusions and implications ..............................................................................64 References....................................................................................................................67 Appendix A..................................................................................................................70
ii
Executive Summary This report presents findings from an empirical study of the operation of the corporate insolvency provisions of the Enterprise Act 2002. The Enterprise Act changed the law in relation to corporate insolvency proceedings by prospectively abolishing administrative receivership, and substituting for it a streamlined administration procedure. In receivership, control of a financially distressed firm passed to an appointee of a secured creditor, who owed only limited duties to other parties who might be interested in the outcome of the proceedings. This mechanism was criticised on the basis that the receiver was insufficiently accountable to stakeholders. The procedure was consequently thought to result in the wasteful closure of good businesses. Under the new administration procedure, the insolvency practitioner may still be appointed by a secured creditor, but now owes duties to all creditors. The aim of these duties is, in essence, to encourage the administrator to maximise the value of the recoveries. A priori, it might be thought that the Enterprise Act would have an impact both on realisations and on costs in corporate insolvency proceedings. If receivers’ lack of accountability formerly lead them not to achieve the highest possible realisations of assets under their control, then it might be thought that the broader duties of administrators would encourage them to exert more effort and thereby achieve greater realisations. At the same time, it might be thought that with greater accountability would come increased costs associated with new procedural requirements. Whether either of these effects has occurred and, if so, their relative sizes, are empirical questions. Our empirical study investigates these questions using both qualitative and quantitative methodologies. The qualitative data consist of thirteen open-ended interviews with insolvency professionals about the way in which the insolvency provisions of the Enterprise Act have affected practice in corporate rescues. In addition to providing a general overview of changes in practice, these are used to refine the hypotheses tested using our quantitative data. Our quantitative results are based on a dataset of 284 cases of receivership and administration, which we constructed from reports filed at Companies House. These are used to perform statistical tests comparing realisations and costs under the new administration procedure with those under receivership. The purely prospective abolition of receivership means that creditors with qualifying floating charges granted before 15 September 2003 are still entitled to appoint receivers. Nevertheless, aggregate statistics on the incidence of insolvency procedures indicate that the new administration procedure has largely replaced receivership. Our interviewees explained this by reference to a desire on the part of banks to distance themselves from the negative publicity associated with receiverships. Consistently with the findings of other studies, our interviewees perceived a general trend towards fragmentation in the structure of corporate debt finance, with a decline in the dominance of banks and a concomitant increase in the number of lenders from
iii
which a typical firm will obtain credit. This trend was thought to be hindering the operation of informal rescue procedures. Practitioners’ views as to the impact of the Enterprise Act on their decision-making were mixed. Some stated that it simply enacted what they had always considered to be best practice; others indicated that the new duties encouraged them to take steps to promote the interests of unsecured creditors which they would not previously have taken. This anecdotal evidence was clarified by our quantitative results: the realisations in the (post-15 September 2003) administration cases in our sample are significantly higher than those in the (pre-15 September 2003) receivership cases, controlling for the size of the insolvent firm and the outcome and duration of the proceedings. Even more significantly, the difference in realisations is largely confined to cases in which the secured creditor was ‘oversecured’ at the commencement of the procedure: that is, the assets were worth more than the secured creditor is owed. It is in such cases that the impact of a duty to act in the interest of all creditors might be expected to be most pronounced. Our interviewees also told us that the costs of corporate rescue proceedings had been increased by greater professional regulation and more stringent ‘best practice’ guidelines from their firms. They considered that the legislative emphasis on explaining and justifying decisions under the new administration procedure, when coupled with these increased professional standards, had lead to a significant increase in costs. These anecdotal reports were also borne out by our quantitative results. We find that the direct costs (primarily. IP and legal fees) of the (post-15 September 2003) administration cases in our sample are significantly higher than those of the (pre-15 September 2003) receivership cases, controlling for the size of the insolvent firm and the outcome and duration of the proceedings. To test whether this effect is due to increased professional regulation generally, as opposed to the Enterprise Act specifically, we compare a separate sample of post-September 2003 receivership cases (which would be subject to any increased professional regulation affecting the post-September 2003 administration cases) with (i) our pre-September 2003 receivership cases and (ii) our post-September 2003 administration cases. The costs are not significantly higher than (i), but are significantly ?lower than (ii). From this we infer that the increased direct costs in the new administration cases result specifically from the impact of the Enterprise Act. More worryingly, some interviewees reported that costs might be greater under the new administration procedure than in receivership because IP fees were being negotiated with unsecured creditors—who are typically numerous and dispersed—as opposed to with banks, which typically negotiate on a repeated basis with IPs. Our quantitative results provide some support for this claim. The increased costs in administration cases, as compared with receiverships, are most pronounced in cases where the secured creditor is oversecured. These are the cases in which, in an administration, the IP’s costs are likely to be approved by unsecured, as opposed to secured, creditors. We find that the administration cases in our sample are significantly shorter in duration than the receivership cases. This is clearly the result of the introduction of a statutory time limit in administration. To the extent that the indirect costs of
iv
insolvency proceedings (e.g. loss of goodwill) are a function of their duration, the statutory time limit appears to have reduced such indirect costs. Consistently with the findings of other studies, our interviewees also thought that the new administration procedure was sometimes being used as a substitute for liquidation, as opposed to receivership. The House of Lords’ decision in Buchler v Talbot [2004] 2 AC 298 was said to have given IPs an incentive to use administration rather than liquidation, owing to the reduced priority accorded to expenses under the latter. However, we do not consider that our principal results—as to realisations and costs—are likely to be affected by any such substitution, as our statistical tests control for the effects of the duration and outcome of the proceedings. Moreover, we check the robustness of our results by comparing our pre-September 2003 receivership cases with a sub-sample of our administration cases commencing before March 2004, which could not be affected by the Buchler decision in March 2004. We obtain the same results using this sub-sample: both gross realisations, and direct costs, are higher in administration than receivership. Our principal findings are that both gross realisations, and direct costs, are higher under the new administration procedure than under receivership. We additionally find that, for those cases in which data on recoveries are available, the average net recoveries to creditors in our administration cases are no greater than in our receivership cases. We interpret this as implying that the impact of the increased recoveries in the new administration cases has been eaten up by the concomitantly increased IP fees. We consider that our results have implications for the debate about the desirability of secured creditor control. The change in the governance of corporate rescue in the UK, in essence, involves a crossing of a central fault line of corporate governance: a shift in control from a concentrated investor to many dispersed investors. With concentrated investor control, the main governance problem is how to prevent the concentrated investor from serving their own interests to the detriment of other investors. With control rights in the hands of dispersed investors, the problem is rather how to render those managing the firm accountable. No clear consensus has emerged in the corporate governance literature as to which of these is preferable as regards share ownership for solvent companies. We interpret our results as an analogous finding for creditor governance in insolvent companies: concentrated creditor governance in insolvency, in the form of strong control rights concentrated in the hands of a single secured lender, does on average at least as good a job at preserving jobs and generating recoveries for creditors as does the new administration procedure, which allocates greater control to dispersed unsecured creditors.
v
The Impact of the Enterprise Act 2002 on Realisations and
Costs in Corporate Rescue Proceedings
1. Introduction This report presents findings from an empirical study of the operation of the corporate
insolvency provisions of the Enterprise Act 2002. A combination of qualitative and
quantitative methodologies is used to compare the operation of the new streamlined
administration procedure to that of the old administrative receivership procedure.
Qualitative data was gathered through open-ended interviews with professionals and
other market participants. These provide a detailed overview of the mechanisms
through which changes have taken place and assists in specifying hypotheses to be
tested through quantitative research. The quantitative analysis is based on a hand-
constructed dataset of 348 administration and receivership cases (receiverships
commencing before, and administrations commencing after, the Enterprise Act came
into force on 15 September 2003). We are able to measure costs and asset realisations
in 284 cases, and compare the two procedures using a multivariate regression analysis
that takes into account a range of other factors which might affect recoveries, such as
firm size, time in insolvency proceedings, and outcome.
The rest of this report is structured as follows. Section 2 reviews the
background to the corporate insolvency provisions of the Enterprise Act 2002, and
surveys theoretical literature on receivership and administration. From this literature,
initial hypotheses about the anticipated impact of the Enterprise Act on corporate
rescue proceedings are identified. Section 3 offers an overview of the findings from
thirteen open-ended interviews with professionals, following which the initial
hypotheses are refined. Section 4 describes our quantitative dataset, and Section 5
presents the results of our analysis. Section 6 summarises the implications of our
statistical findings and concludes.
2. Background to the Enterprise Act 2002 It may be helpful to begin by considering what is meant by the term ‘corporate
rescue’. Classically, corporate rescue occurs where the distressed company or the
business of the distressed company is able to avoid closure and to continue trading as
a going concern after having been through a formal or informal rescue procedure
1
(Harmer, 1997; Armour, 2001; Frisby, 2004). It follows from the first part of this
description that a corporate rescue can take one of two generic forms. It can involve
either the continuation of the company as an entity (e.g. through reorganization,
financial restructuring, refinancing, debt composition or rescheduling) or a going
concern sale of the company’s undertaking which may then continue under new
ownership and management liberated from the company’s debts. Formal rescue
procedures are regimes laid down by statute that seek to facilitate rescue outcomes,
the leading example of which is the administration regime. In contrast, a company is
rescued informally where its fortunes are turned around without it entering a formal
rescue procedure.1 This may, for example, occur where the company enters into a debt
restructuring agreement with its creditors.2
2.1 The old law The corporate insolvency provisions of the Enterprise Act 2002 came into force on 15
September 2003. Before this, English corporate insolvency law had given floating
charge-holders almost plenary powers in relation to distressed companies. A creditor
holding a floating charge and having priority over the whole, or substantially the
whole, of the company’s assets was able to appoint, without any court order, an
administrative receiver,3 whose remit would be to realise the company’s assets for the
benefit of the charge-holder. Such an appointment did not depend on any formal
requirement of insolvency, but merely upon the breach, by the debtor, of the terms of
the loan agreement:4 receivership was essentially contractual in nature (Lightman and
Moss, 2000; Goode, 2005).
Once appointed, the receiver was deemed to be the agent of the company
rather than of the appointing charge-holder, and his main function was to manage and 1 Such informal turnarounds are often achieved with the support of the company’s bankers and/or of a ‘company doctor’ now more commonly referred to as a ‘turnaround professional’.
2 It should be noted that formal rescue procedures are not always used to pursue what we have described as rescue outcomes. It is not uncommon for the administration procedure to be used as a means of carrying out what amounts to a piecemeal liquidation on the premise that a break-up of the assets in administration is anticipated to produce a better return for creditors than a liquidation.
3 Hereafter, for convenience, administrative receivership is referred to as ‘receivership’ and an administrative receiver is referred to as a ‘receiver’.
4 See e.g. Cripps (Pharmaceuticals) Ltd v Wickenden [1973] 1 WLR 944; Bank of Baroda v Panessar [1987] Ch 335.
2
realise the security with a view to repaying the latter. To enable the receiver to carry
out this function, he would normally be granted extensive powers in the debenture to
manage the company’s business.5 Notwithstanding his agency, the receiver’s primary
fiduciary duties were, however, to his appointing charge-holder. The objective was to
maximise the bank’s recovery. Before accounting to the bank, he was also obliged to
pay preferential creditors out of floating charge realisations.6 However ― and this
was to become the principal sticking point ― his duties to other stakeholders, such as
unsecured creditors, were distinctly limited. The receiver owed a heavily
circumscribed duty to the company to obtain the best price for the assets reasonably
available once he had decided to sell.7 However, he was under no duty to maximise
the price that he could get for the assets over and above what was necessary to pay the
bank and the preferential creditors, even if there were possible courses of action open
to him that could have potentially increased the value of the assets (such as delaying a
sale in anticipation of a rising market).8 Accordingly, he was not generally
accountable to junior creditors for his actions. He was merely required by the
Insolvency Act 1986 to provide the junior creditors with certain prescribed
information and a report on the progress of the receivership.9
Nevertheless, the Cork Committee concluded that receivership was, on
balance, a useful institution (Cork Committee, 1982). This was because the procedure
was both quick to initiate and flexible in its outcome. The bank was able to respond
immediately to misbehaviour by debtors through rapid appointment of a receiver, who
once in place had the power, if appropriate, to sell the entirety of the business as a
going concern. This had the effect of saving the business from closure, and thereby 5 Replicated in the Insolvency Act 1986 (‘IA 1986’), Sch 1. Although it remained essentially an institution of private law, receivership was brought within the scope of the 1986 Act for certain limited purposes, in particular, so that receivers could be made subject to the Act’s licensing and regulatory requirements.
6 IA 1986, s 40.
7 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949. The receiver also owed an equitable duty of care to the company in the exercise of his powers of management: see Medforth v Blake [2000] Ch 86.
8 See Silven Properties Ltd v Royal Bank of Scotland [2004] 1 WLR 997 (receiver under no obligation to delay sale pending the making and determination of a planning application or to incur costs pursuing such application).
9 IA 1986, ss 46, 48.
3
preserving the associated jobs. Indeed, the Cork Committee’s proposal for the original
administration procedure (adopted in the Insolvency Act 1985 and carried forward
into the 1986 Act) was motivated by the desire to extend the benefits of such plenary
control by the office-holder to situations where the company had not granted an all-
encompassing floating charge. Thus, as originally conceived, administration was
intended to replicate the benefits of receivership, rather than to replace it. For this
reason, a secured creditor entitled to appoint a receiver was given the right to veto the
appointment of an administrator under the law in force before the introduction of the
Enterprise Act.
In the UK, the introduction of the administration and company voluntary
arrangement procedures by the Insolvency Act 1986, on the recommendation of the
Cork Committee, were based on the idea that ‘a good modern insolvency law’ should
‘provide the means for the preservation of viable commercial enterprises capable of
making a useful contribution to the economic life of the country’ (Cork Committee,
1982). The importance of corporate rescue in the scheme of the 1986 Act has been
reinforced by the courts which have sought overtly to promote ‘rescue-friendly’
constructions of its provisions.10 Changes in banking practices, notably the
establishment of ‘intensive care units’ designed to address the problems of financially
distressed customers within the clearing banks (Franks and Sussman, 2000; Armour
and Frisby, 2001), the re-branding of insolvency practitioners as ‘business recovery
professionals’11 and the increasing profile of the ‘turnaround’ profession (Finch,
2005a and 2005b) have all signaled a sea-change in attitudes on the ground.
Moreover, international institutions such as the International Monetary Fund (1999),
the World Bank (2005) and the United Nations Commission on International Trade
Law (2004) have all been active in promoting the socio-economic benefits of rescue-
oriented insolvency legislation. Indeed, these institutions now regard the provision of
a formal company rescue/reorganization procedure alongside, and as an alternative to, 10 Powdrill v Watson [1995] 2 AC 394, 442A-444A, per Lord Browne-Wilkinson: ‘The rescue culture which seeks to preserve viable businesses was and is fundamental to much of the Act of 1986…If the words used by Parliament have a meaning consonant with its presumed intention not to frustrate the rescue culture, and not to produce unworkable consequences, then in my judgment that construction should be adopted.’ For a more recent example, see Re Huddersfield Fine Worsteds Ltd; Re Ferrotech Ltd [2005] 4 All ER 886.
11 The main trade association for insolvency practitioners is the Association for Business Recovery Professionals (formerly the Society of Insolvency Practitioners).
4
a cessation of business/liquidation procedure as a benchmark of the international
respectability of a country’s insolvency laws.
2.2 Criticisms of the old law Although corporate rescue had been very much on the agenda since the Cork
Committee reported in 1982, there was a perception that the administration and
corporate voluntary arrangement procedures introduced by the 1986 Act had not been
particularly effective in promoting the ‘rescue culture’. Looked at in isolation, the
numbers of companies availing themselves of those procedures suggested that
corporate rescue (or, at least, corporate rescue by formal means) was something of a
minority pursuit. It was thought by some that the very fact that these procedures were
so infrequently used implied some sort of failure in corporate insolvency laws. One
reason for this was thought to be that banks were too frequently blocking the
appointment of administrators. This overlooked the Cork Committee’s reasoning,
which had underpinned the original structure of the administration regime, that
receivership could in many cases result in the successful rescue of the business,
notwithstanding that the company did not survive. However, a number of further
criticisms were commonly made about the way in which receivership operated
(Benveniste, 1986; Aghion, Hart and Moore, 1992; Milman and Mond, 1999; Finch,
2002; Mokal, 2004).
The principal economic objection was that giving decision rights to the
secured creditor created a perverse incentive. Where the value of the firm’s assets was
greater than the amount of secured debt owed, then the secured creditor would not be
the residual claimant. Rather, they would, it was feared, have an incentive simply to
seek repayment of their money as quickly as possible. This would, it was argued, tend
to lead to a bias against continuation of distressed firms, on the basis that closure and
piecemeal liquidation would typically be quicker (Benveniste, 1986; Aghion et al,
1992). This, it was felt, could lead to the premature closure and ‘inefficient
liquidation’ of good firms (Insolvency Service, 2001).
5
Secondly, it was argued that good businesses might also be forced to close
because receivership entailed only a sale of assets, and did not permit a corporate
reorganisation (Insolvency Service, 2001; Mokal, 2004).12 In particular, where the
business depended for its success either on the human capital of the owner-managers,
or on assets which were inalienable, then a reorganisation of the existing corporate
entity might be the only way in which the business could be preserved. It was
therefore thought that where, as with receivership, such an option was not available in
formal insolvency procedures, this might hinder the rescue of such firms.
Thirdly, it was thought that the procedure rendered the receiver insufficiently
accountable to those who were affected by his actions in many cases, namely
unsecured creditors (Insolvency Service, 2001). It was argued that a particular
manifestation of this problem concerned costs: over-secured lenders would fail to
monitor the costs incurred by insolvency professionals in carrying out their functions,
such that their expenditure (including their own fees and remuneration) would be
‘needlessly and wastefully inflated’ (Mokal, 2004).
Fourthly, it was felt that the receivership procedure was increasingly
problematic from an international perspective (Insolvency Service 2001). For
example, the European Insolvency Regulation, which came into force on 31 May
2002 provides for automatic recognition by all EU member states of collective
proceedings opened within the EU in accordance with its provisions.13 However,
receivership was viewed by those conducting the negotiations as insufficiently
collective to merit inclusion under the Regulation; administration, on the other hand,
is a collective proceeding unquestionably falling within the Regulation’s scope. In
order to facilitate international recognition, therefore, it was thought desirable that
receivership be replaced by administration.
12 However, the extent to which it was really necessary to provide a formal mechanism for reorganisation as well as asset sales (whether on a going concern or piecemeal basis) was questionable, as many reorganisations are effected informally outside insolvency proceedings (Franks and Sussman, 2005).
13 Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings [2000] OJ L160/1.
6
2.3 The Enterprise Act 2002 reforms Given the four concerns outlined in the previous section, the corporate insolvency
provisions of the Enterprise Act 2002 were intended to reconfigure the structure of
insolvency law by diminishing the control rights of secured creditors with a view to
encouraging greater usage of the administration procedure.
2.3.1 The abolition of administrative receivership
The first plank of the policymaker’s response was to propose the abolition (for most
purposes) of receivership. Other possibilities, such as a reformed receivership model
with wider duties imposed on the receiver of a type pioneered in New Zealand, were
not considered.14 With effect from 15 September 2003, the Enterprise Act 2002, s
250 inserted sections 72A-72H and Schedule 2A into the 1986 Act.15 Section 72A
provides that the holder of a qualifying floating charge (defined in paragraph 14 of
Schedule B1 to the Insolvency Act, itself introduced by the Enterprise Act) may not
appoint a receiver. This applies despite any provision in an agreement or instrument
which purports to empower a person to appoint a receiver. Section 72A applies only
to floating charges created on or after 15 September 2003. Holders of floating
charges created before 15 September 2003 may still appoint a receiver as before.16
The prohibition on the appointment of a receiver is also subject to a number of narrow
exceptions in sections 72B-72G which apply, regardless of whether the floating
charge was created before or after the coming into force of the Enterprise Act, to a
range of exotic corporate finance transactions of a type generally only encountered at
the top end of the market.
14 Possibly because a revamped receivership model would still not have been a collective insolvency proceeding guaranteed international recognition under such instruments as the European Insolvency Regulation and the UNCITRAL Model Law on Cross-Border Insolvency.
15 For commencement see Enterprise Act 2002 (Commencement No 4 and Transitional Provisions and Savings) Order 2003 SI 2003 No 2093.
16 Retrospective disturbance of pre-Enterprise Act floating charge-holders’ rights was not favoured.
7
2.3.2 Streamlining administration
On its own, the prospective abolition of receivership was unlikely to encourage
greater use of administration. The original 1986 Act administration procedure was
widely perceived as costly and inflexible. It was thought to be costly for two reasons.
First, there was the burden and expense of a mandatory application to the court for an
administration order. Secondly, the procedure was open-ended: an administration
could run for years without the office-holder having any powerful incentives to bring
it to an end. It was thought to be inflexible because of barriers to entry (the
requirement for a court order) and the lack of any clearly defined means of exit. So a
key policy objective, complementing the abolition of receivership, was the so-called
‘streamlining’ of administration achieved through what is now Schedule B1 of the
1986 Act.
The result is a hybrid of the old administration procedure and receivership.
The Enterprise Act made it possible for an administrator to be appointed out of court
with a view to introducing flexibility (ease of entry) and eliminating the costs of a
court application and hearing.17 As a quid pro quo for the abolition of receivership,
floating charge-holders, as well as the company and/or its directors, were given the
right to appoint an administrator out of court. Moreover, the legislation is structured
to give the floating charge-holder veto rights over the choice of administrator where
the company and/or its directors make the appointment.18 The Enterprise Act also
placed much greater emphasis on exit from administration. The appointment of an
administrator is now time-constrained: it will cease to have effect automatically at the
end of the period of one year beginning with the date on which it took effect unless
the period is extended by the court (for a period specified in the order) or with the
consent of the creditors (for a period not exceeding six months).19 The court has no
power to extend the one-year period if the application is made after it has already
17 IA 1986, Sch B1, paras 14 and 22. There is also no longer any need for the proposed administrator to prepare a rule 2.2 report which, although not mandatory, was routinely exhibited to the affidavit in support of the petition. However, as the proposed administrator must make a written statement in Form 2.2B certifying that, in his opinion, the purpose of administration is reasonably likely to be achieved, the preparatory work that underpinned the old rule 2.2 report will still be carried out and the narrative recorded on the insolvency practitioner’s case file, a point borne out by our interview data (see below).
18 IA 1986, Sch B1, para 26(1).
19 Ibid, paras 76-78.
8
expired. There are a range of other prescribed exit routes designed to increase
flexibility and certainty. In particular, the previous difficulties associated with exiting
from administration into creditors’ voluntary liquidation have been overcome.20 It is
also important to note that, in an appropriate case, the administrator can avoid
incurring the additional costs of a liquidation by making distributions in
administration21 and exiting direct to a dissolution.22
As well as increasing flexibility and reducing costs, the new administration
regime seeks to foster accountability by subjecting the administrator to new duties
(Frisby, 2004; Armour and Mokal, 2005; Finch, 2005a). The administrator must seek
to implement a hierarchy of objectives: to rescue the company as a going concern;
failing that, to achieve a better result for the creditors as a whole than in liquidation,
and failing that, to realise collateral for the benefit of secured or preferential
creditors.23 This is intended to correct the perceived incentive problem under
receivership by requiring the administrator to seek to achieve a ‘rescue’ — either of
the company or the business — if he can.24 It is further supplemented by an express
obligation on the administrator to perform his functions in the interests of the
company’s creditors as a whole.25 The administrator is also subject to an express duty
to act ‘quickly and efficiently’, in order to seek to minimise the costs of the
proceedings.26
20 Ibid, para 83.
21 Ibid, para 65. Distributions to unsecured creditors require the permission of the court.
22 Ibid, para 84. See further Re GHE Realisations Ltd [2005] EWHC 2400 (Ch).
23 IA 1986, Sch B1, para 3(1).
24 It was apparently felt that the priority given to rescuing the company would create greater incentives for directors to seek early assistance in addressing problems of financial distress because a rescue of the company (as opposed to a sale of the business) would not threaten their own tenure as managers. This ignores the leverage that major creditors may be able to exert, for example, in the context of a debt-equity swap.
25 IA 1986, Sch B1, para 3(2). In cases where the administrator is simply realising property to make a distribution to secured or preferential creditors under para 3(1)(c) (which will usually be where the secured creditor is hopelessly under-secured and there is no prospect of a return to unsecured creditors), the duty to act in the interests of creditors as a whole is relaxed and substituted by a duty not to cause unnecessary harm to the interests of creditors as a whole: para 3(4)(b).
26 Ibid, para 4.
9
2.4 Analysis Doubts have been raised as to whether these new legal mechanisms of accountability
will result in a significant improvement in the returns to junior creditors. These doubts
take two forms. The first are doubts about the rationales for the change in the law—
that is, the perceived weaknesses of the old regime. If these were in fact smaller than
was perceived, then the benefits which any reform would be capable of capturing
must necessarily also be limited. The second are doubts about the implementation of
the new law: that is, whether, in fact, it is designed in such a way to capture such
potential benefits as exist.
As regards the ‘perverse incentive’ problem, it was pointed out that in cases
where the value of the firm’s assets was less than the amount of secured debt owed
(that is, the secured creditor was not under-secured), then the secured creditor would
themselves be the residual claimant and hence concerns about excess costs and
precipitate liquidation would not be pressing (Armour and Frisby, 2001). Whilst the
available empirical evidence was equivocal, secured creditors were thought to be
under-secured in just under half of all UK insolvencies during the late 1990s (Armour
and Mokal, 2005). This implied that in a significant proportion of cases, there would
be little benefit to be had from amelioration of perverse incentives.
Moreover, it was argued by some that the new law did not do enough to
ameliorate the problem. Banks still retain considerable control over rescue
proceedings. The floating charge-holder has considerable scope to influence the
selection and appointment of the administrator. The major clearing banks typically
operate ‘panels’ for the selection of insolvency practitioners to act as administrators,
and those appointees who take steps contrary to the banks’ interests in the course of
an appointment may expect not to be appointed again. If appointed by a bank, the
administrator will often have conducted an ‘independent business review’ prior to
appointment, as a result of which a range of options will have been presented to the
bank. We might therefore expect that the appointment would often be coupled with
an indication from the bank as to which of the possible courses of action it would
prefer. The bank will often retain control of funding during an administration. This
will make it practically impossible in many cases for an administrator, even if he is so
minded, to pursue an outcome contrary to that desired by the bank.
Secondly, as regards the perceived need for a company, as opposed to business
rescue, mechanism: such rescues already did take place, as was documented by
10
Franks and Sussman (2000), outside formal insolvency proceedings. This was because
formal proceedings tend to harm the goodwill of a business, and so would be avoided
wherever possible (Meeks and Meeks, 2004). If a secured creditor takes the view that
the company is worth saving—because of the human capital of its managers, for
example—then it is possible for it simply to renegotiate its loan to the company,
thereby permitting the latter to continue trading. In effect, this is a private
reorganisation between the secured creditor and the company. Empirical studies done
before the implementation of the Enterprise Act implied that such informal
reorganisations were in fact a frequent occurrence (Franks and Sussman, 2000;
Armour and Frisby, 2001; see also Finch, 2005b). The desire to avoid the loss of
goodwill associated with formal insolvency would, in fact, give banks an incentive to
avoid formal proceedings if a reorganisation was thought desirable. Formal
proceedings would thus be used only to sell assets in cases where it was wished to
remove the incumbent management (Armour and Frisby, 2001). This implies that the
limited incidence of formal corporate rescue proceedings was not evidence of a failing
in the system, but actually of its successful operation. If correct, this would imply that
there would be little to be gained by making formal corporate rescue more readily
available.
Thirdly, as regards accountability and costs, it should be borne in mind that
accountability through the legal system does not come for free. Legal rights require
lawyers and courts to enforce them: professional services are costly. Moreover, even
if the fear of potential liability causes some insolvency practitioners to apply more
effort in a way that is beneficial, it is also possible that the same fear might cause
practitioners to apply too much effort—that is, to focus on ‘form filling’ and the
creation of a ‘paper trail’ to insulate them against the threat of possible legal challenge
for breach of duty, but which may nevertheless bear little relation to the actual
recoveries generated for creditors. The possibility that the new legal liabilities may
result in misplaced (in the sense of not going to improve recoveries) effort is
reinforced by the somewhat opaque terms in which the duties are drafted under
paragraph 3 of Schedule B1 (Frisby, 2004; Armour and Mokal, 2005). The choice
from the hierarchy of objectives is based on what the administrator ‘thinks’, a
subjective term designed to accord respect to the office-holder’s professional and
11
commercial judgment.27 In practice, it will be extremely difficult to demonstrate that
the relevant criteria were not satisfied. Similarly, the duty to act ‘efficiently’ appears
to be devoid of positive content and is not obviously justiciable (Sealy and Milman,
2005).28
Fourthly, as regards the international dimension of insolvency proceedings, it
should be noted that, under the old law, banks always had the option of permitting an
administrator to be appointed if they wished. In an international insolvency from
which there would be a significant benefit from having a pan-European automatic
stay, then the secured creditor would have had an incentive to exercise this option.
Again, it is unclear that a mandatory requirement that formal corporate rescues be
conducted through administration, as opposed to receivership, will be useful.
2.5 Initial hypotheses The foregoing overview suggests that a priori, it is not possible to say with conviction
whether the Enterprise Act’s corporate insolvency provisions would be likely to make
a significant difference either to corporate insolvency outcomes or to the position of
creditors. More specifically, we could make no more than the following predictions:
• Gross recoveries. The new mechanisms of governance, namely unsecured creditor
voting and office-holder duties to maximise recoveries in the interests of all
creditors, are likely to result in increased recoveries, by ameliorating the ‘perverse
incentive’ problem faced by receivers acting for over-secured lenders. This effect
will be pronounced only in cases where the debenture-holder is over-secured. The
extent to which this occurs is an empirical question.
• Corporate rescue. If most corporate rescues occur as a result of informal debt
renegotiations, then the change in the law relating to formal insolvency procedures
may be expected to make little difference to the incidence of corporate rescues.
• Costs. The new mechanisms of accountability in administration are likely to result
in increased costs, associated with the simple mechanics of organising creditor
27 For judicial support see Unidare plc v Cohen [2006] 2 BCLC 140 at [71] where, construing similar wording in IA 1986, Sch B1, para 83, Lewison J accepted that ‘the process of thinking involves a rational thought process, and in that sense must be reasonable’ but refused to accept ‘that what the administrator thinks is subject to any form of test by reference to an objective standard’.
28 However, it may serve as a regulatory benchmark and therefore acquire significance in the context of professional compliance.
12
meetings and with the costs of ‘litigation-proofing’ office-holder actions. It might
be thought, however, that such increased costs would be offset in cases where the
secured creditor is over-secured, by better monitoring of expenses (owing to
greater accountability to unsecured creditors) and hence less waste. Moreover, the
fixed duration of the new procedure may also be expected to reduce costs.
• Net recoveries. Given the foregoing uncertainty surrounding the size of the effect
on gross recoveries and the direction and size of the effect on costs, it is not
possible to say a priori whether net recoveries to creditors (that is, gross
recoveries minus costs) are likely to be increased or diminished by the switch
from receivership to administration.
2.6 Empirical research Since the Enterprise Act 2002 came into force, the Insolvency Service has funded
several empirical studies investigating aspects of its impact on corporate insolvencies,
of which this is one (see also Frisby, 2006; Katz and Mumford, 2006). Frisby (2006)
reports a study investigating outcomes from corporate rescue proceedings. In keeping
with the discussion in section 2.5, it appears that the Enterprise Act regime has
resulted in very little increase in the number of corporate rescues. Moreover, Frisby
finds no significant difference in outcomes as between new-style administrations and
receiverships under the old law: both in terms of going concern sales versus break-up
sales, or in terms of recoveries for creditors. Katz and Mumford (2006) report on the
impact of the Enterprise Act on the use of administration proceedings as an alternative
both to administrative receivership and to liquidation.
The empirical study reported in this paper complements these existing studies.
It seeks to investigate in particular how the use of the new administration procedure
has changed corporate rescue cases. We do this by investigating whether proceedings
under the new administration regime, as compared with the former receivership and
administration procedures have resulted in (i) lower overall costs and/or (ii) greater
gross recoveries. We also consider the net effect of these two factors on total
recoveries for creditors.
The methodology employed includes both qualitative and quantitative aspects.
Quantitative research allows for statistical analysis, and provided that the sample
selected is representative of the whole population, permits meaningful general
statements to be made about the relationship between two or more variables that
13
might be thought to be linked. However, quantitative research sheds no light on the
mechanisms at play—that is, on the reasons why the size of variable A might be
linked to that of variable B. The starting point for thinking about mechanisms is
theory. However, as we have seen, a number of theoretical insights might potentially
be applicable to the context we are considering. In order to establish more precisely
the mechanisms involved, it is helpful to conduct open-ended interviews with market
participants.
Our research began with a pilot study, consisting of several open-ended
interviews with insolvency practitioners. These were used to discuss (i) the theoretical
issues outlined above and (ii) possible sources of data for quantitative research. As a
result of these, we gained further insight into which of the mechanisms postulated by
theory might actually be significant in practice, and also how best to go about
collecting data for quantitative analysis. Collection of quantitative data from the files
of insolvency cases was commenced in February 2006; by July 2006, 348 completed
cases had been added to the database. As the data collection exercise progressed,
further interviews were conducted, largely following up specific points that had arisen
out of the earlier interviews. These not only assisted in our understanding of the
mechanisms in play as regards our data on costs and recoveries, but also provided
pointers to other developments thought to be of significance by practitioners that may
well benefit from future quantitative work. Finally, when the data were analysed, it
was possible to employ a theoretical framework informed by the results of our
qualitative research. We now report the methodology of, and findings from, our
qualitative and quantitative research in turn.
3. Qualitative research: interview data
3.1 Interview subjects and methodology Thirteen open-ended interviews (see Table 1) were conducted with insolvency
practitioners (‘IPs’) and other stakeholders (IP regulators, bankers and a credit
insurer) in order to elicit their perceptions of the way in which the Enterprise Act
2002 has impacted upon practices in the marketplace and, in light of our initial
hypotheses, to investigate the extent to which the behaviour of key players may have
changed in ways that might be expected to affect recoveries and costs. The IPs were
drawn from a range of firms and were selected so as to give a broad cross-section of
opinion. All of the IPs had relevant advisory and office-holder experience both before
14
and after the coming into force of the Act. The purpose of the interviews with the
other stakeholders was to capture different perspectives on the operation of formal
corporate rescue processes and to provide a means of cross-checking and further
evaluating the responses from the IPs. The interviews were loosely structured around
aide memoires with questions relating to various aspects of the legislation and
developments in practice (a typical aide memoire is reproduced in Appendix A).
The rest of section 3 consists of an overview of the principal findings from
these interviews. It is structured as follows. Section 3.2 considers the Enterprise Act’s
general impact on the incidence, and conduct of insolvency proceedings; section 3.3
reports specific findings on decision-making in Enterprise Act administrations and
how this compares with receiverships, and section 3.4 discusses findings on costs
under administration and receivership. Section 3.5 uses these findings to refine our
initial hypotheses.
Table 1: Interview Subjects Interviewee no.
Date interviewed
Profession Location Firm type Practice type
1 06-07-05 IP Birmingham National, insolvency boutique
Middle market
2 12-07-05 IP Nottingham National full service
Middle market
3 20-07-05 IP Birmingham Big four Top end 4 21-07-05 IP Birmingham Big four Top end 5 24-08-05 IP (x 2) Birmingham National full
service Middle market
6 08-11-05 IP London London and South East full service
Middle market
7 08-11-05 Lawyer/Regulator London 8 22-11-05 Regulators (x 2) London 9 22-11-05 IP/Regulator London National full
service Middle market
10 18-4-06 Accountant/ pensions expert
London Big four Top end
11 03-05-06 Credit insurer London 12 19-06-06 Bankers (x 2) London Clearing
bank
13 23-11-06 Banker Bristol Clearing bank
15
3.2 Impact of the Enterprise Act on choice of insolvency proceedings
3.2.1 Increased administrations/decreased receiverships
Interviewees reported consistently that the number of administration appointments has
increased significantly whilst the number of receivership appointments has declined
(1, 2, 3, 4, 5, 6),29 notwithstanding that holders of pre-Act security retain the option to
appoint a receiver. This is borne out by DTI statistics, reported in Figures 1 and 2.
Figure 1: Incidence of Corporate Insolvency Procedures, 2001- 2006
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 (est)
Insolvent Liquidations Receiverships Administrations
Source: DTI30
The trend towards less receiverships and more administrations is in line with
expectations. However, the magnitude of the shift is perhaps surprising. After all,
most of the appointments made, at least in the first few years under the new
legislation, will have been under floating charges created before 15 September 2003,
for which the right to appoint a receiver has been ‘grandfathered’. Banks, we were
told, are content for administrators rather than receivers to be appointed in most cases.
Receivership is being reserved for situations where the bank is under-secured and
there is no prospect that other creditors will get paid out of realisations (2, 3) or where
29 Throughout section 3, numbers in brackets in the text refer to the interview numbers in Table 1.
30 Figures for 2006-7 are estimates based on Q1 and Q2 data.
16
recoveries can be increased through the mitigation of corporation tax that would
otherwise be payable in administration (1, 2, 3, 12).31
Figure 2: Incidence of receivership and administration, 2001-2006
0
500
1000
1500
2000
2500
3000
2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 (est)
Receiverships Administrations
Source: DTI32
However, it appears that banks often prefer not to appoint the administrators
themselves, and instead encourage the directors of distressed firms to make the
appointment.33 IP interviewees suggested that this is primarily a public relations
exercise, through which banks seek to distance themselves from the appointment and
so disguise their role in dictating outcomes (1, 2, 3, 5).34 Banker interviewees (12, 13)
confirmed the importance of reputational concerns for their organisations, and stated
31 A receivership appointment does not automatically terminate an accounting period for tax purposes whereas an administration appointment does. The result is that in administration corporation tax on realisations cannot be set off against pre-administration losses. Thus, if there is likely to be a significant corporation tax hit and all other factors are neutral, receivership will be regarded as the appropriate vehicle if it remains available.
32 Figures for 2006-7 are estimates based on Q1 and Q2 data.
33 Ibid, para 22.
34 Moreover, reputational concerns apart, banks are said to prefer administration in the context of large retail insolvencies (13) and, from the IP perspective, as a means of dealing with aggressive landlords (2, 5) or in insolvencies that involve American customers and suppliers more used to collective proceedings rather than a bank-driven procedure (3).
17
that they prefer not to make ‘hostile’ appointments. They are readily able to persuade
directors to appoint as a means of mitigating potential exposure to liability for
wrongful trading or breach of fiduciary duty (12).35 The banks use the qualifying
floating charge-holder power to block a winding-up petition or to maintain control in
circumstances where a junior secured creditor serves notice of intention to appoint (3,
12, 13).
3.2.2 ‘Liquidation substitution’
In the opinion of most of our interviewees, administration is being used not only as a
substitute for receivership, but also for liquidation (1, 2, 3, 4, 5, 6, 12, 13), although a
number of were clear that this was not something they themselves did.36 Such
substitution has become feasible because the Enterprise Act gives the office-holder
the ability to make distributions in administration and exit direct to dissolution
without the need for a prior transition to creditors’ voluntary liquidation (1, 2, 3, 4, 5,
6, 12).37 This leads to the suggestion that a significant proportion of post-Enterprise
Act administrations may be ‘liquidations’ rather than ‘rescues’. A superficial check of
the data reported in Figure 1 suggests that liquidations have, since 2004, been
increasing more rapidly than administrations, seemingly contradicting this claim.
However, another study, which has investigated the question in more detail, has found
evidence confirming this effect (Katz and Mumford, 2006).
Interviewees offered various thoughts as to the reasons for this phenomenon.
In some cases, the substitution of administration for liquidation may be motivated by
the desire to save the costs of a creditors’ voluntary liquidation (1), or where for some
other reason this is the best option for creditors—for example, in circumstances where
a quick sale by an administrator would be the best means of realising the assets (6).
However, other, less benign, reasons might also exist. Interviewees identified
two motivating factors behind the substitution of administration for liquidation, which
35 This, to some extent, can be viewed as an extension of the practice during the late 1990s of directors ‘requesting’ their bank to appoint a receiver on a consensual basis (12).
36 One considered that the requirement for court permission to distribute to unsecureds (para 65(3)) implies that creditors’ voluntary liquidation should still be used as an exit where appropriate (2). Others reported that it is difficult to complete a distribution in 12 months within administration and so find that a creditors’ voluntary liquidation is invariably used (3, 5, 6).
37 IA 1986, Sch B1, paras 65-66, 84 and see Re GHE Realisations Ltd [2005] EWHC 2400 (Ch).
18
are based at least in part on IPs’ assessment of their own self-interest. The first is that
it is said to be much easier for an IP to make his appointment secure in administration
compared to a creditors’ voluntary liquidation (1, 2, 3, 4, 5, 6, 12, 13). In a creditors’
voluntary liquidation, the IP may do a considerable amount of initial advisory work
but then find that the creditors club together and substitute their own preferred
appointee at the initial creditors’ meeting, called pursuant to section 98 of the
Insolvency Act 1986. In administration, there is no such threat to the appointment.
The administrator has eight weeks in which to circulate his proposals and the first
creditors’ meeting need not take place until ten weeks after the appointment.38 In that
time, the administrator can sell the assets and draw up proposals for a distribution/exit
to dissolution strategy.
The second motivating factor was said to be the House of Lords’ decision in
Re Leyland DAF Ltd, Buchler v Talbot,39 which held that the general expenses of
liquidation (as distinct from costs incurred in realising floating charge assets) are not
payable out of floating charge assets but can only be met from the company’s free
assets.40 This creates an incentive for insolvency practitioners to favour administration
over liquidation because an administrator, unlike a liquidator, can be certain that his
expenses and remuneration will be recoverable from floating charge assets.41
3.2.3 Changes to priority rankings: Crown preference and the prescribed part
There was some perception that the abolition of Crown preference has made it more
difficult to persuade the Crown to participate in a CVA of less than three years’
duration (1). At the same time, one banker thought it had made it easier for distressed
companies with few employees to refinance with asset-based lenders using stock that
would previously have been earmarked for preferential creditors (13).
38 IA 1986, Sch B1, paras 49(5), 51(2).
39 [2004] 2 AC 298.
40 Leyland DAF was identified as a possible motivating factor by all our IP interviewees; however their assessment of its significance varied. Some thought that it was a significant factor encouraging IPs to favour administration over liquidation (2, 6) while others downplayed it pointing out that they had not had difficulty in striking deals with banks to fund realisations (1, 3, 5).
41 IA 1986, Sch B1, para 99. However, the priority of liquidation expenses to floating charge assets is due to be restored by Companies Act 2006 s 1282.
19
Most interviewees thought it was too early to gauge the impact of the
prescribed part (11, 12, 13), though bank lenders are reserving their position on the
vexed question of whether they can participate in the prescribed part in relation to any
shortfall under their security (12).42
3.2.4 Other factors influencing appointments: fragmentation in lending
Most of our interviewees reported that practices regarding appointments were also
being affected by a wider trend towards fragmentation in the market for debt finance
for small to medium-sized enterprises.43 This trend was, in interviewees’ opinions,
largely the result of changes on the supply side of the market (that is, in financiers’
willingness to provide funds). In particular, we were told that the increasingly
restrictive judicial approach to the characterisation of fixed and floating charges,
articulated in Agnew v IRC44 and National Westminster Bank v Spectrum Plus45
(Gullifer and Payne, 2006; Worthington, 2006), has resulted in banks being less
willing to supply overdraft finance for working capital, especially for higher risk
businesses (12, 13), and firms consequently turning to asset-based financiers instead.
This trend is reflected in aggregate data on asset-based lending (see Figure 3), which
show a significant secular growth in invoice discounting, but not in factoring.46 We
were told that, at the same time, there had been a proliferation of different kinds of
non-bank financiers with significant growth, in particular, in the asset-based lending
market (3, 4, 5, 12, 13). Thus, the effect of the fixed/floating charge jurisprudence
was, several interviewees said, simply serving to reinforce an existing trend away
from banks as suppliers of working capital in favour of asset-based finance (see also
Armour, 2006; Frisby, 2006).
42 Concern was expressed for the possible downside impact on guarantors if (as the DTI maintains) the qualifying floating charge-holder is not permitted to share in the prescribed part where there is a shortfall (12).
43 Our findings on the trend towards fragmentation in lending are very similar to qualitative findings reported in Frisby (2006).
44 [2001] 2 AC 710.
45 [2005] 2 AC 680.
46 Invoice discounting is a closer substitute for overdraft lending on the security of a floating charge than factoring, because under an invoice discounting arrangement the company continues to manage its own ledger (see Armour, 2006: 202-206).
20
Interviewees reported that this change in corporate finance patterns was,
predictably, leading to more formal appointments being made by asset-based lenders,
while banks are making less (13). In addition, banks were said to have concentrated
since the last recession on intensive care and informal turnaround (4, 12, 13). Some of
the IPs report a decline in referrals from the banks (3, 4, 5).
There is also some evidence that fragmentation may impact negatively on
rescue outcomes in formal insolvency proceedings because of the increased potential
for creditor conflict, difficulties of co-ordination and the different agendas of the
various stakeholders (4, 13). In particular, receivables financiers may often have
shorter horizons and less of an interest than the banks in the customer relationship per
se. Accordingly, they may simply be looking to recover their debt and termination
fees as quickly as possible and be less concerned about rescuing the business (13).
However, we were told that there has been little or no impact on bank-led turnaround
and workout activity which takes place when a firm is not so severely distressed as to
need formal insolvency proceedings (4, 12, 13). This is presumably because in such
cases other financiers are not involved, but simply receive payment out of funds
advanced by the bank.
Figure 3: UK Domestic Factoring and Invoice Discounting 1999-2005
0
5000
10000
15000
20000
25000
30000
35000
Mar-99
Jul-9
9
Nov-99
Mar-00
Jul-0
0
Nov-00
Mar-01
Jul-0
1
Nov-01
Mar-02
Jul-0
2
Nov-02
Mar-03
Jul-0
3
Nov-03
Mar-04
Jul-0
4
Nov-04
Mar-05
Jul-0
5
£m
Factoring Invoice Discounting
Source: Factors and Discounters Association, reported in Armour (2006).
21
3.2.5 International insolvencies
One interviewee with experience of cross-border work stated that the new
administration procedure has proved extremely useful in large cross-border cases
given the relative ease with which the effects of collective insolvency proceedings can
be exported to other jurisdictions under instruments such as the European Insolvency
Regulation (3).
3.3 Impact of the Enterprise Act on conduct of rescue proceedings
3.3.1 The hierarchy of objectives and the wider duties of the administrator
Our IP interviewees expressed mixed views as to whether the new duties introduced
by the Enterprise Act for office-holders conducting administrations (namely, the
hierarchy of objectives in Schedule B1, paragraph 3; the general duty of the
administrator to creditors as a whole; and the duty to act efficiently) have affected the
way in which they formulate commercial strategies and their decisions about asset
deployment during administration cases under the new regime, as compared with their
conduct of receiverships. Some took the view that the new law’s effect is entirely
neutral. These interviewees stated that they viewed their role as IPs as having always
been to maximise the value of the assets (1, 2, 3). For those IPs, paragraph 3 simply
reflects the decision-making process that they would go through in any event. When
pressed as to why this should be the case, one (2) said that he felt professionally
obliged to maximise realisations regardless of whether he was acting as receiver or
administrator. In receivership, the need to maximise realisations was also driven by
pragmatic considerations: ‘the better the job you do, the more impressed the bank will
be’ (2).
Other IPs did view the Act as having had an impact, albeit marginal, on their
decision-making in administration. One said it had brought about a marginal change
— a statutory ‘pause for thought’ — with regard to the formulation of commercial
strategy and in requiring IPs to produce more paperwork and provide greater
justification to the creditors for their actions (5). Another (6) articulated a change
even more clearly, by saying that paragraph 3 made him focus more on what is best
for all the creditors and meant that he was less driven by what is in the bank’s
particular interests.
As regards the question whether the Enterprise Act would result in greater
rescues of companies, as opposed to their businesses, all of our IP interviewees stated
22
that in their experience administrations with a view to ‘rescuing the company as a
going concern’ were rare although two (1, 6) had done them. One of the bankers (13)
had never come across a ‘reorganisation’ administration. We were told that
reorganisations and restructurings are usually conducted outside formal insolvency
proceedings.
There was some uncertainty in IP interviewees’ answers to questions about
whether the new creditors’ rights of action under Schedule B1 would lead to an
increased incidence of legal challenge of IPs’ decision-making. On the one hand,
interviewees stated that they did not consider that the new duties would lead directly
to an increased incidence of legal challenge. On the other hand, they expressed
concern about increasing litigiousness generally, a common refrain being that ‘we live
in a more litigious and complaining society’. Some IPs stated that they indeed thought
that fear of litigation might have a potential chilling effect on the decision to continue
trading because this is usually a more risky strategy and litigation makes the downside
consequence worse (1, 2). One described an increasing tendency for smaller
accountancy firms to ‘ambulance chase’ post-administration creditors’ voluntary
liquidation appointments with a view to possible misfeasance proceedings against the
administrator (5). Another IP (3) prefers to have his actions ratified by creditors’
committees as a means of minimising litigation exposure and said that he felt more
exposed as a receiver because this mechanism was not available.47
However, all interviewees considered the impact of the Act on their behaviour
to be wholly overshadowed by developments in professional regulation and their
firms’ internal best practice standards (see section 3.4.2, infra).
3.3.2 The role of the creditors’ meeting
Some IPs rely on creditors’ committees to ratify their actions and, as a matter of
course, take informal soundings from key creditors (3, 5). Where the legislation does
not require a creditors’ meeting (e.g. because of asset shortfall), many IPs take the
view that it is usually better to call a meeting simply for the sake of inclusivity and
transparency (1, 2, 5).
However, most of the IP interviewees reported that, in their experience, it is
often necessary to sell assets before a creditors’ meeting is called, in order to
47 See, however, IA 1986, ss 48(2), 49.
23
maximise realisations. This is sometimes done via a ‘pre-pack’. In either case an
independent valuation and extra-careful paper trail will be required to provide the IP
with comfort (1, 5). This is a fortiori where the only realistic buyers of the assets are
the incumbent managers (5).
Most IPs said that the content of reports to creditors’ meetings is dictated by
professional regulation and internal best practice standards rather than paragraph 49
of Schedule B1 directly and reported no change in the content of such reporting
following the coming into force of the EA (1, 2, 3). However, one IP (6) clearly
thought that paragraph 49 has changed practice because the explanation has to be
tailored to paragraph 3 and cannot be done in standard form as each case will differ
and demand a ‘bespoke’ solution.
3.3.3 Role of banks during administration
Whilst banks have encouraged a shift towards director-lead appointments of
administrators, preferring the better ‘PR’ associated with keeping a low profile (2, 3,
5, 6), in interviewees’ experience banks still retain considerable leverage as regards
the appointment and identity of the IP, control of cashflow in the administration and
control of costs, through tendering out assignments among their panel firms (1, 2, 6).
However, a number of interviewees reported that the general trend towards
fragmentation in lending — more asset-based finance, less reliance on a single bank
— has tended to reduce the bank’s control in administration (4, 12, 13).
As regards banks’ attitude to the exercise of their control, there was some
suggestion that they might behave more conservatively under the new regime. Whilst
banks had routinely provided ongoing funding for receivers based on the forecasts and
projections in the independent business review (1, 13), the fact that in administration
the IP is not strictly the ‘bank’s man’ means, according to one banker interviewee,
that funding for administrations may be less forthcoming (13). That said, some banks
have apparently been seeking to share in the benefits of successful rescues through
aggressive restructuring fees and property (equity) participation schemes (1, 2, 5, 13).
Indeed, IPs reported that the only situations in which they had problems with the
incumbent senior creditor’s attitude are those in which it is well secured and is simply
looking for a quick exit (3). This is entirely consistent with the theoretical predictions.
If the existing bank is unwilling to provide continuing funding, then the only
option, apart from closure, is so-called ‘re-banking’: finding an alternative bank to
24
take over the loan. Our IP interviewees had differing views as to how feasible, and
common, this was. Several reported that re-banking is difficult in administration (1, 2,
3), although they pointed out that there are a number of asset-based lenders who will
provide post-administration finance (2, 5). One IP took the view that re-banking
would take too long to be commercially feasible and therefore dictate an alternative
strategy (3). Others, however, thought it was feasible and had experience of
successful re-financing, albeit using asset-based lenders (2, 5, 6).
3.4 Impact of the Enterprise Act on costs of rescue proceedings
3.4.1 Direct impact
We asked interviewees whether the new legislation was having any impact on the
costs of insolvency procedures. Whilst some IPs stated that they were no more likely
to rely on legal advice under the new regime than before (1, 2, 6), others had a
perception that administration may tend to be more expensive than receivership
because it is court-supervised, involves a greater number of parties and hence has a
greater likelihood of requiring lawyers to be instructed (3).
The new administration procedure was intended to reduce the costs of entry by
abolishing the need for a court hearing in every case, and also the requirement,
formerly stated in rule 2.2 of the Insolvency Rules 1986, to produce a report (which
formerly was addressed to the court) explaining the background to the company’s
position. Interviewees were of the opinion that the out-of-court entry routes would be
expected to save costs (1), as compared to the old administration regime. One IP (2)
suggested that whilst the waiver of the requirement for a rule 2.2 report might in
theory produce some savings, they still considered it best practice to undertake proper
due diligence and obtain a similar level of detail about the company’s business prior
to the appointment. In practice, it appears that IPs therefore tend to conduct a
thorough business review equivalent to the old rule 2.2 process even though it is not
formally required (1, 2, 13). As one (2) put it: We still do the work that used to be required for the old rule 2.2 report. We have to do that work
because a proper business review is required if the IP is to make proper, commercial, well-
informed judgments.
25
3.4.2 Indirect impact: interaction with professional regulation
Our IP interviewees did, however, identify an increasing regulatory burden that they
considered was driving up costs. They did not perceive the proximate cause of this,
however, to be the new legislation, but rather what they saw as a ‘step change’ in the
past few years as regards the burden of professional regulation to which they were
subject. Most added that this had created upward pressure on their costs per
assignment (2, 3, 4, 5, 6). In the larger firms, this perceived burden from external
professional regulation is reinforced by internal best practice standards adopted in
order to manage compliance and reputational risk that are usually policed by
compliance officers who have had experience working as inspectors for the regulators
(2, 3, 4, 5, 8).
We probed IP interviewees as to what they considered to be the causes, in
turn, of the increased level of professional regulatory requirements. To explore these
issues further, we followed up with interviews with representatives of two of the
recognised professional bodies that act as regulators. A number of factors were
identified:
(a) The statutory obligations to which IPs are subject have increased, quite apart from
the advent of the Enterprise Act. Examples include IPs’ reporting and other
obligations under pensions and money laundering legislation.
(b) The professional rule-book in the form of Statements of Insolvency Practice
(which, once approved by the Joint Insolvency Committee, become part of the
professional rules of all of the various licensing bodies) has grown significantly.
This appears to reflect developments in regulatory practice since the government’s
review of IP regulation in the late-1990s, not least the input of the Insolvency
Practices Council as representative of the public interest.48
(c) There has been increasing pressure on IPs since the high profile Mirror Group
case49 and the Ferris Report (Ferris, 1998), reinforced further by the decision in
Cabletel,50 to explain and justify time spent under a time-cost resolution by means
48 In addition, practitioners treat guidance issued by the Insolvency Service in the form of the ‘Dear Insolvency Practitioner’ letters as regulation with which they are professionally bound to comply (6).
49 Mirror Group Newspapers plc v Maxwell [1998] BCC 324 (Ferris J) and [1999] BCC 684 (Master Hurst).
50 Re Cabletel Installations Ltd [2005] BPIR 28 (Mr Registrar Baister).
26
of contemporary file notes. As one of the regulators (7) explained, it is no longer
sufficient to rely on the creditors having approved a time-cost basis of
remuneration. The public interest in estates not being wholly absorbed in costs
has generated the need for itemised explanations of what time is spent on. As a
consequence, IPs have been forced to move much closer in terms of practice
culture to the legal profession in order to protect their remuneration from the risk
of creditor challenge.
(d) There has been a gradual shift among the larger IP licensing bodies towards a
greater emphasis on qualitative regulation (concerned with the quality of the job
done, the outcome for creditors, the ‘value added’) and a lesser emphasis on a
‘tick box’ statutory compliance mentality (7, 8, 9).51 The task when the regulatory
framework was reviewed by the government during the mid to late-1990s was to
increase levels of basic statutory compliance (filing of returns etc). This was
achieved in large part through the (now defunct) Joint Insolvency Monitoring
Unit, albeit by means of a ‘checklist’ approach. The shift towards qualitative
regulation means that regulators are increasingly expecting evidence of strategic
planning in the form of file notes explaining key decisions.52 The focus on
qualitative aspects of IPs’ work demands evidence, as the regulators cannot
measure the quality of strategic decisions without an account of the decision-
making process.
Against the background of these regulatory developments, the Enterprise Act
is seen as indirectly reinforcing the compliance culture, because Schedule B1 allows a
range of possible strategies to be pursued and demands explanation of IPs’ decision-
making processes. Most of our interviewees (1, 2, 3, 4, 5, 6, 11, 13) indicated that the
flexibility of Schedule B1, the hierarchy of objectives in paragraph 3 and the
legislative emphasis on explaining and justifying decisions to creditors has tended to
reinforce an existing trend towards greater compliance burdens, a point that was
confirmed by the regulators (7, 8, 9).
51 The Insolvency Practitioners Association, which is the second largest licensing body in terms of the number of IPs that it licenses, has been particularly active in this respect.
52 Examples of such decisions include: the choice of administration rather than liquidation; a trading strategy rather than a non-trading strategy; and a pre-pack sale back to incumbent management rather than a fully exposed sale on the open market.
27
3.4.3 Indirect impact: effect of changed control structures
The Enterprise Act was intended to have the effect of shifting control in corporate
rescue proceedings away from banks and in favour of unsecured creditors. However,
bank interviewees (12, 13) suggested that this might have had an unintended
consequence as regards costs. They reported that IPs give banks discounts on fees that
they do not offer to unsecured creditors. In other words, the expense and remuneration
rates which they seek to get approved by the unsecured creditors will be higher than
the rates approved by the bank. In receiverships, the banks had managers who were
targeted to ‘sit on the IP’ and control costs. This would typically have been facilitated
through the use of the panel system: IPs had an incentive to offer reduced fees in
return for the quid pro quo of the possibility of future work. However, in
administrations where the IP negotiates with unsecured creditors over fees, there is no
such incentive, and so no discount is offered.53
Moreover, one of the bankers (13) pointed out that liquidation formerly served
as a check on the actions of a receiver. It provided scope for an independent
investigation including possible challenge to the receiver’s costs and remuneration.
This interviewee added that there is no such check in administration because the IP
controls the exit: ‘the IP is effectively marking his own work’.
3.5 Summary and refined hypotheses
Having reviewed the qualitative evidence from our interview data, we are now in a
position to revisit the original hypotheses developed about the impact of the
Enterprise Act. Interviews with professionals with wide-ranging experience in the
field, and working from a variety of different perspectives, can assist us in
understanding possible mechanisms by which the Enterprise Act may have changed
outcomes. In the light of the interview findings, we now revisit the initial hypotheses
set out in section 2.5, based at that stage purely upon theoretical reflection, about the
expected impact of the Enterprise Act on corporate rescues.
• Recoveries. The duties of administrators and the increased role for the creditors’
meeting appear to have had an impact on IPs’ actions, at least in some cases. This 53 One interviewee who represented a trade credit insurer stated that where they have an interest in the unsecured indebtedness they will use what leverage they have to pressurise the IP to reduce fees, though they often focus on the enforcement of their insureds’ retention of title claims as a means of limiting exposure (11).
28
is in accordance with our initial predictions, and so the hypothesis regarding gross
recoveries remains the same: the new mechanisms of governance are likely to
result in increased gross recoveries, by ameliorating the ‘perverse incentive’
problem faced by receivers acting for over-secured lenders. This effect will be
pronounced only in cases where the debenture-holder is over-secured. The extent
to which this occurs is an empirical question.
• Costs. The qualitative evidence suggests that the new administration regime, when
combined with a trend towards increased professional regulation, results in IPs
needing to expend greater resources creating ‘paper trails’. This is not so much to
avoid litigation as to ensure compliance with professional regulation or internal
best practice guidelines. The emphasis on accountability and transparency in
decision-making under the Enterprise Act has increased the reporting obligations
for practitioners conducting ‘new style’ administrations, as compared with
receiverships. Moreover, it appears that in circumstances where IPs negotiate with
unsecured creditors over costs, they will be unwilling to offer discounts that they
routinely make available to banks who are their repeat customers (that is, fee
settlements with banks may be done on a ‘wholesale’ as opposed to a ‘retail’
basis). This too is likely to lead to increased costs under Schedule B1
administration, as opposed to receivership. IPs will negotiate with unsecured
creditors in circumstances where the bank is over-secured: the prediction therefore
is that there will be increased costs under the new regime, and that these will be
greatest in circumstances where the bank is over-secured.54
• Net recoveries. Our qualitative evidence on the impact of the Enterprise Act
implies that both gross recoveries and direct costs will have increased. This still
does not allow us to say a priori whether net recoveries to creditors (that is gross
recoveries minus costs) are likely to be increased or diminished by the switch
from receivership to administration.
54 Interestingly, this new formulation directly contradicts the purely theoretical claim that banks would have been most prone to allow inflated costs in circumstances where they were over-secured, and that the new mechanisms of accountability would therefore be expected to result in reduced costs in these cases.
29
However, because we have no way of knowing how representative (if at all) our
interviewees’ perceptions are of reality, these remain at this stage no more than
hypotheses. In the next section, we subject them to tests using quantitative data.
4. Quantitative data: description and methodology In the quantitative empirical research, we seek to compare gross recoveries, outcomes,
costs, and net recoveries for a dataset of cases of receiverships and administrations.
To do this, a dataset of 348 cases of formal insolvency proceedings was constructed to
compare receiverships under the old law with administrations under the new law. A
random sample of 500 cases, comprising 250 receiverships under the old law
(commencing between 1 January 2001 and 14 September 2003) and 250
administrations under the new law (commencing between 15 September 2003 and 31
December 2004), were first identified using the index of insolvency appointments
published in the London Gazette.55
Data on the cases were then collected from the reports filed at Companies
House by insolvency practitioners. From the Statement of Affairs filed shortly after
appointment we extract the book value of the firm’s assets, the directors’ estimate of
the market value of the company’s assets, and the amount of creditors’ claims, all as
of the beginning of proceedings. Insolvency practitioners are also required to file
progress reports as the proceedings continue, and final statements of receipts and
payments on completion of a case. From these, information was collected on the
duration of the proceedings, the realisation value of the firm’s assets (that is, their
post-insolvency market value), the total remuneration paid to the insolvency
practitioner and other insolvency-related direct costs, and distributions made to
creditors. We exclude from the original 500 cases those for which the insolvency
procedure was not completed by 1 February 2006, and those for which the relevant
abstracts of receipts and payments were not available in electronic form via the
55 These were obtained by purchasing quarterly indexes for the Gazette detailing all insolvency appointments for the period 2001-2004 inclusive.
30
Companies House Direct service.56 This yielded a sample of 153 receiverships and
195 administrations, as shown in Table 2.
Table 2: Date of commencement of insolvency proceedings
The table shows the year in which our sample cases entered insolvency proceedings. Random samples of 250 receiverships commencing between 1 January 2001 and 14 September 2003 and 250 administrations commencing between 15 September 2003 and 31 December 2004, respectively, were first identified using the index of insolvency appointments published in the London Gazette. Data relating to each case were then entered manually from reports filed at Companies House by insolvency practitioners. We only include cases in which the insolvency procedure had been completed by February 2006 and cases for which the Receiver’s Abstract of Receipts and Payments or Administrator’s Progress Report are available in electronic form on the Companies House website (www.direct.companieshouse.gov.uk).
Type of proceedings 2001 2002 2003 2004 TotalReceivership 23 79 51 153
Administration 42 153 195Total 23 79 93 153 348
To explore the pattern of realisations and insolvency costs across different
firm characteristics, further information about the firm’s SIC industry code and
accounting data was obtained from the FAME database.57 Table 3 presents descriptive
statistics on various characteristics of our sample firms. As can be seen, Panel A
shows that the average duration of proceedings for receivership (mean 622 days,
median 610 days) was nearly twice as long as for administration (mean 356 days,
median 358 days). This difference, which is statistically significant at the 5% level, is
consistent with our expectations: administration proceedings are subject to a statutory
time limit of one year (extendable with the consent of the court or of creditors),
whereas receivership has no fixed time limit.58 To the extent that the indirect costs of
insolvency are a function of the amount of time spent in formal proceedings, this
56 See www.direct.companieshouse.gov.uk
57 The FAME (Financial Analysis Made Easy) database provides detailed company accounting and financial information on UK and Irish public and private firms.
58 See above, section 3.3.
31
Table 3: Sample firm and insolvency case characteristics Data are from receiverships commencing between 1 January 2001 and 14 September 2003 and administrations commencing between 15 September 2003 and 31 December 2004. Panel A gives the age, duration of insolvency, turnover, number of employees, the book value of assets at the latest available financial statement (extracted from FAME), and the estimated market value of assets at the time of entry into insolvency (from the statement of affairs). Panel B shows the proportion of firms continuing to trade during the insolvency proceedings. Panel C describes the outcome of the insolvency process: going concern sale or piecemeal sale. Panel D describes the eight industry categories based on the 1 digit SIC code.
Panel A Firm characteristics Receivership Administration Mean median Mean median
t-test for differences of mean
Duration of insolvency (days) 622 610 356 358 2.96*Age (years) 14.9 9.8 16.9 14.9 -1.09Employees 85 60 83 57 0.20Turnover (£000) 7,000 4,194 6,682 1,932 0.44Book value of assets from last annual accounts (£000)
3,318 1,521 2,173 846 0.94
Estimated market value of assets on entry to insolvency (£000)
822 473 656 195 0.96
Panel B Trade or not Receivership Administration
Group Frequency Percentage Frequency Percentage Continue trade 33 32.3% 45 24.7%No trade 69 67.7% 137 75.3%Total 102 100% 182 100%
Panel C Outcomes Receivership Administration
Group Frequency Percentage Frequency Percentage Going concern whole sales 43 42.5% 65 35.7%Going concern half sales 3 2.9% 11 6.0%Piecemeal sales 56 54.6% 106 58.3%Total 102 100% 182 100%
Panel D: Industry components Receivership Administration
Industrial Group Frequency Percentage Frequency Percentage Agriculture, forestry and fishing (1) 0 0 1 0.57%Mining (2) 15 10.79% 10 5.75%Construction (3) 39 28.06% 42 24.14%Manufacturing (4) 12 8.63% 23 13.22%Transportation, communication, electric, gas and sanitary services (5)
10 7.19% 24 13.79%
Wholesale trade (6) 27 19.42% 39 22.41%Retail trade (7) 10 7.19% 9 5.17%Service (8) 26 18.71% 26 14.94%Total 139 100% 174 100%
* Significance at 5% level.
32
difference implies that administration proceedings incur lower indirect costs than
receivership.
The ages of firms in our receivership and administration samples are not
significantly different. We also present descriptive statistics for two binary indicators
of outcomes: trading versus closure (Panel B) and going concern versus piecemeal
sales (Panel C). In each case, the receivership and administration samples are very
similar. Panel D reports the distribution of the sample firms by industry at the 1-digit
SIC code level. It appears that approximately 45% of the sample in the two respective
proceedings is comprised of firms in the construction industry and in wholesale
trading. However, the overall industry compositions of the two sub-samples for
administration and receivership are similar.
4.1 Measuring gross realisations Insolvency practitioners in receivership and administration cases are required to
submit to the Registrar of Companies, at six-monthly intervals, a ‘Receiver’s Abstract
of Receipts and Payments’ or an ‘Administrator’s Progress Report’, respectively.
When assets are sold during the reporting period, the gross realisations are entered as
receipts and related costs entered as payments. We classify the receipt items as the
asset realisations and the associated costs as direct insolvency costs on the grounds
that costs of these types (namely, legal fees, investigation fees, advertisement fees,
and appraisal fees) are normally unavoidable and are related to the efforts beings
made by the insolvency practitioners to realise value for the creditors. We gathered
this information for a total of 284 cases; in the remaining 64 of our initial sample of
348 cases, the relevant information was missing from the Insolvency Practitioners’
reports.
However, in cases where the insolvency practitioner continued to operate the
business as a going concern, it would be inappropriate to treat operating costs as part
of the costs of the insolvency procedure. To help distinguish sums received and paid
in the course of trading from asset realisations and associated costs, administrators
typically provide a separate trading receipts and payments account in cases where the
33
business continued to operate.59 Hence, to ensure robustness, three different measures
of realisations were employed in our study:
A1: total asset realisations
A2: total asset realisations + gross trading receipts
A3: total asset realisations + net trading receipts
Simply comparing realisations, of course, would not give a meaningful
comparison between procedures unless those figures can be standardised by a
measure of firm size. Consistently with prior literature (LoPucki and Doherty, 2004;
Bris et al., 2006), we use the estimated value of the firm’s assets at entry into
insolvency as an indicator of size. The value is extracted from the Statement of
Affairs prepared by directors shortly after an insolvency practitioner is appointed. The
directors are required to provide an abbreviated balance sheet containing their best
estimate of the current value of the firm’s assets and liabilities as at the
commencement of insolvency proceedings.
Thus, the ratio of the value of actual realisations in insolvency to the estimated
(pre-insolvency) value of the firm’s assets (‘total assets’) yields one measure of the
‘effectiveness’ of the insolvency practitioner in realising assets. To be sure, the
directors’ estimates are not audited, and may well be subject to an optimism bias.
Provided that this does not differ systematically as between administration and
receivership—and we have no reason for thinking that it should—then this ratio can
nevertheless provide a meaningful way of comparing the effectiveness of the two
procedures. When combined with the three definitions of actual realisations, this
yields three different ‘realisation ratios’, summarised in Figure 4:
Figure 4: three measures of realisation ratio Scaling factor
Realisations
Asset realisations Asset realisations + gross sales
Asset realisations+ net sales
Total assets
A1:Total asset realisations total assets
[ ]A2: Total asset realisations + gross salestotal assets
[ ]A3: Total asset realisations + net salestotal assets
59 In most of the receivership cases, the receiver did not provide a separate trading receipt and payment accounts. In these cases, information on gross trading receipts and net trading receipts was identified from the receiver’s general ‘abstract of receipts and payments’ report.
34
4.2 Measuring direct costs Prior literature typically divides the costs of insolvency into ‘direct’ and ‘indirect’
components. Direct costs are the costs involved in running a procedure: that is, the
fees paid to professionals such as lawyers, accountants, valuers, business consultants
and marketing experts who are employed in realising the assets of the bankrupt firm
and agreeing an appropriate distribution of the proceeds. Direct costs are relatively
easy to observe, as a record of such payments must be kept.
Indirect costs are more wide-ranging and harder to measure. They would
include the costs of any decisional error by the office-holder: that is, deciding to close
a viable firm or to keep open one that is not viable; they would also include the costs
resulting from unnecessary delay in the completion of the proceedings, as this will
impact negatively on the value of the firm’s goodwill. In this study, we focus
primarily on direct costs, as these are easier to measure. However, time spent in
insolvency proceedings, which can also be measured, may be a proxy for indirect
costs, so we report this as well.
A number of studies have investigated direct insolvency costs in various
jurisdictions. These are typically reported as a ratio of total firm value, in order to
control for firm size. Possible denominators for comparison are the value of the pre-
insolvency assets (either at book, or estimated market value, where available) and the
market value of post-insolvency assets, as realised by sales (which can be presented
either as a gross figure or net of the associated costs of sale). The results of various
prior studies using samples of private firms, between them encompassing a variety of
insolvency regimes, are summarised in Figure 5.60
Results reported in Franks and Sussman (2000) and Citron et al (2004) suggest
that the mean direct costs in a typical UK receivership were in the region of 25% of
the value of the post-insolvency assets, net of the costs of realisation.61 Franks and
60 Both mean and median figures are reported, where available, as the presence of large outliers in a sample may skew the mean figure so that it is less representative than the median.
61 However, care must be taken not to read too much into such results. LoPucki and Doherty (2006) suggest that scale effects (namely, that marginal direct costs are declining in firm size) may render
35
Sussman (2000) also report mean costs for a sample of 7 pre-Enterprise Act
administrations, which were slightly higher, at 26.3%.62 However, the sample size is
so small that little significance can be attached to this finding.
Figure 5: Prior literature on the direct costs of insolvency in private firms
Mean costs, % of starting values (median)
Mean costs, % of realised market values (median)
Authors (year) Jurisdiction, firm type, procedure
n
Book value
Market value (est.)
Gross mkt value
Net mkt value
Lawless and Ferris (1997)
US: private firms, Ch 7 98 - 6.1 (1.1) - 13.5 (2.1)
Lawless and Ferris (2000)
US: private firms, Ch 11
118 - 17.6 (3.5) - 7.6 (4.7)
Bris et al (2006) US: private firms, Ch 7 private firms, Ch 11
57 38 222 157
- - - -
8.1 (2.5) - 16.9 (1.9) -
- 37.9 (9.6) - 9.4 (3.5)
- - - -
Thorburn (2000)
Sweden, public and private firms, auction
263 6.4 (4.5) - 19.1 (13.2) -
Franks and Sussman (2000)
UK, private firms, r’ship Administration
41 7
- -
- -
- -
25.2 26.3
Citron et al (2004)
UK, MBO firms, receivership
65 - - 15.2 (14.6) 24.5 (21.3)
Other studies report costs as a fraction of gross post-insolvency asset values.
This tends to reduce the percentage reported. Thus Citron et al (2004) report a mean
(median) cost of 15.2% (14.6%) of gross post-insolvency assets for a sample of 65
MBO firms that subsequently went into receivership. This is similar to the figures
reported by Thorburn (2000) for the Swedish insolvency process, in which firms are
mandatorily auctioned within a year (mean 19.1%, median 13.2%).63
fractional representations of insolvency costs meaningless. At the very least, little weight should be placed on comparisons where the size distribution of the samples may be different.
62 In a later version of their paper, Franks and Sussman (2005) report figures for a larger sample of liquidations, administrations and receiverships, but do not report disaggregated figures.
63 These costs seem somewhat higher than those reported by Lawless and Ferris (2000) and Bris et al (2006) for Chapter 11 proceedings in the US. It may be that this is because the salary of managers of firms in Chapter 11 is reported as an operating expense as opposed to an ‘insolvency’ cost, meaning that procedures in which the firm is managed by an outside appointee may be expected to generate higher reported direct costs. This conjecture is supported by results from Lawless and Ferris (1997) and
36
Katz and Mumford (2003) report a comparison of costs between the pre-EA
administration procedure and receivership, finding the old administration regime to
have generated greater direct costs than receivership. They also report questionnaire
evidence from Insolvency Practitioners suggesting that professionals considered that
the Enterprise Act regime would also be likely to generate greater direct costs than
receivership.
In our study, two measures of the direct costs of insolvency proceedings were
employed: (i) the remuneration paid to insolvency practitioners, and (ii) total direct
costs (comprising, in addition to insolvency practitioner remuneration, all the costs
associated with the realisation of the assets, e.g. legal fees, estate agent fees,
document fees, etc). In order to interpret the results meaningfully across the two
different proceedings, the costs also need to be standardised by a measure of firm size.
We use two measures as a scale factor: (i) the estimated market value, from the
Statement of Affairs, of the firm’s total assets on entry into insolvency and (ii) the
final value of the actual realisations in insolvency. As we have three measures for
asset realisations, the remuneration costs and total direct costs were then divided by
total assets and each of the three proxies for actual realisations to yield eight measures
of the ‘costliness’ of insolvency procedures. These are set out in Figure 6:
Figure 6
Scaling factor Remuneration Total direct costs Total assets: R1: Remuneration
total assets C1: Direct insolvency costs
total assets
Asset realisations: (1) asset realisations R2: Remuneration
Total asset realisations C2: Direct insolvency costs
Total asset realisations
(2) asset realisations plus gross sales
R3: Remuneration Total asset realisations+gross sales
C3: Direct insolvency costsTotal asset realisations+gross sales
(3) asset realisations plus net sales
R4: Remuneration Total asset realisations+net trade sales
C4: Direct insolvency costsTotal asset realisations+net trade sales
Bris et al (2006) suggesting that US Chapter 7 proceedings have significantly higher direct costs than Chapter 11.
37
In assessing whether the change of procedure has had any impact on direct
costs, we should control for other factors that may also affect costs. Those factors that
we consider relevant are as follows:
• Firm size. The larger the value of the business assets at stake, the more effort is
likely to be required to assess and market the assets (Lawless and Ferris, 2000;
LoPucki and Doherty, 2004; Bris et al, 2006).
• Mode of Sale. It might be thought that in situations where the assets are sold
piecemeal, this would be cheaper and quicker to complete than a trading / going
concern sale, and that therefore going concern sales, or continued trading, would
be positively correlated with fees.
• Length of proceedings. The longer the proceedings take to complete, the greater
the professional fees likely to be involved. Thorburn (2000), Franks and Sussman
(2005) and Bris et al. (2006) find a positive relation between time in bankruptcy
proceedings and bankruptcy costs.
4.3 Creditors’ net recoveries The net recovery rate is calculated as the distribution to a class of debt over the face
of the claims. The recovery rate is thus sub-classified into total recovery rate, secured
creditor recovery rate, preferential creditor recovery rate and unsecured recovery rate.
Necessarily, creditor recoveries will be a function of total (gross) realisations minus
costs.
5. Results
5.1 Summary statistics Table 4 shows descriptive statistics for each of our three measures of actual
realisations as a percentage of total assets (that is, actual post-insolvency market
values as a proportion of estimated pre-insolvency market values). So far as
realisation ratios are concerned, the means of each of the measures (A1-A3) are
higher in administration than in receivership, the difference of which is statistically
significant at the 5% level. When actual realisations are measured as total asset
realisations, the actual realisations for administration average 98% of total pre-
38
insolvency assets, the figure of which is much higher than the realisation ratio for
receivership (78% of total pre-insolvency assets). When net trading sales are included
in the calculation for the actual realisations, the administration cases have a mean
realisation ratio of about 103% of total pre-insolvency assets, which is much higher
than the mean of 77% reported for the receivership cases. These results are consistent
with our first hypothesis that we would expect realisations to be larger in
administration than receivership.
Turning to costs ratios, Table 5 shows the summary statistics for remuneration
cost and total direct costs as percentages of, respectively, total pre-insolvency assets
and actual realisations. Overall the mean figures are universally higher in
administration than receivership and all the differences are statistically significant at
the 5% level. This evidence tends to support our second hypothesis, namely that the
costs are likely to be larger in administration than in receivership.
Panel A in Table 5 first measures costs as a proportion of pre-insolvency
assets. The mean (median) remuneration cost for administration is 29% (19%) of total
pre-insolvency assets, which is much higher than 16% (11%) in receivership. Were
one to compare the figures in Panel A with those derived from earlier studies giving
costs as a fraction of pre-insolvency values (see Figure 5, supra), then both the UK
procedures appear to have higher direct costs, by this measure, than those reported by
Lawless and Ferris (2000) and Bris et al (2006) for Chapter 11 proceedings in the
US.64 The total direct costs for administration cases are also higher than the direct
costs for receivership, by a margin of 21% (16%) of total pre-insolvency assets.
Panels B to D of Table 5 respectively use each of our three different
definitions of actual realisations as the denominator. In each case, the cost ratio for
administration is significantly higher than the ratio for receivership. For example,
remuneration costs amount to 26% (21%) of asset realisations plus gross trading sales
in administration, as opposed to 22% (15%) in receivership. Were one to compare the
results in Panels B-D with earlier studies giving remuneration costs as a fraction of 64 The presence of scale effects may, however, mean that the results of different studies are not comparable (LoPucki, 2006).
39
gross receipts in insolvency, the median figures for receivership are similar to those
reported by Citron et al (2004) for a sample of UK receiverships and Thorburn (2000)
for the Swedish auction insolvency procedure, although the mean figures for our
sample are slightly higher.
Finally, Table 6 shows the results for estimated recovery rates in different
classes of claims.65 Owing to incomplete reporting, the number of observations in this
table is smaller than in Tables 4 and 5. An average of 21% of all creditors’ claims was
repaid in both of receivership and administration proceedings. Although, as shown in
Table 4, the gross realisations (as a proportion of pre-insolvency assets) appear to be
significantly higher in administration than in receivership, Table 6 implies that, once
increased costs have been taken into account, the increase in realisations is not
filtering through into higher net recoveries for creditors. Moreover, there is also little
difference in the recovery rate for secured creditors between the administration cases
and receivership cases. Thus, in conjunction with Tables 4 and 5, Table 6 implies that
whilst administration encourages insolvency practitioners to work more effectively in
generating recoveries for creditors, this potential benefit to creditors is eaten up by
concomitantly increased costs. In short, there appears to be no net benefit for creditors
in using administration, as opposed to receivership.
65 Data on recoveries are taken from a dataset compiled by Sandra Frisby (see Frisby 2006).
40
Table 4 T
otal realisations as a percentage of the estimated m
arket value of assets at the comm
encement of insolvency
Data are from
receiverships comm
encing between 1 January 2001 and 14 Septem
ber 2003 and administrations com
mencing betw
een 15 September 2003 and 31 D
ecember
2004. Realisations are obtained from
the Receiver’s A
bstract of Receipts and Paym
ents form (in receiverships) and the A
dministrator’s Progress R
eport form (in
administration). Three m
easures of actual realisations are employed: A
1=total asset realisation, A2=(total asset realisation + gross sales) and A
3=(total asset realisation + net sales). Total assets are the estim
ated value of total assets at entry into insolvency, extracted from the Statem
ent of Affairs prepared by directors shortly after an insolvency
practitioner is appointed.
AD
A
DR
E R
E
Diff
RE
(t -value) A
DA
DR
EA
DR
E
O
BS
mean
Median
Minim
um
Maxim
umR
ealisation ratio :
(1) A
1:Total asset realisations
total assets
182
1020.98
0.782.30*
0.880.69
0.070.002
5.304.19
(2) [
]A
2:Total asset realisations + gross trade sales
total assets
182102
1.220.84
3.21*0.99
0.750.07
0.0029.12
4.25
(3) [
]A
3:Total asset realisations + net trade sales
total assets
182102
1.030.77
2.98*0.93
0.670.07
0.0025.30
3.92
* denotes significance at 5%
level
41
Tab
le 5
Rem
uner
atio
n an
d di
rect
inso
lven
cy c
osts
as a
per
cent
age
of th
e es
timat
e va
lue
of a
sset
s at t
he
com
men
cem
ent o
f ins
olve
ncy
and
as a
per
cent
age
of th
e ac
tual
rea
lisat
ion
Dat
a ar
e fr
om re
ceiv
ersh
ips
com
men
cing
bet
wee
n 1
Janu
ary
2001
and
14
Sept
embe
r 200
3 an
d ad
min
istra
tions
com
men
cing
bet
wee
n 15
Sep
tem
ber 2
003
and
31 D
ecem
ber
2004
. Rem
uner
atio
n co
sts
and
tota
l dire
ct c
osts
are
obt
aine
d fr
om th
e R
ecei
ver’
s A
bstra
ct o
f Rec
eipt
s an
d Pa
ymen
ts fo
rm (i
n re
ceiv
ersh
ip) a
nd th
e A
dmin
istra
tor’
s Pr
ogre
ss
Rep
ort f
orm
(in
adm
inis
tratio
ns).
Tota
l dire
ct c
osts
com
pris
e th
e en
tire
cost
s sp
ecifi
c to
the
inso
lven
cy p
roce
edin
gs (
incl
udin
g re
mun
erat
ion
cost
s, le
gal f
ees,
esta
te a
gent
fe
es, a
nd d
ocum
ent f
ees)
, but
exc
ludi
ng o
pera
ting
cost
s as
soci
ated
with
trad
ing,
whe
re a
pplic
able
. Tot
al a
sset
s ar
e th
e es
timat
ed m
arke
t val
ue o
f to
tal a
sset
s at
ent
ry in
to
inso
lven
cy, e
xtra
cted
from
the
Stat
emen
t of A
ffai
rs p
repa
red
by d
irect
ors s
hortl
y af
ter a
n in
solv
ency
pra
ctiti
oner
is a
ppoi
nted
. Thr
ee m
easu
res o
f act
ual r
ealis
atio
ns a
re u
sed:
A
1=to
tal a
sset
real
isat
ion,
A2=
(tota
l ass
et re
alis
atio
n +
gros
s sal
es) a
nd A
3=(to
tal a
sset
real
isat
ion
+ ne
t sal
es).
AD
A
DR
E R
E
D
iff (t
val
ue)
AD
RE
AD
RE
AD
RE
O
BS
Mea
nM
edia
n M
inim
um
Max
imum
Pane
l A: a
s a p
erce
ntag
e of
the
estim
ate
valu
e of
ass
ets
(1)
Rem
uner
atio
n
tota
l ass
ets
18
210
20.
290.
163.
71*
0.19
0.11
0.00
70
2.45
1.12
(2)
Dir
ect i
nsol
venc
y co
sts
tota
l ass
ets
18
210
20.
490.
284.
04*
0.33
0.17
0.00
70.
0003
3.67
1.34
Pane
l B: a
s a p
erce
ntag
e of
the
actu
al re
alis
atio
n R
1[to
tal a
sset
real
isat
ions
]
(1)
R
emun
erat
ion
T
otal
ass
et re
alis
atio
ns
182
102
0.29
0.23
2.63
*0.
240.
170.
007
0.00
20.
770.
75
(2)
D
irec
t ins
olve
ncy
cost
sTo
tal a
sset
real
isat
ions
18
210
20.
490.
383.
27*
0.43
0.29
0.00
70.
021.
300.
97
Pane
l C: a
s a p
erce
ntag
e of
the
actu
al re
alis
atio
n R
2[to
tal a
sset
real
isat
ions
+ g
ross
trad
e sa
les]
(1)
R
emun
erat
ion
T
otal
ass
et re
alis
atio
ns+g
ross
sale
s
182
102
0.26
0.22
2.06
*0.
210.
150.
007
00.
770.
75
(2)
Dir
ect i
nsol
venc
y co
sts
Tota
l ass
et re
alis
atio
ns+g
ross
sale
s
182
102
0.45
0.36
2.51
*0.
380.
250.
007
0.01
01.
000.
98
42
A
D
AD
RE
RE
Diff (t value)
AD
RE
AD
RE
AD
RE
O
BS
mean
Median
Minim
um
Maxim
um
Panel D: as a percentage of the actual realisation R
2[total asset realisations + net sales]
(1) R
emuneration
Total asset realisations+net trade sales
182102
0.280.23
2.19*0.23
0.180.007
00.77
0.75
(2) D
irect insolvency costsTotal asset realisations+net trade sales
182102
0.470.38
2.71*0.41
0.290.007
0.0191.00
0.98
* denotes significance at 5%
level
43
Tab
le 6
Sum
mar
y st
atis
tics o
f tot
al r
ecov
ery
rate
D
ata
are
from
rece
iver
ship
s co
mm
enci
ng b
etw
een
1 Ja
nuar
y 20
01 a
nd 1
4 Se
ptem
ber 2
003
and
adm
inis
tratio
ns c
omm
enci
ng b
etw
een
15 S
epte
mbe
r 200
3 an
d 31
Dec
embe
r 20
04. T
he re
cove
ry ra
te is
cal
cula
ted
as th
e di
strib
utio
n pa
id to
a c
lass
of d
ebt a
s a
prop
ortio
n of
the
face
val
ue o
f the
ir cl
aim
s. Th
e re
cove
ry ra
te is
sub
clas
sifie
d in
to to
tal
reco
very
rate
, sec
ured
cre
dito
r rec
over
y ra
te, p
refe
rent
ial c
redi
tor r
ecov
ery
rate
and
uns
ecur
ed re
cove
ry ra
te.
AD
A
DR
E R
ED
iff
(t -v
alue
)A
DR
EA
DR
EA
DR
E
O
BS
m
ean
Med
ian
Min
imum
Max
imum
Rec
over
y ra
te :
(1)
Tota
l rec
over
y ra
te
182
102
0.21
0.21
0.02
0.13
0.12
00.
0003
1.00
1.00
(2) r
ecov
ery
rate
to se
cure
d cr
edito
rs
141
101
0.61
0.55
1.10
0.78
0.62
00
1.00
1.00
(3) r
ecov
ery
rate
to p
refe
rent
ial c
redi
tors
10
396
0.36
0.25
1.87
00
00
1.00
1.00
(4) r
ecov
ery
rate
to u
nsec
ured
cre
dito
rs
182
102
0.00
60.
002
1.05
00
00
0.27
0.19
*
deno
tes s
igni
fican
ce a
t 5%
leve
l
44
5.2 Multivariate analysis The analysis in section 5.1 simply compared differences in the mean figures for single
variables, as between administration and receivership. Whilst the mean test provides
simple, one-dimensional, cross-sectional comparisons that are easy to interpret and
have directional significance between receivership and administration, the mean tests
do not take into account factors outside the single variable of interest (that is, the type
of insolvency proceeding). Thus the results may be biased by a number of other
factors that could be affecting the size of costs and realisations. To overcome this
limitation, we now use a regression that incorporates other potential determinants of
realisations and costs into our estimations. In this multivariate framework, we are
looking to identify that part of the difference in costs and realisations which can be
explained by choice of procedure, taking into account those parts of the differences
which are explained by other variables. As before, the dependent variables in our
regression models are realisations and costs. The type of insolvency proceeding is one
explanatory factor. We also incorporate as controls four other explanatory variables
that we expect to affect the realisations and costs.
Specifically, to account for the choice of procedure in this framework, we use
a dummy variable which takes a value of one for administration cases and zero for
receivership cases. We include two further binary variables relating to the outcome of
the case. This is because we expect both realisations and costs to be positively
correlated with continued trading and/or going concern sales. A going concern sale
may plausibly be expected to realise a higher valuation than a piecemeal asset sale.
Continuing to trade can either facilitate a going concern sale, or permit the insolvency
practitioner to work through existing contracts and yield higher values for assets such
as stock in trade and receivables. In both cases, however, these steps are likely to
require more effort and therefore yield higher costs, than a straightforward closure and
fire sale.
We also control for the duration of the proceedings. A priori, we might expect
longer proceedings both to yield greater recoveries, and to involve greater costs. Thus
this might skew the results, particularly as there is a significant difference in the
45
average duration of cases in our administration and receivership sub-samples (see
Table 3).
A fourth control variable relates to the size of the firms. Earlier literature
indicates that there may be scale effect associated with costs (LoPucki and Doherty,
2006) and so it is important to take this into account. We use the estimated market
value of total assets, taken from the Statement of Affairs. Finally, as it is plausible that
costs and realisations may vary by industry sector, we also include an explanatory
variable to reflect this.
1 2 3
4 5 6
1 2 3
log(Realisations)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industry
log(Remuneration)= + dum_proceed+ dum_trade+ dum_outcom
α β β ββ β β
α β β β
× × ×× × ×
× × ×
4 5 6
1 2 3
4 5
e + log (duration) + log (total assets)+ industry
log(direct costs)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total as
β β β
α β β ββ β
× × ×
× × ×
× × 6sets)+ industryβ ×
Where Realisations = a. total asset realisations
b: total asset realisations + gross trading receipts c: total asset realisations + net trading receipts
dum_proceed = 1 if the insolvency procedure is administration 0 if the insolvency procedure is receivership
dum_trade = 1 if the insolvency practitioner continues to trade 0 if the insolvency practitioner ceases to trade
dum_outcome = 1 if the outcome is going concern sales 0 if the outcome is piecemeal sales
duration = Days in insolvency total assets = estimated market value of assets at the beginning
of the insolvency industry = Eight category of industry based on the 1 digit SIC
code level. Inspection of histograms of the data for our dependent variables (realisations and
costs) indicated that they did not follow a normal, but rather a lognormal, distribution.
Hence for the multivariate analysis, we use the natural logarithm of our dependent
46
variables (realisations and costs), and, to maintain consistency, we also subject our
explanatory variables (other than the binary variables) to a logarithmic transformation.
Table 7 shows the results of regression of the logarithm of the asset
realisations against three binary variables [proceedings, outcome, and trade], two
logarithm variables [duration and estimated value of assets], and one categorical
variable [industry]. As the dependent variable is a natural logarithm of the realisation
figure, the slope coefficient measures the elasticity of the realisation amount with
respect to explanatory variables. That is, when the explanatory variable is also a
natural logarithm, the coefficient indicates the percentage change in the amount of
realisations that is associated with a 1% change in the explanatory variable, whilst
holding the other variables constant. For example, when realisation is defined as asset
realisations (A1), for the binary variables, the 5% significance of the coefficient 1β
indicates that the amount of realisations is 48% higher in administration than in
receivership, holding the other variables constant. Overall, the amount of the actual
realisations in the specifications are positively and statistically significantly correlated
with administration (as opposed to receivership), length of time in proceedings, a
decision to continue to trade (as opposed to closure), and the size of the firm (as
represented by asset values). These results are all consistent with our expectations,
and provide further support for hypothesis 1.
Table 8 contains estimated coefficients and t-statistics from regressions of
remuneration costs and total direct costs on the explanatory variables. The same other
explanatory variables (proceedings dummy, log duration, trading dummy, going
concern sale dummy, industry code and log assets) are employed in each of the
specifications. Consistently with the predictions, and with the descriptive statistics, all
five specifications show that the insolvency procedure used makes an economically,
and statistically significant difference to the ratio of costs to total value of realisations.
They first indicate that the costs are higher in administration cases than in
receivership cases. Cases in which the insolvency practitioner decides to carry on
trading can result in higher remuneration costs and total direct costs, and all of the
47
Table 7 Determinants of realisations
Data are from receiverships commencing between 1 January 2001 and 14 September 2003 and administrations commencing between 15 September 2003 and 31 December 2004. Realisations are obtained from the Receiver’s Abstract of Receipts and Payments form (in receivership) and the Administrator’s Progress Report form (in administration). Three measures of realisations are employed: A1=total asset realisation, A2=(total asset realisation + gross sales) and A3=(total asset realisation + net sales). Dum_proceed takes the value of one in an administration case and zero for receivership; dum_trade equals one if the firm continues to trade in insolvency; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated market value of the firm’s assets at the beginning of the insolvency from the Statement of Affairs; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
log(Realisations)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industry
α β β ββ β β
× × ×× × ×
A1 A2 A3
Constant -0.46 0.19 0.13 (-0.42) (0.17) (0.12)
0.48 0.48 0.48 Dum_proceed (3.50*) (3.56*) (3.54*)
Dum_trade 0.49 0.92 0.61 (3.80*) (7.27*) (4.61*) Dum_outcome 0.11 0.05 0.03 (1.04) (0.43) (1.17) Log(duration) 0.48 0.35 0.36 (2.99*) (2.24*) (2.32*) Log(assets) 0.73 0.74 0.74 (18.88*) (19.23*) (19.44*) Industry 0.00009 0.006 0.002 (0.00) (0.22) (0.07) observations 261 261 261 Adjusted R2 66.67% 70.45% 68.27%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
48
Table 8 Determinants of remuneration and total costs Data are from receiverships commencing between 1 January 2001 and 14 September 2003 and administrations commencing between 15 September 2003 and 31 December 2004. Remuneration costs and total direct costs are obtained from the Receiver＇s Abstract of Receipts and Payments form (in receivership) and the Administrator＇s Progress Report Form (in administration). Total direct costs comprises remuneration costs, legal fees, estate agent fees, document fees, etc. dum_proceed takes the value of one in an administration case and zero for receivership; dum_trade equals one if the firm continues to trade in insolvency; dum_outcome equals one if the outcome is a going concern sale; duration is the length of insolvency; total assets is the estimated market value of assets at the beginning of the insolvency, from the Statement of Affairs; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
1 2 3
log(Remuneration)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industrylog(direct costs)= + dum_proceed+ dum_trade+ dum_outcom
α β β ββ β βα β β β
× × ×
× × ×× × ×
4 5 6
e + log (duration) + log (total assets)+ industryβ β β× × ×
Remuneration Direct Costs
Constant 2.04 2.44 (1.78) (2.35*)
0.47 0.46 Dum_proceed (3.39*) (3.66*)
Dum_trade 0.83 0.61 (6.53*) (5.37*) Dum_outcome 0.09 0.02 (0.94) (0.20) Log(duration) 0.51 0.46 (3.09*) (3.06*) Log(assets) 0.39 0.45 (10.2*) (12.8*) Industry -0.01 -0.03 (-0.5) (-1.16) Observations 261 261 Adjusted R2 49.61% 54.74%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
49
costs are positively correlated with the length of proceedings. Moreover, as would be
expected, costs are higher in larger firms. We find little evidence of any industry
effect, or that the choice between going concern sale and piecemeal sale has costs
implications: the coefficients for the categorical industry variable and for the
‘outcome’ dummy variable are small and not statistically significant.66
5.3 Multivariate analysis: decomposition to under- and over-secured cases It will be recalled that our first hypothesis, that administration would yield greater
realisations, is based on the idea that the introduction of legal mechanisms designed to
render the insolvency practitioner accountable to the residual claimant (as in
administration) as opposed to senior claimants (as in receivership) will improve his
incentives to raise value. If this is indeed the reason why recoveries in administration
tend to be larger than in receivership, we would expect to see the effect being most
pronounced in situations where the senior debt is over-secured: this is precisely the
circumstance that may give rise to inadequate incentives on the part of an office-
holder acting solely for the senior creditor.
To test this, we decompose our sample into an over-secured group and an
under-secured group, and re-examine the determinants of actual realisations and
remuneration and direct costs in these two groups. If the new mechanism of
administration can mitigate the perverse incentive problem, we expect that the
increase in realisations in the administration cases should be largely driven by the
over-secured sub-sample.
Table 9 reports the estimated coefficients and t-statistics for the determinants
of realisations in the over-secured and under-secured sub-samples. A case is placed in
the over-secured sub-sample if the estimated value of total assets at the
commencement of the insolvency proceedings is larger than the face value of the
debts owing to secured creditors; otherwise it is placed in the under-secured sub-
sample. The pattern of the regression results in the over-secured group is consistent
66 It is likely that any effect related to outcome is reflected in the positive and statistically significant coefficient for the dummy variable for continued trading.
50
Table 9 Determinants of realisations for over-secured group and under-secured group Data are from receiverships commencing between 1 January 2001 and 14 September 2003 and administrations commencing between 15 September 2003 and 31 December 2004. A firm is classified as ｀over-secured＇if the estimated value of total assets at the entry to insolvency is larger than the face value of secured creditors＇ claims. Realisations are obtained from the Receiver＇s Abstract of Receipts and Payments form (in receivership) and the Administrator＇s Progress Report form (in administration). Three measures of realisations are used: A1=total asset realisation, A2=(total asset realisation + gross sales) and A3=(total asset realisation + net sales). Dum_proceed takes the value of one in an administration case and zero for receivership; dum_trade equals one if the firm continues to trade in insolvency; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated market value of the firm＇s assets at the beginning of the insolvency from the Statement of Affairs; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
log(Realisations)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industry
α β β ββ β β
× × ×× × ×
Over-secured group Under-secured group A1 A2 A3 A1 A2 A3
Constant -0.78 -0.47 -0.61 1.57 2.78 2.49 (-0.59) (-0.35) (-0.45) (0.60) (1.12) (1.02)
0.63 0.68 0.71 0.15 0.19 0.07Dum_proceed (3.57*) (3.80*) (3.89*) (0.55) (0.72) (0.27)
Dum_trade 0.44 0.83 0.52 0.67 0.98 0.86 (2.90*) (5.37*) (3.35*) (2.30*) (7.42*) (3.17*) Dum_outcome 0.17 0.12 0.11 0.26 0.12 0.17 (1.34) (0.88) (1.17) (1.15) (0.54) (0.79) Log(duration) 0.53 0.47 0.48 0.56 0.37 0.39 (2.98*) (2.44*) (2.51*) (1.50) (1.05) (1.11) Log(assets) 0.71 0.72 0.72 0.58 0.57 0.59 (15.34*) (15.25*) (15.21*) (6.91*) (7.12*) (7.44*) Industry 0.01 0.01 0.007 -0.07 -0.07 -0.06 (0.34) (0.32) (-0.07) (-1.27) (-1.19) (-1.06) observations 156 156 156 105 105 105Adjusted R2 65.36% 67.73% 64.98% 51.11% 59.26% 56.00%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
51
Table 10 Determinants of remuneration (or total costs) for over-secured group and under-secured group Data are from receiverships commencing between 1 January 2001 and 14 September 2003 and administrations commencing between 15 September 2003 and 31 December 2004. A firm is classified as ｀over-secured＇if the estimated value of total assets at the entry to insolvency is larger than the face value of secured creditors＇ claims. Remuneration costs and total direct costs are obtained from the Receiver＇s Abstract of Receipts and Payments form (in receivership) and the Administrator＇s Progress Report Form (in administration). Total direct costs comprises remuneration costs, legal fees, estate agent fees, document fees, etc. dum_proceed takes the value of one in an administration case and zero for receivership; dum_trade equals one if the firm continues to trade in insolvency; dum_outcome equals one if the outcome is a going concern sale; duration is the length of insolvency; total assets is the estimated market value of assets at the beginning of the insolvency, from the Statement of Affairs; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
1 2 3
log(Remuneration)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industrylog(direct costs)= + dum_proceed+ dum_trade+ dum_outcom
α β β ββ β βα β β β
× × ×
× × ×
× × ×
4 5 6
e + log (duration) + log (total assets)+ industryβ β β× × ×
Over-secured group Under-secured group remuneration Total costs remuneration Total costs
Constant 0.65 0.06 4.58 6.22 (0.55) (0.05) (1.89) (2.88*)
0.60 0.76 0.35 0.23Dum_proceed (3.87*) (5.07*) (1.42) (1.05)
Dum_trade 0.65 0.83 1.09 0.83 (4.97*) (5.37*) (4.06*) (3.48*) Dum_outcome 0.10 0.04 0.16 0.17 (0.93) (0.34) (0.77) (0.88) Log(duration) 0.76 0.78 0.32 0.12 (4.74*) (4.89*) (0.93) (0.40) Log(assets) 0.38 0.47 0.29 0.32 (9.30*) (3.83*) (3.73*) (4.60*) Industry -0.02 -0.03 -0.03 -0.04 (-0.59) (-0.97) (-0.54) (-0.83) observations 156 156 105 105Adjusted R2 52.58% 59.15% 35.80% 38.69%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
52
with that in the full sample as reported in Table 7. The coefficient for the proceeding
dummy variable in the over-secured group is around 0.6, at a 5% significance level.
This suggests that the realisation in administration for over-secured groups is 60%
higher than that in receivership. Conversely, with the same regression specification in
the under-secured group, we do not find any significant improvements of asset
realisations in administration. These results strongly support the first hypothesis: that
the introduction of administration proceedings has, by reducing secured creditors’
control, enhanced the insolvency practitioner’s incentive to generate recoveries in
situations where the senior claims are over-secured.
We also consider the costs effects of insolvency procedure choice for
situations where senior claimants are both over- and under-secured. Table 10 reports
the estimated coefficients and t-statistics for the determinants of costs between the
over-secured group and under-secured group. Interestingly, the effect from the
proceeding dummy is significantly positive in the over-secured group, but
insignificant in the under-secured group. This suggests that administration is leading
to increased costs in situations where senior claimants are over-secured, but is having
relatively little impact where their claims are under-secured. These results again
support our second hypothesis that the new mechanisms of accountability in
administration may be expected to result in an increase in costs.
5.4 Robustness checks In interpreting these results, we must be alert to the possibility that they do not reflect
the operation of the mechanisms posited in our hypotheses, but rather are the result of
some other factors not taken into account by the analysis. In order to guard against
this possibility, we run ‘robustness checks’: additional tests designed to show whether
or not the other factors in question might be affecting the results.
5.4.1 Exogenous change in the regulatory environment
The most obvious possible source of bias might be from wider changes in professional
regulation other than the introduction of the Enterprise Act 2002. As will be recalled,
53
our qualitative data suggest that practitioners view themselves as being subject to an
increasing burden of regulatory compliance. Whilst most of the relevant changes were
said to have occurred before our sample period began, and therefore we interpreted
interviewees’ observations as being about the way in which the Enterprise Act,
mediated through professional reporting obligations, was affecting their practice, it
might be that there were other changes in the regulatory environment that meant that
the administration cases in our sample tended to have higher costs and higher
recoveries than the receivership cases, not because of the difference in procedure, but
simply owing to the fact that the administration cases took place later and therefore
may have been subject to greater regulatory pressures. To control for this possibility,
we constructed an additional sample of post-Enterprise Act receiverships. These were
then analysed (i) against the post-Enterprise Act administration cases (Tables 11-1
and 11-2), and (ii) against the pre-Enterprise Act receivership cases (Tables 12-1 and
12-2), using the same multivariate framework. If the increased costs in the post-
Enterprise Act administrations, as compared to pre-Enterprise Act receiverships, were
caused by changes in the regulatory environment more generally, as opposed to
specific effects of the use of the Enterprise Act administration procedure rather than
receivership, then we would expect to see (i) no significant differences between post-
Enterprise Act receiverships and administrations, which would both be subject to the
same general regulatory environment; and (ii) post-Enterprise Act (later) receiverships
tending to raise greater recoveries, and generate increased costs, as compared with
pre-Enterprise Act (earlier) receiverships.
Tables 11-1 and 11-2 report findings in relation to realisations and costs,
respectively, for post-Enterprise Act receivership cases and the post-Enterprise Act
administration cases. Both show that the coefficient for the ‘procedure’ dummy
variable is significant and positive. This indicates that the effects observed in Tables 7
and 8 in relation to pre-EA receiverships and post-EA administrations—namely that
administrations tend to yield greater gross recoveries, but also greater total costs—
also hold when post-EA receiverships are compared with post-EA administrations.
54
Table 11-1 Determinants of realisations (comparing administrations with post-EA receiverships) Data for both administrations and receiverships are from the period between September 2003 and March 2004. Realisations are obtained from ｀receiver＇s abstract of receipts and payments＇ (under receivership) and ｀administrator＇s progress report＇ (under administration). Three measures of realisations: A1=total asset realisation, A2=(total asset realisation + gross sales) and A3=(total asset realisation + net sales). Dum_proceed equals one if it is the administration case; dum_trade equals one if the firm continues to trading during insolvency proceeding; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated value of asset at the beginning of the insolvency; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
log(Realisations)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industry
α β β ββ β β
× × ×× × ×
A1 A2 A3
Constant -0.30 0.56 0.32 (-0.18) (0.33) (0.20)
-0.01 0.06 0.01Dum_proceed (-0.07) (0.34) (0.08)
Dum_trade 0.27 0.93 0.42 (1.46) (4.75*) (2.24*) Dum_outcome 0.48 0.42 0.41 (2.93*) (2.50*) (2.56*) Log(duration) 0.52 0.39 0.39 (2.11*) (1.52) (1.59) Log(assets) 0.75 0.74 0.76 (13.78*) (13.04*) (14.06*) Industry -0.04 -0.04 -0.03 (-0.88) (-0.96) (-0.80) Observations 114 114 114Adjusted R2 72.82% 73.36% 73.48%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
55
Table 11-2 Determinants of remuneration and total costs (comparing administrations with post-EA receiverships) Data for both administrations and receiverships are from the period between September 2003 and March 2004. Remuneration cost and total direct costs are obtained from ｀receiver＇s abstract of receipts and payments＇ (under receivership) and ｀administrator＇s progress report＇ (under administration). Total direct costs of the procedure＇, which comprises remuneration costs, legal fees, estate agent fees, document fees, etc. Dum_proceed equals one if it is the administration case; dum_trade equals one if the firm continue to trading during insolvency proceeding; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated value of asset at the beginning of the insolvency; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
1 2 3
log(Remuneration)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industrylog(direct costs)= + dum_proceed+ dum_trade+ dum_outcom
α β β ββ β βα β β β
× × ×
× × ×× × ×
4 5 6
e + log (duration) + log (total assets)+ industryβ β β× × ×
Remuneration Direct Costs
Constant 0.75 0.89 (0.63) (0.82)
0.38 0.36 Dum_proceed (2.79*) (2.86*)
Dum_trade 0.82 0.55 (5.59*) (4.11*) Dum_outcome -0.09 -0.20 (-0.68) (-1.69) Log(duration) 0.68 0.65 (3.63*) (3.80*) Log(assets) 0.42 0.49 (9.75*) (12.47*) Industry 0.02 -0.004 (0.63) (-0.12) observations 114 114 Adjusted R2 65.33% 71.00%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
56
Table 12-1 Determinants of realisations (pre- and post-EA receiverships compared) Data for pre-Enterprise Act receiverships commencing between 1 January 2001 and 14 September 2003 and data for post-Enterprise Act receiverships cover the period between 15 September 2003 and 31 December 2004. Realisations are obtained from ｀receiver＇s abstract of receipts and payments＇ (under receivership) and ｀administrator＇s progress report＇ (under administration). Three measures of realisations: A1=total asset realisation, A2=(total asset realisation + gross sales) and A3=(total asset realisation + net sales). Dum_preAct equals one if it is the receivership case prior to the Act; dum_trade equals one if the firm continue to trading during insolvency proceeding; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated value of asset at the beginning of the insolvency; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
log(Realisations)= + dum_preact+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industry
α β β ββ β β
× × ×× × ×
A1 A2 A3 Constant 0.05 0.81 0.56 (0.03) (0.46) (0.31)
-0.49 -0.45 -0.46Dum_preAct (-0.07) (-1.79) (-1.77)
Dum_trade 0.69 1.00 0.72 (2.96)* (4.46*) (3.12*) Dum_outcome 0.44 0.41 0.38 (2.22*) (2.12*) (1.93) Log(duration) 0.42 0.29 0.31 (1.55) (1.14) (1.18) Log(assets) 0.76 0.76 0.77 (9.28*) (9.64*) (9.54*) Industry -0.02 -0.02 -0.02 (-0.45) (-0.36) (-0.47) Observations 133 133 133Adjusted R2 51.49% 56.04% 52.16%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
57
Table 12-2 Determinants of remuneration and total costs (pre- and post-EA receiverships compared) Data for pre-Enterprise Act receiverships commencing between 1 January 2001 and 14 September 2003 and data for post-Enterprise Act receiverships cover the period between 15 September 2003 and 31 December 2004. Remuneration cost and total direct costs are obtained from ｀receiver＇s abstract of receipts and payments＇ (under receivership) and ｀administrator＇s progress report＇ (under administration). Total direct costs of the procedure＇, which comprises remuneration costs, legal fees, estate agent fees, document fees, etc. Dum_preAct equals one if it is the receivership case prior to the Act; dum_trade equals one if the firm continue to trading during insolvency proceeding; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated value of asset at the beginning of the insolvency; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
1 2 3
log(Remuneration)= + dum_preact+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industrylog(direct costs)= + dum_preact+ dum_trade+ dum_outcome
α β β ββ β βα β β β
× × ×
× × ×× × ×
4 5 6 + log (duration) + log (total assets)+ industryβ β β× × ×
Remuneration Direct Costs
Constant 2.79 2.58 (1.87) (1.99)
-0.15 -0.25 Dum_preact (-0.66) (-1.25)
Dum_trade 1.01 0.81 (5.05*) (4.60*) Dum_outcome 0.14 0.13 (0.79) (0.85) Log(duration) 0.57 0.68 (2.55*) (3.53*) Log(assets) 0.32 0.34 (4.59*) (5.57*) Industry -0.02 -0.04 (-0.58) (-1.00) observations 133 133 Adjusted R2 40.24% 45.54%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
58
Tables 12-1 and 12-2 report findings in relation to realisations and costs,
respectively, for both post-EA and pre-EA receivership cases. In neither case is the
coefficient for the ‘procedure’ dummy statistically significant. This indicates that pre-
EA and post-EA receiverships are not significantly different in terms of recoveries
and costs. The results of both these cross-checks imply that the differences in
recoveries and costs observed between the receivership and administration cases are
the result of specific differences in the legal procedures, as opposed to general
changes in the regulatory environment over time.
5.4.2 Selection bias in sample
As so many appointments are made under ‘grandfathered’ floating charges,
participants in many post-15 September 2003 cases still have the choice to use
receivership or administration. It may be that this results in a self-selection bias
affecting the administration cases: that is, that cases for which the new administration
procedure is used are typically different from those which would have been
receiverships under the old law.
However, we are doubtful as to whether this can be the case. First, the
dramatic increase in the use of administration since the Enterprise Act came into force
implies that many of the administration cases would have been receivership cases
under the old law. Secondly, the results in Tables 11-1 and 11-2 imply that the
differences between (new) administration and receivership hold even when a
comparison is made between post-EA receiverships and administration.
5.4.3 ‘Liquidation substitution’
It is conceivable that the trend towards ‘liquidation substitution’ described by
practitioners may also be a source of bias. If it is true that new-style administration is
being used in cases that under the old law would have been liquidations, then it is
conceivable that this may also bias both costs and recoveries. For example,
liquidations may tend to be completed more quickly than trading cases; the inclusion
of a greater proportion of such cases in the administration sub-sample than the
59
receivership sub-sample may bias the costs estimates downwards for administration.
They may also be expected to realise less on average than trading cases, and so bias
recoveries downwards. However, we control for time taken in our multivariate
analysis, which should take any bias of the former variety into account. Moreover, our
‘firm size’ measure is derived by reference to the expected market value of the assets
at the commencement of proceedings, and so should also take into account any bias
introduced in relation to recoveries.
Nevertheless, to guard against any other possible biases, we analyse separately
a sub-sample of the administration cases decided before 4 March 2004, the date when
the House of Lords’ decision in Re Leyland DAF, Buchler v Talbot67 was announced.
Before this date, liquidation expenses were understood as being payable out of
floating charge assets, and so the incentive it gave for practitioners to use
administration was not present.68 Tables 13-1 and 13-2 report the results of our
multivariate analysis of determinants of realisations and costs, respectively, with the
sub-sample of administrations restricted to those which commenced before 4 March
2004. The coefficient for the ‘procedure’ dummy variable is still significant and
positive. This indicates that the pre-Buchler v Talbot administrations both generated
greater recoveries and greater costs than receivership under the old law. Further, it
implies that the results noted in Tables 7 and 8 for the entire sample are not artifacts
of a tendency towards liquidation substitution in the administration sample.
67 [2004] 2 AC 298.
68 The important date for these purposes is when the procedure commenced. This is because the effect postulated—namely an incentive to use administration rather than liquidation—would manifest itself in the choice of insolvency procedure.
60
Table 13-1 Determinants of realisations (sensitivity test for impact of ‘liquidation substitution’) Data are from receiverships between 2001 and 14 September 2003 and administration proceedings between 15 September 2003 and March 2004. Realisations are obtained from ｀receiver＇s abstract of receipts and payments＇ (under receivership) and ｀administrator＇s progress report＇ (under administration). Three measures of realisations: A1=total asset realisation, A2=(total asset realisation + gross sales) and A3=(total asset realisation + net sales). Dum_proceed equals one if it is the administration case; dum_trade equals one if the firm continue to trading during insolvency proceeding; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated value of asset at the beginning of the insolvency; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
log(Realisations)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industry
α β β ββ β β
× × ×× × ×
A1 A2 A3
Constant -0.91 0.08 -0.08 (-0.65) (0.06) (-0.06)
0.61 0.63 0.60Dum_proceed (3.68*) (3.91*) (3.70*)
Dum_trade 0.55 0.99 0.64 (3.30*) (6.24*) (3.95*) Dum_outcome 0.12 0.07 0.03 (0.85) (0.50) (0.24) Log(duration) 0.58 0.40 0.43 (3.05*) (2.20*) (2.29*) Log(assets) 0.72 0.73 0.74 (13.29*) (13.95*) (13.93*) Industry -0.013 -0.009 -0.02 (-0.35) (-0.25) (-0.47) observations 172 172 172Adjusted R2 61.35% 67.12% 63.47%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
61
Table 13-2 Determinants of remuneration and total costs (sensitivity test for impact of ‘liquidation substitution’) Data are from receiverships between 2001 and 14 September 2003 and administration proceedings between 15 September 2003 and March 2004. Remuneration cost and total direct costs are obtained from ｀receiver＇s abstract of receipts and payments＇ (under receivership) and ｀administrator＇s progress report＇ (under administration). Total direct costs of the procedure＇, which comprises remuneration costs, legal fees, estate agent fees, document fees, etc. Dum_proceed equals one if it is the administration case; dum_trade equals one if the firm continue to trading during insolvency proceeding; dum_outcome equals one if the outcome is a going concern sale; duration is the length of the proceeding; total assets is the estimated value of asset at the beginning of the insolvency; industry indicates the eight categories of industry based on the 1 digit SIC code level.
1 2 3
4 5 6
1 2 3
log(Remuneration)= + dum_proceed+ dum_trade+ dum_outcome + log (duration) + log (total assets)+ industrylog(direct costs)= + dum_proceed+ dum_trade+ dum_outcom
α β β ββ β βα β β β
× × ×
× × ×× × ×
4 5 6
e + log (duration) + log (total assets)+ industryβ β β× × ×
Remuneration Direct Costs
Constant 1.14 1.74 (0.82) (1.43)
0.59 0.59 Dum_proceed (3.39*) (4.07*)
Dum_trade 0.81 0.61 (5.07*) (4.40*) Dum_outcome 0.05 -0.006 (0.35) (-0.05) Log(duration) 0.60 0.57 (3.10*) (3.35*) Log(assets) 0.43 0.46 (8.36*) (10.23*) Industry -0.04 -0.05 (-1.13) (-1.77) observations 172 172 Adjusted R2 49.33% 55.10%
The value in parentheses indicates the t-statistics and * denotes significance at 5%
62
5.5 Limitations and future research There is necessarily a considerable amount of uncertainty involved in the application
of a new insolvency procedure. Empirical results from the early years of the Chapter
11 procedure in the US found that the (then) new law had given debtors a great deal
of power, and creditors correspondingly less (LoPucki 1983). However, the law’s
effect has tended to become diluted with time as participants respond by ‘contracting
around’ the law (Baird and Rasmussen, 2002; Skeel, 2004). A similar process may
well occur in the UK. It is therefore too soon to say whether the changes documented
in our results will persist, or whether they may simply be disequilibrium effects
resulting from transition. Further research conducted after the Enterprise Act regime
has had time to ‘bed down’ would shed light on this issue.
However, a study of the immediate impact of a change in the law is
nevertheless valuable because it offers a more direct comparison of the old and new
regimes than a study with an intervening gap of several years. The wider the time
difference between the two samples, the greater the possibility a temporal bias may be
introduced, if unobserved time-variant effects impact upon the costs and recoveries in
insolvency proceedings.
A more specific limitation of our results relates to the way in which
insolvency procedures interact in the UK. Under the old regime, a receivership was
almost always followed by a liquidation. Under the new regime, a significant
proportion of administrations are not so followed (Katz and Mumford, 2006). It is
therefore possible that for the cases reported in our study (i) recoveries for
receivership cases may be relatively under-reported; and (ii) costs for administration
cases may be relatively over-reported, as compared with the picture that would
emerge by taking into account total costs and recoveries from all procedures
undertaken in relation to a specific company. A future extension of our dataset might
therefore examine recoveries and costs in ‘follow on’ liquidation proceedings taking
place after the receiverships and administrations for our sample companies were
completed. At the time of writing, however, many such liquidations had not yet been
completed.
63
6. Conclusions and implications This paper reports on the findings of an empirical enquiry into the impact of the
Enterprise Act on corporate rescue proceedings. A mixture of qualitative and
quantitative methodologies was used. Thirteen open-ended interviews with
professionals gave insights into their perceptions of the impact of the new legislation,
and the mechanisms by which change was occurring. A dataset of 348 cases of
administration and receivership permitted multiple regression analysis to determine
the effect of the difference in procedure on costs and recoveries, whilst controlling for
size and industry sector of the firms in insolvency, and the duration and outcome of
the proceedings.
We find that cases conducted under the new administration procedure are
much quicker than receiverships, taking on average a little over half the time. This is
consistent with predictions, given the statutory time limit for administration
proceedings. To the extent that the indirect costs of insolvency proceedings are a
function of their length, this implies that the new administration procedure has lower
indirect costs than receivership. However, such costs are extremely difficult to
estimate.
Controlling for a range of other explanatory variables, we find that
administration cases are associated with higher gross recoveries than were
receiverships. When the sample is decomposed into cases where senior claimants
(principally, debenture-holders) are over- and under-secured respectively, we find that
the difference in recoveries between the old and new procedures appears to be driven
by changes where senior claimants are over-secured. This is consistent with the
intuition that greater accountability to unsecured creditors encourages administrators
to act more effectively to generate recoveries in cases where, as fiduciaries solely for
the senior claimant, they would have lacked sufficient incentives under receivership.
However, we also find that administration cases are associated with higher
direct costs than receiverships, which tend to consume any additional realisations,
with the result that net recoveries to creditors are no better. Moreover, administrations
do not result in any significantly greater incidence of continued trading or going-
64
concern sales than did receiverships, indicating that the new procedure is not
preserving any more employment.
When the sample is decomposed into over- and under-secured groups, the
procedure used appears to make no difference to costs in situations where the senior
claimant is under-secured. This is consistent with theoretical claims that in such
situations the secured creditor has appropriate incentives to monitor costs. However,
in cases where the senior claimant is over-secured, their incentives to monitor costs
are weaker. Nevertheless, the finding that costs have increased in over-secured
administrations, coupled with our interview data, tends to suggest that unsecured
creditors, who are dispersed and each have a very small stake in the business, have
even weaker incentives to monitor. It was argued in the theoretical literature that in
such situations, receivership costs would be “unnecessarily” inflated. This
characterisation presupposed that an alternative mechanism could be devised to
ameliorate the perceived problem. The Enterprise Act administration procedure does
not appear to be such a mechanism.
Our principal quantitative findings, regarding realisations and costs, are robust
to a number of cross-checks. In particular, using a sample of post-Enterprise Act
receiverships, we found that (i) costs and realisations for receiverships had not
changed since the introduction of the Act; and (ii) the increase in costs and
realisations in administrations relative to receiverships was true for a comparison of
administrations with post-Enterprise Act receiverships as well. These findings imply
that our main results are not explicable by exogenous changes in regulation, or by
selection effects on the sample of firms using the different procedures. Moreover, we
found that the principal results (for costs and realisations) were replicated in a test
using only a sub-sample of administration cases commencing before March 2004,
implying that the results are not skewed by a change in the law regarding liquidation
expenses.
In addition to helping to explain our principal quantitative results, our
qualitative data reinforce findings in complementary studies (Frisby, 2006; Katz and
Mumford, 2006), namely that (i) banks are in many cases now willing to permit a
65
debtor company to initiate administration proceedings; (ii) whilst administration has
largely replaced receivership, in some cases, administration may be being used as a
substitute for liquidation; (iii) the reduction in control enjoyed by debenture-holders
has tended to lead to greater fragmentation in a typical corporate borrower’s debt
structure.
We consider that our results have implications for the debate about the
desirability of secured creditor control. The change in the governance of corporate
rescue in the UK, in essence, involves a crossing of a central fault line of corporate
governance: a shift in control from a concentrated investor to many dispersed
investors (see, e.g., Shleifer and Vishny, 1997). With concentrated investor control,
the main governance problem is how to prevent the concentrated investor from
serving their own interests to the detriment of other investors. With control rights in
the hands of dispersed investors, the problem is rather how to prevent those managing
the firm from extracting rents. No clear consensus has emerged in the corporate
governance literature as to which of these is preferable as regards share ownership for
solvent companies. We interpret our results as an analogous finding for creditor
governance in insolvent companies: concentrated creditor governance in insolvency,
in the form of strong control rights concentrated in the hands of a single secured
lender, does on average at least as good a job at preserving jobs and generating
recoveries for creditors as does the new administration procedure which allocates
greater control to dispersed unsecured creditors.
66
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Appendix A
Interview Aide Memoire (used to structure interviews)
The purpose of our work is to find out more about how the corporate insolvency provisions of the Enterprise Act 2002 are impacting upon practice. We are particularly interested in the following questions: The way in which the new administration regime, as compared with administrative receivership, is affecting: • IPs’ decisions whether or not to try to keep distressed businesses open, so as to
attempt a reorganisation or a going concern sale; and • Costs in insolvency proceedings. And more generally, how are the practices of banks, insolvency practitioners and legal advisers changing in this area? Confidentiality We will not attribute any statements to you, or write about any cases in ways that would identify individuals or organisations, without your express consent.
Introduction Please give a brief account of your practice and the nature of your work in relation to troubled companies. What have been the major impacts, if any, of the Enterprise Act 2002 on your practice? Have there been any other significant developments in your practice in the past few years? Realisations 1. Has the new administration regime affected the process by which you make
decisions in relation to distressed companies? If so, how?
2. Would you be more likely to try to effect a going concern sale under the new administration regime than under administrative receivership? Why (not)? Can you give an example?
3. Would you be more likely, in a situation where a company’s existing bank has
indicated that it is no longer willing to continue funding, to look for alternative funding under administration than under administrative receivership?
70
4. Would you be likely to attempt a reorganisation (i.e. CVA or Scheme of Arrangement) in conjunction with the new administration procedure? Under what circumstances?
5. How do you interpret para 3 of the new Sch B1 to the IA 1986? Do you consider it
creates a potential risk of liability that did not exist before (or is it so unlikely that an action would be brought that there is no real risk)?
6. To what extent does the threat of potential litigation affect the way in which you
go about (a) making and (b) justifying decisions in administration?
7. Under what circumstances, if any, would you feel justified in selling assets before a creditors’ meeting is called? How frequently does this happen in your experience?
8. Under what circumstances, if any, would you feel justified in not calling a
creditors’ meeting, on the basis that the unsecured creditors would be unlikely to receive anything in a distribution (under para 52)? How frequently does this occur in your experience?
9. How have you interpreted the requirement, under para 49 of Sch B1 of the IA
1986, to give reasons to the creditors’ meeting for your proposed course of action? Do you use a pro forma document?
10. Which exits do you most frequently employ for administrations? Do you ever (and
if so, how often) use administration to effect what is in reality a liquidation? If so, why?
11. Do you conduct ‘prepackaged’ administrations? When are they most useful?
12. What role is played by the Crown in negotiations in administration in your
experience?
13. How have the recent changes in relation to pensions impacted upon your practice?
14. How does TUPE impact upon your decision-making? Costs
15. Has the new administration procedure brought extra costs as compared with administrative receivership? How?
16. In particular, how costly are the following: (i) calling a creditors’ meeting; (ii)
preparing a statement of reasons; (iii) taking any additional steps to mitigate potential litigation risk under the new regime?
17. Para 70 permits you to use floating charge assets to fund an administration. How
much freedom, in your experience, does this permit?
71
18. Has the HL decision in Buchler v Talbot meant that you are now more likely to try an administration than a liquidation because the floating charge will fund the former but not the latter?
19. Are you more likely to rely on legal advice under the new regime? To what extent
have the costs of such advice increased? Can you give examples?
Final questions Can you suggest examples of cases that illustrate points we have discussed (raise at appropriate points in discussion)? Follow up on any issues raised by interviewee. Thank you very much for your assistance.
72
ASD
Session D – Adventures in Cross-Border Insolvency
(i) The UNCITRAL Model Law andother influences
Dr. Paul Omar, University of Sussex“1849 and All That: comparative reflections on the genesis of section 426 and the provision of international judicial assistance”
(ii) The quest for global principles of cooperation in international insolvency cases
Professor Bob Wessels, Vrije University Amsterdam, St. John’s University, School of Law New York
“The quest for global principles of cooperation in international insolvency cases: A Contribution from Europe”
Professor Ian Fletcher, University College London “Challenge and Opportunity: the ALI Global Principles Project”
Professor Ted Janger, Brooklyn Law School, New York “Thoughts about the harmonization of choice of law principles
Photograph courtesy of South African Tourism
ASD
The Common Law Co-Operation Model: A
History
Paul OMAR
University of Sussex
The Co-Operation Model
• History
– Bentham and bankruptcy consolidation
– Jabez Henry and co-operation ideals
– 1849 foreign bankruptcy as
evidence/execution of warrants overseas:
British Isles and India
– 1861/1869 auxiliary doctrine: British Isles
and elsewhere in Empire
The Co-Operation Model
• History
– 1883-1914 bankruptcy model stabilised
– Application by default: Callender (1869)
– Export phase: Bankruptcy Act model
adopted elsewhere, together with s118 BA
1883/s122 BA 1914
– Developments intimately connected with
later history of Empire / Commonwealth
The Co-Operation Model
• Types of Developments:
– Open model of co-operation used (full
comity principle)
– Restricted model used (subject to
conditions or declarations)
– Model abandoned/never extended
– Bankruptcy model extended to corporate
insolvency
The Co-Operation Model
• Open Model/Full Comity:
– BA 1883/1914 ancestral model: Fiji,
Gibraltar
– Predicated on requesting aid
– Who is British?
– What is bankruptcy?
– What does ‘shall’ mean?
– Conditions for assistance (e.g. revenue
debts)
The Co-Operation Model
• Restricted Model:
– Historical reasons: closely associated
states: Mal/Sin, KUT and Zambia
– Subject to conditions:
– (i) provisions on reciprocity:
– (ii) regard for PIL rules
– (iii) compatibility with ‘ordre public’
– Subject to declarations: states must be
approved for inclusion within model
The Co-Operation Model
• Model Abandoned/Never Extended:
– Abandonment: Zimbabwe
– Non-Extension:
– (i) BA 1883/1914 not adopted
– (ii) BA model adopted without s118/s122
– (iii) Doubts about extra-territorial effect: Al-
Sabah v Grupo Torras SA (2005)
The Co-Operation Model
• Model Extended (Corp Ins):
– Multi-Text Model: Australia (BA 1966/CA
2001)
– Unifying approach: UK (IA 1986)
The Co-Operation Model
• Principles and Influences:
– Promotion of comity
– Retaining judicial discretion
– Interpreting ‘insolvency’ and ‘assistance’
widely
– Presumption of assistance (assistance
nisi/forum non conveniens)
– Model Law formula in Chapter IV
The Co-Operation Model
• Future Developments:
– Supersession by EIR/Model Law
– Multi-path approach: UK
– Continuation of model: is there life in the
old dog still?
1
INSOL INTERNATIONAL ACADEMICS
Cape Town 17-18 March 2007
The Quest for Global Principles of
Cooperation in International Insolvency Cases:
A Contribution from Europe
Prof. Dr. Bob Wessels
Professor of Business and Insolvency Law Vrije University, Amsterdam
Distinguished Adjunct Professor of International and Comparative Insolvency Law, St.
John’s University School of Law, New York City
2
The Quest for Global Principles of Cooperation in International Insolvency Cases:
A Contribution from Europe
1. Since January 1, 2007, with the entry of Bulgaria and Romania, the European Union
contains 27 Member States. The EU Insolvency Regulation which came in force in May
2002 is applicable to 26 of them (Denmark opted out). Roughly some 200 published court
cases demonstrate applications of the Regulation. Cross-border insolvency proceedings in
these countries are managed and realized within a model of main insolvency proceedings
(opened in a Member State where the debtor has its centre of main interest, or COMI) and
secondary insolvency proceedings (in other Member States, where the debtor possesses an
establishment). This raises questions with regard to the coordination of these proceedings.
A close and trustful cooperation between liquidators in main and secondary insolvency
proceedings is indispensable in order to achieve an efficient and optimal administration of
the insolvent debtor’s assets.
2. The footing for cooperation is expressed in Recital (20) of the Insolvency Regulation
(“...the main condition here is that the various liquidators must cooperate closely, in
particular by exchanging a sufficient amount of information ...“, which has been worded in
Article 31 of the EC Insolvency Regulation. The text is as follows:
Article 31
Duty to cooperate and communicate information
1. Subject to the rules restricting the communication of information, the liquidator in the
main proceedings and the liquidators in the secondary proceedings shall be duty bound to
communicate information to each other. They shall immediately communicate any
information which may be relevant to the other proceedings, in particular the progress
made in lodging and verifying claims and all measures aimed at terminating the
proceedings.
2. Subject to the rules applicable to each of the proceedings, the liquidator in the main
proceedings and the liquidators in the secondary proceedings shall be duty bound to
cooperate with each other.
3. The liquidator in the secondary proceedings shall give the liquidator in the main
proceedings an early opportunity of submitting proposals on the liquidation or use of the
assets in the secondary proceedings.
3. The vagueness of Article 31 EC Insolvency Regulation in general results in ad hoc and
case by case communication and cooperation without a solid and practical framework
which might guarantee the realisation of the overriding objective of enabling liquidators
and courts to efficiently and effectively operate in cross-border insolvency proceedings in
the context of the EC Insolvency Regulation.
4. The Core Group of the Academic Wing of Insol Europe, in its second meeting in
October 2004 (Prague), discussed a proposal to address the principle issue of the
liquidators’ duties of communication and cooperation in cross-border insolvency instances.
The Core Group tossed the idea of the possibility/necessity of the establishment of a (non-
binding) set of standards for communication and cooperation in cross-border insolvency
cases, which are a subject to the application of the EC Insolvency Regulation. The Core
Group in general agreed that the proposal should be supported and it established a Task
Force with the mandate to draft a plan, which was approved early 2005. The Task Force is
co-chaired by professor Bob Wessels (Amsterdam, the Netherlands) and professor Miguel
Virgós (Madrid, Spain).
3
5. The following European Communication and Cooperation Guidelines For Cross-
border Insolvency European Communication and Cooperation Guidelines are based
on several papers of individual members of the Task Force providing an overview and
critical assessment of literature and court cases with regard to Article 31 of the EC
Insolvency Regulation, of literature and court cases concerning non-EU examples of cross-
border communication and cooperation in cross-border insolvency cases and of literature
and the EC Treaty related regulation and court cases concerning cross-border
communication and cooperation in general civil and commercial law matters, within the
framework of the EC Treaty. The members are listed in the attachment.
6. The Task Force has been guided by three primary reasons for focusing on the
development of ‘standards’ for cross-border communication and cooperation between
liquidators in the EU:
a. A set of Guidelines reflects (i) the central principle of cooperation and coordination
between insolvency proceedings pending in two or more Member States, where the text of
the Regulation is left open, and (ii) a realistic set of Guidelines should ensure as best
possible to make the Regulation work in practice.
b. A set of Guidelines fits in the current environment within which in the field of cross-
border insolvency efficient and effective solutions have been developed based on models
reflecting cooperation among courts and liquidators (e.g. Protocols; UNCITRAL Model
Law).
c. The insolvency profession in Europe has reached a stage in its development that demands
heightened attention to strong, international standards of professionalism. A consistent set
of Guidelines regarding the organisation, the contents and the quality of communication
and cooperation processes (i) aims to be beneficial to the goals of the insolvency
proceedings within which they will function, (ii) increases the strength and the reputation
of the profession, and (iii) may support courts in providing tailor-made orders or insolvency
(related) judgments in general.
7. The Task Force, assigned with the project, has organized its work according to a plan,
which would ensure that during its operation different stakeholders will be involved in the
outcome. In addition to several discussions of several drafts beteen the members of the
Task Force, the Task Force has been guided in its work by a Review Group, committed to
review drafts of the Guidelines and comment on their consistency and practical use. The
members are listed in the attachment.
8. A non-public draft of Guidelines was discussed at the INSOL International
Academics meeting in Scottsdale, May 20-21, 2006. Compared to text distributed there,
during further discussion and evaluating, the number of Guidelines now is 18 as compared
to Scottsdale, where the draft contained 22 Guidelines. Main reasons here are (i) a
rearrangement of certain sections, (ii) superfluous in the stage of a fist step framework (
Guideline 13 - Notices Among liquidators; Guideline 17 - Informal processes; Guideline 19
- Interim measures; Guideline 22 - Definitions, combined with (iii) (Guideline 16 -
Corporate Groups; Guideline 21 - Actions to be taken outside the territory of the Member
States where proceedings are pending).
9. A first public draft of the Guidelines was discussed extensively during the general
meeting at the Annual Conference of INSOL Europe in Bucharest (October 2006),
assembling over 200 insolvency practitioners. Additionally in a workshop during this
Conference specific Guidelines were discussed, and during the treatment of a hypothetical
case twenty questions were raised and answered by the audience by way of electronic
voting. For an overview of the results of the voting and the progress of the work
undertaken by Virgós and me, see my the weblog on my website
4
(www.bobwessels.nl), the sources under 2006-10-doc1, 2006-10-doc2 and 2006-12-
doc12.
10. In the light of the outcome of the discussions, the authors consider the Guidelines, in
their final form, to function as a first step in a framework to realize the objective of
enabling liquidators and courts to efficiently and effectively operate in cross-border
insolvency proceedings in the context of the EC Insolvency Regulation. Other steps have
been discussed too:
(i) The Guidelines presuppose that liquidators act with the appropriate knowledge of the EC
Insolvency Regulation and its applicability in practice, which would include the operation
of these Guidelines. INSOL Europe is in the process of organising distribution of these
Guidelines and a structured training on a European level.
(ii) We are confident that the Guidelines reflect present consensus within larger groups of
insolvency practitioners and specialised scholars. INSOL Europe is in the process of
establishing a permanent Communication/Cooperation Standards Committee, supervising
the roll out of the Guidelines, review them on an ongoing basis and police and monitor their
application in practice. It is the purpose that judges will participate in such a committee
(iii) The Guidelines strongly endorse the use of agreements concerning cooperation or
‘protocols’ as a means to codify coordination in decision making procedures. INSOL
Europe will install a ‘Protocol Committee’ to further develop certain forms or templates for
such protocols.
11. The authors are finalising the Guidelines, including expanding the Explanation.
Publication is foreseen in May/June 2007 in a Legal Technical series of INSOL Europe.
5
PUBLIC DRAFT
Version September 2006
European Communication and Cooperation Guidelines
For Cross-border Insolvency
Developed Under the Aegis of
Academic Wing of INSOL Europe
by
Professor Bob Wessels and Professor Miguel Virgós
Pages
Guidelines 6
Brief explanation 10
Task Force and Review Group 13
Checklist Protocol 14
To be discussed during the Annual Congress of INSOL Europe
Bucharest, 28 September – 1 October 2006
6
European Communication and Cooperation Guidelines For
Cross-border Insolvency (Public draft September 2006)
Guideline 1 Overriding objective
1.1. These Guidelines embody the overriding objective of enabling courts and liquidators to efficiently
and effectively operate in cross-border insolvency proceedings within the context of the EC
Insolvency Regulation.
1.2. All interested parties in cross-border insolvency proceedings are required to further the overriding
objective as set out above in Guideline 1.1.
Guideline 2 Aim
2.1. The aim of these Guidelines is to facilitate the coordination of the administration of insolvency
proceedings involving the same debtor, including through the use of a governance protocol.
2.2. In particular, these Guidelines aim to promote:
(i) The orderly, effective, efficient and timely administration of proceedings;
(ii) The identification, preservation and maximization of the value of the debtor’s assets (which
includes the debtor’s undertaking or business) on a world-wide basis;
(iii) The sharing of information in order to reduce the costs involved;
(iv) The avoidance or minimization of litigation, costs and inconvenience to creditors and other parties
affected by proceedings.
Guideline 3 Status
3.1. Nothing in these Guidelines is intended:
(i) To interfere with the independent exercise of jurisdiction by each of the national courts involved,
including their respective authority over a liquidator;
(ii) To interfere with national rules or ethical principles by which a liquidator is bound according to
applicable national law and professional rules;
(iii) To confer substantive rights or to interfere with any function or duty arising out of the EC
Insolvency Regulation or to impinge on applicable national law.
Guideline 4 Liquidator
4.1. A liquidator is any appointed person or body whose function is to administer or liquidate assets of
which the debtor has been divested or to supervise the administration of his affairs, either in
reorganisation or in liquidation proceedings.
4.2. A liquidator is required to act with the appropriate knowledge of the EC Insolvency Regulation
and its application in practice.
4.3. A liquidator is required to act objectively, fairly and expeditiously in dealing with all parties
concerned, including the courts.
Guideline 5 Direct Access
5. A liquidator should be granted direct access to any court necessary for the exercise of legal rights to
the same extent that a national liquidator is so permitted.
Guideline 6 Communications
6.1. Liquidators in related cases are required to communicate with each other directly and as soon as
they are appointed.
6.2. The main liquidator should always take the initiative to start or to continue said communications.
7
6.3. Substantive replies to queries from duty bound liquidators should be done with always as soon as
reasonably practical. The same rule applies to queries from creditors or the debtor.
Guideline 7 Information
7.1. Liquidators are required to provide prompt and full disclosure, to all other liquidators involved, of
all relevant information about the existence and status of the insolvency proceedings in which they
have been appointed.
7.2. The liquidators are required to periodically provide information which may be relevant to the
other proceedings, detailing the conduct of the proceedings, in particular the progress made in lodging
and verifying claims, the ranking of the admitted claims, the calling of creditors meetings, planned
actions regarding realization of relevant assets, and all measures aimed at terminating proceedings,
including a composition or rescue plan. The information may include details of the debtor’s assets and
past transactions, specially those taking place during an applicable suspect period, and such other
particulars as the other liquidators may reasonable require.
7.3. Liquidators in possession of such information are required, insofar as they are subject to any
reporting duties under national law, to inform the courts of any material development in any such
other proceedings.
7.4. A foreign liquidator should be permitted to use all legal methods to obtain information that would
be available to a creditor or to a liquidator in any national insolvency proceedings.
7.5. To the fullest extent permissible under any applicable law, any relevant information not available
publicly should be shared with other liquidators subject to appropriate confidentiality arrangements
insofar as this is commercially and practically sensible.
Guideline 8 Information by a liquidator in secondary proceedings
8.1. The liquidator in any secondary proceedings should provide without any delay all relevant
information to the liquidator in main proceedings so as to facilitate the submission of proposals on the
liquidation or use of assets in secondary proceedings.
8.2. The liquidator in any secondary proceedings is encouraged to provide advice to the liquidator in
main proceedings concerning any views on how to best to proceed.
8.3. The liquidator in main proceedings is encouraged to involve liquidators in any secondary
proceedings in devising those proposals referred to above in Guideline 8.1.
8.4. Where a reorganization plan can be adopted in secondary proceedings that would give better value
to creditors in main proceedings or reduce the overall debt, the liquidator in main proceedings and the
courts shall take advantage of the opportunity to promote the adoption of this plan.
Guideline 9 Authentication
9.1. Save as otherwise provided under any law applicable, where existing authentication of documents
is required, methods should be established so as to permit rapid authentication and secure transmission
of faxes and other electronic communications relating to cross-border insolvencies on any basis that
permits their acceptance as official and genuine communications by liquidators and courts in other
jurisdictions.
9.2. To the extent permissible under national law, courts are encouraged to provide or publish
judgements, orders or rulings also in languages other than those regularly used in proceedings or
encourage as much as possible to allow translations to be made.
Guideline 10 Language
10.1. The liquidators shall determine the language in which communications take place on the basis of
convenience and the avoidance of costs.
8
10.2. Courts are encouraged, to the maximum extent permissible under national law, to accept any
documents related to those communications in this language, without the need for a translation into the
language of proceedings before them.
Guideline 11 Costs
11.1. Obligations incurred by the liquidator during proceedings and the liquidator’s fees are funded
from the assets within those proceedings in which the liquidator is appointed.
11.2. Obligations and fees incurred by the liquidator in the main proceedings prior to the opening of
any secondary proceedings but concerning assets to be included in the secondary estate will be funded
by this estate.
Guideline 12 Cooperation
12.1. Liquidators are required to cooperate in all aspects of the case.
12.2. Cooperation takes place, to the maximum extent permissible under national law, with other
liquidators with a view to minimizing conflicts between parallel proceedings and maximizing
prospects for the rehabilitation and reorganization of the debtor’s business or the value of the debtor’s
assets subject to realization, as may be the case.
12.3. Cooperation is intended to address all issues that are important to the actual case, including but
not limited to:
(i) Publication of the proceedings and notice to creditors;
(ii) Organising creditors meetings;
(iii) Continuing operation and management of the business;
(iv) Disposal of relevant assets;
(v) Raising of new finance;
(vi) Preparing and implementing composition or reorganisation plans;
(vii) Realization of the estate in liquidation and distribution to creditors.
12.4. Cooperation may be best attained by way of an agreement or “protocol” that establishes
decision-making procedures, although decisions may continue to be made informally as long as they
are compatible with the substance of any such agreement or “protocol”.
12.5. A protocol for cooperation between proceedings should include, at the very least, provisions for
the coordination of court approval for decisions and actions whenever required and for
communications with creditors as required under any applicable law. It should also include a statement
of the various cross-border issues to be addressed (e.g. reorganisation, treatment of claims, realisation
of assets) and any questions in respect of which the liquidators are required to seek agreement in
advance from other liquidators.
12.6. In cases where any matter is not specifically provided for within the protocol, the parties shall act
in a manner designed to promote the overriding objective set out above in Guideline 1.1.
Guideline 13 Cross-Border Sales
13.1. Where during any period of cooperation between liquidators in main and any secondary
proceedings assets are to be sold or otherwise disposed of, every liquidator should seek to sell these
assets in cooperation with the other liquidators so as to produce the maximum value for the assets of
the debtor as a whole.
13.2. Any national court, where required to act, should approve those sales or disposals that will
produce such value.
Guideline 14 Assistance in Reorganization
14.1. Where main proceedings are aimed at ensuring the rehabilitation and reorganization of the
debtor’s business, all other liquidators shall cooperate in any manner consistent with the objective of
9
reorganization or the sale of the business as a going concern wherever possible, without however
prejudicing interests protected by local insolvency proceedings.
14.2. Liquidators should cooperate so as to obtain any necessary post-commencement financing,
including through the granting of priority or secured status to reorganization lenders as may be
appropriate and insofar as permitted under any applicable law.
Guideline 15 Coordination between secondary proceedings
15. Liquidators in all secondary proceedings are required to comply with these Guidelines.
Guideline 16 Courts
16.1. Courts are advised to seek to give effect to the overriding objective as set out above in Guideline
1.1. wherever they:
(i) Exercise any power given to them by the law applicable or by the EC Insolvency Regulation;
(ii) Interpret any of these Guidelines in light of the requirements set out above in Guideline 2.
16.2. Courts are advised to operate in a cooperative manner to resolve any dispute relating to the intent
or application of the terms of any cooperation agreement or protocol.
16.3. Courts are advised to consider whether a joint appointment of the liquidator in main proceedings
or a nominated agent thereof to function as a liquidator in secondary proceedings would form an
appropriate way of ensuring cooperation between liquidators in different proceedings under the court’s
supervision.
16.4. To the maximum extent permissible under national law, courts supervising insolvency
proceedings or requests for assistance or any matters relating to communications from other courts
should cooperate with each other directly, through liquidators or through any person or body
appointed to act at the direction of the court.
16.5. Courts should encourage liquidators to report periodically, as part of national reporting duties, on
the way these Guidelines and/or agreed Protocols are applied, including any practical problems which
have been encountered.
Guideline 17 Notices
17.1. Notice of any court hearing or the making of any order by a court should be given to each of the
liquidators at the earliest possible point in time, where the hearing or order is relevant to that
liquidator.
17.2. Where a liquidator cannot be present in person before the court, the court is advised to invite the
liquidator to communicate any observations to the court prior to any order being made.
17.3. The liquidators should provide for the keeping of an accessible record of such notices, which
shall be regularly updated, to note the dates and relevant descriptions of any legal documents
communicated, including those filed or transferred electronically.
Guideline 18 Scope
18. Where the aim of these Guidelines is to facilitate the coordination of the administration of
insolvency proceedings involving the same debtor, including through the use of a governance
protocol, liquidators, administrators and courts outside the scope of the EC Insolvency Regulation are
encouraged, wherever possible, to use these Guidelines so as to facilitate or increase the prospects of
cooperation in other proceedings taking place.
-0-0-0-
10
Brief explanation to European Communication and Cooperation Guidelines For Cross-
border Insolvency (Public draft September 2006)
Guideline 1 Overriding objective
Member States have a strong mutuality of interests in the management and execution of effective
operations of cross-border insolvency proceedings. It is therefore important that Member States,
courts, any other competent legal authority and (associations of) insolvency practitioners develop
arrangements for the efficient and effective cooperation in enforcing these proceedings.
Guideline 2 Aim
In the system of the EC Insolvency Regulation there is only one debtor who is submitted to main
insolvency proceeding and one or more secondary proceedings in other Member States towards that
same debtor. The Insolvency Regulation requires these proceedings to be coordinated. Coordination
means that the duties of communication and cooperation as set out in Article 31 of the Insolvency
Regulation are fulfilled within the context of a common purpose regarding the debtor, his assets and
the treatment of his creditors.
Guideline 3 Status
Guideline 3 seeks to ensure that the Guidelines do not cause friction with existing applicable laws or
professional rules or with duties flowing from the Regulation, nor that the Guidelines create any
rights. In their nature these Guidelines are non-binding for anyone concerned (court, liquidator,
creditor, debtor).
Guideline 4 Liquidator
The text aims to secure that in cross-border insolvency cases liquidators act with appropriate know
how and experience and in an honest way, with appropriate understanding of that any parallel
proceedings are interwoven. Courts are invited to play an active role in ensuring the overriding
objective of the Guidelines.
Guideline 5 Direct Access
The text underlines the importance of direct access to the courts of each Member State for intervention
or for substitution, as appropriate, in lawsuits involving the debtor. It also allows for bringing lawsuits
to obtain or defend assets or for other purposes. Granting access does not alter the need to engage local
counsel in each State.
Guideline 6 Communications
Cross-border insolvency proceedings where the insolvent debtor’s estate is managed and realized in
two or more separate proceedings raises questions with regard to the coordination of these
proceedings. A close and trustful cooperation between liquidators in main and secondary insolvency
proceedings is indispensable in order to achieve an efficient and optimal administration of the
insolvent debtor’s assets.
Guideline 7 Information
Communications relate to information. Exchange of information and cooperation cannot take place
without knowledge of the other proceedings. In main or secondary proceeding local rules cannot be
correctly applied in ignorance of activities elsewhere. In its role as a representative of creditors,
liquidators should be able to use all legal processes to obtain information to the same extent as a
creditor seeking to enforce a claim or a judgment. This information should include, as far as possible,
non-public information.
11
Guideline 8 Information by a liquidator in secondary proceedings
Guideline 8 reflects the dominant role of the main proceedings, within the context of a fair relationship
between insolvency professionals. The liquidator in the secondary proceedings must give the
liquidator in the main proceedings the opportunity to submit proposals on the realization or use of the
assets in the secondary proceedings (Article 31(3)). In these proposals the main liquidator should
involve liquidators in any secondary proceeding. The duty to communicate information forms at the
same time the basis for the liquidator’s supplementary duty to ensure mutual cooperation as provided
in Article 31(2) and enables the main liquidator to intervene in any individual secondary insolvency
proceeding according to Articles 32 to 38.
The overriding objective of Guideline 1.1 and the liquidators’ general obligation to act fair and in
respect of each others know how and professional integrity in the meaning of Guideline 4 justify that
any secondary liquidator can give to the main liquidator his advice on how to proceed best, which will
be in accordance with applicable domestic law. All liquidators should be mindful for unnecessary
delay and of the fact that the main liquidator represents the dominant proceedings.
Guideline 9 Authentication
Efficient operation of cross-border proceeding is enhanced greatly by authentication procedures with
respect to judicial cooperation. National rules and practices may include such procedures; in individual
cases they may be agreed. Where certain judgments and orders follow a same structure court may
anticipate use of foreign language, to facilitate coordination and promote the speedy administration of
proceedings.
Guideline 10 Language
Although in appropriate cases of cross-border insolvency e.g. German or French will be the language
used in parallel proceedings and cross-border communication between liquidators, the general
experience is that English is the language of the global business community and in the cross-border
communications between advisors, lawyers and liquidators involved in a cross-border insolvency case.
Where a choice for a language is made native speakers of that language should be cautious of the fact
that the person(s) s/he is speaking to communicates in its second or third language. Acting fair
(Guideline 4.3) in general will mean the usage of simple, clear words, spoken in slow pronunciation
and avoiding dialect, sophisticated language, puns or references.
Where courts are involved, the ordinary language will be the language regularly used by the courts,
although the Guideline seeks a balance by avoiding unnecessary translations.
Guideline 11 Costs
Costs may relate to obligations incurred (including trading costs), to fees, to the costs of the court,
costs for service of documents, costs for an expert, costs for representation in a court or costs of
enforcement. The general principle is that costs are to be funded from the debtor’s assets and satisfied
as they fall due. Pre-secondary proceedings costs will be borne by the estate in the secondary
proceedings. Liquidators may agree another division based on the availability of assets in a certain
estate and the interests of creditors concerned.
Guideline 12 Cooperation
Article 31(2) of the Insolvency Regulation is the central provision concerning the coordination
between main and secondary insolvency proceedings. Main liquidators are obliged to actively
cooperate with secondary liquidators. Guideline 12 seeks to ensure that cooperation is related to all
aspects of certain insolvency proceedings, to the maximum extend possible and encourages globally
accepted practices of recording method and content of cooperation in writing.
See Checklist Protocol (attached).
12
Guideline 13 Cross-Border Sales
A central goal of cooperation is maximizing value (Guideline 2.2(ii)). In reorganisation cases that
objective may be sought primarily in a financial or operational restructuring or in a sale of the
business. Sale of (large parts of) the assets is the most common method used in liquidation. An
coordinated and aligned approach across national borders is likely to produce greater value. Guideline
13 addresses the latter goal. Approval by anyone concerned, but at least by any national court, will be
encouraged when proposals are based on advice of or marketed by a professional third party,
employed jointly by all liquidators concerned. This third party may also provide an expert opinion as
to allocation of the sales price among the assets sold, which allocation could be the basis for
distributions to creditors, unless a protocol contains another principle.
Guideline 14 Assistance to Reorganization
In case the chosen method of maximizing value is reorganisation all liquidators should cooperate.
Quite often the prospect of reorganisation is based on the availability of post-commencement
financing. Liquidators should cooperate to the maximum extend possible to put in place a financing
proposal, which may count on the approval of a large group of creditors.
Guideline 15 Coordination between secondary proceedings
Estate assets and business values are more likely to be preserved and enhanced if administration is
coordinated from a single forum. If there are multiple insolvency proceedings and there is no main
forum and if assets are located in several plenary fora or outside of any plenary forum, the same
objectives may be met if the relevant fora agree upon a governance protocol. The protocol should take
into account Guideline 12.5 and consider a balanced way of cooperation, as all secondary proceedings
are on the same footing.
Guideline 16 Courts
Article 31 only provides a duty of the liquidator to communicate information and to cooperate as far as
the relationship between main and secondary liquidators is concerned. Mutual communication and
cooperation between courts is however not excluded and flows generally from the rational of the duty
of mutual assistance and cooperation between Member States as provided in Article 10 of the EC
Treaty. Courts are encouraged to manage insolvency proceedings efficiently. Furthermore, as may
flow from the principle of mutual trust, courts are advised to act in aid of, and be auxiliary to each
other and to all courts, as well as judges and officers of those courts, that have jurisdiction under
corresponding laws in all administration matters. Cooperation between two courts takes place with a
view to establishing methods of communication, with or without counsel, the co-appointment of a
liquidator, coordinating orders and rulings and conducting joint hearings, e.g. by conference call.
Guidelines 16.5 underlines the importance of accountability of insolvency professionals.
Guideline 17 Notice between liquidators
When a court is involved by a specific order or approval it is presumed to be important enough to
require notice to the other liquidators. When allowed hearings could be assisted by technological aids
(conference call; video conference) or by making certain court orders subject to action by the other
interested court. When the exigencies of the circumstances render it impractical to provide prior
written notice as required herein, the necessary notice shall be provided as soon as possible thereafter
and providing a liquidator to give his views.
Guideline 18 Scope
In is encouraged that the Guidelines are applied by analogy in instances which are outside the scope of
the EC Insolvency Regulation.
13
European Communication and Cooperation Guidelines For
Cross-border Insolvency
Task Force
- Paul Omar, Associate Professor University of Sussex, United Kingdom;
- Klaus Pannen, insolvency practitioner, partner White & Case, Hamburg, Germany;
- Susanne Riedemann, associate White & Case, Hamburg, Germany;
- Anker Sörensen, Medus Devaux Sorensen, Paris, France;
- Professor Miguel Virgós, Universidad Autónoma de Madrid, Spain
- Professor Bob Wessels, Vrije University, Amsterdam, the Netherlands
- Willem van Nielen, attorney-at-law, Udink & De Jong, The Hague, the Netherlands.
Review Group
- Jan van Apeldoorn, Attorney-at-law, Amsterdam, The Netherlands; former member of several
Technical Committees of INSOL Europe;
- Neil Cooper, Partner Corporate Advisory & Restructuring Group, Kroll, London, United Kingdom;
Past President of Insol Europe and INSOL International;
- Isabelle Didier, Insolvency Practitioner, Paris, France; Former President Insol Europe; Chair “Best
Practices” Committee of Insol Europe;
- Professor Eric Dirix, University of Leuven (Belgium) and Justice Supreme Court Belgium;
- Honourable James Farley, Senior Counsel to McCarthy Tetrault LLP, Toronto, formerly Justice in
the Ontario Superior Court of Justice, Toronto, Canada; Member of the Committee on Cross Border
Communications in Insolvency Cases, International Insolvency Institute (III);
- Richard Gitlin, Gitlin & Company, Hartford (CT), USA. Past president of the American Bankruptcy
Institute;
- R. Han C. Jongeneel, Justice District Court (Bankruptcy Chambers), Amsterdam, The Netherlands;
- Professor Sebastian Kortmann, University of Nijmegen, The Netherlands; Chair Core Group
Academic Wing INSOL Europe;
- Maggie Mills, Partner Corporate Finance & Advisory Services, Ernst & Young, London, United
Kingdom;
- Steven Taylor, partner AlixPartners, London, United Kingdom;
- Professor Heinz Vallender, Justice District Court Cologne, Germany; Professor University of
Cologne;
- Professor Jay Westbrook, Benno C. Smidt Chair of Business Law, University of Texas Law School,
Austin (Texas), USA. U.S. Reporter of American Law Institute’s Principles of Cooperation in
Transnational Insolvency Cases Among the Members of NAFTA.
14
Checklist Protocol
A Protocol is designed to apply within the framework of the EC Insolvency Regulation and all
liquidators should be acquainted with the terms referred to in the Regulation, the Guidelines and in a
Protocol. See Guideline 4.1. In practice, cooperation – and therefore a Protocol – will particularly refer
to certain basic requirements and to specific issues to be addressed in the cross-border insolvency case
at hand.
Basic requirements with regard to liquidators
1. Statement of the status of the liquidators
2. Statement that each of the liquidators is subject only to the jurisdiction of its own court
3. Statement of the right of each of the liquidators to be heard as a foreign representative in the other
insolvency proceedings
4. Statement of each of the liquidators that they will communicate and cooperate with each other as
best as possible under the application of the European Communication and Cooperation Guidelines
For Cross-border Insolvency
Basic requirements with regard to the debtor
1. Statement of identity of the debtor and its management
2. Statement of the involvement of the debtor prior to certain steps taken
Basic requirement with regard to the proceedings
1. Statement of type (main, secondary) and nature (domestic name) of the insolvency proceedings
2. Statement of specific topics, like mandatory involvement of certain third parties or bodies and to
certain mandatory forms to use
3. Statement of the use of language
4. Statement of division of costs
5. Statement relating to methods of exchanging and sharing information
Basis requirements with regard to courts
1. Statement confirming the sovereignty and independence of the courts involved
2. Statement on recognition by each court of the proceedings opened by the other, any other judgments
or preservation measures and of any stays granted
3. Statement of each of the courts that they will, while respecting the sovereignty and independence of
each other, communicate and cooperate with each as best as possible under the application of the
European Communication and Cooperation Guidelines For Cross-border Insolvency
Specific issues for cooperation
1. The goal of co-operation;
2. The performance of certain acts and timescales to realise this goal;
3. The coordination of issuing information to be communicated to creditors;
4. The coordination of lodging of claims
5. Information on claims lodged, the verification and disputes concerning claims
6. The ranking of creditors
7. The description and disposal of relevant assets;
8. The actions planned or underway in order to recover assets;
9. The location of assets when not covered by the location rule of Article 2(g), e.g. shares, IP rights or
inter-company accounts;
10. The actions to obtain payment from debtors
11. The initiation of actions to set aside detrimental acts;
15
12. The filing of actions against third parties in relation to the insolvent company;
13. The exercise of the an option (to continue; to terminate) in case of reciprocal agreements;
14. The exercise of any voting rights;
15. The termination of contracts;
16. The decisions relating to (post-commencement) borrowing or the provision of security;
17. The filing of additional insolvency petitions concerning establishments in other Member States;
18. The process of drawing up or the submission of a liquidation or reorganisation plan;
19. The submission of an insolvency plan (of reorganization or liquidation) or a composition;
20. The distribution of any dividends;
21. The application of the hotch-pot rule;
22. The applicable law on certain issues;
23. The closure of secondary proceedings and the change in applicable law
ASD
Plenary Discussion Session: The Future Activities of theAcademics’ Group
Photograph courtesy of South African Tourism
ASD
[DRAFT] EBRD INSOLVENCY OFFICE HOLDER PRINCIPLES
EBRD PRINCIPLES IN RESPECT OF THE QUALIFICATIONS, APPOINTMENT, CONDUCT, SUPERVISION, AND REGULATION OF
OFFICE HOLDERS IN INSOLVENCY CASES
January 2007
© European Bank for Reconstruction and Development, 2007
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holders. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature.
[DRAFT] EBRD INSOLVENCY OFFICE HOLDER PRINCIPLES
- 2 -
Contents
• Introduction 3
• Principle 1 Qualifications & Licensing Generally 3
• Principle 2 Appointment in an Insolvency Case 4
• Principle 3 Review of Office Holder Appointment 5
• Principle 4 Removal, Resignation & Death of Officer Holder 5
• Principle 5 Replacement of Office Holder 5
• Principle 6 Standards of Professional And Commercial Conduct 6
• Principle 7 Reporting and Supervision 7
• Principle 8 Regulatory and Disciplinary Functions 8
• Principle 9 Remuneration 9
• Principle 10 Release of Office Holder 9
• Principle 11 Insurance and Bonding 10
• Principle 12 Code of Ethics 10
[DRAFT] EBRD INSOLVENCY OFFICE HOLDER PRINCIPLES
- 3 -
[DRAFT] EBRD PRINCIPLES IN RESPECT OF THE QUALIFICATIONS,
APPOINTMENT, CONDUCT, SUPERVISION, AND REGULATION OF OFFICE HOLDERS IN INSOLVENCY CASES
INTRODUCTION These principles are relevant to an insolvency law regime that provides for the appointment of an office holder to administer the assets and affairs of a debtor upon the opening or commencement of an insolvency case in respect of the debtor. The term ‘office holder’ means a trustee, administrator, receiver, liquidator, insolvency representative, or similar functionary. The principles have been developed from a consideration of the manner in which office holders are provided for in the legislation of a number of countries and from the knowledge and experience of the EBRD Operation Leader Jay Allen and the EBRD consultants engaged to formulate the principles, Messrs Ronald W Harmer and Neil H Cooper. PRINCIPLE 1 – QUALIFICATIONS & LICENSING GENERALLY The law should provide for: (a) the qualifications of an office holder
Qualifications should extend to appropriate educational standards, relevant experience skills and good character elements. Certain factors (for example, a criminal conviction for a serious offence such as fraud) should disqualify a person from being eligible to apply to become an office holder.
(b) an examination in insolvency law and practice and other relevant subjects
for office holder candidates An examination about insolvency law and practice and related subjects (such as accounting) is highly desirable. The function of developing an examination curriculum, conducting examinations and continuing education (see later) may be conducted by a government body or an autonomous professional body.
(c) the licensing or registration of a candidate who satisfies the qualification
standards The function of licensing/registration may be conducted by a government body or a recognised autonomous professional body.
(d) a register of licensed/registered office holders
This should be a public register to which access should be available to every court having jurisdiction in insolvency cases and also by public search. This should be maintained by the authority undertaking the licensing function referred to above.
(e) a requirement for continuing education for office holders
See comment under (b) above. This is a common feature of most professional bodies and should apply to the office holder profession.
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(f) the renewal of a license or registration
This may be set as appropriate. Renewal should be subject to a number of factors, such as satisfactory conduct of insolvency cases, satisfactory continuing education achievements.
(g) the licensing of a corporate body
This should only be permitted if the above qualifications will apply to the principals of such a corporate body.
PRINCIPLE 2 – APPOINTMENT IN AN INSOLVENCY CASE The law should state: (a) the grounds upon which an office holder may be ineligible for appointment
This is not concerned with the general qualifications of an office holder. It is concerned about whether some factor exists that would make it undesirable or inappropriate to appoint a particular office holder in a particular case. Relevant factors would include that a proposed office holder is a creditor of the debtor, conflict of interest, or an absence of independence from the debtor [which may include factors such as (but not limited to) an existing or recent close connection or professional relationship with the debtor (or, in the case of a corporate debtor, its officers, or shareholders) or with a major creditor of the debtor].
(b) the body who may appoint such a office holder
This could be a court or other relevant authority or other body (such as the general creditor body or creditors committee).
(c) in the case of an appointment by a court [or other relevant authority], clear
guidelines concerning the manner in which the court should select such an office holder This might involve the selection of an office holder according to a strict rota taken from the register of office holders. It might also involve the nomination of an office holder by the party who has the carriage of the insolvency proceedings (for example, the debtor or an applicant creditor). It might also involve the referral by the court of the issue of appointment to the general body of creditors.
(d) in the case of an appointment by the general body of creditors or a
committee of creditors, the manner in which such appointment may be made This would normally require provision for a formal meeting and determination by resolution according to a required majority vote.
(e) in the case of an appointment by the debtor or a representative of a debtor,
the manner in which such appointment may be made This would normally require provision for a formal appointment and notification. In the case of an appointment by a corporate debtor it might require a resolution of shareholders or directors.
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(f) that there is no restriction upon the number of cases in respect of which an office holder may be appointed This is necessary to remove any doubt that office holders may be engaged in a number of insolvency cases at the same time.
PRINCIPLE 3 – REVIEW OF OFFICE HOLDER APPOINTMENT The law should facilitate the review of a decision to appoint an office holder by: (a) providing the grounds upon which an appointment may be reviewed
The grounds would include conflict of interest or other absence of independence, inability to properly administer the case (by reference to expertise, experience and resources) and so forth.
(b) providing a process for a review
In the case of a review of a court appointment this would require an appeal against the decision to appoint the office holder. In the case of an appointment by the general body of creditors (or a committee of creditors), the review would have to be conducted by a court or other relevant tribunal or authority. The process needs to be one that can be conducted speedily.
(c) if an appointment is set aside, providing for the appointment of another
qualified office holder It is clearly necessary that upon the removal of an office holder, a replacement office holder should be immediately appointed. The law should specify the means to achieve this. It may impose the same rules and procedure for selection as for an initial appointment of an office holder.
PRINCIPLE 4 – REMOVAL, RESIGNATION & DEATH OF OFFICER HOLDER The law should provide for: (a) the resignation of an office holder from office
It may be anticipated that, for whatever reason or cause, an office holder may wish to resign an appointment. The law should facilitate that and state the process that must be followed.
(b) the grounds upon which an office holder may be removed from an
insolvency case These would normally include incompetence, negligence, breach of duty, fraud and undue delay.
(c) the process for the removal of an office holder
This should normally involve an application to the relevant court or a relevant authority by a concerned party (the debtor, creditors or a regulatory authority) and the conduct of a hearing.
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PRINCIPLE 5 – REPLACEMENT OF OFFICE HOLDER In any case where an office holder dies, retires or is removed, the law should provide: (a) for the appointment of a new office holder to replace the former office holder
As to appointment of a new office holder see comments under Principle 3 (c) above. (b) that the new office holder is entitled, without delay, to the assets, books and
records of the debtor in the possession of the former office holder This is an important part of the transition/transmission process. The former office holder should be required to account for his/her trusteeship of the estate and affairs of the debtor to the incoming office holder.
(c) that the new office holder is entitled, without delay, to the books and records
of the former office holder that concern or are related to the previous conduct of the administration of the insolvency case by the former office holder This is directed at records that have been kept in relation to the administration of the estate and affairs of the debtor by the displaced office holder.
(d) that the retiring or removed office holder must co-operate with and assist the
new office holder in the transfer and transmission of the conduct of the insolvency case This should be provided for as a general and continuing obligation. Enforcement provisions may be necessary.
PRINCIPLE 6 – STANDARDS OF PROFESSIONAL AND COMMERCIAL CONDUCT The law should: (a) by primary legislation, provide basic, fundamental standards that are critical
to proper professional and commercial conduct on the part of office holders The purpose of such basic standards is to set standards of conduct in every case (for example to act honestly, to act diligently, to comply with professional standards). Then, to regulate and guide an office holder in the conduct of his/her work, a sub-set of professional standards are required. They would normally be made by secondary legislation in the form of rules or regulations, or by a recognised professional body of office holders that requires members of the professional body to comply with them.
(b) by secondary legislation (or otherwise), provide standards relating to:
• reports This should deal with reports on the administration of the insolvency case to creditors, to the regulatory authority, to a court and should detail the contents of and time requirement for such reports.
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• initial collection and safeguarding of assets This should cover things like identifying assets, insuring of assets, inventory of assets, taking control of bank accounts and so forth. • trading of the debtor’s business subsequent to the commencement or opening of the insolvency proceedings This should cover such elements as the conditions under which trading may be continued; the liability for continuing obligations of the debtor; the records to be kept; and accounting for taxes on trading. • keeping of records This should be directed toward the maintenance of records of the administration of the case. • convening and conduct of creditors meetings This should be directed at content, publication of notices and timing of meetings, conduct of meetings, election of chair person, proposal of resolutions, conduct of voting and so forth. • sale and other disposal of assets This should deal with the alternative methods of sale, the conduct of an auction, the conduct of a tender, the conduct of a private sale and etc. • opening and operation of bank accounts This should cover the separation of estate funds from those of the office holder, safeguarding, investment and use of estate funds. • reorganisation plan contents and explanatory memorandum This should supplement any legislation regarding the information to be contained in and explanation of a plan.
PRINCIPLE 7 – REPORTING AND SUPERVISION The law should provide: (a) that an office holder provide regular reports on the work undertaken and
progress of the administration of the insolvency case Although this is mentioned in relation to standards under Principle 6 above, it is essential that the principal legislation require appropriate reporting by an office holder to enable those affected by the insolvency case to be kept informed.
(b) for the appointment, in appropriate cases, of a committee of creditors who
may ‘oversee’ the work of an office holder This is not to encourage interference in the performance of the work of an office holder, rather to enable a group of creditors to consider the progress and quality of the work. It can sometimes be achieved by close consultation between the office holder and the committee in relation to the more important matters that arise. A committee of creditors will not be appropriate in all cases. Factors to be considered in determining the need include the size of the estate relative to the expense of a committee, the number of creditors and so forth.
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(c) that the performance of an office holder in an insolvency case be monitored
This should not be required in respect of every case, but, rather, would be something that is capable of being instituted on an ‘ad hoc’, sample or ‘for cause’ basis.
PRINCIPLE 8 - REGULATORY AND DISCIPLINARY FUNCTIONS The law should: (a) provide for a government or other body (including a recognised professional
association) to have appropriate regulatory, investigatory and disciplinary powers in respect of office holders The question to be decided in each jurisdiction is what body should have the power.
(b) provide for the grounds upon which the conduct of an office holder may be
investigated It is suggested that rather than provide broad general grounds (such as ‘for good reason or cause’), the law should detail more specific behaviour (such as a failure to comply with a relevant duty or standard).
(c) provide for the powers of such a regulatory body, including the power to:
• investigate the conduct of an office holder upon a referral from a court, upon the complaint of an affected third party or on its own motion This is intended to apply in a case in which the conduct of an office holder should be considered in the context of his/her eligibility to continue as an office holder. It is not intended to usurp the function of a court, for example, in considering a complaint from an affected third party in relation to a particular insolvency case. • intervene and be heard on any application to a court concerning the conduct of an office holder or for the removal of an office holder from an insolvency case It is important that a court should have the assistance of a regulatory body (an ‘industry’ view) in cases in which an office holder has been alleged to have engaged in misconduct or where a court is asked to consider the removal of an office holder from an insolvency case. • impose disciplinary measures upon an office holder in respect of whom misconduct has been established It may not be always appropriate that the regulatory body should have a power to impose penalties or sanctions. It might be preferable to refer any findings of the regulatory body to a court for a consideration of the appropriate penalty to be imposed.
(d) provide that disciplinary powers include a power to:
• impose a fine upon an office holder • suspend the license or registration of an office holder • terminate the registration or license of an office holder • require that an office holder compensate third parties who have been
affected by the misconduct of an office holder • require that the office holder undergo further education and training
The above remedies and sanctions are not intended to be exhaustive.
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(e) provide for a right of appeal from the exercise of a disciplinary power
The livelihood of an office holder should be respected and any decision that, directly or indirectly, affects that livelihood should be capable of review or appeal.
PRINCIPLE 9 - REMUNERATION The law should provide: (a) for the entitlement of an office holder to be remunerated for work done by the
office holder in an insolvency case It is axiomatic that a private office holder should be entitled to be remunerated.
(b) that the entitlement for remuneration of an office holder may be determined
by a court, relevant authority or other institution (for example, a committee of creditors)
These can be alternatives or they may create a hierarchy – for example, if creditors fail to resolve the issue, the court may do so.
(c) the basis upon which the remuneration of an office holder may be calculated
This needs careful consideration and a balance is needed between remuneration based on ‘time’ and a percentage of realisations and/or distributions.
(d) an appropriate mechanism for the review/appeal against the determination of
the remuneration payable to an office holder Depending on the approach taken in (b) above, this may be an appeal to a court or other authority.
(e) for the payment of such remuneration out of the assets of the estate of the
debtor including payment on account during the progress of the case Another possible source is some form of fund established by the government.
(f) an appropriate level of priority for the payment of such remuneration ahead
of other claims With the possible exception of secured creditor claims, there should be no claims that have priority for payment before the remuneration of an office holder. To provide otherwise would run the certain risk of deterring office holders from accepting appointments.
PRINCIPLE 10 – RELEASE OF OFFICE HOLDER The law should provide that, subject to any objection by a regulatory body or an interested party, an office holder may be released from his/her appointment as office holder in an insolvency case The law may provide that this may occur upon the expiry of a term of years (for example, X years from the payment of a final dividend to creditors or from the filing of final accounts or report) or by order of the court upon the application of the office holder. The effect of such a release is, normally, that it formally terminates the appointment of the office holder to the insolvency case. It may also release the office holder from all claims and liability in respect of things done or not done in the administration of the insolvency case.
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PRINCIPLE 11 – INSURANCE & BONDING The law should require that an office holder must at all times maintain a bond or professional indemnity insurance cover to protect third parties against negligence or breach of duty or fraud by an office holder This is necessary and is consistent with the requirement for such insurance in most professions.
PRINCIPLE 12 - CODE OF ETHICS The law should encourage and facilitate the development of a code of ethics for office holders, preferably through a professional body Such a code should deal with appropriate conduct as, for example:
• the need for impartiality • the need for integrity and accountability • the need for independence • the need to avoid the perception of possible conflicts of interest • the need for proper conduct between office holders (as, for example, if they are
competing for appointment to an insolvency case). The law could compel the application of a ‘code’ of ethics, either by setting that code or requiring that a code that has been established by a professional body be recognised as binding on office holders.