Restructuring moratoriums through an information-processing lens

ABSTRACT

Using insights from complex systems theory, it is argued that financially distressed large corporates will seek the protection of a moratorium when the benefits it brings outweigh its signalling and information-processing problems – likely to be in the later stages of distress. Applying this insight, the article offers a somewhat gloomy assessment of the Part A1 moratorium introduced in the UK by the Corporate Insolvency and Governance Act 2020. It is suggested that the UK administration moratorium may be more fit for purpose, but that serious signalling and information processing concerns remain. After touching on possible adaptations of the tools, the article concedes that there may have been a deliberate decision to restrict the usefulness of both of them. The article ends by arguing that if this the case, the decision may not be sustainable in a rapidly changing economic environment, and that recent suggestions for reform should be supported.

KEYWORDS:

• Debt restructuring
• moratorium
• stay
• Corporate Insolvency and Governance Act 2020
• CIGA

Acknowledgment

An earlier draft of this paper was presented at the 'CIGA two years on' workshop at Harris Manchester College, Oxford on 23 June 2022. The author thanks participants at that event for helpful comments and suggestions. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For ease of reference, the term moratorium will generally be used unless US Chapter 11 is being discussed specifically.

2 Thomas H Jackson, The Logic and Limits of Bankruptcy Law (1986) 12–13.

3 Harvey R Miller, ‘Chapter 11 in Transition – From Boom to Bust and into the Future’ (2007) 81 American Bankruptcy Law J. 375, 386–87.

4 Wai Yee Wan, Casey Watters, and Gerard McCormack, ‘Schemes of Arrangement in Singapore: Empirical and Comparative Analyses’ (2020) 94 American Bankruptcy Law J. 463, 471.

5 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) OJ/26.6.2019/L, Article 6(1) (the European Restructuring Directive).

6 n 38, n 40 and accompanying text.

7 Melanie Mitchell, Complexity: A Guided Tour (2009) 170. Thanks are due to Kenneth Ayotte and Adam Badawi for introducing me to this excellent work.

8 Insolvency Act 1986, Sch B1, para 42–3.

9 S. Rep. (1978) No. 95–989, 54–55 cited in Vincent S J Buccola, ‘Bankruptcy’s Cathedral: Property Rules, Liability Rules, and Distress’ (2019) 114 Northwestern University Law Rev. 705, 741–42.

10 Miller (n 3) 386–87.

11 Douglas G Baird, Anthony J Casey, and Randal C Picker, ‘The Bankruptcy Partition’ (2018) 166 University of Pennsylvania Law Rev. 1675.

12 11 USC § 1126 (f).

13 11 USC § 1122(b).

14 11 USC § 362(a).

15 John McConnell and Henri Servaes, ‘The Economics of Pre-packaged Bankruptcy’ in Jagdeep S Bhandari and Lawrence A Weiss (eds), Corporate Bankruptcy: Economic and Legal Perspectives (1996) 322.

16 For a useful table of recent expedited prepackaged bankruptcy cases see Angela Libby, ‘U.S. Restructuring in the Last Decade; Key Developments and Emerging Themes’ in Sebastian van den Berg, Lynetter Janssen and Ivén J Romo (eds), Cross-Border Restructuring and Insolvency 2012–2022: Cases and Developments (2023), 250.

17 Mitchell (n 7) 170.

18 Donald D Bergh, Brian L Connelly, David J Ketchen, Jr and Lu M Shannon, ‘Signalling Theory and Equilibrium in Strategic Management Research: An Assessment and a Research Agenda’ (2014) 51(8) Journal of Management Studies 1334, 1335.

19 Buccola (n 9) 718–19 citing Randal C Picker, ‘Security Interests, Misbehavior, and Common Pools’ (1992) 59 University of Chicago Law Rev. 645, 657 and Lucian Ayre Bebchuk and Jesse M Fried, ‘The Uneasy Case for the Priority of Secured Claims in Bankruptcy’ (1996) 105 Yale Law J 857, 876 n 65.

20 See, for example, Belk Inc. press release 24 February 2021, ‘ … plan of reorganization allows suppliers to be paid in full, has no impact to employees and all store locations to remain open’ <https://www.prnewswire.com/news-releases/belk-successfully-completes-pre-packaged-one-day-financial-restructuring-with-backing-of-majority-owner-sycamore-partners-and-lenders-including-kkr-credit-and-blackstone-credit-301234984.html>.

21 Frank Partnoy and David A Skeel Jr., ‘The Promise and Perils of Credit Derivatives’ (2007) 75 University of Cincinnati Law Rev. 1019, 1035; Henry TC Hu and Bernard Black, ‘Equity and Debt Decoupling and Empty Voting II: Importance and Extensions’ (2008) 156 University of Pennsylvania Law Rev. 625, 731; Daniel Hemel, ‘Empty Creditors and Debt Exchanges’ (2010) 27 Yale Journal on Regulation 159, 160; Douglas G Baird and Robert K Rasmussen, ‘Antibankruptcy’ (2010) 119 Yale Law J. 648, 681; David A. Skeel Jr and Thomas H Jackson, ‘Transaction Consistency and the New Finance in Bankruptcy’ (2012) 112 Columbia Law Rev. 152, 155.

22 Kennet Ayotte and David A Skeel Jr, ‘Bankruptcy Law as a Liquidity Provider’ (2013) 80 University of Chicago Law Rev. 1557.

23 Rodrigo Olivares-Caminal, Randall Guynn, Alan W. Kornberg, Eric McLaughlin, Sarah Paterson, and Dalvinder Singh, Debt Restructuring (2022) 163.

24 Janis Sarra, Jennifer Payne and Stephan Madaus, ‘The Promise and Perils of Regulating Ipso Facto Clauses’ (2022) 31(1) International Insolvency Review 45.

25 11 USC § 365(e).

26 Pen Kent, ‘The London Approach’ (1993) Q1 Bank of England Quarterly Bull. 110; John Flood, Robert Abbey, Eleni Skordaki, and Paul Aber, ‘The Professional Restructuring of Corporate Rescue: Company Voluntary Arrangements and the London Approach’ (1995) ACCA Research Report 45; Alice Belcher, Corporate Rescue: A Conceptual Approach to Insolvency Law (1997) 116–22; John Armour and Simon Deakin, ‘Norms in Private Insolvency: The “London Approach” to the Resolution of Financial Distress’ (2001) 1 Journal of Corporate Law Studies 21.

27 Flood et al (n 26) 7, ‘in the London Approach the aim of the banks doing the reconstruction is to prevent the involvement of trade creditors’.

28 Kent (n 26) 111.

29 Armour and Deakin (n 26) 33–34, 46.

30 For a discussion see Sarah Paterson, Corporate Reorganization Law and Forces of Change (2020) 100–03.

31 Companies Act 2006, s 895–901.

32 See, for example, MyTravel Group PLC [2004] EWHC 2741 (Ch); McCarthy & Stone Plc [2009] EWHC 712 (Ch); and Bluebrook Ltd [2009] EWHC 2114 (Ch).

33 Sarah Paterson, ‘Reflections on English Law Schemes of Arrangement in Distress and Suggestions for Reform’ (2018) 15 European Company and Financial Law Review 472, 478–79.

34 ibid; Sarah Paterson, ‘The Rise of Covenant-lite Lending and Implications for the UK’s Corporate Insolvency Law Toolbox’ (2019) 39 Oxford Journal of Legal Studies 654.

35 The Insolvency Service, ‘A Review of the Corporate Insolvency Framework: A Consultation on Options for Reform’ May 2016.

36 ibid 10–19.

37 ibid 11.

38 ibid.

39 Department for Business, Energy & Industrial Strategy, ‘Insolvency and Corporate Governance: Government Response’ 26th August 2018.

40 ibid 42.

41 ibid 47.

42 The Insolvency Lawyers’ Association Technical Committee and The City of London Law Society Insolvency Law Sub-Committee, ‘Issues Paper Insolvency and Corporate Governance Proposals and Corporate Insolvency Regime Reforms 2018/19’ 13 (the ‘ILA/CLLS 2018 Issues Paper’) <https://www.citysolicitors.org.uk/clls/committees/insolvency-law/>.

43 Explanatory Notes to the Corporate Insolvency and Governance Act 2020, para 4.

44 For a review of the tools in US Chapter 11 facilitating the raising of new debt to address liquidity problems see: Ayotte and Skeel (n 22).

45 Carillion Group; Thomas Cook Group. It should be noted that no claim is being made that either the Carillion Group or the Thomas Cook Group could or should have been saved – merely that they were in late-stage distress and were not saved.

46 Paterson, ‘Covenant Lite Lending’ (n 34).

47 Insolvency Act 1986, s A6(e).

48 ibid s A38.

49 ibid s 233B(3).

50 ibid s 233(B)(4).

51 ibid s 233(B)(7).

52 For a fascinating insight see: Peter Walton, Chris Umfreville and Lézelle Jacobs, Company Voluntary Arrangements: Evaluating Success and Failure May 2018 commissioned by R3, the insolvency and restructuring trade body, 50.

53 For an equally fascinating insight on customer behaviour see: Samuel Antill and Megan Hunter, ‘Consumer Choice and Corporate Bankruptcy’ SSRN <https://ssrn.com/abstract=3879775>

54 Mark J Roe and Frederick Tung, ‘Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain’ (2013) 99 Virginia Law Rev. 1235.

55 Insolvency Act 1986, s A28.

56 ibid s A3.

57 ibid s A4 and A5.

58 ibid ss A4 and A6.

59 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualification, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debts and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) [2019] OJ 172.

60 ibid Art 4.

61 ibid Sch ZA1 (Moratorium in Great Britain: Eligible Companies).

62 ibid para 13.

63 Professor Peter Walton and Dr Lézelle Jacobs, ‘Corporate Insolvency and Governance Act 2020 – Interim Evaluation Report March 2022’ (Insolvency Service, 21 June 2022).

64 Professor Peter Walton and Dr Lézelle Jacobs, ‘Corporate Insolvency and Governance Act 2020 – Final Evaluation Report November 2022’ (Insolvency Service, 19 December 2022).

65 Insolvency Service, ‘Post-Implementation Review: Corporate Insolvency and Governance Act’ 21 February 2023 <https://www.legislation.gov.uk/ukia/2023/69/pdfs/ukia_20230069_en.pdf>.

66 ibid para 5.69.

67 Insolvency Act 1986, s 174A

68 CIGA Post-Implementation Impact Review (n 65) para 6.4.

69 For the day on which the moratorium comes into force, see Insolvency Act 1986, s A7(1).

70 ibid s A10.

71 ibid ss A11 and A12.

72 ibid s A13.

73 ibid s A14.

74 ibid s A15.

75 CIGA Final Evaluation Report (n 64) 35.

76 ibid 36.

77 Insolvency Act 1986, s A13.

78 ibid s A18.

79 ibid s A18(3)(a) and (b).

80 ibid s A18(3)(c).

81 ibid s A18(3)(d) and (e).

82 ibid s A18(3)(f).

83 ibid Sch ZA2.

84 CIGA Final Evaluation Report (n 64) 36.

85 ibid 34.

86 Ayotte and Skeel (n 22) 1576–78.

87 ibid 1591.

88 Insolvency Act 1986, s 174A.

89 ibid s A4A(1).

90 Jennifer Payne, ‘An Assessment of the UK Restructuring Moratorium’ SSRN <https://ssrm.com/abstracts=3759730> 16.

91 See the exclusion for contracts relating to financial services: Insolvency Act 1986, Sch 4ZZA.

92 ibid s 174A(3)-(4).

93 ibid s A38(d).

94 Payne (n 90) 13.

95 Buccola (n 9) 713.

96 Insolvency Act 1986, Sch B1, para 3(1)(a).

97 ibid paras 3(1)(b) and (c).

98 Insolvency Act 1986, Sch B1, paras 22–34. An application can also be made out of court by the holder of a qualifying floating charge (Insolvency Act 1986, Sch B1, paras 14–21) or in court on the application of the company, its directors, one or more of the company’s creditors or a combination of those persons (Insolvency Act 1986, Sch B1, paras 11–13).

99 Insolvency Act 1986, Sch B1, para 76. It is worth noting that one free text comment at the end of the survey for the CIGA Final Evaluation Report specifically identified that ‘an IP might prefer the longer period of administration to address issues which had arisen’ CIGA Final Evaluation Report (n 64) 35.

100 Simon Garner and Alexandra Frith, A Practical Approach to Landlord and Tenant (2017) 35.

101 ibid 36.

102 ibid 148.

103 Re Instant Cash Loans Limited [2019] 10 WLUK 97.

104 Lundy Granite (1870 - 71) L R 6 Ch App 462 (CA).

105 [2014] EWCA Civ 180; [2014] 3 WLR 901.

106 ibid.

107 Joel Hills, ‘Debenhams Empties Westfield Store as Landlord Fear Mass Store Closures’ 8 April, 2020 <https://www.itv.com/news/2020-04-08/debenhams-empties-westfield-store-landlords-fear-mass-store-closures-administration>.

108 Insolvency Act 1986, s A18(3)(d) and (e).

109 Insolvency Act 1986, Sch B1, para 99(4) and para 99(5).

110 Allders Department Stores Ltd (in administration) [2005] 2 All E R 122; Huddersfield Fine Worsteds Ltd [2005] 4 All E R 886.

111 Craig Rajgopaul, ‘TUPE and insolvency’ 1 June 2008 Tolley’s Employment Law Newsletter.

112 Insolvency Act 1986, Sch 6.

113 Employment Rights Act 1996, s 166–69.

114 Insolvency Act 1986, Sch B1, para 66. For Court of Appeal authority on the breadth of para 66 see Re Debenhams Retail Limited (in administration) [2020] 3 All E R 319.

115 n 91 and accompanying text.

116 Vanessa Finch and David Milman, Corporate Insolvency Law: Perspectives and Principles (3rd ed, CUP 2017) at 336–38; Gerard McCormack, ‘Super-priority New Financing and Corporate Rescue’ (2007) Journal of Business Law 701.

117 Sarah Paterson, ‘Finding Our Way: Secured Transactions and Corporate Bankruptcy Law and Policy in America and England’ (2018) 18 Journal of Corporate Law Studies 247, 254.

118 ibid Sch B1, para 64.

119 Insolvency Lawyers’ Association, ‘Changing the Narrative Around Administration’ 2 April 2020 <https://www.ilauk.com/news-events/news-view/changing-the-narrative-around-administration>.

120 Mark Phillips QC, William Willson, and Stephen Robins, ‘Joint Administrators’ Consent under Paragraph 64 of Schedule B1 to the Insolvency Act 1986’ ILA <https://www.ilauk.com/docs/ILA.consent_.protocol_.17.April_.2020.V2_.pdf>.

121 Jonathan Eley and Tabby Kinder, ‘Companies Explore ‘Light Touch’ Administration in Wake of Debenhams’ Financial Times (16 April 2020) <https://www.ft.com/content/76c7c985-ff8c-4707-b4e4-28eb7a8f7b62>.

122 Ian Barry Dearing v Mark Skelton, Richard Fleming (Joint Administrators of ASA Resource Group plc [2020] 5 WLUK 422.

123 Mitchell (n 7) 170.

124 Eley and Kinder (n 121).

125 Amicus Finance plc [2021] EWHC 3036 (Ch).

126 ILA/CLLS 2018 Issues Paper (n 42) 9–10.

127 Insolvency Act 1986, Sch B1, para 3(1)(a).

128 Jay R Galbraith, Designing Complex Organizations (1973) 5.

129 Buccola (n 9) 745.

130 Mitchell (n 7) 182.

131 ibid.

132 ibid 183.

133 ibid 204.

134 ibid 208.

135 Minor Hotel Group [2022] 2 WLUK 221.

136 Ronald Davis, Stephan Madaus, Alberto Mazzoni, Irit Mevorach, Rizwaan Jameel Mokal, Barbara Romaine, Janis Sarra and Ignacio Tirado, Micro, Small, and Medium Enterprise Insolvency: A Modular Approach (2018) 10.

137 CIGA Final Evaluation Report (n 64) 35–36.

138 ibid.

139 For a discussion of the relationship between a small business and its senior lender see Edward R Morrison, ‘Bargaining around Bankruptcy: Small Business Workouts and State Law’ (2009) 38 The Journal of Legal Studies 255.

140 For a discussion of the real problem of transaction costs for a small business attempting a restructuring see Robin Greenwood, Benjamin Iverson, and David Thesmar, ‘Sizing Up Corporate Restructuring in the COVID Crisis’ National Bureau of Economic Research Working Paper 28104, November 2020 3, 19.

141 Paterson, Covenant-lite Lending (n 34).

142 CIGA Post-Implementation Impact Review (n 64) para 6.3.

Additional information

Notes on contributors

Sarah Paterson

Sarah Paterson is a Professor of Law at the London School of Economics and Political Science where she teaches and researches corporate insolvency and restructuring law. Before joining the LSE, Sarah was a partner in the Restructuring and Insolvency Group of Slaughter and May, with whom she retains a senior consultancy.