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Control and Corporate Rescue–An Anglo-American Evaluation

Published online by Cambridge University Press:  17 January 2008

Gerard McCormack
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Abstract

This article compares and contrasts Chapter 11 of the US Bankruptcy Code with the UK administration procedure under the Insolvency and Enterprise Acts. It focuses in particular on who runs a company during the restructuring process—debtor-in-possession or management displacement in favour of an outside administrator. Various reasons have been given to explain the US/UK divergence in this respect including differences in entrepreneurial culture and differences in the lending markets in the two countries. The article suggests that the divergence cannot be reduced to a single factor but instead implicates a complex web of circumstances.

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Articles
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International & Comparative Law Quarterly , Volume 56 , Issue 3 , July 2007 , pp. 515 - 551
Copyright
Copyright © British Institute of International and Comparative Law 2007

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References

1 For a comparative evaluation of the ‘pro-creditor’ nature of the US insolvency regime see the joint HM Treasury/DTI report, ‘A Review of Company Rescue and Business Reconstruction Mechanisms’ (05 2000) 38–41.Google Scholar The Review Group, however, concluded at p 33 of its report that ‘it would be wholly inappropriate to attempt to replicate Chapter 11 in the UK, where the business culture and economic environment are quite different’.

2 What is now schedule B1 Insolvency Act 1986, para 64, provides that a company in administration or an officer of a company in administration may not exercise management power without the consent of the administrator. Management power is defined as meaning a power which could be exercised so as to interfere with the exercise of the administrator's powers.

3 On the relative merit of debtor-in-possession versus management-displacement insolvency regimes see Hahn, D, ‘Concentrated Ownership and Control of Corporate Reorganisations’ (2004) 4 JCLS 117.Google Scholar See also Finch, V, ‘Control and co-ordination in corporate rescue’ (2005) 25 Legal Studies 374CrossRefGoogle Scholar; Brupbacher, O, ‘Functional Analysis of Corporate Rescue Procedures: A Proposal from an Anglo-Swiss Perspective’ (2005) 5 JCLS 105.Google Scholar

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8 According to Professor Stuart Gilson in deciding the merits of alternative corporate reorganization one can consider whether the various systems ‘(1) allow reorganization or liquidation to be accomplished at minimum cost; (2) encourage insolvent firms to reorganize when their going concern value exceeds their liquidation value, while forcing them to liquidate when their liquidation value exceeds their going concern value; and (3) not create incentives for managers or stockholders to ‘game’ the system ex ante by taking actions that generate private benefits at the expense of firm value’: Gilson, SC, ‘Methodological Issues in Cross-Country Comparisons of Commercial Bankruptcy Law: Comment on Papers by Eisenberg-Tagashira and Rajak’ in Ziegel, JS (ed), Current Developments in International and Comparative Corporate Insolvency Law (Clarendon Press, Oxford, 1994) 262, 263.Google Scholar

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11 Prentice, D, Oditah, F, and Segal, N, ‘Administration: The Insolvency Act 1986, Part 11’Google Scholar; [1994] LMCLQ 487Google Scholar, considers the reasons for the introduction of the administration procedure, its evolution and effect. See more generally Carruthers, B and Halliday, T, Rescuing Businesses: The Making of Corporate Bankruptcy Law in England and the United States (Clarendon Press, Oxford, 1998)Google Scholar; Alice, BelcherCorporate Rescue (Sweet & Maxwell, London, 1997).Google Scholar

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13 Productivity and Enterprise: Insolvency–A Second Chance (Cm 5234, 2001).Google Scholar

14 Schedule B1 Insolvency Act 1986, paras 14 and 22. It appears that most appointments are made by the company rather than by a bank holding a floating charge. Banks appear reluctant to make the appointment themselves, as distinct from influencing the company's choice of appointee, because of reputation concerns. On this see generally the empirical study by Frisby, Sandra on the Insolvency Service website: <http://www.insolvency.gov.uk> (11 04 2007).+(11+04+2007).>Google Scholar

15 Schedule B1 Insolvency Act 1986, paras 22 and 26.

16 ibid para 36(2).

17 In the Productivity and Enterprise White Paper it was suggested that the result would be a procedure that would be as flexible and cost-effective as administrative receivership, but one in which the administrator will owe a duty of care to all creditors, unsecured creditors will have the opportunity for input and participation and the process will be subject to the oversight and direction of the court in a public and transparent way.

18 An empirical study by Dr Sandra, Frisby on the Insolvency Service website– <http://www.insolvency.gov.uk> (11 04 2007)–reveals that in only a small minority of cases will administration lead to a genuine rescue outcome. Corporate rescue, as distinct from business, remains very much a minority pursuit.+(11+04+2007)–reveals+that+in+only+a+small+minority+of+cases+will+administration+lead+to+a+genuine+rescue+outcome.+Corporate+rescue,+as+distinct+from+business,+remains+very+much+a+minority+pursuit.>Google Scholar

19 A proposal for a CVA, whether made outside or within administration, cannot, however, affect the right of a secured creditor to enforce his security or affect the priority of a preferential creditor except with the consent of the relevant creditor–Schedule B1 Insolvency Act 1986, para 73.

20 Schedule B1 Insolvency Act 1986, para 65.

21 Re GHE Realisations Ltd [2006] 1 WLR 287.Google Scholar

22 For a somewhat sceptical perspective on the merits of reorganization versus liquidation see Baird, DG and Rasmussen, RK, ‘The End of Bankruptcy’ (2002) 55 Stan L Rev 751, 758CrossRefGoogle Scholar: ‘We have a going-concern surplus (the thing the law of corporate reorganizations exists to preserve) only to the extent that there are assets that are worth more if located within an existing firm. If all the assets can be used as well elsewhere, the firm has no value as a going concern’. Butler, Richard V and Gilpatric, Scott M see ‘going-concern surplus’ more broadly in ‘A Re-Examination of the Purposes and Goals of Bankruptcy’ (1994) 2 American Bankruptcy Institute Law Review 269, 281: ‘part of the going concern surplus represents the value to the firm of the relationships which it has established with factor owners. The rest reflects the value to it of its relationships with customers, regulators, and other interested parties’.Google Scholar

23 US v Whiting Pools Inc (1983) 462 US 198, 203.Google Scholar see also HR Rep No 595, 95th Congress, Ist Session 220 (1977). It is worth pointing out that insolvency law (or bankruptcy law as it is termed in the US) is federal law, not law, under Art 1, s 8, clause 4 of the US constitution. On the other hand, property law (including secured property law) falls within the domain of the individual states.Google Scholar

24 Professor Elisabeth Warren sees the law as being designed to save jobs and companies for the benefit of numerous impacted communities and not just creditors in ‘Bankruptcy Policymaking in an Imperfect World’ (1993) 92 Mich L Rev 336, 354–5CrossRefGoogle Scholar: ‘Bankruptcy policy also takes into account the distributional impact of a business failure on parties who are not creditors and who have no formal legal rights to the assets of the business. Business closings affect employees who will lose jobs, taxing authorities that will lose rateable property, suppliers that will lose customers, nearby property owners who will lose beneficial neighbours, and current customers who must go elsewhere. Congress was acutely aware of the wider effects of a business failure on the surrounding community and it adopted the 1978 Bankruptcy Code specifically to ameliorate those harmful effects …’ Contractarian theorists would respond broadly by saying that only legally enforceable interests of particular members of these constituencies under non-bankruptcy law should be taken into account. For other inclusive perspectives see Mokal, RJ, ‘The Authentic Consent Model: Contractarianism, Creditors' Bargain and Corporate Liquidation’ (2001) 21 Legal Studies 400, 440–3CrossRefGoogle Scholar; and see also Korobkin, DR, ‘Rehabilitating Values: A Jurisprudence of Bankruptcy’ (1991) 91 Columbia Law Review 717.CrossRefGoogle Scholar

25 see the statement of the government minister, Lord, McIntosh, when piloting the legislation through the House of Lords (Hansard HL Deb vol 638 col 766 (29 07 2002)):Google Scholar

‘Company rescue is at the heart of the revised administration procedure. We want to make sure that viable companies do not go the wall unnecessarily. That is why we are restricting administrative receivership and revising administration to focus on rescue and to make it more accessible to companies as well as their creditors. That is not just for the companies themselves; it is also good for their suppliers, customers and employees. The emphasis on company rescue will create more incentive for company management to take action promptly and use the administration procedure before the situation becomes terminal. That is why the purpose directs the administrator to perform his or her functions with “objective of rescuing the company”.’

26 [1995] 2 AC 394, 442.Google Scholar see also Belcher, A, Corporate Rescue (Sweet & Maxwell, London, 1997).Google Scholar

27 See generally on this Finch, V, Corporate Insolvency Law: Perspectives and Principles (CUP, Cambridge, 2002) 194–206.CrossRefGoogle Scholar

28 See Goode, R, Principles of Corporate Insolvency Law (3rd edn, Sweet & Maxwell, London, 2005) 328.Google Scholar

29 Moss, G, ‘Chapter 11: An English Lawyer's Critique’ (1998) 11 Insolvency Intelligence 17, 18–19.Google Scholar

30 See also Carruthers, B and Halliday, T, Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States (Clarendon Press, Oxford, 1998) 246.Google Scholar

31 see generally Moss, G, ‘Comparative Bankruptcy Cultures: Rescue or Liquidations? Comparisons of Trends in National Law–England’ (1997) 23 Brooklyn Journal of International Law 115.Google Scholar

32 see the comment by Westbrook, JL, ‘A comparison of bankruptcy reorganisation in the US with administration procedure in the UK’ (1990) Insolvency Law and Practice 86, 88Google Scholar: ‘In the U.S. a variety of factors, including a deep emotional commitment to the entrepreneurial ethic, make the owners of the corporation central to a salvage proceeding. In the U.K, the prevailing view seems to be that the prior owners were the ones whose venality or incompetence created the problem and their interests disappear from moral or legal consideration once a formal proceeding has begun. Americans are much more willing to believe that financial difficulty is the result of external forces and that preservation of the company, not just the business, is a crucial social concern.’

33 Nathalie, Martin, ‘Common-Law Bankruptcy Systems: Similarities and Differences’ (2003) 11 American Bankruptcy Institute Law Review 367, 374.Google Scholar

34 ibid 374–5.

35 see generally on the German Insolvency Balz, Law M, ‘Market Conformity of Insolvency Proceedings: Policy Issues of the German Insolvency Law’ (1997) Brooklyn Journal of International Law 167Google Scholar; Kamlah, K, ‘The New German Insolvency Act’ (1996) 70 American Bankruptcy Law Journal 417Google Scholar; Schiessl, M, ‘On the Road to a New German Reorganization Law’ (1988) 62 American Bankruptcy Law Journal 233.Google Scholar

36 Schiessl, M, ‘On the Road to a New German Reorganization Law’ (1988) 62 American Bankruptcy Law Journal 233, 247–8.Google Scholar

37 The merits of the Australian approach has been commended by the Banking Law SubCommittee of the City of London Law Society–see Yeowart, G, ‘Administrative Receivership: Abolition or Reform?’ [2002] Butterworths Journal of International Banking and Financial Law 6, 9.Google Scholar

38 see generally Lewis, PB, ‘Trouble Down Under: Some Thoughts on the Australian-American Corporate Bankruptcy Divide’ [2001] Utah Law Review 189, 223–5.Google Scholar

39 Martin (n 33) 404.Google Scholar

40 Concerning perverse incentives there is a famous American story involving Federal Express: ‘Federal Express was near financial collapse within a few years of its inception. The founder, Frederick Smith, took $20,000 of corporate funds to Las Vegas in despair. He won at the gaming tables, providing enough capital to allow the firm to survive’–see Stephen, Ross et al. , Corporate Finance (7th edn, McGraw-Hill/Irwin, New York, 2002) 428.Google Scholar

41 see generally Lewis, PB (n 38) 223–5.Google Scholar

42 Addressing the British–American Chamber of Commerce–see The Times (London, 14 10 1998)Google Scholar; and see the discussion in Hunter, M, ‘The Nature and Functions of a Rescue Culture’ [1999] JBL 491, 519–20.Google Scholar

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46 See generally Moss (n 31).

47 Hunter (n 42) 519.Google Scholar

48 Hahn (n 3) 127, suggests that three primary factors affect the efficiency and fairness of corporate reorganization regimes: ‘(a) the ownership structure of corporate debtors and its effect on the extent of independent judgment the debtor's management is capable of exercising, (b) the effect of the respective regimes on the firm's decision-making concerning the commencement of bankruptcy, and (c) the professional qualification of the person controlling the reorganisation case’.Google Scholar

49 HR Rep No 595 95th Cong, 1st Session 231 (1977).Google Scholar

50 see Federal Deposit Insurance Corp v Sea Pines Co (1982) 692 F2d 973, 976–7Google Scholar: ‘when the corporation becomes insolvent, the fiduciary duty of the directors shifts from the stockholders to the creditors’; and see generally Nimmer, RT and Feinberg, RB, ‘Chapter 11 Business Governance: Fiduciary Duties, Business Judgment, Trustees and Exclusivity’ (1989) 6 Bankruptcy Developments Journal 1.Google Scholar

51 Geyer v Ingersoll Publications Co (1992) 621 A2d 784, 787Google Scholar: ‘when the insolvency exception does arise, it creates fiduciary duties for directors for the benefit of creditors’; and see generally Adler, B, ‘A Re-Examination of Near-Bankruptcy Investment Incentives’ (1995) 62 U Chi Law Review 575, 590–8.CrossRefGoogle Scholar

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56 Sections 6 and 8 of the Company Directors Disqualification Act 1986. Liquidators and others are required to report suspected cases of unfitness to the Department of Trade and Industry disqualification unit.

57 ‘Unfitness’ is considered by reference to the factors listed in Schedule 1 to the Act.

58 see Hahn (n 3) 139.Google Scholar

59 ibid 141.

60 See ibid 142–3.

61 Schedule B1 Insolvency Act 1986, para 3.

62 see Hahn (n 3) 146.Google Scholar

63 See Posner, R, ‘Foreword’ in Bhandari, J and Weiss, L (eds), Corporate Bankruptcy: Economic and Legal Perspectives (CUP, Cambridge, 1996).Google Scholar

64 see Schedule B1 Insolvency Act 1986, para 64: ‘A company in administration or an officer of a company in administration may not exercise a management power without the consent of the administrator.’

65 see Frisby, S, ‘In Search of a Rescue Regime: The Enterprise Act 2002’ (2004) 67 MLR 247, 262CrossRefGoogle Scholar; and more tentatively Finch (n 3) 395–6: ‘The terms of EA 2002 mean that it is arguable that an administrator is obliged to pursue a going concern sale where he thinks this will serve creditors better than efforts made to rescue the company–even where it might be possible to rescue the company. Primacy is accordingly given to maximising overall returns to creditors, rather than to rescue per se.’

66 Insolvency Act 1986 Schedule B1, para 3(1). An administrator must also perform his/her functions in the interests of the company's creditors as a whole.

67 Schedule B1, para 3(4).

68 See the comments by the relevant Minister, Lord McIntosh of Haringey (n 25).

69 Schedule B1, para 49(2)(b).

70 For somewhat different perspectives see Armour, J and Mokal, R, ‘Reforming the Governance of Corporate Rescue: The Enterprise Act 2002’ [2005] LMCLQ 28Google Scholar; Mokal, R and Armour, J, ‘The New UK Rescue Procedure–The Administrator's Duty to Act Rationally’ (2004) I International Corporate Rescue 136Google Scholar; Simmons, M QC, ‘Enterprise Act and Plain English’ [2004] Insolvency Intelligence 76.Google Scholar

71 Hansard, HL Deb, vol 638, col 768 (29 07 2002).Google Scholar

72 see Re GHE Realisations Ltd [2006] 1 WLR 287Google Scholar; and see also Finch, V, ‘Re-invigorating Corporate Rescue’ [2003] JBL 527, 546Google Scholar; Linklater, L, ‘The Enterprise Act: Fulfilling Great Expectations’ [2003] 24 Company Lawyer 225.Google Scholar

73 An administrative receiver can choose to exercise or not to exercise the power of sale over a particular asset. According to the Privy Council decision in Downsview Nominess v First City Corp [1993] AC 295Google Scholar, the only constraint on the administrative receiver's choices is the criterion of good faith. In the words of Professor Sir Roy Goode ((n 28) 284–5) Downsview suggests that: ‘The receiver … is entitled, if he so chooses, to decide not to continue the company's business, and to sell a part of the business which would be better kept. It would also seem that he can select a particular asset to realise for the benefit of his debenture holder even though the removal of that asset would damage the company's business and there are other assets to which he could resort and on which the business is less dependent.’

74 See the comment at para 193 of the 1982 Cork Report (n 10): ‘In the case of an insolvent company, society has no interest in the preservation or rehabilitation of the company as such, though it may have a legitimate concern in the preservation of the commercial enterprise’. See also the empirical study by Dr Sandra Frisby on the Insolvency Service website: <http://www.insolvency.gov.uk> (11 Apr 2007).

75 see the comment by Martin (n 33) 397.Google Scholar

76 see also the comments of the US Supreme Court in NLRB v Bildisco (1983) 465 US 513, 528Google Scholar: ‘The fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources’ citing views expressed in the US House of Representatives HR Rep No 95–595, p 220 (1977)Google Scholar: ‘The purpose of a business reorganization case, unlike a liquidation case, is to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders … It is more economically efficient to reorganize than to liquidate, because it preserves jobs and assets’.

77 see the comments in White, JJ, ‘Death and Resurrection of Secured Credit’ (2004) 12 American Bankruptcy Institute Law Review 139, 139–40.Google Scholar

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79 see Skeel, DA Jr, ‘Creditors’ Ball: The “New” New Corporate Governance in Chapter 11’ (2003) 152 U Pa L Rev 917, 918.CrossRefGoogle Scholar

80 see generally Hansmann, and Kraakman, (n 6) 33.Google Scholar See generally on this area Parkinson, J, ‘Inclusive Company law’ in John De, Lacy (ed), The Reform of UK Company Law (Cavendish, London, 2002) 43, who suggests that the priority afforded to shareholders ‘reflects not so much a belief that their interests are inherently more deserving of protection than those of other groups, as acceptance of the traditional economic analysis that argues that the greatest contribution to “wealth and welfare for all” is likely to be made by companies with a primary shareholder focus’.Google Scholar

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83 For somewhat more critical voices see Zeigel, J, ‘The Privately Appointed Receiver and the Enforcement of Security Interests: Anomaly or Superior Solution’ in Zeigel, J (ed), Current Developments in International and Comparative Corporate Insolvency Law (Clarendon Press, Oxford, 1994) 451, 461Google Scholar; and Milman, D, ‘A new deal for companies and unsecured creditors’ (2000) 21 Company Lawyer 59–60.Google Scholar

84 Receivership was essentially a creditor-centred rather than a public-interest-centred remedy. The high-water mark of this analysis came with the Privy Council decision in Downsview Nominees Ltd v First City Corp Ltd [1993] AC 295Google Scholar; [1993] 3 All ER 626.Google Scholar In this case it was held that provided that a receiver and manager appointed under a debenture acted in good faith for the purpose of enabling the assets comprised in the debenture holder's security to be preserved and realised for the benefit of the debenture holder, his decisions could not be impeached even if they were disadvantageous to the company or other charge-holders, and he was subject to no further or greater liability.

85 For a defence of receivership see Armour, J and Frisby, S ‘Rethinking receivership’ (2001) 21 OJLS 73.CrossRefGoogle Scholar

86 The White Paper Productivity and Enterprise: Insolvency a Second Chance (2001) para 2.5, talked about ‘making changes which will tip the balance in favour of collective insolvency proceedings–proceedings in which all creditors participate, under which a duty is owed to all creditors and in which all creditors may look to an office holder for an account of his dealings with company's assets’.Google Scholar

87 see the statement by the government minister in Hansard, Standing Committee B, Enterprise Bill, 15th Sitting (9 05 2002) col 602.Google Scholar

88 Schedule B1 Insolvency Act 1986, paras 22 and 26.

89 ibid, para 36(2).

90 See generally Davies, S (ed), Insolvency and the Enterprise Act 2002 (Jordans, Bristol, 2003) 40–1.Google Scholar

91 see generally Skeel, D Jr, ‘An Evolutionary Theory of Corporate Law and Corporate Bankruptcy’ (1998) 51 Vand L Rev 1325Google Scholar; Skeel, D Jr, Debt's Dominion (Princeton University Press, Princeton, 2001); Armour, Cheffins and Skeel Jr (n 4).Google Scholar

92 Central Trust Co v Wabash (1886) 29 Fed 618, 626.Google Scholar

93 Hansen, B, ‘The people's welfare and the origins of corporate reorganization: The Wabash receivership reconsidered’ (2000) 74 Business History Review 377.CrossRefGoogle Scholar

94 See ibid, text accompanying footnote 63: ‘Later decisions, including those by the Supreme Court, continued to emphasize that creditors did not have the same rights in quasi-public corporations that they did in other enterprises. These judges also made clear that the remedies available to railroads were not available to corporations in general but were restricted to enterprises that were regarded as quasi-public, such as railroads or drawbridges. It would be left to Congress to make reorganization available to all corporations’ and see generally Canada Southern v Gebhard (1883) 109 US 527.Google Scholar

95 see generally for a discussion of these issues Skeel, Jr, 1998 (n 91) 1353–8Google Scholar; Skeel, Jr, 2001, (n 91) ch 2.Google Scholar

96 see generally Hansen, B, ‘Commercial Associations and the Creation of a National Economy: The Demand for Federal Bankruptcy Law’ (1998) 72 Business History Review 86.CrossRefGoogle Scholar

97 One contemporary study of 150 receiverships between 1870 and 1898 found that in over 90 per cent of these cases insiders were appointed as receivers–see Swaine, H (1898) 3 Economic Studies of the American Economic Association 71, 77, where he refers to Bradley Hansen (n 93) text accompanying footnotes 48–51.Google Scholar

98 see generally Skeel, Jr, 1998 (n 91) 1368–70.Google Scholar

99 see generally Securities and Exchange Commission Report on the Study and Investigation of the Work, Activities, Personnel and functions of Protective and Reorganization Committees volumes 1–8 (1937–1940)Google Scholar and see generally the discussion in Skeel, Jr, 1998 (n 91) 1369–70.Google Scholar

100 see generally Skeel, Jr, 2001 (n 91) ch 4, ‘William Douglas and the Rise of the Securities and Exchange Commission’.Google Scholar

101 In SEC v United States Realty & Improvement Co (1940) 310 US 434 the Supreme Court, however, leaned against publicly held companies using Chapter XI.Google Scholar

102 (1940) 350 US 462, 466.Google Scholar

103 see Weintraub, B and Levin, H, ‘A Sequel to Chapter X or Chapter XI: Coexistence for the Middle-Sized Corporation’ (1957) 26 Fordham Law Review 292.Google Scholar

104 Report of the Commission on the Bankruptcy Laws of the United States, HR Doc No 93, p 137.Google Scholar

105 see generally Skeel, Jr, 1998 (n 91) 1375.Google Scholar

106 There is a legislative statement that a trustee can be appointed only for cause such as fraud, dishonesty or gross mismanagement and that sheer size or large numbers of bondholders or shareholders are not enough–s 1104. This provision has cautioned the courts against appointing trustees. It has been held that simple mismanagement is not a sufficient reason for an appointment –Re Anchorage Boat Sales (1980) 4 Bankr 635.Google Scholar

107 See Roe, MJ, ‘Political Foundations for Separating Ownership from Control’ in McCahery, JA (ed), Corporate Governance Regimes: Convergence and Diversity (OUP, New York, 2002) 113, 129.Google Scholar

108 See generally Armour, Cheffins and Skeel Jr (n 4); and see also Hahn (n 3).

109 This is referred to as ‘ex post’ because of the after-the-fact nature of the correctives–see Skeel, Jr, 1998 (n 91) 1328.Google Scholar

110 see Hahn (n 3) 128–30.Google Scholar

111 ibid 120.

112 ibid 134.

113 see Cheffins, BR, ‘Law, Economics and the UK's system of Corporate Governance: Lessons from History’ (2001) 1 Journal of Corporate Law Studies 71.CrossRefGoogle Scholar

114 see generally Armour, Cheffins and Skeel Jr (n 4) 1754.Google Scholar

115 ibid 1766–72.

116 ibid 1775–6: ‘If such pressure develops and ultimately yields the creation of a Chapter 11 option for larger firms, the end result would be what our refined evolutionary theory of corporate bankruptcy and corporate governance would suggest: diffuse share ownership, dispersed debt, and manager-driven bankruptcy law. The available evidence suggests that these various predictions are turning out to be true. To start, there is evidence that banks already are losing their near hegemony over debt finance for widely held UK firms. In recent years, British firms have increasingly turned to other institutional lenders, such as insurers and pension funds for debt financing. Although the market for public debt remains much smaller than in the US, it has significantly increased in recent years … With respect to law reform, there has been lobbying of the type the reconfigured evolutionary theory would predict.’

117 see Martin, (n 33) 397Google Scholar: ‘Aussies share the English distrust of the American debtor in possession system, finding it mired by the potential misdeeds of existing management’; and her comment at p 404: ‘The attitude down under seems to be if a business fails, it should be pushed aside so others can fill the gap’. For a somewhat different perspective see Cheffins, BR, ‘Corporate Governance Convergence: Lessons from Australia’ (2002) 16 Transnational Lawyer 13Google Scholar, who makes the point, inter alia, that Australia's listed companies exhibit a far higher degree of ownership concentration than do those of UK listed companies. Cheffins also discusses the implications of the Australian example for theories of Anglo-American insolvency law at pp 37–8.Google Scholar

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119 see Armour, , Cheffins, and Skeel, Jr (n 4) 1733.Google Scholar

120 See Insolvency Act 1986, section 1A and Schedule A1 as amended by section 1 and Schedule 1 Insolvency Act 2000.

121 Basically a company is a small company if it meets two of the following three criteria: (1) annual turnover not greater than £5.6m, (2) balance sheet total not more than £2.8m and (3) not more than 50 employees.

122 On the ‘London Approach’ see generally Brierley, P and Vlieghe, G, ‘Corporate workouts, the London Approach and financial stability’ [1999] Financial Stability Review 168Google Scholar; Kent, P, ‘Corporate Workouts–A UK Perspective’ (1997) 6 International Insolvency Review 165CrossRefGoogle Scholar; Armour, J and Deakin, S, ‘Norms in Private Bankruptcy: the “London Approach” to the Resolution of Financial Distress’ [2001] Journal of Corporate Law Studies 21.CrossRefGoogle Scholar

123 see Armour, , Cheffins, and Skeel, Jr (n 4) 1774.Google Scholar

124 An important empirical study suggests the existence, even in the case of small and medium sized companies, of an elaborate rescue process outside formal procedures. Banks, it appears, use their position as secured creditors to encourage or force financially distressed firms to undergo restructuring that would include downsizing and management replacement–see Franks, J and Sussman, O, ‘The Cycle of Corporate Distress, Rescue and Dissolution: A Study of Small and Medium Size UK Companies’ (2000).Google Scholar This study was sponsored by the DTI/Treasury Working Group on Company Rescue and Business Reconstruction Mechanisms. see also Cook, G, Pandit, N, and Milman, D, ‘Formal Rehabilitation Procedures and Insolvent Firms: Empirical Evidence on the British Company Voluntary Arrangement Procedure’ (2001) 17 Small Business Economics.CrossRefGoogle Scholar

125 Gilson, S, ‘Management Turnover and Financial Distress’ (1989) 25 Journal of Financial Economics 241, 261CrossRefGoogle Scholar, finding that ‘in any given year, 52% of sampled firms experience a senior management change if they are either in default on their debt, bankrupt, or privately restructuring their debt to avoid bankruptcy’; and see also Gilson, S, ‘Bankruptcy, Boards, Banks, and Blockholders: Evidence on Changes in Corporate Ownership and Control When Firms Default’ (1990) 27 Journal of Financial Economics 355, 386, stating that ‘on average, only 46% of incumbent directors and 43% of CEO's remain with their firms at the conclusion of the bankruptcy or debt restructuring’.CrossRefGoogle Scholar

126 LoPucki and Whitford, (n 7).

127 According to Carruthers, B and Halliday, T, Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States (Clarendon Press, Oxford, 1998) 265Google Scholar, the Chapter 11 process ‘is not a safe haven for management’. see generally Broude, R, ‘How the Rescue Culture Came to the United States and the Myths that Surround Chapter 11’ (2001) 16 Insolvency Law and Practice 194.Google Scholar

128 ‘The End of Bankruptcy’ (2002) 55 Stan L Rev 751.CrossRefGoogle Scholar

129 US v Whiting Pools Inc (1983) 462 US 198, 203.Google Scholar

130 see also Adams, Charles W, ‘An Economic Justification for Corporate Reorganizations’ (1991) 20 Hofstra L Rev 117, 133Google Scholar: ‘[M]ost assets are probably not firm-specific, and so, most insolvent corporations will not have substantially greater going concern than liquidation values and, consequently, will not be good candidates for an effective reorganization.’

131 ‘The End of Bankruptcy’ (2002) 55 Stan L Rev 751, 788.CrossRefGoogle Scholar

132 In United Timbers Association of Texas v Timbers of Inwood Forest Associates Ltd (1988) 484 US 365Google Scholar, the US Supreme Court gave a very firm push in the direction of speedier reorganizations. It said that once the creditor establishes that the debtor has no equity in the collateral, the debtor has the burden of establishing that the collateral is necessary to an effective reorganization. What this requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it, but that the property is essential for an effective reorganization that is in prospect. This means that there must be a reasonable possibility of a successful reorganization within a reasonable time. For criticism of the pre-Inwoods state of affairs see Baird, DG and Jackson, TH, ‘Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy’ (1984) 51 U Chi L Rev 97, 126–7CrossRefGoogle Scholar: ‘A Chapter 11 proceeding typically buys time for the managers, the shareholders, and other junior owners at the expense of the more senior ones … Bankruptcy judges sometimes seem inclined to do little to remedy this state of affairs. A few seem to show either an inability or unwillingness to comprehend the possibility that secured credit may be something more than a perverse and unfair creature of state law that should be thwarted at every possible turn. Even more remarkable is their wonderful capacity for hope, their unshakeable faith that given time, the firm's ship will come in. Often, bankruptcy judges seem to think that markets systematically undervalue firms that have filed petitions in bankruptcy. A bankruptcy judge may insist that he, not the market, is the best one positioned to set a value on a firm in distress, even though year after year in case after case his valuations prove wildly inflated.’

133 see Warren, E and Westbrook, JL, ‘Secured Party in Possession’ (2003) 22 American Bankruptcy Institute Journal 12Google Scholar: ‘We have a new form of chapter 11 emerging in the courts. Having invented the DIP (debtor-in-possession), American lawyers are now creating the SPIP (secured-party-in-possession). More and more chapter 11 chases seem to be no more than vehicles through which secured parties may enjoy their Article 9 rights under the umbrella, and the protective shield, of the bankruptcy laws.’

134 see Baird, DG and Rasmussen, RK, ‘Four (or Five) Easy Lessons From Enron’ (2002) 55 Vand L Rev 1787, 1807Google Scholar: ‘In the case of a large firm in bankruptcy, we find that, at the moment Chapter 11 is filed, a revolving credit facility is already in place that entrusts decision making authority to a single entity. This entity will often step in and replace management. It will make the necessary operational decisions before Chapter 11 begins.’

135 see generally D Skeel Jr (n 78); Skeel, D Jr, ‘The Past, Present and Future of Debtor-in-Possession Financing’ (2004) Cardozo Law Review 101Google Scholar; Baird, DG, ‘The New Face of Chapter 11’ (2004) 12 American Bankruptcy Institute Law Review 69.Google Scholar

136 For an argument that market failure could induce too much liquidation in the new world of Chapter 11 see Adler, BE, ‘Bankruptcy Primitives’ (2004) 12 American Bankruptcy Institute Law Review 219, 222.Google Scholar

137 see DA Skeel Jr (n 78) 918–19.Google Scholar

138 see Douglas Baird, G and Rasmussen, Robert K (n 22) 751–2Google Scholar: ‘Corporate reorganizations have all but disappeared. Giant corporations make headlines when they file for Chapter 11, but they are no longer using it to rescue a firm from imminent failure. Many use Chapter 11 merely to sell their assets and divide up the proceeds … Even when a large firm uses Chapter 11 as something other than a convenient auction block its principal lenders are usually already in control and Chapter 11 merely puts in place a preexisting deal. Rarely is Chapter 11 a forum where the various stakeholders in a publicly held firm negotiate among each other over the firm's destiny.’

139 But for a different perspective see LoPucki, LM ‘The Nature of the Bankrupt Firm: A Reply to Baird and Rasmussen's The End of Bankruptcy’ (2003) 56 Stanford Law ReviewGoogle Scholar, who concludes by saying ‘Big-case bankruptcy reorganizations have not ended. They are booming … Baird and Rasmussen's view of the bankrupt firm as merely an asset-owning entity misses the firm's essence. Coase's view of the bankrupt firm as a relationship among people captures it. Baird and Rasmussen's firm has no going concern value and so it makes no sense to reorganise it. Coase's firm may have going concern value, and so it makes sense to reorganize it if the relationships are working or can easily be fixed. Baird and Rasmussen's firm does not fit the data; Coase's firm does.’

140 See, eg, Skeel, D Jr (n 135) 117–25 who refers to DIP lenders bootstrapping earlier unsecured debt through cross-collateralization provisions in new financing agreements.Google Scholar

141 For an early perspective see Jackson, TH and Scott, RE, ‘An Essay on Bankruptcy Sharing and the Creditors' Bargain’ (1989) 75 Va L Rev 155, 159CrossRefGoogle Scholar: ‘The problem of transferring decisionmaking power from the equity owners … is compounded by the associated problem that no other class may sufficiently reflect the interests of the claimants taken as a whole. Thus, the objective of the collective is never entirely congruent with the objective of any of the constituent parts.’

142 see Skeel, Jr (n 135) 118.Google Scholar

143 If too many firms liquidate rather than reorganize, industry may become concentrated in the hands of a few major players.

144 See, however, the comment by Gross, K (n 7) 217–18Google Scholar: ‘Yes, secured creditors did make some gains, some of which were not originally contemplated. Yes, they may control some cases through DIP financing packages. But, there are a host of other things that have been operating since 1978 that explain how large Chapter 11 cases are working and why secured creditors have done that which they have done and why, in some instances, they are not the star of the show … At the end of the day, the world got more complex, more markets opened, new uses of Chapter 11 were invented, new parties came to the table, lawyers and other professionals developed new strategies, and financial sophistication increased.’

145 See Warren and Westbrook (n 133).

146 see the comment in Westbrook (n 32) 87: ‘if an American banker is very, very good, when he dies he will go to the United Kingdom. British banks have far more control than an American secured lender could ever hope to have. Receiverships on the British model are unknown and almost unthinkable in the US. A US banker could barely imagine a banker's Valhalla in which a bank could veto a reorganization as a UK bank may effectively veto an administration by appointing an administrative receiver’. This comment must now, of course, be seen in the light of the changes to the administration procedure introduced by the Enterprise Act 2002.Google Scholar