Bargaining in Financial Restructuring: Market Norms, Legal Rights and Regulatory Standards

Abstract

This paper makes the case for development in the standards by which financial restructurings are assessed in the UK, but argues that this should be achieved by an increased focus on the role of the administrator, and on applicable regulatory standards, rather than further development in the role of the court and in the common law. In the 1990s large financial restructurings were typically negotiated by reference to the market conventions of the day, reflected in a set of principles known as The London Approach. As some scholars predicted at the start of the last decade, the London Approach has failed to survive rapid changes in the credit markets and the parties to a large UK financial restructuring now negotiate by reference to their strict legal rights. No legal procedure exists in the UK which has been developed solely to achieve a financial restructuring (unlike Chapter 11 in the US). Adaptation of existing procedures to take the place of out-of-court, market based restructurings has led to a focus on the price the business and assets of the company will fetch in the market as the benchmark for assessing the proposed restructuring terms. This paper argues that this tilts the balance of negotiating power in favour of senior creditors and may offer them a perverse incentive to prefer a legal, rather than a negotiated, solution. However, if there is to be a move towards a more detailed examination of value, as currently occurs in the US, there is a significant risk that the balance of power will simply tilt the other way. Someone must therefore undertake the task of maintaining a level playing field between the parties. It is difficult to conclude that the courts have the expertise to judge complex valuation disputes. The administrator is much better placed to do so, provided regulatory standards provide sufficient guidance to steer behaviour and enhance confidence.