Selective Corporate Restructuring Strategy

Abstract

This article engages with a fundamental, but under-theorized, fact: that modern corporate restructuring generally, and UK and US corporate restructuring specifically, are frequently processes in which only selected creditors are impaired by the restructuring plan, and which frequently treat impaired creditors of equal rank unevenly. This selectivity stands in contrast to the foundational idea of corporate insolvency as a collective process, in which individual creditors’ rights of enforcement are suspended for the good of the general body of creditors; in which all creditors participate; and in which the proceeds of realization of the assets are distributed in accordance with the distributional order of priority prescribed by corporate insolvency law. Restructuring procedures in which certain creditors are selected by the debtor to absorb the loss while others ride through unaffected raise very different issues of distributional fairness from an insolvency procedure in which all creditors participate. Moreover, the uneven treatment of creditors who would be of equal rank in corporate insolvency law’s distributional order of priority raises quite different issues from controversies over the distributional order of priority itself. Yet, with a few notable exceptions, selective corporate restructuring strategies have received hardly any attention from corporate insolvency and restructuring law scholars. We start from the premise that selectivity – strategic decisions to engage with selected creditors rather than to engage with all creditors in restructuring negotiations, and differential treatment – strategic decisions to allocate losses unevenly among creditors of the same rank, depending on their relative commercial bargaining power – can often be justified. Selectivity reduces the direct costs of restructuring by limiting the groups whose cooperation is needed to reach agreement. And it reduces indirect costs of restructuring by helping to keep unimpaired creditors on board with the business for the future. However, there are normative questions about the boundaries within which debtors ought to be able to make use of legal mechanisms for selective and differential treatment. Our article is the first, sustained investigation of the selective nature of corporate restructuring and the mechanisms in UK and US restructuring law that facilitate selective strategies. In the article, we review how selective strategies can be operationalized in four UK law procedures: Part 26 schemes of arrangement; Part 26A restructuring plans; company voluntary arrangements (‘CVAs’); and connected party pre-packaged administration sales. Where relevant, we draw explicit comparisons with the tools available in US chapter 11. We then develop a menu of relevant criteria to distinguish legitimate and illegitimate uses of selective strategies and map our relevant criteria onto the various UK restructuring procedures and US chapter 11, concluding with some limited suggestions for reform.