Corporate Insolvency Law Research Articles

Private Equity in Distress and the Incentives of Collateralised Loan Obligations

Abstract This article explores the problem that both modern private equity (PE) firms, and collateralised loan obligation (CLO) lenders to PE portfolio companies, have incentives to avoid a formal restructuring of PE portfolio companies in financial distress. The author is concerned that this may lead to negative social costs for suppliers, employees, customers and even government agencies. She explores how and why the problem arises, and the ways in which corporate and corporate insolvency law might be able to respond to it. Some suggestions are made, but it is accepted that any solution involves a sensitive balance that needs to be approached with considerable care.

Bank Failure and Corporate Insolvency Law: Similarities and Differences

Abstract It is well-established that managing the failure of banks requires a special legal regime. While retaining the specificities of such regime is key to preserve financial stability and more broadly public interest, bank failure proceedings operate in the broader legal infrastructure of a country, where corporate insolvency regimes have a key role. This chapter examines at high-level some institutional, substantive and procedural areas where bank failure proceedings and corporate insolvency frameworks interact.

Corporate ownership and insolvency law: An evidence from India

Reorganization or revival of the financially distressed corporate person is the prime objective of insolvency law. To rationalize the said objective, the insolvency law in India— Insolvency and Bankruptcy Code 2016 has adopted the manager-displacement model of the insolvency regime. It has become progressively evident from existing literature that the development of corporate governance mechanisms may have imperative implications on the aptness of a nation's legal system and its accomplishments. The existing evolutionary theory asserts that corporate bankruptcy and corporate governance structure complement each other. The historical account of corporate ownership structure in India represents a predominance of concentrated ownership patterns. Through the perspective of the existing evolutionary theory of corporate insolvency, the paper analyzes the corporate ownership structure and development of corporate insolvency law in India. The article also explores whether corporate ownership structure as a corporate governance mechanism can explain the progression of the insolvency regime in India. The findings of this paper would be of significance for jurisdictions that are considering reforms within their existing corporate insolvency law.

Small and state‐funded: An empirical study of liquidations in Scotland

AbstractThere is significant scope for empirical research in the field of corporate insolvency law. This paper seeks to make a valuable contribution to this field of research. It features analysis of data regarding all insolvent liquidations in Scotland that had their end point within a period of a year, specifically 1 October 2019‐30 September 2020 (even if the liquidations commenced prior to that period). A dataset was compiled using information from final accounts documentation for liquidations available from the UK's companies register. Following the introduction, the paper provides background and context for corporate insolvency in Scotland, with particular reference to liquidation and the rules relating to creditors. The section also includes comparisons with the law of England and Wales. The paper then moves on to discuss the empirical methodology adopted and how the relevant data was obtained. This is followed by results and analysis focused on: the asset values of companies in the study, the lifespan of those companies, the timespan of their liquidations, the levels of liquidation expenses, the recoveries of creditors (including secured, preferential and ordinary unsecured creditors), and the role of HMRC in liquidations, as a petitioner and in terms of paying liquidation expenses. The paper contains a number of significant findings regarding each of these matters. It supports the case for a streamlined liquidation procedure for smaller companies and for the introduction of an official receiver in Scotland (while also justifying the existence of the official receiver in England and Wales). Lastly, after the identification of some limitations regarding the analysed data, the paper highlights potential lines of further research building upon this study, including expanding the time periods examined, comparing the data for Scotland with data for other jurisdictions, most obviously England and Wales, and the consideration of corresponding data for other insolvency procedures.

On the meaning of bankruptcy: ‘Old–new’ lexicon in corporate insolvency law in the Commonwealth Caribbean

Several jurisdictions in the Commonwealth Caribbean have undertaken reform and modernisation of their insolvency legislation. The dominant model for the new enactments has been Canada's federal statute, the Bankruptcy and Insolvency Act, RSC 1985, which has already been transplanted into six jurisdictions of the region. The transplantation has introduced lexicon which, while part of the vocabulary of the old statutes for personal insolvency, has, traditionally, been unfamiliar to the region's corporate insolvency law, hence the phrase, ‘“old–new” lexicon’, in the title. This article examines the meanings of some of this lexicon, particularly ‘bankruptcy’ and cognate terms, including ‘acts of bankruptcy’. The examination extends to the term ‘receiving order’, operationally related to bankruptcy. Legal interpretation of the terms is enriched in the discussion by insights from linguistics. While showing that the importation of these terms into the region's corporate insolvency law is semantically problematic, the article elucidates the signification of the terms. It points out that some of the ‘old–new’ terms may tend to reduce the efficacy in the contemplated lay administration of the statutes. It also warns that the ‘old–new’ lexicon threatens to undermine key goals of the reform exercise, suggesting a need for deeper scrutiny in the transplantation process.

The future of corporate insolvency law: A review of technology and AI‐powered changes

AbstractThe conversation about how artificial intelligence (AI) might affect various areas of law (and other areas of life) has, in recent months, centred around ChatGPT which is just one application of AI. This article takes a broader view and assesses how AI, and technology more broadly, has begun to transform, and will continue to transform corporate insolvency law. While the pandemic has increased the adoption of technology in corporate insolvency processes, there is scope for further transformation. This article aims to survey the technological changes to corporate insolvency law and practice thus far and assess, based on current advances in technology, the potential for further transformation. It advances the argument that technology can improve efficiencies both prior to and during formal insolvency resolution processes. It therefore would be in the interests of every country to facilitate the adoption of technology at various points in the insolvency process. The article takes a cross‐jurisdictional approach to identify tech advances in insolvency law across different countries based on which best practices and guidelines can be outlined.

Zombie companies in China in the COVID‐19 era

AbstractCOVID‐19 poses novel sources of uncertainty and risk to companies, but it also offers many opportunities. In the COVID‐19 era, unprecedented government and central bank interventions to tackle the economic crisis precipitated by the pandemic have reinvigorated the debate on the threat of a zombification of the economy in China, caused by unviable companies being kept alive artificially. This particular consequence of COVID‐19 may aggravate the economic problem of zombie companies in China, increase the risk of further zombification, and create new zombie companies. Recognizing the risk factors of zombie companies and revisiting corporate insolvency law in China, this article aims to address a gap in knowledge related to how zombie companies are being handled in practice in China in the era of the pandemic. In particular, we will investigate the definition, recognition, and uniqueness of zombie companies in the context of COVID‐19, and propose several policy actions, primarily through Chinese insolvency law, to mitigate the risk of the return of zombie companies or a further zombification of the economy. It is anticipated that these measures will help to enhance China's sustainable economic recovery in the wake of the COVID‐19 pandemic.

Extra-territoriality and the UK Insolvency Act 1986

AbstractThis paper considers whether UK corporate insolvency law and the UK Insolvency Act 1986 have extra-territorial effect post-Brexit, and whether – and to what extent – it is for the courts or the legislature to extend any extra-territorial effect. It does not deal with ‘inward recognition’, ie the recognition of foreign judgments and orders in the UK.Brexit has left something of a vacuum and provisions which might otherwise have applied extra-territorially, at least within the EU, may now have been deprived completely of extra-territorial effect. But all is not lost and Brexit here presents opportunities. There is room for clarifying that particular provisions which might otherwise have discriminated between EU application and application vis-à-vis the rest of the world can now be given a uniform global interpretation. Courts should, however, proceed incrementally in extending the extra-territorial scope of UK corporate insolvency law.A bolder reform would be to enact legislation that specifies the exact extent to which the UK Insolvency Act applies extra-territorially. Legislation obviously depends on parliamentary time and requires detailed drafting but also provides the opportunity for the UK to showcase that it remains at the forefront of international insolvency developments.

A comparative analysis of the Australian and New Zealand liquidation schemes

AbstractOn September 28, 2022, Australia announced an inquiry into the effectiveness of its corporate insolvency laws. The Australia and New Zealand corporate insolvency frameworks have similar objectives and operate in a similar context where, as is the case the world over, most companies are small to medium enterprises. Despite liquidation being just one of several collective and formal corporate insolvency procedures, it is the most frequently occurring procedure in both countries by a large margin. The Australian and New Zealand liquidation schemes have many similarities but also some key differences. Differences include the structure of the respective schemes; the levers prompting liquidation of companies in appropriate circumstances; the role of creditors, the court and the regulator; and the management of low‐value and assetless liquidations. These differences are analysed to determine what, if anything, the New Zealand scheme might contribute to development and/or reform of Australian corporate insolvency law. As consistency and coordination with Australian insolvency law is a New Zealand policy aim, the lessons the Australian scheme might have for New Zealand are also considered. Many of the points on which the Australian and New Zealand liquidation schemes differ are of universal concern (such as the management of low‐value liquidations), meaning that the nature and success (or otherwise) of the Australian and New Zealand responses are of wider, comparative interest.

Comparative Corporate Insolvency Law, Second Edition

Comparative Corporate Insolvency Law, Second Edition

What is an insolvency proceeding? Gategroup lands in a gated community

AbstractMany English (and other) restructuring lawyers consider that the scheme of arrangement cannot properly be characterized as an insolvency proceeding for the purposes of certain international instruments for (amongst other things) the allocation of jurisdiction and/or the recognition of proceedings, judgments, and/or orders. This article shows that this view is mistaken. The article examines insolvency as a scalar attribute and a vague concept. It draws out the implications of treating insolvency law functionally as that part of law which responds to the circumstances peculiar to a debtor's insolvency. It considers the nature of insolvency, “pre‐insolvency”, “preventive'”, restructuring, liquidation, and “pre‐pack” proceedings. It shows that proceedings operating under insolvency law in relation to insolvent debtors often operate in identical or materially similar ways in relation to solvent debtors. This is as true of winding‐up, administration, and company voluntary arrangement proceedings under English law as of the scheme of arrangement. This has important implications for the characterization of a proceeding as an insolvency proceeding for relevant purposes. The article outlines the development of the concordat in several civil law jurisdictions, starting with its roots in Justinian's Digest. It traces the development of the composition in England, starting with its status as a voluntary process incapable of binding dissentients, taking in the “protections” granted by the Privy Council and the “bills of conformity” issued by the Court of Chancery, and then considering statutory compositions. It shows how the statutory composition travelled from natural person insolvency law to corporate insolvency law. The artic draws on this analysis and the official reports on key European instruments allocating international jurisdiction in insolvency and “civil and commercial” matters to characterise the scheme of arrangement. The article also assesses the most detailed critique yet of the gategroup judgment of the High Court of England and Wales, which characterized the restructuring plan proceeding as an insolvency proceeding for certain jurisdictional purposes. The critique of this judgment usefully exposes to the sunlight of public scrutiny — at length and independently of the exigencies of any particular litigation — the types of arguments which have been used to resist the conclusion that the scheme is (quite plainly) a judicial composition which constitutes an insolvency proceeding for relevant purposes when deployed in relation to insolvent companies. The article shows that these arguments are unpersuasive.

The Case for Amendment of Section 665 Cama 2020 and for Unenforceability of Ipso Facto Clauses in Nigeria

Until recently, Nigeria did not have a robust Corporate Insolvency law regime. Fortunately, efforts were made recently to broaden the country’s Insolvency law with the enactment of the Companies and Allied Matters Act, 2020 (“CAMA 2020”). CAMA 2020 is essentially an amendment of the Companies and Allied Matters Act, 1990 (“CAMA 1990”) and is designed to update Nigeria’s Corporate and Insolvency law in conformance with global best practices. How well the Insolvency law provisions introduced by CAMA 2020 align with global best practices and whether they go far enough in addressing current insolvency problems in Nigeria remain to be seen. However, there is no denying the fact that the Insolvency provisions in CAMA 2020 are a significant upgrade of the rudimentary insolvency rules contained in CAMA 1990. One of the novel insolvency rules introduced in Nigeria by CAMA 2020 is contained in section 665 of the Act. Section 665(2) forbids a supplier of certain essential supplies (namely: water, gas, electricity and communication services) from making the provision of such essential supplies conditional on payment of outstanding charges owed the supplier by an insolvent company. The prohibition applies only where an insolvent company owes the supplier charges on supplies made to the insolvent company before the insolvent company entered administration or before it went into liquidation or before a voluntary arrangement took effect with respect to the said company or before a provisional liquidator was appointed (“pre-insolvency debt”). Section 665(2)(a) however permits a supplier of the above-mentioned essential supplies to make it a condition for the supply of the above-mentioned utility services to an insolvent company that the officeholder personally guarantees the payment for the supply of the above-mentioned utility services . As I will explain in greater depth in paragraph 2.1 of this paper, Section 665 is designed to prevent creditors who provide essential goods and services to insolvent companies from undermining efforts to restore insolvent companies to profitable trading. It is also designed to prevent creditors who provide essential goods and services to insolvent companies from jumping ahead of the queue to get paid by the insolvent before other creditors in breach of the law. I will argue in this paper that section 665 is deficient and may well be incapable of achieving its intended objectives. I will further contend that there ought to be a provision in CAMA 2020 that renders ipso facto clauses unenforceable. I will also make the case that the narrow scope of section 665 and the lack of a provision in CAMA 2020 which would make ipso facto clauses unenforceable are not in sync with modern trends in corporate insolvency law in other common law jurisdictions like the U.K, Australia, Canada, Singapore and the U.S

Kayode Akintola, Creditor Treatment in Corporate Insolvency Law

Kayode Akintola, Creditor Treatment in Corporate Insolvency Law

Selective Corporate Restructuring Strategy

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.

The Impact of Cryptocurrencies on the General Powers and Duties of South African Insolvency Practitioners

Within the context of the fourth industrial revolution, cryptocurrencies pose several challenges in the framework of corporate insolvency law. In South African law, no statutory framework vis-à-vis cryptocurrencies, such as Bitcoin, currently exists. This has however not prevented entities from engaging in the cryptocurrency market. The specific dilemma is that insolvency practitioners do not have legislative guidelines to assist them in dealing with the subject of cryptocurrencies. Consequently, international judicial developments must be consulted and analysed with the aim to close the gap between the legislature and Industry 4.0. This article unpacks the South African legal position on cryptocurrencies within the context of the statutory powers and duties of insolvency practitioners. It engages in an analysis of selected international courts cases that have dealt with the concept of cryptocurrencies within the context of insolvent estates and continues to make recommendations for the development of an efficient and effective regulatory model.

Insolvency and Bankruptcy Code 2016: revisiting with market reality

PurposeThis paper aims to revisit the Indian experience on corporate bankruptcy law to answer “why Indian corporate insolvency law structured differently from a manager-driven (pre-Insolvency Code) to manager-displacing model (post-Insolvency Code)?”Design/methodology/approachThis paper is qualitative in nature. The paper analyses the prevailing theoretical wisdom in corporate insolvency law in India and examines the practices of Indian bankruptcy regime.FindingsThe authors argued, considering the corporate ownership composition, the Insolvency and Bankruptcy Code 2016 will not accomplish the intended objective (i.e. the “creditor primacy”). The findings refute with the evolutionary theory, i.e. debt and equity both will tend towards dispersion in outsider system of governance.Originality/valueThis paper put forward the imprint that Indian corporate insolvency regime is manager-displacing under Law on Books and manager-driven under Law on Practice.

Cross-border Corporate Insolvency Law in India: Dealing with Insolvency in Multinational Group Companies—Determining Jurisdiction for Group Insolvencies

Cross-border Corporate Insolvency Law in India: Dealing with Insolvency in Multinational Group Companies—Determining Jurisdiction for Group Insolvencies

The Efficacy of Insolvency-Related Termination Clauses in Commercial Agreements

It is common practice for contracting parties to include provisions for termination or variation of their commercial agreements on a party’s insolvency. These insolvency-related termination clauses are usually aimed at insulating solvent parties from a counterparty‘s insolvency. Although parties are bound by the terms of arm’s length contracts, the commencement of formal insolvency proceedings may invalidate unambiguous and copper-bottomed contractual rights. Insolvency-related termination clauses are no exceptions. A core objective of corporate insolvency law is to impose a mandatory collective regime for resolving insolvencies. This collective regime supplants the free-for-all individual enforcement actions against insolvents. This two-part article explores the efficacy of insolvency-related termination clauses which are sometimes regarded as boilerplates. The first part examines primary principles of insolvency law against which the enforceability of insolvency-related termination clauses may be assessed. The second part will examine the enforceability of insolvency-related termination clauses in certain commercial agreements. The first part of this article examined the core principles of insolvency law against which the enforceability of insolvency-related termination clauses may be gauged. This concluding part examines the enforceability of insolvency-related termination provisions in certain commercial agreements.

The Rise and Fall of Regulatory Competition in Corporate Insolvency Law in the European Union

In this article, I discuss the rise and fall of regulatory competition in corporate insolvency law in the European Union. The rise is closely associated with the European Insolvency Regulation (EIR, 2002), and it is well documented. The UK has emerged as the ‘market leader’, especially for corporate restructurings. The fall is about to happen, triggered by a combination of factors: the recasting of the EIR (2017), the European Restructuring Directive (ERD, 2019) and Brexit (2019). The UK will lose its dominant market position. I present evidence to support this hypothesis.

The rise, fall and potential for a rebirth of receivership in UK corporate law

ABSTRACTIn this article, we explore diverse forms of receivership in order to demonstrate the extent of the continued or potential utility of this institution in UK Corporate Law. We do this by placing the historical origins of receivership alongside its contemporary manifestations in both solvent and insolvent scenarios. In so doing, we present a nuanced picture of receivership as a process that, in specie and – by reference to outcomes in other corporate insolvency law procedures – in substance, continues to provide protection for creditors (and other stakeholders) in modern commercial transactions.