Conclusion

employees are central figures in corporate insolvency law and processes, but the law is based on notions of directorial roles and employee rights that are multiple, inconsistent and competing. This has led to a host of confusions, uncertainties, inefficiencies, unfairnesses and misplaced accountabilities. The broad end-product has been a system of corporate insolvency law that has offered, for much of the period since Cork, not so much a choice of processes that pull together harmoniously as an illorganised array of procedures that, in many respects, have undermined each other.

There may be signs, though, that matters have improved in recent years. The Enterprise Act 2002, for instance, went some way to harmonise processes when it ended the potential for deploying receivership so as to ride roughshod over other corporate insolvency mechanisms such as administration and company voluntary arrangements. UK insolvency law has, moreover, embraced the rescue culture as a framing objective of insolvency law and it has espoused a generally collectivist approach to insolvency processes with the establishing of the post-Enterprise Act administration procedure.

The challenges facing insolvency lawyers and practitioners are, however, as acute now as they have ever been and a host of rapid changes has altered the nature of insolvency practice. As noted in the Introduction, much more ‘insolvency work’ is now being carried out prior to the institution of any formal insolvency process and the growing use of devices such as the ‘pre-packaged’ administration demand that we pay increasing attention to the quality of informal procedures for dealing with corporate troubles. New and acute questions have arisen concerning the efficiency, accountability and fairness of those procedures and actors that are encountered in the ‘twilight zone’ of insolvency. A related concern may be the level of expertise that is brought to bear by the new corporate distress specialists who operate in the shadows of insolvency.

The development of the ‘new capitalism’ has also imposed new strains on the world of insolvency. As sources of credit have become more disparate, and as the ever more complex packaging of debt has lowered the transparency of lending, it has become increasingly difficult to rely on the old assumptions that have traditionally underpinned insolvency processes. Thus, it can no longer be assumed that a dominant bank lender will be present to monitor and organise a company’s attempts to turn its affairs around. Similarly, the ‘London Approach’ to rescue has been taken to breaking point by the difficulties of securing essential undertakings across ever larger numbers of lenders with increasingly

divergent natures and interests. In such a world of change, the unavoidable danger is that the rules of insolvency law – even if they are coherent and satisfactory – will not be able to exert real control in those areas of activity where the real decisions are being made. Nor can it be assumed that such a danger will be less acute after the credit crisis has passed. The credit crisis of 2007–8 and aftermath may stimulate the taking of steps to increase the transparency of credit-related transactions. There may be new regulatory reforms that are designed to render the credit markets more stable, but such responses are unlikely to reduce the number and variety of parties who provide financing in the ‘new capitalism’.

To return to insolvency law’s need to mesh with other legal domains, consistency of philosophy means not only that insolvency law has to be characterised by purpose and direction but that company and employment laws need to be both internally coherent and consistent with insolvency law. The chapter 16 and 17 discussions of directors and employees give an indication of the dangers and challenges being confronted here. To give a simple example, it is of little value to design insolvency laws that are rescue friendly if laws on employment protection offer strong disincentives to the corporate transfers that are necessary to keep businesses alive.

The returns from philosophical consistency are, moreover, important. At various points throughout this book it has been argued that legal uncertainties produce high costs, inefficiencies and unfairnesses. It might be responded, though, that laws can never be certain, that judges have to apply rules to differing circumstances, and that judges need to adjust criteria, standards and rules to cope with changes in such matters as business practices and ways of setting up commercial relationships. There is, however, an important distinction to be drawn between the unavoidable uncertainties that flow from the factors just noted and the unnecessary uncertainties that arise because inconsistent philosophies are vying with each other in driving legal developments. If, for example, punitive approaches to company direction are sustained in competition with public protection philosophies (or if rescue-oriented and creditor protection responses are set against each other) a great deal of uncertainty will unnecessarily arise if there is no set of overarching principles that indicates which of the competing approaches will prevail in which circumstances, or what balance between the approaches is appropriate.

It is philosophical consistency – within and across the areas of insolvency, company and employment law – that offers such guiding principles. This, it should be emphasised, does not mean that a single

substantive blueprint has to be laid down – in a changing world such blueprints rapidly pass their sell-by dates. What is required is an approach that confronts competitions between values and objectives and explains how these can be understood and argued out. It is the ability to explain – and so to understand and predict – that reduces uncertainties.

This book has set out to respond to these questions of philosophical deficiency. It has done so, first, by making out the case for an ‘explicit values’ approach to the design and evaluation of corporate insolvency processes. This is an approach that is applicable to all corporate insolvency procedures and encourages the development of mechanisms that are consistent in so far as they link to a common philosophy and to a limited number of identifiable values. Second, this book has set out to examine not merely the formal rules of corporate insolvency law but also the procedures, actors and institutions that give substance to the law as an aspect of corporate life and decline. The law, after all, does not achieve a great deal if formal rules are harmonious but confusions and inconsistencies of approach pervade the processes and institutional structures that are needed to implement these rules. Attending to procedures, actors and institutions means that difficult questions have to be tackled concerning not merely the substantive and procedural rights of individuals, groups and firms but also the capacities and incentives of these parties to deliver the appropriate levels of managerial skill and commitment to rescue or winding-up processes. The return from coming to grips with these issues is that corporate insolvency law can be assessed and redesigned with an eye to operational matters and not merely to the formal rules.

A third way of responding to the current problems that are encountered in the law has been to examine whether the assumptions that underpin existing laws, procedures and institutions need to be challenged so that new ways of conceiving rules, processes and actors are necessary if an explicit values approach is best to be served.

The chapters above have presented arguments in favour of a number of changes that seem likely to lead to gains in efficiency, expertise, accountability or fairness without unduly negative side-effects. On the financing of corporate organisations, current arrangements involve significant dangers that transfers of insolvency wealth will be effected from unsecured to secured creditors and to parties who are well equipped to make use of quasi-security devices. Such transfers, where they occur, may prejudice healthy companies’ needs as well as the interests, in

insolvencies, of certain creditor classes (notably the unsecured trade creditors). Procedures could and should be adopted to allow unsecured creditors to inform themselves more easily about the risks they are running when they provide credit. This is not a complete answer for all unsecured creditors but it is a step that will help reduce inefficiencies and unfairness with regard to certain parties.

As for the system of priorities that insolvency law establishes, this is rendered uncertain and confused by the capacity of ‘creditors’ to employ quasi-security devices such as retention of title clauses. Steps could be taken to reduce such confusions and, in turn, to lower general transaction costs. Thus, for example, a more rigorous approach to the registration of retentions of title would increase transparency and reduce the costs of borrowing by lowering the levels of financial uncertainty that creditors face when providing funds.

Turning to the major actors in corporate insolvency processes – the IPs – it has been argued above that there is no strong case for reforms to replace IPs with court officials or civil servants. There may be good grounds, however, for tightening the mechanisms used to regulate IPs, for rethinking the breadth of the duties that IPs owe in insolvency procedures and for subjecting IP regulation to more rigorously independent oversight. Where, moreover, much insolvency work is being undertaken informally by non-IPs there is a need to monitor, on an ongoing basis, the activities of turnaround specialists and those other parties who impact on corporate troubles. The hanging question is whether it makes sense for the law to control IPs tightly and yet leave unregulated a series of practitioners who engage in work of a similar nature and impact.

Current governmental endorsements of a rescue orientation in corporate insolvency procedures are to be welcomed but the discussion of rescue in chapters 6 to 12 revealed considerable scope for improvements in present arrangements. First, there is a need for harmonisation so that different rescue procedures do not undermine each other – so that, for instance, the use of ‘pre-packs’ does not allow the sidestepping of those procedural protections and balances that are established by the law governing post-Enterprise Act administrations. Efficiency in rescues may also be served by giving directors greater incentives and capacities to resort to rescue procedures before the company’s chances for turnaround have evaporated. Thought should be given, for instance, to ending the requirement, in the Insolvency Act 1986 Schedule B1, paragraph 11(a) that a court must be satisfied that a company is, or is likely to become, unable to pay its debts before it can make an administration

order. Consistent assumptions ought also to be made across rescue procedures concerning the roles of different actors such as directors or IPs. Such assumptions, moreover, should be based not on traditions of deference or unexplored notions of culpability but on a considered analysis of factors such as informational position; training; incentives; specialist knowledge of the relevant market; ability to assess financial options; and commitment to rescue.

Accountability within rescue procedures should, again, be ensured in reflection of a philosophy that is consistent across procedures. To this end, the use of pre-packs, again, may prompt the observer to ask whether such processes allow vulnerable creditors properly to hold decisionmakers to account and to bring an appropriate voice to bear on proceedings. There may also be a case for reconsidering whether shareholders should be excluded from the approval process in Schedule B1 administrations when insolvency is merely likely. Such an exclusion may not be fairness-enhancing and it may, similarly, be argued that fairness demands that the interests of employee stakeholders should be reflected in greater access to, or recognition in, the decision-making processes governing administration.

As far as the substantive principles governing post-insolvency contributions are concerned, it is collectivity and the pari passu principle that have long occupied centre stage as regards residual assets. Pari passu has, however, been subjected to a variety of exceptions and bypassing arrangements. The Crown preference has been abolished but the case for revising the rules on set-off is one not to be dismissed. It is difficult to support proposals for giving consumer creditors increased priority – largely because it is so difficult to distinguish ‘consumer’ from ‘trade’ creditor vulnerability – but employees can, for the moment, be identified as the creditor group most deserving of special treatment because of their status as non-adjusting, high-cost risk bearers. On replacing the pari passu principle with another approach to distribution of the residual assets, it has been argued that alternatives that involve assessing the individual position or merits of the creditor would give rise to much uncertainty and would involve both inefficiencies and unfairnesses. New approaches to the definition of creditor classes face severe difficulties in dealing with heterogeneities within the memberships of such redefined classes and there would be problems in showing why such newly favoured classes would have claims that are stronger than those of competing classes.

It has been emphasised in chapter 15 that pari passu only comes into operation once the relevant, residual, insolvency estate has been

constructed. Values such as efficiency and fairness have, accordingly, to be pursued in constructing the estate more generally and in establishing protections for ‘vulnerable’ risk bearers in the form of: procedural requirements (of information provision and disclosure); substantive protections (such as setting the ‘prescribed part’ at the appropriate level); ways of reducing overall risks of insolvency (for example, by improving directorial standards and training); and ways of spreading insolvency risks and, thereby, lowering risks borne by vulnerable parties.

The position of employees needs to be clarified not merely for the sake of employed persons but so that parties buying and selling companies can do so without excessive costs. A way forward, in the corporate transfer area, may lie through building on the TUPE 2006 Regulations by increasing further the state funding of employees’ acquired rights costs in corporate transfers post-insolvency. The law should also move towards a conception of the employee that recognises his or her participatory rights and contributions to the company. The relationship between this conception of the employee and the dictates of economic efficiency should be set out clearly in the law and such a relationship sustained in a consistent manner by the judiciary. As an underpinning to such developments in the law, more research should be undertaken (and state funded) on such matters as the potential role of the employee in rescues. Only against a reliable background of research can legislators, policy-makers, judges or others make informed judgements on implications for employees, other creditors or the variety of affected parties when they are shaping corporate insolvency processes or deciding issues.

As a final conclusion, a return should be made to the nature of the corporate insolvency law philosophy that is being argued for here. The ‘explicit values’ approach, it should be emphasised, is one that seeks to embrace both the public and private dimensions of corporate insolvency law. It is always difficult to reconcile public interests with those of private contractors, especially where private contractors vary sharply in their economic power, information levels, expertise and so on. A way to effect a ‘least-worst’ reconciliation, and to argue out the merits of this, is, however, to identify the values that are sought to be furthered within corporate insolvency processes. This, in the first instance, helps us to identify the ways in which different rules, processes and institutional arrangements affect various parties in divergent ways. Greater transparency is thus given to decisions about trade-offs. We can be clearer, for instance, on how much a new statutory requirement might affect small trade creditors compared to large secured bank lenders. Such

an approach also helps us to identify more easily the contradictory effects and assumptions that are associated with different processes and arrangements.

If corporate insolvency law is to move forward as a coherent, consistent and purposeful set of rules and processes, it is necessary to rethink a number of its elements in the light of such transparency. Some of those elements have been identified here and one route towards greater clarity of design and evaluation has, I hope, been mapped out in this book.