authority with which they can deliver business reviews and proposals for reorganisation, refinancing and so on. To the extent that the clients of turnaround professionals are paying for services that have value by virtue of their independence, the market is valuing their rescue-enhancing rather than bank-serving effects. The market, it seems, is increasingly willing to value such services and rescue-enhancing effects.

Turnaround professionals and fairness

When companies have entered into a statutory insolvency procedure it is clear that the law obliges IPs to act fairly when carrying out functions within these procedures.215 The duty to act fairly, moreover, has substantive and procedural aspects. The IP who acts as an administrator, for instance, is obliged to pursue his functions ‘in the interests of the creditors of the company as a whole’.216

Such an administrator would also be obliged to act procedurally fairly. This flows from the administrator’s status as an officer of the court (a public official)217 and because the administrator’s substantive duty to

215As noted above, whether as officers of the court (administrators and liquidators in compulsory liquidations) or as professionals governed by their relevant RPB’s code of ethics. What fairness involves in any particular case will be assessed by the courts. (Challenges on the basis of unfairness can be mounted in, for example, the ‘new’ administration procedure under Insolvency Act Sch. B1, para. 74(1).) On judicial scrutiny of IP activities in the ‘new’ administration procedure see J. Armour and R. Mokal, ‘Reforming the Governance of Corporate Rescue: The Enterprise Act 2002’ [2005] LMCLQ 28; R. Mokal and J. Armour, ‘The New UK Corporate Rescue Procedure – The Administrator’s Duty to Act Rationally’ (2004) 1 Int. Corp. Rescue 136; V. Finch, ‘Re-invigorating Corporate Rescue’ [2003] JBL 527; Finch, ‘Control and Co-ordination in Corporate Rescue’ and ch. 9 below.

216The ‘new’ administrator owes statutory duties to act in the interests of creditors as a whole and to perform his functions as quickly and efficiently as is reasonably practicable: see Insolvency Act 1986 Sch. B1, paras. 3(2), 4. He must pursue a single hierarchy of objectives set out in para. 3(1) and paying off the secured creditors ranks last in those statutory objectives (in doing so he is under a positive duty not to harm the company’s other creditors: para. 3(4)(b)). See ch. 9 below.

217See Insolvency Act 1986 Sch. B1, para. 5. As an officer of the court the administrator is bound by the rule in Ex p. James (1874) 9 Ch App 609 (obligations to act honourably and fairly). As a public official the administrator must act procedurally fairly and principles of judicial review necessitate the challenged actions of the administrator meeting demands of rationality: see e.g. Associated Provincial Picture Houses Ltd v.

Wednesbury Corporation [1948] 1 KB 223; Council of Civil Service Unions v. Minister for the Civil Service [1985] AC 314. See further Mokal and Armour, ‘New UK Corporate Rescue Procedure’; Finch, ‘Control and Co-ordination in Corporate Rescue’ and ch. 9 below.

228 the context of corporate insolvency law

consider the interests of all creditors carries an obligation to act reasonably by recognising the procedural rights of such creditors.218 Can it be argued that turnaround specialists are, or should be, obliged to act according to similar canons of fairness?219 A difficulty in making this argument is that a distinction might be sought to be drawn between situations that obtain before and those that are encountered after a company has entered a formal insolvency process. Once the company has entered a statutory insolvency procedure (which may be preor postinsolvency)220 insolvency law is based on the premise that such procedures involve impositions and that those parties who have to make concessions within such procedures must be given process rights in return for these concessions. The CVA procedure, for example, can be used pre-insolvency221 and involves a variety of procedural protections for creditors (for example, the need for proposals to be approved by specified majorities).222 Such protections can be seen as a quid pro quo for creditors having to submit to proposals that bind them223 and to a moratorium on enforcing their rights in the ‘small company’ CVA.224 In contrast, it might be argued, parties in informal situations – before statutory insolvency procedures come into play – are free to protect

218As demanded by Wednesbury. On the ‘new’ administration see ch. 9 below.

219The STP/IFT Code of Ethics, para. 3.1 requires members to act with honesty, fair dealing and truthfulness in all professional appointments and to strive for objectivity in all professional judgements. Objectivity here requires having regard to all considerations relevant to the task in hand and no others. Paragraph 5 of the Code requires the declining of any assignment that would create a conflict of interest. Advice has to be impartial and frank, free from any external or adverse pressures or interests that would weaken the member’s professional independence (STP/IFT Code of Ethics, Appendix, para. A.2).

220A company is insolvent for the purposes of the law if it is unable to pay its debts. Legal consequences only attach to a company, however, on the institution of a formal proceeding, such as winding up or administration: see ch. 4 above.

221Unless it is being invoked in conjunction with an administration order made under the Insolvency Act 1986 Sch. B1.

222The proposal for a CVA needs to be approved by 75 per cent of creditors voting in person or by proxy by reference to the value of their claims. It also requires the approval of 50 per cent in value of the shareholders present at the shareholders’ meeting. If approved the scheme becomes operative and binding upon the company and all of its creditors (save for secured or preferential creditors who have not consented: Insolvency Act 1986 s. 4(3) and (4)). See further ch. 11 below.

223As noted above, the Insolvency Act 1986 s. 4(3) and (4) specifies that the CVA proposal cannot affect the rights of secured or preferential creditors without their consent.

224See Insolvency Act 1986 s. 1A and Sch. A1 (inserted by the Insolvency Act 2000) and ch. 11 below.

themselves by exercising whatever rights225 they may possess. There is no need to demand that they act altruistically or recognise any participatory rights of other parties since those parties are not being forced to accept any proposals or settlements.

If the above distinction between preand post-formal scenarios is accepted, it can be contended that issues of procedural fairness are not to the fore when, say, a company employs turnaround professionals to devise restructuring plans and applies these in informal processes. It might be responded that, in reality, it is often the case that when a company employs a TP a plan of action will be imposed on less wellresourced creditors and that powerful creditors will negotiate for solutions that are not so much in the best interests of all creditors as they are designed to improve their own positions by increasing their security or equity. (There is evidence, indeed, that during periods of rescue, bank credit tends to contract but unsecured trade credit tends to expand, sometimes dramatically.)226 From the point of view of an unsecured creditor, it could be pleaded, it matters little whether a bank-orientated strategy impacts on it by means of a formal process such as a CVA or an informal turnaround strategy. Why, therefore, should procedural protections avail in the case of the CVA but not in informal turnaround? One answer, perhaps, is that insolvency law has to draw a line at some point between formal processes, which involve formal, legal protections, and informal processes, which involve contractual and market-driven protections (for example, the unsecured creditor’s freedom to refuse to trade or to enforce a debt). It might be argued that what is really at issue here is where the formal/informal line should be drawn. Advocates of greater protection for vulnerable creditors might contend that some informal procedures should be made formal by the imposition of a statutory scheme of processes and protections.227 This would cover the situation, for instance, in which a floating-charge-holding bank negotiates with the company’s turnaround specialists and then presses the company to take steps that do not appear to unsecured creditors to be in their interests (for example, the bank persuades the company both to

225These may be existing or newly negotiated contractual rights and statutory rights, for example to levy execution for the debt. On informal rescues and reconstructions see ch. 7 below.

226See J. Franks and O. Sussman, ‘The Cycle of Corporate Distress, Rescue and Dissolution’, IFA Working Paper 306 (2000), p. 2: trade credit expansions of up to 80 per cent are noted in cases that end in a formal insolvency procedure.

227On arguments for placing the London Approach on a statutory footing see ch. 7 below.

230 the context of corporate insolvency law

increase the bank’s security in return for continued lending and to demand improved credit terms from unsecured creditors). To such advocates of greater protection, it could be replied, first, that the law already offers such unsecured creditors a set of rights that allows them to enforce their debts; second, that if the actions being taken by the company mean that it is likely to be unable to pay its debts, the Insolvency Act 1986 already allows the unsecured creditors to apply for the appointment of, say, an administrator;228 and third, that to advance the threshold of formal insolvency proceedings further into the activities of noninsolvent companies may create a set of serious uncertainties that would prejudice entrepreneurship. These uncertainties would be considerable, it might be cautioned, because there would be vagueness in the boundary between ordinary healthy commercial activity and activity producing some risks to some creditors which would give rise to extra obligations of fairness.

On behalf of TPs, further arguments might be mounted to suggest that the growth of TP activity positively enhances fairness in most informal turnaround schemes. First, it could be emphasised that the TP generally acts for the company not the bank and that, if he is an IFT member, he is ethically bound to act fairly and to give advice free from outside pressure (from the bank, for example).229 Second, it could be argued that the work of a specialist TP enhances fairness through improved transparency. The TP carries out a central function – the gaining of creditor agreement to a way forward for the company. In repeatedly performing this function TPs become expert facilitators and mediators. They are the parties who lubricate the machinery of negotiation that is necessary for agreements to be devised. As one turnaround specialist indicated, when talking of a large and successful reorganisation, the first success factor was: ‘Communicate directly with all the stakeholders. Many of the banks had no direct contact with the company. We held one to one discussions with each institution to ensure that their issues and concerns were addressed. This was critical to building support for the restructuring.’230

The TP, accordingly, can be held out as the person who plays a key role in making turnaround processes open, transparent and intelligible. In doing so, it can be argued, the TP conduces to processes that are more open and fair than would be the case without professional facilitation.

228See Insolvency Act 1986 Sch. B1, paras. 12 and 22.

229See STP/IFT Code of Ethics, Appendix, para. A.2.

230L. Barlow, ‘Turnaround and Restructuring at Stolt Offshore’ (2004) STP News (Winter) 11.