companies look to an increasingly wide variety of lenders and methods of raising money – and, notably, to asset-based finance arrangements such as invoice discounting or factoring.252 In terms of rescue, the fear (as noted in chapters 3 and 6) is that such arrangements do not lend themselves to turnarounds because creditor co-ordination costs and difficulties are increased and more obstacles are placed in the way of a successful rescue.253 Alternatively, lenders may take charges that are not QFCs but are fixed charges over certain of the company’s assets. The holder of such a charge is then placed to appoint a receiver should the need arise. Similarly, complex arrangements can be devised whereby lending is carried out through numbers of subsidiaries, each of which has a fixed charge over part of the company’s property but none of which has security over the whole or substantially the whole.254 The EA 2002, by encouraging these strategies, however, may be said not to further rescue objectives since it incentivises the selling off of parts of the company and may lead to piecemeal disintegration of the business.

Administrators’ expenses and rescue

The successful pursuit of a rescue requires that the administrator decides that it is appropriate to continue trading so as to produce a better return for creditors than would be likely in an immediate liquidation.255 This decision may turn in no little part, however, on how the law

deals with debts owed to employees by virtue of employment legislation256 and on how priority is attached to the expenses of the

administration.257

The Insolvency Act 1986 Schedule B1 paragraph 99(4) and (5) provides that where the administrator adopts employees’ contracts, the

252On techniques for lenders to avoid the controls of the EA 2002 see R. Stevens, ‘Security after the Enterprise Act’ in Getzler and Payne, Company Charges, at pp. 166–7.

253See IS 1999. Lack of ‘creditor consensus’ may thus be an increasing problem: see Armstrong, ‘“Return to First Principles”’, p. 110. Armstrong argues, however, that he has seen ‘no empirical evidence to prove that increasing fragmentation of the small companies finance market frustrates rescue’: p. 111.

254See Stevens, ‘Security After the Enterprise Act’.

255IA 1986 Sch. B1, para. 3(1).

256See pp. 372–5 above. For further discussion of employees in insolvency see ch. 17 below.

257See also A. Walters, ‘The Impact of Employee Liabilities on the Administrator’s Decision to Continue Trading’ (2005) 26 Co. Law. 321; H. Lyons and M. Roberts, ‘Administration Expenses – “Friday Afternoon Drafting” and the Rescue Culture’ (2005) 16 Sweet & Maxwell’s Company Law Newsletter 1.

wages and salaries involved have ‘super-priority’ and are payable in advance of not merely the claims of floating charge holders and preferential creditors but also the expenses of the administration and even the administrator’s own remuneration.258 The rescue issue is, however, that if ‘wages and salary’ is interpreted broadly, this places the administrator in a very difficult position. The broad interpretation reduces the prospects of turnaround considerably by reducing the assets available to fund a rescue and, in order to limit such liabilities, the administrator may have to lay-off the very staff that are needed for realistic prospects of continued trading.259 The courts have considered these matters and sought to further rescue objectives. In Re Allders Department Stores Ltd260 the court held that redundancy or unfair dismissals payments were not ‘wages and salary’ enjoying priority under paragraph 99 since they arose from statute, not the contract of employment. Similarly in Re Huddersfield Fine Worsteds Ltd261 it was held that protective payments under the Trade Union Labour Relations (Consolidation) Act 1992 were not payable in priority to administration expenses.

258Administration expenses, as noted, are payable ahead of floating charge holders: IA 1986 Sch. B1, para. 99(3)(b). See the House of Lords’ decision in Freakley v. Centre Reinsurance International Co. [2006] BCC 971 – handling expenses incurred by insurers (who under the policy were entitled to handle insurance claims of the company in administration) did not have priority over administration expenses under the then s. 19(5) of the Insolvency Act 1986. Note that after the Enterprise Act 2002 there are new rules governing the fixing of the administrator’s remuneration. Insolvency Rule 2.106 provides for the fixing of the administrator’s remuneration on a percentage or timespent basis by the creditors’ committee, by a meeting of creditors or by the court: see further Sims and Briggs, ‘Enterprise Act 2002 – Corporate Wrinkles’, p. 52. Note also that after the Enterprise Act 2002 removed Crown preference the Treasury changed the rules so that when a company goes into administration, its existing accounting period comes to an end and a new one starts. Consequently any corporation tax chargeable on the profits earned in the administration becomes an expense of the administration as opposed to an unsecured claim: see generally B. Walsh and S. Martins, ‘Tax in Enterprise Act Administrations: Some Practical Issues’ (2008) 21 Insolvency Intelligence 103.

259See Walters, ‘Impact of Employee Liabilities’, p. 321 and the judgment of Neuberger LJ

in Re Hu dder sfi eld Fine Worsteds Ltd [200 5] 42 All005 ER] B8CC86, 915[ . S ee f ur th ch. 17 below.

260[2005] 2 All ER 122, [2005] BCC 289.

261[2005] 4 All ER 886, [2005] BCC 915. See similarly Leeds United AFC Ltd [2008] BCC 11: damages for wrongful dismissal would not be covered by para. 99 and would not be payable ahead of the other expenses of the administration. Pumfrey J further deemed that liabilities for wrongful dismissal would not count as necessary disbursements for the purpose of r. 2.67(1)(f) of the Insolvency Rules 1986 so as to rank in priority to the ordinary creditors.

Less conducive to rescue, however, is the effect of the new version of rule 2.67 that is set out in the Insolvency (Amendment) Rules 2005.262 In the Exeter City (Trident) case263 it was held that non-domestic rates were necessary disbursements within rule 2.67(1)(f) and paragraph 99(3). This ruling followed the liquidation expenses rule set out by the House of Lords in Toshoku264 but Exeter City (Trident) is not rescue friendly since, by giving priority to non-domestic rates for the period of the administration, funds available for continued trading are reduced. Gabriel Moss QC has dubbed Exeter City (Trident) ‘a potential disaster’ and commented: ‘This could make an administration insolvent from day one if there are a large number of leasehold retail premises incurring new liabilities for rates.’265 David Richards J said in Exeter City (Trident) that his conclusion was arrived at in spite of the overall policy of promoting a rescue culture and stood in the face of evidence that the effect of the decision would be detrimental to successful administrations. He suggested that the legislators had subordinated

the policy of rescue to the desire to give priority to the payment of rates.266

Some relief from the effects of Exeter City (Trident) was offered in 2008 when the Department for Communities and Local Government promulgated new regulations to exempt companies in administration from liability for unoccupied property rates.267 This followed lobbying from R3 who argued that, in view of Exeter City (Trident), companies in administration should have the same exemption from empty property rates as companies in liquidation. This reform, accordingly, renders empty property rates neutral regarding decisions about whether to enter administration or liquidation.

262SI 2005/527. On tensions between this rule and the statutory provisions of Sch. B1, para. 99 see G. Moss, ‘Rescue Culture Speared by Trident’ (2007) 20 Insolvency Intelligence 72.

263Exeter City Council v. Bairstow and Others, Re Trident Fashions plc [2007] BCC 236. See

J. Bannister, ‘Legal Update’ (2007) Recovery (Summer) 11; R. Heis, ‘Technical Update’ (2007) Recovery (Autumn) 14; L. C. Ho, ‘Sealing Administration Expenses, Puncturing Rescue Culture?’, available at http://ssrn.com/abstract=981795, (2007) 23 IL&P.

264In Re Toshoku Finance UK plc [2002] UKHL 6; [2002] 1 WLR 671.

265See Moss, ‘Rescue Culture Speared by Trident’, p. 75.

266Exeter City Council v. Bairstow and Others, Re Trident Fashions plc [2007] BCC 236, para. 8.

267See Non-domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/ 386), effective from 1 April 2008. The new rules apply to companies already in administration on 1 April 2008 but do not apply retrospectively: see T. Bugg, ‘Legislative Changes Afoot’ (2008) Recovery (Spring) 10.

The case for cram-down and supervised restructuring

At this point it is relevant to consider an argument that the new administration procedure is, in reality, old hat: that it addresses an outdated set of challenges; that it does not provide the rescue procedure that modern restructurings really require; and that there is a need to move to a regime of cram-down and court supervision. This argument has been put forward strongly by the European High Yield Association (EHYA), an association representing participants in the European high yield bond markets.268 The EHYA contends that, against a background of huge growth in the leveraged lending market, most restructurings occur outside formal procedures269 and administrations will have only limited use in coming years because use of a formal procedure is seen as reflecting corporate failure; the ability of suppliers and customers to abandon contracts frustrates purposes and destroys value; and funding difficulties often impair trading through the proceedings. The EHYA suggests, furthermore, that the out-of-court debt restructuring processes that can now be used will face increasing challenges due to the growing complexities of capital structures, the dispersion of debt and the multiplicity of parties generally involved with troubled companies:270

Stakeholders approach each restructuring with their own agenda and strategy, often looking for positions of control and influence to gain leverage, not always seeking common ground and consensus. The absence of a predictable, supervised restructuring process creates a con-

siderable layer of uncertainty, increases costs and can alter the economics of a deal.271

What is needed, the EHYA argues, is a court-supervised restructuring process that includes a stay on enforcement actions, including a ban on the exercise of contract termination provisions by suppliers and customers (as found in the USA and France); judicial resolution of valuation disputes; and a system of cram-down to prevent those without an

268See EHYA, Submission on Insolvency Law Reform (EHYA, London, 2007), discussed by

R. Heis, ‘ Technica l U pdate’ (2 007 ) Recov er y (Autu mn) 15. In Febr uary 2 0

reported that its extensive consultations with industry had produced ‘nearly unanimous’ support for its proposals: see the revised EHYA Submission on Insolvency Law Reform (EHYA, London, 2008) and P. J. Davies, ‘Treasury Urged to Reform Insolvency Laws’, Financial Times, 26 February 2008.

269The EHYA acknowledged that the informality of such actions means that statistics on numbers of restructurings are not available.

270On such tensions in informal rescues and reconstructions see ch. 7 above.

271EHYA, Submission on Insolvency Law Reform (200 7), p. 3.

economic interest (the ‘out of the money’ parties) from frustrating the proceedings. The effect would, inter alia, be that when a company is in administration, the power of customers and suppliers272 would be curbed and there would be no vetoing of a restructuring plan by those shareholders and creditors who no longer have economic interests in the company (because available company funds do not allow them a return). The EHYA’s stated intention is to streamline the claims of ‘financial stakeholders’ (i.e. ‘structural investor debt’ and shareholder claims) as opposed to ‘trade’ creditors ‘whose claims arise out of the day to day operations of the business’.273 There is no advocacy of a cram-down applicable to trade creditors.

Excluding the ‘out of the money’ parties from the restructuring process is a contentious point but one on which the EHYA takes a firm line: ‘As a policy matter, we do not consider that creditors or shareholders with no economic interest in the enterprise (on a proper valuation basis)

should be in a position where their “veto” forces full insolvency proceedings.’274 The quid pro quo for removing the veto of the ‘out of the money’

parties is the proposed system of judicial supervision.

In support of the proposal, it can be said that the 1986 Insolvency Act, as amended, already allows the administrator to avoid calling a creditors’ meeting if there is no prospect of a return to unsecured creditors.275 The administrator, moreover, has a general duty to act in the interests of all creditors of the company. As for shareholders, it can be said that the dispersion of equity which the ‘new capitalism’ involves276 means that, for practical purposes, many holders of equity interests will be unable to participate in a restructuring to rescue-essential, tight timescales in any

272Note that the Insolvency Act 1986 s. 233 already prohibits utility suppliers (for gas, electricity, water and communication services) from cutting off connections unless, for example, arrears are paid. The supplier may require the administrator (or ‘office holder’) to undertake personal responsibility for payment for any new supply but may not make the provision of a new supply conditional on receiving payment or security for the old.

273EHYA, Submission on Insolvency Law Reform (2007), Appendix 1, p. 6.

274Ibid., p. 5. No weakening of protections for employees is envisioned by the EHYA: see p. 6.

275Under Sch. B1, para. 52(1)(b) the administrator is not obliged to call an initial creditors’ meeting (under para. 51(1)) if he thinks that the company lacks the property to make a distribution to unsecured creditors other than the prescribed part under IA 1986 s. 176A(2)(a). Creditors holding over 10 per cent of total debts can, nevertheless, call for a creditors’ meeting under Sch. B1, para. 52(2)(a).

276See ch. 3 above, pp. 133–40.

event. If, moreover, their holdings have no economic value, the EHYA argument that they have no economic interest carries some weight.

The difficulties with the proposals, however, are not trivial.277 The EHYA anticipates that the suggested court-supervised restructurings would be effected by either a scheme of arrangement or a Company Voluntary Arrangement (CVA) procedure and would involve a courtappointed ‘monitor’ to prevent improper use of the stay and reporting back to the court. Some observers, however, fear that resort to a courtrun procedure would see the UK rescue regime descend into bitter litigation and delays: ‘[B]y pushing so much of the UK’s insolvency and restructuring process into the courts these proposals could lead us into the mire of expensive litigation that US companies are now so keen to escape. Insolvencies will change from being relatively quick and

pragmatic into huge set piece multi-party litigation of the kind that exists in the US.’278

A central worry about the EHYA proposals is that the cram-down rules would turn on drawing a distinction between ‘in the money’ and ‘out of the money’ parties. This distinction might well raise difficult issues and precipitate the complex and economically technical litigation that would undermine the speedy route to rescue that the EHYA desires. In a world of highly structured, complex debt – in which creditors increasingly hold bundles of debts of quite different kinds – it might prove more and more difficult to identify the parties that are ‘out of the money’ and much might depend on debatable assumptions and contentious modes of calculation. All of this could fuel litigation.

277See V. Finch, ‘Corporate Rescue in a World of Debt’ [2008] 8 JBL 756, 773–6. See also the concerns expressed by the Insolvency Service in concluding that there was not sufficient evidence to show that the UK needed the EHYA proposed procedure (IS letter to the Managing Director, EHYA, 8 May 2008, reproduced on IS website: www. insolvency.gov.uk). The IS expressed particular concerns about: retaining managers in place when there might have been mismanagement or fraud; dangers that shareholder challenges and ‘legal wrangles’ would delay restructurings; the likelihood that, where potential overridings of rights were anticipated, this would distort commercial arrangements; the possibility that the EHYA regime would stimulate a move towards more use of fixed charges and/or higher interest rates, with possible shorter call periods – all of which could deter investment in UK enterprises. A further IS worry was that an automatic stay outside insolvency would give an unfair advantage to a company in temporary difficulty compared to its competitors. The IS suggested that the proposed EHYA regime did not offer much that was unavailable under administration.

278Per P. Flood of City law firm Reynolds Porter Chamberlain, quoted in N. Neveling, ‘Hedge Funds Push for Radical Insolvency Review’, Accountancy Age, 10 May 2008.

As for shareholders, it could be argued that they would often be inclined to contest both their being condemned to the ranks of the ‘out of the money’ and the company’s grounds for going to court because it (in the EHYA phrase) ‘believes there is a real prospect of it becoming unable to pay its financial debts’. The EHYA put forward its reforms as a way to cut down on the uncertainties associated with the current judicial position on shareholder approvals279 but many may fear that, given the issues involved in judicial supervision, significant uncertainties may be generated within their own proposed regime.

The EHYA’s critics, moreover, may fear that the proposed scheme will operate as a procedure that allows the hedge funds and other economically powerful operators to secure court approval for essentially pre-packaged deals and approaches to valuation280 that favour their own interests and make it difficult for less well-positioned, less wellresourced and less fleet-footed creditors to challenge the settlements put to the court. The critics might contrast the proposed regime with the post-Enterprise Act administration procedure and its emphasis on the administrator’s duty to act in the interests of all creditors. The big difference, they might say, would be that less powerful creditors will find it far more difficult to secure protection of their own interests in a court-driven procedure than in one that relies on the administrator to produce a set of proposals that reflects the interests of all of the company’s creditors.281

As for the proposal to apply a stay so as to prevent customers and suppliers from enforcing contractual terminations triggered by insolvency, the likely objection is that this element of the EHYA system involves shifting risks to unsecured creditors by removing their ability to adjust their positions in the light of the company’s troubles – that more risk is being loaded onto those parties who are least able to evaluate or handle that risk and most vulnerable to financial shocks. There may be concerns that this is not only unfair but that it undermines the

279 See the cases of Marconi, British Energy and My Travel as discussed in EHYA,

Submission on Insolvency Law R eform ( 200 7), p . 5 .

280In the EHYA scheme, the company would submit its own valuation evidence with the draft scheme documents to support any proposed cram-down, debt to equity swap or other division of the value of the company.

281In administration procedure it is the administrator, not the court, who will exclude the ‘out of the money’ parties within the terms of Sch. B1, para. 52(1)(b) – by not calling a creditors’ meeting where he believes that funds will not allow a distribution to unsecured creditors.