contents educational sessions - insol international

INSOL International Academics’ Colloquium

Contents

INSOL President’s Welcome 3

Chairman’s Welcome 4

Colloquium Program 5-8

General Information 9

INSOL’s Mission Statement and Goals 10

Member Associations 11

Group of Thirty-Six 12

INSOL Board Directors 13

Curricula Vitae of Speakers 15-28

Educational Sessions

Session 1: The tension between integrity of process and maximization of value inasset realisations (e.g. “stalking horse” arrangements; pre-packaged administrations)

29-88

Session 2: Consumer bankruptcy 89-100

Session 3: Special focus on Latin-American insolvency issues 101-122

Session 4: International insolvency developments 123-208

Session 5: Joint Session with the INSOL Global Insolvency Practice Program Fellows 209-246

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President’s Welcome

It gives me great pleasure to welcome you all to the INSOL Academics Colloquium here in Miami, the

14th meeting of this group and a gathering that is always a major part of the wider INSOL International Annual

Conference.

One of the main reasons why the Academics group is so important is that you grapple with such significant and

relevant issues. You push the boundaries of knowledge and understanding to the benefit of the entire insolvency

community.

The sharing of insights from research projects, the debates and the important learning that take place at these

colloquia form a vital part of the INSOL project and I really believe it has a significant impact on the work our non-

academic membership undertakes – by helping to craft innovative solutions to new - and old - problems and by

bringing intellectual clarity where previously there was just confusion.

Once again, sincere thanks must go to Professor Ian Fletcher for organising this meeting and for his work with the

INSOL Academics’ Group throughout the year.

Make the most of the next two days and our busy program – I look forward to meeting with you during the

colloquium.

Gordon StewartPresidentINSOL International

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Chairman's Welcome

Welcome to the Academic’s Colloquium here at the INSOL International Conference in Miami Florida.

I am really excited at the prospect of two days of catching up on research developments and sharing some new ideas

with valued colleagues from around the globe.

The conference always allows two important aspects of academic work to take place. Firstly, giving us all the

chance to discuss the thinking that underpins our theories in the presence of other minds that are frequently applied

to similar complex issues. Secondly it brings us the invaluable opportunity to listen and absorb the ideas and

perspectives of others engaged in international insolvency research.

Both of these elements make the Academics Colloquium a really important opportunity and one I urge every

delegate to make the most of.

Ian FletcherINSOL Academics’ Group Chair

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INSOL International – Academics’ ColloquiumMiami 19-20 May 2012

Turnberry Isle Miami19999 West Country Club DriveAventura, Florida 33180

PROGRAM

Saturday 19 May 2012

8.00 a.m. – 9.00 a.m. Delegate RegistrationWelcome coffee & pastriesGarden Foyer

Technical Sessions: Veranda EastTurnberry Isle Miami

9.00 a.m. – 9.15 a.m. Welcome and opening remarks

Gordon Stewart, President, INSOL International

Professor Ian Fletcher, University College LondonChairman of the INSOL International Academics’ Group

Morning Chair: Professor Ian Fletcher, University College London

9.15 a.m. – 11.00 a.m. Session 1: The tension between integrity of process andmaximization of value in asset realisations (e.g. “stalking horse”arrangements; pre-packaged administrations)

Restructuring Foreign Entities through English Schemes of ArrangementLucas P. Kortmann, RESOR NV, Fellow, INSOL InternationalProfessor Michael Veder, RESOR NV

A Comparative Analysis of Anglo-Australian Pre-packs:Can the Means be Made to Justify the Ends?Dr. Peter Walton, University of WolverhamptonMark Wellard, Queensland University of Technology

The CCAA: Public Interest IssuesAssistant Professor Jassmine Girgis, University of Calgary

11.00 a.m. – 11.30 a.m. Coffee Break

11.30 a.m. – 12.10 p.m. Session 1 (continued)

Involuntary Bankruptcy as Debt Collection: Some Thoughts on anAnglo-American PuzzleProfessor Jason Kilborn, John Marshall Law SchoolProfessor Adrian Walters, Chicago-Kent College of Law

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12.10 p.m. – 12.45 p.m. Session 2: Consumer bankruptcy

Repayment PlansProfessor André Boraine, University of Pretoria

12.45 p.m. – 2.00 p.m. Delegate LunchSalon III

Afternoon Chair: Professor Charles D. Booth, University of Hawaii at Mānoa

2.00 p.m. – 2.30 p.m. Session 2 (continued)

Home Sweet Home in Insolvency: A Foretaste for South Africa?(And a Smorgasbord of International Tidbits).Professor Lienne Steyn, University of Kwazulu-Natal

2.30 p.m. – 3.00 p.m. Session 3: Special focus on Latin-American insolvency issues

Report on Argentinian Insolvency DevelopmentsProfessor Sergio Muro, Universidad Torcuato di Tella

3.00 p.m. – 3.30 p.m. Coffee Break

3.30 p.m. – 5.00 p.m. Session 4: International insolvency developments

The future of Cambridge Gas: How far can the Common Law go?Dr. Paul Omar, University of Sussex

The ALI-III Global Insolvency Principles Project: Report on the Final ReportProfessor Ian Fletcher, University College London

Sovereign Insolvency Developments: From Adam Smith to the EurozoneCrisis and Beyond..."?.Dr. Juanitta Calitz, University of Johannesburg

5.00 p.m. Conclusion of day 1

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Sunday 20 May 2012

8.00 a.m. – 9.00 a.m. Welcome coffee & pastriesGarden Foyer

Technical Sessions: Veranda EastTurnberry Isle, Miami

Morning Chair: Professor Ian Fletcher, University College London

9.00 a.m. – 9.45 a.m. Business meeting of the Academics’ Group

Items for discussion include:

• Proposals are invited for research topics in practical aspects of insolvency, forsubmission to INSOL International as projects to be pursued with fundingsupport if commissioned by INSOL.

• Nominations (and expressions of willingness to serve) for the AcademicSteering Committee.

• Planning for the next conference of the Group (prospectively in The Hague,18-19 May 2013). Suggestions are invited for major themes and papersubjects, as well as expressions of willingness to present a paper.

• Plans to celebrate 21 years of publication of the International InsolvencyReview.

• AOB. If any member of the Group wishes to propose a substantial item ofbusiness it would be appreciated if the Chairman could be notified in advance.

9.45 a.m. – 11.00 a.m. Session 4 (continued)

Conflicts and Avoidance in International InsolvencyProfessor Gerard McCormack, University of Leeds

Israel’s New Corporate Reorganisation LegislationProfessor David Hahn, Bar-Ilan University

11.00 a.m. – 11.30 a.m. Coffee Break

11.30 a.m. – 12.00 p.m. Session 4 (concluded)

The GFC and Corporate Workouts: Throwing Light on the Law of ShadowDirectorship and Creditor Liability in AustraliaAssociate Professor Anil Hargovan, University of New South Wales

12.00 p.m. – 12.45 p.m. Research forum

Delegates are invited to deliver a short account of current or proposed researchprojects on which they are engaged. Feedback and discussion are encouraged.There will also be an opportunity for PhD students to deliver short presentationson their doctoral research.

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12.45 p.m. – 2.00 p.m. Delegate Lunch, Veranda West

Afternoon Chair: Professor André Boraine, University of Pretoria

2.00 p.m. – 3.30 p.m. Session 5: Joint Session with the INSOL Global InsolvencyPractice Program Fellows

The Revenue Rule and the Recognition of Tax ClaimsStephen Packman, Archer & Greiner P.C.Fellow, INSOL International

The Tension between Integrity of Process and ValueMaximisation – A Comparative CritiqueJudge Timothy A. Barnes, United States Bankruptcy Court forthe Northern District of Illinois, Fellow, INSOL InternationalJeffrey Oliver, Gowlings LLP, Fellow, INSOL International

Insolvency Issues in Developing Jurisdictions: The Case of the P.R.C.Timothy Le Cornu, KRyS Global, Fellow, INSOL International,

3.30 p.m. – 3.45 p.m. Coffee break

3.45 p.m. – 4.40 p.m. Session 5 (continued)

The Importance of COMI in Transaction PlanningStewart Maiden , Barrister, Victorian Bar, Fellow, INSOL International

Comparative Assessment of Business Sales: USA/UK/The NetherlandsNicolaes Tollenaar, RESOR N,V Fellow, INSOL International

4.40 p.m. Chairman’s closing remarks and conclusion of colloquium

7.30 p.m. – 10.00 p.m. Welcome Reception & DinnerLaguna PoolSponsored by BDO LLP

For delegates and registered accompanying persons

The Program may be subject to change.

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General Information

Continuing Professional Development / Continuing Legal EducationFor those delegates who are required by their professional associations to achieve minimum levels ofcontinuing education, certificates of attendance will be available on request.

BadgesYour ancillary name badge MUST be worn throughout the Colloquium. Entrance to both the educational programand welcome reception and dinner will be by name badge. Should you lose your badge, please enquire at theregistration desk, where you will be issued with a replacement.

Dress CodeDelegates are requested to wear smart casual clothes to the educational sessions. Speakers are requested towear business attire. Social functions, Welcome Reception & Dinner smart casual.

MessagesIt will not be possible to leave messages with INSOL Staff.

Mobile TelephonesPlease ensure mobile telephones and BlackBerrys are switched off during all sessions as they lead to interferencewith the technical equipment.

Health & SafetyFire - Please familiarise yourself with the fire escape routes and meeting place on arriving at the hotel.Health - If you are taken ill please contact inform a member of INSOL Staff so they can arrange fora doctor to visit.

DisclaimerINSOL International (INSOL) cannot accept any liability for any loss, cost or expense suffered or incurred by any person ifsuch loss is caused or results from the act, default or omission of any person other than an employee or agent of INSOLInternational. In particular, INSOL cannot accept any liability for losses arising from the provision of services provided byhotel companies or transport operators. Nor can INSOL accept liability for losses suffered by reason of war, includingthreat of war, riots, and civil strife, terrorist activity, natural disaster, weather, fire, flood, drought, technical, mechanical orelectrical breakdown within any premises visited by delegates or their guests in connection with the colloquium, industrialdisputes, government action, regulations or technical problems which may affect the services provided in connection withthe Meeting. INSOL is not able to give any warranty that any person will appear as a speaker or panellist. English Lawshall govern the contract between delegates, and INSOL International and any disputes shall be the exclusive preserve ofthe English Courts.

Future Conferences

INSOL Academics’ Colloquium, The Hague 18 & 19 May 2013

INSOL 2013 Ninth World International Quadrennial Congress 19-22 May 2013The Hague, The Netherlands

INSOL Hong Kong 23-25 March 2014

INSOL San Francisco 22-24 March 2015

CopyrightNo part of this document may be reproduced or transmitted in any form or by any means without the permission of INSOL International. Thepublishers and authors accept no responsibility for any loss occasioned to any person acting or refraining from acting as a result of any viewexpressed herein.

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INSOL International is a world-wide association of national associations of accountants and lawyers who specialisein turnaround and insolvency. There are currently over 40 Member Associations with over 9,000 professionalsparticipating as members of INSOL International. Individuals who are not members of a member association join asindividual members.

INSOL also has ancillary groups that represent the judiciary, regulators, lenders and academics. These groups playan invaluable role within INSOL and provide valuable forums for discussions of mutual problems.

INSOL was formed in 1982 and has grown in stature to become the leading insolvency association in the world. It isa valuable source of professional knowledge, which is being put to use around the world on diverse projects to thebenefit of the business and financial communities.

INSOL’S Mission

INSOL with its Member Associations will take the leadership role in international turnaround, insolvency andrelated credit issues; facilitate the exchange of information and ideas; encourage greater international co-operationand communication amongst the insolvency profession, credit community and related constituencies.

Our Goals:

To work with and involve our Member Associations in our activities To implement research into international and comparative turnaround and insolvency issues To participate in Government, NGO and intergovernmental advisory groups and to liaise with these institutions

on relevant issues To assist in developing cross-border insolvency policies, international codes and best practice guidelines To provide a leadership role in international educational matters relating to turnaround and insolvency topics To facilitate the exchange of knowledge amongst our Member Associations through our conferences and

publications

For further information on INSOL International please contact:

Dorothy Williams, Membership ManagerINSOL International6-7 Queen StreetLondon EC4N 1SPTel: +44 207 248 3333Fax: +44 207 248 3384E-mail: [email protected]

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Member AssociationsAmerican Bankruptcy Institute (Professional Section)Asociación Argentina de Estudios Sobre la InsolvenciaAssociation of Business Recovery Professionals – R3Association of Hungarian Insolvency LawyersAssociation of Insolvency and Restructuring AdvisorsAssociation of Insolvency Practitioners of Southern AfricaBusiness Recovery and Insolvency Practitioners Association of NigeriaBusiness Recovery and Insolvency Practitioners Association of Sri LankaCanadian Association of Insolvency and Restructuring ProfessionalsCanadian Bar Association (Bankruptcy and Insolvency Section)China University of Politics and Law, Bankruptcy Lawand Restructuring Research CentreCommercial Law League of America (Bankruptcy and Insolvency Section)Consiglio Nazionale Dei Dottori Commercialisti and Esperti ContabiliEspecialistas de Concursos Mercantiles de MexicoGhana Association of Restructuring and Insolvency AdvisorsGroupe de Réflexion sur l’insolvabilité et sa prévention 21Hong Kong Institute of Certified Public Accountants(Restructuring and Insolvency Faculty)Hungarian Association of Insolvency PractitionersINSOL New ZealandINSOLAD - Vereniging Insolventierecht AdvocatenINSOL–EuropeINSOL–IndiaInsolvency Practitioners Association of AustraliaInsolvency Practitioners Association of SingaporeInstituto Brasileiro de Gestão e TurnaroundInstituto Iberoamericano de Derecho ConcursalInstitute of Certified Public Accountants of Singapore(Special Interest Group of Insolvency)International Association of Insurance ReceiversInternational Women’s Insolvency and Restructuring ConfederationJapanese Federation of Insolvency ProfessionalsLaw Council of Australia (Business Law Section)Malaysian Institute of Certified Public AccountantsNepalese Insolvency Practitioners AssociationNon-Commercial Partnership Self-Regulated Organisation of Arbitration Managers“Mercury” (NP SOAM Mercury)REFor – The Insolvency Practitioners Register of the National Councilof Spanish Schools of EconomicsRecovery and Insolvency Specialists Association (BVI) LimitedRecovery and Insolvency Specialists Association (Cayman) LimitedRussian Union of Self-Regulated Organizations of Arbitration ManagersThe Association of the Bar of the City of New YorkThe Society of Insolvency Practitioners of IndiaTurnaround Management Association (INSOL Special Interest Group)

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The Group of Thirty-Six features some of the most prominent and influential firms within the insolvency and

turnaround profession. The aim of the Group of Thirty-Six is to work with INSOL to develop best practice guidelines

and develop legislation to enhance the ability of practitioners globally to save businesses throughout the world.

AlixPartners LLP

Allen & Overy LLP

Alvarez & Marsal LLC

BTG Global Network

Bingham McCutchen LLP

Cadwalader Wickersham & Taft LLP

Chadbourne & Parke LLP

Clayton Utz

Cleary Gottlieb Steen & Hamilton LLP

Clifford Chance

Davis Polk & Wardwell

De Brauw Blackstone Westbroek

Deloitte LLP

Ernst & Young LLP

Ferrier Hodgson

Freshfields Bruckhaus Deringer

Goodmans LLP

Grant Thornton

Greenberg Traurig LLP

Hogan Lovells

Huron Consulting Group

Jones Day

Kaye Scholer LLP

Kirkland & Ellis LLP

KPMG LLP

Linklaters LLP

Norton Rose Group

Pepper Hamilton LLP

PPB Advisory

PwC

RSM Intenational

Shearman & Sterling LLP

Skadden, Arps Slate, Meagher & Flom LLP

Weil, Gotshal & Manges LLP

White & Case LLP

Zolfo Cooper LLP

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INSOL Board Directors

Executive Committee

Gordon Stewart, Allen & Overy LLPPresident

James H.M. Sprayregen, Kirkland & Ellis LLPVice-President

Mark Robinson, PPB AdvisoryTreasurer

Claire Broughton, INSOL InternationalExecutive Director

Directors

William Courage, BDO Canada LimitedCanadian Association of Insolvency and Restructuring Professional

Robert Dangremond, AlixPartners LLPTurnaround Management Association

Gerhard Gispen, Simmons & SimmonsINSOLAD (The Netherlands)

Adam Harris, Bowman Gilfillan Inc.The Association of Insolvency Practitioners of Southern Africa

Richard Heis, KPMG LLPAssociation of Business Recovery Professionals (R3)

Edward S. Middleton, KPMG LLPHong Kong Institute of Certified Public Accountants

David Perry, Buddle FindlayINSOL New Zealand

Howard Seife, Chadbourne & Parke LLP * (USA)

Michael Thierhoff, Thierhoff Müller & PartnerINSOL Europe

Luiz Fernando Valente de Paiva, Pinheiro Neto Advogados * (Brazil)

Ian Williams, SGH Martineau LLPAmerican Bankruptcy Institute

*Nominated Directors

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Curricula Vitae of Speakers

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Judge Timothy Barnes United States Bankruptcy Court for the Northern District of Illinois, USAFellow, INSOL International

Timothy Barnes became a United States Bankruptcy Judge on May 16, 2012. He presides over matters in theNorthern District of Illinois (Chicago, Illinois).

Prior to taking the bench, Judge Barnes was a partner in the Restructuring and Insolvency group of the internationallaw firm Curtis, Mallet-Prevost, Colt & Mosle, practicing out of the New York and London offices. He practicedcorporate restructuring, bankruptcy and insolvency law in large and complex matters, which matters have beennominated for and awarded a variety of recognition. Judge Barnes is an attorney licensed in the United States and asolicitor licensed in England & Wales.

Judge Barnes is a Fellow of INSOL International, graduating (with honors) from the Global Insolvency PracticeCourse in 2011. He is also a frequent writer and speaker on bankruptcy and international insolvency issues, and asan adjunct professor of law teaching corporate restructuring.

Professor André BoraineUniversity of Pretoria, South [email protected]

André Boraine is a professor of law and head of the Department of Procedural Law at the University of Pretoria. Hehas served as Deputy Dean for 7 years and is on the roll of practising attorneys. Over the years he has taught avariety of law subjects at both the undergraduate and postgraduate levels; and has involved himself with practicallegal training of candidate attorneys as well as insolvency practitioners. He was the INSOL Scholar for the 2008-2009 cycle. His current research interests include insolvency law, the law of civil procedure, aspects of property lawand consumer protection. He has published widely, and regularly presents papers at local and internationalconferences.

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Professor Charles BoothUniversity of Hawai`i at [email protected]

Professor Booth (BA, Yale University, 1981, summa cum laude; JD Harvard Law School, 1984, cum laude),practiced on Wall Street from 1984 to 1986, taught at the Richardson School of Law from1986-89, and taught in theFaculty of Law at the University of Hong from 1989 to 2005 and served as the Director of the Asian Institute ofInternational Financial Law from 2000-2005. He rejoined the Richardson faculty in January 2006 and is theFounding Director of the Institute of Asian-Pacific Business Law.

Prof Booth’s primary research interests are in comparative and cross-border insolvency and commercial law, HongKong and Chinese insolvency law reform, and the development of insolvency and commercial law infrastructures inAsia and the Pacific in the aftermath of the Asian financial crisis. He lectures and publishes extensively on thesetopics and has authored or co-authored more than 60 publications. He has co-authored the Hong Kong PersonalInsolvency Manual (2nd edition) (2010), A Global View of Business Insolvency Systems (2010), and the Hong KongCorporate Insolvency Manual (2nd edition) (2009), and authored The 2006 PRC Enterprise Bankruptcy Law: TheWait is Finally Over, 20 SINGAPORE ACADEMY OF LAW JOURNAL SPECIAL ISSUE (INSOLVENCY LAW) (2008). He hasserved as an Expert Witness on the proliferation of non-performing loans and the development of asset managementcompanies in China.

He is a Fellow in the American College of Bankruptcy, a Founding Member of the International Insolvency Institute,and a Member of the International Academy of Commercial and Consumer Law. He has served as a consultant oninsolvency and commercial law reform projects for many international organizations including the World Bank, theADB, and the OECD, and has been involved in projects in China, Vietnam, Asia generally, and recently in Vanuatu.He is also a member of the World Bank Creditors’ Rights Task Force and a co-director of the HKICPA's Diploma inInsolvency Course.

Dr. Juanitta CalitzUniversity of Johannesburg, South [email protected]

Juanitta Calitz graduated from the University of Pretoria with a LLB degree in 1993; LLM degree in 1999 and LLDdegree in 2009. She was appointed as a senior lecturer in the Department of Mercantile Law at the University ofJohannesburg in 2004, and is currently the Head of the Department of Public Law. Juanitta presents undergraduate;postgraduate and extra-curricular courses in insolvency law as well as corporate insolvency law. Juanitta haspresented at national and international conferences as well as published articles in her areas of major researchinterest, insolvency law and sovereign bankruptcy law. She is currently a member of the Board of Trustees of TheSouth African Institute for Advanced Constitutional, Public, Human Rights and International Law (SAIFAC) as wellas an honorary member of the Association of Insolvency Practitioners of Southern Africa (AIPSA). The objective ofher LLD thesis, “A Reformatory Approach to State Regulation of Insolvency Law in South Africa”, had been toinvestigate certain aspects of state regulation with the view ultimately to propose a framework within which thelegislator could pursue legal reform based on comprehensive policy objectives in this field of law.

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mailto:[email protected]


Professor Ian FletcherUniversity College London, UK [email protected]

Ian Fletcher is the Professor of International Commercial Law at University College London. Previously, he wasProfessor of Commercial Law at Queen Mary, University of London and Director of the Centre for Commercial LawStudies from 1994 -2000. A graduate of Cambridge University, he undertook postgraduate studies at TulaneUniversity, U.S.A. He was called to the Bar by Lincoln's Inn in 1971, of which he was elected a Bencher in 2003,and currently practices from 3/4 South Square, Gray's Inn.

Professor Fletcher's principal scholarly interests are in the fields of Bankruptcy and Insolvency Law, CommercialLaw, European Community Law, Conflict of Laws and Comparative Law. He is the author of numerous books andarticles including The Law of Insolvency (1990; 4th edition 2009); and Insolvency in Private International Law(1999, 2nd edition 2005). He is a member of the American Law Institute and of the Insolvency Lawyers' Association,and is an International Fellow of the American College of Bankruptcy. He has been the Editor in Chief of the INSOLInternational Insolvency Review since 1992, and a Specialist Editor of Palmer's Company Law since 1987. He is oneof the joint authors and editors of The EC Regulation on Insolvency Proceedings, A Commentary and AnnotatedGuide (Oxford University Press, 2002, 2nd edition 2009).

Assistant Professor Jassmine GirgisUniversity of Calgary, Faculty of Law, [email protected]

Professor Jassmine Girgis joined the Faculty of Law at the University of Calgary in 2008. She researches andteaches in the areas of director and officer liability, corporate, contract and bankruptcy and restructuring law. In2007, she received a Second Annual Lloyd Houlden Research Fellowship from the Canadian Insolvency Foundationto undertake research in the area of director and officer liability to creditors during insolvency. In 2010, she wasappointed the INSOL International Scholar for the Americas. She serves as the Book Review Editor for theCanadian Business Law Journal, the Academic Member of the editorial review board for the Canadian Associationof Insolvency and Restructuring professionals. (CAIRP) and she is the Secretary of the Board of Directors of theCanadian Insolvency Foundation (CIF).

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Professor David HahnBar-Ilan University Faculty of Law, [email protected]

As of June 2011, Prof. Hahn is the Official Receiver of Israel. Prior to his appointment Prof. Hahn served as fulltimefaculty member at Bar-Ilan University Law School.

A former J.S.D. graduate of New York University School of Law (1997), David Hahn is a professor at the LawFaculty of Bar-Ilan University in Israel. Prof. Hahn teaches Corporate Law and Insolvency Law. He is a member ofthe Israel Bar and a non-active member of the New York Bar. Prof. Hahn is a frequent lecturer to various forms ofthe Israel Bar and to Israel's Judiciary on topics of his expertise. Prof. Hahn serves as a special adviser to theeconomic-fiscal department of the legislation branch in the Ministry of Justice for the reform of Israel's insolvencylaw. Prof. Hahn also advises the Israel Bar on the pending new secured transactions bill. In 2009 Prof. Hahnpublished his comprehensive book (in Hebrew) on Insolvency Law. He is also the author of several law reviewarticles, the recent of which include The Financial Crisis of 2009 – Have Reorganization Proceedings in EmergingMarkets Gone Bankrupt? – Israel as a Case Study, 12 U. Pa. J. Bus. L. 731 (2010); The Internal Logic of Assumptionof Executory Contracts, forthcoming U. Pa. J. Bus. L. 731 (2011). Other articles include When Bankruptcy meetsAntitrust: The Case for Non-Cash Auctions in Concentrated Banking Markets, 11 Stanford J. L. Bus. & Fin. 28(2005); Concentrated Ownership and Control of Corporate Reorganisations, 4 J. Corp. L. Stud. 117 (2004). Prof.Hahn is the national reporter for Israel in the International & Comparative Insolvency Law Series (ICIL).

Associate Professor Anil HargovanUniversity of New South Wales, [email protected]

Anil Hargovan is an Associate Professor in the School of Taxation and Business Law at the University of New SouthWales. His research interests are in the area of corporate and insolvency law, a discipline in which he has presentedmany conference papers and published widely in refereed Australian and international law journals. Anil hasauthored and co-authored several books, including Australian Corporate Law (2009, LexisNexis) and Principles ofContemporary Corporate Governance (2010, Cambridge University Press).

Anil is a member of the Executive Committee of the Corporate Law Teachers Association of Australia and is amember of the Corporate Governance Subject Advisory Committee for Chartered Secretaries, Australia.

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Professor Jason KilbornJohn Marshall Law School, [email protected]

Professor Jason Kilborn teaches business and commercial at John Marshall Law School in Chicago. ProfessorKilborn served as the American Bankruptcy Institute’s Robert M. Zinman Scholar in Residence during the fall 2011semester, and from September 2010 to September 2012, he occupies the Van der Grinten Chair in International andComparative Insolvency Law at the Radboud University Nijmegen in the Netherlands. He has written severalpioneering articles and a book examining the developing consumer insolvency systems in Europe, he co-authored abook on cross-border cooperation in international insolvency cases, published by Oxford University Press, and he iseditor and co-author of a series of volumes on comparative reorganization practice, also published by Oxford. Hechairs the World Bank drafting group on the treatment of insolvency of natural persons and is a member of theWorld Bank working group on insolvency.

Lucas P. KortmannRESOR N.V., The NetherlandsFellow, INSOL [email protected]

Lucas Kortmann is partner at RESOR N.V., an Amsterdam based law firm specialised in high-endcorporate restructuring, insolvency law and corporate litigation. His practice includes advising andlitigating for banks, (multinational) companies, management and court-appointed administrators on allinsolvency or restructuring related issues, in particular in cross-border situations.

Recent experience includes advising and representing in court:• Multi Corporation, a leading European inner-city real estate development company, on its EUR

900 million cross-border debt restructuring;• Goldman Sachs International on the restructuring of several multi billion euro real estate

portfolio’s with cross border insolvency aspects;• the Dutch market-leader on regional passenger transportation on the acquisitions of several

transportation businesses out of bankruptcy;• the supervisory board of a major Dutch retail company with approximately 200 stores

nationwide on its restructuring;• the largest national chain of book stores in the Netherlands on its financial restructuring; • a European market-leader in retail real estate development on the acquisition of distressed real

estate property with cross-border aspects; • lenders in a cross-border financial restructuring of a German listed company and its pan-

European subsidiaries, including debt for equity swaps; • a Dutch flower export company on its restructuring through a pre-packed bankruptcy sale; • a servicer on the financial and operational restructuring of a EUR 480 million multi-

jurisdictional real estate portfolio.

Previously, Lucas worked at De Brauw Blackstone Westbroek (Amsterdam) and Hengeler Mueller(Berlin). Lucas is a Fellow of INSOL International and a member of INSOL Europe and Insolad. Hecompleted the INSOL International Global Insolvency Practice Course in 2010/2011 with honours.Lucas holds both a degree in English law (University of Southampton, 1998), and a degree in Dutch law(University of Groningen, 2003). He speaks Dutch, English, German and French.

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Stewart MaidenBarrister, Victorian Bar, AustraliaFellow, INSOL [email protected]

Stewart was admitted to practise in 2000. He practised as a solicitor with Ashurst (as it now is) and with GadensLawyers, before signing the Victorian Bar Roll in 2002.

Stewart appears in appeals, trials and interlocutory proceedings in the Federal Court of Australia, the Supreme Courtof Victoria, and other courts and tribunals. His clients include regulators, banks and other financiers, insolvencypractitioners, companies and company officers.

His publications include articles in International Corporate Rescue, the Insolvency Law Journal, the Company andSecurities Law Journal, the Australian Bar Review and the Law Institute Journal. He is also a reporter for theVictorian Reports.

His published works have been cited in the judgments of several Australian superior courts.

Stewart is a reporter for the Victorian Reports. He has lectured graduate students at Monash University and theAustralian National University, and presented papers for INSOL International, the New York State Bar Associationand the Law Institute of Victoria.

He is a member of the Law Council of Australia's Insolvency and Reconstruction Law Committee, a full member ofthe Insolvency Practitioners' Association of Australia (IPA), and a member of the IPA's national Education StrategyWorking Group.

Stewart obtained undergraduate degrees in Arts and Law from the University of Queensland. He has a PostgraduateDiploma in Legal Practice from the Australian National University, and a Master of Laws from the University ofMelbourne. He is a graduate of the IPA’s Advanced Insolvency Law and Practice course.

He is one of three Australian lawyers to have been awarded the designation of Fellow of INSOL International. Hepassed INSOL's Global Insolvency Law & Practice Course with honours, having achieved the highest result of theclass of 2009-10.

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Professor Gerard McCormackUniversity of Leeds, [email protected]

Gerard McCormack is Professor of International Business Law at the University of Leeds in the UK.

Previously he has been a professor of Law at the University of Manchester and the University of Essex, a VisitingProfessor at the National University of Singapore and a Marie Curie Fellow at the Centre for European Law andPolitics, University of Bremen.

His scholarly and research interests are in the corporate and commercial field, with particular emphasis onInternational and Comparative Corporate Insolvency Law and the Law of Secured Credit as well as theharmonisation of law.

Key Publications

BooksSecured Credit and Legal Harmonisation (2011, Edward Elgar Publishing) Corporate Rescue Law - An Anglo-American Perspective, (2008, Edward Elgar Publishing)Secured Credit under English and American Law (2008, Cambridge University Press)

Journal Articles“Universalism in Insolvency Proceedings and the Common Law” (2012) Oxford Journal of Legal Studies pp. 1-23

“COMI and Comity in UK and US Insolvency Law” (2012) 118 Law Quarterly Review pp. 140-159.

“Reconstructing European Insolvency Law: Putting in Place a New Paradigm” (2010) 30 Legal Studies pp.126-146.

“Jurisdictional Competition and Forum Shopping in Insolvency Proceedings” (2009) 68 Cambridge Law Journal pp.169-197.

“The Law Commission Consultative Report on Company Security Interests: An Irreverent Riposte” (2005) 68 Modern Law Review pp.286-309.

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Dr Sergio Muro Universidad Torcuato Di Tella, [email protected]

Sergio Muro is Assistant Professor of Law at Universidad Torcuato Di Tella in Buenos Aires, Argentina. He holds aJSD from Cornell University Law School. Professor Muro received his LLB from Universidad Nacional de Rosario,an MA in Law & Economics from Universidad Torcuato Di Tella, thesis with honors, and an LLM from CornellUniversity, thesis with honors. At Universidad Torcuato Di Tella, he teaches Bankruptcy Law and CorporateGovernance and he is the Academic Director of the Master in Law & Economics. His research focuses onBankruptcy Law, Corporate Governance and Economic Analysis of Law. He is a visiting professor at theInternational University College of Turin (Italy), where he teaches Law & Finance in Latin America and atUniversidad Icesi (Cali, Colombia) where he teaches Law and Economics. Born and raised in Argentina, Mr. Murohas published articles in Italy, Mexico, The Netherlands, Spain and the United States.

Jeffrey OliverGowlings LLP, CanadaFellow, INSOL [email protected]

Jeffrey Oliver is an associate in the Calgary office of Gowling Lafleur Henderson LLP, practising incorporate restructuring and insolvency law. Jeffrey routinely acts for lenders, landlords, purchasers, debtors, securedand unsecured creditors, directors, as well trustees, receivers and monitors. He advises clients on corporatereorganizations, bankruptcies, receiverships, foreclosures, lease realizations and loan workouts, including on cross-border insolvencies and realizations.

Jeffrey is currently the only Western Canadian that has been named a Fellow of INSOL International.

Jeffrey's most recent engagements include:

• Representing CNOOC Limited in its US$2.1 billion acquisition of OPTI Canada Inc. pursuant to the CBCAand CCAA.

• Representing secured creditors and stalking horse bidders in the cross-border receivership of WellPointSystems Inc.

• Representing trustee in bankruptcy of Phytogen Life Sciences Inc. and proposal trustee in New HomeWarranty of British Columbia Inc. and Desmarais Energy Corporation.

• Representing secured creditors in receiverships of SQFive Intelligent oilfield solutions and JW Auto Group.

• Representing liquidator in Winding-Up and Restructuring Act proceedings of Commonwealth TrustCompany liquidation.

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Dr Paul OmarUniversity of Sussex, [email protected]

Paul J. Omar is a Senior Lecturer at the University of Sussex, Brighton, and a Visiting Professor at the JerseyInstitute of Law, St Helier. He has also had visiting appointments at the University of Pretoria and UniversityCollege London. Paul’s research interests are in comparative and international insolvency law. He is the author ofnumerous texts and over 170 articles including European Insolvency Law (2004) Ashgate (author) and InternationalInsolvency Law: Themes and Perspectives (2008) Ashgate (editor). He is the Secretary of the INSOL-EuropeAcademic Forum and a member of the Steering Committee of the INSOL International Academic Group. He hasalso served as a member of the INSOL Europe Joint Academic-Practitioner Project on Cooperation andCommunications, the Academic Advisory Group on the INSOL International Diploma Project and is now a memberof the Course Committee of the INSOL International Global Insolvency Practice Course.

Stephen M. PackmanArcher & Greiner P.C., USAFellow, INSOL [email protected]

Stephen M. Packman chairs Archer & Greiner’s Bankruptcy (Debtor/Creditors Rights) Practice Group. He representsdebtors, committees, trustees, equity, creditors and other interests in all types of restructuring, insolvency andlitigation proceedings. Mr. Packman represents clients in court and out of court in proceedings in New Jersey,Pennsylvania, Delaware, New York, nationally and internationally. He has represented Chapter 11 debtors,committees, creditors and other clients in wide array of industries including manufacturing, retail, aerospace,hospitality, environmental, agriculture, food service, distribution, transportation, construction, financial, real estate,health services, and franchises.

Gordon Stewart, INSOL International PresidentAllen & Overy [email protected]

Gordon is the Head of Allen & Overy’s Global Restructuring Group. Over the years Gordon has been involved inmany major restructuring and insolvency assignments around the globe. Recent assignments have involvedcompanies and businesses in Spain, Germany, Italy, Ireland, Scandinavia, the Baltics, Kazakhstan, theMiddle East, Australia, the Caribbean, Canada, USA as well as the UK.

Writing credits include ‘Administrative Receivers and Administrators’ (CCH) and ‘Directors in the Twilight Zone’(INSOL International, now in its 3rd Edition) – a multi-jurisdictional analysis of the duties of directors when theircompany is in financial difficulties. He became President of INSOL International in March 2011 and he is a pastpresident of the UK insolvency and restructuring practitioners’ organisation, the Association of Business RecoveryProfessionals (R3).

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Professor Lienne SteynSchool of Law, University of KwaZulu-Natal, South [email protected]

Lienne Steyn is an Associate Professor in the School of Law at the Howard College Campus (Durban) of theUniversity of KwaZulu-Natal, South Africa. She teaches and researches in insolvency law, consumer law and the lawof contract.

Nicolaes TollenaarRESOR N.V., The NetherlandsFellow, INSOL [email protected]

Nicolaes is specialised in corporate and bankruptcy law, and both advises and litigates on a variety of matters in thisarea. He has a special focus on cross-border matters and has acted on various major pan-European bankruptcies.Nicolaes represents banks, multinational corporations, foreign office holders, investors and other stakeholders informal and informal restructurings.

Recent matters include:

- advising a Dutch bank on its position in the insolvency of one of the largest group of bars and restaurants in theNetherlands;

- advising a global real estate developer on the restructuring of a EUR 100 million real estate portfolio withassets in Spain, France, Greece, Vietnam, Antigua and Panama;

- the restructuring of a major construction company and property developer with assets in excess of EUR 250million, including the stadium of a premier league football club.

Nicolaes is a member of various professional organisations including the Corporate Litigation Association(Vereniging van Corporate Litigation), INSOLAD, the Dutch Association of Insolvency Lawyers, and INSOLEurope. He is a Fellow of INSOL International and completed the Global Insolvency Practice Course of INSOLInternational in 2009/2010 with honours. He is regularly invited to lecture and speak on the subject of bankruptcylaw and holds tutorships for the Business Law Masters programme of the University of Amsterdam and for theEducational Training programme of the Dutch Bar Association. Nicolaes has published a number of law reviewarticles, is a regular annotator of a case law journal and is a co-author of commentaries on Dutch law.

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Professor Michael VederRESOR N.V., The [email protected]

Michael Veder is professor of law at the Molengraaff Institute for Private Law (Utrecht University School of Law,the Netherlands) and attorney/adviser at the Amsterdam based law firm RESOR. He specialises in (international)property law, (international) insolvency law and security rights. He holds a doctorate in law from the University ofNijmegen and is author of Cross-Border Insolvency Proceedings and Security Rights (2004). Michael was secretaryof the Government Committee on Insolvency Law (Commissie Insolventierecht) that advised the Dutch governmenton the reform of insolvency law. He is fellow of the Dutch Insolvency Practitioners Association (VerenigingInsolventierecht Advocaten (INSOLAD)), fellow of the Business & Law Research Centre (University of Nijmegen),member of INSOL Europe – for which he is a board member of its Academic Forum - and member of INSOLInternational. He regularly publishes and lectures on matters of property law, secured transactions, insolvency lawand private international law. He is a member of the core committee and a lecturer on the EC Insolvency Regulationfor the Global Insolvency Practice Course for the Fellowship of INSOL International.

Michael joined RESOR as an adviser in January 2010 and is admitted to the bar. His practice at RESOR includesadvising on cross-border aspects of insolvency proceedings, the creation and foreclosure of security rights and(financial) restructuring. Michael further advises the International Monetary Fund on insolvency and restructuringissues.

Professor Adrian WaltersChicago-Kent College of Law, Illinois Institute of Technology, [email protected]

Adrian Walters is the Ralph L. Brill Professor of Law at Chicago-Kent College of Law (USA) and a visitingprofessor at Nottingham Law School, Nottingham Trent University (UK) where, from September 1994 to July 2011,he was a full-time Lecturer and, latterly, Geldards LLP Professor of Corporate and Insolvency Law. ProfessorWalters publishes widely in the areas of bankruptcy law (both corporate and individual) and general corporate andcommercial law. He is co-author of Directors’ Disqualification & Insolvency Restrictions (Sweet & Maxwell, 3rdedn. 2010) (with M. Davis-White Q.C.), the leading treatise on the U.K.'s Company Directors Disqualification Act of1986 and a contributing author of Lightman & Moss: The Law of Administrators and Receivers of Companies (Sweet& Maxwell, 5th edn. 2011). He is a past general editor of the Nottingham Law Journal and a current member of theeditorial boards of Company Lawyer and International Insolvency Review. He has conducted empirical research forthe UK’s Insolvency Service and the Insolvency Practices Council, a UK public interest body. He was an INSOLscholar during 2009-10.

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Dr Peter WaltonUniversity of Wolverhampton, [email protected]

Dr Peter Walton has taught at the University of Wolverhampton for over twenty years. He is a Reader in Law and isthe Co-Director of the University’s Law Research Centre. During the academic year 1991-2 he was visiting professorat Akron University in Ohio, USA. His research interests are in the area of insolvency law and related areas. He haspublished widely in both specialist journals such as Receivers, Administrators and Liquidators Quarterly, InsolvencyIntelligence, Insolvency Lawyer, Company Lawyer, Corporate Rescue and Insolvency, International InsolvencyReview and Insolvency Law and Practice and more general journals such as The Conveyancer, Amicus Curiae,Company, Financial and Insolvency Law Review, Common Law World Review, Lloyds Maritime and CommercialLaw Quarterly and the Law Quarterly Review. He has co-authored, with Professor Andrew Keay of LeedsUniversity, a well-received textbook entitled Insolvency Law: Corporate and Personal which is published byJordans.

Mark WellardQueensland University of Technology (School of Law), [email protected]

Mark Wellard joined the QUT Law School as Lecturer in July 2010. Prior to joining QUT he was a Senior Associatewith Australian law firm Mallesons Stephen Jaques and a senior solicitor with a London city law firm, Nabarro. Hehas 9 years of private practice experience in corporate insolvency and commercial litigation in Australia and theUnited Kingdom, having acted for various financial institutions, insolvency practitioners and other stakeholders. During his time in legal practice he also had significant experience in the conduct of large-scale litigation and trialsin the Supreme and Federal Courts as well as mediations (ADR). At the QUT Law School he teaches undergraduateand post-graduate insolvency law and professional responsibility and ethics. He is an academic member of theInsolvency Practitioners Association of Australia.

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Session 1: The tension between integrityof process and maximization of value inasset realisations (e.g. “stalking horse”arrangements; pre-packagedadministrations)

Restructuring Foreign Entities through English Schemes of ArrangementLucas P. Kortmann, RESOR NV, Fellow, INSOL InternationalProfessor Michael Veder, RESOR NV

A Comparative Analysis of Anglo-Australian Pre-packs:Can the Means be Made to Justify the Ends?Dr. Peter Walton, University of WolverhamptonMark Wellard, Queensland University of Technology

The CCAA: Public Interest IssuesAssistant Professor Jassmine Girgis, University of Calgary

Involuntary Bankruptcy as Debt Collection: Some Thoughts on anAnglo-American PuzzleProfessor Jason Kilborn, John Marshall Law SchoolProfessor Adrian Walters, Chicago-Kent College of Law

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A comparative analysis of Anglo-Australian pre-packsCan the means be made to justify the ends?

Peter Walton, University of WolverhamptonMark Wellard, Queensland University of Technology

“Well, at first sight it strikes us as dishonest,But if it's good enough for virtuous England-The first commercial country in the world-

It's good enough for us.”

King Paramount in Utopia Limitedby Gilbert and Sullivan

(towards the end of Act I)

I INTRODUCTION

Pre-packs are spreading like wildfire around the world. Different forms of what arebeing described as “pre-packs” are developing in a number of jurisdictions.1 TheUnited Kingdom (“UK”) version of a pre-pack appears to be largely unique in that theentire process is dealt with outside of court with no requirement to obtain the priorconsent of different classes of creditor. It would appear to be the market leader. Therelative popularity of the UK pre-pack can be seen in the keenness of some companiesto relocate to the UK specifically for the purpose of entering into a pre-packadministration. Such relocation has led to the accusation that the UK has become the“bankruptcy brothel” of the world.2

In the UK a pre-pack has been defined as “an arrangement under which the sale of allor part of a company’s business or assets is negotiated with a purchaser prior to theappointment of an administrator, and the administrator effects the sale immediatelyon, or shortly after, his appointment.”3 As with all definitions there are likely to becases on the border-line which arguably do or do not fall within its terms but forpresent purposes it gives a clear indication as to what will be discussed below.

Against the tide of the pre-pack contagion, Australia’s voluntary administration lawand practice appear to have remained resistant to the UK brand of pre-packaged sales.The voluntary administration regime in Australia and the administration regime in UKshare many common features and each have drawn on the other throughout theirevolution and refinement over the last 20 years. Australia’s voluntary administrationregime originated in 1993 as a procedure commenced exclusively by an out-of-courtappointment of an administrator - something which the UK did not embrace until the

1See e.g. Phillips and Kaczor “The Benefits of UK-style Pre-packs and Comparisons with otherJurisdictions” (2010) 7(5) International Corporate Rescue 328 and Sorenson and Tetley “French Pre-packs: Key Stages and their Related Issues” (2010) 7 (1) International Corporate Rescue 7.2A comment accredited to Bertrand des Pallieres one of the junior creditors aggrieved by “the largestpre-pack” in UK history, that of Wind Hellas (Times 18th January 2010). There has been muchpublicity adverse to pre-packs (see the references in footnote 2 of Finch “Pre-PackagedAdministrations and the Construction of Propriety” (2011 JCLS 1). Parliamentary reports have alsoquestioned their efficacy (see e.g. the Sixth Report of the House of Commons Business and EnterpriseSelect Committee – HC198).3Paragraph 1 of Statement of Insolvency Practice 16 (“SIP16”).

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Enterprise Act 2002 reforms a decade later and which arguably kick-started the UKpre-pack trend. Despite the parallels of the two regimes, differing customs andstandards have emerged which warrant reflection by policy-makers and practitionersin both jurisdictions.

The pre-pack question in both the UK and Australia sits at the forefront of an ongoingdebate as to the appropriate balance between “creative insolvency” outcomes andstakeholder participation (or due process) in insolvency procedures. It is fair to saythat too much of the latter must necessarily compromise the former. At the risk ofdrawing too creative an analogy, it might be said that UK practitioners advocate a“benevolent dictatorship” approach to pre-packaged insolvency solutions, exercisingtheir significant powers of sale immediately upon their appointment (invariably withthe very best of intentions for the company’s creditors). On the other hand, theAustralian approach is generally to eschew early business sales in voluntaryadministrations without creditor or court approval, appearing to subscribe to the viewof one of the mother country’s renowned former prime ministers who famouslydeclared that “democracy is the worst system, except for all others”.

As with many of these sorts of debates, it is difficult to declare that one jurisdictionhas got it all right or all wrong. The purpose of this paper is to consider the criticismsto which pre-packs have been subject in the UK, to consider why UK-style pre-packshave not been readily adopted in Australia (and how they might be embraced) andfinally to propose one way in which a pre-pack regime could be modified or designedto work to the advantage of all stakeholders without the controversies which havehaunted its early years in the UK.

II THE DEVELOPMENT OF THE PRE-PACK IN THE UK

It is widely accepted that although pre-packs were used to a limited extent, in thecontext of receivership, prior to the changes brought about by the Enterprise Act2002,4 it was this Act which proved to be the catalyst for their burgeoning popularity.The reasons for this can be stated simply. The Enterprise Act introduced a new systemof administration under Sch B1 of the Insolvency Act 1986 (“the Act”). The Actcontains no mention of a pre-packaged version of administration. It is the abilityunder Schedule B1 to appoint an administrator out of court with minimal formalitywhich has led to the recent widespread adoption of the pre-pack version ofadministration.5 The statutory regime is used in this way: a deal is agreed to buy thecompany’s business; the buyer is often a person connected to the company; thecompany is put into administration out of court;6 and immediately the administratortransfers the business to the buyer for a pre-agreed price without the need for acreditors’ meeting to be called to consider the terms of the deal.7 The process is quick

4 This statement is based upon practitioner comments made at a panel discussion held at the Londonoffices of Ernst & Young on 20th November 2006 entitled “Prepacks: The Good, the Bad and theUgly”.5 See e.g. Harris “The Decision to Pre-Pack” Winter 2004 Recovery 26, 27.6 Either by the holder of a qualifying floating charge under Sch B1, para 14 of the Act or by thedirectors or the company under Sch B1, para 22 of the Act.7 There are detailed provisions within the Act which deal with the administrator’s duty to prepare aproposal to put to creditors and to call a creditors’ meeting to have that proposal voted upon. In a pre-pack any proposal and creditors’ meeting by definition occur after the pre-pack has already beenexecuted. In addition, there is no requirement for the administrator to call a creditors’ meeting underSch B1, para 52, where he or she thinks that, inter alia, no payment will be made to the unsecured

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and, in the right circumstances, arguably brings about the best possible resolution forall stakeholders in the company.8 The business survives, jobs are saved and moremoney is raised for the creditors than would have been the case in an immediateliquidation.

Once the pre-pack has been executed, the administrator will distribute the proceeds ofsale. There is frequently no money in the pot for the unsecured creditors9 in whichcase the administrator may immediately file a notice at Companies House to dissolvethe company.10 If there is some money for the unsecured creditors, the administratorwill usually be appointed as liquidator to make the distribution to the unsecuredcreditors and then takes steps to dissolve the company.11 In either post pre-packscenario, no independent insolvency practitioner is likely to be appointed to assess thepre-pack unless disgruntled junior creditors decide to take action against theadministrator, which will be expensive and by no means guaranteed to be successful.

Difficulties experienced in traditional trading administrations are sometimessuggested as a further reason for the widespread adoption of pre-packs. Suppliers tocompanies which enter a traditional administration appear to change the terms andconditions of that supply which makes the administrator’s task of trading thecompany more difficult.12Complexities in the law relating to employees’ rights13 andexpenses including pension contribution notices,14 rent15 and business rates16 haveencouraged a move away from traditional trading administrations.17 Estimates as tohow many pre-packs occur each year vary from 27-29%18 of the total number to

creditors (apart from under the prescribed part provisions of s.176A of the Act). The court has held, inRe Transbus International Ltd [2004] 2 All ER 911 that the effect of these provisions is that, evenwhere para 52 does not apply, the administrator is permitted to exercise any statutory powers availableunder Sch 1 of the Act, including the power to sell company assets, without first calling a creditors’meeting or applying for directions from the court.8 For early support for careful use of pre-packs see e.g. Harris “The Decision to Pre-Pack” Winter 2004Recovery 26 and Ellis “The Thin Line in the Sand – Pre-Packs and Phoenixes” Spring 2006 Recovery3. For a less positive view of pre-packs see Moulton “The Uncomfortable Edge of Propriety – Pre-Packs or Just Stitch-Ups?” Autumn 2005 Recovery 2.9 Frisby A preliminary analysis of pre-packaged administrations – Report to The Association ofBusiness Recovery Professionals August 2007 (the “Frisby Report”) at p65. In approximately 80% ofpre-packs there is no money available to unsecured creditors apart from under the prescribed partprovisions of s176A of the Act. The Sixth Report of the House of Commons Business and EnterpriseSelect Committee (HC198) suggests that only 1% of unsecured debt is paid in pre-packs.10Sch B1, para 84.11Sch B1, para 83.12See the comments made to the House of Commons Business, Innovation and Skills Committee onTuesday 24th January 2012 available athttp://www.parliamentlive.tv/Main/Player.aspx?meetingId=9951 (last accessed on 7th March 2012)where an extension of s233 of the Act was suggested.13See e.g. Key2Law (Surrey) LLP v De’Antiquis [2011] EWCA Civ 1567.14See e.g. Re Nortel Gmbh, Bloom v Pensions Regulator [2011] EWCA Civ 1124.15See e.g. Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2010] Ch 455.16See e.g. Exeter City Council v Bairstow [2007] BCC 236.17See the comments made to the House of Commons Business, Innovation and Skills Committee onTuesday 24th January 2012 available at:http://www.parliamentlive.tv/Main/Player.aspx?meetingId=9951 (last accessed on 7th March 2012).18Insolvency Service Report on the Operation of Statement of Insolvency Practice 16 July - December2009 p5 and Insolvency Service’s Report on the Operation of Statement of Insolvency Practice 16 for2010 at p5.

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between 50-80%.19 Either way, there are quite a lot of them and they are not goingaway.

As there is no mention of pre-packs within the Act, it is not surprising that theinsolvency profession, the courts and the UK Government have struggled to come toterms with them. The following is a summary of the principal contributions made bythose respective bodies to the pre-pack procedure.

1 The Profession – Managing Conflicts in a Pre-Pack

As from the 1st January 2009, the insolvency profession adopted a new InsolvencyCode of Ethics (“the Code”).20 A breach of the Code may lead to professionaldisciplinary proceedings but will not necessarily be grounds for the removal by thecourt of the administrator.21 The Code sets out five fundamental principles ofintegrity, objectivity, professional competence and due care, confidentiality andprofessional behaviour.22 The Code sets out a framework enabling insolvencypractitioners to identify actual or potential threats to any of the fundamentalprinciples. If a threat is identified, the insolvency practitioner must then consider ifthe threat may be neutralised by putting in place appropriate safeguards. If noappropriate safeguards are available, the insolvency practitioner must not act orcontinue to act in the matter.23

One obvious threat to the objectivity of a pre-packing administrator is where theadministrator has advised either or both the company and any secured creditor in theplanning stage of the pre-pack.24 Once appointed as administrator, a duty is owed toall the company’s creditors.25 This duty might be seen as conflicting with the decisionwhich has already been made to pre-pack the business. Paragraph 51 of the Codespecifically highlights that “where the assets and business of an insolvent companyare sold by an Insolvency Practitioner shortly after appointment on pre-agreed terms,this could lead to an actual or perceived threat to objectivity.” The Code suggests thatthe threat to objectivity in these circumstances may be managed by, for example,obtaining an independent valuation or considering other potential purchasers.

It is quite permissible for an administrator to act subsequently as liquidator of thesame company. Indeed the Act assumes this process to be commonplace.26 Suchsequential appointments contain an inherent threat to the fundamental principle ofobjectivity and this is accentuated with a pre-pack administration. The Code statesthat sequential appointments should not be accepted unless: disclosure is made of thethreat to objectivity to either the Court or the creditors on whose behalf the 19 The Frisby Report at p15.20 The Code replaced the previous Insolvency Ethical Guide (dating from January 2004). It wasproduced by the Joint Insolvency Committee which was formed in 1999 to facilitate discussionbetween the Recognised Professional Bodies (“RPBs”) and to ensure, as far as is possible, that eachRPB is governed by the same ethical standards. Each of the RPBs is represented on the Committee.The Code is intended to align ethical guidance to insolvency practitioners more closely with theInternational Federation of Accounting Bodies’ Code.21 See Sisu Capital Fund Limited v Tucker [2006] BPIR 154.22 The Code, para 4.23 The Code, paras 5-19.24For a detailed consideration of how the terms of the Code might impact upon a pre-pack see thediscussion in Walton “Pre-Packin’ in the UK” [2009] International Insolvency Review 86.25 Sch B1, para 3(2) of the Act.26 Sch B1, para 83.

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practitioner would be acting and no objection is made to the appointment; andsafeguards are put in place to eliminate or reduce the threat to an acceptable level.27

A new Statement of Insolvency Practice, SIP 16, was introduced by the profession inan attempt to head off complaints that creditors were not being informed of how andwhy the pre-pack was entered including details as to any valuations of the business.28

SIP 16 requires detailed information to be provided to creditors and so makes theprocess more transparent. On the downside, this information is only provided once thepre-packaged deal has been completed.29 SIP 16 does not require the administrator tohold a creditors’ meeting30 to explain what has happened and why. The Governmenthas been monitoring compliance with SIP16 and has found that full complianceincreased from 62% in 2009 to 75% in 2010. Although a significant number ofinsolvency practitioners have been referred to their respective RecognisedProfessional Bodies in relation to breaches of SIP16, few such breaches have beenfound serious enough to warrant regulatory action.31

The profession therefore sees potential conflicts, which might arise in a pre-packsituation, as generally capable of being managed. This applies to insolvencypractitioners who, in a pre-pack, will invariably be involved in advising the companyin the run-up to the pre-pack’s execution and also pre-pack administrators whofrequently take on the subsequent role as liquidator. Compliance with SIP 16 isdesigned to assist in managing these conflicts. Full information as to the terms of thepre-pack deal will be provided to creditors who can therefore consider whether theinsolvency practitioner has effectively managed threats to objectivity. The Code’spragmatic approach is reflected in the context of a pre-pack administration in favourof connected parties. In advising the company, prior to the administration, theadministrators (consistently with para 5 of SIP16) would stress that they are advisingthe company (or its lenders) but not the company’s directors. There will be no conflictwhen the pre-pack is subsequently executed in favour of the company’s directors. Therelative subtlety of this argument might be lost on the unsecured creditors who merelysee the insolvency practitioner advising on and executing the pre-pack deal in favourof the management team, and then acting subsequently as liquidator.

2 The Courts – From Early Sales to Pre-Packs

27 The Code, para 24.28 SIP 16 requires the administrator to explain to the creditors, inter alia, how the administrator came tobe involved, the extent of his or her involvement prior to appointment, a full explanation of any attemptto market the business, any valuations, alternative courses of action which were considered, why a pre-pack was decided upon, whether major creditors were consulted, and full details of the sale includingthe price and the identity of the buyer. Breach of SIP 16 will be prima facie evidence of professionalmisconduct.29 SIP 16 appears to be based upon the idea that as long as the pre-pack process is explained in detailafter the deal is done, the creditors should accept that the provision of information to them is asufficient quid pro quo for their losing their statutory right to participate in the process and to vote onthe administrator’s plans.30 SIP 16 does not require a creditors’ meeting to be held but requires that when one is held that it isheld as soon as possible after the appointment.31See the Executive Summary of the Insolvency Service Report on the Operation of Statement ofInsolvency Practice 16 for 2010 and the R3 report “Pre-packs and SIP 16” March 2010.

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The courts have moved away from a position which emphasised the importance ofcreditors having a say in any plan of the administrator,32 to one where the courts seethe financial bottom line as being the most important factor.33 Concerns that thestatutory regime is not designed for this type of procedure have been largely sweptaside in favour of achieving the best price possible for the business.34 The commercialdecision of the practitioner is seen as all-important and it is very difficult forunsecured creditors to attack that commercial judgment.35

Once an administrator has decided that rescuing the company as a going concern isnot reasonably practicable, he or she must next consider realising the company’sassets in the most efficient manner possible.36 If the only realistic possibility ofachieving a good price for the business is a buyer (often connected to the company)who requires the sale to be completed quickly, the administrator will wish to go for anearly sale. This desire appears to conflict with the statutory requirement to send aproposal to the company’s creditors (within 8 weeks of appointment)37 and to call acreditors’ meeting (within 10 weeks of appointment)38 to consider that proposal. If theadministrator waits for the green light from the creditors, the buyer may have left thescene. The creditors might then understandably complain that the administrator hasbeen negligent. To go ahead with a quick sale clearly negates the views of anysubsequent creditors’ meeting which might equally upset the creditors. The courtswere initially reluctant to allow such early sales without creditor consent recognisingthat any subsequent creditors’ meeting would be entirely powerless.39 Despite suchearly reservation the courts have now concluded that early sales are entirelypermissible. Re T & D Industries Limited40 clearly established that as long as theadministrator’s decision to sell early is reasonable, he or she will not be liable forbreach of any duty. It is purely a matter for the commercial and professional judgmentof the administrator.41

It was a relatively small step, it would appear, for the courts to move from approvingearly sales in administration to approving the idea of a pre-pack. If a tradingadministration is seen as likely to destroy goodwill or to reduce significantly the sale

32See e.g. Peter Gibson J in Re Consumer and Industrial Press Ltd (No2) (1988) 4 BCC 72 at 73 and74.33See e.g. DKLL Solicitors v HMRC [2008] 1 BCLC 112; Re Kayley Vending Limited [2009] BCC 578and Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2009] EWHC 3199(Ch), [2010] BCC 295.34 Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2009] EWHC 3199 (Ch),[2010] BCC 295.35 See e.g. Shean “Administrators: above the law?” (2011) 6 Corporate Rescue and Insolvency 184.36 Sch B1, para 3 of the Act.37 Sch B1, para 4938 Sch B1, para 51 (no meeting need be called if the criteria in para 52 are satisfied – this includes thesituation where the company has insufficient property to make any payment to unsecured creditors(apart from under the prescribed part provisions of s176A)).39 See e.g. Re Consumer and Industrial Press Ltd (No2) (1988) 4 BCC 72 and Re NS Distribution Ltd[1990] BCLC 169.40 [2000] BCC 956.41 See also Re Transbus International Ltd [2004] 2 BCLC 550 where the court followed T & DIndustries.

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price,42 a pre-pack may be seen by the insolvency practitioner as the only feasibleoption.43

The courts have on a number of occasions given their approval to such pre-packs.44 Itseems it is now too late to argue that they are inherently inconsistent with thefiduciary position of administrators or the statutory code.45 But the courts have notfound it easy to identify the grounds upon which a pre-pack should be assessed.Indeed, Lewison J has commented: “It is not entirely easy to see precisely where inthe statutory structure the court is concerned with the merits of the pre-pack sale.”46

There is no doubt that administrators are fiduciaries but their fiduciary character doesnot prevent them advising the company prior to, and then executing the pre-pack. Itwould seem that the courts might be alive to complaints about pre-packs where theadministrator has acted where there is an actual or potential conflict of duty. Theproblem facing any complainant is that the courts have tended to approach the issueof insolvency practitioner conflicts of duty in a flexible manner not obviouslydissimilar to that found under the profession’s Code.

Adopting an essentially pragmatic approach, the courts have shown themselves loathto replace conflicted insolvency practitioners, due largely to a desire to ensureefficiency and save money.47 The courts have, in addition, shown a willingness topermit administrators to be appointed by the court even where the insolvencypractitioner has disclosed prior relationships with the company suggesting potentialconflicts of interest and duty.48 The court has even approved a pre-pack where amajority of unsecured creditors were steadfastly against the plan.49

It may be that due to the relatively small number of very large firms of accountantsspecialising in insolvency work that the courts and the profession have had to bepragmatic about how they deal with conflicts of interest.50 The idea that a significantproportion of conflicts might be capable of being managed does arguably lead to amore cost effective result for all concerned. If there is a potential conflict but none yetin existence, it is pragmatic to wait and see whether one does arise and then deal with

42 For a list of the grounds relied upon by pre-packaging administrators justifying the decision to pre-pack see the analysis by R3 entitled: “Pre-packs and SIP 16” March 2010.43 See e.g. the court’s approval of a pre-packaged deal in DKLL Solicitors v HMRC [2008] 1 BCLC112.44 See e.g. DKLL Solicitors v HMRC [2008] 1 BCLC 112, Re Kayley Vending Limited [2009] BCC578, Re Johnson and Machine Tool Co Ltd [2010] BCC 382 and Re Hellas Telecommunications(Luxembourg) II SCA (in administration) [2009] EWHC 3199 (Ch), [2010] BCC 295.45 For arguments that the pre-pack procedure is inconsistent with the statutory scheme see Walton “Pre-packaged Administrations – Trick or Treat?” (2006) 19 Insolvency Intelligence 113.46 Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2009] EWHC 3199 (Ch),[2010] BCC 295 at [8].47 See e.g. Sisu Capital Fund Ltd v Tucker [2006] BCC 463. Even if the courts do not remove anadministrator they may still report a lack of objectivity to the administrator’s professional body for theconsideration of disciplinary action: see e.g. Mourant v Sixty UK Ltd [2011] 1 BCLC 383 in the contextof a lack of objectivity in advice on a company voluntary arrangement.48 Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2009] EWHC 3199 (Ch),[2010] BCC 295.49 DKLL Solicitors v HMRC [2008] 1 BCLC 112.50 See in particular the comments by Morritt V-C in Re Barings plc (No 1) [2001] 2 BCLC 159, wherehis Lordship considers the problems of having so few large firms who have so many potential conflictsof duty. His Lordship suggested that the Official Receiver might need to be appointed to avoidconflicts in circumstances similar to those before the court.

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it if it does. Cases such as Re Arrows Ltd,51 Re Maxwell Communications Corporationplc52 and Parmalat Capital Finance Ltd v Food Holdings Ltd53 highlight the courts’willingness to cope with a conflict, should one arise, by, for example, the appointmentof an additional independent practitioner or to require independent legal advice on aparticular issue.The courts’ flexible approach in the context of pre-packs appears to have some limits.It has been recognised, in certain circumstances, that a pre-pack does need the benefitof a review by an independent insolvency practitioner. Clydesdale Financial ServicesLtd v Smailes54 involved a pre-pack administration sale of a solicitors’ practice. Thecourt ordered the replacement of the administrators. A majority of the creditorssupported this move. The court expressly stated that there was no suggestion that theadministrators who were removed had acted in any improper manner. The principalissue was that on the evidence available to the court, there was a significant issueraised by the majority of creditors as to whether or not the sale of the business was ata significant undervalue. As part of this determination, it appeared that theadministrators had not fully complied with SIP 16 in terms of providing fullinformation about the sale. Although not a typical management buy-out pre-pack, themain participator in the solicitors’ practice was subsequently employed by thepurchaser on attractive terms. The court found that the terms of the pre-pack saleconstituted a legitimate matter for an independent review. This independent reviewrequired an independent administrator to be appointed.55

In Re Hellas Telecommunications (Luxembourg) II SCA (in administration)(No2),56

following a court ordered pre-pack administration, the court ordered that the companybe put into compulsory liquidation. Although the court accepted that theadministrators had carried out appropriate investigations into the affairs of thecompany, the court was persuaded that there remained matters which a liquidatorcould potentially investigate. Such matters included the role of a firm of accountantswho were connected to the administrators’ firm whose involvement had not beendisclosed to the court when the administration order was made. It seems the courtregarded the potential conflict of interest and duty of the administrators as a matterwhich could only be investigated by an independent office holder.57

Such appointments appear to be the exception and require a determined effort byjunior creditors. There is no right, unless cause can be shown, to have the pre-packassessed by an independent insolvency practitioner. The perceived lack ofindependence of the pre-packing administrator, especially where the pre-pack is in

51 [1992] BCC 121.52 [1992] BCC 372.53 [2008] BCC 371.54 [2009] BCC 810.55 The court considered the alternative of a creditors’ voluntary liquidation with an independentinsolvency practitioner acting as a liquidator but appears to have been swayed by the consequentialdelay this option would cause and also the majority creditors’ wish for a replacement administrator.56 [2011] EWHC 3176 (Ch).57 Sales J also emphasised the wider purposes of a winding up and cited Lord Millett’s dicta in RePantmaenog Timber Co Ltd [2004] 1 AC 158 at [64] where his Lordship said: “I reject the unspokenassumption that the functions of a liquidator are limited to the administration of the insolvent estate.This is only one aspect of an insolvency proceeding; the investigation of the causes of the company'sfailure and the conduct of those concerned in its management are another….”

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favour of connected persons, is still therefore a significant matter of concern todisenfranchised unsecured creditors.

3 The Government – Much Ado About Nothing

The Government supported the introduction of SIP16 and has carried out assessmentsof its effectiveness, going as far as referring certain pre-packs to respectiveRecognised Professional Bodies for investigation.58

The Government has engaged in two consultations considering if and how controls onpre-packs should be introduced.59 The suggestions made in the consultations have notbeen acted upon and appear to have been kicked into the long grass. The firstconsultation, launched in March 2010 by the previous Government, suggested, interalia; that SIP 16 should be given statutory force; that following a pre-packadministration the company should be placed into compulsory liquidation, so as toachieve automatic scrutiny by the official receiver of directors’ and administrators’actions; that different insolvency practitioners should undertake pre and postadministration appointment work; and/or that the approval of the court or creditors, orboth, would be needed to approve all pre-pack business sales to connected parties.The present Government has dropped these proposals. The latter three would havegone a long way to ensuring an independent assessment of the pre-pack takes place,either before or after its execution but would have added significantly to the costs ofthe administration.60

With a change of government came a change of approach to reform of pre-packs. Thesecond consultation, launched in March 2011, was based upon a draft StatutoryInstrument which, had it come into effect, would have required: administrators to givethree days’ notice to creditors where the proposed sale is to a connected party; all pre-pack administrators to file SIP16 information at Companies House; and all pre-packadministrators to confirm that the sale price represents best value for the creditors.Ultimately, the Government decided to take no action but to keep the matter underreview. The reason given was that it preferred to adhere to its policy of imposing “amoratorium on regulations affecting micro-business.”61 The main criticisms of theseproposals were firstly, that the three day notice period would effectively frustrate thewhole point of a pre-pack, that is, its speed and secrecy; and secondly that thedeclaration that the price represented best value would impose an onerous duty uponthe administrator to the point that pre-packs would be less likely.

4 The Result (so far) 58 See Insolvency Service Report on the First Six Months Operation of Statement of InsolvencyPractice 16, Insolvency Service Report on the Operation of Statement of Insolvency Practice 16 July -December 2009 and Insolvency Services Report on the Operation of Statement of Insolvency Practice16 for 2010.59 The first was issued by the Insolvency Service in March 2010 and was entitled a Consultation/Callfor Evidence on “Improving the transparency of, and confidence in, pre-packaged sales inadministration”. The second, with the title, dates from March 2011.60See Walton “Government Consultation: Is It Time to Re-Pack the Pre-Pack?” (2010) Issue 273 Sweet& Maxwell’s Company Law Newsletter 1.61Written Ministerial Statement 26 January 2012 by Edward Davey, Minister for EmploymentRelations, Consumers and Postal Affairs, on “Pre-packaged sales in insolvency” made on 26 January2012 found at: http://www.bis.gov.uk/insolvency/Consultations/PrePack?cat=closedwithresponse (lastaccessed on 25th March 2012).

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The only decisive action taken by the Government thus far has been to rush through astatutory instrument ensuring pre-pack administrators could get their pre-appointmentfees approved.62 The courts have fired some warning shots across the boughs of pre-packing administrators in emphasising that the decision to pre-pack is the decision ofthe insolvency practitioner and he or she will need to be able to defend the decision topre-pack.63 Where the pre-pack is in favour of the incumbent management team, thecourts have expressly held, in specific circumstances, that the administration is for thebenefit of the management team not the creditors.64 The profession has introduced SIP16 which is designed to ensure that creditors are given full information as to how andwhy a pre-pack has been entered. The Government has been assessing theprofession’s adherence to the requirements of SIP16 and has made a number ofreferences to the professional bodies to look at possible breaches of professionalconduct.65

Action taken to regulate pre-packs has been somewhat ad hoc and lacks decisiveness.There has been an element of pass-the-parcel about how the courts, the Governmentand the profession have approached regulating pre-packs.

The problems perceived by critics of pre-packs tend to run together. There is aperception that a conflict of duty exists where administrators have advised thecompany and recommended the pre-pack, especially where the pre-pack is in favourof the management team; that administrator may have carried out or supervisedlimited marketing of the business prior to the pre-pack; that administrator may havecommissioned valuations; there may be a perception that full value has not beenrealised; senior creditors will almost certainly have been consulted; junior creditorswill not have been consulted; there is unlikely to be any creditors’ meeting at all andeven if one is held, it will be impotent as it will only happen after the sale iscompleted; the sale proceeds will be distributed to the senior creditors who will havethe power to approve the administrator’s fees (assuming no distribution to thecreditors is possible apart from under s176A); no independent assessment is made ofthe directors’ and administrator’s conduct and decision making; junior creditors areoften out of the money and remain so even if the pre-packaged business goes ontosuccess; no independent insolvency practitioner is appointed to consider the pre-pack,either before or after it is executed.66

5 Déjà vu?

62 Insolvency (Amendment) Rules 2010 (SI 2010/686).63See e.g. Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2009] EWHC3199 (Ch), [2010] BCC 295.64See e.g. Re Kayley Vending Limited [2009] BCC 578, Re Johnson and Machine Tool Co Ltd [2010]BCC 382 and Walton “Re Kayley Vending Limited: Pre-pack Administration – is its Achilles Heelshowing?” (2010) 31 Company Lawyer 85.65The Institute of Chartered Accountants in England and Wales is currently investigating the WindHellas pre-pack triggered by a complaint from a junior creditor not the government (Daily Telegraph28th February 2011).66It is interesting to note that the Pensions Regulator has announced that it is currently investigating anumber of pre-pack administrations in relation to pensions’ liabilities (Daily Telegraph 31 October2011).

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The disquiet caused by pre-packs is reminiscent of two former practices: the firstknown as Centrebinding67 (so named after the case of Re Centrebind Ltd68); and thesecond, the “Phoenix Syndrome.”

Centrebinding involved a company passing a resolution to enter voluntary liquidationand at the same general meeting appointing a friendly liquidator. No creditors’meeting was ever called which would have had the power to replace the members’nominated liquidator. The liquidator would sell the business on, often to a newcompany formed by the company’s management team at a bargain price. Section 166of the Act was passed specifically to outlaw this practice by requiring the court’ssanction to any sale by the liquidator prior to the creditors’ meeting.

Centrebinding and pre-packs have a number of similarities. In both, an office holder isappointed without the involvement of the creditors and proceeds to sell the businesson, often to a connected party. The only real difference is that Centrebinding could becarried out by unqualified office holders whilst pre-packs must be conducted underthe auspices of a licensed insolvency practitioner.69 The practice of Centrebindingwas described by the Government White Paper leading to the passing of s166 in thefollowing terms: “[it] effectively wrests control from the creditors and provides scopefor the disposal of assets at below their true value, possibly involving collusionbetween the liquidator and the company’s directors.”70

The Cork Committee, described what is colloquially known at the “PhoenixSyndrome” in the following way:

[T]he ease with which a person trading through the medium of one or morecompanies with limited liability can allow such a company to become insolvent, forma new company, and then carry on trading much as before, leaving behind him a trailof unpaid creditors, and often repeating the process several times. The dissatisfactionis greatest where the director of an insolvent company has set up business again,using a similar name for the new company, and trades with assets purchased at adiscount from the liquidator of the old company.71

The Cork Committee recommended a restriction on the directors of failed companiesbeing able to benefit from limited liability in the immediate future:

[A] person who, at any time during the period of two years prior to thecommencement of its insolvency, has been a director… of a company… which hasgone into insolvent liquidation shall, unless the Court otherwise orders… bepersonally liable for the relevant liabilities of any other company … of which he is orbecomes a director… and which commences or continues trading within 12 months

67 Reference might be made to the debate in the House of Commons on 19 October 1981 where theCentrebinding exploits of Maurice Sidney Caplan, known as “Hissing Sid,” and his associates arediscussed: http://hansard.millbanksystems.com/commons/1981/oct/19/meetings-of-creditors-and-centerbinding (last accessed 24th March 2012).68 [1967] 1 WLR 377.69 It has been suggested that s166 was unnecessary as the requirement for insolvency practitioners to belicensed from 1985 onwards should have prevented the practice in itself. See e.g. Sealy and MilmanAnnotated Guide to the Insolvency Legislation (14th ed, 2011, Sweet and Maxwell) at p160.70A Revised Framework for Insolvency Law (1984) Cmnd. 9175 at para 20.71 At para 1813.

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after the commencement of the insolvent winding up of the first company and itselfgoes into insolvent liquidation within three years after such commencement.72

The Government of the day thought this suggestion to be too draconian. The WhitePaper73 outlining the purposes of what became the Insolvency Act 1986 states:

The Government is concerned to remedy the abuse identified by the ReviewCommittee and has considered the imposition on directors of a measure of personalliability for subsequent failures. It has, however, not been possible to adopt theReview Committee’s proposals because the Government considers that they are toofar reaching and whilst they would curb the activities of the delinquent director theywould, at the same time, deter the genuine entrepreneur from risking his capital in afurther venture.74

The Government was of the view that the strengthened powers of disqualification(under the Company Directors Disqualification Act 1986) and possible liability forwrongful trading (under s 214 of the Act) would without more deal with the problemof the “Phoenix Syndrome.”75

No express provision was therefore made in the Insolvency Bill 1985 for theoutlawing of the “Phoenix Syndrome.” What are now ss 216-7 of the 1986 Act wereintroduced late in the Parliamentary passage of the Insolvency Act 1985.76 Theprovisions are a strange way of controlling the mischief as they merely control the re-use of the name (a “prohibited name”) of the company which has gone into insolventliquidation.77 The provisions, described as an “afterthought”78 by Professor Milman,provide that a director of a company that has gone into insolvent liquidation cannot beinvolved in the management of a second company using the same or similar name tothat of the failed company for a five year period. The provisions have no effect onparticipation in a successor company which does not adopt the same or a similarname.

A prohibited name is one by which the liquidated company was known at any time inthe 12 months immediately prior to the liquidation. The restriction applies to anyperson who was a director of that company at any time during the 12 months prior tothe liquidation. The prohibition may in individual circumstances be lifted withpermission of the court. There also exist three specific exceptions.79 Breach of s 216

72 Ibid at para 1827.73 A Revised Framework for Insolvency Law (1984) Cmnd. 9175.74 Ibid at para 55.75 Ibid at para 56.76 See generally Werner “Phoenixing – avoiding the ashes” [2009] Insolvency Intelligence 105.77 The company goes into liquidation for these purposes if it passes a resolution to wind up voluntarilyor if the court makes a winding up order (s247(2) Insolvency Act 1986).78 Milman “Curbing the phoenix syndrome” [1997] JBL 224 at 225.79 See Insolvency Rules 4.228-4.230 (1 - If the liquidator sells the business to a company where therewould otherwise be a breach of s216, the connected persons may give the required notice of theirintention to use a prohibited name. The notice must be published in the Gazette and given to all knowncreditors, at the latest within 28 days of completion of the sale. The same notice provisions apply if thesale is to be made by an administrator and a subsequent insolvent liquidation is anticipated; 2 - If thedirector in question applies to the court for permission under s216, as long as the application is madewithin 7 days of the winding up, the director is not subject to the restrictions under s216 for a period ofsix weeks following the liquidation (or earlier date if the court deals earlier with the application); 3 -The restriction does not apply if the company in question was using the prohibited name continuouslyfor the 12 months prior to the winding up of the liquidated company).

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is a criminal offence and under s 217 will lead to the person in breach being heldpersonally liable for the successor company’s debts.

The problem of the “Phoenix Syndrome” has not been solved by ss 216-7 as theprovisions are relatively easy to navigate around and even when applicable only applyto the re-use of the previous corporate name. Pre-packs in favour of connected partieslook extremely similar to the descriptions and concerns articulated by the CorkCommittee back in 1982. Sections 216-7 were not and are not the answer to legitimateconcerns of unsecured creditors. Even where ss 216-7 are breached, there is noremedy for the creditors of the first liquidated company.

The problem of Centrebinding was dealt with by banning the activity. The “PhoenixSyndrome” has in part been discouraged. There is no obvious appetite for outlawingpre-packs in the UK.80 It remains to be seen whether a solution to concerns about pre-packs can be arrived at which satisfies all stakeholders. A number of possiblecompromises have been considered by both the present and previous UKGovernments but none has been adopted. There remains at least one possibility notyet considered by the UK Government, which will be considered below.

Prior to that, it is instructive to assess the current situation and debate in Australia asto whether pre-packs can (or should) become a customary feature of insolvencypractice.

III LOOKING AT THE MENU BUT JUST CAN’T EAT:AUSTRALIA’S PRE-PACK DEBATE

The widespread use of pre-packs in UK administrations has gained the attention ofAustralian insolvency practitioners, turnaround specialists and commentators in recentyears. Given the similarities between the UK regime and the Australian voluntaryadministration regime, this is unsurprising. However, the cosmetic similarities of theUK and Australian legislation belie significant underlying differences in general law,custom and practice. These distinguishing jurisdictional features explain why theprevalence of UK pre-packaged administrations has not been emulated in Australia.The Australian experience also provides a useful frame of reference for UK policy-makers when considering how their brand of pre-packs might be regulated in thefuture.

1. That’s not a pre-pack, that’s a pre-pack

When Australian insolvency practitioners, lawyers or academics discuss the notion ofpre-packs it not uncommon for there to be an initial acknowledgment of theconceptual merits of pre-packing. However, somewhat paradoxically suchconversations often turn to the necessity of obtaining creditor approval of such a sale -either by a deed of company arrangement (“DOCA”)81 or at least notifying creditors

80See the ministerial statement by Edward Davey MP, Minister for Employment Relations, Consumersand Postal Affairs, on “Pre-packaged sales in insolvency” made on 26 January 2012 found at:http://www.bis.gov.uk/insolvency/Consultations/PrePack?cat=closedwithresponse (last accessed on25th March 2012).81 Generally speaking, a deed of company arrangement (or “DOCA”) is the Australian equivalent of theUK’s company voluntary arrangement or “CVA”.

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(e.g., at their first meeting)82 of an intention to sell the business with court approval.Of course, the customary UK pre-pack involves no formal creditor participation orcourt approval and is, at its very core, a procedure which relies on the implementationof a business sale transaction immediately upon the initiation of an out-of-courtvoluntary administration process.

The emerging commentary upon pre-packs in Australian literature demonstrates thatthe notion of a “pre-pack” means different things to different people. As Brown(2009) has noted, “a “pre-pack” is not a legal term of art.”83 The debate as towhether Australia should embrace pre-packs sometimes appears to avoid illuminatingor addressing the garden-variety UK pre-pack “warts and all”. In Australia theconcept of “acting early” upon an appointment of an administrator to preservebusiness value is readily grasped, but the procedural reality (i.e., that early actiondiminishes creditor participation) is where pre-packing begins to meet with dampenedenthusiasm or even downright resistance.

In Australian voluntary administrations the company’s creditors (save for any courtextension of the statutory timetable) meet some 15 to 25 business days following theappointment of administrators to determine the fate of the company. Creditors areeffectively presented with the choice of either voting for liquidation or alternativelyaccepting a DOCA which will address the company’s present insolvency andimmediate future.84 Like the analogous UK company voluntary arrangement(“CVA”), a DOCA is a flexible instrument subject to negotiation and circumstance.A DOCA may take the form of either (at one end of the spectrum) a complexrestructuring/work-out/genuine company rescue, or (at the other end of the spectrum)a de facto or “glorified liquidation”, or anything in between.

Poulos and McCunn (2011) contend that pre-packs can be completed through DOCAsin Australia:

From a definitional perspective, the defining feature of a pre-pack is that thetransaction is negotiated to near completion such that the desired outcome is knownprior to the appointment of the insolvency practitioner. In accordance with thatunderstanding of pre-packs, the timing of the execution of the sale is a factor thatonly affects whether all of the benefits of pre-packing are achieved. Timing does notdetermine whether a particular transaction is a pre-pack. In that sense, a pre-pack canbe completed under a DOCA.85

However, the reality is that pre-packing as it is understood and practised in the UKvery rarely (if at all) occurs through a CVA. Most UK pre-pack sales occur well inadvance of any creditors’ meeting which might be held to consider “proposals” for theadministration. A CVA is one possible proposal for achieving the purposes of anadministration of a UK company, just as a DOCA can be proposed to creditors (tovote upon in meeting) under Australia’s Part 5.3A voluntary administration regime. 82 Under Australia’s voluntary administration regime a first creditors’ meeting must be held within 8business days of appointment. Strictly speaking, the only purposes of that meeting are to determinewhether the administrator is to be replaced by creditors (as of right) and whether to establish acreditors’ committee.83 Brown “Unpacking the pre-pack” (2009) 9(10) Insolvency Law Bulletin 164.84 Sections 439A and 439C Corporations Act 2001 (Cth) provide that at the second creditors’ meetingconvened by the administrator the creditors may resolve that the company execute a DOCA, that theadministration end (rare) or that the company be wound up.85 Poulos & McCunn “Pre-pack transactions in Australia” (2011) 19 Insolvency Law Journal 235, 254.

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However, UK administrators implementing a pre-pack sale customarily exercise theirpower of sale immediately upon appointment and, in so doing, preclude a CVA as astarter in the way of a proposal for consideration at the creditors meeting held some10 weeks subsequent to the sale. Indeed, the UK pre-pack itself often ensures that noproposals of any substance are able to be put to creditors at the subsequent meeting,because the company has already been divested of its essential value by reason of thebusiness sale.

It is the very absence of creditor (or court) participation, approval or oversight whichis the essence of the UK pre-pack and its lauded benefits. UK pre-packs are praisedbecause they deploy an armoury of limited publicity, speed and creditordisenfranchisement, all in the interests of achieving the efficient closure of a sale andthereby delivering a seamless transition for a company’s business to the successorentity (purchaser). Creditor approval of a pre-packaged sale of a distressedcompany’s business (for example, by means of a DOCA) is anathema to thecustomary UK practice where such sales are viewed as ideally completed immediatelyupon the administrator’s appointment. Waiting several weeks for a creditors’ meetingto approve a sale suffers from the very drawbacks which UK proponents contend areavoided by a pre-pack – namely, substantial delay and publicity which are bothdestructive of business value.

Despite maintaining the prospect of pre-packing under a DOCA, Poulos and McCunnconcede that “[t]he speed with which pre-pack transactions are effected soon after theformal appointment is the key to their success in reducing the loss suffered by acompany.”86 To put it another way, the more protracted the post-appointment processrequired to complete a sale, the greater the risk of destruction of business value (suchthat the administrator may only be left with a bucket of water, rather than a block ofice, to sell). Poulos and McCunn suggest legislative reform to allow abridgement ofthe statutory timetable for creditor meetings to facilitate a “rapid sale or restructurethrough a DOCA.”87 Quite apart from the fact that such a mechanism already existsunder the present legislation (albeit by application to court)88, an abridged processwould still have to contain minimum notice requirements necessitating at least some

86 Ibid 256.87 Ibid 255. Similarly, Turnaround Management Association of Australia (“TMAA”), in its 2 March2010 submissions (pp 6-11) in response to the Australian Government’s insolvent trading discussionpaper, called for legislative amendment to allow the convening of a creditors’ meeting within 5business days of appointment to consider a DOCA proposal. TMAA submitted that “there is currentlyno ability for the Court to shorten the convening period [for the second creditors’ meeting] if thecircumstances so require” and that “if an administrator wished to implement a sale or restructurealmost immediately after appointment through a deed of accompany arrangement, he or she wouldneed to wait at least 15 business days after the commencement of the administration before putting theproposal to creditors.” (Section 439A of the Corporations Act 2001 (Cth) provides that the secondcreditors meeting must be held within 5 business days before or after the end of the convening period,the convening period usually being 20 business days starting on the first business day following theappointment.) However, this aspect of TMAA’s submission does not accord with Re Sims, in thematter of Destra Corporation Limited [2009] FCA 1199 where Lindgren J of the Federal Court ordered(under s 447A) that where the applicant liquidators were proposing to instigate an administration thefirst creditors’ meeting could be dispensed with and the second creditors’ meeting could be held at anytime during the convening period (subject to the usual 5 business days notice requirement). Lindgren Jmade the abridgement order so that the administrators would not have to “sit on their hands” until fivebusiness days before the end of the convening period.88 Section 447A Corporations Act 2001 (Cth); Re Sims, in the matter of Destra Corporation Limited[2009] FCA 1199, as to which see above n 86.

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“delay” following the administrator’s appointment. It is noteworthy that the UKGovernment’s 2011 announcement of its intention to mandate three days notice tocreditors of pre-pack sales to connected parties prompted hue and cry from pre-packadvocates who claimed that even this modest delay would defeat the advantage ofspeed which is integral to the customary pre-pack sale.89

It can therefore be argued that “pre-packing through a DOCA” is really no pre-pack atall and certainly not in the sense that pre-packs are commonly (and successfully)practised in the UK. The UK naturally provides Australia with an analogous(voluntary) administration regime for comparative purposes. It is the reported successof pre-packs in that jurisdiction which has provided the impetus for the debate inAustralia as to their broader use or availability. Accordingly, the manner in whichUK pre-packs are customarily practised warrants focus and attention in Australia. Anabstract consideration of how pre-packs (however defined) might be achieved throughDOCAs is something of an arid exercise given that such pre-packs are not reflectiveof either the reality or the successes of the UK experience.

2. The roadblocks to pre-packing in Australia

Reports of genuine pre-packs in Australia are sparse.90 Lloyd, O’Brien and Robertson(2009) acknowledge that “[t]his procedure has not been used to date in Australia” butalso assert that “the legal infrastructure exists to permit pre-packaging.”91 Australianliterature and case law support the conclusion that “day 1” pre-packaged sales byvoluntary administrators (being the same insolvency practitioners who have advisedthe company prior to their appointment) are rare, if not non-existent. The primaryreasons for this position are twofold. Firstly, Australia’s general law imposes strongindependence standards upon insolvency practitioners. Secondly, the orthodoxy ofAustralian administrators is to effect “early sales” only in exceptional circumstances -a custom based upon an entrenched culture and regard for creditor participation in thevoluntary administration process, but which is also supported by a statutoryconstruction of the legislative regime (discussed below).

In Australia, reference is often made to the country’s strict insolvent trading lawswhich are said to discourage directors from continuing to trade while obtaining adviceto implement “creative insolvency” options (e.g., pre-packs) which would maximisebusiness value.92 This point is well made. However, even if “softer” insolventtrading laws were introduced, Australia’s independence standards and the aversion of 89 On 1 November 2011 the Gazette of The Law Society of England & Wales reported both commentfrom R3 that a 3 days notice requirement would be long enough to “derail a rescue” as well as theopinion of a law firm partner that the “concern with putting in three days for creditors to stop the salegoing ahead is that you would take away the very reason why pre-packs work” (see the article athttp://www.lawgazette.co.uk/features/pre-pack-administrations-rule-changes-face-trouble).90 For some specific instances of pre-packs reported to have been implemented in Australia see Black“A crystal clear result (bankruptcy reorganization of glass company Waterford Wedgwood)” (2010)Intheblack 80(1) 42 and Bryant “An Analysis of the Use of ‘Pre-Pack’ Proceedings in an InsolvencyWorkout – Experiences from the UK and Australia” March 2011 Insol International ElectronicNewsletter . These pre-packs were not sales to connected parties, appear to have involved unique orexceptional examples of group or corporate distress and were not of the “garden variety” ilk of pre-pack commonly practised in the UK. Of course, even in the UK pre-packs may present in any numberof forms and circumstances.91 Lloyd, O’Brien & Robertson “Pre-packaged transactions in administration – strategy andapplication” (2009) 9(7) Insolvency Law Bulletin 110.92 Poulos & McCunn, above n 85, 243-246; TMAA submission, above n 87, 11-12.

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administrators to early sales would still constitute two fundamental obstacles to thepractice of a UK brand of pre-packing.

3. Australian independence standards for insolvency practitioners – generallaw and professional codes of conduct

Australia’s general law imposes strong and exacting independence standards upon itsinsolvency practitioners. It is clear that the independence requirements of Australianadministrators are no less than those of liquidators.93 Both are recognised asfiduciaries. Australian courts have also demonstrated a willingness to deploy aheightened sense of scrutiny in respect of voluntary or “privately ordered” or nomineeappointments.94 In very general terms, Australian voluntary administrators are notpermitted under the general law to have “a substantial prior involvement” with acompany to which they are appointed. In Commonwealth v Irving95 Australia’sFederal Court held that prior contact is not completely prohibited as this wouldconstitute “commercial unreality.”96 The court considered that a company obtaining“professional advice respecting actual or apprehended insolvency” would notdisqualify that advising practitioner as a prospective appointee.97 However, the courtalso held that a “substantial involvement” with a company prior to its administrationwould “be seen to detract from the ability of the person to act fairly and impartiallyduring the course of an administration.”98

In Commonwealth v Irving the court noted the earlier Federal Court decision in ReStadbuck Pty Ltd99 where Sheppard J “spoke of an accountant, perhapssubconsciously, tending to favour those who had originally consulted him or her.”100

The court in Commonwealth v Irving understood Sheppard J to be applying thoseobservations to “a consultation or consultations on matters of ongoing businessrelevance.”101 In another case addressing the extent of permissible pre-appointmentadvice, the Queensland Supreme Court held that a line is crossed where a liquidator isinvolved in providing advice and consultations which go beyond basic financialadvice (e.g., as to solvency) or general canvassing of options with a view to anappointment or initiation of some insolvency process.102

This strict requirement of Australian insolvency law and practice was againdemonstrated by the Federal Court in the recent case of Pinklillies Pty Ltd (Trustee),in the matter of Northwest Motel Group Pty Ltd (in liq) v Huxtable (“Pinklillies”).103

In that case a liquidator was removed by the court by reason of his prior associationwith a creditor. While the liquidator had disclosed the existence of certainrelationships prior to his appointment, further details came to light subsequent to thewinding up order which compromised the practitioner’s perceived independence. A

93 Commonwealth v Irving (1996) 144 ALR 172; Bovis Lend Lease v Wily (2003) 45 ACSR 612.94 Independent Cement & Lime Pty Ltd v Brick & Block Co Ltd (in liq) (recrs & mgrs apptd) (2010)267 ALR 613, [49]-[51]; Commonwealth Bank v Fernandez (2010) 81 ACSR 262, [60]-]88].95 (1996) 144 ALR 172.96 Ibid 177.97 Ibid.98 Ibid.99 Unreported, Federal Court of Australia, Shepard J, 18 May 1993.100 Commonwealth v Irving (1996) 144 ALR 172, 177.101 Ibid .102 Re Club Superstores Australia Pty Ltd (1993) 10 ACSR 730.103 [2011] FCA 1543.

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services company which employed the impugned liquidator and the creditor whichhad successfully applied for the winding up were both ultimately controlled by thesame individual. The applicant creditor’s debt was subsequently found to be indispute and in the court’s view this fatally compromised the perception ofindependence on the part of the practitioner. The Pinklillies decision is but anotherrecent reinforcement of the long-standing principle in Australian general law that theappearance of independence of a liquidator (or administrator) is seen by the courts tobe equally vital as actual independence. In Pinklillies Logan J of the Federal Courtreferred to the longstanding line of authority in Australia that “[i]t is essential that theindependence and impartiality of a liquidator should at all times exist in point ofsubstance, and be manifestly be seen to exist.”104 Logan J also stated:

The test, in relation to the removal of a liquidator, is whether, having regard to theliquidator’s conduct as a whole, it can be said to be such as to give rise in the mind ofa fair minded observer to a perception of a lack of impartiality as between the variousinterests that he or she as liquidator must serve, and a lack of objectivity in servingthose interests. Apple Computer Pty Ltd v Wiley (2003) 46 ACSR 729 at 738.

Logan J expressly noted that there was “no suggestion” that the impugned liquidatorhad “acted in any improper way in the conduct, to date, of the liquidation.” HisHonour held that “[t]he order for his removal does not carry with it any condemnationon my part in respect of the actions which he has or has not undertaken as liquidator.”Furthermore, Logan J rejected the solution of appointing a special purpose liquidatorto determine the validity of the proof of debt of the “associated” creditor. Logan Jheld that this would still leave the impugned liquidator having to assess all otherproofs in the liquidation (or deciding whether to bring certain recovery proceedings)which would still affect the dividend which the “associated” creditor stood to receive.While the specific threat to independence in Pinklillies was not on all fours with thatof a pre-pack administrator, the case does provide a timely restatement of the strictattitude Australian courts take to any adverse perceptions surrounding a practitioner’sappointment.

The Insolvency Practitioners Association of Australia (“IPA”) also promulgates aCode of Professional Practice (“CoPP”) which reflects (and in some respects extends)the Australian general law standards of independence to which its memberpractitioners are subject. While not strictly legally binding, Australian courts haverecognised the “utmost importance” of the COPP in cases assessing the perceivedindependence of practitioner appointees and also (for example) the reasonableness ofa practitioner’s remuneration.105 The provisions of the CoPP relating to independenceare extensive. In Australia the CoPP is a significant and established part of theinsolvency practice landscape.

104 Ibid [18] (Logan J).105 In Re Monarch Gold Mining Co Ltd; ex parte Hughes [2008] WASC 201, [34]-[40] MasterSanderson of the Western Australian Supreme Court stated that the “the code is something more than apublic relations exercise designed to assuage the concerns of those involved with insolvencypractitioners.” Master Sanderson ordered a direction that administrators had tabled a Declaration ofIndependence, Relevant Relationships and Indemnities (“DIRRI”) in accordance with the CoPP, statingthat the order would “necessarily add to the status of the code and assure the public generally that thecourts regard adherence to its terms as a matter of utmost importance.” In Golden Star Resources Ltd vRosel [2010] QSC 28 the Queensland Supreme Court relied on the CoPP in determining whether theremuneration of receivers was reasonable.

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The approach to insolvency practitioner independence in Australia might therefore beseen as “absolute.” There is very little room for negotiation or pragmatism. If there isa conflict identified, an insolvency practitioner will generally be removed. Thiscontrasts with the approach of both the profession and the courts in the UK, whereeven if a conflict is identified, that conflict may be seen as being capable of beingmanaged. The replacement of an office holder in the UK is seen as something of a lastresort.

4. Perceived independence and pre-packs: mutually exclusive?

It is hard to see how a compliant, “independent” Australian insolvency practitionercan ever be in a position to effect a “day 1” pre-packaged sale in a voluntaryadministration. Indeed, regardless of the post-appointment timing of a pre-pack sale,it is hard to see how any Australian insolvency practitioner who has substantivelyadvised or assisted on the detail of the pre-packaged transaction (i.e., advice goingbeyond the general availability of a pre-pack as an option) can subsequently take anappointment as voluntary administrator. Poulos and McCunn (2011) concede that theindependence standards prescribed by the IPA CoPP “are likely to somewhat restrictthe scope of an insolvency practitioner’s involvement in negotiations for progressinga pre-pack sale prior to their formal appointment.” However, Poulos and McCunnthen contend:

In practical terms, an insolvency practitioner may still be involved in a pre-pack saleif the pre-appointment involvement is providing advice about the alternative coursesof action that are open to the company, which could include consideration of a pre-pack sale. It may be that the sale is ultimately determined to be the best course, andthe same practitioner is appointed as an administrator or receiver to complete therelevant transaction. The clear advantage of this approach is that the same practitionerthat advised on the proposed pre-pack can complete the sale without the need to bebrought up to speed with the details of the transaction. The practitioner would ofcourse still need to declare his or her prior relationship under s 60 of the Act incompleting their declaration of relevant relationships.106

With respect, this is a fine line to walk for an Australian insolvency practitioner. Ifthe practitioner’s pre-appointment advice and assistance is of such substance anddetail that he or she need not be “brought up to speed” upon appointment - or there isnothing left to do upon appointment except immediately implement the pre-negotiatedsale - then the pre-appointment advice and assistance might well have “crossed theline” to constitute an impermissible “substantial prior involvement” of which thecourt spoke in Commonwealth v Irving. Reflecting again on the perceptions ofcreditors (which count for everything in Australia’s general law test of independence)it is clear that an administrator implementing a “day 1” pre-pack sale will bereasonably perceived by creditors to be endorsing a strategy ultimately controlled orinspired by a company’s directors and with which the administrator has beensubstantively involved prior to appointment. It is contended that detailed involvementand assistance with a pre-pack proposal (particularly a proposed sale to a partyconnected with the directors of the subject company) would ipso facto disqualify anAustralian insolvency practitioner from taking an appointment as voluntaryadministrator. The above course contended by Poulos and McCunn is obviouslyexpedient and cost-effective, but in many circumstances could involve (rightly or 106 Poulos & McCunn, above n 85, 251-252.

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wrongly) a failure to meet the standards of perceived and actual independence whichAustralian courts plainly require.

It appears that very recently a similar view was reached by an Australian insolvencypractitioner who applied for his own replacement in the case of DCT v WestApartments Pty Ltd (in liq).107 The replacement application was brought about by theoriginal liquidator’s resignation due to his firm’s prior role as investigatingaccountants for a secured creditor. The original liquidator had become aware of acontract of sale for one of the company’s properties during his initial investigationsinto the company’s affairs. The contract of sale pre-dated the appointment of theoriginal liquidator but had not yet settled or completed and, as the court noted, itwould “be necessary for that contract to be considered and evaluated prior to theproposed settlement date.”108 The original liquidator (who was not aware of the priorrole of his firm at the time of his appointment) decided that his resignation wasappropriate because “there could be an appearance of a lack of impartiality on his partin the execution of his duties as liquidator.”109 While the reasons for judgment (in theapplication for the liquidator’s replacement) do not disclose more detail of theindependence issues and concerns relating to the uncompleted contract, the parallelswith a pre-pack sale are obvious.

The Australian parameters are thus far removed from the UK environment which hasaccepted the “pre-pack” practice of prospective administrators working side-by-sidecompany directors to engineer pre-ordained outcomes of subsequent administrations.Such outcomes may well be judged by upstanding professionals to be in the bestinterests of creditors. However, the fact remains that a customary UK pre-packinvolves a pre-appointment assessment by a practitioner following discussions withdirectors who have already expressed a firm intention to appoint the said practitionerby means of an out-of-court, voluntary appointment process. The issues and concernssurrounding “perceived independence” in this scenario are obvious. In Australia thegeneral law’s requirements of actual and perceived independence do not and wouldnot allow practitioners to be put in such a position in the first place.5. Early sales in administration: not “orthodox” practice in Australia

Australian voluntary administrators are often reluctant to countenance an early sale ofa company’s business in the absence of court or creditor approval, and only thenwhere there is a compelling justification. Like the UK regime, Australianadministrators enjoy an express statutory power to sell a company’s business at anytime following their appointment.110 However, Australian practitioners often have aninnate aversion to exercising such broad powers in a manner which maydisenfranchise creditors. Australian insolvency practitioners are sensitive to the factthat a significant, early exercise of a voluntary administrator’s powers will effectivelymake the creditors’ decision for them regarding the substantive outcome of theadministration and the fate of the company. Notwithstanding the plain general natureof their statutory powers of sale, administrators seeking to invoke those powers prior

107 [2012] FCA 222.108 Ibid [6] (Yates J).109 Ibid [2] (Yates J).110 Section 437A Corporations Act 2001 (Cth). See also Re eisa Ltd (admin apptd); Application ofLove (2000) 35 ACSR 394; Brashs Holdings Ltd v Shafir (1994) 14 ACSR 192. The equivalent powerof UK administrators is contained in Sch 1 of the Insolvency Act 1986 (UK).

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to the second “substantial” creditors’ meeting often seek court imprimatur for thecontemplated “early sale.”

This practice is evident in two recent Australian decisions where voluntaryadministrators applied to court for directions that they would be “justified” ineffecting an early business sale (or that it would be “proper and reasonable” to do so).The two cases, Re Advanced Medical Institute Pty Ltd (admin apptd) and AMIAustralia Holdings Pty Ltd (admin apptd)111 and Re Killer; North Coast Wood PanelsPty Ltd (admin apptd),112 have been the subject of considered analysis andcommentary by Schaffer & McCoy (2011) who conclude:113

It may be argued that, even if administrators do not need directions, they may stillwant their potential prophylactic benefits against as yet unforeseen complaints. Theproblem with that train of thought is that it ultimately negates both the clear conferralof power on administrators and another major policy underlying the enactment ofPt 5.3A — the creation of an insolvency regime that did not require court supervisionas a matter of course.

These cases illustrate an emerging awareness in Australia of the value of early actionby administrators, but also that Australian administrators consider themselvesexposed without a court order blessing an early and significant exercise of theirpowers. These two decisions evidence a real and entrenched resistance to the practiceof disenfranchising creditors without both good cause and some protection from latercriticism or challenge.

This resistance may not be purely attributable to culture or custom. As a matter ofstatutory construction, the voluntary administration regime can be said ordinarily torequire creditor participation in the determination of the substantive fate of thecompany. Naturally, the statutory powers conferred upon administrators (andexercisable at any time upon appointment) sit in tension with the creditor participationalso mandated by the regime. It stands to reason that such tension must beapproached and resolved as a question of statutory construction. Rampant, customaryearly exercise of powers by administrators defeats the clear legislative intention thatcreditor participation be an ordinary feature of administrations and not a meretheoretical possibility. It could be argued that a line must be drawn according to areasonable statutory construction of the legislation establishing voluntaryadministration. In Australia there is at least one example of a court having attemptedto arrive at something resembling a “test” in order to resolve this tension within thelegislative regime.

Carter v Global Food Equipment Pty Ltd (“Global Food”)114 has been previouslyidentified for its relevance to the possible advent of pre-packs in Australia.115 InGlobal Food White J of the NSW Supreme Court was asked to extend the conveningperiod for the substantial creditors meeting in circumstances where it was apparentthat the extension sought would in fact provide the administrators a window withinwhich they could complete a business sale and thereby render the substantial creditors

111 [2011] NSWSC 574.112 [2011] FCA 776.113 Schaffer & McCoy “Direct me if I am wrong…Early sales in voluntary administrations” (2011)12(1) Insolvency Law Bulletin 6, 8.114 (2007) 25 ACLC 1173.115 Brown, above n 83, 166.

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meeting a non-event. White J attempted to resolve the tension in the regime asfollows:

In principle, it seems to me that if the prospect of maximising returns to creditors wasnot jeopardised by the second meeting of creditors being held before any sales ofbusinesses were effected, then it would be preferable for the second meeting ofcreditors to be held before the creditors were presented with what might be a faitaccompli.

Notwithstanding that it is the administrators’ right and their power to decide how thecompanies’ assets will be dealt with, the creditors have a legitimate expectation thatthe second meetings to decide the companies’ fate will be held swiftly and, hence, toconsider the proposals in the deed of company arrangement which might beprecluded by a sale.

However, whilst this is the theoretical position, the sting is in the rider. The orderextending the period for convening the second meeting … is sought by theadministrators because they consider that a swift completion of the sale process willmaximise returns to creditors. They are experienced insolvency practitioners whosejudgment should be respected. It may be that prospective purchasers will bediscouraged if they believe that they will be unable to complete the purchaseswiftly.116

The reasoning of White J could provide an answer to the anomalous reluctance ofadministrators to exercise their powers early without court protection (as questionedby Schaffer & McCoy). White J’s statement of principle offers something of apotential guide for administrators in resolving this very real tension within the Part5.3A voluntary administration regime. The primary question for an administratorconsidering an early sale (such as a pre-pack) is whether creditor return isdemonstrably jeopardised by creditor participation. If so, an administrator mayexercise powers early to relieve creditors from this jeopardy. No directions should benecessary – indeed, unnecessary applications for directions also impair returns tocreditors of companies in administration. As with any aspect of the conduct of anadministration, administrators will need to justify their actions if subsequently queriedor challenged. However, the essential reasoning of White J suggests that the earlyexercise of powers by an administrator in a manner inconsistent with creditorparticipation should generally be regarded as the exception to the rule.117

One revealing feature common to the early sales contemplated in Re Killer andGlobal Food was that the proposed early sale was “flagged” at the first creditors’meetings in the respective administrations.118 Australian voluntary administrationsrequire a first meeting of creditors within 8 business days of appointment but themeeting has the very limited dual purpose of (i) considering the possible replacementof the administrator and (ii) whether to establish a creditors’ committee.119 However,as these two cases show, first creditors’ meetings are often used by administrators for 116 Ibid [18]-[20] (White J).117 Brown (above n 83, 166) appears to concur, contending that the judgment of White J does notendorse pre-pack sales as “the norm”.118 Similarly, in Re Eisa (above n 110) the administrator consulted with a committee of creditorselected at the first creditors’ meeting.119 Section 436E, Corporations Act 2001 (Cth).

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other informal purposes, including the provision of notice of the administrator’sintention to sell the company’s business prior to the substantial (second) creditors’meeting. In both cases it was clearly comforting to the court that the administratorhad provided informal notice of the intended transaction to creditors at their firstmeeting, and that no creditors had voiced any objection to that course. The role offirst creditors’ meetings in Australia’s voluntary administration regime appears todiscourage administrators taking significant action - such as a sale - before having atleast gauged the attitudes of creditors in that forum.

The manner in which Australian courts have sought to resolve this tension in thevoluntary administration regime appears more cautious and “creditor-friendly” whencompared with the UK experience. Creditor participation is a concept which dieshard in Australian custom and culture, but the point should never be lost that suchparticipation is contemplated and mandated in both the UK and Australian statutesestablishing their respective administration regimes. The test for the legitimacy of apre-pack in the UK should really be no different to that espoused in Global Food –i.e., the practice must be justified in the interests of maximising business value (orpreventing the destruction of it). In reality, however, the prevalence of pre-packs inthe UK means that the onus is largely upon aggrieved parties to demonstrate that therisk of destruction of value was overstated or illusory. This is a difficult burden todischarge. When hearing a formal challenge to an administrator’s decision to pre-pack, UK courts are presented with an inexact, “crystal ball” task of determiningwhether there was in fact a risk to business value which justified early action in theform of a pre-pack. It is not hard to see why the evidence of an insolvencypractitioner’s judgment will be difficult to displace in circumstances where thealternative course of events will never be known. How can a professional’s judgmentbe proven wrong except in the most clear-cut of circumstances? (This issue is alsorelevant to the proposal discussed below which suggests how pre-packs might bemade to take account of the subsequent reality of the post-sale fate and fortunes of asold business.)

The judgment in Global Food bears some similarity to the UK judgment in T & DIndustries. Both cases support a statutory construction of the respectiveadministration regimes whereby court directions should not ordinarily be required ifthe administrator is satisfied that an exercise of the power of sale is justified. Prior toT & D Industries, the UK courts were reluctant to permit early sales and therebydisenfranchise unsecured creditors. The point made by Schaffer & McCoy - that thepropensity of Australian administrators to seek court approval of their conductnegates the out-of-court rationale for the voluntary administration regime - bears astriking resemblance to the reasoning of Neuberger J in T & D Industries:

It seems to me that there is a powerful argument for saying that the fewer applicationswhich need to be made to the court by administrators the better. From the point ofview of the court, it is obviously undesirable to have a potential plethora ofapplications by administrators, many of them urgent, many of them pretty trivial evenif important to the administration in question. Administration is meant to be a moreflexible, cheaper and comparatively informal alternative, with a potentially lessdestructive result, to liquidation.120

120 Re T & D Industries Limited [2000] BCC 956, 961 (Neuberger J).

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It is also interesting that the Australian practice of informal consultation withcreditors in the first creditors’ meeting appears to dovetail with another part of thereasoning of Nueberger J in T & D Industries, where His Lordship discussed theimbalance which might be said to exist in the conferral of a broad power upon anadministrator to sell a company’s business prior to creditors’ consideration ofproposals. Neuberger J stated that “one answer, albeit by no means a whollysatisfactory answer to this … is that, at least in an appropriate case, the administratorcan informally discuss the proposal with at least some of the creditors.”121

Introducing a first creditors’ meeting (or some other early consultative mechanism) tothe UK administration regime might be a proposal worthy of consideration.

The underlying reasoning of the decisions in Re AMI, Re Killer and Global Food –insofar as the Australian courts have demonstrated a willingness to endorse thedecisions of administrators to effect justifiable early sales – might now encouragepractitioners to “back themselves” more often and use their powers without theexpense and delay of court involvement (particularly where informal consultationshave yielded no objections). It is arguable that in the UK the decisions in T & DIndustries and Re Transbus International laid the platform for the prevalence of earlypre-pack sales. It is therefore conceivable that in Australia, Re AMI, Re Killer andGlobal Food may be looked back on as a collective milestone in the journey towardspermitting pre-packs (or at least more early sales). Although the voluntaryadministration procedure differs from UK administration in requiring an early initialcreditors’ meeting, it may not be long before the Australian courts bless an “urgent”early sale prior to such meeting. Australia may well be heading in the same directionas the UK (albeit slowly and cautiously).

The faith in the judgment of insolvency practitioners (as professed by White J inGlobal Food) is not unreasonable and parallel observations have been made by UKjudges when assessing the justification for pre-packs. The difference in Australia ofcourse, is that the “professional” judgment as to an early sale is made by a practitionerwho has had no substantial pre-appointment involvement with the company.Australian general law, settings and practice are a timely (and possiblyuncomfortable) reminder of how the UK has clearly compromised the perceivedindependence of its practitioners in the interests of early action to preserve businessvalue. Whether the outcomes and successes of pre-packs have justified theconsequential loss of confidence by stakeholders in the administration regime is amatter for debate.

IV POSSIBLE WAYS FORWARD IN AUSTRALIA (AND POSSIBLE WAYSBACK FOR THE UK)

The “early sale” cases above demonstrate that there is presently a limit as to how farAustralia is prepared to come in the way of countenancing early action (sales) at theexpense of creditor participation. Despite a general awareness of the obstacles to pre-packing in Australia, there has been little appetite evident on the part of eithergovernment or commentators to formulate the sort of reforms which would benecessary to open the way for an increased and legitimate use of the practice in

121 Ibid 962.

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Australia. The gulf between the realities of professional practice in the UK andAustralia remain unbridged. Talk of pre-packs in Australia largely remains just that.

“Softer” insolvent trading laws may incentivise pre-packs on one level, but in theabsence of other compendious changes to the law the only pre-packs which would bepermissible in Australia would be those which entail the use of two practitioners - onepre-appointment adviser and one post-appointment, “independent” practitioner actingas administrator. The notion of two practitioners acting on a pre-pack transaction hasbeen canvassed both in Australia and the UK.122 In the UK this idea has(unsurprisingly) met with objections to the attendant costs and delay involved with asecond practitioner’s review of a pre-packaged transaction.123 Possible legislativereforms facilitating pre-packs which have been floated in the course of the debate inAustralia include (i) a “pre-pack panel” which would comprise some sort of review ofthe proposed pre-pack by a second, independent practitioner,124 (ii) some degree oflegislative abrogation of general law independence requirements and/or (iii)abridgement of administration timeframes for creditor participation (already discussedabove).

All these suggestions would appear to attract criticism on account of costs and delay,or a risk of diminished professional standards which may erode overall confidence involuntary administrations and the insolvency regime generally (as might be said hasoccurred in the UK). If the bitter pill of further costs can be accepted – and it must beacknowledged that there are costs associated with all sorts of transactions - the notionof a “pre-pack panel” delivering a genuinely independent, pre-appointment review ofa proposed sale could have merit. Some legislative abrogation of independencestandards could be introduced whereby an insolvency practitioner may act and adviseupon a pre-pack, on the condition that the transaction be reviewed and approved by anindependent practitioner prior to appointment and implementation. The value of thepanel process would be that the “reviewing” practitioner, unlike the pre-appointmentadviser and prospective administrator, could not be “privately ordered” by thecompany or its directors.

122 Wellard “UK pre-pack reforms: Pause for thought in Australia?” (2011) 23(2) Australian InsolvencyJournal 12, 18; UK Insolvency Service’s March 2010 Consultation/Call for Evidence “Improving thetransparency of, and confidence in, pre-packaged sales in administrations” (Option 4).123 UK Insolvency Service’s March 2011 Summary of consultation responses “Improving thetransparency of, and confidence in, pre-packaged sales in administrations” 33, [7.1]-[7.6].124 Wellard (above n 122, 19) suggested that an independent practitioner could be appointed from sucha panel to act as administrator and review a pre-pack proposal which had been negotiated or designedbefore his/her appointment. Building on this idea, Paul Billingham of Grant Thornton (Sydney) andLeonard McCarthy of Henry Davis York (Brisbane) - in a presentation at the IPA’s NationalConference on 1-3 June 2011 - agreed that a “pre-pack panel” might work to provide for a review andapproval of the proposed transaction, but suggested that the pre-pack should still be implemented bythe same practitioner who had advised the company pre-appointment. As a matter of commercialreality, it is accepted that bona fide directors of companies would baulk at a process whereby their“pre-pack adviser” ultimately delivers them into the hands of a different practitioner to take theappointment as administrator and implement the transaction. From a professional standpoint, it seemsthat practitioners would also feel uncomfortable not maintaining “ownership” and carriage of theinsolvency solution they have helped procure for the company and its creditors. Therefore, the notionof an independent review (i.e., undertaken by a practitioner from a panel which is entirely independentof the directors and their IP adviser) – but with the retention of the same pre-appointment practitioneras subsequent administrator - would appear to have merit. Indeed, the notion of a review by apractitioner who does not stand to earn fees from any subsequent assignment (implementing thetransaction) also has appeal.

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A pre-appointment review process could be embraced in the UK with the requisiteprofessional and political will. Such a process would not pose undue risk to businessvalue or compromise the speed of pre-packs – there would be no post-appointmentdelay. The only real quibble one could mount would be with the costs of the review.In this regard, one might ask: what price confidence in an insolvency regime? Anindependent review is no perfect substitute for creditor participation, but it wouldaddress the independence issues which have created negative perceptions of pre-packsales, especially those in favour of connected party purchasers.

Be that as it may, further regulation of pre-packs is plainly not the flavour of themonth, as demonstrated by the recent about-turn by the UK Government in respect ofits 2011 proposals for a mandatory notice (to creditors) of connected-party pre-packsales. Any regulation which impinges on the current ability and discretion of UKpractitioners to pre-pack will clearly face an uphill battle for acceptance and support.However, another proposal may lend itself to addressing the confidence-sappingpractice of “connected-party pre-packs”: a proposal which has the advantages ofleaving unfettered the speed and expediency of a pre-pack, but which might deliver tocreditors a “royalty” or return for their disenfranchisement and exclusion from thevoluntary administration process (including the very decision to pre-pack). Indeed, aworking model for such a proposal already exists in the personal bankruptcy regimesof both the UK and Australia.

V WHAT PRICE A SECOND CHANCE? - A POST-SALE INCOMECONTRIBUTION OBLIGATION FOR CONNECTED PARTY PRE-

PACKS

It is well known that pre-pack sales to connected party purchasers attract the severestcriticism and disapproval of the practice.125 Far from decrying connected party pre-pack sales as something which should be an exception to the rule, UK proponentsopenly laud pre-packs as an appropriate “tool” for insolvency practitioners to ensurethat a business is able to be saved by its transfer to a new entity managed by the same,key personnel. This “second chance” rationale for connected party pre-packs hasbeen laid bare by Frisby (2009)126 and a recent UK House of Commons SelectCommittee inquiry.

Frisby’s 2009 analysis of the UK pre-pack’s “contribution to the “second-chanceculture” for both businesses and owner/managers of companies”127 contended that:

[T]here is nothing intrinsically objectionable, and certainly nothing unlawful, in“phoenixing”: indeed, there may be very good reasons for offering the existingowner/managers a second chance along with their businesses. In many reports andstatements of proposals to creditors, practitioners justify the phoenix by reference to avariety of factors, including that the connected party offer was the best available, orsometimes the only offer. Where pre-pack sales are concerned, this may appear lessthan convincing given that, at best, only limited and discrete solicitation of offers for

125 See UK Insolvency Service’s March 2011 Summary of consultation responses, above n 123, 6 [2.3].126 Frisby “The second-chance culture and beyond: some observations on the pre-pack contribution”(2009) Law and Financial Markets Review 242.127 Ibid.

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the business will have taken place, but where the purchaser is both integral andcritical to the business in question, it may have some credence.128

Frisby’s analysis demonstrated that “connected party pre-packs appear to survive onaverage longer than their unconnected party counterparts”, which “may provide somesupport for facilitating that second chance”.129 Frisby concluded that “there is roomto suggest that the tendency towards “phoenixing” is not to be roundly condemned, asin many cases the phoenix will survive, and even where it does not, it will trade for arelatively sustained period during which it may make some positive contribution tothe economy.”130

These observations were reinforced in the course of the UK House of CommonsSelect Committee inquiry into The Insolvency Service,131 which convened meetingsin early 2012 to hear contributions from representatives of peak insolvencyassociations and regulatory bodies on a variety of matters, including pre-packs. Thecommittee meeting of 24 January 2012 heard a contribution from Ms FrancesCoulson, R3 President,132 to the effect that connected-party pre-packs are a reflectionof the reality that:

[I]n a large number of cases nobody else would give the [insolvent company’s]business a go, if you like, so I think it’s fair to say that it [pre-packing] is a valuabletool particularly in the SME sector and if you want people to try and then try againthen … you have to have some sort of mechanism whereby they can do that. Again,that’s not a policy decision for us to make but I think it would have an effect if thattool were taken away, particularly in the SME sector.133

Pre-packing therefore appears to be very much driven by a desire to enable or providesmall business proprietors (and their employees) a “second chance” in circumstanceswhere the only beholder of business value might be the existing board ormanagement. This objective, in and of itself, is patently reasonable. Naturally,creditors will also stand to benefit to some extent from any insolvency procedureswhich preserve business value. But the reality and pervasive nature of the “second-chance” rationale for pre-packing warrants deeper reflection as to whether there mightbe room for improvements to the legislative framework – i.e., whether the law shouldask those who receive the benefit of a “second chance” to make a further contributionin light of it, particularly in circumstances where that second chance has enabled orfacilitated a profitable, rehabilitated business. Is it unreasonable to consider whetherthose enjoying the privilege of a “second chance” delivered by a corporate insolvencyprocedure should be compelled to make a contribution - from the income or fruit ofthe “second life” of their business – back in favour of the remaining creditors of theinsolvent company they have left behind? As will be seen, the insolvency regimes in 128 Ibid 243.129 Ibid 244.130 Ibid 246.131 House of Commons Business, Innovation and Skills Committee inquiry into the Insolvency Service,announced 30 November 2011.132 R3 is the UK insolvency trade body, the professional association for insolvency practitioners,representing some 97% of UK insolvency practitioners.133 Ibid, House of Commons Business, Innovation and Skills Committee meeting regarding its inquiryinto The Insolvency Service held on Tuesday 24 January from 10.28am to 12.28pm. The quotedcontribution from Ms Coulson, R3 President (including the question to which she was responding) is at53 mins 02 secs of the total 1hr 59 mins recording). A recording of the hearing is available on the UKParliament website: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=9951.

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Australia and UK reflect an expectation that this is a reasonable thing to ask ofinsolvent (bankrupt) individuals. The question then becomes whether there is anyreason not to ask the same of directors of “pre-packed” insolvent companies who are,in reality, enjoying a “second chance” in much the same manner as a bankruptindividual.

There is an obvious objection to translating this type of provision into the corporateworld of the pre-pack. In bankruptcy law, it is the same debtor who has failed to payhis or her debts who is being ordered to pay a proportion of future income towards thepayment of those debts. In the context of a pre-pack (to connected persons) it wouldseem contrary to the principle of separate corporate legal personality to make incomefrom “Newco” be used to pay off (to some extent) the debts of “Oldco”. There isthough, the corporate precedent of making successor companies liable for certainrights of employees which have been breached by the predecessor company where thebreach occurred due to the transfer of the business. Such rights against “Oldco” aretransferred to “Newco”.134

It is also arguably “fair” that “Newco” (in a connected party pre-pack) should beasked to contribute. In the context of the payment of pre-appointment fees, the UKHigh Court has been asked to consider: “whether the advantage to the purchasingdirectors in retaining a business shorn of debt is clearly outweighed by the advantagederived by creditors from the pre-pack.” The answer was: “Where the directors … arethe purchasers, it is rarely possible to establish clearly that the balance of advantage isin the creditors’ favour.”135 From this it would appear that where a pre-pack is infavour of connected persons, it will be rare for the pre-pack to be seen as to theadvantage of the creditors. If the pre-pack is to the advantage of the connectedpersons, it would seem fair and reasonable that if the business is successful, then itshould be asked to contribute to the satisfaction of the debts owed by the predecessorcompany.

In addition to these arguments, the idea of a future contribution would appear to beconsistent with various UK Government policy statements leading up to theEnterprise Act 2002. The Executive Summary of the White Paper,136 which led to theEnterprise Act 2002, refers to the purpose of the reforms as being “designed to createa fairer system in which there is a duty of care to all creditors and all creditors areable to participate. It should also help to maximise economic value by aligningincentives properly….”

Under the White Paper’s Corporate Insolvency Proposals heading at para 2.2, thepurpose of the Enterprise Act 2002 was stated as providing “adequate incentives tomaximise economic value” and equally to provide “an acceptable level oftransparency and accountability to the range of stakeholders with an interest in acompany’s affairs, particularly creditors.” At para 2.4: “on the grounds of both equityand efficiency, the time has come to make changes which will tip the balance firmly

134 See the Transfer of Undertakings (Protection of Employment) Regulations 2006 (2006/246) and thecourts’ recent interpretations of the insolvency provisions of those regulations in Key2Law (Surrey)LLP v De’Antiquis [2011] EWCA Civ 1567 and Spaceright Europe Ltd v Baillavoine [2011] EWCACiv 1565.135 Re Johnson Machine and Tool Co Ltd [2010] BCC 382 per HHJ Purle at para 5. See also Re KayleyVending Ltd [2009] BCC 578.136 Insolvency – A Second Chance (2001) CM 5234.

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in favour of collective insolvency proceedings in which all creditors participate.”Similar sentiments could be put forward to support the suggested contributionsolution.

A connected party pre-pack (post-sale) contribution obligation could be advocatedand justified on two grounds. Firstly, as already mentioned, those UK and Australianinsolvency regimes which promote a “second chance” for individual debtors havealready enshrined income contribution obligations as a just corollary of the debtor’s“clean slate”. Secondly, in a (voluntary) administration context, a contributionmechanism could be seen as an acknowledgement or “compensation” for thecreditors’ loss of participation and voting rights in the administration through which apre-pack sale is implemented. Such a mechanism could be viewed as an “incomecontribution” or a “royalty”, depending on which justification holds greater appeal.

1. UK/Australian bankruptcy antecedents of income contributionmechanisms

Income contribution mechanisms exist in both Australian and UK bankruptcylegislation - regimes which provide a “second-chance” for insolvent debtors similar tothat which pre-packs deliver for the directors of insolvent companies and theirbusinesses.

The Australian bankruptcy regime (for individuals) provides for an “automatic” orcompulsory obligation upon bankrupts to make income contributions according totheir level of earnings. This component of the regime (Division 4B of the BankruptcyAct) was introduced in 1991, prior to which income contributions could only beordered by a court upon application by the trustee in bankruptcy.137 The 1991 regimewas introduced to provide a more effective mechanism “for obtaining incomecontributions from bankrupts who are able to make some contribution”.138 TheExplanatory Memorandum for the enabling legislation stated the rationale formandating such a contribution:139

Many bankrupts earn quite large incomes after bankruptcy and for all practicalpurposes are not required to make any repayment to creditors from that income. In acase where the bankrupt has few if any divisible assets, the creditors will get nothingout of the process at all, notwithstanding that the bankrupt may have considerablecapacity to pay. Further, some bankrupts manage to put their assets out of the reachof creditors and to channel income away from themselves through the use ofassociated individuals, companies, partnerships, or trusts which are referred to in theAct as “associated entities” of the bankrupt. These associated entities may, andusually do then provide the bankrupt with substantial non-cash benefits, such as freeor low cost housing, motor vehicles, boats and payment of expenses. Very often theentity employs the bankrupt, and by virtue of that employment, the entity is able togenerate substantial income. If the bankrupt ceased to be in the employment of theentity, its capacity to derive income would be lost.

137 Murray & Harris, Keay’s Insolvency: Personal and Corporate Law and Practice (Thomson Reuters,Australia 2011), [6.265].138Bankruptcy Amendment Bill 1991 (Cth), Explanatory Memorandum.139 Ibid [8].

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In the UK, under s 310 of the Insolvency Act 1986,140 a trustee in bankruptcy mayapply to the court for an income payments order. The effect of such an order is that apart of the bankrupt’s income, while the bankrupt remains undischarged, must be paidover to the trustee. The court will not order an amount to be paid over which reducesthe bankrupt’s income to below the level which the court believes is necessary formeeting the reasonable domestic needs of the bankrupt and his or her family. Theincome payments order will specify how long it is to continue. It may end when thebankrupt is discharged (which, in the ordinary case, will happen within 12 months) orlast for up to three years from the date of the bankruptcy order.141 If the amount to bepaid over to the trustee in bankruptcy can be agreed between the parties, there is noneed to obtain a court order. Instead, an income payments agreement can be enteredinto under s 310A.142 This legally binding agreement is enforceable as if it were anincome payments order.

2. The connected-party pre-pack “royalty” – putting a price ondisenfranchising creditors from the voluntary administration process

From a quid pro quo perspective, it is just and reasonable that unsecured creditorsreceive something for their exclusion from the (voluntary) administration process incircumstances where the business of their corporate debtor has been transferred to acompany directed by the same individuals. As outlined above, bearing in mind that itis the exclusion of creditors from any approval process (e.g., creditors’ meeting)which enables a pre-pack sale to be successfully and speedily implemented, the quidpro quo for the lack of a collective decision-making process could be that creditorsstand to receive a modest benefit (e.g., percentage) of any “upside” in the way ofincome earned by the successor entity which trades the business into the future, freeof the old company’s debts. Put simply, it is the creditors’ non-participation whichprovides and enables the business rescue – thus, those creditors should stand toreceive a modest contribution from the monetary rewards of that second chance.

It should be stressed that the above proposal (and the justifications for it) would onlyapply to connected party pre-pack sales. Only where the successor entity is directed,managed or owned by the same individuals could it be legitimately contended that thepre-pack has delivered a “second-chance” justifying some sort of contributionobligation.

3. Valuations, “crystal ball” projections and “strike oil” scenarios

One response to an income contribution proposal might be to point out that a pre-packadministrator obtaining proper value for a business sale will be ensuring that creditorsreceive all they could (or should) ever justifiably ask for. With an arms-lengthinvestor or purchaser this argument would carry considerable weight – and it couldnot be said that the new directors of the successor entity were enjoying a “second-chance” in the commonly understood meaning of the term. Even for a connectedparty sale it might still be argued that a contribution mechanism is unjustified if theadministrator (as agent of the insolvent corporate vendor) has obtained proper value

140 A similar provision was previously contained in s51 Bankruptcy Act 1914 but appears not to havebeen utilised effectively (see the Cork Committee’s discussion and recommendations at paras 591-598and 1158-1163 which led to the introduction of s310).141 See generally Miller “Income Payments Orders” (2002) 18 Insolvency Law and Practice 43.142 This provision was introduced by s260 Enterprise Act 2002 and came into force in April 2004.

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for the sale which comprises or represents future cash flow earnings of the rescuedbusiness, discounted for present value and the risk assumed by the purchaser.

However, the inadequacies of valuations in the context of business rescue and creditorparticipation have been demonstrated by decisions such as Re Bluebrook Ltd (“IMOCarwash”)143 where the court observed that while a “going concern” valuation mayclearly be appropriate, there are various, alternative valuation methodologies whichpresent themselves. The IMO Carwash decision also demonstrates the potentialunfairness which can arise from “valuing out” junior or unsecured creditors from aninsolvency process.

IMO Carwash dealt with a challenge to a scheme of arrangement which - in verygeneral terms - effected a pre-pack transfer of an insolvent company’s business andsenior secured debt to a new company (“Newco”), leaving behind junior debt in theinsolvent company (“Oldco”). Oldco, by virtue of the business transfer, was tobecome a mere, assetless shell. Junior secured creditors were denied any vote on thescheme because the accepted range of enterprise value of the business was assessed tobe less than even the quantum of the senior lenders’ debt, rendering the subordinatedcreditors unable to point to an “economic interest” in the outcome of the scheme.Mann J assessed a range of differing valuation approaches to determine the competingvaluations proffered by the proponents of the scheme and the objecting creditors.One of the possible going-concern methodologies for valuing a business (and whichwas considered by Mann J among a range of alternative methodologies)144 is anincome or Discounted Cash Flow (“DCF”) approach which “indicates businessrealisation proceeds based on the cash flow that the business can be expected togenerate in the future.”145

In the final analysis, Mann J identified significant failings in the competing valuationevidence submitted by the objectors to the scheme (e.g., an absence of detailedunderlying assumptions). Mann J found for an enterprise value in a range which was(at its highest) much less than the senior debt. Mann J found that he could notconclude that the junior lenders were “getting a raw deal because there is a good oreven reasonable case for saying that they are being deprived of value.”146 While thedecision appears eminently justified on the evidence put before the court, the reasonsof Mann J beg the question as to what the court would have made of the scheme if thecompeting valuations were closer. Seah (2011), in analysing the effect of the IMOCarwash decision, contends that “the pendulum has on many occasions swung too farin favour of safeguarding the senior claimants’ interests”.147 Seah persuasively makes

143 [2009] EWHC 2114 (Ch); [2010] B.C.C. 209.144 For a considered discussion of the various methodologies for valuing the business of a financiallydistressed company (including those canvassed in IMO Carwash), see Purcell “Distressed Valuation”(2009) 6(1) International Corporate Rescue 17, Purcell “The Courts Speak on Valuation inRestructurings: IMO Carwash, SAS and Wind Hellas Lessons” (2010) 7(2) International CorporateRescue 129 and Whiter “Valuation Disputes in Restructurings: More to Come” (2010) 7(1)International Corporate Rescue 3.145 Ibid [11] (Mann J).146 Ibid [52] (Mann J).147 Seah “The Re Tea Corporation Principle and Junior Creditors’ Rights to Participate in a Scheme ofArrangement – A View from Singapore” (2011) 20 International Insolvency Review 161, 183.

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the case for creditors who are understandably aggrieved at being “valued out” ofparticipation in an insolvency procedure:148

The Senior Creditors and the scheme companies were unanimous in wishing to keepthe businesses of the companies as going concerns so as to actualize any benefitswhich may accrue following a successful rehabilitation of the companies, therebyincreasing the prospects of … repayment of the Senior Debt in due course. Toachieve such rehabilitation, the scheme terms contemplated the transfer of the assetsof the scheme companies to the Newcos. The balance sheets of the reconstitutedcompanies were thereby significantly improved…

The improved balance sheets of the Newcos with the resultant reduced gearing ratioswould significantly improve the prospects of the Newcos obtaining new credit linesor other financial accommodation for their operations, thereby increasing chances ofa successful rehabilitation. Any upsides of a successful rehabilitation (assuming theymaterialize) would however accrue to the Senior Creditors exclusively as the JuniorCreditors had been cut-off from the new structure and left with claims against shellcompanies.

The IMO Carwash decision highlights the potential problems and unfairness whenvaluations are used to determine the extent of creditors’ ability to participate and/orshare in the benefits of a successful business rescue or rehabilitation. Valuations areinvariably an inexact science. An Irish judge recently observed (in the context ofanother valuation exercise relating to a scheme) that “[t]he business of economicforecasting is notoriously difficult; its sole function according to J.K. Galbraith beingto make astrology look respectable.”149 Upon initiation of an administrationprocedure, it is the interests of creditors which are paramount vis a vis the company’sassets. Should it not be the creditors’ decision to “sell” (i.e., accept the valuation onoffer from a connected party) or to “hold” (i.e., hold out for a better offer or evenpropose a CVA/DOCA or longer work-out)?

Proponents of pre-packs laud the procedure as a “business rescue tool”. However, anupfront, “enterprise value” or pre-packaged approach to business rescue which deniescreditor participation raises an awkward question – for whose benefit is the businessbeing rescued? In any event, rather than proposing that pre-pack sales withoutcollective approval be prohibited, a workable “compromise position” might be tointroduce an income contribution mechanism for connected party pre-packs. Thismechanism would preserve the efficacy of pre-packs (and the business rescueoutcomes they deliver) while recognising that in a connected party/phoenix scenario,pre-packs constitute a dramatic abrogation of creditors’ rights of participation. Theloss of participation rights in a connected party pre-pack business rescue merits amodest stake for creditors in the ultimate success of the attempt at businessrehabilitation.

In circumstances where the connected party purchaser is the only party interested inthe business (Frisby and Coulson suggest this is not uncommon), it would beinteresting to know if it is customary for administrators to seek to insist upon a saleconsideration calculated according to a “DCF” formula. As mentioned, a purchaseprice which incorporates future projected (discounted) cash flow could possiblycounter any suggestion that creditors should receive a subsequent “premium” on the

148 Ibid 175.149 Re McInerney Homes Ltd [2011] IESC 31, [54] (O’Donnell J).

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initial, agreed sale consideration. Some pre-pack commentary has referred to the factthat many pre-pack sales incorporate deferred consideration terms,150 but again it isunclear if such terms customarily endeavour to ensure that “dumped” creditors retaina direct stake in the potential upside (i.e., profits) of a subsequently successfulbusiness rescue. There might be scope for insolvency practitioners to negotiate a pre-pack sale which incorporates something similar to an income contributionmechanism. However, this would be very much a matter for the commercial will ofthe parties involved. If an administrator is provided with a “take-it-or-leave-it” offerby a connected party which cannot be matched – or indeed where there is nocompeting bidder to be found at all, as Frisby observed151 – then there is a reasonableargument that the administrator has little room to do anything but accept the best (oronly) offer on the table. That scenario is where a mandated contribution mechanismfor connected party pre-packs would instil some confidence in the process –particularly from the perspective of creditors whose debts are seen as significantenough to “dump”, but not deserving enough to participate in the decision to pre-pack.

4. Design and implementation of a contribution mechanism for connectedparty pre-packs

The existing bankruptcy regime contribution mechanisms which exist in the UK andAustralia already provide a template model for a similar contribution obligation forconnected party pre-packs. Appropriate income thresholds and earning periods152 fora contribution mechanism could be debated, as could the appropriate definition of“connected party”. It should be stressed that the contribution mechanism proposedherein is one which would trigger an obligation in the event of income being earnedincidental to a successful business rescue. In their analysis of outcomes in CVAs inthe UK, Frisby and Walters (2011) noted that “one might suggest that the ‘ethos’ ofthe CVA procedure requires this sacrifice from owners and managers” and that someCVA proposals “envisage that contributions to the CVA may rise according to theprofits of the company, which … appears to be a reasonable term.”153 If a connectedparty pre-pack resulted in a second business failure or poor earnings then nocontribution obligation would arise.154 Liquidations would need to be “held open” forthe period of time in which the assessment periods and contribution obligations wouldoperate, but this would not appear to provide any significant difficulties in terms oftime and cost. It is acknowledged that a contribution mechanism is less attractive(and may even be self-defeating) in circumstances where a genuine “white knight”investor is looking to step up to the business rescue plate. There will always be

150 Frisby “A preliminary analysis of pre-packaged administrations” (August 2007) Report to TheAssociation of Business Recovery Professionals (R3), 74.151 See above n 126.152 In Australia the trustee-in-bankruptcy assesses a bankrupt’s income for each “contributionassessment period” which is every 12 month period from the commencement of the bankruptcy (or lessthan 12 months if the bankrupt is discharged or the bankruptcy annulled): ss 139K and 139WBankruptcy Act 1966 (Cth). In Australia a bankrupt is automatically discharged after 3 years in theabsence of any objections: s 149 Bankruptcy Act 1966 (Cth). In the UK an income payments order oragreement may last up to three years even though the bankrupt will be discharged within 12 months.153 Walters & Frisby “Preliminary Report to the Insolvency Service into Outcomes in CompanyVoluntary Arrangements” (23 March 2011), 17 (n 39).154 It should be mentioned that the prevalence of second chance business failures (or “serial” pre-packing of the same business) raises its own separate ground for a policy debate of the merits of pre-packing.

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varying degrees of “connected party” status of a pre-pack purchaser. The contributionmechanism would need to be designed so that third party, arms-length investors arenot discouraged from pre-pack sales merely because (for example) one key director ofthe old company is maintaining a presence with the new entity taking over thebusiness. As always, an appropriate balance would need to be struck.

The contribution mechanism would be entirely consistent with the “rescue culture”and the idea of the “second chance.” It would go some way to counter the complaintfrom some that pre-packs give a business an unfair advantage over its competitors,have a significant, negative knock-on effect on its own suppliers and are bad for theeconomy as a whole.155 The pre-packaged business, if successful second time around,would share its success with its former creditors and would encourage those formercreditors to continue to trade with it, as they would have a clear stake in its success. Itwould encourage the survival of the pre-packaged business and its suppliers. Theconcept of a “second chance” might be taken literally so that the contributionmechanism could be combined with a prohibition of a further connected party pre-pack of the business within a certain time period. There would be no third or fourthchance.

In the context of the straightforward, “second-chance” connected party pre-pack, it isdifficult to contest that a contribution mechanism would introduce to many gardenvariety UK pre-packs added fairness and creditor-confidence. From the perspectiveof an unsecured creditor, it is contended that the SIP 16 information disclosures(important though they are) pale in comparison with a contribution mechanism whichwould deliver a self-executing, monetary stake in a business rescue which the creditormay be powerless to prevent or even influence.156

VI CONCLUSION

Australia’s resistance to the UK brand of pre-packing may be an uncomfortable butinstructive point of reference for UK policy-makers and practitioners. It is somethingof an oddity that independence standards in the mother country have so profoundlydiverged from the Australian general law (or perhaps it is the other way round). Thatsaid, it is an open question as to whether the clear loss of perceived independence ofUK insolvency practitioners is offset by the successes delivered by pre-packs in theway of business rescues and jobs retention. The above analysis has endeavoured toacknowledge the successes of pre-packs and also highlight the underlying reasons forthe success of the practice. The controversial facets of pre-packs (i.e., creditordisenfranchisement, pre-appointment practitioner involvement and the early exerciseof administrator power) are the very things which enable pre-packs successfully torescue businesses.

In both jurisdictions, policy makers and practitioners should not lose sight of theoriginal ideals which promoted the introduction of voluntary administrations in thefirst place: that is, the notion of rescuing a distressed company (or its business) for thebenefit of creditors (secured and unsecured). Voluntary administration was not

155 See e.g., the letter from the Association of British Insurers to the Insolvency Service found at:http://www.abi.org.uk/Media/Releases/2009/08/ABI_calls_on_Insolvency_Service_to__improve_transparency_of_prepack_administrations.aspx (last accessed 1st April 2012).156 Some creditors may be able to hold and exercise some commercial leverage in a pre-pack sale (e.g.,by being a key supplier).

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introduced primarily to deliver directors or management of small businesses a“second chance”. Practitioners and policy makers might reflect a little more onwhether the profitable businesses of some distressed companies could be made towork just a little harder for “Oldco” (the existing corporate owner and its creditors)instead of taking the expedient route of a second-chance “dump and transfer” pre-pack sale to “Newco”. This is a question which any prospective administrator shouldbe critically considering before deciding whether to engineer a pre-pack in the firstplace.

It is debateable whether the ability of prospective UK administrators to undertakesignificant pre-appointment transactional work means that threshold decisions to pre-pack may not always undergo the same rigour of “critical” analysis which might beapplied by practitioners who are not privately consulted, or “privately ordered” by adirector. Debates as to professional standards, independence and ethics often focus onextreme examples of conduct, misconduct or conflicts. However, the reality ofprofessional insolvency practice is that honest, reputable professionals are consultedby a “client” and asked to proffer “solutions” for a corporate distress scenario. Aswith all reputable professionals doing their level-best in a competitive, consumer-driven marketplace, the competing interests of the “client”, the company and creditorscan present judgment calls which are often more grey than black or white. Few woulddisagree that thoroughly unscrupulous professionals are a rarity in both jurisdictions.However, putting to one side the clear cases of abuse which will arise in any system,it is not unreasonable to ask further whether the prevalence and popularity of UK pre-packs reflect the fact that for some companies the practice is being used as a tool ofconvenience for directors rather than being one option in a considered assessment ofall possible alternatives - including, say, a work-out with collective creditor supportwhere a profitable business could “stay where it is” and be put to work for the benefitof the insolvent company and its creditors (e.g., through a DOCA or CVA).

In their analysis of CVA outcomes, Frisby and Walters (2011) identified theambivalence of directors or equity holders toward trading on for creditors rather thanthemselves:

One important aspect of the possible move towards longer CVAs is that it effectivelylocks out equity holders from at least a proportion of their possible dividend for aconsiderable period. Where the company in question does not distribute dividends,and instead its owners are also managers/directors who receive a … salary calculatedwith reference to profits [available for the purpose of distribution] the same applies:such owners/managers are subjecting themselves to an ‘austerity’ schedule of quitesome length. There is, of course, absolutely nothing objectionable in this, but … toput it simply, owner/managers may find that the effort of continuing to trade, whenlittle or no return is generated to them personally, ultimately hollow. … Again, this isspeculative, and the matter could usefully be investigated further, but well-adviseddirectors may find themselves with alternative strategies from which to choose, theobvious one being a pre-pack administration under which they themselves acquire thebusiness and assets of the company free of its debts.157

The ability to pre-pack arguably disincentivises the CVA as a genuine alternative toaddress a company’s insolvency.

157 Walters & Frisby, above n 153, 16-17.

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In any event, it appears that pre-packs will very much remain in the UKadministrator’s “toolkit” and that there is little appetite to impair their expediency interms of regulating implementation process (e.g., by mandating creditor/courtparticipation). That being the case, an income contribution mechanism is oneproposal which could restore some balance to the “outcome-process pendulum”which in the UK has arguably swung a little too far towards expediency at theexpense of process and creditor confidence. Creditor participation has been a long-accepted hallmark of insolvency systems said to be worthy of stakeholderconfidence.158 It is clear that this aspect of the Australian insolvency landscape willdie hard. The UK and Australia may both serve as examples of jurisdictions wherethe “outcome-process pendulum” has swung too far, but in opposite directions. Itmay be that neither jurisdiction has yet found the right balance. Perhaps lessons canbe learned both ways.

The attraction of a connected party pre-pack contribution mechanism is that it deliversa quid pro quo or “royalty” to creditors for their disenfranchisement, while stillallowing such pre-packs to deliver expediently “second chances” in the SME sector.An income contribution proposal warrants consideration and reflection, not just in theUK (to correct a perceived imbalance) but also in Australia as that jurisdictioncontinues to broach questions of if, and how, creditor participation should becompromised in the interests of achieving better business rescue outcomes.

158 Harmer Report (ALRC 45, General Insolvency Inquiry, 1988), Part I, Aims of insolvency law–Principles, para 33; Cork Committee at e.g., paras 232, 914,917 and 919.

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A comparative analysis of Anglo-Australian pre-packs: Can the means be made to justify the ends?

Mark Wellard, Qld University of TechnologyDr Peter Walton, University of Wolverhampton

Overview of analysis and proposal

• UK state of play re pre-packs– Professional/judicial attitudes– Loss of appetite for regulation

• Australian state of play re pre-packs– Why the “UK pre-pack” hasn’t emerged– Some possible signs of movement?

• Possible regulatory mechanisms– Income contribution proposal for connected

party pre-packs

Pre-packs: UK state of play

• The Profession– Managing conflicts (or damage control?)

• The Courts– Early sales evolved to pre-packs

• Government regulation – all talk no action– Two consultations– No controls introduced (why?)

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Australian pre-packs: unfulfilled desire?

• Calls for legislative override of roadblocks to pre-packs: – Insolvent trading laws– Independence standards (general law)– Statutory timetable vs early action

• Early sale (in administration) cases– Administrators may “back themselves”

more in the future– Judicial attitudes to early sales similar to

those in UK’s journey toward pre-packs

Possible ways forward (Australia) and possible ways back (UK) • Build in process for review by truly

independent IP (eg, from a panel)– Need not compromise speed– Added cost (like all transactions)

• UK: difficult to unscramble the egg, but could also adopt Australia’s early (first) creditors’ meeting– Greater IP accountability– Promote informal consultation?

Income contribution proposal for connected party pre-packs• Connected party “phoenixes” are what give

pre-packs a bad name – Approx. 20% of UK administrations are

connected party pre-packs (2010 stats)• Pre-packs and the “second chance” culture

– Comments re SMEs in UK House Inquiry– Should directors/equity holders make a

contribution in return? • Pre-packs disenfranchise creditors

– Do unsecured creditors deserve something in return? A “royalty”?

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Income contribution proposal for connected party pre-packs

• UK and Australian Bankruptcy regimes provide for income contribution obligations – Part and parcel of the “second chance”– Reflect community expectations– Serve as a model for connected party pre-

packs?– Income earning thresholds – only a

successful second chance requires a contribution

Income contribution proposal for connected party pre-packs• Valuations

– IMO Carwash a reference point for potential unfair outcomes in connected party pre-packs

– Pre-pack sale may not always capture the true value of a successfully rehabilitated business

– Rather than upfront “crystal ball” valuations, why not give unsecured creditors a modest share of the reality of a successful business rescue?

Company vs business rescue

• CVA analysis (Walters & Frisby, 2011) – Directors/equity holders reluctant to

undertake lengthy work-outs for creditors (rather than themselves)

– Pre-packs inherently more attractive option for connected party business rescues

– Some intervention needed to restore balance

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Conclusion

• UK and Australia can both reflect on the possible use of income contribution obligations for “second-chance” business rescues

• Income contribution obligation: – Would not “hold up” or “derail” business

rescue implementation (cf UK 3 day notice proposal)

– Would restore some balance, fairness and confidence to the connected party pre-pack

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DRAFT – do not cite without author’s permission

Corporate Reorganizations and the Public InterestSummary

Jassmine Girgis±

In Canada, the public interest has always been a significant consideration in the restructuring of

insolvent corporations. The “public interest” is generally a consideration of how varying

stakeholder interests are affected when a company is liquidated, and it involves interests which

are broader than the interests impacted in a particular case.1 The public interest was a primary

consideration when Canada’s restructuring legislation2 was being enacted in 1933, during the

Great Depression,3 and it was most recently confirmed by Canada’s highest court, the Supreme

Court of Canada, in Century Services Inc. v Canada (Attorney General),4 in its first

interpretation of the provisions of Canada’s restructuring statute, the Companies Creditors

Arrangement Act.5 In Century Services, the Court had to determine which federal statute

governed the priority of unremitted Goods and Services Taxes during a company’s restructuring.

In the decision, the Court also commented on the history and purpose of the CCAA.

A proceeding that has become increasingly prevalent within the restructuring topic is liquidating

plans of arrangement (also referred to as “liquidating CCAAs”). Traditionally, the two concepts,

± Assistant Professor, Faculty of Law, University of Calgary.1 Andrew Keay, “Insolvency Law: A Matter of Public Interest?” (2000) 51 Northern Ireland Legal Quarterly 509 atp. 510, referred to in Janis Sarra, Creditor Rights and the Public Interest, Restructuring Insolvent Corporations(Toronto: University of Toronto Press Incorporated, 2003) at p. 49.2 Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 [CCAA]. The CCAA is the primary statutegoverning corporate reorganizations in Canada. In order for a company to be governed by the CCAA during itsrestructuring, it must have more than $5M in debt.3 Secretary of State Honourable C.H. Cahan, Remarks on the Introduction of Bill 77 (20 Apr. 1933), Dominion ofCanada, Official Reports of the Debates, House of Commons, 4th session, 17th Parliament 23-24 George V, VolumeIV (Ottawa: King’s Printer, 1933) at 4090.

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liquidation and reorganization, have been seen as mutually exclusive solutions for a financially

distressed corporation. Reorganization allows for the modification of corporate affairs of the

debtor company such that the company may emerge from the proceeding as a “going concern”

whereas liquidation involves the sale of the company’s assets for cash to a third party, either

piecemeal or in bulk.6 These proceedings effectively liquidate the debtor corporation, but not

under the legislation typically used for liquidation, the Bankruptcy and Insolvency Act,7 which

provides for liquidation under the supervision of a trustee in bankruptcy. In a liquidating CCAA,

the liquidation is carried out under the CCAA, the very statute originally designed to avoid

liquidation and keep the company operating as a going concern.8

Although the Supreme Court in Century Services traced the history of the CCAA and spoke of its

remedial purpose, it did not discuss liquidating CCAAs or how they can be reconciled with the

public interest purpose. It would have been ideal if the Supreme Court had provided some

commentary on liquidating plans of arrangement in Century Services, especially in light of the

lengthy discussion devoted to the discretionary power of the supervisory court in a CCAA

reorganization. But no such reference was made, leaving unanswered questions about the

seemingly contradictory purpose of the CCAA and the nature of these liquidating plans of

arrangement, and their impact on the public interest.

4 2010 SCC 60, [2010] 3 S.C.R. 379 [Century Services]. See also Chef Ready Foods Ltd. v Hongkong Bank of Can.(1990), 51 BCLR (2d) 84, at 91; Nova Metal Products v Comiskey (1990), 1 OR (3d) 289, at 119-20; LehndorffGeneral Partner Ltd. (1993), 17 CBR (3d) 24, at 31.5 R.S.C. 1985, c. C-36 [CCAA].6 John C. Anderson & Peter G. Wright, “Liquidating Plans of Reorganization”, (1982) 56 Am. Bankr. L.J. 29.7 R.S.C. 1985, c. B-3 [BIA].8 Shelley C. Fitzpatrick, “Liquidating CCAAs – Are We Praying to False Gods” in Janis Sarra, ed., Annual Reviewof Insolvency Law (Canada: Thomson Carswell, 2008) at 33.

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The traditional purpose of the CCAA is to help an insolvent debtor corporation avoid bankruptcy

by negotiating plans of arrangement with its creditors to enable the company to continue in

business.9 To achieve that goal, the court has the power to issue a broad stay of proceedings

under s. 11.02 of the CCAA, to provide the debtor with a limited time to develop a plan or

proposal and submit it to creditors, who must then determine whether they will accept the

proposal or reject it. When an application for relief is made by a debtor company under the

CCAA, the court must decide whether the restructuring proceedings shall be permitted to

proceed or whether the company will be liquidated in bankruptcy or receivership proceedings.

The CCAA is “[a]n Act to facilitate compromises and arrangements between companies and

their creditors”. The determination as to whether CCAA proceedings will be permitted to

proceed is dependent upon whether the objectives of restructuring law are being fulfilled, namely

to maximize creditor recovery, preserve the going concern value, and preserve the jobs and

communities affected by the firm’s distress.10

The CCAA has traditionally been used on the understanding that companies utilizing

restructuring proceedings would emerge as viable financial entities and continue operating.

However, our views of restructuring proceedings are evolving and applicants are increasingly

using these proceedings to liquidate businesses. And given the original and traditional view of

the CCAA as legislation put in place primarily to avoid liquidations, the tension surrounding its

evolving nature is understandable. Early cases very much embodied that sentiment.11

9 Hongkong Bank of Canada v. Chef Ready Foods Ltd. (1990) 4 C.B.R. (3d) 311 (B.C. C.A.) at 315.10 See generally J. Sarra, Rescue! The Companies’ Creditors Arrangement Act (Canada: Thomson Canada Limited,2007).11 See, for example, Norcen Energy Resources Ltd. v. Oakwood Petroleums Ltd. (1988), 72 C.B.R. (N.S.) 1 (Alta.Q.B.), where Forsyth J. maintained, “Therefore, if the proceedings under this new Act of 1933 are not, strictlyspeaking, “bankruptcy” proceedings, because they had not for object the sale and division of the assets of the debtor,they may, however, be considered as “insolvency proceedings” with the object of preventing a declaration of

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But the reality is that the traditional view of the CCAA has indeed been evolving and we are now

seeing more “liquidating CCAA” proceedings, proceedings about which reservations have been

expressed by the very courts allowing the liquidating CCAA, but which are nonetheless taking

place under the CCAA.

Under a liquidating CCAA, the debtor corporation is effectively liquidated under the CCAA, a

restructuring statute, and not under the supervision of a trustee, as required by bankruptcy

legislation. Generally the phrase “liquidating CCAA” can mean a variety of things. It can involve

asset sales to a single purchaser who intends to continue operating the debtor company’s

business. It can mean selling the debtor’s assets piecemeal to a variety of purchasers, who have

no intention of continuing to operate the debtor’s business or any part of it. And it can involve

anything in the middle, to one or more purchasers who intend to continue operating parts of the

debtor’s business.12 Of course, traditional proceedings under the CCAA would need to allow for

a certain amount of liquidation, as a debtor company may need to shed some assets or operations

in the process of its restructuring. The issue, however, is how much liquidation is and should be

permitted under the legislation.

Courts in the United States have been allowing these liquidating types of reorganizations since

approximately the year 1944.13 In fact, the U.S. specifically allows liquidation proceedings as

bankruptcy and the sale of these assets, if the creditors directly interested for the time being reach the conclusionthat an opportune arrangement to avoid such sale would better protect their interest, as a whole or in part... TheC.C.A.A. is an Act designed to continue, rather than liquidate companies” (paras. 73-74).12 Shelley C. Fitzpatrick, “Liquidating CCAAs – Are We Praying to False Gods?” in Janis Sarra, ed., Annual Reviewof Insolvency Law (Canada: Thomson Carswell, 2008) at 41.13 Cary, “Liquidation of Corporations in Bankruptcy Reorganization” (1946) 60 Harv. L. Rev. 173.

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part of reorganization proceedings. 11 U.S.C. § 1123(b)(4) provides that a plan may “provide for

the sale of all or substantially all of the property of the estate, and the distribution of the proceeds

of such sale among holders of claims or interests”. In addition, the removal of the “good faith”

requirement, which was contained in s.146 of the Bankruptcy Act14 has allowed for a plan for

reorganization to be filed where liquidation will be utilized. Prior to the amendment, the

Bankruptcy Act had provided that a petition filed under Chapter X was not filed in good faith if

there was no prospect that the debtor could be reorganized (hence equating the filing of a petition

for liquidation to be one without good faith).15

Unlike the U.S., in Canada, the CCAA has been silent about using the legislation to liquidate

debtor companies. However, under the CCAA, the court is given the power to make a wide range

of orders as well as the general power to make any order it thinks appropriate, subject to the

restrictions contained in the legislation (s.11). And the new amendments have partly addressed

this issue by allowing a court to authorize a debtor company to dispose of assets outside the

ordinary course of business (which it would not otherwise be allowed to do), and taking the

following factors into consideration before granting authorization:

(a) whether the process leading to the proposed sale or disposition was reasonable in thecircumstances;(b) whether the monitor approved the process leading to the proposed sale or disposition;(c) whether the monitor filed with the court a report stating that in their opinion the saleor disposition would be more beneficial to the creditors than a sale or disposition under abankruptcy;(d) the extent to which the creditors were consulted;(e) the effects of the proposed sale or disposition on the creditors and other interestedparties; and

14 July 1, 1898, ch. 541, 30 Stat. 544, codified at 11 U.S.C. § 1-1255 (1978), repealed 1979.15 Liquidating Plans, supra note 5 at 30.

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(f) whether the consideration to be received for the assets is reasonable and fair, takinginto account their market value.16

While the factors will assist the courts when determining whether a sale should take place, the

courts still have discretion to determine which type of liquidations to allow among the variety of

liquidations noted earlier, if any.

Even without explicit sanction for the liquidating proceedings, we have been seeing an

increasing number of liquidating CCAAs in Canada. The trend has been stronger in Ontario

(with the west utilizing the more traditional CCAAs) but the liquidating trend has been making

its way west. It has not yet been resolved in Canada whether liquidating CCAAs are contrary to

the purpose of the CCAA and courts are not entirely convinced about the legitimacy of a

liquidating CCAA. However, courts are, for the most part, permitting them to proceed, which

means the statute is evolving as we contemplate whether the proceedings are a legitimate use of

the legislation.

A plan under the CCAA must be fair and reasonable and one of the questions surrounding

liquidating CCAAs is whether a plan is fair and reasonable if liquidation under the CCAA results

in a better outcome for creditors, as compared to bankruptcy. And since the public interest is

such a significant consideration in CCAA proceedings, and courts often consider the public

interest in their analysis of CCAA proceedings, one question that arises is whether the focus of

justifying CCAA proceedings should be in the public interest realm.

16 CCAA, supra, at section 36(3).

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That issue necessarily leads to the consideration of how broadly we define “public policy”. Need

it involve the general public, or even on a narrower level, those who can gain ongoing benefits

from the corporation such as employees and pensioners, or is it enough if it is in the best interests

of creditors? The answer to that question will depend on the theory we perceive to underlie the

CCAA and that theory will, in turn, determine the limits of the legislation.

The courts have gone both ways in considering whose interests are at stake in CCAA

proceedings. For example, in Lenhndorff General Partner Ltd.,17 Farley J. maintained that the

purpose of the CCAA “is also to protect the interests of creditors” and in Anvil Range Mining

Corp.,18 he referred to “maximizing the value of the stakeholders pie”. Still, other courts have

expanded their consideration of the effects of bankruptcy to stakeholders beyond creditors, such

as employees, suppliers and the larger communities.19

However, while it may be possible to find decisions that support both narrow and broad views of

the purpose of restructuring proceedings and the intended beneficiaries, the question as to the

groups to be considered must necessarily be answered on a theoretical level first. This question is

relevant for issues arising under the CCAA in general and is not limited to liquidating CCAAs.

And the answer to the question will assist greatly in the consideration of when or if liquidating

17 (1993), 17 C.B.R. (3d) 24 (Ont. Gen. Div. [Commercial List] at para. 7.18 (2001), 25 C.B.R. (4th) 1 (Ont. S.C.J. [Commercial List]).19 In Re West Bay SonShips Yachts Ltd.,19 the British Columbia Court of Appeal adopted the following statementmade in Skeena Cellulose Inc., Re (2003 BCCA 344, 13 B.C.L.R. (4th) 236 (B.C. C.A.), “...[C]ourts appear to havegiven full effect to the "broad public policy objectives" of the [CCAA], which in the phrase of a venerable article onthe topic (Stanley E. Edwards, "Reorganizations under the Companies' Creditors Arrangement Act", (1947) 25 Can.Bar Rev. 587) are to "keep the company going despite insolvency" for the benefit of creditors, shareholders andothers who depend on the debtor's continued viability for their economic success”. And in Lindsay v. TranstecCanada Ltd. (1994), 28 C.B.R. (3d) 110 (B.C. S.C.), the court maintained, “A CCAA proceeding is not a stage foran individual creditor to try to ensure the best possible position for himself. Whatever it may have been in past

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proceedings should be allowed under the legislation. As Professor Wood notes, the objective of

restructuring law “is to provide an insolvent debtor with a limited but reasonable period of time

within which to develop a plan or proposal and to put it before the creditors who must then

decide to accept or reject it”. But he goes on to maintain that the task is complicated “when

attempting to explain exactly why this is considered to be a socially desirable goal and under

what circumstances and in whose interests this objective ought to be pursued”.20

The objective of restructuring law is broad, which consequently has the potential to justify or

deny any process or decision made under the CCAA. Ideally, a theory needs to be articulated

before the tension arising from questions as to whose interests to consider in a restructuring can

be resolved. Should the consideration involve the general public, or those who can gain ongoing

benefits from the corporation such as employees and pensioners, or is it enough if it is in the best

interests of creditors? Or, instead of considering specific groups, can the valuation be one to

society in general? If restructurings, or proceedings under the CCAA, are to be done for the

purpose of public interest, at least in part, then a determination of what constitutes public interest

and how to advance it, must be undertaken.

The question of the various stakeholders and the public interest has already been considered. In

this paper, my research is going to focus on the question of value, as in, economically, what it is

that is being saved or put back into the economy when a company is rescued or liquidated. In

considering that bankruptcy and restructuring regimes exist for the public interest, i.e., a

consideration of how various stakeholder interests are affected when a company is liquidated,

years, it is now a stage where creditors are to participate in the collective enterprise of keeping a company going forthe benefit of employees, customers, and the general community, as well as the creditors” (para. 74).

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this line of analysis seeks to consider how that purpose is being fulfilled with liquidating plans of

arrangement. My argument takes a broader, more value-based approach. I maintain that instead

of considering specific groups of stakeholders when determining whether the public policy

purpose of the CCAA is being fulfilled, we should be considering the value that is being

enhanced or removed with any particular restructuring. In other words, so long as the “public

interest” can be defined to include the continuance of value in the economy, in any form, then

the purpose is being fulfilled. This is the case even if the company is liquidated, or pieces are

sold in bulk. While that may not necessarily entail a continuation of employment, there is value

of another sort that is being maintained, or at least, not being lost through the continued

operation of a non-profitable company.

In a previous paper, I concluded that there has been a change in the nature of corporations’ assets

as firms evolved from having traditional, tangible, firm-specific assets to more modern,

intangible assets.21 In that paper, I posed the question of whether companies’ use of liquidating

plans of arrangement over traditional plans of restructuring reflected this change in firms’ asset

base. The issue is further complicated by the fact that the liquidating plans of arrangement are

taking place under the same legislation that governs traditional reorganizations, the CCAA. The

dialogue has also changed in response to liquidating plans of arrangement, namely going from

questioning whether these are appropriate under the CCAA, to a general acceptance of these

procedures. However, even with these changes, the underlying policy has not changed. The

CCAA has had a public policy purpose since its enactment during the Great Depression and that

purpose has been continually confirmed in the case law and literature since that time.

20 Roderick J. Wood, Bankruptcy and Restructuring Law (Canada: Irwin Law Inc., 2009) at 311.

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Therefore, further questions are raised. How can we adhere to the fundamental purpose of the

CCAA while changing the nature of the proceedings taking place under the legislation, and

consequently changing the outcome? With traditional restructurings, the aim was to have a

company at the end, whereas with liquidating plans of arrangement, we may have anything from

a company to proceeds to anything in between. If we assume that the premise is correct, in that

both types of proceedings are allowed by the legislation, and that the legislation has a public

interest goal, then it must mean is that both types of proceedings are furthering the public interest

goal. But how does that work? First, the “public interest” must be discussed then we must

determine if it is being furthered by both proceedings.

This paper will discuss whether and how the changing nature of reorganizations has an effect on

the public interest purpose, and whether we can continue to pay homage to this purpose if

liquidating CCAAs are dismantling the very business the CCAA was originally enacted to

reorganize. Originally, the object of the CCAA has been to continue the company through its

difficulty.22 And in keeping with that object, in Century Services, the Court confirmed the

importance of the public interest in restructuring decisions by noting that the “purpose of the

CCAA… is to permit the debtor to carry on business and, where possible, avoid the social and

economic costs of liquidating [a debtor corporation’s] assets” and acknowledging that even

today, “reorganization [is] justified in terms of rehabilitating companies that are key elements in

a complex web of interdependent economic relationships in order to avoid the negative

21 J. Girgis, “Corporate Reorganization and the Economic Theory of the Firm” in Janis Sarra, ed., Annual Review ofInsolvency Law (Canada: Thomson Carswell, 2010) at 267.22 There are many references to this purpose in case law, which will be discussed below.

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consequences of liquidation”.23 In considering how the public interest is discussed in the context

of liquidating plans of arrangement, the paper will also consider whether the recent amendments

to the CCAA permit a liquidating CCAA.24 Finally, it will look at the factors courts consider

when determining whether to authorize a sale under the CCAA in the absence of a plan25 and

how those differ from the factors courts used to consider in the approval of a traditional

reorganization.26

23 Century Services, supra, note 3, at paras. 15 and 18, respectively.24 While the legislation does not expressly permit a sale of “all or substantially all” the assets, it is arguably allowedby the spirit of the legislation. Regardless, it has been argued that liquidating CCAAs fall within the ambit of thestatute (Fitzpatrick, supra note 6 at pp. 43-44; Bill Kaplan, “Liquidating CCAAs: Discretion Gone Awry?” in JanisSarra, ed., Annual Review of Insolvency Law (Canada: Thomson Carswell, 2008) at pp. 93-96) and that section 36CCAA does permit a sale of “substantially all of the debtors’ assets” (Janis Sarra, “The Evolution of the Companies’Creditors Arrangement Act in Light of Recent Developments” (2011), 50 Can. Bus. L.J. 211 at p. 232).25 See Nortel Networks Corp., Re, 2009 Carswell Ont. 4467, 55 C.B.R. (5th) 229 (Ont. S.C.J.) at para. 49; RailPower Technologies Corp., Re, 2009 CarwellQue 6503, at paras. 105-113.26 In Royal Bank v Fracmaster Ltd. (1999), 11 C.B.R. (4th) 230, the Alberta Court of Appeal, in support oftraditional reorganizations, stated, “there must be an ongoing business entity that will survive the asset sale… a saleof all or substantially all of the assets of a company to an entirely different entity with no continued involvement byformer creditors and shareholders does not meet this requirement” (para. 16).

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Involuntary bankruptcy as debt collection: Some thoughts on an Anglo-American puzzle

Jason Kilborn & Adrian Walters

INSOL Academics Group – Miami, May 2012

Summary

We are currently embarked on a comparative study of involuntary bankruptcy proceedings inEngland & Wales and the United States and the purpose of our presentation is to outline thecontours of our study and share our initial thoughts. This is very much a work in progress.

We start from the observation that the incidence of involuntary bankruptcy proceedings as aproportion of all formal bankruptcy proceedings is much higher in England & Wales than it isthe United States. Involuntary bankruptcy proceedings in the United States are rare to an extentof being virtually an endangered species whereas creditors in England & Wales make frequentuse of compulsory winding-up and creditor bankruptcy petitions, seemingly as a mechanism forleveraging the collection of unpaid debts.

On closer inspection, it becomes clear that England & Wales and the United States offer twocontrasting models as regards creditor commencement of bankruptcy proceedings. When theBankruptcy Code was enacted, the United States chose to regulate entry into involuntaryproceedings carefully through a combination of standing requirements, the onus on the petitionerto prove that the debtor is in general default and strict penalties for misuse. The result is a modelthat aligns closely with legal theory. In theory, individual creditors should enforce individualclaims through recourse to nonbankruptcy law with involuntary bankruptcy proceedings beingreserved for collective relief against a debtor in general default (either to deal with the inter-creditor collective action problem or to protect creditors collectively where the assets are injeopardy). Practically, the fruits of individual enforcement will go to the enforcing creditorwhereas a creditor who forces a debtor into an involuntary bankruptcy proceeding will have toshare with other creditors. Thus, theoretically and practically, we might expect individualcreditor enforcement to dominate and involuntary bankruptcy proceedings to be a rare exception– the pattern in the United States.

In England & Wales, the model for creditor commencement of involuntary bankruptcyproceedings for both individual and corporate debtors can be traced back to the Companies Act,1862. When acts of bankruptcy in relation to individuals were abolished in 1986, the law oninvoluntary bankruptcy for all debtors simply defaulted to the extant corporate model. Underthis model, liberal access to involuntary bankruptcy proceedings is the embedded norm. A singlecreditor owed a sum exceeding the modest threshold of £750 has standing to petition.Furthermore, the availability of statutory presumptions and other procedural devices have theeffect that general default can be inferred from the debtor’s failure to pay the petition debt.Although creditors do use individual enforcement mechanisms (notably attachment of earnings,warrants of execution and real estate charging orders), the relatively high usage of involuntarybankruptcy proceedings (both in absolute numbers and as a proportion of all formal insolvencyproceedings) implies that the creditor community regard involuntary bankruptcy proceedings aslittle more than an additional, and seemingly potent tool, in the armoury of the debt collector.

83

Petitions filed by Her Majesty’s Revenue & Customs and local authorities in respect of unpaidtaxes are particularly prevalent.

Our study has the following objectives:

1. To explore why usage of involuntary bankruptcy proceedings in England & Wales remainsso prevalent and persistent going beyond observed differences between England & Walesand the United States as regards the “law on the books”. What are the actual and perceivedcomparative advantages of involuntary bankruptcy over ordinary collection mechanisms inpractice? Why are public creditors such heavy users? Is involuntary bankruptcy perceivednot merely as an effective collection device but also as a useful tool for dealing with“zombie” debtors?

2. To consider whether the commencement of collective rather than individual enforcementproceedings as a debt collection tool is justifiable and normatively desirable especially asregards individual/consumer debtors. Is there anything that the United States can learn fromEngland & Wales and vice versa? More importantly, which model should emerging anddeveloping countries follow: debtor commencement only; predominantly debtorcommencement with restricted access for creditors (more akin to the United States); debtorand creditor commencement with creditors having relatively generous access (more akin toEngland & Wales)?

84

Involuntary bankruptcy as de

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87


Session 2: Consumer Bankruptcy

Repayment PlansProfessor André Boraine, University of Pretoria

Home Sweet Home in Insolvency: A Foretaste for South Africa?(And a Smorgasbord of International Tidbits).Professor Lienne Steyn, University of Kwazulu-Natal

89

Abstract: Discussion points regarding repayment plans and consumer bankruptcy

By André Boraine, University of Pretoria

This paper deals with the notion of repayment plans or debt restructuring within the broad ambit ofconsumer bankruptcy. At first it should be noted that all systems will in principle allow a debtor tonegotiate new repayment terms etc with his or her creditors on a voluntary basis. The outcome ofsuch negotiations will usually depend on the cooperation and agreement of all the creditors whichcooperation is sometimes difficult to obtain – hence some systems provide formal debt repaymentplans that are regulated by statute and in some instances the majority of creditors may bind theminority by a prescribed vote, or it may be enforced against creditors by way of a court order.

It is fair to say that whenever a debtor is confronted with a situation where he or she cannot repayhis or her due debts, the solution to deal with the debt problem will usually either be a liquidation ofassets, ie a collective execution procedure, or to enter into a repayment plan with creditors that willin essence allow for a rescheduling of the payments. The first option will in some systems pre‐suppose that there are some realisable assets, whilst the second option will usually be dependent ona regular income in order to continue with payments in order to settle the debts in terms of theplan. There are also hybrids that will allow for a partial realisation of assets and repayment that mayinclude partial or full debt discharge, or not. The No Income No Asset estates (NINA) or Low IncomeLow Asset estates (LILA) pose difficulties in many systems because neither of these procedures maysuffice.

In some systems bankruptcy law is viewed from the perspective of liquidation of assets whilestatutory regulated, ie formal, repayment plans – if provided – are in many instances dealt with inseparate legislation and also not always viewed as insolvency procedures.

For the purposes of this paper a brief overview of the system of the US Bankruptcy Code, 1978, asamended, will be provided. The policy regarding liquidation of assets versus repayment plans interms of the US system will be briefly discussed and compared with the South African system that ismarked by a multiplicity of legislation and procedures as well as the lack of a coherent approach inthis regard. The US also represents a system in operation in a developed economy whilst the SouthAfrican system applies in a mixed economy, ie a blend of developed and developing economicstructures.

Against the above backdrop the ultimate aim of the paper will be to open up a discussion on avariety of problematic aspects relating to issues like: access to various debt settlement options;formal versus informal repayment plans; the treatment of secured and unsecured debt; prescribedrepayment time‐periods; court involvement; the regulatory framework; the role of insolvencypractitioners; full repayment or prescribed discharge of debt and cost of procedures. Related issueslike debt counselling and NINA/ LILA estates will be mentioned as well.

91

Home Sweet Home in Insolvency: A foretaste for South Africa? ---(and a smörgåsbord of international tidbits)

Lienne Steyn (UKZ-N)

Home Sweet Home

South Africa: individual debt enforcement process– Jaftha v Schoeman 2005 (CC)

• s 66(1) of Magistrates’ Courts Act• "extraneous debt"• trifling original principal debts• indigent debtors; rendered homeless

Home Sweet Home

– Jaftha v Schoeman 2005 (CC)• Bill of Rights in the Constitution• s 26: right to have access to adequate

housing (Grootboom 2001 (CC))• recognised execution against the home

in such circumstances as an infringement of the "negative aspect" of s 26

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Home Sweet Home

• s 36 of the Constitution– limitation clause – any infringement of

a right must be reasonable and justifiable in an open and democratic society, taking into account all relevant factors• balancing various rights and interests• purpose of debt enforcement• proportionality

Home Sweet Home

– Jaftha v Schoeman 2005 (CC)• judicial oversight required• court should seek "creative

alternatives"• execution against a debtor’s home

should occur as a "last resort"

Home Sweet Home

– Jaftha v Schoeman 2005 (CC)• execution against a mortgaged home

should be permitted unless there has been "an abuse of process"

• rejected notion of exemption of "low value" home – potential "poverty trap"

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Home Sweet Home

– High Court Rules amended in December 2010 • rules 45 and 46(1)

– default judgment– mortgaged property– "primary residence" of "judgment debtor"– judicial evaluation– "all the relevant circumstances"

Home Sweet Home

South Africa: individual debt enforcement process–Gundwana v Steko 2011 (CC)

• mortgaged home • "moderately-priced" home• bed-and-breakfast business

Home Sweet Home

– Gundwana v Steko 2011 (CC) • judicial evaluation required in every case where

execution sought against "a person’s home"• includes a mortgaged home• execution should be avoided where there are

"reasonable alternative means" by which the debt may be satisfied

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Home Sweet Home

South Africa: individual debt enforcement process– right to dignity (s 10)?– contractual rights? pacta sunt servanda? – property rights? (s 25) real security rights?– children’s rights (s 28)?

Home Sweet Home

South Africa: individual debt enforcement process– uncertainty prevails– lack of substantive and procedural

framework– divergent approaches in high courts

Home Sweet Home

South Africa: implications for insolvency process?– Insolvency Act 24 of 1936– no specific judicial evaluation required– at which stage of the process?– considerations? other rights? children’s

rights? property rights?

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Home Sweet Home

South Africa: implications for insolvency process?– s 26 not yet raised as an issue

….. reality --- affluent debtors….. "advantage of creditors"

Home Sweet Home

South Africa: implications for insolvency process?– is sequestration the last resort?

….. acts of insolvency– reasonable alternative means by which

debt may be satisfied?…… alternatives to sequestration

Home Sweet Home

South Africa: alternatives to sequestration – administration s 74 Magistrates’ Courts Act

32 of 1944– debt review and debt rearrangement in

terms of the National Credit Act 34 of 2005 (NCA)

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Home Sweet Home

Debt review and rearrangement (NCA) – only credit agreements– no discharge– magistrate’s court empowered to modify terms of

mortgage obligation– debt review does not bar application by creditor for

sequestration(Investec v Mutemeri; FirstRand Bank v Evans)

Home Sweet Home

• INSOL International Consumer Debt Report II – Debt review and debt rearrangement (NCA)

does not conform

Home Sweet Home

Comparative analysis– Home exemptions

• USA• Canada (Manitoba)• England and Wales – low equity exemption• Proposal in Scotland

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Home Sweet Home

Comparative analysis– Delay in realisation of insolvent debtor’s

home• England and Wales• Scotland

Home Sweet Home

Comparative analysis– Restrictions imposed on realisation of

home: must deal with it within three years• England and Wales • Scotland

Home Sweet Home

Comparative analysis– Repayment plans/ "rehabilitation procedures"

• USA: Chapter 13 bankruptcy• Canada: consumer proposal• England and Wales: individual voluntary

arrangement (IVA)• Scotland: protected trust deed; debt arrangement

scheme• Ireland: proposed debt settlement arrangement

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Home Sweet Home

South Africa• proposed s 118 of the working draft of the

South African Law Reform Commission’s Insolvency and Business Recovery Bill("pre-liquidation composition")

• holds the potential to pose a reasonable alternative to sequestration which will allow a debtor to retain his home

Home Sweet Home

South Africa: a "menu of options" suggested– specific judicial evaluation of the position in

respect of the insolvent debtor’s home– liquidation or repayment plan?– liquidation: delay? exemption?– repayment plan: modified option needed

Home Sweet Home

Thank you!

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Session 3: Special focus onLatin-American insolvency issues

Report on Argentinian Insolvency DevelopmentsProfessor Sergio Muro, Universidad Torcuato di Tella

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New Developments in Argentine Insolvency: AddingHeterogeneous Resolution Alternatives

Sergio A. Muro*

I. IntroductionFor the past 200 years Argentina has been for the most part a peripheral country, perhaps

one of the more important peripheral countries. There have been some notable exceptions toArgentina’s lack of centrality. Chief among them is Argentina’s historical importance as aproducer and exporter of agricultural commodities.i Other developments of Argentina’seconomic and social system have been less significant.

In the area of insolvency, nonetheless, Argentina has had a much more prominent role.Early after Argentina’s independence in the XIX century the country began its long liveddifficulties with lenders. Provincial and National defaults have occurred at six different timesduring this periodii and its latest occurrence in 2002 was, at that moment, the biggest state defaultin history (now surpassed by the Greek insolvency).iii The history of State defaults has caused atremendous impact on Argentina’s economy and has provided rich lessons for other countries.

But the reign of state insolvency’s salience is now being challenged. Private bankruptcymay soon become the famous one. Recent changes in the Bankruptcy Law allowing workercooperatives to bid for insolvent companies have opened up several pressing questions on howliquidations and reorganization biddings should be dealt with. The new amendments challengestandard insolvency and corporate ownership theory while offering a new approach to cope withdistress situations.iv

In this paper I will critically analyze the recently amended Argentine reorganizationsystem. The paper will proceed as follows. In part II, I will describe some key features of theArgentine insolvency system as it was designed in the mid 1990’s and some of the challenges itfaced upon the emergence of the 2001-2 economic crisis. In part III, I will describe the earlylegislative reaction to the crisis, marked by the introduction of the option to continue a firmundergoing a liquidation proceeding if it is proposed by a newly created workers’ cooperative.Specifically, I will describe the emergence of social movements supporting those ideas anddescribe the scope of firms affected. In part IV, I will describe the latest amendments to the lawthat allow worker cooperatives to bid for firms even in a reorganization proceeding and willanalyze how this new law affects the bargaining process. In part V, I will provide someconcluding remarks.

II. Argentina’s Insolvency system in 1995 and the eruption of the 2001-2 crisisArgentina’s insolvency system has suffered many structural modifications since its

inception in the Commercial Code of 1862. The last attempt to modify the system in a globalmanner was done in 1995 through the passing of federal Law Nº 24522. This new regulation ofthe insolvency system represented an improvement over the older system by incorporating thepossibility of prepacks – through the Acuerdo Preventivo Extrajudicial (from now on APE) –

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and other novel institutions such as the Salvataje – a second round of negotiations when not onlythe debtor could present a reorganization plan – or the possibility to relax the pari passu principlein order to facilitate restructurings.v

The law was geared towards a preventive tutelage of the insolvent estate in order toobtain successful business reorganization. In order to do so, private parties were urged tonegotiate in order to find a solution to proceedings that were perceived to be the product ofbusiness’ crisis. This privatistic overtone of the then new system came with somecounterbalancing measures. One notorious example of the intended balance was the introductionof a minimum threshold of unsecured creditors’ payments in order to approve the plan. The lawmandated that any proposed plan could offer a hair cut of no more than sixty percent (60%)under the assumption that it would limit the potential for abusive offers.vi Those preventivemeasures were perceived to be rather important given that the law also eliminated the possibilityfor substantive judicial review of creditors’ approved plans.

Whatever the pros and cons that one could mention about the law, it was ill prepared todeal with what was about to happen.vii After nearly four years of economic recession, the newlyappointed interim Argentine government decided in early 2002 that it could no longer maintainthe monetary peg between the Argentine peso and the United States dollar “ushering in the firstfinancial crisis of the new millennium”.viii The government subsequently decided that it could nolonger make payments to its creditors and entered into a prolonged period of default.ix Themagnitude of the crisis can also be appreciated by the effect it had on the political system: duringthose turbulent days at the end of 2001 Argentina had 5 different presidents in just over oneweek.x

Those economic measures - eliminating the peg and declaring default - had the strongestimpact on Argentine economy. The government heavily limited the withdrawal of funds frombank accounts as a way to prevent an even bigger bank run with two subsequent measurespopularly known as corralito and corralón.xi The unemployment grew well over twenty percent(20%) and about half of the population fell below the poverty rate.xii The liberalized exchangerate made the peso loose two thirds of its value in one trimester and the gross domestic productfell by an accumulated twenty percent (20%) during the recession period, falling almost elevenpercent (11%) just in 2002.xiii This is in stark contrast to the negative growth of one percent (-1%) which had been predicted for 2002 before those measures were taken.xiv

After the crisis exploded, the Argentine parliament passed a couple of provisionsintended to protect the economic viability of firms. First, in February of 2002 parliament passedNational Law Nº 25563, which was referred to as the Productive and Credit Emergency Law(Ley de Emergencia Productiva y Crediticia). The key provisions of this law showed the level ofdespair facing the Argentine economy during a period where the financial system completelycollapsed. Five of those provisions are worth mentioning: a six month extension of themoratorium of creditors’ rights to sell their collateral; the abolition of the figure of salvage(salvataje), which allowed third parties to present a reorganization plan if the debtor failed toreach an agreement during the exclusivity period; an extension of the exclusivity period; theelimination of the hair-cuts upper limits in reorganization proposals; and, a hundred and eightydays period where no new involuntary bankruptcy petitions could be presented to the court.

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The second provision, Law Nº 25589, came soon afterwards and was mainly gearedtowards the correction of some of the problems generated by the Productive and CreditEmergency Law.xv The new modification swept away with most of the latest amendmentsallowing the system to regain part of its previous identity.xvi For example, the filing ofinvoluntary bankruptcy petitions was permitted once again and creditors, as well as third parties,regained the ability to propose a plan whenever the debtor failed to reach an agreement duringthe exclusivity period.xvii There were some improvements too. Notably, pre-pack regulation wasamended to make an approved plan binding on non-consenting creditors, largely solving the holdout problem.xviii There was yet another innovation that would allow for a paradigm shift in thesystem’s conception: permitting continuation of the enterprise in a liquidation proceeding.

III. Introduction of continuation in liquidation proceedingsBy the end of 2001 several Argentine firms were in dire situations. Some of them

proceeded to shut down as the costs of keeping each firm running were not worth it for theshareholders.xix Before the crisis, a typical reaction by workers of a shut-down firm would haveinvolved a double strategy of fighting for their compensatory rights while at the same time lookfor a new job in order to have a fallback option in case the firm didn’t reopen. But at the time ofthe biggest economic crisis of Argentine history neither route was a realistic option. Workerscompensatory rights were provided priority under the law but were nonetheless second tosecured creditors, making the prospect of compensation very dim in a highly depreciatedsecondary market. In addition, the magnitude of the crisis prevented any hope to find a new job,regardless of how hard one would try. This left the workers of bankrupt firms in dire need for anew solution.

Some of the workers decided to resist by physically occupying some of the bankruptfirms’ premises. Even though Argentina has a long and rich tradition of left wings activists, theoriginal idea of the occupation was rather conservative: to prevent (or stop) the owners or eventhe bankruptcy court to start selling piecemeal the firms equipment or raw materials.xx Soonafterwards it added a crucial new element: running the firm themselves.xxi

One of the first cases where workers took this approach was with Brukman. By the timethe crisis peaked Brukman had been a textile factory in Buenos Aires for about fifty (50) years.Business began to shrink in 1995 and by 1998 Brukman had debts piling. Two other sister firmsof Brukman, Brukman Construcciones and Brukman Hermanos, had recently gone bankrupt.xxii

In 1999 Brukman was declared bankrupt but was able to convert the proceeding into areorganization one (concurso preventivo).xxiii Brukman began to pay only part of the salary owedto the workers and by the end 2001 the situation became unbearable. On December the 18th,some workers confronted the owners on the unpaid salaries issue. The owners left promising tocome back with the money but never did. The workers remained inside Brukman and,interestingly, opted to keep on working. As the time went by, they began to make more and moredecisions and would ultimately acquire full control of all Brukman’s business decisions.xxiv Thatsmall but critical step –to keep on working- was readily noticed and many workers in diresituations elsewhere looked at it as potential solution to their problems.

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It goes without saying that the perceived solution was a factual one and not necessarilyone that could easily fit within the legal framework. As a matter of fact, Argentina’s BankruptcyLaw at the time made a stark division between reorganization and liquidation solutions. In thelater case, the aim was solely to repay creditors through a sale of assets. Continuation waspossible only if it was favorable to the creditors or if it was necessary for the preservation of theassets.xxv Neither exception seemed to clearly apply in most firms taken over by workers(empresas recuperadas).

This problem built the case for the biggest innovation that National Law Nº 25589brought. The new article 190 mandated the bankruptcy judge to take into consideration theformal petition of at least two thirds of the workers united in a workers’ cooperative whenmaking his decision to allow a bankrupt business to keep operating. The new amendment didn’tgenerate a clear decision tree, it rather left the obligation of coming up with a proper solution topotentially conflicting objectives under the discretionary powers of the bankruptcy judge. But ifthe decision was to keep the business running, then the judge could postpone at his discretion thedecision to liquidate.

This amendment generated a new transitory way of dealing with the bankrupt debtor.Given the condition of the economy, it could be argued that the amendment had a reasonableobjective of preventing liquidations to actually turn into fire sales. But it also added new legalproblems, two of which are worth mentioning. First, the law proposed to have a second firm –the workers’ cooperative – run the bankrupt firm. As a result, any benefits that could begenerated were potentially dissociated from the bankrupt debtor and its creditors. Second, itstrengthened a sense of entitlement that the workers were beginning to have over the assets –notthe debts- of the bankrupt firm.xxvi The case of Zanon is exemplary.

Zanon was a traditional ceramic tile manufacturing firm in the province of Neuquen. InOctober of 2001, Zanon announced that it wasn’t able to pay salaries and that it would alsowithdraw workers’ benefits.xxvii As a result, the workers organized several assemblies and Zanonanswered with a lockout. This triggered a permanent sentry of workers by the main plant ofZanon, as well as a judicial decree to vacate the premises.xxviii By the end of November, Zanonfired all the workers and political rallies in favor of those workers ensued. In addition, Zanonfiled its reorganization petition.xxix

Up to this point, the Zanon’s case seemed quite ordinary, but by the end of December2001 it took a surprising turn. On the December 19th, in an unprecedented move the workersdonated Zanon’s tile to a regional public hospital.xxx The move, blatantly prejudicial to creditors,generated even more social support for the workers’ cause. It also helps to explain why Zanon’sworkers were able to reject the firm’s plan to reopen in January 2002xxxi and why the workers’were able to restart production –under worker control- by early March 2002.xxxii This factualsituation continued despite the bankruptcy judge’s new order to vacate the premises and toallocate control to the bankruptcy trustee.xxxiii

As time passed by, the worker operated Zanon began to prove successful enough to hireten new part-time workers by late 2002.xxxiv This accomplishment gave much force to the idea ofworker operated firms.xxxv Zanon was then referred to as FaSinPat which stands for factory

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without employers (fábrica sin patrones). In the following years, FaSinPat would hire close to ahundred new workers without authorization from the bankruptcy judge or sharing the benefitswith the bankruptcy estate.

Despite all the social support and its early economic victories, FaSinPat severelystruggled in the legal front. The workers acknowledged early on that their legal situation wasprecarious and they devised a strategy to remediate it. Perhaps in a normal situation, a firm thatcan manage efficiently a set of assets could ask for a loan to acquire those assets. Regardless ofwhether they were such a firm –as it had subsidized its costs of capital and its raw materials-, thecredit market was non-existent in 2002 and remained that way for a while.xxxvi As a result, theworkers organized a lobbying campaign in favor of the expropriation of Zanon.xxxvii

The expropriation strategy also had several problems. From a legal standpoint, it wasquite doubtful that the expropriation could be qualified to be in the public interest.xxxviii From afinancial standpoint, both the federal and most provincial governments in Argentina werebankrupt which limited their firepower in these types of situations. The fact that FaSinPat, aswell as other workers in similar situations, kept on lobbying for expropriation speaks volumesabout the difficulties they were facing in terms of keeping the bankrupt firm to themselves whileat the same time fending off the bankrupt firms’ creditors.xxxix

After a long lived struggle, the provincial legislature of Neuquén finally passed law Nº2656 expropriating Zanon in 2009. The expropriating bill gave FaSinPat all the rights over thereal estate, plant, machinery, raw materials and products existing in Zanon. The bill has only onereference to a potential public interest objective in the law, namely to preserve jobs under workercontrol.xl

Zanon’s example is one among many. It is estimated that more than two hundred firmswere taken over by the employees since 2001.xli This new phenomenon has occurred in small andmedium size firmsxlii operating in the most diverse industries.xliii While at first the nationalgovernment was reticent to support taken over firms, state support has grown over the last fewyears. For example, the Ministry of Labor has developed a program – Programa TrabajoAutogestionado – to provide operating and technical support to firms run by workers.xliv All inall, the possibility to continue the operation of a liquidating firm through a workers’ cooperativeappears to be a well established feature of the Argentine insolvency system.

IV. The new amendment: facilitating exit As it can be readily noticed, the introduction of the continuation option in a liquidation

proceeding deeply changed the structure of the law. In addition, the amendment gave new life toa way of doing business –through workers’ cooperatives- that was existent but rather dormant inArgentina.xlv As more workers cooperatives operated taken over firms it became increasinglyclear that the system was missing an exit option to the truncated liquidation process.xlvi Creditorsstill needed to be paid and the continuation scenario through a workers’ cooperative didn’tprovide for any way of doing it.

As a result, workers of taken over firms were always fearing a bankruptcy judge’sdecision to auction some or part of the firm. This explains why almost all taken over firms

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started to lobby for expropriation bills. Starting in 2003 with the new Kirchner administration,the political situation became more favorable to expropriation requests, though some provincialstates remained non-committal. As a result of the workers’ lobbying and the more favorablepolitical atmosphere, about two thirds of the taken over firms achieved their goal of beingexpropriated after lengthy processes.xlvii

Within this context, the Argentine Congress passed in 2011 Law Nº 26684. The new lawintroduced important modifications to both the liquidation and restructuring proceedings. Withinthe liquidation proceeding three amendments are worth noticing. The first modification looked toadequate the law to the factual situation by granting the workers’ cooperative the right to requesta two-year suspension of the foreclosure of mortgages or liens on assets of the bankrupt entity inthe case the judge decides the continuation of a business.xlviii As was the case in Brukman andZanon, workers’ in taken over firms had occupied those firms’ premises and had factuallyprevented any foreclosure from happening. The law now implicitly limits continuation to twoyears as that is how long foreclosures are going to be suspended.xlix Whether that is enough toreign in factual situations is yet to be seen.

A second important modification focused on providing a way to avoid the lengthybankruptcy proceedings resulting from unresolved continuation scenarios. This was a pressingneed, as several taken over firms had been formally in bankruptcy for over ten (10) years withoutany legal solution. Under the new law, the workers’ cooperative may now purchase the assets ofthe bankrupt entity during the bankruptcy proceeding setting-off the labor credits of the membersof the labor cooperative for that purpose.l

The reform was inspired in the solution found to the Comercio y Justicia case.li Comercioy Justicia Editores SA was a traditional editorial firm in the province of Cordoba which started in1939 and specialized on weekly reviews of regional commercial cases. By the end of the 1990’sthe firm encountered financial problems and was ultimately bought in 2001 by the BrazilianGazeta Mercantil.lii The acquisition didn’t improve Comercio y Justicia’s situation and, as aresult, it filed for bankruptcy. At that time, Comercio y Justicia was taken over by its employeeswho upon the auction of the assets were able to creatively bring forward a proposal that includedsetting off their preferred credits against the firm as part of their bid. As Comercio y Justiciaowed relatively little in terms of secured credit –which is generally preferred to unpaid salaries-,their bid was successful.liii Even though this solution was found in 2003, other taken over firmsweren’t able to take advantage of the scheme due to the difficulties they faced in financing thepayment of those creditors which had a higher preference.liv As a result, the evidence suggeststhat the amendment will not be able to provide a viable bankruptcy exit option to more than afew of the taken over firms.lv

A third modification refers to the status of workers’ claims upon the filing of abankruptcy or reorganization petition. Argentine Bankruptcy Law provides that credits don’taccrue interest while either the reorganization or liquidation process is open.lvi Law Nº 26684now provides a very relevant and pro-labor exception. Upon the filing of a concurso preventivoor a liquidation proceeding (quiebra), the accrual of interests of labor credits will no longer besuspended, nor will collective bargaining agreements or special workers statutes be suspended.lvii

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Note that this amendment modifies workers’ rights relative to other creditors, thereforestrengthening their bargaining or bidding positions. Taken together with the previouslymentioned modifications, a workers’ cooperative will be able to benefit unevenly from aliquidation proceeding. For example, the workers’ cooperative could ask for both thecontinuation of the firm under its helm and the suspension of foreclosures during two years.During this period only their credits will be the ones accruing interests and therefore by the endof the period the workers will be owed a larger piece of the pie. As a result, at that time thebankruptcy judge decides to liquidate the firm the workers’ cooperative is going to be muchmore likely to generate a successful bid. And if the firm had previously been in an unsuccessfulconcurso preventivo, the workers’ position would be enhanced in an even larger disproportionalway.lviii

In addition to the aforementioned changes to the liquidation procedure, there has been arather important modification to the concurso preventivo. As it was mentioned above, theArgentine restructuring process consists of a sequence where the debtor gets the exclusive rightto propose a reorganization plan and, only if that plan does not meet the minimal acceptancerequirements, others may join the debtor in proposing a reorganization plan in what is calledsalvataje. According to the new article forty-eight (48) bis, a workers’ cooperative may now bidin the salvataje process to purchase the shares of a reorganizing firm.lix

Explained in this way, the amendment adds nothing new. As a matter of fact, even beforethe latest modification, nothing prevented a workers’ cooperative from participating in thesalvataje process. This view was affirmed in the precedent “Frannino Industrias MetalurgicasSA.”lx What’s innovative in the new law is what workers’ cooperatives can use as part of theirsalvataje proposal. The insolvency law now mandates that, in the case that a workers’cooperative wants to participate in the salvataje process, the judge must order the trustee toestimate the amount that workers would be owed in case they were fired without notice or justcause. The workers’ cooperative will then be able to use these potential compensation rights’ ascredits for its proposal.

It is quite astonishing what the parliament has done. Under the assumption that laborcooperatives are not just a viable solution for running a business –what they may certainly be insome situations- but also a vehicle to prevent abuse by unscrupulous firms’ owners, the law hascreated credits from thin air.lxi And it didn’t just create the credits, it also produced a specialexception which waives a workers’ cooperative duty to make any down-payments to supporttheir proposals.lxii All things considered, it is quite clear from a policy standpoint that the newlaw favors enterprises organized as labor cooperatives.

The effects of this amendment are rather uncertain. No case law exists yet on the matter.The legislators may have intended to merely add another element to the bankruptcy judge’stoolkit without damaging the whole reorganization edifice. Whether that turns out to be the caseor not will depend on how the obscure language of the new provision gets interpreted. Thatinterpretation could generate two types of possible scenarios. The first scenario would involveminimal impact on the bargaining conditions. This scenario may come about provided that thecourts limit, for example, who the beneficiaries of the workers’ compensation rights can be. Forinstance, it could be argued that the new provision may be unconstitutional to the extent that it

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imposes the cooperatives’ plan on non-consenting creditors without those creditors getting actualcompensation. Therefore, an interpretation along these lines would only generate marginalmodifications to the bargaining conditions.lxiii

The second scenario involves a more favorable reading of the new provision by thecourts. Under this state of affairs, the effects on the bargaining structure could turn out to besurprisingly pro-debtor.lxiv To understand why, one needs to look into the structure of thereorganization bargaining. As it was mentioned above, Argentina grants each debtor in concursopreventivo an exclusivity period.lxv Only after that period has passed without an approvedreorganization plan will third parties be able to offer their own plan. This sequential structureimplies that only the debtor will have the option to move fast and save the insolvent estate someof the reorganization direct and indirect costs.lxvi Given that direct and indirect costs are nonnegligible - estimated taken together to be in the ten (10) to twenty (20) percent range-, anydebtor in concurso preventivo possesses an important bargaining chip when he negotiates withthe creditors. As result of this scheme, creditors may very well believe that it is in their bestinterest to approve reorganization plans more favorable to the debtor if those plans save onbankruptcy costs.lxvii A fraction of all the violations to the absolute priority rule that manycountries face each year are the result of this structure.lxviii

The new Argentine amendment adds yet another element in favor of the debtor. If afterthe failure to reach an agreement during the exclusivity period a workers’ cooperative could get aplan approved which uses its potential workers compensation rights, creditors may be receivingless value in a salvataje than they would have had they approved a plan in the exclusivityperiod.lxix The upper limit of the smaller value will be given by the aggregated mount of workerscompensation rights. Consequently, the debtor’s ability to extract benefits from its creditors willnot only depend on the magnitude of the insolvency costs, the length of the exclusivity periodand the volatility of the debtor firm’s value - as was identified by Bebchuk and Chang -, but alsoon the size of the potential loss due to receiving workers’ credits –instead of actualcompensation- during salvataje. Therefore, the new amendment has made whatever plan thedebtor offers during the reorganization period even better looking in the creditors’ eyes.lxx

The same type of analysis can be extended to cover pre-packs. APEs, argentine pre-packs, allow the debtor and creditors to avert the reorganization proceedings direct and indirectcosts.lxxi The APE’s direct and indirect costs are believed to be much smaller. At the same time,the APE grants essentially the same type of benefits that a concurso preventivo does, namelyimposing a binding agreement on non-consenting creditors.lxxii Given that the debtor is the onlyone allowed to bring forward an APE for court approval (homologacion),lxxiii creditors will bewilling to grant even more concessions to the debtor through an APE than they would be willingin a concurso preventive. The reason is straight forward: creditors would be able to save both onthe risks imposed by a workers’ cooperative approved plan and the costs of entering a concursopreventivo.lxxiv

It should be noted that the above conclusion –the stronger pro-debtor character of theconcurso preventive- is based on a rather standard assumption in the bankruptcy literature,namely that the debtors’ assets are worth less than what the debtor owes.lxxv It is possible,nonetheless, that in certain specific occasions the assumption doesn’t hold, as the debtor enters a

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concurso preventivo owing less than what his assets are worth. In this type of situations thebargaining table flips over.lxxvi It would then be the debtor who would lose part of his equity withthe passage of time and the potential occurrence of salvataje. Consequently, it will be thecreditors who in those cases will be able to extract even more quasi-rents from the debtor.lxxvii

Most importantly, and whatever the debt to asset value ratio, this analysis shows that the latestamendment to the salvataje process further disrupts the reorganization bargaining game allowingmore quasi rents to be obtained.

Accepting that delays in bankruptcy generate costs, doesn’t necessarily imply that puttingoff the bankruptcy resolution is always detrimental. As a matter of fact, it is quite clear that indifferent circumstances, postponing the decision to liquidate cold turn out to be beneficial. Thesereasons cover such diverse situations as a depressed market for the firm’s assets,lxxviii uncertaintyabout the firms’ future prospects,lxxix or raising the odds to obtain repayment of what is owed tothe distressed debtor.lxxx Yet again, even when under particular circumstances there may be goodreasons not to liquidate immediately an insolvent firm, continuation could be accomplishedeither voluntarily or without modification to the bargaining conditions. Hence, one of theundesirable ex post problems generated by the amendment to the salvataje process is the creationof systematically re-occurring opportunities for quasi rents extraction.lxxxi

To sum up, the insolvency system in Argentina is now strongly geared towards theprotection of employment through the specific protection of the jobs that are jeopardized byinsolvency proceedings.lxxxii This is done through four main measures which complement pre-existing regulations favoring workers’ cooperatives. Namely, upon employees’ petitionsbankruptcy courts may delay foreclosures, as well as allow bids involving workers’ credits andpotential workers’ credits. In addition, the credits that workers may have will keep on accruinginterest.

V. ConclusionStandard accounts of insolvency resolution are now being complemented, not to say

outright challenged, by new and heterogeneous approaches in Argentina. It has taken the law adecade to adapt its legislation in order to provide an adequate answer to business bankruptcy inthe context of a crisis. Unfortunately, the necessary learning period to find a somewhat workablesolution has created a stark regulatory contrast between an insolvency model which seems to becrafted for exceptional circumstances –the biggest economic crisis in Argentina’s history- andthe periods of normalcy.

It is unknown whether legislators believe that Argentina is back within a period ofnormalcy. As a matter of fact, the state of emergency that the parliament declared back in 2002has been extended several times and it is still currently in force.lxxxiii What is definitely known isthat legislators understand the shortcomings of doing business through workers’ cooperatives,especially in a bankruptcy context.lxxxiv And therefore the National Law Nº 26684 has alsomandated the state to provide technical assistance to those workers’ cooperatives that opt tocontinue a business in a liquidation proceeding.lxxxv

The judgment is still to come on the new amendments and, more generally, on favoringworkers’ cooperatives as the better way to exit both reorganization and liquidation proceedings.

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Argentina chose to challenge insolvency orthodoxy which predicates to focus on avoiding the exante financing costs generated by either a prolonged bankruptcy proceeding or violations of theabsolute priority rule.lxxxvi Argentina also chose to challenge ownership theory orthodoxy whichasserts that workers’ cooperatives have, just as other organizational forms, comparativeadvantages and disadvantages in specific situations and chose to extend the workers’ cooperativesolution to every scenario.lxxxvii Regardless of whether it is for the right or the wrong reasons, theoutcome of this bold experiment will likely make its case famous. * JSD, Cornell University. Acting director, Master in Law & Economics, Universidad TorcuatoDi Tella.i For example, in the period from 2005-7 Argentina generated 8.4% of the world’s totalagricultural products, ranking as the eight largest producer in the world. See Sergio H. Lence“The Agricultural Sector in Argentina:Major Trends and Recent Developments”, in The Shifting Patterns of Agricultural Productionand Productivity Worldwide, The Midwest Agribusiness Trade Research and Information Center,Iowa State University, Ames, Iowa, 2010, p. 410ii See Federico Sturzenegger & Jeromin Zettlemeyer “Debt Defaults and Lessons from a Decadeof Crises”, The MIT Press, Cambridge, Massachusetts, p. 7 (2007)iii The 2001-2 crisis has been compared to the great depression in the United States. See, forexample, Horacio Spector “Don’t cry for me Argentina: Economic Crises and the Restructuringof Financial Property”, 14 Journal of Corporate and Financial Law 771, 777 (2009).iv The analysis of the insolvency law reforms from the perspective of ownership theory is beyondthe scope of this paper and will be left for further work.v See, for example, Ariel A. Dasso “Quiebras, Concurso Preventivo y Cramdown”, AD-HOC,Buenos Aires, Argentina, p. 47-53 (1997)vi See article 43 of Argentine Law Nº 24522.vii This statement should not be read as a critique of the system design. Rather, it follows fromthe evident limitations that bankruptcy laws have when facing global collapses of the economicand financial system of which they form an integral part.viii See David Mckenzie “Aggregate Shocks and Urban Labor Market Responses: Evidence fromArgentina’s Financial Crisis”, 52 Economic Development and Cultural Change 719, 719 (2004).ix Gelos et al. report that during the 1990’s the average period of exclusion form the market, ameasure of the length of the default period, was two years. Argentine started to restructure itsdebt only in 2005. The process has not yet concluded. See Gaston Gelos, Ratna Sahay & GuidoSandleris “Sovereign Borrowing by Developing Countries: What Determines Market Access”,83 Journal of International Economics 243 (2011)x See Ana M. Mustapic “América Latina: las renuncias presidenciales y el papel del Congreso”,47 Política 55 (2006)xi See Eduardo Levy Yeyati, Sergio L. Schmukler & Neeltje Van Horen "The price ofinconvertible deposits: the stock market boom during the Argentine crisis," Economics Letters,Elsevier, vol. 83(1), pages 7-13, Aprilxii The reported poverty statistics come from 31 January 2003 press release of the NationalInstitute of Statistics and Census (INDEC) “Incidencia de la Pobreza y de la Indigencia en losAglomerados Urbanos”.xiii See “The Role of the IMF in Argentina, 1991-2002.” Independent Evaluation office, July2003, available at http://www.imf.org/external/np/ieo/2003/arg/

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xiv See David Mckenzie “Aggregate Shocks and Urban Labor Market Responses: Evidence fromArgentina’s Financial Crisis”, 52 Economic Development and Cultural Change 719, 723 (2004).xv This new norm was known as the Counter-reform Law (Contrareforma). See, for example,Horacio Roitman “Ley de Concursos y Quiebras N° 24.522 y modificatorias”, 8 Revista deDerecho Comparado 31, 34 (2004).xvi It has been repeatedly alleged that among the reasons behind the sudden amendment to thenew law N 25563 was the lobbying of international financial organizations, especially theInternational Monetary Fund. See, for example, Francisco Junyent Bas & Carlos MolinaSandoval “Ley de Concursos y Quiebras Comentada”, Tomo I, p. 48 Abeledo Perrot, 2008.xvii This provision was mainly limited to limited liability companies and corporations.xviii A double majority of credit amount and personal creditors, the same one required forstandard reorganization plans, was necessary to generate that effect.xix We can appreciate the peak in bankruptcy filings with the data from the Statistics Office of theNational Judicial Power. For the city of Buenos Aires, in the 2001-2 period there were a total of2705 concursos preventivos and 4198 quiebras petitions filed, while in the 2003-4 period thenumber dropped to about half for concursos preventivos (1412) and about five percent forquiebras (4019). See Alejandra N. Tevez “Empresas Recuperadas y Cooperativas de Trabajo”,Buenos Aires, Editorial Astrea, 2010, p. 6.xx Those were a testament to the perception that the workers had about the way bankruptcy courtsacted in Argentina. It is not clear whether those workers understood that those courts couldexercise the powers vested on them by the fraudulent conveyance law or whether they justthought that it wouldn’t solve their problems.xxi On the evolution of the workers’ motivations behind occupying insolvent firms, see SeeAlejandra N. Tevez “Empresas Recuperadas y Cooperativas de Trabajo”, Buenos Aires, EditorialAstrea, 2010, pp. 144-7xxii See Laura Vales “Informe sobre la Historia de Brukman”, Pagina 12, May 19th 2003,available at http://www.pagina12.com.ar/diario/elpais/1-20301-2003-05-19.htmlxxiii See Laura Vales “Informe sobre la Historia de Brukman”, Pagina 12, May 19th 2003,available at http://www.pagina12.com.ar/diario/elpais/1-20301-2003-05-19.htmlxxiv The two workers who confronted the Brukman owners never expected what came afterwards.“We only wanted to get paid”, said Matilde Adorno and Celia Martinez. See “Brukman, seisaños después: ¿Se creen que pueden manejar la fábrica?”, La Vaca, 12/21/2007, available athttp://lavaca.org/notas/brukman-seis-anos-despues/xxv The exception to continuation was interpreted in a restrictive way. A classic example of anallowed continuation at the time would involve the business to keep on running so that anyperishable goods could be sold.xxvi The appearance of cooperatives and this new sense of entitlement move furthered the youngdissociation between the owner and the firm. In Argentine’s bankruptcy system history, thisdissociation started with the introduction of the Salvataje. See Ariel A. Dasso “Quiebras.Concurso Preventivo y Cramdown”, Editorial Ad-Hoc, Buenos Aires, Argentina, p. 52 (1997).xxvii Those benefits referred to medical care and luncheon service.xxviii Zanon’s workers worried that either machinery or raw materials or unsold stock wouldsomehow disappear.

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xxix See “Zanon se presentó en concurso de acreedores”, Rio Negro online, 12/1/2001, availableat http://www1.rionegro.com.ar/arch200112/r01g11.htmlxxx It is unclear how were the workers able to donate products which were the property of Zanon.The donation was a testimony to the lack of control exercised by the bankruptcy judge in themidst of general social unrest due to the crisis and specifically due to Zanon’s shut down.xxxi Zanon’s plan would have employed only 62 of the more than 300 original workers and thatwas the main reason behind workers’ opposition to it.xxxii A few examples of the social support gathered by Zanon’s workers were notable. First,Bersuit Vergarabat, one of Argentina’s most popular rock bands, threw a concert in solidaritywith Zanon’s workers (Bersuit Vergarabat was the first among many bands to offer this type ofconcerts). See “Los ceramistas de Fasinpat (ex Zanon) celebran una década de gestión obrera”,Neuquen Portal, 10/01/2011, available at http://www.neuquenportal.com.ar/los-ceramistas-de-fasinpat-ex-zanon-celebran-una-decada-de-gestion-obrera/ Second, the Mapuche community allowed the workers to use their clay quarriesto extract the raw materials needed for production. See “El INTI asesorará a los trabajadores dela recuperada fábrica ex Zanon”, Diario La Prensa, available athttp://www.laprensa.com.ar/NotePrint.aspx?Note=340442xxxiii There were at least five judicial orders to vacate the premises through 2004 but none of theorders were successful due to the workers resistance. See “Zanón: La Fábrica Sin Patronesmarchó a Buenos Aires para doblegar la presión del derechista Jorge Sobisch”, Revista Zoom,Politica y Sociedad en Foco, 11/27/2004, available at http://revista-zoom.com.ar/articulo205.htmlxxxiv See “Bajo control obrero Zanon incorporó nuevos trabajadores”, 106 La Verdad Obrera,08/07/2002, available at http://www.pts.org.ar/spip.php?article2912. Those new workers lackedany formal status. Again, informality ruled this first chaotic period.xxxv Part of the success may be due to the fact that generally people react positively to communityframeworks. For example, Liberman, Samuels and Ross, have shown that subjects in their studyof a prisoner dilemma situation tend to cooperate much more when the game is labeled as“community” than when it is labeled “wall street”. See Varda Liberman, Steven M. Samuels &Lee Ross “The Name of the Game: Predictive Power of Reputations Versus Situational Labels inDetermining Prisoner’s Dilemma Game Moves”, 30 Personality and social Psychology Bulletin1175, 1177 (2004) (“It is equally clear that the name of the game exerted a considerable effect onthe participants’ choices. When playing the Community Game, 67% of the most likely tocooperate nominees and 75% of the most likely to defect nominees cooperated on the first round.When playing the Wall Street Game, 33% of participants with each nomination statusCooperated”)xxxvi Recall that the first attempt to renegotiate Argentina’s defaulted bonds came in 2005.xxxvii The expropriation strategy was necessary given the broad protection that ArgentineConstitution provides to property rights and the Supreme Court long lived decisions to includeall interests a man can posses outside himself, his life and liberty. See Corte Suprema de Justiciade la Nación [CSJN], 14/12/1925, “Bourdieu , Pedro E. v. Municipalidad de la Capital Federal ,”Fallos (1925-145-307) (Arg.). For a general discussion on this and other leading cases onproperty protection, see generally, Horacio Spector ““Don’t cry for me Argentina: EconomicCrises and the Restructuring of Financial Property”, 14 Journal of Corporate and Financial Law771, 775 (2009).

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xxxviii Public interest is together with just compensation a prerequisite of Argentina’s constitutionin article 17 (“Property may not be violated, and no inhabitant of the Nation can be deprived of itexcept by virtue of a sentence based on law. Expropriation for reasons of public interest must beauthorized by law and previously compensated…”). There have been at least two cases –cooperatives La Cacerola and IMPA- where the expropriating bill has been declaredunconstitutional because it lacked public interest.xxxix The bankrupt firm’s creditors had no alternative but to keep on procuring the satisfaction oftheir credits in front of a bankruptcy court which at the time was close to powerless.xl See 80 Saber Como, Instituto Nacional de Tecnología Industrial, p. 4, September 2009,available at http://www.inti.gob.ar/sabercomo/sc80/pdf/sc80.pdf (“Artículo 1: Decláranse deutilidad pública y sujetos a expropiación los inmuebles, bienes muebles y todo otro bien tangibleo intangible que sea parte accesoria de la planta industrial incluida la marca comercial….Artículo 3: El objeto de la presente expropiación es mantener la fuente laboral bajo gestiónobrera, a los fines de posibilitar la continuidad de la actividad productiva de lamencionada planta en el marco de sus fines cooperativos, con la totalidad de los bienesinmuebles y muebles ubicados en la Ruta provincial 7, km 6,5 de la Provincia del Neuquén,donde se encuentra asentada la planta industrial de Cerámica Zanon SACIyM.”)xli See Andres Ruggeri “Las Empresas Recuperadas en la Argentina 2010. Informe del tercerRelevamiento de Empresas Recuperadas por sus Trabajadores”, p. 7, available athttp://www.recuperadasdoc.com.ar/Informes%20relevamientos/informe_ultima_correccion.pdfxlii Almost forty-five percent (40%) of taken over firms have between twenty-one (21) and fifty(50) workers, while only two percent (2%) have more than two hundred (200). See AndresRuggeri “Las Empresas Recuperadas en la Argentina 2010. Informe del tercer Relevamiento deEmpresas Recuperadas por sus Trabajadores”, p. 39, available athttp://www.recuperadasdoc.com.ar/Informes%20relevamientos/informe_ultima_correccion.pdfxliii The highest concentration of taken over firms is in food processing and steel producing.These two industries represent about forty percent (40%) of all the taken over firms and a similarnumber in terms of the participating workers. See Andres Ruggeri “Las Empresas Recuperadasen la Argentina 2010. Informe del tercer Relevamiento de Empresas Recuperadas por susTrabajadores”, p. 10, available athttp://www.recuperadasdoc.com.ar/Informes%20relevamientos/informe_ultima_correccion.pdfxliv The program is destined to firms over by their workers, regardless of whether those firms arerunning or in the process of being reactivated. For a description of the program seehttp://www.trabajo.gov.ar/promoempleo/autogestionadas2.aspxlv Workers’ cooperatives have been around in Argentina for more than a century. The firstregulation of cooperatives was done with National Law Nº 11.388.xlvi Cracogna described the situation left by Argentine Law Nº 25589 as “precarious”. See DanteA. Cracogna “Crisis Empresarias y Cooperativas de Trabajo”, 178 Doctrina Societaria yConcursal 563xlvii See Andres Ruggeri “Las Empresas Recuperadas en la Argentina 2010. Informe del tercerRelevamiento de Empresas Recuperadas por sus Trabajadores”, p. 24, available athttp://www.recuperadasdoc.com.ar/Informes%20relevamientos/informe_ultima_correccion.pdf.It must be mentioned though that the expropriation bills have been controversial. Most of themrefer to a temporary expropriation and deferred the payment due to the owner –in these casesrepresented by the bankruptcy trustee- to a later date.

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xlviii See new article 195 of Argentine Law Nº 24522xlix Note that this may not be much to celebrate. The World Bank’s report “Doing Business inLatin America - 2012” indicates that it takes on average 2.8 years to work through thebankruptcy process in Argentina. To the extent that this estimate is accurate, the new provisionpractically ensures that it will be surpassed. The World Bank report is available athttp://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Profiles/Regional/DB2012/DB12-Latin-America.pdfl See new article 203 bis of Argentine Law Nº 24522li “Comercio y Justicia Editores S.A. –Hoy quiebra-“. Juzgado Civil y Comercial 7a Nominación,Córdoba, 21/08/03.lii See 82 Saber Como, Instituto Nacional de Tecnología Industrial, November 2009, available athttp://www.inti.gob.ar/sabercomo/sc82/inti5.phpliii The bid was successful because the worker cooperative was able to raise enough financing topay what was owed to secured creditors.liv Another solution somewhat similar to the one obtained in Comercio y Justicia was found inthe case of Salvia SA. See CNCom., Sala A, 5/9/01, Salvia S.A. s/Quiebra- Inc. de realización debienes. Also, two of Argentina’s neighboring countries have now amended their insolvencylegislation to include a similar solution. This is the case of the new article 145 of BrazilianInsolvency Law Nº 11101 -enacted in 2005-, available athttp://www.planalto.gov.br/ccivil_03/_ato2004-2006/2005/lei/l11101.htm. Uruguay is the othercase with the enactment in 2008 of its new Insolvency Law Nº 18387, which in article 172 givesthe workers’ cooperative the option to use its labor credits to acquire the bankrupt firm. The textof Uruguayan law Nº 18387 is available athttp://www0.parlamento.gub.uy/leyes/AccesoTextoLey.asp?Ley=18387&Anchor=lv This conclusion would also extend to any new set of taken over firms.lvi See new articles 19 and 129 of Argentine Law Nº 24522. In periods of high inflation, as theone Argentina is going through right now, this provision creates a great opportunity for debtorsor third parties willing to acquire the firm for a fraction of its value.lvii In Argentina, the labor credits are considered to be credits destined to cover basic needs. Thisdefinition seems to provide the motivation behind the amendment. On the definition of laborcredits, see Corte Suprema de Justicia de la Nación [CSJN], 04/02/1985, “Complejo TextilBernalesa SRL s/quiebra (inc. de revisión, art. 38, ley 19551, por Sosa, María T.”lviii Again, note that under the current high inflation scenario accruing interest is key for a creditto prevent loosing value.lix See new article 48 of Argentine Law Nº 24522lx See JuzgProcConcs y Registros nº 3 Mendoza “Frannino Industrias Metalurgicas SA”,25/9/1998.lxi It doesn’t matter how careful a firm has been in complying with precision with labor law.Article 48 bis makes no distinctions.lxii Third party bidders need to make a twenty five percent (25%) deposit in case that the sharesof the reorganizing firm were considered by an expert to have positive value.lxiii Note that such an interpretation would make the amendment rather ineffectual.lxiv This fact adds to systems that already are pro-debtor due to systemic circumstances. SeeSergio A. Muro “Sistemas de Insolvencia y Errores de Filtrado”, unpublished manuscript, p. 13,available on file with the author

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lxv According to the law the exclusivity period should not involve more than 120 business days,but the actual application of different parts of the insolvency law can potentially make this periodextend over several years. See article 43 of Argentine Law Nº 24522. An example of aexclusivity period that gets indirectly extended much longer could be found in the famous case“Sociedad Comercial del Plata SA s/concurso preventivo”, Corte Suprema de Justicia de laNación [CSJN], 20/10/2009.lxvi The literature explaining and quantifying the direct and indirect bankruptcy costs is vast. SeeEdward I. Altman “A Further Empirical Investigation of the Bankruptcy Cost Question”, 39Journal of Finance 1067 (1984); Robert A. Haugen & Lemma W. Senbet “The Insignificance ofBankruptcy Costs to the Theory of Optimal Capital Structure”, 33 Journal of Finance 383(1978); Arturo Bris, Ivo Welch & Ning Zhu “The Costs of Bankruptcy: Chapter 7 Liquidationversus Chapter 11 Reorganization”, 61 Journal of Finance 1253 (2006); Maria Carapeto “IsBargaining in Chapter 11 Costly?”, Cass Business School Working Paper, available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=241569 (2003); and, Robert M. Lawless &Stephen P. Ferris “Professional Fees and Other Direct Costs in Chapter 7 BusinessLiquidations”, 75 Wash. U. L. Q. 1207 (1997).lxvii This point was first raised by Bebchuk and Chang. See Lucian A. Bebchuk & Howard F.Chang “Bargaining and the division of value in Corporate Reorganization”, 8 Journal of LawEconomics & Organization 253 (1992)lxviii On the absolute priority rule issue, see Douglas G. Baird & Robert K. Rasmussen “ControlRights, Priority Rights, and the Conceptual Foundation of Corporate Reorganizations”, 87 Va. L.Rev. 921 (2001).lxix Remember that these credits are created by the legislator only with the purpose of helping theworkers’ cooperative to get its reorganization plan approved.lxx Argentine Insolvency Law mandates now that bankruptcy courts should make substantivereviews to approved plans in order to check that the plan is not the result of an abusive orfraudulent situation. See article 52 of Argentine Law Nº 24522lxxi See John McConnell & Henri Servaes, The Economics of Pre-packaged Bankruptcy, inCorporate Bankruptcy: Economic and Legal Perspectives, Cambridge University Press (1996),pp. 322-6lxxii See articles 73 and 76 of Argentine Law Nº 24522.lxxiii See article 69 of Argentine Law Nº 24522.lxxiv For an early extension of the reorganization analysis to the context of prepacks, see MichelleWhite “Corporate Bankruptcy as Filtering Device: Chapter 11 Reorganizations and Out-of-CourtDebt Restructurings”, 10 Journal of Law Economics & Organization 268 (1994)lxxv An example of this assumption can be found in David T. Brown “Claimholder IncentiveConflicts in Reorganization: The Role of Bankruptcy Law”, 2 Review of Financial Studies 109(1989).lxxvi A situation where the assumption may not hold could arise out of asymmetric informationproblems or financial market restrictions that push a healthy firm into filing a reorganizationpetition. On the bankruptcy initiation problem, see Douglas G. Baird “The initiation problem inbankruptcy”, 11 International Review of Law and Economics 223 (1991).lxxvii The potential for quasi-rents extraction could be larger upon the creation of informalcoalitions, between either the debtor and the workers’ cooperative or the creditors –or a subset ofthem- and the workers’ cooperative.

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lxxviii Shleifer and Vishny show that liquidation value is dependent on the liquidity of the assets.Hence, if there’s industry or economy wide recession, a mandatory auction won’t necessarilyassign the assets to the highest value users. See Andrei Shleifer & Robert Vishny “LiquidationValues and Debt Capacity: A Market Equilibrium Approach”, 47 Journal of Finance 1343 (1992)lxxix Baird and Morrison argue that the decision to liquidate or not at the beginning of thebankruptcy process depends on the growth of the profit rate and the variance of the profits overtime – all of which may be unknown at the moment of filing a bankruptcy petition. Therefore, areorganization proceeding may be a valuable way of obtaining that information as long as theliquidation value stays rather constant. See Douglas G. Baird & Edward Morrison “BankruptcyDecision Making”, 17 J. L. Econ. & Org. 356 (2001).lxxx Peterson and Rajan explain that “It is possible that debtors are less willing to repay adistressed firm. Since repayment is enforced by the threat of cutting off future supplies, suchthreats are less credible when the supplier is distressed. Also, a distressed firm may be lesscapable of legal action to recover its dues.” See Mitchell A. Peterson & Raghuram G. Rajan“Trade Credit: Theories and Evidence”, 10 The Review of Financial Studies 661, 675 (1997).lxxxi On the problems that changing the rights allocated outside of and inside of a bankruptcyproceeding, see generally Thomas H. Jackson “Bankruptcy, Non-Bankruptcy Entitlements, andthe Creditors’ Bargain”, 91 Yale Law Journal 857, 857-71 (1982). The uneven nature of rights inand outside of bankruptcy may disrupt the incentives existent to bring forward an insolvencyproceeding too. See Douglas G. Baird “The initiation problem in bankruptcy”, 11 InternationalReview of Law and Economics 223 (1991). Of course, there are some ex ante problems of themodification to salvataje too. As the creditors risk recuperating less now, they will be willing tolend less too –and/or at a more expensive interest rate-. Therefore, there will be some positive netvalue projects that won’t even be undertaken. On the ex ante consequences of bankruptcy rules,see Alan Schwartz “A Normative Theory of Business Bankruptcy,” 91 Virginia L. Rev. 1199(2005).lxxxii The law makes no mention to how this type of regulation may affect the rest of the firms inthe economy.lxxxiii See “El Senado aprobó el proyecto de Presupuesto 2012 y prórroga de la EmergenciaEconómica”, Diario Digital de la Agencia de Noticias Telam, 12/21/2011, available athttp://www.telam.com.ar/nota/10876lxxxiv The National Institute of Industrial Technology (INTI) provides specific assistance to takenover firms. See http://www.inti.gob.ar/sabercomo/sc34/inti11.php. In the context of the supportthe provided to Zanon, the INTI discussed the difficulties facing workers’ cooperatives, namely,lost clientele, worn off machinery increasingly becoming outdated, obtaining financingdifficulties, and lack of capital to invest in new equipments. See 80 Saber Como, InstitutoNacional de Tecnología Industrial, p. 4, September 2009, available athttp://www.inti.gob.ar/sabercomo/sc80/pdf/sc80.pdflxxxv See new article 191 bis of Argentine Law Nº 24522 (“En toda quiebra que se haya dispuestola continuidad de la explotación de la empresa o de alguno de sus establecimientos por parte delas dos terceras partes del personal en actividad o de los acreedores laborales, organizados encooperativas, incluso en formación, el Estado deberá brindarle la asistencia técnica necesariapara seguir adelante con el giro de los negocios”). One of the government programs that iswithin the Ministry of Labor is the “Programa de Competitividad para Empresas

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Autogestionadas y Sistematización de Modelos de Gestión - ATN/ME-9355- AR FOMIN”,available at http://www.trabajo.gov.ar/promoempleo/autogestionadas3.asplxxxvi See, for example, Douglas G. Baird “Bankruptcy’s Uncontested Axioms”, 108 Yale LawJournal 573 (1998); Barry E. Adler “Bankruptcy Primitives”, 12 American Bankruptcy InstituteLaw Review 219 (2004).lxxxvii The comparative advantages or disadvantages that a specific organizational form may havedepend on the relative costs of contracting, of controlling managers, of collective decisionmaking and of risk-bearing that each ownership structure has. On the theory of enterpriseownership see Henry Hansmann “The Ownership of Enterprise”, The Belknap Press of HarvardUniversity, Cambridge, Massachusetts, 2000, pp. 24-49.

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New Developments in Argentine Insolvency: Adding Heterogeneous Resolution Alternatives

Professor Sergio MuroUniversidad Torcuato di Tella

Introduction

• Argentina & periphery • Argentina & sovereign insolvency• New kid on the block• Road map

– Argentina’s Insolvency system in 1995 and the eruption of the 2001-2 crisis

– Introduction of continuation in liquidation proceedings

– The new amendment: facilitating exit– Conclusion

• Innovations

• Privatistic overtones

• Partially off-setting regulation

Argentina’s Insolvency system in 1995

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• 4 years of economic recession– corralito and corralón– 50% unemployment– 20% drop in GDP

• 5 presidents in 1 week

• Productive and Credit Emergency

The eruption of the 2001-2 crisis

Introduction of continuation in liquidation proceedings

• Shut-down firms and lack of workers’options

• Occupation of firms’ premises– Brukman case

• Changing the structure of liquidations– Zanon case– Lack of exit– Workers’ coops shortcomings & state

support

New amendment: facilitating exit

• Legal informality/ expropriation lobbying

• Law 26684: Key liquidation amendments – workers’ cooperative right to request a 2

year foreclosure moratorium– Bid for assets setting-off workers’

compensatory rights• Comercio y Justicia case

– Non-suspension of labor credits’ accrual of interests

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• Key Reorganization amendment– workers’ cooperative participation in

salvataje• Frannino Industrias Metalurgicas SA case

– Use of potential compensation rights’ as credits for its proposal

• Creating credits from thin air• 2 possible interpretations:

a) Limits to the beneficiaries of potential compensation rights


• 2 possible interpretations:b) Expansive – Unintentionally Pro-debtor outcome– Potentially pro-creditor, but not necessarily

for the coop!!!

• Delays not always detrimental

• Changing the bargaining scenario is!!

Conclusion

• A decade to adapt to a crisis context

• Challenging the orthodoxy

– Insolvency theory

– Ownership theory

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Session 4: International insolvencydevelopments

The future of Cambridge Gas: How far can the Common Law go? Dr. Paul Omar, University of Sussex

The ALI-III Global Insolvency Principles Project: Report on the Final ReportProfessor Ian Fletcher, University College London

Sovereign Insolvency Developments: From Adam Smith to the Eurozone Crisis and Beyond..."?. Dr. Juanitta Calitz, University of Johannesburg

Conflicts and Avoidance in International InsolvencyProfessor Gerard McCormack, University of Leeds

Israel’s New Corporate Reorganisation LegislationProfessor David Hahn, Bar-Ilan University

The GFC and Corporate Workouts: Throwing Light on the Law of Shadow Directorship and Creditor Liability in AustraliaAssociate Professor Anil Hargovan, University of New South Wales

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The Principle in Cambridge Gas:How far can the Common Law go?

byPaul J. Omar

of Gray’s Inn, Barrister

Introduction

Cambridge Gas, 1 a 2006 case heard before the Privy Council on appeal fromthe Isle of Man, created a stir in the insolvency world, being subsequentlycommented upon in the literature and on the judicial stage. The essence ofCambridge Gas was that the Privy Council said that, in relation to a judgmentapproving a creditor composition plan, the judgment could be enforced giventhat the law of the Isle of Man knew of a similar procedure (the scheme ofarrangement) and given the court’s duty to enable the principles of unity anduniversality to be achieved. The court said:

“The underlying principle of universality is of equal application and this isgiven effect by recognising the person who is empowered under the foreignbankruptcy law to act on behalf of the insolvent company as entitled to do soin England. In addition, as Innes CJ said in the Transvaal case of Re AfricanFarms 1906 TS 373, 377, in which an English company with assets in theTransvaal had been voluntarily wound up in England, “recognition carries withit the active assistance of the court”. He went on to say that active assistancecould include:

“A declaration, in effect, that the liquidator is entitled to deal withthe Transvaal assets in the same way as if they were within thejurisdiction of the English courts, subject only to such conditionsas the courts may impose for the protection of local creditors, orin recognition of the requirements of our local laws.”

Their Lordships consider that these principles are sufficient to confer upon theManx court jurisdiction to assist the committee of creditors, as appointedrepresentatives under the Chapter 11 order, to give effect to the plan. As thereis no suggestion of prejudice to any creditor in the Isle of Man or local lawwhich might be infringed, there can be no discretionary reason for withholdingsuch assistance.

What are the limits of the assistance which the court can give? In cases inwhich there is statutory authority for providing assistance, the statute specifieswhat the court may do. For example, section 426(5) of the Insolvency Act1986 provides that a request from a foreign court shall be authority for anEnglish court to apply “the insolvency law which is applicable by either court inrelation to comparable matters falling within its jurisdiction.” At common law,their Lordships think it is doubtful whether assistance could take the form of 1 Cambridge Gas Transportation Corp v. Official Committee of Unsecured Creditors ofNavigator Holdings plc [2006] UKPC 26.

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applying provisions of the foreign insolvency law which form no part of thedomestic system. But the domestic court must at least be able to provideassistance by doing whatever it could have done in the case of a domesticinsolvency. The purpose of recognition is to enable the foreign office holder orthe creditors to avoid having to start parallel insolvency proceedings and togive them the remedies to which they would have been entitled if theequivalent proceedings had taken place in the domestic forum.”

In doing so, the court created a sui juris/generis category of insolvencyjudgments, neatly side-stepping the traditional classification of judgments intothose in personam and in rem, in relation to which centuries of case law hadbeen built up. In the instant case, had the judgement been classified as inrem, the asset concerned was not within the court’s jurisdiction and were itinstead viewed as in personam, there were issues about whether there hadbeen a proper submission to jurisdiction. To avoid this, insolvency judgmentswere determined to have a different status as judgments ancillary to the mainpurpose of insolvency, that of enforcing a collective procedure for themaintenance and distribution of assets reflecting entitlements that werealready in existence or that could be achieved by litigation subordinate to themain procedure.

Cambridge Gas has found favour in many of the cases that followed it.Although strictly only of persuasive precedent, being a Privy Counciljudgment, the courts in England and Wales took it to heart and adopted itstenor in subsequent cases explored here.

The Cases

Rubin & Anor v Eurofinance SA & Ors [2009] EWHC B16 (Comm) (31 July2009); [2010] EWCA Civ 895 (30 July 2010)

This case was a useful introduction to the context in which English courts aretaking a purposive approach and creatively interpreting domestic enablingrules so as to further the use of the UNCITRAL Model Law on Cross-BorderInsolvency (“Model Law”), which in the United Kingdom is given force of lawby the Cross-Border Insolvency Regulations 2006.2

The Facts:

The facts arise from insolvency proceedings involving The Consumers’ Trust,a trust scheme settled by Eurofinance SA, a company set up in the BritishVirgin Islands, and whose trustees were 4 English solicitors and accountants.The substance of the scheme carried out by the trust, whose operations tookplace largely in North America, involved participating retailers issuingvouchers to customers, who would then be required to undergo a complexseries of procedures before obtaining what amounted to an effective refund ofthe sales price. The trust collected some 6% of the value of the products fromthe retailers, but, owing to the complex and difficult procedures resulting in a

2 SI 2006/1030 (in force 4 April 2006).

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low success rate for claims, retained substantial amounts in bank accounts inthe United States and Canada. Following a successful claim in Missouri by thestate’s Attorney-General under consumer protection legislation and theprospects of similar claims in other states/provinces where the trust operatedtheir scheme, the settlor company applied in the United States for the openingof Chapter 11 proceedings over the trust for a number of practical reasons,including almost all creditors and assets being present in North America aswell as the availability of bankruptcy protection for the debtor trust as aspecies of business trust.

On 14 November 2005, the applicants in the instant proceedings wereappointed receivers and managers of the trust. In May/June 2007, thereceivers settled potential claims against the solicitor trustees for some GBP3.2 million. On 24 October 2007, the United States Bankruptcy Courtapproved a liquidation plan under Chapter 11 and authorised action to bebrought against a number of defendants, including the respondents in theinstant proceedings. Default summary judgment was obtained in subsequentadversarial proceedings on 23 July 2008 in the amount of approximately USD160 million on the basis that the defendants were general partners in the trustbusiness and had breached their fiduciary duties and/or were negligent.Default judgment was also entered against the settlor company and thepresent respondents on the basis of transfers of money made to them at atime when the trust was effectively insolvent. The October order alsoauthorised the respondents to act as foreign representatives of the trust inorder to seek recognition of the American proceedings in the United Kingdomand to enforce the various court orders against the respondents. The instantproceedings are the consequence of this order and were taken with view to: (i)recognise the American proceedings as foreign main proceedingsaccompanied by recognition of the applicants as foreign representatives; and(ii) an order under Article 25 of the Model Law enforcing the decision of theUnited States Bankruptcy Court holding the respondents liable for the debts ofthe trust as a judgment of the English courts.

The Judgment (HC):

There were two principal considerations for the court, which were to firstlydecide on whether recognition could be offered to the bankruptcy proceedingsand, second, what assistance could be forthcoming, including whether or notthe proceedings brought against, inter alia, the respondents could beenforced. The first issue related to whether the trust fulfilled the definition of adebtor required for recognition under Article 17 of the Model Law. In objection,counsel for the respondents, although admitting that the trust could underUnited States law be the subject of bankruptcy proceedings, argued that theword debtor should be given its ordinary meaning under English law, whichdid not recognise the separate legal existence of the trust as a possiblesubject of insolvency proceedings. The court gave short shrift to thisargument, holding that Article 8 of the Model Law required that courts haveregard to the international origins of the text in interpreting its provisions. A“parochial” interpretation, the Court held, would result in the refusal ofrecognition to bona fide proceedings taking place in another jurisdiction.

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Although there might be some difficulty in applying the terms of the Model Lawto a debtor whose legal entity status is unknown in English law, the courtwould apply a purposive interpretation to the assets of and proceedingsinvolving the trust held by the trustees qua trustees. The Court was thereforeprepared to recognise the Chapter 11 proceedings as foreign mainproceedings under the Model Law.

As far as assistance was concerned, the main issue revolved around theenforcement of proceedings taken against the defendants, including therespondents in the instant case. Counsel for the respondents argued that theapplicants were only entitled, if the recognition application was successful, forrecognition in connection with the Chapter 11 proceedings and not theadversarial proceedings taken against the respondents, which were separateproceedings and, furthermore, unrelated to the collective proceedings forwhich recognition was being sought. The Court was unpersuaded by thesearguments, holding that, although procedurally the adversarial proceedingshad a separate case number, their existence was authorised by the Octoberliquidation plan, which vested certain causes of action in thereceivers/managers. Furthermore, the adversarial proceedings were seen asarising out of the Chapter 11 proceedings, being incidental to the process ofcollecting the bankrupt’s assets with view to effecting a distribution tocreditors. Furthermore, the Court was minded to give a purposive constructionto the provisions, given their object to facilitate co-operation between variouscourts administering assets involving the same debtor. The pursuit by trusteesin bankruptcy of adversarial proceedings against persons connected with thedebtor was not an unusual feature of insolvency cases and the Court wouldnot construct the provisions in such a way so as to impede co-operation orassistance.

In this light, the applicants argued that the Court could use Articles 21(e) onthe granting of appropriate relief and 25 on co-operation to the maximumextent possible to direct the enforcement of the adversarial judgments inEngland and Wales. However, the Court held that the effect of the bankruptcyorder was not necessarily to provide authority for the Court to disregardnormal rules of private international law, including those that governed theenforcement of judgments at common law. Under these rules, the adversarialjudgment, although it arose out of the bankruptcy proceedings, was by naturea judgment in personam and so could not be treated automatically as anEnglish judgment contrary to these rules (which included the need for thedefendant to be present within or submit to the jurisdiction), albeit the courtcould authorise the trustees in bankruptcy to bring an action on the judgmentor a fresh claim. Thus, Articles 21(e) and Article 25 could not be of assistance,as the Court could not disregard important provisions of its own legal system,although it could, within the law, search for practical means to give effect tothe co-operation implicit in those provisions. The trial judge also held that,even if he were wrong on that point and that the provisions could authorisesuch a treatment, he would not exercise discretion to do so because of theviolation of the principles of English private international law. Thus, theapplication was successful in part (recognition of the judgment andappointments), but failed in part (enforcement of the adversarial judgments).

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Analysis and Impact:

As the case reveals, an important impulse for the court is to be practical andto give pragmatic support to the use of the Model Law within the jurisdiction inthe case of applications for recognition. Nonetheless, as the Harms case hasalso revealed,3 the generally positive view of comity and the need to assist oravoid impeding proceedings before other courts that motivates English courtsremains to be tempered by rules of domestic law that are mandatory in nature(ordre public). In the Harms case, the Court of Appeal required the appellantsto have foreign proceedings that interfered with domestic proceedingsdismissed and maintained injunctive relief to the respondents (in effect ananti-suit injunction), because of the unconscionable behaviour of the formerthat violated canons of domestic law. In the instant case, the canon beingviolated, according to the High Court, was the prohibition against enforcementof a judgment obtained by default in the absence of the defendants (whichcategory included the respondents) by means of the recognition of insolvencyproceedings to which the adversarial action was incidental. This does notmean that ultimately the applicants will not be successful; recognition of theinsolvency judgment was in fact obtained and orders could undoubtedly issueon the basis of the recognition of the capacity of the applicants/foreignrepresentatives to preserve assets of the trust pending determination throughfresh action on the litigation issue, i.e. whether through breach of fiduciaryduty/negligence, the respondents remain liable for the debts of the trust. TheHigh Court sought to temper the need to give effect to the Model Law with theapplication of canons of fairness and equity, preserving the discretion thecourts have long enjoyed in similar requests for assistance under section 426of the Insolvency Act 1986 (“section 426”).4 In the Court of Appeal, however,this finding was overturned, the judges preferring the sui generis approachtaken in Cambridge Gas and permitting enforcement against the defendantsdirectly.

New Cap Reinsurance Corp Ltd v Grant and others [2011] EWCA Civ 971 (9August 2011)

This case reinforced the utility of section 426 and provides that the foreignpractitioner seeking the assistance of the English courts may do so under this

3 Harms Offshore AHT "Taurus" GmbH & Co Kg v Bloom & Ors [2009] EWCA Civ 632.4 The relevant parts of section 426 read as follows:

“(4) The courts having jurisdiction in relation to insolvency law in any part of theUnited Kingdom shall assist the courts having the corresponding jurisdiction in anyother part of the United Kingdom or any relevant country or territory.(5) For the purposes of subsection (4), a request made to a court in any part of theUnited Kingdom by a court in any other part of the United Kingdom or in a relevantcountry or territory is authority for the court to which the request is made to apply, inrelation to any matters specified in the request, the insolvency law which is applicableby either court in relation to comparable matters falling within its jurisdiction.(11) In this section “relevant country or territory” means-(a) any of the Channel Islands or the Isle of Man, or(b) any country or territory designated for the purposes of this section by theSecretary of State by order made by statutory instrument.”

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provision even though another parallel framework may exist for therecognition and enforcement of judgments.

The Facts:

The facts arise from insolvency proceedings involving the New CapReinsurance Corporation Limited, which was in liquidation in New SouthWales, Australia. The liquidator sued members of a Lloyd’s syndicate, whohad placed reinsurance with New Cap and who had obtained payment inrespect of liabilities in two successive years of account (1997 and 1998), onthe basis that those payments amounted to a preference under the law, thecontention being that New Cap was insolvent at the time the payments weremade. The court in Australia accepted the liquidator’s argument on the basisof evidence presented to it and issued judgments against the syndicatemembers following proceedings in which the syndicate members did notparticipate, but about which they had been informed by means of substitutedservice under the relevant rules of court. The syndicate members had arguedthat proceedings in Australia would have involved increased costs andinconvenience for them compared to proceedings in England and Wales,hence their declining to take part. The Australian court made an order on 11September 2009 providing for the payment by syndicate members of thesums due under the judgment, attached interest as well as costs. It also madean order requiring a Letter of Request to be sent to the English courts, whichwas duly performed sometime after 20 October 2009, stated as the date ofissue. The Letter of Request was issued on the basis of section 426, whichextends co-operation in cross-border insolvency matters to Australia.5 TheLetter of Request recorded that the Australian court had been shown andaccepted that the duty placed on the liquidator under Australian law, inparticular to recover assets for the benefit of the creditors, required the issueof the Letter of Request and that it was just and convenient for the court to doso. The Letter of Request couched the terms of the assistance requested asbeing primarily that the English courts should enforce the order of theAustralian court in relation to payment due from the syndicate members underthe terms of the judgment itself. Alternatively, it requested the English courtsto sanction the bringing of proceedings in England and Wales by the liquidatoragainst the syndicate members on the same basis as in Australia, i.e. that thepayments were in the nature of preferences.

The Judgement Below:

At the hearing before Mr Justice Lewison in the High Court on the Letter ofRequest, Counsel for the liquidator put his case in two ways. He first relied onthe powers available to the court under section 426; alternatively, he arguedthat the court was able at common law to provide assistance under the rule inCambridge Gas. In response, Counsel for the syndicate members argued thatenforcement via these avenues was unlawful, given that the only method forenforcement of the Australian court’s judgment was via the Foreign

5 Australia is a “relevant country or territory” under the terms of the Co-operation of InsolvencyCourts (Designation of Relevant Countries and Territories) Order (SI 1986/2123).

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Judgments (Reciprocal Enforcement) Act 1933 (“1933 Act”),6 section 6 ofwhich precluded the use of other methods to effect enforcement, whichCounsel said included both the powers at common law as well as those undersection 426. If section 426 did apply, however, the argument was that thecourt’s discretion should not be exercised in the liquidator’s favour.Interestingly, the Australian court had also decided that its judgment was onethat could not fall within the ambit of the 1933 Act, as a result of which it hadissued the Letter of Request on the basis of section 426. In response,Counsel for the liquidator argued that the 1933 Act could not apply to thejudgements in question, given that they were orders made in the context ofinsolvency proceedings, which he argued was excluded from the scope of the1933 Act, given that orders in bankruptcy and analogous proceedings weredeemed not to be judgments given on the basis of an action in personamincluded within the category of judgments that could be registered using thatlegislation.

In giving judgment, Mr Justice Lewison held that the 1933 Act could not apply,as it had not been the intention of the Committee appointed to consider thelegislation that it should, especially given their observation that in formulatingthe legislation they need not consider the effect of foreign judgments inbankruptcy.7 In determining whether assistance could be forthcoming undersection 426, the trial judge held that it could and that, despite the sectionbeing framed as including discretion for the court, in practice the court oughtnot to refuse assistance except on very cogent grounds, for example that itwould be improper to extend assistance. On arguments advanced by Counselfor the syndicate members, the judge saw no merits in the contention that thecase would have been better heard in England and Wales, stating that theseat of the insolvency had been in Australia and that the syndicate memberswould not have been hampered in exercising their rights to defend the claimthere. Similarly, the argument that the claim was stale was dismissed as afactor of no weight. In respect of the position at common law, the judge alsoheld that assistance could have been forthcoming had section 426 not been ofapplication. In sum, the order the judge made was for payment by thesyndicate members under the terms of the Australian judgment, which thejudge was prepared to enforce under section 426.

The Judgment on Appeal:

It is against this judgment that both parties appealed. For the syndicatemembers, Counsel again advanced the arguments that the 1933 Act did applyand that assistance could not be forthcoming under other avenues that wereimplicitly or explicitly excluded. Were the 1933 Act to apply, then the syndicatemembers had an arguable claim that the judgement could be set aside. Weresection 426 to apply, however, Counsel iterated the position of the syndicatemembers that they did not consider themselves immune from proceedings,but that it was more apt for these to take place in England and Wales, albeit 6 Extended to Australia by virtue of the Reciprocal Enforcement of Foreign Judgments(Australia) Order 1994 (SI 1994/1901) (“1994 Order”).7 Report of the Foreign Judgments (Reciprocal Enforcement) Committee (Cmnd 4213)(1932), at paragraph 4.

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that the law applicable to the substance of the proceedings could beAustralian law. In response, Counsel for the liquidator contended that the trialjudge’s findings were correct, but that, even if the 1933 Act did apply toinsolvency proceedings, the judgement that could be registered could not beset aside and that the court should make a determination on this matter in theappeal proceedings.

The judgement of the court was given by Lord Justice Lloyd, Lords JusticeMcFarlane and Mummery concurring. On the matter of the 1933 Act, the courtwas of the view that the legislation did apply to insolvency proceedings. TheReport, on whose terms the trial judge had based his findings, was “at worstequivocal and unclear”. The reasoning of the court was that section 1(2) of the1933 Act, in defining judgments (that would be registrable) as including“judgments for a sum of money” (subject to exceptions in the case of taxes,fines or penalties), clearly included judgments given or made by a court in anycivil proceedings, which to the court encompassed the proceedings before theAustralian court and the order for the payment of a sum of money it hadmade. The court held here that the terms “civil”, used in the 1933 Act, and“civil and commercial”, used in the 1994 Order, also included insolvencymatters. The fact that the Brussels Convention 1968, from which the latterphrasing was borrowed, excluded insolvency judgments from its remit did notmean, to the court, that the term itself excluded insolvency matters.

In the event that registration of that judgement took place, section 4(1) of the1933 Act delimited the circumstances in which the registration could be setaside, paragraph (a)(ii) of which (the only paragraph the court said couldapply) provided that set aside was to occur where the original court hearingthe matter had no jurisdiction in the circumstances of the case. In determiningwhether jurisdiction existed, section 4(2)(c) (again the only provision the courtsaid could apply), the original court hearing the matter had this jurisdiction ifthe court where enforcement was to take place recognised that jurisdiction.The court was satisfied that registration could not, under the provisionsapplicable, be set aside and went as far as to state this in its overallconclusion.8 As far as the exclusions under section 6 were concerned, thecourt held those to refer to the common law methods for recognition andenforcement of judgments which had been intended to be superseded by the1933 Act.

In turning to the applicability of section 426, the court was of the view that bothsection 426 and 1933 Act regimes could operate side by side. The scope ofapplication for both regimes was not identical, given that different countrieswere designated under the two texts. However, even where they did overlap,they could operate in parallel, although the courts would be free to determinewhich avenue was the more appropriate for the office-holder to use and, itbeing the case, that the use or non-use of the 1933 Act was relevant to theexercise of discretion under section 426. The court gave the example of a 8 It also refers to the case of Rubin v Eurofinance SA [2010] EWCA Civ 895, which it says isauthority for the proposition that insolvency judgements do not fall under the provisionspreventing enforcement based on non-submission. NB. This case is being appealed on thisand other points.

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judgement sought to be enforced under section 426 where the time-limitsunder the 1933 Act had passed, which it says could preclude the exercise ofdiscretion in the office-holder’s favour. Where section 426 did apply, the courtstated that there was no reason why assistance could not includeenforcement of a judgment, given that the provision had been invoked duringthe currency of its application in a wide manner to allow, for example, forinjunctive anti-suit relief, to permit examinations of material witnesses and toremit funds to a main liquidation. On whether discretion should be exercisedagainst an order under section 426, the court found that the trial judge’sreasoning was sound and upheld it on that basis, although the court did notfind it necessary to determine whether the common law power to provideassistance was available where section 426 was not of application. However,the fact the court was of the view that the 1933 Act also applied was materialinsofar as it could not countenance the use of section 426 to avoid anythingmandated by the 1933 Act.


This is a very interesting judgement by the Court of Appeal which, althoughcomplex in its reasoning, contains two very important elements. It first statesthat recognition and enforcement powers under statute, such as the 1933 Act,can apply to judgements in insolvency matters that have the status of civil (orcommercial) judgements, opening up an avenue for enforcement that some(including the Australian court and trial judge below) thought excluded fromthe scope of such legislation. The second is that, notwithstanding theavailability of enforcement under the 1933 Act, section 426 can be used as anavenue of enforcement, a factor which extends considerably the range ofremedies available in an application based on section 426. This addsconsiderably to the canon and range of assistance that has been developedby the courts incrementally over the years since section 426 came into force.Furthermore, although the court does states that the 1933 Act closes off thepossibility of enforcement of such judgments at common law, it does leaveopen the possibility of the common law continuing to be of use, as the trialjudge has indicated, in situations as illustrated by the case of Cambridge Gas,where section 426 does not apply, to other forms of assistance. The result isto increase the strategic possibilities open to office-holders considering howbest to pursue the aim of recovery and concomitant benefit for creditors.

Re Phoenix Kapitaldienst GmbH, Schmitt v Deichmann & Ors [2012] EWHC62 (Ch) (23 January 2012)

This case illustrates the continuing role of the common law in permitting theenforcement of judgments and the extension of assistance to foreign courtsand office-holders in the absence of an express statutory assistanceframework or where such a framework is not available for use in thecircumstances of the case. The role of the courts in developing the commonlaw in such instances has a rich pedigree and was given a fresh lease of lifeby the Privy Council in the Cambridge Gas case.

The Facts:

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The facts arise from the insolvency of Phoenix Kapitaldienst GmbH, acompany incorporated in Germany and carrying investment business on thereand in a number of other countries. Moneys collected from investors weredeposited in a single managed account and intended, so the company said, tobe held on trust with view to being invested on the futures market. TheGerman administrator appointed in the case alleged that the business wasloss-making from the outset and that the investment moneys received weregoing to meet overheads and pay out fictitious profits to prior investors, ineffect a Ponzi scheme. Criminal proceedings had been successfully broughtagainst those directing and controlling the company, while civil proceedings torecover moneys had taken place or were ongoing in some 20 jurisdictions,including the United Kingdom. In this context, the German administrator hadapplied for a Recognition Order in respect of the German insolvencyproceedings, which was heard and granted on a without notice basis on 8April 2008, giving the administrator the same powers afforded to insolvencyoffice-holders under the Insolvency Act 1986 (the “Act”). In light of this order,the administrator had applied on 15 March 2010 for an order under section423 of the Act (set aside of transactions defrauding creditors) against MessrsDeichmann and others (the appellants) to clawback sums stated to have beenreceived by them representing the initial sums invested and the fictitiousprofits. It is against this and the Recognition Order that an appeal was madeto the Court of Appeal, whose judgment was handed down on 23 January2012.

It was agreed by the parties that the European Insolvency Regulation did notapply because the company concerned was an investment undertakingexcluded from the scope of that instrument.9 It was also agreed that theUNCITRAL Model Law on Cross-Border Insolvency Proceedings 1997 did notapply because of the date when this was adopted into the law in the UnitedKingdom.10 It was also certain that section 426 of the Act providing for co-operation between insolvency courts could not apply here since Germany wasnot a designated country for the purposes of that provision.11 It remained to bedecided whether the court had an inherent jurisdiction at common law topermit the statutory power under section 423 of the Act to be applied in thecase of a foreign administrator seeking to use those powers.

The Judgment:

The court begins with the position reached in Re Dallhold,12 where the courtused its powers under section 426 of the Act to open administrationproceedings in respect of an Australian company pursuant to a Letter ofRequest. In this case, Mr Justice Chadwick (as he then was) took the view 9 Article 1(2), Council Regulation (EC) No. 1346/2000 of 29 May 2000.10 Had this not been the case, the court was of the view that it could order relief under Article21(1)(g) of the text.11 The view of the court here too was that, although the case law on this point was not quitecertain, it would have been able to make an order under section 426 given the cumulativeimpact of sub-sections (5) and (10) permitting the application of domestic law, which definitionwould include section 423.12 Re Dallhold Estates (UK) Pty Ltd [1992] BCC 394.

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that the common law might not afford the same level of assistance absent thespecific enabling words of the statute. As Lord Hoffmann subsequentlyexplained in Re HIH,13 section 426 extends the jurisdiction and choice of lawto enable a court to do things where under domestic law alone it might nothave that choice, thus giving potentially a wider variety of remedies. On thatbasis, that the availability of remedies under the statute and at common lawcould differ, the court examined the views taken by the Privy Council inCambridge Gas, the case most relied on by the administrator in thearguments put forward. Under what was termed in that case the “underlyingprinciple of universality”, a court should, even at common law, recognise theneed for a single insolvency process and recognise and assist a foreign office-holder empowered under a foreign law. Lord Hoffmann in this case stated thateven where:

“…it is doubtful whether the assistance could take the form of applyingthe provisions of domestic law which form no part of the domesticsystem… the domestic court must be at least able to provideassistance by doing whatever it could have done in the case of thedomestic insolvency”.14

In Cambridge Gas, the issue was whether the vesting of shares in an Isle ofMan company pursuant to a Chapter 11 plan approved by courts in the UnitedStates could be given effect on the island where such a plan was unknown tolocal law. On the basis that local law provided that the debtor could enter intoa scheme of arrangement with its creditors to achieve the same effect as theplan, the court could and would exercise its discretion under the principle ofcomity to give effect to the American court’s request. For the administrator,the argument was made that the court had a sufficient breadth of powers andwas under an important obligation to assist the foreign court on the basis ofthe principles of universality and comity. It was precisely on this basis andreliant on the rule in Cambridge Gas that Registrar Jaques had assented tothe orders in the instant case which were being appealed. By way of contrastthough, the court made reference to the rule in Al-Sabah,15 where a trustee inbankruptcy had obtained a Letter of Request addressed to the courts in theCayman Islands to set aside trusts established by the debtor. In this case, thePrivy Council was of the view that the Cayman court did not have the inherentjurisdiction to exercise the “extraordinary powers” conferred by a domesticbankruptcy statute in circumstances not contemplated by that statute.16 Al-Sabah was followed in Bermuda, where the court similarly declined toexercise its jurisdiction to employ powers contained in a statute in a situationoutside the terms of the text.17

13 Re HIH Casualty and General Insurance Ltd, McGrath and Riddell [2008] UKHL 21.14 Above note 1, at [22].15 Al-Sabah and others v Grupo Torras SA [2005] 2 AC 333.16 Although it did hold that section 122, Bankruptcy Act 1914 (United Kingdom) had “imperial”effect and, by not having been repealed expressly in local legislation, was still in force in theCayman Islands and under which the assistance sought could be given.17 Re Kingate (in liquidation) 2010: No 262 (per Kawaley J), albeit the judge here was notedas later recanting this viewpoint in Re Founding Partners Global Fund Ltd (No 2) [2011] SC(Bda) 19 Com.

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Returning to Re HIH, the court compared the approach being taken by thevarious members of the Appellate Panel. The issue at the heart of the casewas whether the courts in the United Kingdom should remit assets held underthe control of provisional liquidators in England to their counterparts inAustralia, especially contentious given the differences in the substantive rulesapplicable to distributions.18 The first instance court held that it had nojurisdiction and could not remit because the United Kingdom rules, whichwould be mandatory within the jurisdiction, would not apply in a distributiontaking place in Australia. The Court of Appeal found that it did havejurisdiction, but that, exercising its discretion, it would not remit because of thedisadvantage impacting on some classes of creditors. The House of Lordsheld that not only did it have jurisdiction, but that the discretion to remit wouldbe exercised. The reasoning for this differed markedly between the Lords ofAppeal in Ordinary. Lords Scott and Neuberger held that the jurisdiction toremit arose solely because Australia was a jurisdiction specified under section426 of the Act with the former going so far as to state that the court would nothave had an inherent jurisdiction to remit because of the differences in thedistributions regimes, but that section 426 of the Act raised the presumptionthat the insolvency regime in Australia was “necessarily acceptable”. LordPhillips, who was in the majority with Lords Hoffmann and Walker approvingthe remittance of funds, would not be drawn on whether a court would haveinherent jurisdiction in the absence of the application of section 426 of the Act.Lord Hoffmann, though, approved by Lord Walker,19 referred to the ideal ofinternational judicial co-operation and the principle of modified universalism toenable the court to achieve the aim of a “unitary and universal bankruptcylaw”, provided that this was consonant with principles of justice and notoffending against public policy. In this light, Lord Hoffmann stated that section426 of the Act simply extended the choice of law which could be applied toachieve this aim, seemingly implying that the section perhaps adds little towhat could be achieved already via the use of the inherent jurisdictionavailable to the courts.

The position that the common law and statutory powers operate in parallel isone that is adopted in New Cap, where the judge states that the discretionavailable that, together with any relevant considerations, would lead tostatutory assistance being extended should inform the choice as to whetherassistance at common law is similarly forthcoming. Furthermore, in Rubin,although the issue was whether a foreign office-holder could enforce a foreignjudgment,20 not only is there agreement with the definition of bankruptcy inCambridge Gas,21 but the court holds that mechanisms enabling office-holders to bring actions against third parties for the benefit of creditors, were anatural extension of the definition. Although there was some debate in theinstant case as to whether the administrator had the necessary powers underGerman law to do this (and, if he did, whether he was time-barred from

18 Sections 74(2)(f), 107, 175, 386 of the Act (United Kingdom); section 555 et seq.,Corporations Act 2001 (Australia).19 Seemingly recanting his position in Al-Sabah.20 This judgment is on appeal to the Supreme Court and expected to be heard sometime inMay 2012.21 Above note 1, at [15].

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pursuing claims), the court accepts that Cambridge Gas and Rubin areauthority for the view that insolvency proceedings are for the collectiveenforcement of rights, which definition necessarily includes proceedings to setaside transactions.22 Ultimately, the court states that its view is that theprinciple of universalism requires the courts in the United Kingdom to giveactive assistance to office-holders, including assistance by doing whatever thecourt could do in the case of a domestic case. Three propositions are set outby the court:

(i) The common law does contain powers to recognise and assistforeign office-holders;

(ii) Insolvency proceedings are about collective enforcement for thebenefit of all creditors and include set aside proceedingsdirected at third parties; and

(iii) Set aside proceedings are in fact central to the purpose ofinsolvency proceedings generally.

In this light, the court is inclined, despite the apparent conflict in perspectivesbetween the cases of, on the one hand, Al-Sabah and, on the other,Cambridge Gas and Re HIH, to follow the views expressed by Lord Hoffmannin the last of these cases. The court determines that it has the jurisdiction toauthorise the administrator to invoke the set aside provision and that, as amatter of discretion, it should do so. In the court’s view, it would be particularly“perverse” not to do, given the many proceedings (some 240 or so) that havetaken place in other jurisdictions. Given the lack of prejudice to creditors withinthe jurisdiction, it holds that it would allow proceedings to take place to pursuethe amounts claimed, although it would leave to any substantive hearing theissue of whether setting aside transactions involving the principal amountsinvested, as opposed to just the fictitious profit distributed, would be unfair.


This is a case that establishes that the common law continues to have vitalityoutside the statutory frameworks that are available for cross-borderassistance in the United Kingdom.23 The case of Cambridge Gas continues tohave resonance in the United Kingdom, where the persuasive and expansiveprecedent it sets has seemingly been followed in a number of cases. Thepresent instance adds considerably to the canon and range of assistance thathas been developed by the courts incrementally over the years since section426 came into force by re-stating the view that the common law range ofassistance is similarly developing in parallel. It does, however, throw into reliefthe fact that the existence of multiple avenues of assistance might lead toconfusion in that, as the courts develop principles in relation to each avenue,the risk is that the range of assistance and discretion in its extension maydiffer from case to case. It is notable here that the court is attempting toensure that, at the very least, the common law and section 426 frameworks 22 This is also consistent with the view of the European Court of Justice in Seagon v DekoMarty Belgium NV [2009] EUECJ C-339/07, to which the court also refers.23 See, by this author, Cross-Border Insolvency Law in the United Kingdom: AnEmbarrassment of Riches (2006) 22 IL&P 132.

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keep up with developments in relation to each other, harmonising theremedies and relief available. This ensures equality of treatment and equalityof arms for foreign office-holders. This can only be of benefit to foreign office-holders seeking to maximise the debtor’s estate, which ultimately accrues tothe benefit of creditors.

Application of Cambridge Gas

Cambridge Gas is of course law in the Isle of Man and has been followed inEngland and Wales. It is also highly persuasive precedent in Jersey andGuernsey, given the role of the Privy Council as highest court for thosejurisdictions and also, in Jersey, because it was followed in Re MontrowInternational Ltd 2007 JLR Note 40. In this case, a provisional liquidatorappointed under British Virgin Islands (“BVI”) legislation applied for recognitionof his position, the examination of a material witness in proceedings and theproduction of information and documents, the courts took a purposiveapproach consonant with the position under Article 49 of the Bankruptcy(Désastre) (Jersey) Law 1990.24 In the second hearing on the matter,25 therespondents applied for a stay of execution of process on the grounds that theposition of provisional liquidator was unknown in Jersey law and that therelevant BVI legislation permitting examination and production did not haveeffect outside that territory. Furthermore, they stated their intention tochallenge the appointment in the BVI. The court in the stay hearing declinedto enter into a debate on the true construction of the BVI legislation, statingthat the production of a Letter of Request must denote that the issuing courtbelieved it had the necessary jurisdiction and powers that the Jersey courtwould exercise on its behalf. Moreover, recognition should extend, even to anoffice-holder not known in Jersey law on the basis of the principle inCambridge Gas, where the Privy Council stated that the underlying principleof universality is of equal application and is given effect by recognising theperson who is empowered under the foreign bankruptcy law to act on behalfof the insolvent company.

In the subsequent appeal hearing,26 the court states that principles underwhich assistance is given to foreign bankruptcy courts as elucidated by thecourts in England and Wales in Hughes27 apply by analogy to requests forassistance to Jersey courts under the customary law. Under these principles,the fact of a request for assistance being made is a weighty factor that theJersey court should take into account. It is not, however, conclusive as to themanner in which the discretion of the court should be exercised and there isno reason of comity or justice that would prevent the Jersey court fromconsidering events occurring subsequent to the request in order to exercise its 24 The local equivalent of and modelled after section 426.25 An earlier hearing on 14 March 2007 in relation to the application is noted as [2007] JRC065 (unreported). In this hearing, the Viscount objected to there not being a Letter of Requestfrom the BVI court in the usual form, unlike in previous instances cited to the court, such asRe Meade Malone (7 June 2005) (unreported) and Re Louise Britton (7 November 2001)(unreported), whereupon the matter was adjourned overnight for the Letter of Request to beobtained.26 Re Montrow International Limited 2007 JLR Note 49.27 Hughes & others v Hannover Ruckversicherungs-AG [1997] 1 BCLC 497.

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discretion as to how enforcement of the Letter of Request is to progress. TheJersey court can accept without further investigation the views of therequesting court as to what was required for the proper conduct ofproceedings. Notwithstanding this, Le Cocq states that the request may beaccepted with conditions, including the payment of costs incidental to therequest.28

Cambridge Gas is also being followed by the courts in Australia29 and NewZealand30 and Bermuda.31

Caveat

One notable dissent has been emitted by the courts in Ireland.

Re Flightlease (Ireland) Ltd (In Voluntary Liquidation) [2012] IESC 12 (23February 2012)

This case illustrates some of the problems that might arise in the classificationof judgments pertinent to insolvency causes. It also highlights the possiblerole of the common law in permitting the enforcement of judgments and theextension of assistance to foreign courts and office-holders in the absence ofan express statutory assistance framework or where such a framework is notavailable for use in the circumstances of the case. The role of the courts indeveloping the common law in such instances has a rich pedigree and wasgiven a fresh lease of life by the Privy Council in the Cambridge Gas case. Inthis case, the Supreme Court in Ireland declined to follow the persuasiveprecedent in Cambridge Gas, holding that amendments to the statutoryframework were necessary to enable cross-border co-operation.

The Facts:

The facts arise from the insolvency of Flightlease (Ireland) Limited, a companyincorporated in the Irish Republic on 21 November 1997, principally to carryout aircraft leasing activities for the purposes of companies within the SwissairGroup. Moneys due from the lease arrangements were dealt with centrallyand a sum of CHF 8 million was remitted on 20 September 2001 to thecompany. The creditors of the company entered into a wind down agreementwith its liquidators on 22 December 2003 for the orderly distribution of thecompany’s assets in accordance with the terms of that agreement. In theliquidation that ensued, Swissair submitted on 23 May 2005 a claim for themoneys that had been transferred to the company, which proof of debt wasrejected on 18 October 2005. Swissair had open to it an appeal under section280 of the Companies Act 1963, but chose instead to pursue a claim before 28 T. Le Cocq, Jersey, Chapter 22 in I. Kawaley et al. (eds), Judicial Cooperation in Civil andCommercial Litigation: The British Offshore World (2009, Wildy Simmons and Hill, London), at297-299, citing Re Kong Wah Holdings Ltd and Akai Holdings Ltd [2007] JRC 116 and JCA214 (unreported). The case is also known under the title Borrelli v HSBC (CI) Ltd.29 Bank of Western Australia v Henderson (No 3) [2011] FMCA 840 (obiter).30 Williams v Simpson Civ 2010-419-1174 (12 October 2010) per Heath J (in connection withprinciples for the enforcement of section 8, Insolvency (Cross-Border) Act 2006).31 Re Founding Partners Global Fund Ltd (No 2) [2011] SC (Bda) 19 Com.

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the Zurich Commercial Court, instituting proceedings without notice to theliquidators. The basis for these proceedings, which arose because of thesubjection of Swissair itself to insolvency proceedings, was Articles 288 and331 of the Swiss Debt Enforcement and Bankruptcy Law, which operated toenable a claw-back claim seeking to recover an unlawful preference. Serviceof the Swiss proceedings was made on the company on 31 January 2006.The liquidators filed an originating motion in the High Court in Dublin seekingan order enabling them to distribute the company’s assets without referenceto the claim before the Swiss courts or, in the alternative, to require Swissairto appeal under Irish law. In response, Swissair contended that the Swisscourt had jurisdiction to hear and determine their claim.

Both parties sought a ruling on a preliminary point before the Supreme Courtas to whether the Swiss judgment, if obtained, would be recognised andenforced by the courts in Ireland. The liquidators of the company wished toascertain this to know whether they should participate in the Swissproceedings, rather than risk a submission to jurisdiction by appearing if thiswere not necessary, while Swissair wished to know whether recognition andenforcement would be forthcoming so as to decide whether to pursue theclaim before the Swiss courts. The preliminary point raised four issues:

(i) Whether, under the common law, such a judgment would beexcluded from recognition and enforcement by virtue of itsarising from a proceeding in insolvency or whether it was insubstance a claim in personam?

(ii) If the answer to this was the latter, whether the order of theSwiss court could be recognised and which test would apply tosuch recognition, that in Dicey’s Rule 3632 or that of a “real andsubstantial connection” as applied by some other common lawcourts?

(iii) Whether on the facts the appropriate test was met in the instantcase and could be invoked to permit recognition?

(iv) Whether it was material to the recognition issue that Swissairhad not used their right of appeal under section 280 of theCompanies Act 1963?

In the High Court, the trial judge had determined that the claim by Swissairwas an action in personam and its enforceability depended on the commonlaw rules pertaining to recognition and enforcement. In this context, the trialjudge also held that Dicey’s Rule 36 represented the prevailing law in Irelandand that the Irish courts ought not to accept the “real and substantialconnection” test as developed in Canada, whose jurisprudence had beenamply cited to the court. Under Dicey’s Rule 36 therefore, the trial judge foundthat none of the limbs of the rule applied and that therefore the Swiss

32 Collins et al. (eds), Dicey, Morris and Collins’ Conflicts of Law (14th ed) (2010, Sweet andMaxwell, London). The rule permits enforcement if (a) the judgment debtor was present in theforeign country; (b) the judgment debtor claimed or counterclaimed in the foreignproceedings; (c) the judgment debtor (as defendant) submitted voluntarily to the jurisdiction ofthe foreign court; or (d) the judgment debtor had agreed prior to the commencement ofproceedings to submit to the jurisdiction of the foreign court.

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judgment, were it to be obtained, could not be enforced at common law. It wasnot necessary to determine the fourth issue as a result.

The Judgment:

Two judgments were issued by the Supreme Court with which the otherjustices concurred. The tenor of the judgments by Mr Justice Finnegan and MrJustice O’Donnell is to uphold the findings made by the trial judge and todetermine that the Swiss proceedings were in substance in personamproceedings to which Rule 36 of Dicey would apply to determine therecognition and enforcement of any judgments emanating from the courts inSwitzerland. Although Mr Justice O’Donnell was of the view that Dicey’s Rule36 might be unduly restrictive and not in keeping with modern developments,both judges were of the view that to move to a different test, such as the “realand substantial connection” propounded in Canada, would require legislation.Thus, it could not fall within the role of the judges to redefine the terms ofrecognition and enforcement in a way that radically departed from thecommon law position in Ireland.

Cambridge Gas was cited to the High Court in the context of an alternativecontention by the company’s liquidators that the judgment in Swissproceedings could be regarded as being a judgment in the context ofliquidation proceedings, but which could not then be enforced because of theprohibition at common law applicable in Ireland. Addressing this issue, the trialjudge accepted that the common law in Ireland defined an action in personamas one against a person with view to enforcing the doing of a particular thing.In this light, the judge viewed proceedings in insolvency as not in themselvesproceedings against an individual, but instead the collecting in of the assets ofthat individual for distribution to entitled parties. Proceedings for thedetermination of liabilities and entitlements of the debtor as against thirdparties might fall to be dealt with within insolvency proceedings as a matter ofprocedural convenience, but could also be done through separateproceedings. Swissair’s contention in response to the liquidators was to agreethat the relief sought by invoking the relevant provisions of the Swiss DebtEnforcement and Bankruptcy Law was analogous to the collection anddistribution of assets and was thus bound up with the mechanism forcollective execution. In fact, applying the principles in Cambridge Gas,insolvency proceedings would be neither in rem nor in personam, but sui jurisin their own category, but that the principles in that case would, if followed inthe Irish courts, entitle recognition and enforcement at common law ofjudgements incidental to that process. The trial judge did not accept this,holding that the substance of the order, even allowing that it arose from aclaim analogous to the Irish law in relation to fraudulent preferences, was thatit required the payment of a liquidated sum and thus was more akin to ajudgment in personam.

The Supreme Court agrees with this contention, Mr Justice Finnegan holdingthat Cambridge Gas represents a “significant development” in the law of theUnited Kingdom and was in fact highly dependent on the statutory framework

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that existed in that jurisdiction.33 He states that the common law in Ireland issimilar to that represented by the case of Re Lines Brothers,34 cited inCambridge Gas, in which the collective enforcement procedure could bedistinguished from matters incidental to it, which might include claims thatwere in rem or in personam in nature and that might only arise because thereare insolvency proceedings in existence, in the course of which it maybecome necessary to determine these issues. To the judge’s mind, the factsof Cambridge Gas, in which an in personam order for the transfer of shareswas enforced, pursuant to a Letter of Request in the context of insolvencyproceedings, by invoking the principle of universality, was a step too far. Inthis, the judge’s view was that the American courts would not have hadjurisdiction to determine the issue and would not have been able to make anorder that could have been enforced apart from within the insolvency context.Similarly, the subsequent development in Rubin, following the precedent ofthe Cambridge Gas case, where the same principle of universality wasinvoked to enable the enforcement of a judgment in personam for thepurposes of bankruptcy proceedings, despite the defendants’ lack ofsubmission to the jurisdiction, was an undesirable precedent to follow. In thejudge’s view, it was preferable to “await development of a broad consensus”before developing the common law. In any event, even in the presence ofsuch a consensus, which the judge held not yet to exist,35 the judge regardedthe possibility of effecting such a change as falling more properly within theprovince of the legislature.

Interestingly, although broadly accepting the view that the judgment was inpersonam in nature, Mr Justice O’Donnell was prepared to take a more liberalperspective to insolvency co-operation. He expressly stated that he did notwant to entirely rule out the development of an insolvency principle atcommon law that drew from that outlined in Cambridge Gas. In fact, althoughhe would prefer if the development would occur pursuant to internationalagreement and domestic legislation, he does not rule out the developmenttaking place within the common law were it to be necessary, though he leavesit to be resolved another day, perhaps in proceedings re-remitted to the HighCourt, where it could be the subject of “focussed argument in the context of allthe conditions then prevailing”.


This is a case which shows that the common law continues to be invoked inaid of insolvency proceedings in the absence of an appropriate statutoryframework for cross-border co-operation. Unfortunately, it also illustrates thelimits of the common law, faced with the reluctance of judges to trespass onwhat they see as being the legitimate province of the legislature. CambridgeGas undoubtedly represents a departure for the common law in that it

33 It is uncertain as to what the judge meant by the “statutory framework”, as the recognition inthe Isle of Man of the American judgment was done on the basis of the common law.34 In re Lines Bros Ltd [1983] Ch 1.35 Pointing incidentally to the fact that Rubin was not universally approved by commentatorsand was, in any event, the subject of an appeal to the Supreme Court.

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reclassified judgments in the insolvency context as being sui juris, whatevertheir substance, and thus amenable to being recognised and enforced in aidof insolvency proceedings in compliance with the principles of universality andunity. Cambridge Gas, which it must be remembered was an Isle of Man case,has been followed in the United Kingdom in not just Rubin, but, more recently,Re Phoenix, where an order under section 423 of the Insolvency Act 1986 (setaside of transactions defrauding creditors) was held available pursuant to aLetter of Request emanating from a German court inviting the United Kingdomcourt to use its inherent jurisdiction at common law to make such an order.The parallels with this case are evident, given the subject matter, and it isparticularly interesting that the United Kingdom court holds that the definitionof insolvency proceedings, which are normally for the collective enforcementof rights, necessarily includes proceedings to set aside transactions. This isconsistent with the judgment of the European Court of Justice in Seagon,36

which does not seem to have been cited to the Irish Supreme Court, in whichthe European court confirms that such matters are closely connected with theopening of insolvency proceedings and that the court which exercisesinternational jurisdiction in insolvency is equally competent to determinerelated matters such as an application to set aside.

On this last ground alone, the Irish Supreme Court might have been in error inclassifying the claim as an in personam action. It might well have wanted to,given the prohibition at common law in Ireland from recognising and enforcinginsolvency judgments, thus subjecting the judgment to the test in Dicey’s Rule36, which, given the right circumstances, might well have led to recognitionand enforcement being forthcoming. In the last analysis, classifying thejudgment as one emanating from the insolvency context and then applying thepersuasive precedent of Cambridge Gas to enforce it may have been twosteps too far for the Irish court, needing as it did to overturn the weight of thecommon law as applied in that jurisdiction and effectively create a new rule forthe recognition of insolvency judgments. If, as Mr Justice O’Donnellcontemplated was possible, the Irish courts were prepared to do so, thenchange could come swiftly to that jurisdiction. If, on the other hand, as MrJustice Finnegan preferred, change would have to come through legislativeaction, then cross-border instances at common law in Ireland might have towait a while to achieve a framework comparable to their counterparts in therest of the British Isles.

Summary

Cambridge Gas brought a new principle into the world of insolvency, but oneresting on the roots of comity, universality and assistance that have graduallybuilt up over the centuries since Solomons v Ross.37 It has shown judicial 36 This is consistent with the judgment of the European Court of Justice in Seagon v DekoMarty Belgium NV [2009] EUECJ C-339/07 (albeit on a procedural point), which does notseem to have been cited to the Irish Supreme Court and builds on the principle in Gourdain vNadler (C-133/78) [1979] ECR 733. Nor apparently were other cases such as Byers andothers v Yacht Bull Corpn and another [2010] EWHC 133; Gibraltar Residential Properties Ltdv Gibralcon 2004 SA [2010] EWHC 2595, in which the connection between insolvencyproceedings and related judgments is also canvassed.37 Solomons v Ross (1764) 1 Hy. Bl. 131n; 126 ER 79.

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creativity as well as its limits. The underlying problem though is the piece-meal and sometimes painfully slow incremental approach to building upframeworks of cross-border assistance, such that the common law remains astop gap and sometimes preferred option for its flexibility in being able torecognise or not the cases in which help is to be forthcoming. Rubin, however,it must be recalled, is on further appeal to the Supreme Court. Will the courtplace a further gloss on Cambridge Gas, now that the sui generis nature ofinsolvency judgments is becoming more and more accepted in the commonlaw world?

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The Principle in Cambridge Gas: How Far can the Common Law Go?

Paul Omar, Sussex

How far can the Common Law go?

• Cambridge Gas- In rem/In personam- Sui juris- Collective nature of proceedings- Fairness- Universal application- Lack of unifying principles- Active assistance even by enforcing

judgments


• Rubin v Eurofinance SA- HC: no enforcement at common law of in

personam judgments contrary to PIL rules- CA: more modern approach to PIL rules

required- Agreeing with PC in Cambridge Gas- Mechanism of collective execution- Model Law and EIR support- Art 27: co-operation to maximum extent

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• New Cap- S426 and FJ provisions operate in parallel- Extending range of assistance- Same principles as in Cambridge Gas- Common law extent not nec to determine

but must be same?- Query if FJ supersedes common-law, why

not s426?


• Re Phoenix Kapitaldienst- EIR and Model Law not applicable- Sufficient breadth of powers- Active obligation to assist- Universality and comity- Common law and statute operate in

parallel (as one expands, so does the other)

- Difference: common law retains discretion, while s426 couched in mandatory terms


• Cambridge Gas Application- Yes: - Australia: Bank of WA v Henderson (obiter)- Bermuda: Re Founding Partners Global

Fund- Jersey: Re Montrow International- Isle of Man: Cambridge Gas- New Zealand: Williams v Simpson- No: Ireland: Flightlease (Ireland) Limited

(only statute can extend co-operation)

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• Conclusions- Caveat: Rubin v Eurofinance on appeal to

SC (May hearing)- Common law principles first outlined in

Solomons v Ross continue to have vigour- Judicial creativity of the essence- The Big Issue: patchy co-operation

frameworks- Common law as stop gap and extension

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INSOL Academics’ Group Miami Conference May 2012

The ALI-III Global Insolvency Principles Project: Report on the Final Report

Professor Ian FletcherUniversity College London

1. New readers begin here: background to the Global Principles Project. The story sofar – basic aims: the international dissemination of the ALI TransnationalInsolvency Project (“Cooperation among the NAFTA Countries”, 1993-2000).The evolving approach of the Joint Reporters (Ian Fletcher and Bob Wessels).Festina lente, February 2006 – May 2012.

2. The shape of the Final Report: 37 Global Principles for Cooperation inInternational Insolvency Cases; 18 Global Guidelines for Court-to-CourtCommunication in International Insolvency Cases; 23 proposed Global Rules onConflict of Laws Matters in International Insolvency Cases; plus Reporters’ Notesand Comments, Glossary of Terms and Descriptions, and Bibliography.

3. Remarks and discussion about selected provisions, including: Principles 1-3(Overriding Objective; Aim; International Status and Public Policy); Principle 5(Equality of Arms); Principle 7 (Recognition) and Principle 13 (InternationalJurisdiction) together with Principle 14 (Alternative Jurisdiction); Principle 23(Communications between Courts; Intermediaries); The Global Guidelines(general comment); Global Rule 1 (Scope); Rule 4 (Interpretation); Rules 12-14(Applicable Law – General Rules); Rules 15-18 (Rights of Secured Creditors;Set-off); Rules 21-23 (Avoidance of Detrimental Acts; Exception).

4. Where do we go from here?

Reference Materials – The Reporters’ Current Proposals

NOTE: RESTRICTED MATERIALS

The materials reproduced below represent the Reporters’ current position as contained inthe Proposed Final Draft of our Report for consideration by the membership of theAmerican Insolvency Institute. At this stage, the text has been reviewed by the Council ofthe Institute (in January 2012) as a Council Draft, and it will be submitted forconsideration by the membership at the Institute’s Annual Meeting in May 2012. Untilsuch consideration by the membership has taken place, and conditional upon the outcomeof that, the text does not represent the position of the Institute on any of the issues withwhich it deals. The text below is here made available on a restricted basis only for thepurpose of discussion at this conference. It should not be cited or quoted without theReporters’ express permission.

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GLOBAL PRINCIPLES FOR COOPERATIONIN INTERNATIONAL INSOLVENCY CASES

Principle 1 Overriding Objective

1.1. These Global Principles embody the overriding objective of enabling courts andinsolvency administrators to operate effectively and efficiently in internationalinsolvency cases with the goals of maximizing the value of the debtor’s global assets,preserving where appropriate the debtors’ business, and furthering the justadministration of the proceeding.1.2. In achieving the objective of Global Principle 1.1, due regard should be given tothe interests of creditors, including the need to ensure similarly ranked creditors aretreated equally. Due regard should also be given to the interests of the debtor andother parties in the case, and to the international character of the case.1.3. All parties in an international insolvency case should further the overridingobjective of Global Principle 1.1 and should conduct themselves in good faith indealing with courts, insolvency administrators, and other parties in the case.1.4. Courts and insolvency administrators should cooperate in an internationalinsolvency case with the aim of achieving the objective of Global Principle 1.1.1.5. In the interpretation of these Global Principles, due regard should be given totheir international origin and to the need to promote good faith and uniformity intheir application.

Principle 2 Aim

2.1. The aim of these Global Principles is to facilitate the coordination of theadministration of international insolvency cases involving the same debtor,including where appropriate through the use of a protocol.2.2. In particular, these Global Principles aim to promote:

(i) The orderly, effective, efficient, and timely administration of proceedings;(ii) The identification, preservation, and maximization of the value of thedebtor’s assets, including the debtor’s business, on a global basis;(iii) The sharing of information in order to reduce costs; and(iv) The avoidance or minimization of litigation, costs, and inconvenience tothe parties in the proceedings.

2.3. These Global Principles aim to promote the administration of separateinternational insolvency cases with a view to:

(i) Ensuring that creditors’ interests are respected and that creditors aretreated equally;(ii) Saving expense;(iii) Managing the debtor’s estate in ways that are proportionate to theamount of money involved, the nature of the case, the complexity of theissues, the number of creditors, and the number of jurisdictions involved;and

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(iv) Ensuring that the case is dealt with effectively, efficiently, and timely.

Principle 3 International Status; Public Policy

Nothing in these Global Principles is intended to:(i) Interfere with the independent exercise of jurisdiction by a national courtinvolved, including in its authority or supervision over an insolvencyadministrator;(ii) Interfere with the national rules or ethical principles by which aninsolvency administrator is bound according to applicable national law andprofessional rules;(iii) Prevent a court from refusing to take an action that would be manifestlycontrary to the public policy of the forum state; or(iv) Confer substantive rights, interfere with any function or duty arising outof any applicable law, or encroach upon any local law.

Principle 4 Case Management

4.1. A court should, by actively managing an international insolvency case,coordinate and harmonize the proceedings before it with those in other states exceptwhere there are genuine and substantial reasons for doing otherwise and then onlyto the extent considered to be appropriate in the circumstances.4.2. A court:

(i). Should seek to achieve disposition of the international insolvency caseeffectively, efficiently, and timely, with due regard to the internationalcharacter of the case;(ii). Should manage the case in consultation with the parties and theinsolvency administrators involved and with other courts involved;(iii). Should determine the sequence in which issues are to be resolved; and(iv). May hold status conferences regarding the international insolvency case.

Principle 5 Equality of Arms

5.1. All judicial orders, decisions, and judgments issued in an internationalinsolvency case are subject to the principle of equality of arms, so that there shouldbe no substantial disadvantage to a party concerned. Accordingly:

(i). Each party should have a full and fair opportunity to present evidenceand legal arguments;(ii). Each party should have a full and fair opportunity to comment on theevidence and legal arguments presented by other parties.

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5.2. When the urgency of a situation calls for a court to issue an order, decision, orjudgment on an expedited basis, the court should ensure:

(i). That reasonable notice, consistent with the urgency of the situation, isprovided by the court or the parties to all parties who may be affected by theorder, decision, or judgment, including the major unsecured creditors, anyaffected secured creditors, and any relevant supervisory governmentalauthorities;(ii). That each party may seek to review or challenge the order, decision, orjudgment issued on an expedited basis as soon as reasonably practicable,based on local law;(iii). That any order, decision, or judgment issued on an expedited basis istemporary and is limited to what the debtor or the insolvency administratorrequires in order to continue the operation of the business or to preserve theestate for a limited period, appropriate to the situation. The court shouldthen hold further proceedings to consider any appropriate additional relieffor the debtor or the affected creditors, in accordance with Global Principle5.1.

Principle 6 Decision and Reasoned Explanation

6.1. Upon completion of the parties’ presentations relating to the opening of aninsolvency case or the granting of recognition or assistance in an internationalinsolvency case, the court should promptly issue its order, decision, or judgment.6.2. All parties should cooperate and consult with one another concerningscheduling of proceedings.6.3. The court may issue an order, decision, or judgment orally, which should be setforth in written or transcribed form as soon as possible.6.4. The order, decision, or judgment should identify any order previously made onany related subject; the period, if any, for which it will be in force; any appointmentof an insolvency professional; and any determination regarding costs, the issues tobe resolved, and the timetable for the relevant stages of the proceedings, includingdates and deadlines.6.5. If the order, decision, or judgment is opposed or appealed, the court should setforth the legal and evidentiary grounds for the decision.

Principle 7 Recognition

7.1. An insolvency case opened in a state that, with respect to the debtor concerned,has jurisdiction under the rules of international jurisdiction established by theseGlobal Principles, in conformity with Global Principle 13, should be recognized andgiven appropriate effect under the circumstances in every other state.7.2. Recognition should be determined in a proceeding that is orderly, effective,efficient, and timely, with a minimum of formalities and with due regard to the

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requirements of Global Principle 3 (Public Policy) and Global Principle 5 (Equalityof Arms).

Principle 8 Stay or Moratorium

8.1. Insolvency cooperation may require a stay or moratorium at the earliestpossible time in each state where the debtor has assets or where litigation is pendingrelating to the debtor or the debtor’s assets. The stay or moratorium should imposereasonable restraints on the debtor, creditors, and other parties.8.2. If the local law does not provide an effective procedure for obtaining relief fromthe stay or moratorium, then a court should exercise its discretion to provide suchrelief where appropriate. Exceptions to the stay or moratorium should be limitedand clearly defined.

Principle 9 Cooperation and Sharing of Information Between Courts andAdministrators

9.1. Cooperation between courts and between administrators should include promptand full disclosure regarding all relevant information, including assets and claims,with a view to promoting transparency and reducing international fraud.9.2. Insolvency administrators should provide all other insolvency administratorsinvolved with prompt and full disclosure about the existence and status of theinsolvency proceedings in which they have been appointed.9.3. Insolvency administrators should share relevant nonpublic information withother insolvency administrators, subject to applicable law and appropriateconfidentiality arrangements.9.4. Following recognition, a foreign representative should be entitled to use allavailable legal means to obtain information about the debtor’s assets in alljurisdictions where those assets may be found.9.5. An insolvency administrator, debtor, or creditor filing an insolvency case orseeking recognition of a foreign insolvency proceeding should provide prompt andfull disclosure about the existence and status of any foreign insolvency case thatconcerns the same or a related debtor at the time of filing.9.6. An insolvency administrator should provide prompt and full disclosure to otherinsolvency administrators of material developments in any foreign insolvency casethat concerns the same or a related debtor.

Principle 10 Sharing of Value

Where a court has recognized a foreign insolvency case that has been opened inanother state having international jurisdiction according to these Global Principles,the court should approve the sharing of the value of the debtor’s assets on a globalbasis.

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Principle 11 Nondiscriminatory Treatment

Subject to Global Principle 3, a court should not discriminate against creditors orclaimants based on nationality, residence, registered seat or domicile of theclaimant, or the nature of the claim.

Principle 12 Adjustment of Distributions

Where there is more than one insolvency case pending with respect to the debtor, acreditor should not receive more through the distributions made in a particular casethan the percentage recovered by other creditors of the same class in that case,having regard to distributions already received in other cases concerning the samedebtor. A creditor who receives more than one distribution should account for allprevious distributions as a condition to participating in a subsequent distribution inanother case.

Principle 13 International Jurisdiction

13.1. For the purposes of these Global Principles, the courts or other authorities of astate should have jurisdiction to open an insolvency case in respect of a debtor wheneither:

(i) The debtor’s center of main interests is situated within that state’sterritory; or

(ii) The debtor has an establishment within that state’s territory.13.2. Where an insolvency case is opened on the basis of Global Principle 13.1(ii), itseffects should generally be restricted to those assets of the debtor situated in thestate in question. Such a case may be accorded more extensive effect if an insolvencycase cannot be opened under Global Principle 13.1(i) because of conditions laiddown by the law of the state in which the center of main interests is situated.13.3. For the purposes of these Global Principles:

(i) “Center of main interests” means the place where the debtor conducts theadministration of its interests on a regular basis, to be determined on thebasis of objective factors that are known to or are readily ascertainable bythird parties.(ii) In the case of a company or legal person, the place of the registered officeshould be presumed to be the center of its main interests, unless the contraryis proved.(iii) In the case of an individual, the debtor’s habitual residence should bepresumed to be the center of his or her main interests, unless the contrary isproved. In the case of an individual who is engaged in a business, trade, or

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profession, the debtor’s professional domicile or, if there is none, the debtor’sregistered business address should be presumed to be his or her center ofmain interests, unless the contrary is proved.(iv) An “establishment” means a place of operations where or through whichthe debtor carries out an economic activity on a nontransitory basis, withhuman means and assets or services, to be determined on the basis ofobjective factors that are known to or are readily ascertainable by thirdparties. Such activities may be commercial, industrial, or professional.

13.4. Where an insolvency case is opened on the basis of Global Principle 13.1(i), thecourt should determine whether the center of main interests is situated within theterritory of the forum state. For this purpose, the location of the center of maininterests should be determined as of the earliest date on which the debtor or a partywith standing seeks to invoke the jurisdiction to open the insolvency case.13.5. If the debtor’s center of main interest was previously in a different state (the“Prior State”) from the state in which the insolvency case was opened, theinternational jurisdiction of the Prior State should not be displaced unless either (i)at the time of the alleged relocation of the center of main interests, the debtor wasable to pay all debts and liabilities incurred prior to that time or (ii) the debtor hasfully paid or concluded a composition or compromise in respect of its obligationsincurred before the relocation of its center of main interests. Alternatively,jurisdiction of the Prior State may be displaced if there is no undue prejudice tocreditors whose claims arose from dealings with the debtor during the time whenthe debtor’s center of main interest was in the Prior State.

Principle 14 Alternative Jurisdiction

14.1. In the absence of international jurisdiction based on Global Principle 13.1, acourt may exercise jurisdiction to open an insolvency case under its local law.14.2. In an insolvency case where jurisdiction is based on Global Principle 14.1 andthe local law, the court should cooperate with the court in an insolvency case inanother state where jurisdiction is based on Global Principle 13.1.14.3. In an insolvency case where jurisdiction is based on Global Principle 14.1 andthe local law, the court should normally restrict its actions to assets and operationswithin the forum state.

Principle 15 Request for Recognition

15.1. In an insolvency case where jurisdiction is based on Global Principle 13.1,courts and relevant authorities in all other states should provide access to the

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representative of that case and should grant recognition to that case and itsrepresentative.15.2. A court should deny recognition to an insolvency case pending in another stateif recognition would be manifestly contrary to public policy in the forum state.15.3. In an insolvency case where jurisdiction is based on Global Principle 14.1 andthe local law, a court in another state may grant such recognition and assistance tothat case and its representative as permitted by the forum state’s local law. For thispurpose, the court may give due regard to the extent to which the court exercisingjurisdiction under Global Principle 14.1 and the local law is cooperating with anyinsolvency case concerning the same debtor that is pending in a court exercisingjurisdiction under Global Principle 13.

Principle 16 Modification of Recognition

Recognition may be modified if the court becomes aware of evidence that warrantssuch action. Such evidence may include evidence:

(i) That there was fraud in the opening of the foreign insolvency case or inobtaining recognition in the recognizing court,(ii) That the foreign insolvency case was opened in the absence ofinternational jurisdiction based on Global Principle 13,(iii) That the initial decision to recognize the foreign insolvency case wasbased on an incomplete or erroneous understanding of the relevant facts, or(iv) That there has been a material change of circumstances following theopening of the foreign insolvency case or its recognition by the court.

Principle 17 Stay or Moratorium upon Recognition

17.1. Unless a stay already exists because of a domestic insolvency case concerningthe same debtor, if a court recognizes a foreign insolvency case as a main proceedingwith respect to the debtor it should promptly grant a stay or moratoriumprohibiting the unauthorized disposition of the debtor’s assets and restrainingactions by creditors to enforce their rights and remedies against the debtor or thedebtor’s assets.17.2. In a reorganization case, the stay or moratorium should normally permit thecontinued operation of the debtor’s business.17.3. Where there is no domestic insolvency proceeding pending in the recognizingstate, if the court recognizes a foreign insolvency case as a main proceeding withrespect to the debtor, and has granted a stay or moratorium that is substantiallyequivalent to the stay or moratorium in a domestic insolvency case, the stay ormoratorium in the main proceeding should not apply in the recognizing state and,conversely, the stay or moratorium in the recognizing state should not apply in thestate of the main proceeding.

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Principle 18 Reconciliation of Stays or Moratoriums in Parallel Proceedings

18.1. Where there is more than one insolvency case pending with respect to a debtor,each court should minimize conflicts between the applicable stays or moratoriums.18.2. Where there is more than one insolvency case pending with respect to a debtorand an insolvency case in one state has been recognized as a main proceeding by thecourt in a second state, the stay or moratorium applicable or issued in therecognizing state should apply in a third state only to the extent that the stay ormoratorium in the main proceeding does not apply.

Principle 19 Abusive or Superfluous Filings

19.1. Where there is more than one insolvency case pending with respect to a debtor,and the court determines that an insolvency case pending before it is not a mainproceeding and that the forum state has little interest in the outcome of theproceeding pending before it, the court should (i) dismiss the insolvency case, ifdismissal is permitted under its law and no undue prejudice to creditors will result;or (ii) ensure that the stay or moratorium in the proceeding before it does not haveeffect outside that state.19.2. Global Principle 19.1 should not be applied until a main proceeding has beenopened by a court that has international jurisdiction on the basis of these GlobalPrinciples.

Principle 20 Court Access

20.1. Upon recognition, a representative of a foreign insolvency case should havedirect access to any court in the recognizing state necessary for the exercise of itslegal rights.20.2. Upon recognition, a representative of a foreign insolvency case that is a mainproceeding should have access to any court to the same extent as a domesticinsolvency administrator.20.3. Upon recognition, a representative of a foreign insolvency case that is a mainproceeding should be able to request the opening of a domestic insolvency case withrespect to the debtor.

Principle 21 Language

21.1. Where there is more than one insolvency case pending with respect to a debtor,the insolvency administrators should determine the language in whichcommunications should take place with due regard to convenience and the

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reduction of costs. Notices should indicate their nature and significance in thelanguages that are likely to be understood by the recipients.21.2. Courts should permit the use of languages other than those regularly used inlocal proceedings in all or part of the proceedings, with due regard to the local lawand available resources, if no undue prejudice to a party will result.21.3. Courts should accept documents in the language designated by the insolvencyadministrators without translation into the local language, except to the extentnecessary to ensure that the local proceedings are conducted effectively and withoutundue prejudice to interested parties.21.4. Courts should promote the availability of orders, decisions, and judgments inlanguages other than those regularly used in local proceedings, with due regard tothe local law and available resources, if no undue prejudice to a party will result.

Principle 22 Authentication

Where authentication of documents is required, courts should permit theauthentication of documents on any basis that is rapid and secure, including viaelectronic transmission, unless good cause is shown that they should not be acceptedas authentic.

Principle 23 Communications Between Courts; Intermediaries

23.1 Courts before which insolvency cases or requests to recognize foreigninsolvency proceedings or requests for assistance are pending should, if necessary,communicate with each other directly or through the insolvency administrators topromote the orderly, effective, efficient, and timely administration of the cases.23.2. Such communications should utilize modern methods of communication,including electronic communications as well as written documents delivered intraditional ways. The Global Guidelines for Court-to-Court Communications, setout in Section III of these Global Principles, should be employed. Electroniccommunications should utilize technology that is commonly used and reliable.23.3. Courts should consider the use of one or more protocols to manage theproceedings with the agreement of the parties, and approval by the courtsconcerned.23.4. Courts should consider the appointment of one or more independentintermediaries, within the meaning of Global Principle 23.5, to ensure that aninternational insolvency case proceeds in accordance with these Global Principles.The court should give due regard to the views of the insolvency administrators inthe pending insolvency cases before appointing an intermediary. The role of theintermediary may be set out in a protocol or an order of the court.23.5. An intermediary:

(i) Should have the appropriate skills, qualifications, experience, andprofessional knowledge, and should be fit and proper to act in aninternational insolvency proceeding;

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(ii) Should be able to perform his or her duties in an impartial manner,without any actual or apparent conflict of interest;(iii) Should be accountable to the court that appoints him or her;(iv) Should be compensated from the estate of the insolvency case in whichthe court has jurisdiction.

Principle 24 Control of Assets

24.1 If there is not a domestic insolvency case pending with respect to the debtor,then:

(i) upon recognition, a representative of a foreign insolvency case should begiven legal control, and assistance in obtaining practical control, of thedebtor’s assets, wherever they are located, to the same extent as a domesticinsolvency administrator;(ii) upon recognition, a representative of a foreign insolvency case should bepermitted to remove assets to another jurisdiction, where doing so isappropriate for the purposes of the insolvency case and if there is no undueprejudice to creditors.

24.2. If Global Principle 24.1 applies, the representative of a foreign proceeding issubject to the same level of accountability towards the court of the situs as would berequired of an insolvency administrator appointed in a domestic proceeding.

Principle 25 Notice

25.1. If an insolvency case appears to include claims of known foreign creditorsfrom a state where an insolvency case is not pending, the court should assure thatsufficient notice is given to permit those creditors to have full and fair opportunityto file claims and participate in the case. Such notice should include publication inthe Official Gazette (or equivalent publication) of each state concerned.25.2. For the purposes of notification within the meaning of Global Principle 25.1, aperson or legal entity is a known foreign creditor if:

(i) The debtor’s business records establish that the debtor owes or may owe adebt to that person or legal entity; and(ii) The debtor’s business records establish the address of that person or legalentity.

Principle 26 Cooperation

26.1. Insolvency administrators in parallel proceedings should cooperate in allaspects of the cases. The use of an agreement or “protocol” should be considered topromote the orderly, effective, efficient, and timely administration of the cases.26.2. A protocol for cooperation among insolvency administrators should addressthe coordination of requests for court approvals of related decisions and actions

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when required and communication with creditors and other parties. To the extentpossible, it should also provide for timesaving procedures to avoid unnecessary andcostly court hearings and other proceedings.

Principle 27 Coordination

27.1. Where there are parallel proceedings, each insolvency administrator shouldobtain court approval of an action affecting assets or operations in that forum ifrequired by local law, except as otherwise provided in a protocol approved by thatcourt.27.2. An insolvency administrator should seek prior agreement from any otherinsolvency administrator as to matters that concern proceedings or assets in thatadministrator’s jurisdiction, except where emergency circumstances make thisunreasonable.27.3. A court should consider whether the insolvency administrator in a mainproceeding, or his or her agent, should serve as the insolvency administrator orcoadministrator in another proceeding to promote the coordination of theproceedings.

Principle 28 Notice Among Administrators

An insolvency administrator should receive prompt and prior notice of a courthearing or the issuance of a court order, decision, or judgment that is relevant tothat administrator.

Principle 29 Cross-Border Sales

When there are parallel insolvency proceedings and assets will be sold, courts,insolvency administrators, the debtor, and other parties should cooperate in orderto obtain the maximum aggregate value for the assets of the debtor as a whole,across national borders. Each of the courts involved should approve sales that willproduce the highest overall price for the debtor’s assets.

Principle 30 Assistance to Reorganization

If a court recognizes a foreign insolvency case that is a reorganization case as a mainproceeding with respect to the debtor according to these Global Principles, the courtshould conduct any parallel domestic case in a manner that is as consistent with thereorganization objective in the main proceeding as is possible under thecircumstances, with due regard to the local law.

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Principle 31 Post-Insolvency Financing

Where there are parallel proceedings, especially in reorganization cases, insolvencyadministrators and courts should cooperate to obtain necessary post-insolvencyfinancing, including the granting of priority or secured status to lenders, with dueregard to local law.

Principle 32 Avoidance Actions

Where there are parallel proceedings, insolvency administrators should cooperate toreach a common position with respect to the avoidance of pre-insolvencytransactions involving the debtor, with due regard to local law.

Principle 33 Information Exchange

Insolvency administrators in parallel proceedings should make prompt and fulldisclosure to each other on a continuing basis of all relevant information they have,including a list of all claims and claimants indicating whether the claims areasserted as secured, priority, or ordinary claims, and whether they are approved,disputed, or disapproved.

Principle 34 Claims

Where there are parallel proceedings, each of which is taking place in a state whosecourts have international jurisdiction with respect to the debtor according to theseGlobal Principles, claims admissible and allowable in one proceeding should beaccepted in each of the other proceedings, except as to distinct factual and legalissues arising under the other state’s applicable law.

Principle 35 Limits on Priorities

35.1. A claim that is governed by the law of a state other than that in whichinsolvency proceedings are taking place should in principle have only the priority itwould have in a strictly territorial process conducted in the state whose law governsthe insolvency proceedings, and restricted to assets located in that state.35.2. In exceptional circumstances an exclusion of Global Principle 35.1 can beaccepted.

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Principle 36 Plan Binding on Participant

36.1. If a Plan of Reorganization is adopted in a main proceeding pending in a courtwith international jurisdiction with respect to the debtor under Global Principle13.1, and there is no parallel proceeding pending with respect to the debtor, the Planshould be final and binding upon the debtor and the creditors who participate in themain proceeding.36.2. For this purpose, participation includes (i) filing a claim; (ii) voting on thePlan; or (iii) accepting a distribution of money or property under the Plan.

Principle 37 Plan Binding: Personal Jurisdiction

If a Plan of Reorganization is adopted in a main proceeding in a court withinternational jurisdiction with respect to the debtor under Global Principle 13.1,and there is no parallel proceeding pending with respect to the debtor, the Planshould be final and binding upon an unsecured creditor who received adequateindividual notice and over whom the court has jurisdiction in ordinary commercialmatters under the local law.

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GLOBAL GUIDELINES FOR COURT-TO-COURT COMMUNICATIONSIN INTERNATIONAL INSOLVENCY CASES

Guideline 1 Overriding Objective

1.1. These Global Guidelines embody the overriding objective to enhancecoordination and harmonization of insolvency proceedings that involve more thanone state through communications among the jurisdictions involved.1.2. These Global Guidelines function in the context of the Global Principles ofCooperation in International Insolvency Cases and therefore do not intend tointerfere with the independent exercise of jurisdiction by national courts asexpressed in Global Principles 13 and 14.

Guideline 2 Consistency with Procedural Law

Except in circumstances of urgency, prior to a communication with another court,the court should be satisfied that such a communication is consistent with allapplicable rules of procedure in its state. Where a court intends to apply theseGlobal Guidelines (in whole or in part and with or without modifications), theGuidelines to be employed should, wherever possible, be formally adopted in eachindividual case before they are applied. Coordination of Global Guidelines betweencourts is desirable and officials of both courts may communicate in accordance withGlobal Guideline 9(d) with regard to the application and implementation of theGlobal Guidelines.

Guideline 3 Court-to-Court Communication

A court may communicate with another court in connection with matters relating toproceedings before it for the purposes of coordinating and harmonizing proceedingsbefore it with those in the other jurisdiction.

Guideline 4 Court to Insolvency Administrator Communication

A court may communicate with an insolvency administrator in another jurisdictionor an authorized representative of the court in that jurisdiction in connection withthe coordination and harmonization of the proceedings before it with theproceedings in the other jurisdiction.

Guideline 5 Insolvency Administrator to Foreign Court Communication

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A court may permit a duly authorized insolvency administrator to communicatewith a foreign court directly, subject to the approval of the foreign court, or throughan insolvency administrator in the other jurisdiction or through an authorizedrepresentative of the foreign court on such terms as the court considers appropriate.

Guideline 6 Receiving and Handling Communication

A court may receive communications from a foreign court or from an authorizedrepresentative of the foreign court or from a foreign insolvency administrator andshould respond directly if the communication is from a foreign court (subject toGlobal Guideline 8 in the case of two-way communications) and may responddirectly or through an authorized representative of the court or through a dulyauthorized insolvency administrator if the communication is from a foreigninsolvency administrator, subject to local rules concerning ex partecommunications.

Guideline 7 Methods of Communication

To the fullest extent possible under any applicable law, communications from acourt to another court may take place by or through the court:

(a) Sending or transmitting copies of formal orders, judgments, opinions,reasons for decision, endorsements, transcripts of proceedings, or otherdocuments directly to the other court and providing advance notice tocounsel for affected parties in such manner as the court considersappropriate;(b) Directing counsel or a foreign or domestic insolvency administrator totransmit or deliver copies of documents, pleadings, affidavits, factums, briefs,or other documents that are filed or to be filed with the Court to the otherCourt in such fashion as may be appropriate and providing advance notice tocounsel for affected parties in such manner as the court considersappropriate;(c) Participating in two-way communications with the other court bytelephone or video conference call or other electronic means, in which caseGlobal Guideline 8 should apply.

Guideline 8 E-Communication to Court

In the event of communications between the courts in accordance with GlobalGuidelines 2 and 5 by means of telephone or video conference call or otherelectronic means, unless otherwise directed by either of the two courts:

(a) Counsel for all affected parties should be entitled to participate in personduring the communication and advance notice of the communication should

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be given to all parties in accordance with the rules of procedure applicable ineach court;(b) The communication between the courts should be recorded and may betranscribed. A written transcript may be prepared from a recording of thecommunication that, with the approval of both courts, should be treated asan official transcript of the communication;(c) Copies of any recording of the communication, of any transcript of thecommunication prepared pursuant to any direction of either court, and ofany official transcript prepared from a recording should be filed as part ofthe record in the proceedings and made available to counsel for all parties inboth courts subject to such directions as to confidentiality as the courts mayconsider appropriate.(d) The time and place for communications between the courts should be tothe satisfaction of both courts. Personnel other than judges in each court maycommunicate fully with each other to establish appropriate arrangements forthe communication without the necessity for participation by counsel unlessotherwise ordered by either of the courts.

Guideline 9 E-Communication to Insolvency Administrator

In the event of communications between the court and an authorized representativeof the foreign court or a foreign insolvency administrator in accordance with GlobalGuidelines 4 and 6 by means of telephone or video conference call or otherelectronic means, unless otherwise directed by the court:

(a) Counsel for all affected parties should be entitled to participate in personduring the communication and advance notice of the communication shouldbe given to all parties in accordance with the rules of procedure applicable ineach court;(b) The communication should be recorded and may be transcribed. Awritten transcript may be prepared from a recording of the communicationthat, with the approval of the court, can be treated as an official transcript ofthe communication;(c) Copies of any recording of the communication, of any transcript of thecommunication prepared pursuant to any direction of the court, and of anyofficial transcript prepared from a recording should be filed as part of therecord in the proceedings and made available to the other court and tocounsel for all parties in both courts subject to such directions as toconfidentiality as the court may consider appropriate;(d) The time and place for the communication should be to the satisfaction ofthe court. Personnel of the court other than judges may communicate fullywith the authorized representative of the foreign court or the foreigninsolvency administrator to establish appropriate arrangements for thecommunication without the necessity for participation by counsel unlessotherwise ordered by the court.

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Guideline 10 Joint Hearing

A court may conduct a joint hearing with another court. In connection with anysuch joint hearing, the following should apply, unless otherwise ordered or unlessotherwise provided in any previously approved protocol applicable to such jointhearing:

(a) Each court should be able to simultaneously hear the proceedings in theother court.(b) Evidentiary or written materials filed or to be filed in one court should, inaccordance with the directions of that court, be transmitted to the othercourt or made available electronically in a publicly accessible system inadvance of the hearing. Transmittal of such material to the other court or itspublic availability in an electronic system should not subject the party filingthe material in one court to the jurisdiction of the other court.(c) Submissions or applications by the representative of any party should bemade only to the court in which the representative making the submissions isappearing unless the representative is specifically given permission by theother court to make submissions to it.(d) Subject to Global Guideline 8(b), the court should be entitled tocommunicate with the other court in advance of a joint hearing, with orwithout counsel being present, to establish Guidelines for the orderly makingof submissions and rendering of decisions by the courts, and to coordinateand resolve any procedural, administrative, or preliminary matters relatingto the joint hearing.(e) Subject to Global Guideline 8(b), the court, subsequent to the jointhearing, should be entitled to communicate with the other court, with orwithout counsel present, for the purpose of determining whether coordinatedorders could be made by both courts and to coordinate and resolve anyprocedural or nonsubstantive matters relating to the joint hearing.

Guideline 11 Authentication of Regulations

The court should, except upon proper objection on valid grounds and then only tothe extent of such objection, recognize and accept as authentic the provisions ofstatutes, statutory or administrative regulations, and rules of court of generalapplication applicable to the proceedings in the other jurisdiction without the needfor further proof or exemplification thereof.

Guideline 12 Orders

The court should, except upon proper objection on valid grounds and then only tothe extent of such objection, accept that orders made in the proceedings in the otherjurisdiction were duly and properly made or entered on or about their respective

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dates and accept that such orders require no further proof or exemplification forpurposes of the proceedings before it, subject to all such proper reservations as inthe opinion of the court are appropriate regarding proceedings by way of appeal orreview that are actually pending in respect of any such orders.

Guideline 13 Service List

The court may coordinate proceedings before it with proceedings in anotherjurisdiction by establishing a service list that may include parties that are entitled toreceive notice of proceedings before the court in the other jurisdiction (“nonresidentparties”). All notices, applications, motions, and other materials served for purposesof the proceedings before the court may be ordered to also be provided to or servedon the nonresident parties by making such materials available electronically in apublicly accessible system or by facsimile transmission, certified or registered mailor delivery by courier, or in such other manner as may be directed by the court inaccordance with the procedures applicable in the court.

Guideline 14 Limited Appearance in Court

The court may issue an order or issue directions permitting the foreign insolvencyadministrator or a representative of creditors in the proceedings in the otherjurisdiction or an authorized representative of the court in the other jurisdiction toappear and be heard by the court without thereby becoming subject to thejurisdiction of the court.

Guideline 15 Applications and Motions

The court may direct that any stay of proceedings affecting the parties before itshall, subject to further order of the court, not apply to applications or motionsbrought by such parties before the court in the foreign jurisdiction or that relief begranted to permit such parties to bring such applications or motions before thecourt in the foreign jurisdiction on such terms and conditions as it considersappropriate. Court-to-court communications in accordance with Global Guidelines7 and 8 hereof may take place if an application or motion brought before the courtaffects or might affect issues or proceedings in the court in the other jurisdiction.

Guideline 16 Coordination of Proceedings

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A court may communicate with a court in another jurisdiction or with anauthorized representative of such court in the manner prescribed by these GlobalGuidelines for purposes of coordinating and harmonizing proceedings before it withproceedings in the other jurisdiction regardless of the form of the proceedingsbefore it or before the other court wherever there is commonality among the issuesand/or the parties in the proceedings. The court should, absent compelling reasonsto the contrary, so communicate with the court in the other jurisdiction where theinterests of justice so require.

Guideline 17 Directions

Directions issued by the court under these Global Guidelines are subject to suchamendments, modifications, and extensions as may be considered appropriate bythe court for the purposes described above and to reflect the changes anddevelopments from time to time in the proceedings before it and before the othercourt. Any directions may be supplemented, modified, and restated from time totime and such modifications, amendments, and restatements should becomeeffective upon being accepted by both courts. If either court intends to supplement,change, or abrogate directions issued under these Global Guidelines in the absenceof joint approval by both courts, the court should give the other courts involvedreasonable notice of its intention to do so.

Guideline 18 Powers of the Court

Arrangements contemplated under these Global Guidelines do not constitute acompromise or waiver by the court of any powers, responsibilities, or authority anddo not constitute a substantive determination of any matter in controversy beforethe court or before the other court nor a waiver by any of the parties of any of theirsubstantive rights and claims or a diminution of the effect of any of the orders madeby the court or the other court.

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GLOBAL RULES ON CONFLICT-OF-LAWS MATTERSIN INTERNATIONAL INSOLVENCY CASES

A. General Provisions

Rule 1 Scope

These Global Rules shall apply to insolvency proceedings that are opened in a statewhich has jurisdiction for that purpose according to the provisions of GlobalPrinciple 13 of the Global Principles for Cooperation in International InsolvencyCases.

Rule 2 International Obligations of This State

These Global Rules shall not affect whatsoever the effects of binding internationalrules related to choice of law arising out of any treaty or other form of agreement towhich [this state] is a party with one or more other states.

Rule 3 Ex Officio Application

These Global Rules and the law thereby indicated are to be applied ex officio.

Rule 4 Interpretation

In the interpretation of these Global Rules, regard is to be had to their internationalorigin and to the need to promote uniformity in their application and theobservance of good faith.

Rule 5 Exclusion of Renvoi

In applying these Global Rules, any reference to the law of a state means theinternal (“domestic”) rules of law in force in that state other than its rules of privateinternational law.

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B. Localization of Assets

Rule 6 Immovable Property

6.1. Immovables, and rights vested in or attached to them, are located at the placewhere the immovable, and the right vested in it or attached to it, is registered in apublic register designated for the registration of rights.6.2. If an immovable, and the right vested in it or attached to it, is not recorded in apublic register designated for the registration of rights, then the immovable, and theright vested in it or attached to it, is located where the immovable is situated.

Rule 7 Nonregistered Movables

7.1. Nonregistered movables, and rights vested in or attached to them, are located atthe place where the nonregistered movable is situated.7. 2. For the purposes of Global Rule 7.1, the following legal presumptions apply:

a. Movables recorded in a vehicle license register, and rights vested in orattached to them, are presumed to be located at the place where the movableis recorded in the vehicle license register.b. Goods in transit, as well as rights vested in or attached to them, arepresumed to be located in the state of destination.

Rule 8 Registered Movables

8.1. Registered movables, and separately registered rights vested in or attached tothem, are located at the place where the movable or the right in question is recordedin a public register designated for the registration of rights.8.2. For the purposes of Global Rule 8.1, unless there is proof to the contrary,registered movables shall be presumed to be located at the place where the movableis recorded in a public register designated for the registration of rights.

Rule 9 Claims

9.1. Claims payable to bearer or order, and rights vested in or attached to them, arelocated at the place where the bearer or order document is situated.9.2. Claims of known creditors, and rights vested in or attached to them, are locatedat the place where the debtor has his seat or his domicile.

Rule 10 Shares in Joint-Stock Companies

10.1. Bearer shares, and rights vested in or attached to them, are located at the placewhere the bearer share certificate is situated.

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10.2. Registered shares, and rights vested in them, are located at the place where theregistered share, or the right vested in it, is recorded in a register of shareholderskept by the company.10.3. If a registered share, or a right vested in it, is not recorded in a register ofshareholders, the registered share or the right vested in it is located at the placewhere the company has the center of its main interests. The center of the maininterests of the company is presumed to be the place of its registered office.10.4. Book-entry shares, and rights vested in them, are located at the place of theregistered office of the intermediary with which the securities account is kept inwhich the book-entry shares are administered.

Rule 11 Intellectual Property Rights

Patent rights, trademark rights, and copyrights, and rights vested in them, arelocated at the place where the patent holder, trademark proprietor, or copyrightholder has his seat or his domicile.

C. General Rules of Law Applicable to Insolvency Proceedings

Rule 12 Law of the State of the Opening of Proceedings

12.1. Save as otherwise provided in [this Act/these Rules], the law applicable toinsolvency proceedings and their effects shall be that of the state within the territoryof which such proceedings are opened, hereafter referred to as “the state of theopening of proceedings.”12.2. The law of the state of the opening of proceedings shall determine theconditions for the opening of those proceedings, their conduct, administration,conversion, and their closure.

Rule 13 Law of the State of the Opening of Non-Main Proceedings

If insolvency proceedings are opened in a jurisdiction other than that where thecenter of main interests of the debtor is situated (“non-main” proceedings), theeffects of the application of the law of the state of the opening of such proceedingsshall be restricted to those assets of the debtor situated in the territory of that stateat the time of the opening of those proceedings.

Rule 14 Cross-Border Movement of Assets

In relation to any asset of the debtor that is of a moveable character, Global Rules12 and 13 shall apply, subject to the following modifications:

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(a) Any rule of insolvency law that is applicable by virtue of the localizationof an asset in the territory of the state of the opening of insolvencyproceedings, at the time of the opening of the proceedings, shall not apply if itis shown that the asset in question has been moved to that location from theterritory of another state, to whose insolvency law it would otherwise havebeen properly subject, in circumstances that suggest that the transfer waseffected wholly or primarily for the purpose of avoiding the effects of the lawof the other state, including its insolvency law.(b) Conversely, where an asset has been moved from the territory of one stateto that of another state under the circumstances stated in paragraph (a), theeffects of any insolvency proceedings that are opened in the former state shallapply to the asset in question.(c) In the absence of evidence to the contrary, it shall be presumed that anyasset that has been removed from the territory of the state in whichinsolvency proceedings are opened, within 60 days prior to the opening ofsuch proceedings, was made with intent to avoid the effects of the law of thatstate. It is for the party who seeks to maintain the validity of the act, wherebythe property was removed from the territory of that state, to provideevidence that the transfer was made for a bona fide and legitimate purpose.(d) Except in a case to which paragraph (c) is applicable, it is for the partywho alleges that the provisions of paragraphs (a) and (b) of this Rule areapplicable in relation to a particular asset to prove that this is the case.

D. Exceptions to the General Rules of Law Applicable to Insolvency Proceedings

Rule 15 Rights of Secured Creditors

15.1. Insolvency proceedings shall not affect the rights in rem of creditors or thirdparties in respect of tangible or intangible, moveable or immoveable assets—bothspecific assets and collections of indefinite assets as a whole that change from time totime—belonging to the debtor, which are situated within the territory of anotherstate at the time of the opening of proceedings.15.2. The rights referred to in Global Rule 15.1 shall in particular mean:

(a) The right to dispose of assets or have them disposed of and to obtainsatisfaction from the proceeds of or income from those assets, in particularby virtue of a lien or a mortgage;(b) The exclusive right to have a claim met, in particular a right guaranteedby a lien in respect of the claim or by assignment of the claim by way of aguarantee;(c) The right to demand the assets from, and/or to require restitution by,anyone having possession or use of them contrary to the wishes of the partyso entitled;(d) A right in rem to the beneficial use of assets.

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15.3. The right, recorded in a public register and enforceable against third parties,under which a right in rem within the meaning of Global Rule 15.1 may beobtained, shall be considered a right in rem.

Rule 16 Exception

16.1. By way of exception to Global Rule 15, a right in rem (“in rem security right”)shall not be exempted from the effects of insolvency proceedings if proof is providedthat the state where the assets are situated, at the time of the opening of insolvencyproceedings, has no substantial relationship to the parties or the transaction inrelation to which the security right was created, and there is no other reasonablebasis for the fact that the assets are so situated.16.2. It is for the party who claims that the conditions specified in Global Rule 16.1are met, in relation to a particular security right, to prove that those conditions arein fact met in the relevant case.

Rule 17 Set-Off

Insolvency proceedings shall not affect the right of creditors to demand the set-off oftheir claims against the claims of the debtor, where such a set-off is permitted by thelaw applicable to the insolvent debtor’s claim.

Rule 18 Exception

Where a right of set-off is demanded on the basis of Global Rule 17, if it is the casethat, in the absence of express choice made by the parties, the law applicable to theinsolvent debtor’s claim would be that of the state of the opening of main insolvencyproceedings, Global Rule 17 shall not apply if the law of the state chosen by theparties has no substantial relationship to the parties or the transaction, and there isno other reasonable basis for the parties’ choice.

Rule 19 Reciprocal Contracts: General Rule

Save as otherwise provided by [this Act/these Rules], mutual obligations in respectof a reciprocal contract, which has been concluded prior to insolvency of one of theparties, shall be governed solely by the law of the state of the opening ofproceedings.

Rule 20 Contracts of Employment (Labor Contracts)

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The effects of insolvency proceedings on employment contracts and relationshipsshall be governed solely by the law of the state applicable to the contract ofemployment.

Rule 21 Restrictions to Exceptions

Global Rules 15, 17, and 20 shall not preclude actions for voidness, voidability, orunenforceability of legal acts detrimental to the general body of creditors, pursuantto the law applicable to the insolvency proceedings, as determined by Global Rule 12or by Global Rule 13 (as the case may be).

Rule 22 Defenses to the Avoidance of Detrimental Acts

Global Rule 21 shall not apply where the person who benefited from an actdetrimental to the general body of creditors provides evidence that:

(i) The said act is subject to the law of a state other than that of the state ofthe opening of proceedings; and(ii) That law does not allow any means of challenging that act in the relevant

case.

Rule 23 Exception

23.1. By way of exception to Global Rule 22, a transaction detrimental to the generalbody of creditors shall not be exempted from the effect of the avoidance rule of thelaw of the state of the opening of insolvency proceedings if proof is provided that thestate to whose law the transaction is subject has no substantial relationship to theparties or the transaction, and there is no other reasonable basis for the selection ofthe law of that state as the law to govern the transaction in question.23.2. It is for the party who claims that the conditions specified in Global Rule 23.1are met, in relation to a particular transaction, to prove that those conditions are infact met in the relevant case.

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Sovereign Insolvency Developments: From Adam Smith to the EurozoneCrisis and beyond...

JUANITTA CALITZUNIVERSITY OF JOHANNESBURG

SOME THOUGHTS ON SOVEREIGN INSOLVENCY

• When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor.

– Adam Smith Of the Revenue of Sovereign or Commonwealth (Book V) Ch II of Public Debts (1776).

INTRODUCTION

• Bullet Text One– Two

• Three– Four

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INTRODUCTION

• sovereign insolvency law has increasingly become the subject of scholarly articles, reflection and debate

• to refer to a government as being bankrupt = metaphor

• become apparent that many players in the global financial system have dug a debt hole far larger than they can reasonably expect to escape from

PURPOSE OF DISCUSSION

• not to envisage the possible causes, implications and solutions to the current sovereign debt crisis

• rather discuss some general thoughts resovereign insolvency law

• …as well as certain key aspects such as – fresh start approach – sovereignty – human rights and sovereign debt

BRIEF HISTORICAL OVERVIEW • 1st recorded default at least to the 4th cen B.C.,

when 10 out of 13 Greek municipalities in the Attic Maritime Ass defaulted

• The defaults of Philip II (Spain 1556-98) -attained mythical status -origin of sovereign debt crises

• Adam Smith called for an orderly state insolvency in his famous book The Wealth of Nations in 1776

• After World War I the Great Depression resulted in a major debt crises

• era of the emerging economies’ dramatic economic demise -1980s most emerging economies defaulted

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HISTORICAL OVERVIEW…

• Argentina’s spectacular collapse in beginning 21st century finally lead to debates and proposals for an international bankruptcy regime

• current financial crisis?– mere scale thereof – several European states warned the rest of

Europe and the world of potential bankruptcy

– Pandora’s box....

SOME THOUGHTS ON SOVEREIGN INSOLVENCY LAW IN GENERAL

• main objective of modern bankruptcy law is to afford a “fresh start”

• At national level the principle benefits and purposes of a personal bankruptcy system – to divide the assets of an insolvent debtor

fairly and equitably between the creditors, – allow an insolvent debtor a fresh start free

of the burden of accumulated debt

SOME THOUGHTS ON SOVEREIGN INSOLVENCY LAW IN GENERAL• effective bankruptcy system will improve

allocation of credit within an economy and -make the economy more stable

• proposal to emulate features of domestic insolvency -Adam Smith-no longer controversial

• no global bankruptcy court to evaluate the claims of creditors + protect the debtor from abusive practices + vulnerable citizens?

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TIME FOR A MEDIATOR?

• economic affairs of a state cannot be taken over and managed by a receiver, trustee or administrator - deal with a DIP

• IMF vaguely simulates the role of a company doctor -much less power as the administrator in a corporate insolvency

• public law treaty or the private law contract negotiation…..?

CONCEPT OF REGULATION

• “cornerstones” or “building blocks”identified as essential to an effective insolvency system٭– legal framework– institutional cornerstone– regulatory cornerstone

• The entire insolvency system rests on the proper functioning of all three cornerstones

– ٭ Mahesh Uttamchandani

CHALLENGES TO AN INTERNATIONAL BANKRUPTCY REGIME

• difficulty of establishing an international institutions..UN, IMF, Word Bank…

• elephant in the room ?– Presume sovereignty exits if referring to

sovereign debt/restructuring/insolvency...• states jealously guard their sovereignty

under international law - resist interference by other states or international institutions

• major intellectual effort to decipher the -the term sovereignty

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SOVEREIGNTY?...

• the Greek PM admitted that his country had accepted – “a partial surrender of sovereignty…Our

struggle will be to recover our autonomy and liberate Greece from the surveillance imposed by the forces of conservatism”.

SOVEREIGN DEBT AND HUMAN RIGHTS• The international regime for sovereign debt

relief remains ad-hoc in nature + relies on political will of key creditor states

• despite a link between debt relief and poverty reduction, – the current system prioritizes debt servicing

over and above a state’s duty to provide for the social and economic welfare of its citizens

Cephas Lumina, UN expert on foreign debt and human rights….

• “The implementation of the second package of austerity measures and structural reforms, which includes a wholesale privatization of state-owned enterprises and assets, is likely to have a serious impact on basic social services and therefore the enjoyment of human rights by the Greek people, particularly the most vulnerable sectors of the population such as the poor, elderly, unemployed and persons with disabilities,” Mr. Lumina 30 June 2011

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Celine Tan….

• argued here that debt relief and mechanisms for achieving them must be located within a wider systemic reform of the international financial architecture and that this, in turn, must be located within a human rights-based framework.

• The concept of international financial stability as a global public good is not a novel one but one that has been gaining ground in the advent of the globalization of financial markets.

International Covenant on Economic, Social and Cultural Rights

• Notably, Article 2(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR) provides that state parties to the Covenant must ‘take steps individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights in the present Covenant’

DEVELOPMENT?

• Existing efforts to address the problem of unsustainable debt burdens of sovereign states have relied on an ad-hoc process characterised by Herman et al as ‘embodying informal and imperfect coordination of the debtor and its creditors’supervised by the International Monetary Fund (IMF) under the policy direction and political guidance of the major industrialised countries (Herman et al, 2010: 4)

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DEVELOPMENTS?

• This political nature of the debt relief initiatives is further compounded by the assignment of the Bretton Woods institutions as gatekeepers to the process.

• Current proposals:– Sovereign Debt Restructuring Mechanism

(SDRM)– International club and international

institution approach– The contractual approach– Individual proposals

RETURN TO HUMAN RIGHTS…

• Crucially, the development of an international sovereign debt resolution framework – subjected to states’ obligations under

international law, – such as obligations to respect state

sovereignty, – maintaining the right to development and

territorial integrity, – as well as states’ duties under human rights

regimes (see section 1).

Ann Pettifor, debt campaigner -chief architects of the Jubilee 2000 campaign ...

• Introducing an insolvency framework will introduce regulation and discipline over the flows of international capital – through lending and borrowing. It will do so not just in bankrupt states; but in states where lax lending and excessive borrowing could lead to bankruptcy. In other words, the very existence of the framework could help regulate capital movements, and prevent future crises (Pettifor, 2002: 5).

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CONCLUSION• The year of Jubilee ….• The public interest has been a vital

component of insolvency regulation since the earliest days and continues to occupy a position of prominence

• the role of social rights considerations in the context of sovereign debt is rather limited

• BALANCE BETWEEN SOCIAL RIGHTS AND ECONOMIC, FINANCIAL AND COMMERCIAL INTERESTS…

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Conflicts and Avoidance in International Insolvency

The Lehman Brothers case has highlighted issues of jurisdiction and conflict of laws in

international bankruptcy cases.1 It has drawn attention to possible inconsistencies in the

bankruptcy and insolvency codes of the US and UK2 but it has not provided much illumination

about how these conflicts should be resolved.

These potential conflicts came to the fore in the Maxwell bankruptcy almost 20 years before.3 In

Maxwell, potential problems in the collection and distribution of the insolvency estate were

massaged away through judicial dialogue and cooperation In Lehman, UK/US judicial conflict

was presented in much starker form for there have been apparently inconsistent judicial decisions

addressing the same issue and the same pool of assets. This heightening of tension is superficially

surprising since in the period after Maxwell we have had the UNCITRAL Model Law on Cross-

Border Insolvency. The Model Law is intended to improve the administration of cross-border

insolvency cases and has been implemented in both the US and UK.

This paper asks whether the Model law has achieved its goal specifically in the context of

transactional avoidance mechanisms. The paper begins by looking briefly at the nature and

function of such procedures.

Avoidance provisions in insolvency cases

Many jurisdictions have provisions in their insolvency law allowing an insolvency representative

to challenge certain transactions entered into by the debtor before the commencement of the

formal insolvency case. Firstly, these provisions may allow the insolvency representative to

challenge transactions that are intended to delay or defeat creditors – so-called fraudulent

transfers or conveyances. Secondly, both the US and UK have rules that operate more generally

to invalidate acts benefiting creditors that take place within a defined period of time.4 These rules

1 The expressions “bankruptcy” and “insolvency” will be used interchangeably. Bankruptcy is the referredexpression in the US whereas in England its technical meaning is limited to the insolvency of individuals.2 [2010] Ch 347 (Court of Appeal) and [2011] UKSC 38 where it is reported under the name Belmont ParkInvestments v BNY Corporate Trustee and for the US proceedings see Re Lehman Brothers Holdings Inc (2010) 422BR 407 (US Bankruptcy Court, Southern District of New York).3 See generally JL Westbrook “Choice of Avoidance Law in Global Insolvencies” (1991) 17 Brooklyn Journal ofInternational Law 499; “The Lessons of Maxwell Communication” (1996) 64 Fordham Law Review 2351;“Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases” (2007) 42 Texas International LawJournal 899.4 Section 547 of the Bankruptcy Code in the US and s 239 of the Insolvency Act in England. The Scottish provisionis s 243.

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are referred to as the law of preferences because the effect of the acts, if undisturbed, may put

beneficiaries in a better position than other creditors if the debtor becomes insolvent.5 The

preference laws operate more harshly against corporate insiders in that they are more likely to be

aware of a company’s financial difficulties.

There are differences in detail between the law of preferences in the US and UK. The UK is

stricter when it comes to avoidance periods with a general 6 month of vulnerability prior to the

commencement of a formal insolvency case compared with 90 days in the US. UK law is weaker

however in that it imposes an “influenced by a desire to” criterion as a condition of avoidance.6

Before an allegedly preferential payment can be set aside it must be shown that the debtor was

influenced by a desire either to prefer the creditor or a guarantor for the debt. US law contains no

such requirement. The key factor there is the simple test of preference – was the creditor put in a

better position than other creditors as a result of the transaction? There are however a number of

exceptions including for payments made in the ordinary course of business and the effect of

amendments to the Bankruptcy Code has been to widen the scope of these exceptions. But the

absence of an “influenced by a desire’’ requirement in the US means there is no potential

minefield of having to look into a debtor’s state of mind. This is why UK insolvency

administrators instituted US rather than UK avoidance proceedings in Maxwell.7 This attempt

was somewhat ironic given the fact that the administrators had initially objected to US

bankruptcy proceedings in respect of the debtor on the basis that it was a UK incorporated, as

well as owned and managed company, albeit one that had around 80% of the value of its assets in

the US, in the form largely of shares in other companies.

Jurisdictional conflicts between avoidance procedures and the possibilities for resolving such

cases

5 See R Parry et al Transaction Avoidance in Insolvencies (Oxford, OUP, 2nd ed 2011); G McCormack “SwellingCorporate Assets: Changing what is on the Menu” [2006] Journal of Corporate Law Studies 39; A Walters“Preferences”, in J Armour and H Bennett (eds), Vulnerable Transactions in Corporate Insolvency (Oxford, HartPublishing, 2003 and for a US perspective see TH Jackson “Avoiding powers in bankruptcy” (1984) 36 StanfordLaw Review 725.6 On the interpretation of this provision see Re MC Bacon (No 1) [1990] BCC 78.7 In re Maxwell Communication Corporation (1994) 170 BR 800, 818; affirmed (1995) 186 BR 807; affirmed(1996) 93 F3d 1036.

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Even the simplest insolvency case may have a foreign element - a payment to a domestic creditor

may have been made overseas or routed through a foreign bank account. It is easy to envisage

cases with a more substantial foreign element however. The creditor may be a foreign creditor or

the debt may arise out of a contract with a foreign choice of law clause. Alternatively, as in

Maxwell, the bulk of a company’s assets may be held overseas or the proceeds to make the

payment may have come from the profits generated from foreign assets or from the sale of those

assets. One could no doubt devise a taxonomy of cases with a foreign element but given the

inherent difficulty in assigning cases to one category rather than another there is room for a

degree of scepticism about how useful such an exercise might be. At an intuitive level however,

there is the feeling that the greater the contacts that an impugned transaction has with a foreign

jurisdiction, the smaller is the justification for applying purely domestic insolvency avoidance

law.

Lord Hoffmann has spoken of a universalist ideal underlying English insolvency law but he has

also acknowledged pragmatic realities.8 There is a practical problem of enforcing orders that

relate to foreign assets and in securing the co-operation of third parties based overseas to the

enforcement of such orders. In the US, while bankruptcy law ostensibly applies to all a debtor’s

assets irrespective of location9 there is also a presumption against territoriality that militates

against applying US bankruptcy norms and doctrines to foreign-based parties.10 In addition, the

Yukos Oil11case shows that while the formal ingredients of bankruptcy jurisdiction may be

present, the US courts will pay great attention to the largely foreign factors in a case before

exercising effective jurisdiction.

8 Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors (of Navigator Holdings Plc)[2007] 1 AC 508 at 516. See also Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852 and LordNeuberger MR “The international dimension of insolvency” (2010) 23 Insolvency Intelligence 42.9 Section 541(a)(1) of the Bankruptcy Code defines property of the bankrupt estate in very broad possible terms ands 1334 of the United States Code gives bankruptcy courts jurisdiction of “all property, wherever located, of thedebtor.”10 In Equal Employment Opportunity Commission v Arabian American Oil Co (1991) 499 US 244 at 248 the USSupreme Court spoke of a “longstanding principle of American law that legislation of Congress, unless a contraryintent appears, is meant to apply only within the territorial jurisdiction of the United States.”11 Re Yukos Oil Co (2005) 321 BR 396 and see also Re Aerovias Nacionales de Colombia SA Avianca (2006) 345BR 120.

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In deciding what insolvency avoidance law should be applied essentially five basic possibilities

present themselves.12 The first is to apply exclusively the law of the forum state no matter how

strong the foreign factor may be in a particular case. The second possibility is to apply the law of

the foreign jurisdiction assuming that the act or transaction in question can be said to be “located”

in that foreign jurisdiction. A third possibility is to allow avoidance if the law of either the home

jurisdiction or the foreign jurisdiction permits avoidance. This gives an insolvency representative

the option of choosing the avoidance law of whatever jurisdiction is most favourable to it.13 The

fourth possibility is least favourable to the insolvency representative only allowing avoidance

where both forum and foreign States permit avoidance. The fifth possibility is to apply a type of

“interests” analysis and ask, irrespective of forum, which jurisdiction is most closely connected

with the case and then applying that law.

Selecting the most appropriate law and the “interests” approach

Formerly, the predominant judicial approach in the US and UK focused on “interests”.14 This

analysis asks which jurisdiction is most closely connected with a transaction and then applies the

avoidance law of that jurisdiction. The law was settled by Re Maxwell Communications Corp15

in the US and Re Paramount Airways Ltd16 in the UK. The case law however tends to use a triple

cocktail consisting of “interests”; a presumption against extra-territorial application of laws; and

“comity” to reinforce the same conclusion.

But using “comity” per se as the basis for a judicial decision is somewhat unsatisfactory since it

is a vague and imprecise term lacking definite meaning. One commentator has remarked that

despite “ubiquitous invocation of the doctrine of comity, its meaning is surprisingly elusive”17

while another has claimed that it is “far too vague and shifting a notion to serve as a satisfactory

12 See JL Westbrook “Choice of Avoidance Law in Global Insolvencies” (1991) 17 Brooklyn Journal ofInternational Law 499 at 525.13 See Al Sabah v Grupo Torras SA [2005] 2 AC 333 and for criticism see JL Westbrook “Avoidance of Pre-Bankruptcy Transactions in Multinational Bankruptcy Cases” (2007) 42 Texas International Law Journal 899 at 911-913.14 See generally Look Chan Ho “Conflict of Laws in Insolvency Transaction Avoidance” (2008) 20 SingaporeAcademy of Law Journal 343.15 In re Maxwell Communication Corporation (1994) 170 BR 800; affirmed (1995) 186 BR 807; affirmed (1996) 93F3d 1036.16 [1993] Ch 223.17 See J Paul “Comity in International Law” (1991) 32 Harvard International Law Journal 1 at 4.

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theoretical underpinning for a sophisticated system of private international law”.18 Despite these

limitations, comity played its part in resolving the Maxwell litigation. In Maxwell there were

simultaneous insolvency proceedings – administration in the UK and Chapter 11 bankruptcy in

the US.19 The UK administrators were recognised as the “debtor-in-possession” for the purpose

of the US proceedings though the US bankruptcy court also appointed an examiner to safeguard

the interests of the bankruptcy estate. The administrators and the examiner brought proceedings

in the US seeking to avoid large pre-bankruptcy transfers to British and French banks made in

response to pressure from these creditors. The administrators were in effect forum shopping in

the US but the UK courts20, led by Hoffmann J, refused to prevent them from so doing although

ultimately they were turned away empty handed in the US. Hoffmann J suggested that a foreign

judge was normally in the best position to decide whether proceedings are to go forward in the

foreign court and that anti-suit injunctions should be issued only where an assertion of

jurisdiction in the foreign court would be "unconscionable."21

Judge Brozman in the US Bankruptcy court declined to apply the US Bankruptcy Code to the

transfers holding that the transfers were extraterritorial; had a "center of gravity" that lay outside

the United States and also international comity precluded the application of the Code in this

instance. She asked which jurisdiction's laws and policies were implicated to the greatest extent

and the answer was found to be England.22 Judge Brozman’s ruling was affirmed at appellate

level in the US on substantially similar grounds. She considered but rejected a similar route to the

same conclusion offered by amicus curiae, Professor JL Westbrook who argued in favour of

English law on the basis that it was the law of the debtor’s home country i.e. where it had the

centre of its main interests. But in Maxwell it was particularly problematic to accept this line of

18 See JG Collier Conflict of Laws (Cambridge, CUP, 3rd ed 2001) at p 379. See also Look Chan Ho “Ant-suitinjunctions in cross-border insolvency: a restatement” [2003] ICLQ 697 at 734 “Comity saps the power ofratiocination and slants things in the opposite direction, namely towards ‘ad hocery’.”

19 See John Pottow "The Maxwell Case" in R Rasmussen ed Bankruptcy Law Stories (New York, Foundation Press,2007). UK administration involves management displacement whereas the US Chapter 11 is based on a norm of“debtor-in-possession”. Recognising the UK administrators as the “debtor-in-possession” constitutes an attempt toreconcile these divergent notions. See generally for a comparative account G McCormack Corporate Rescue Law –An Anglo American Perspective (Cheltenham, Edward Elgar Publishing, 2009).

20 Re Maxwell Communications Corp (Barclays Bank plc v Homan) [1992] BCC 757; [1992] BCC 767.21 Barclays Bank plc v Homan [1992] BCC 757 at 762.22 In re Maxwell Communication Corp (1994) 170 BR 800 at 818.

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reasoning since full plenary insolvency proceedings in respect of the debtor had been opened in

both the US and UK. The US proceedings were not ancillary to the UK proceedings.

The Maxwell line of reasoning has also been applied more recently by the US Circuit Court of

Appeals in the French case to a conflict between US and Bahamian fraudulent transfer law.23

The transfer was of Bahamian real estate but the relevant parties including the debtor and

transferees were all US residents. If US law was applied the transfer could be set because the

transfer was constructively fraudulent i.e. at an undervalue and within the bankruptcy reach back

period. Bahamian law, on the other hand, did not invalidate such transactions. The only

bankruptcy proceedings in respect of the debtor were US Chapter 7 proceedings.

The court had little truck with the argument that it should refrain from applying US law on

grounds of international comity because the dispute related to Bahamian real estate. The US was

said to have a stronger interest than the Bahamas in regulating this particular transaction. Most of

the activity surrounding the transfer took place in the US; almost all of the parties with an interest

in the litigation including the debtor and transferees were US based and had been for many years.

Moreover, there were no parallel insolvency proceedings taking place in the Bahamas so that

there was no danger that US avoidance law would in fact conflict with Bahamian avoidance law.

Moreover, the Bahamas were considered to have comparatively little interest in protecting

nonresidents

The leading English case is Re Paramount Airways Ltd24 where it was held that the relevant

statutory provisions were sufficiently wide that the court had an overall discretion, if justice so

required, to make an order against any other party to the impugned transaction, irrespective of

location. But it would need to be satisfied that the party was sufficiently connected with England

for it to be just and proper to make the order against him despite the foreign element. Nicholls

VC pointed out that, on its face, the legislation was of unlimited territorial scope. If a transaction

satisfied the statutory requirements, then prima facie the provisions applied, irrespective of the

situation of the property; the nationality or residence of the other party, and the law governing the

transaction. He said Parliament may have intended that the English court should make orders

23 Re French (2006) 440 F 3d 145 and see also In re Midland Euro Exchange (2006) 347 BR 708. See generally NSegal “Avoidance Actions in Cross-Border Bankruptcies” Insol World – Second Quarter 2006

24 Re Paramount Airways Ltd (No 2) [1993] Ch 223.

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against a person who had no connection whatever with England save that he entered into a

transaction, abroad and in respect of foreign property, with a person who was subject to the

insolvency jurisdiction of the English court. Such an intention by Parliament was possible but

such a jurisdiction would be truly extraordinary. The difficulty however, lay in finding an

acceptable implied limitation.

Lord Nicholls noted that trade increasingly took place on an international basis as did fraud,

while money could be transferred quickly and easily. Therefore, it was impossible to identify any

particular limitation that could be said to represent the presumed intention of Parliament. But in

granting appropriate relief the courts had a discretion and a “sufficient connection” test could be

used to tailor the exercise of that discretion. Lord Nicholls said the court will look at all the

circumstances and the importance to be attached to these factors will vary from case to case.

The Model Law on Cross-Border Insolvency and avoidance provisions

The Cross-Border Insolvency Regulations 2006 (CBIR) implement the Model law in the UK. It

has been implemented in the US by a new Chapter 15 of the Bankruptcy Code which supersedes

the old s 304 of the under which a bankruptcy court could exercise various powers in a “case

ancillary to a foreign proceeding”.25 In the UK the CBIR follow the Model Law fairly closely

and the Insolvency Service has explained that this was done 26 “to try and ensure consistency,

certainty and harmonization with other States enacting the Model Law….” In Re Stanford

International Bank Ltd27 Lewison J suggested that Chapter 15, by contrast, contained some

significant divergences from the Model Law. The legislative history in the US however, suggests

that the intent was to stay loyal at least to the spirit of the Model Law.28

Article 23 of the Model Law invests a foreign insolvency representative, upon recognition of the

foreign proceedings, with the standing to initiate avoidance actions under the law of the enacting

State. In the US however, the effect of Article 23 is limited by Chapter 15. Section 1523 provides

that a foreign representative only has the standing to invoke the US avoidance provisions where

full, plenary bankruptcy proceedings have been commenced under Chapters 7 or 11 of the US

25 For discussion see Ian Fletcher Insolvency in Private International Law (Oxford, OUP, 2nd ed 2005), pp 247–262.26 See UK Insolvency Service “Implementation of UNCITRAL Model Law on Cross-Border Insolvency in GreatBritain” (2005) at para 7.27 [2009] BPIR 1157. But see however the US House of Representatives report on Chapter 15 – H Rep No 109–31(2005) at p 106.

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Bankruptcy Code.29 Section 1523 does not expressly address the question whether a foreign

representative may employ foreign avoidance laws in Chapter 15 proceedings. One might argue

however, from the structure of the legislative scheme as a whole that they only become relevant

in a Chapter 7 or 11 bankruptcy and that a foreign representative only has the standing to assert

avoidance claims in such proceedings. Maxwell shows that foreign avoidance law may be taken

account of in Chapter 7 or 11 proceedings. On the other hand, full bankruptcy proceedings under

Chapters 7 or 11 are likely to be significantly more expensive than Chapter 15 proceedings and

there are certain foreign debtors, including foreign-incorporated insurance companies,

specifically precluded from using Chapters 7 and 11. This is largely the reason why in Re

Condor Insurance Ltd 30 a foreign representative sought to use foreign fraudulent transfer law to

invalidate a large transfer by the company to a US affiliate. The company was in liquidation in

Nevis, its “home” jurisdiction and Nevis law was in material respects similar to US law. The US

Fifth Circuit Court of Appeals permitted the use of Nevis law to avoid the transfer in the Chapter

15 context. While conscious of conflict of law difficulties, it took the view that foreign law was

not excluded. It referred to comity and the fact that debtors might otherwise be tempted to hide

assets in the US out of the reach of the foreign jurisdiction. The court spoke of the cost and

inconvenience of full US bankruptcy proceedings which in any event were statutorily prohibited

in this case. It also observed that if the US Congress wished to bar all avoidance actions whatever

their source it could have said this explicitly but did not do so.31

The court referred to the “helpful marriage of avoidance and distribution whether the proceeding

is ancillary applying foreign law or a full proceeding applying domestic law-a marriage that

avoids the more difficult … rules of conflict law presented by avoidance and distribution

decisions governed by different sources of law.”32 It suggested that this solution addressed the

concern that foreign representatives would bring an ancillary action simply to gain access to

avoidance powers not provided by the law of the foreign proceeding. With respect to the court,

however, the marriage spoken of is not fully complete. As it recognized itself, and the Maxwell

case shows, foreign avoidance law may be applied in US Chapter 7 or 11 proceedings.

28 See HR Rep No 31, 109th Congress Ist Session at paras 106, 107 and 109.29 Chapter 7 is concerned with liquidation and Chapter 11 with restructuring.

30 (2010) 601 F3d 319. For the denouement in the case see Fogerty v Condor Guaranty Inc (In re Condor Ins Ltd),2012 Bankr LEXIS 929 (Bankr SD Miss, March 5, 2012)

31 See (2010) 601 F3d 319 at 325-327.32 (2010) 601 F3d 319 at 327.

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While the Condor ruling is conceptually sharp and neat; brings benefits to foreign representatives

and may enhance asset recoveries, it does not necessarily sit very well with the structure of

Chapter 15 which seems designed to keep a tight grip on avoidance actions by foreign

representatives. Moreover, the Condor case does not discuss the possibility of using US law as a

shield when a transaction or transfer is challenged under foreign avoidance law pursuant to

Chapter 15. If the transaction out of which the transfer arises was governed by US law and,

under US law, the transfer cannot be impeached, it is difficult to see a US court allowing settled

expectations of the parties to be upset on the basis of foreign law.

In the UK, a less restrictive track was taken when implementing Article 23 of the Model Law.

Once the foreign proceedings have been recognized, Article 23 CBIR enables the foreign

representative, on the basis of conditions that are similar for domestic insolvency office holders,

to initiate avoidance actions.33 This is purely a procedural mechanism and there is no intention to

alter domestic law in substantive respects though the CBIR provide in Art 23(7) that, on making

an order in a successful application under Art 23, the court can give directions with respect to the

distribution of the proceeds of the claims. This provision is designed to deal with the fact that

there may be different distributional regimes and priorities under UK law and foreign law.34

Article 23 does not expressly dealt with the conflicts of laws difficulties arising from the fact that

the relevant transaction is governed by the laws of a foreign jurisdiction which does not allow the

transaction to be impeached. In the consultation exercise on the framing of the regulations, it was

suggested that Article 23 could be used to “forum shop” by foreign representatives seeking to

resolve issues under UK law where there was no substantial connection between the UK and the

underlying transaction. The Insolvency Service dismissed this concern stating there was no

intention to alter conflict of law rules and substantive rights.35 Consequently, the law as stated in

Re Paramount Airways Ltd would continue to apply.

In the CBIR there is no reference to the use of foreign avoidance law by a foreign representative

and whether or nor this is permitted in the circumstances considered by the US courts in the

Condor case. Article 21(1)(g) however, upon the recognition of foreign insolvency proceedings,

33 Cross-Border Insolvency Regulations 2006, Sch 1, Art 23(1) sets out the list of avoidance actions to which theprovision is intended to apply.34 UK Insolvency Service “Implementation of UNCITRAL Model Law on Cross-Border Insolvency in Great BritainSummary of Responses and Government Reply” ((2006) at para 137.35 UK Insolvency Service “Implementation of UNCITRAL Model Law on Cross-Border Insolvency in Great BritainSummary of Responses and Government Reply” ((2006) at paras 134-135.

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permits the grant of any additional relief that may be available to a British insolvency

officeholder under UK law. In Larsen v Navios International36 Norris J suggested that Article 21

should be given a wide interpretation since it is a discretionary power “only exercisable after all

relevant interests have been taken into account”. Section 426 Insolvency Act 1986 is a part of UK

law and this section allows UK courts to respond to requests for assistance in insolvency cases

from courts in other parts of the UK or from certain designated foreign courts or tribunals. In

responding to the request for assistance, the UK court can apply UK insolvency provisions, or the

foreign equivalents. On a broad reading of s426 and Article 21 in combination, a foreign

representative could seek the application of foreign avoidance law when seeking recognition of

foreign proceedings.37

In Re New Cap Reinsurance Corp Ltd38 s 426 was used to enforce an Australian judgment given

in corporate insolvency proceedings that ordered the recipient of an allegedly improper payment

to repay the company. UK courts, in considering s 426 requests, are obliged by the provision to

have regard, in particular, to the provisions of private international law - s 426(5). Lewison J

cited this subsection in New Cap but he did not consider its meaning in any detail or focus on the

differences in detail between English and Australian transactional avoidance law. He did say

however that “the fact that there may be differences at the margins between our insolvency law

and the insolvency law of the foreign state will rarely be of importance; first, because the

Secretary of State will have taken that into account in deciding whether to designate the foreign

state at all, and second because section 426 itself gives the English court power to apply the law

of the foreign state.”39

Lewison J did not specifically address the private international law reference in s 426(5) and the

Court of Appeal did not cite it at all. The reference tends to throw one back to the substantial

connection test set out clearly in Paramount Airways. In Re Television Trade Rentals Ltd40

Lawrence Collins J however, suggested that s 426(5) was “obscure and ill thought out” though

the requested court would take the foreign elements into account in deciding what law to apply.

36 [2011] EWHC 878 at para 23. Article 21(g) was also referred by Proudman J in Re Phoenix Kapitaldienst GmbH[2012] EWHC 62 at para 5.37 On the application of local avoidance law in response to a s426 request see Al Sabah v Grupo Torras SA [2005] 2AC 333.38 [2011] EWHC 677 and {2011} BCC 937: [2011] EWCA Civ 971.39 [2011] EWHC 677at para 33. Lloyd LJ in the Court of Appeal – [2011] EWCA Civ 971 at para 73 commentedthat “any relevant issue of jurisdiction must be taken into account in relation to the statutory discretion”. 40 [2002] BPIR 859. See also Lord Neuberger in Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852 at

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Where those elements pointed to the application of the foreign law, this may influence the court

in deciding to apply that law but the courts would still to have the discretion to disregard the UK

conflicts rule in an appropriate case. For instance, it might be considered appropriate to offer the

assistance requested where creditors would otherwise go without a remedy.

A broad interpretation like this promotes the application of foreign avoidance law by a UK court

in responding to s 426 requests and by implication when authorizing additional relief under

Article 21 of the CBIR. The downside to a broad judicial discretion about which law to apply,

tempered only by considerations of “justice”, is increased uncertainty and this militates against

effective transaction planning and the accurate pricing of risk. The EC Regulation on Insolvency

Proceedings puts a greater premium on certainly but at the price of rendering certain possibly

dubious transactions immune from challenge. The EC Regulation will now be considered.

Avoidance and the EC Regulation on Insolvency Proceedings

The EC Regulation on Insolvency Proceedings applies in respect of companies whose centre of

main interests (or “COMI’) is in an EC member State with exception of Denmark. It establishes

uniform rules on jurisdiction and choice of law. Generally under the Regulation, the law of the

State where insolvency proceedings are opened, governs the conduct and effect of the

proceedings. Article 4(2)(m) provides that the law of the insolvency forum shall dictate the rules

relating to the voidness, voidability or unenforceability of legal acts detrimental to all creditors.

But according to Article 13, there is an escape route where the person who benefited from an act

detrimental to all the creditors provides proof that (i) the act is subject to the law of a different

Member State and (ii) that law does not allow any means of challenging that act in the relevant

case. In these circumstances there is an effective veto on the operation of the avoidance law of

the forum state. “This veto is introduced in the interests of upholding legitimate expectations

based upon the circumstances existing at the relevant time of acting”. 41

One might criticize the veto on four inter-related grounds. The first is that it compromises the

goal of universality of insolvency proceedings that the Regulation is supposed to embody. Article

13 is one of many exceptions eating away at the principle. The second criticism is that, despite

the opaqueness of language, the effect of the rule seems to be that a transaction will generally

para 81 talking about the reference as ‘slightly mystifying’.41 See I Fletcher “The European Union Convention on Insolvency Proceedings: Choice- of-Law Provisions (1998)33 Texas International Law Journal” 119 at 128.

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escape avoidance unless it is avoidable under the laws of both the forum State and the State

whose laws otherwise govern the transaction. A rule with double avoidance requirements narrows

greatly the potential application of avoidance provisions and weakens implementation of the

policies of fairness and priority that underlie such provisions. The third criticism is that avoidance

laws are all about vindicating the mandatory policies and principles of the forum State – fairness

between creditors, avoiding premature liquidation, reinforcing the collective nature of the

liquidation process etc. The Article 13 defence, on the other hand, trumps these wider goals in

the interests of party autonomy.

The fourth criticism focuses on the precise language used in Article 13. The Article talks about a

person benefiting from an act detrimental to all the creditors who provides proof that the “act is

subject to the law of a Member State other than that of the State of the opening of proceedings”.

The ambiguities are legion. For example, does the expression “provides proof” imply the normal

civil standard of proof or something more, or less? When the Article talks about an act being

“subject to a law” does it mean the governing law as determined by an express choice of law

clause, or normal choice of law principles, or something else? What if the impugned transaction

consists of a two or more stage or act process? Should each of these stages be regarded as a

separate “act”? What if the law of different jurisdictions applies to each stage and one law

provides a defence to an avoidance action but not other laws. Can the transaction be challenged?

Overall, an insolvency representative wishing to challenge a transaction has to run a huge

obstacle course. This is likely to dissuade all but the most foolhardy or financially well resourced

representatives from instituting proceedings.

Conclusion

There are many difficulties that inhibit an insolvency representative from bringing transactional

avoidance actions including cos, and the problems in surmounting legal barriers. The difficulties

are compounded when the potentially impeachable transaction has an international dimension.

Cost and legal obstacles increase. The UNCITRAL Model on Cross-Border Insolvency has not,

in this area at least, led to greater harmonization; certainly between the US and UK. The Model

Law has been implemented in different ways in the US and UK with the US going down the

route of forcing foreign insolvency representatives to choose between different Bankruptcy Code

chapters with different substantive rules applying to each. Not that the UK can be accused of

taking the legally minimalist route. The effect of the EC Regulation is to complicate the picture

in respect of insolvency proceedings for companies with a centre of main interests in the UK. If a

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liquidator or administrator seeks to impugn a transfer or transaction entered into by the company,

then the other party to the transaction may raise the defence that the transaction is subject to the

laws of a different EC Member State which does not permit avoidance in the particular instance.

If the transaction is subject to the law of a non-EC state such as the US, then no such defence

may be raised. 20 years ago the Maxwell litigation showed a similarity in approach between the

US and UK. The years since have seen a movement at least in theory towards greater uniformity.

The practice on the ground however appears to be different in that the impressive unity of

Maxwell has been replaced by a plurality of approaches towards transactional avoidance. There is

the paradox of greater diversity in an insolvency world that is seen to move towards universalism.

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Conflicts and Avoidance in International Insolvency

Interaction between theUNCITRAL Model Law and the

EIR

Professor Gerard McCormackUniversity of Leeds

Lehman v Maxwell

• Lehman – jurisdiction and conflict issues• Maxwell – issues judicially massaged• But calls for international insolvency

ageements• Since come to pass but conflicts have not

disappeared• Focus of paper is on transactional

avoidance

Transactional avoidance

• Different rules in different jurisdictions• May catch fraudulent conveyances,

transactions at an undervalue, improperpreferences

• Rationales – avoiding prematureliquidation, preserving scheme of insolvency distribution, maintainingcollective process, preventing fraud

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Improper preferences

• England – s 239 Insolvency Act – influenced by a desire to prefer – conscious wish to improvedebtor’s position

• US – s547 Bankruptcy Code – effects test butordinary course of business and other defences

• More generous limitation periods in England• But generally accepted easier to challenge a

transaction in US - Maxwell

Transactions with aninternational element

• International element present in many cases• Difficult to devise taxonomy• English law – principle of modified universalism

– should apply to all debtor’s assets• US- applies to all assets irrespective of location• But presumption against applying US law to

foreign-based parties

Applicable law – five basicpossibilities

• Law of the forum state• Law of the foreign country assuming the

“act” is located abroad• Permit avoidance if this is allowed by the

law of either country• Only allow avoidance if both countries

permit this• Apply an interests analysis

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Maxwell and Paramount -Interests rule OK

• Maxwell in the US – triple cocktail of interests, presumption against extra-territoriality andcomity

• Centre of gravity of impugned transactions wasin UK

• Paramount – UK court had a discretion to makean order against any party to impugnedtransaction, irrespective of location, if sufficientconnection and just and proper

• List of factors – no hard and fast rules – elementof circularity

Model Law – art 23 foreign rep can invoke local law

• Differently implemented in US and UK• In US local law can only be used where full US

bankruptcy proceedings commenced• US law not available in Chapter 15 “foreign

case” proceedings• Full US proceedings likely to be more expensive

– certain entities cannot file• Re Condor – foreign law could be used in

Chapter 15 – otherwise assets might be hiddenin US

• Some difficulties remain

UK applicationof Model Law

• Art 23 CBIR - a standing section• No intention to alter substantive domestic

law - Paramount• But conflict of law difficulties• Re Condor issue – can s426 Insolvency

Act and Arts 21 and 23 be read togetherso as to permit application of foreign law

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EC Regulation• Applicable law is that of forum State• Includes avoidance law – Article 4(2)(m)• But Article 13 exception – premium on certainty

and transactional integrity – runs counter tomandatory goals of forum State

• EC Regulation - a territorial scheme withUniversalist pretensions?

• Effective rule of double avoidance – transactionsdifficult to challenge

• Practical ambiguities – meaning of “subject to” –2 stage transactions etc

Conclusion• Interests analysis can be criticised• Uncertainty, ambiguity, unilateralist home

country focus• But practical harmonisation, great fact

sensitivity, due regard to certainty• Different method of implementation of Model

Law complicates picture in US• EC Regulation immunises many transactions• Does more international instruments mean less

harmonisation in practice?

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Israel’s New Reorganization Legislation

Professor David HahnBar Ilan University

Reorganization Since 1995

• Compromise or Arrangement Scheme

– Within the Companies Ordinance (as of 1929)

– Pre-Statehood

Reorganization Since 1995

• Coupled by Comprehensive Moratorium

– Effective against all (?) creditors –unsecured and secured alike

• Query: ROTs (since The North Drills case)– Moratorium by court order

• No automatic stay– Lift of moratorium if secured creditor not

adequately protected

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The 2012 Legislation

• Splitting Compromise or arrangement into 2 parts:– Compromise or arrangement w/out

moratorium (and no court appointed officer)– Compromise or arrangement w/ moratorium

• Psychological marketing– May encourage voluntary pre-packs– Especially appealing for corporate bonds

arrangements

The 2012 Legislation

• Issues legislated:– Moratorium – Sale or Use of Property– Reorganization Financing– Adequate Protection– Trustee or DIP– Executory Contracts– Utilities and Essential Services– Cramdown

Moratorium

• Explicit subjecting ROTs to moratorium

• Leaving standard of valuation for adequate protection open for court decision

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Sale or Use of Property

• Authority to use or sell secured property –– In ordinary course of business – w/out

advance court order– Otherwise – with advance court order

• Entitles secured creditor to adequate protection

• Traceable proceeds shall be collateral

Reorganization Financing

• Authorization to obtain financing – Only w/ court order– After notice to secured and priority creditors

• Priority of the reorg. financing – ascending scale:– Administrative expenses– Junior lien– Senior lien

Adequate Protection

• Required :– For maintaining the moratorium– In exchange for use or sale of secured

property– In exchange for providing senior lien to

reorg. financing• Standard of valuation:

– Deliberate statutory silence• Post-commencement interest:

– Not provided by statute

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Trustee or DIP

• Rule: – Court appointed trustee– No explicit specification of practice– Officer of the debtor may qualify as trustee

• Exception:– DIP

• Where officer of debtor appointed or DIP –– Court shall appoint monitor for protection of

creditors

Executory Contracts

• Authority to assume or reject contract– Within 30 days after commencement – After hearing and court order

• Rejection:– Non-debtor party retains rights of

unsecured claim

• Invalidation of insolvency ipso factoclauses

Executory Contracts

• Assumption:– Despite pre-commencement breach– Provided that debtor shall perform timely

post-assumption– No requirement for cure of pre-

commencement breaches– Post-assumption payments shall constitute

administrative expenses– Assumed contract may be assigned to 3rd

party

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Utilities and Essential Services

• Utilities and Essential Services:– Electricity– Water– Other products/services defined in

regulation– Any service/product vital for continued

operation of debtor

Utilities and Essential Services

• Court may order continued providing of product or services for 60 days– Under original terms– No payment of pre-commencement debts– Post-commencement payments shall

constitute administrative expenses

Approval of Reorganization Plan

• Classes of interest

• Double Majority w/in class:– Simple majority in person

– Super priority (75%) of claims attending and voting

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Cramdown

• Court may confirm over dissent of a class if – Supermajoity of 75% of total claims voting

(in all classes combined) – approved• Plan is “fair and equitable” –

– w/ respect to class of unsecured creditors -

– W/out plan the debtor will be liquidated, and

– Plan provides for dissenting class value equal or higher than liquidation value

Cramdown

• Plan is “fair and equitable” –– w/ respect to class of unsecured creditors -

• W/out plan the debtor will be liquidated, and• Plan provides for dissenting class value

equal or higher than liquidation value• Plan provides for class:

– Cash payment of value of secured claim as of date of confirmation;

– Installment payments of value of secured claim;– Collateral of value of secured claim.

THANK YOU !

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Session 5: Joint Session with theINSOL Global InsolvencyPractice Program Fellows

The Revenue Rule and the Recognition of Tax ClaimsStephen Packman, Archer & Greiner P.C.Fellow, INSOL International

The Tension between Integrity of Process and ValueMaximisation – A Comparative CritiqueJudge Timothy A. Barnes, United States Bankruptcy Court forthe Northern District of Illinois, Fellow, INSOL InternationalJeffrey Oliver, Gowlings LLP, Fellow, INSOL International

Insolvency Issues in Developing Jurisdictions: The Case of the P.R.C.Timothy Le Cornu, KRyS Global, Fellow, INSOL International,

The Importance of COMI in Transaction PlanningStewart Maiden , Barrister, Victorian Bar, Fellow, INSOL International

Comparative Assessment of Business Sales: USA/UK/The NetherlandsNicolaes Tollenaar, RESOR N,V Fellow, INSOL International

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1

THE REVENUE RULE AND THE RECOGNITION OF TAX CLAIMS IN CROSS-BORDER CASES

Stephen M. Packman, Esq.a1

Douglas G. Leney, Esq.a2

I. Introduction

In the nearly seven years since the United States Bankruptcy Code3 was amended to include anew Chapter 15 to address cross-border insolvencies,4 a number of previously unsettledinsolvency issues has been put to the test, with some measure of clarity coming from the courtswhile still other guidance is provided by Chapter 15 itself. To be sure, Chapter 15, like itspredecessor transnational legal texts,5 seeks to provide a general framework for recognition offoreign proceedings, relief which may be granted to a foreign representative, and cooperationamong foreign courts in which concurrent proceedings are pending. However, Chapter 15 doesnot explicitly provide instruction with respect to claims procedures, either within or outside theUnited States. Courts have thus been left to fashion their own means of ensuring fairadjudication of claims while simultaneously seeking to protect the interests of localconstituencies. The issue is further compounded when the claims at issue are foreign tax claims,which are generally not recognized outside the country in which they arise. This paper begins byexamining the various approaches to administering cross-border insolvencies, which providessome context for the various ways in which claims may be treated. It then outlines the historicalreasons for non-recognition of foreign tax claims, and provides potential solutions which areconsistent with the goals of Chapter 15 and international insolvency jurisprudence.

II. The Theoretical Spectrum: From Universalism to Territorialism

“Universalism” refers to a concept in which a single court – that of the debtor’s “home country”– would maintain exclusive jurisdiction over a debtor’s assets, wherever located, and distributethem in accordance with the law of that country.6 Under a “pure universalist” approach, courtsin other, “non-home” countries would be expected to recognize and enforce the laws andpriorities of the home country’s court.7 This end of the philosophical spectrum is championed bythose such as Jay Lawrence Westbrook, a leading advocate of the universalist convention.Professor Westbrook submits that in order for universalism in international bankruptcies tosucceed, a single law and a single forum must govern each case.8 Proponents of universalismespouse among its theoretical benefits the reduced administration costs to the bankruptcy estate,as a result of one centralized proceeding rather than multiple international fragments; increasedpredictability on an ex ante basis, as a result of knowing the debtor’s home country, andtherefore, the applicable insolvency law;9 and, in large part due to this increased predictability,encouragement of foreign investment and extension of credit. While these perceived benefitsmay still be far more theory than practice, even critics of the universalism view concede that “theglobalization of business eventually will harmonize the now-divergent debt collection andinsolvency systems of the countries of the world, making conditions ripe for universalism.”10

In response to the relatively stricter rigidity imposed by a pure universalism approach, the notionof “modified universalism” instead combines the core elements of pure universalism – one mainproceeding and one main body of law – with the flexibility for countries other than the home

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country to “evaluate the fairness of the home-country procedures and to protect the interests oflocal creditors.”11 This is accomplished by the establishment of a main proceeding in the homecountry and the appointment of a foreign representative charged with the administration of thedebtor’s assets. However, rather than a single venue and mandatory application of a single bodyof law, modified universalism allows for, on a case by case basis, the initiation of ancillaryproceedings in other countries, and some degree of discretion in applying foreign law. In otherwords, where application of the home country’s law would offend justice or public policy in thecountry where an ancillary proceeding may be pending, the ancillary court – against a backdropof deference and cooperation with the home country – would nevertheless have some discretionin choosing to apply the foreign law. If this sounds familiar, it is because the Model Law andChapter 15 have embraced a modified universalism approach in the administration oftransnational insolvency proceedings.

At the other end of the philosophical spectrum on administration of international insolvency isthe “territorialism” approach. In stark contrast to universalism, territorialism attempts to providea more flexible and organic process for bankruptcies which may require more than one centralproceeding. Lynn LoPucki, a supporter of cooperative territorialism, frames the basic approachof pure territoriality as follows: “[i]n a territorial system, the necessary international cooperationtakes place in each case. That is, ‘parallel’ bankruptcy proceedings are initiated in each countryin which the corporate group has substantial assets. Each court appoints a “representative” forthe estate of each entity filing in its jurisdiction. Those representatives then negotiate a solutionto the debtor’s financial problems. If the estates are worth more in combination than they areseparately, it will be in the interests of the representatives to combine them.”12 The perceivedbenefits of territorialism include safeguards against potentially biased foreign courts or laws;keeping a closer eye on local assets and thus a affording a greater level of protection to localcreditors; and furthering national sovereignty while eliminating blind deference to foreign laws.13

With the goal of preserving some measure of cooperation among countries and courts, amodified form of territorialism known as “cooperative territorialism” has emerged. Thisapproach, like the pure territorialism from which it is derived, would still favor separateinsolvency proceedings in each country in which a debtor maintains interests. However, a keyelement of cooperative territorialism would be cooperation among various representativesappointed in their respective country’s proceedings, and this discretionary cooperation and jointdecision-making would somewhat temper the blanket application of “local country” laws in eachproceeding, where it is determined that the debtor’s overall bankruptcy estate is better servedthrough such cooperation.14

While none of the above theories can provide a perfect solution to the problems facing the manyplayers involved in international insolvency proceedings, it seems evident that pure universalism,and its mandate for one singular proceeding, is likely an unrealistic option. This is not to suggestthat pure territorialism, and its “race to assets” approach spread among numerous countries andcourts, provides a more palatable answer to the problem. Whether the Model Law and Chapter15, and the principles of modified universalism they encompass, have aimed in the rightdirection or not, it seems that multiple proceedings in multiple countries are an inevitability, andtherefore some level of international cooperation is required. Accordingly, we now shift ourfocus to the manner in which claims are adjudicated in these cases, and the unique problemsassociated with foreign tax claims.

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III. Claims Procedures and Treatment in Cross-Border Cases

Prior to the enactment of Chapter 15, U.S. bankruptcy courts’ willingness to recognize or enforcethe laws of foreign jurisdictions found its roots in general principles of international comity.15

Notions of comity were codified in Chapter 15’s predecessor statute – Section 30416 of theBankruptcy Code – but the mechanics of where, when, and how to apply comity have long beenamorphous concepts in U.S. courts. Unlike judgments entered in other states, foreign judgmentsare not governed by the Full Faith and Credit Clause.17 Moreover, the United States is not aparty to any international agreement regarding the recognition of foreign judgments.18

Nevertheless, more than a century ago, in the landmark case of Hilton v. Guyot,19 the SupremeCourt of the United States decided in favor of a presumptive recognition of foreign judgments,subject to certain requirements, including a reciprocity requirement with the country seeking toenforce said judgment.20

While Section 304 employed some degree of judicial analysis of weighing policy interests andexamining various factors,21 including comity, in recognizing a foreign insolvency proceeding,Chapter 15 streamlined the process and made recognition fairly automatic provided the requisiteprocedural elements were met.22 Upon the bankruptcy court’s recognition of a foreign main ornon-main proceeding, Chapter 15 relatively clearly enumerates various forms of relief whichmay be granted to the foreign representative of the petitioning debtor, as well as certain powersand duties which may be vested in the foreign representative vis-à-vis the administration of theChapter 15 case.23 Chapter 15 is also clear that interim relief may be granted to the foreignrepresentative upon commencement of the Chapter 15 case and until the petition for recognitionis decided by the bankruptcy court.24 When it comes to the issue of claims administration,however, Chapter 15 is not so clear. Chapter 15 does not explicitly provide for a local,territorialist claims administration process to be conducted in the United States, nor does itexplicitly state, without reservation, that the Chapter 15 case will defer all claims adjudication tothe home country. Rather, Section 1521(b) provides that “[u]pon recognition of a foreignproceeding, whether main or nonmain, the court may, at the request of the foreign representative,entrust the distribution of all or part of the debtor’s assets located in the United States to theforeign representative or another person, including an examiner, authorized by the court,provided that the court is satisfied that the interests of creditors in the United States aresufficiently protected.”25 The notion of protection of local, U.S. interests and public policyappears elsewhere throughout Chapter 15.26

In practice, this has manifested in several different ways. Where the claims administrationprocess in the foreign proceeding does not seem to infringe upon the public policy exceptionembodied in Section 1506, U.S. bankruptcy courts have simply recognized and enforced theclaims procedure as binding on U.S. parties in interest. This was the case in the Chapter 15proceedings of Alitalia,27 Quebecor World Inc.,28 and De Coro Limited.29 On the other hand,where the public policy exception may be implicated, the Chapter 15 court may makerecommendations regarding the claims procedure’s modification before recognizing andenforcing same. For example, in the matter of Ephedra Products Liability Litigation, theBankruptcy Court for the Southern District of New York approved the recognition andenforcement of a foreign claims procedure in Canada, but only after the Canadian claimsprocedure was amended to provide for notice and opportunity to be heard by claimants.30

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In at least one instance, the Chapter 15 court expressly reserved its ability to review anyproposed distribution to be made in the foreign main proceeding to ensure that such distributionwas consistent with protecting the interests of U.S. creditors.31 “[I]t was clear from the start thatJudge Bentz expressed reservations about the distribution of Railpower U.S. assets in theCanadian Proceeding which is why every key order he entered in the Chapter 15 case included aprovision to the effect that Railpower U.S. assets were not to be distributed in the CanadianProceeding without the prior approval of this Court.”32 In the case of De Coro Limited, theBankruptcy Court for the Middle District of North Carolina approved the recognition andenforcement of the claims procedure in Hong Kong, the debtor’s home country. Subsequently,the Internal Revenue Service sought to be carved out of the approved claims procedure,contending that its tax claim would not be recognized in a Hong Kong insolvency court, andtherefore, it would be “manifest injustice” within the meaning of Section 1506 to be bound bysuch claims process. The Bankruptcy Court rejected this argument as speculative and consisting“entirely of supposition” on the part of the Internal Revenue Service.33 The Bankruptcy Courtthus directed the Internal Revenue Service to file its claim against the debtor in the Hong Kongproceedings. However, some of the concerns raised by the Internal Revenue Service inconnection with the perceived non-recognition of its claim abroad are discussed in the nextsection of this paper. Nevertheless, creditors must be careful when filing claims in cross-borderbankruptcy cases. Unless case protocol specifically calls for claims to be filed in the Chapter 15case, a U.S. trade creditor filing its claim in a U.S. non-main proceeding – and not where theforeign main proceeding is pending – will likely lead to disallowance of the claim.34

Once it is determined where a creditor must file its claim, the issue then becomes how that claimwill be treated for distribution purposes. The Model Law mandates a minimum level of fair“treatment” of creditors – that is, foreign creditors must be treated in the same manner that localcreditors are treated, including the rights associated with participating in the local insolvencyproceedings.35 This is different, however, than the “treatment” of a particular foreign creditor’sclaim. In that regard, the Model Law does not mandate universal cross-priority of claims, andrequires only that a foreign creditor’s claim be treated as well as a similarly situated generalunsecured creditor’s claim.36 The Model Law leaves to each enacting country, at its option,whether to recognize foreign priority claims and foreign revenue claims.37 Affording cross-priority to foreign claims is one thing where there is only one insolvency proceeding pending inone court; it is another matter entirely where there are multiple ancillary proceedings pending invarious jurisdictions. Simply put, in many instances, different countries afford vastly differentpriorities to seemingly similar claims. For example, consider the various treatments of securedcreditors’ claims compared with employee claims around the world: (i) countries whereemployee claims trump those of secured creditors include Chile, Columbia, Indonesia, andMexico; (ii) countries where secured creditors’ claims enjoy priority over claims of employeesinclude Austria, Canada, Japan, Malaysia, South Africa, the United States; and (iii) countrieswhere employee claims do not enjoy any priority a all, and are simply paid together with those of“common creditors” include Estonia and Germany.38 This can serve as an impediment to theoverarching spirit of cooperation and comity embodied by the Model Law and othertransnational regimes, and increase tensions between countries hosting what ought to becooperatively parallel proceedings in a cross-border case. Perhaps nowhere is this tension moreevident than in the recognition and treatment of foreign tax claims.

IV. The Revenue Rule and Traditional Policy Regarding Foreign Tax Claims

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Foreign tax claims present a special set of problems in international insolvency proceedings inpart because a foreign tax claim is often unenforceable in countries outside that in which theclaim arose. In the United States, the refusal to recognize foreign revenue or penal judgmentsruns contrary to the general presumption of enforceability of foreign judgments as articulated bythe Hilton v. Guyot court.39 This presumption against recognition of foreign tax claims traces itsmore than 200-year old history to English common law. In 1775, in deciding the contract case ofHolman v. Johnson, Lord Mansfield wrote that “… no country ever takes notice of the revenuelaws of another.”40 The historical reasons for this refusal to recognize foreign tax claims –termed the “revenue rule” – are varied and generally policy-driven, but two of the mostcommonly cited are (i) that enforcement of foreign tax claims would require some review andanalysis of those claims, and may result in the enforcing nation declaring the tax law upon whichthe claim is based to be invalid, which may in turn result in embarrassment and tension betweenthe countries; and (ii) that courts generally lack the necessary competence or context to properlyunderstand, evaluate, and enforce tax claims arising in other nations.41

The revenue rule was explicitly incorporated into American jurisprudence in the case of HerMajesty the Queen v. Gilbertson,42 which involved Canadian taxing authorities attempting tolevy certain logging taxes against U.S. citizens in Oregon. In recognizing that the SupremeCourt of the United States had not previously opined directly on the revenue rule, the NinthCircuit nonetheless confirmed that the revenue rule has long been a doctrine recognized in theUnited States: “since its inception [the revenue rule] has become so well recognized that thisappears to be the first time that a foreign nation has sought to enforce a tax judgment in thecourts of the United States … The revenue rule has been with us for centuries and as such hasbecome firmly embedded in the law.”43 The revenue rule, or some variation thereof, has beenapplied in other countries, such as Canada, England, Ireland, and France.44 Essentially, in theabsence of a tax treaty explicitly providing for the reciprocal treatment of tax claims betweentwo countries, those countries should expect that their respective tax claims may simply not berecognized in courts abroad.45 Recently, the Bankruptcy Court for the Southern District of NewYork denied millions of dollars in tax claims filed by the Republic of Indonesia against a U.S.debtor in a Chapter 11 proceeding, citing that “the Revenue Rule is firmly entrenched in the lawof the Second Circuit” and that the doctrine of stare decisis left the court with no choice but toapply the rule and deny the Republic’s claims.46

The revenue rule has certainly been met with its share of criticism: “[i]n an age when virtuallyall states impose and collect taxes and when instantaneous transfer of assets can be easilyarranged, the rationale for not recognizing or enforcing tax judgments is largely obsolete.”47 Inthe context of international insolvency, the Model Law, Chapter 15, and the ALI Project arenoticeably silent regarding the recognition and enforcement of foreign tax claims. This lack ofguidance cuts against the generally (modified) universalist philosophies embraced by thesedoctrines, and leaves open the issue of finding a more workable solution which both comportswith the more rigid framework of the universalist model while simultaneously addressing theinternational concerns giving rise to the revenue rule in the first place.48 In order to be practicalin its application, any such solution will likely require the abandonment – or at the very least,significant retooling – of the revenue rule and the manner in which countries treat foreign taxclaims, if only in the limited “universe” of bankruptcy proceedings.

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Upon its enactment, Chapter 15 specifically declined to “change or codify present law as to theallowability of foreign revenue claims or other foreign public law” in cross-border proceedingssubject to its terms.49 A solution which is both practical and implementable must therefore befashioned. The first potential solution is not so much a new paradigm for the treatment offoreign tax claims in transnational insolvency proceedings, but rather a continuation of themanner in which the United States already attempts to address foreign tax claims – bilateral taxtreaties. The United States maintains tax treaties with a number of foreign countries.50 Thesetreaties seek, among other things, to correct the issue of double-taxation, and often provide forreductions or exemptions of certain kinds of taxes imposed on foreign residents in a reciprocalmanner. Tax treaties also provide relief from many of the concerns underlying the revenue rule.For example, the presence of a tax treaty between two nations will eliminate the need for judicialscrutiny – and thus potential embarrassment and tension – as the enforcing country will simplybe applying the enforcement set forth in the treaty. Similarly, the judicial competence andcontext concern is eliminated by an ex ante understanding of the terms of the treaty, and amechanical application of its terms with respect to foreign tax claims.51 Finally, concernsregarding national sovereignty and furthering the laws of another nation are ameliorated by areciprocity requirement under the applicable treaty.52 However, while at first glance tax treatiesseem to address some of the problems associated with the revenue rule, it should be noted thattreaties typically only contemplate double-taxation issues, and do not specifically mandaterecognition of foreign tax claims in insolvency proceedings. Moreover, tax treaties as a solutionto the treatment of foreign tax claims seems relatively inefficient, in that each country would beleft to negotiate the terms of multiple bilateral treaties with other countries on a case-by-casebasis.

Moreover, if foreign tax claims are to be recognized abroad, what priority (if any) should they begiven? There exist a number of policy arguments both for and against affording tax claimspriority in bankruptcy. For example, proponents for tax priority argue that affording tax claimspriority protects the revenue base for the common good, and avoids shifting the burden of thedebtor’s unpaid taxes to be defrayed by other taxpayers.53 Additionally, taxing authorities arestatutory, involuntary creditors of debtors, unable to negotiate terms of extending credit orotherwise vested with the advantages that voluntary creditors enjoy, and thus their claims shouldbe given priority over those of general unsecured creditors.54 In contrast, critics of tax priorityargue that the tax debts owed by a given debtor are unlikely to be significant in terms ofgovernmental revenue, yet deprive private creditors of any real hope of recovery in a bankruptcyproceeding.55 Moreover, critics of granting priority to tax claims contend that the taxingauthorities, unlike most private creditors, are armed with a number of ways in which to collecttheir taxes due, such as the imposition of default interest and penalties, third-party liability, andgovernmental liens and levies upon the debtor’s assets, which more than make up for the taxingauthority’s “involuntary creditor” woes.56 Inconsistencies among treaties could result in similartax claims being subjected to different priority schemes depending upon the country in whichsuch claims originate.

The better solution, it seems, is to include foreign tax claims under the broad umbrella of cross-priority universalism of Chapter 15 and the Model Law, while reserving a public policyexception “safety valve” to prevent abuse or the recognition of claims which are patentlyoffensive to justice. This would essentially mean a limited abrogation of the revenue rule in thenarrower context of claims administration in international insolvency proceedings, and would

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help to foster the overarching goals of cooperation and communication. Similar to the treatyapproach, presumptive recognition and enforcement of foreign tax claims in insolvencyproceedings also would also solve many of the problems caused by unpredictability under thecurrent regime, such as whether the claim will be recognized and what priority will be affordedto the claim if it is indeed recognized. Presumptive recognition and enforcement would alsoprovide less incentive for non-home countries to commence their own ancillary proceedings, andincreased trust and deference to a centralized home country proceeding will in turn decreaseadministrative costs to the insolvency estate. Cross-priority thus appears to be an attractiveoption, provided the public policy exception is properly framed and invoked only whennecessary.

In order for cross-priority of foreign tax claims to be a realistic option in internationalbankruptcy proceedings, there must nevertheless remain some sort of public policy exceptionsimilar to that found in doctrines providing for the enforcement of foreign judgments.57 Thedifficulty with such an exception lay in properly defining its scope. If the exception is toonarrowly tailored, then its invocation may be hindered, resulting in foreign tax claims which aremanifestly unjust in countries in which they are filed. On the other hand, if the exception is toobroad, then it simply eviscerates the notion of recognition and cross-priority in the first place,giving rise to many of the problems the revenue rule sought to prevent entirely, such as broadcase-by-case judicial examination and application of the tax claims of other nations. Rather, thepublic policy exception should be implicated only when the foreign tax claims at issue are“crooked” or “illegal,”58 or where the claims so exceed some definable threshold that they maybe considered to be unduly burdensome or unenforceable as manifestly unjust.59

V. Hypothetical Example for Discussion

A hypothetical case scenario involving the tax claims dilemma will be presented during thelecture for discussion.

a1 Stephen M. Packman is a shareholder with Archer & Greiner, P.C. in Haddonfield, New Jersey, and chairs thefirm’s Bankruptcy (Debtor/Creditor Rights) practice group. He is a member of the inaugural class of INSOLFellows.a2 Douglas G. Leney is an associate with Archer & Greiner, P.C. in Haddonfield, New Jersey, and a member of thefirm’s Bankruptcy (Debtor/Creditor Rights) practice group.3 Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the “Bankruptcy Code”).4 The addition of Chapter 15 was among many amendments to the Bankruptcy Code under the Bankruptcy AbusePrevention and Consumer Protection Act of 2005 (“BAPCPA”), which was enacted on April 20, 2005.5 These texts include, for example, the UNCITRAL 1997 Model Law on Cross-Border Insolvency (the “ModelLaw”), the American Law Institute’s Principles of Cooperation in Transnational Insolvency Cases Among Membersof the North American Free Trade Agreement (the “ALI Principles”), and the European Union InsolvencyRegulation (the “EU Regulation”).6 Lynn M. LoPucki, The Case for Cooperative Territoriality in International Bankruptcy, 98 Mich. L. Rev. 2216,2220 (2000).7 Jonathan M. Weiss, Tax Claims in Transnational Insolvencies: A “Revenue Rule” Approach, 30 Va. Tax Rev.261, 269 (2010).

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8 Jay Lawrence Westbrook, A Global Solution to Multinational Default, 98 Mich. L. Rev. 2276, 2292 (2000).9 Of course, this assumes that a given debtor’s “home country” may be readily determined without dispute. In aglobal economy where the countries of a debtor’s incorporation, principal place of business, headquarters, inventory,and primary market may all be different, such a determination may itself lead to as much fragmented and protractedlitigation as would multiple insolvency proceedings themselves under a territorialist approach.10 See LoPucki, supra note 4 at 2217.11 In re Maxwell Commc’n Corp. plc, 170 B.R. 800, 816 (Bankr. S.D.N.Y. 1994).12 See LoPucki, supra note 4 at 2219.13 See Weiss, supra note 5 at 274-75.14 See Weiss, supra note 5 at 276-77.15 “The extent to which the law of one nation, as put in force within its territory, whether by executive order, bylegislative act, or by judicial decree, shall be allowed to operate within the dominion of another nation, dependsupon what our greatest jurists have been content to call ‘the comity of nations.’” Hilton v. Guyot, 159 U.S. 113, 163-64 (1895).16 11 U.S.C. § 304 (repealed 2005).17 The Full Faith and Credit Clause refers to Article IV, Section 1 of the United States Constitution, which requiresthat states within the United States must respect the “public acts, records, and judicial proceedings of every otherstate.”18 Born and Rutledge, International Civil Litigation in United States Courts, (Fifth Edition), Aspen Publishers 2011,p. 1012.19 159 U.S. 113 (1895).20 Although not completely abandoned, the reciprocity requirement “is no longer followed in the great majority ofState and federal courts in the United States.” Restatement (Third) Foreign Relations Law § 481, comment d (1987).21 These factors are sometimes referred to the “304(c) factors.” See 11 U.S.C. § 304(c) (repealed 2005).22 Zink and Vazquez, U.S. Bankruptcy Code – Chapter 15: The Early Returns, Insolvency Intelligence, Volume 20,Number 2 (March 2007); see also, In re Bear Stearns High–Grade Structured Credit Strategies Master Fund, Ltd.,389 B.R. 325, 333 (S.D.N.Y. 2008).23 Section 1521 of the Bankruptcy Code provides, in pertinent part:

(a) Upon recognition of a foreign proceeding, whether main or nonmain, where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors, the court may,at the request of the foreign representative, grant any appropriate relief, including—(1) staying the commencement or continuation of an individual action or proceeding concerning the debtor’s assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520 (a);(2) staying execution against the debtor’s assets to the extent it has not been stayed under section 1520 (a);(3) suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under section 1520 (a);(4) providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;(5) entrusting the administration or realization of all or part of the debtor’s assets within the territorial jurisdiction of the United States to the foreign representative or another person, including an examiner, authorized by the court;(6) extending relief granted under section 1519 (a); and(7) granting any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724 (a).(b) Upon recognition of a foreign proceeding, whether main or nonmain, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor’s assets located in the United States to the foreign representative or another person, including an examiner, authorized by the court, provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected.(c) In granting relief under this section to a representative of a foreign nonmain proceeding, the court must be satisfied that the relief relates to assets that, under the law of the United States, should be administered in the foreign nonmain proceeding or concerns information required in that proceeding.

24 See generally, 11 U.S.C. § 1519.25 11 U.S.C. § 1521(b).

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26 See, e.g., 11 U.S.C. §§ 1506, 1522(a).27 In re Alitalia Linee Aeree Italiane S.p.A., Case No. 08-14321-BRL (Bankr. S.D.N.Y.), Docket Ref. No. 23.28 In re Quebecor World Inc., Case No. 08-13814-JMP (Bankr. S.D.N.Y.), Docket Ref. No. 7.29 In re De Coro Limited, Case No. 09-10369-WLS (Bankr. M.D.N.C.), Docket Ref. No. 53. The authors of thispaper previously represented the foreign representative from Hong Kong in the debtor’s Chapter 15 bankruptcycase.30 In re Ephedra Products Liab. Litig., 349 B.R. 333, 335 (S.D.N.Y. 2006) (“As to due process, while most of theobjectors’ objections are frivolous, there were various paragraphs of the June 8 Order that conceivably could havebeen read as permitting the Claims Officer to refuse to receive evidence and to liquidate claims without grantinginterested parties an opportunity to be heard. At this Court’s initiative, the Monitor proposed amendments to theJune 8 Order that entirely cured these problems. The Ontario Court promptly adopted these amendments in itsAugust 1 Order, and it is only as a result that this Court now gives its approval to recognition and enforcement of theProcedure.”).31 In re Railpower Hybrid Technologies Corp., Case No. 09-10198-TPA (Bankr. W.D. Pa.), Docket Ref. No. 23.32 In re RHTC Liquidating Co., 424 B.R. 714, 725 (Bankr. W.D. Pa. 2010).33 In re De Coro Limited, Case No. 09-10369-WLS, 2010 WL 5140440 at *4-5 (Bankr. M.D.N.C. , December 13,2010).34 Nathan and Horn, Demystifying Chapter 15 of the Bankruptcy Code, Business Credit, National Association ofCredit Management, June 2009.35 See Model Law at art. 13.36 See Weiss, supra note 5 at 299.37 Jay Lawrence Westbrook, Multinational Enterprises in General Default: Chapter 15, the ALI Principles, and theEU Insolvency Regulation, 76 Am. Bankr. L.J. 1, 16 (Winter 2002).38 OECD (2007), Asian Insolvency Systems: Closing the Implementation Gap, OECD Publishing, p. 260.39 See Born and Rutledge, supra note 16 at 1034.40 98 Eng. Rep. 1120, 1121 (1775).41 See Weiss, supra note 5 at 304-05.42 Her Majesty the Queen in Right of the Province of British Columbia v. Gilbertson, 597 F.2d 1161 (9th Cir. 1979).43 Id. at 1164-66.44 Brenda Mallinak, The Revenue Rule: A Common Law Doctrine for the Twenty-First Century, Duke J. of Int’land Comp. Law, 80, 88-92 (2006); see also, Government of India v. Taylor, [1955] A.C. 491 (affirming the decisionof the Court of Appeal in In re Delhi Electric Supply and Traction Co. Ltd., [1954] Ch. 131, in which Jenkins, L.J.said: “I have come to the conclusion that if the claim of the applicant were allowed, subject to ascertainment ofquantum, the substance and reality of the matter would be that the English court would be collecting tax for thebenefit of another State. That would involve an invasion of the principle which, as I think, must be definitelyrecognized.”); Peter Buchanan Ltd. v. McVey, [1954] I.R. 89, [1955] A.C. 516 (in which the Irish Supreme Courtstrictly applied the revenue rule in an action on a claim by the Scottish liquidator of the plaintiff company,wound up at the instance of the Scottish Revenue to which taxes of £155,000 were due, against the abscondingdefendant owner of 99 percent of its shares); Héritiers Vogt v. Feltin, Cass. civ., July 3, 1928, 56 Clunet 385 (1929);Bemberg v. Fisc de la province de Buenos Ayres, Seine, Feb. 24, 1949, 1949 J.C.P. II No. 4816, 1949 Sirey II 101(standing for the proposition that the general French rule of ordre public is that the French courts will not assist inthe collection of foreign taxes).45 See, e.g., Republic of Honduras v. Philip Morris Cos., Inc., 341 F.3d 1253, 1259 (11th Cir. 2003) (holding that therevenue rule barred the Republic’s suit to recover tax revenue because “[t]he political branches undisputedly havenot entered into any type of tax treaty with any of the Republics that would allow the Republics to enforce their taxclaims underlying this suit in this country.”); Att’y Gen. of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268F.3d 103, 119–22 (2d Cir. 2001) (discussing at length the tax treaty framework as between the United States andCanada).46 In re BearingPoint, Inc., et al., Chapter 11, Case No. 09-10691-REG, Docket Ref. No. 1964. The Republic ofIndonesia filed multiple proofs of claim to recover taxes allegedly due and owing by PT Barents Indonesia, anondebtor subsidiary of the Chapter 11 debtor BearingPoint, Inc. Notably, for purposes of its analysis under therevenue rule, the bankruptcy court nevertheless assumed that the domestic debtor BearingPoint, Inc. would havebeen liable to the Republic of Indonesia for the tax claims at issue, but that the revenue rule’s application barredrecognition of the claims altogether.

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47 Restatement (Third) Foreign Relations Law § 483, Reporters’ Note 1 (1987); see also, Kovatch, RecognizingForeign Tax Judgments: An Argument for Revocation of the Revenue Rule, 22 Hous. J. Int’l L. 265 (2000).48 See Weiss, supra note 5 at 302-03.49 Pub.L. 109-8, Title VIII, § 801(a), Apr. 20, 2005, 119 Stat. 138, 15 U.S.C. § 1513(b)(2)(A) (2006); cf. Art. 13,UNCITRAL Model Law on Cross-Border Insolvency; see also, In re Lernout & Hauspie Speech Products, N.V., 301B.R. 651 (Bankr. D. Del. 2003), aff’d, 308 B.R. 672 (D. Del. 2004) (confirming a plan that proposed to pay toBelgian curators in parallel proceeding additional funds for payment only of claims having priority under Belgianlaw, including tax and employee claims).50 A list of the countries with which the United States maintains bilateral tax treaties is available online athttp://www.irs.gov/businesses/international/article/0,,id=96739,00.html.51 See Weiss, supra note 5 at 308.52 Id.53 Barbara K. Morgan, Should the Sovereign be Paid First? A Comparative International Analysis of the Priority forTax Claims in Bankruptcy, 74 Am. Bankr. L.J. 461, 3 (2000).54 Id. at 4.55 Id. at 6.56 Id. at 6-7.57 See Weiss, supra note 5 at 311-12; see also, Karen E. Minehan, The Public Policy Exception to the Enforcementof Foreign Judgments: Necessary or Nemesis?, 18 Loy. L.A. Int’l & Comp. L. Rev. 795, 807 (1996).58 See, e.g., In re Yukos Oil Co., 320 B.R. 130 (Bankr. S.D. Tex. 2004). In that case, a Russian company soughtrelief in the United States from what it considered to be punitive and illegal taxation by Russia. Although thebankruptcy court found that the taxation in fact appeared to have been “not conducted in accordance with Russianlaw,” it nevertheless refrained from deciding the matter, instead dismissing the bankruptcy case on jurisdictionalgrounds. Id. at 136; see also, In re Yukos Oil Co., 321 B.R. 396 (Bankr. S.D. Tex. 2005).59 With respect to enforcement of foreign tax claims within the United States, one scholar has suggested a possiblethreshold of enforcement of tax rates up to the top U.S. marginal tax rates at that time. See Weiss, supra note 5 at n.300. While other possible standards certainly exist, the point is that the policy exception must set a clearly definedthreshold at some level under which foreign tax claims will be enforced and given cross-priority without furtherexamination.

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THE TENSION BETWEEN INTEGRITY OF PROCESS ANDVALUE MAXIMIZATION IN INSOLVENCY MATTERS –

A COMPARATIVE CRITIQUE

Timothy A. Barnes and Jeffrey Oliver*

I. INTRODUCTION

Every organization has to ask and answer the question: What are we tryingto accomplish? Or, to put the same question in more concrete terms: Howdo we keep score? When all is said and done, how do we measure betterversus worse?

Michael Jensen, Value Maximization, Stakeholder Theory, and the Corporate Objective Function,Working Paper 01-01 Harvard Business School (October 2001).

In a strict value maximization regime, Jensen argues that the foregoing quantification is an easy task.“Spend an additional dollar on any constituency provided the long-term value added to the firm fromsuch expenditure is a dollar or more.”

In opposition, stakeholder theory invokes a system in which objective quantification is nearlyimpossible. As Jensen states:

[S]takeholder theory plays into the hands of managers by allowing them topursue their own interests at the expense of the firm’s financial claimantsand society at large. It allows managers and directors to devote the firm’sresources to their own favorite causes—the environment, art, cities,medical research—without being held accountable for the effect of suchexpenditures on firm value.

Jensen correctly points out that—absent the strict objective criteria of value maximization as he definesit—there exists little in the pure academic view of corporate management decision making to provide acheck on abuse. But we do not live in an academic world, and even absent a pure value maximizationstandard against which actions of corporate managers may be weighed, there exists a whole host ofchecks and balances on behavior. Further, in the real world of management decision making, abusessuch as favorite causes are but hyperbolic examples of the finer choices—clearly within any acceptedbusiness judgment standard—where immediate pursuit of increase in value is either inappropriate or, atthe very least, governed by subjective conditions as to what true measure of value is to be achieved.

Nowhere are these decisions more evident than in the realm of insolvency, where individualstakeholder measures of value often conflict, and where larger, policy decisions affect the actions ofthe judicial officers charged with oversight and guidance of the applicable processes.

II. VALUE MAXIMIZATION AND INTEGRITY OF PROCESS IN INSOLVENCY MATTERS

While “value maximization” is an academic term of art that, tautologically, carries specific meaning inits use,1 in bankruptcy, it is axiomatic that the goal to be achieved is to maximize the value of the assetsof the estate.2 According to economic literature, managers of an insolvent firm have a duty to“maximize the sum of the values of all financial claims (both those held by shareholders and those held

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by creditors) against the firm. Put differently, an insolvent firm’s managers should maximize the totalfinancial value of the firm, not just the value of its equity.”3

Courts have recognized that the duty to maximize value in bankruptcy is more than a duty to a singleconstituency. In the United States, the U.S. Court of Appeals for the Second Circuit has explained thatthis duty is an obligation to the estate as a whole, not to individual creditors.4 In Canada, a similar dutyhas been described in legislation and in various cases as a duty to act in the interests of the “generalbody of creditors.”5 The scope of this duty creates a tension as value maximization means differentthings to different stakeholders. To coin a phrase, value is in the eye of the beholder. Valuemaximization of the estate does not perfectly parallel value maximizing the value of a specific asset orendeavour or maximization to an individual stakeholder.6 In addition, in a strict economic value-maximization model, parties that are owed contractual performance from the debtor but do not haveoutstanding financial claims against the firm may be ignored at the worst, or at least severelydiscounted.7 The concerns of these stakeholders, including contractual counterparties and employees,cannot be ignored in a bankruptcy proceeding, whether formal or informal.

In order to strike a balance between different stakeholder factions within an estate and attempt tomaximize value for all concerned, the United States Bankruptcy Code contains provisions that aredesigned to build consensus regarding how to administer an estate. In a classic bankruptcyrehabilitation model, wherein value maximization is achieved under a plan of reorganization, theconcerns of individual stakeholders are addressed through class voting procedures.8 In addition,bankruptcy courts are cognizant that they posses a key role in ensuring fairness to creditors and theintegrity of the process.9

Canadian law contains similar provisions. Pursuant to the Companies’ Creditors ArrangementAct10and the proposal mechanisms of the BIA,11 there are also class voting procedures andrequirements for court approval of any plan of arrangement or proposal, respectively.12

Four traditional strategies for achieving value maximization are: (1) debt refinancing with existinglenders; (2) recapitalizing balance sheets by raising additional equity; (3) debt restructuring; and(4) selling the business.13 These strategies can be utilized both in and out of a formal insolvencyproceeding.14 Depending on the specific concerns of a particular class of creditors, one of these fourstrategies is often preferable to the others. For example, the classic value-maximizing strategy for asecured creditor is liquidation of an asset.15 However, unsecured creditors and equity holders mayprefer a longer-term rehabilitation approach and arguably even the secured creditor may be harmed bythe realization of mere liquidation values on said assets.16

Irrespective of whether a rescue is implemented or a sale is consummated, in both the United Statesand Canada, the trend in terms of achieving value maximization has shifted towards a paradigm inwhich a quicker process is preferred over a long-term solution. The current wisdom appears to be thatthe shorter the process – no matter what form the process takes – the better. As such, in the UnitedStates, there has been a surge in the number of large Chapter 11 filings that file with a pre-negotiated orpre-packaged plan of reorganization or where a sale under Section 363 of the Bankruptcy Code hasbeen prearranged (the so-called “stalking horse” sale).17 In the United States, in 2011, 43% of all largepublic company bankruptcies involved a sale under Section 363 of all or substantially all of the assetsof the debtor, while 40.9% of such cases involved a pre-negotiated or pre-packaged plan ofreorganization. 18 Thus, more than 4 in every 5 such cases is disposed of through a sale or pre-packaged administration (discussed below). The average duration of non-pre-packaged, non-pre-negotiated bankruptcies understandably has declined from 2006.19

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Commentators have cited numerous factors as contributing to this trend. These factors include: (a) theaggressive tactics of hedge funds; (b) the credit crisis; and (c) in the United States, the burdensassociated with the 2005 amendments to the Bankruptcy Code.20 Although the credit crisis issignificant, the long-term fate of the formed rescue statutes in the United States and Canada (and itscontinuing shift towards a shorter process) seems to be most attributable to the changing faces of theplayers in the bankruptcy arena, i.e., the growing dominance of distressed-debt traders and hedgefunds.21

These distressed-debt traders tend to be sophisticated players in a Chapter 11 case.22 They also havemotivations that are distinct from the types of creditors that used to have a seat at the table in typicalChapter 11 cases.23 Because debtors and trade creditors often share long-standing commercialrelationships, trade creditors tend to be more willing to work with a debtor as the debtor rehabilitates.24

For similar reasons, traditional commercial lenders (e.g., banks and savings and loans) were alsowilling to acquiesce to the longer rescue processes.

For the trade creditor, value-maximization may be best achieved by protecting its existing relationshipwith the debtor rather than forcing the debtor to sell its assets. For the commercial bank, relationshipsother than debtor/creditor are at play, and reputations are also at risk.

Distressed-debt traders, on the other hand, tend to be unwilling to “sacrifice recovery for the sake ofthe debtor’s rehabilitation” and are generally less concerned with creating a reputation of beingrecalcitrant.25 Additionally, since distressed-debt traders may buy their claims at steep discounts, aspeedy guaranteed recovery may be more lucrative than a higher but speculative recovery years downthe road. Thus, from the perspective of distressed-debt traders, value-maximization is often achievedthrough a quick sale under Section 363. Such entities also may be prohibited from holding the types ofrecovery a rescue plan may offer (e.g., ownership in the debtor), but can always find a use for cash.

The tensions that are created when parties attempt to maximize value in an insolvency situation can beexamined in the context of pre-packaged bankruptcies and sales of substantially all of the assets of abusiness. In the United States, the Bankruptcy Code attempts to address the tensions between variousstakeholders by enacting a set of procedures designed to provide integrity to the process while stillmaintaining the flexibility necessary to maximize value. In the context of asset sales, the tensionsinclude those that are created by the stalking horse process and credit bidding.

III. COMPARATIVE CRITIQUE

The following discussion examines these tensions in the United States and Canadian systems in light ofthe two most frequent points of intersection: pre-packaged administrations and asset sales. Each isconsidered in turn in each of the two jurisdictions.

Following this is a discussion of recent cases from each jurisdiction that exemplify the tensions, with abrief commentary following each case on how the identified issues would likely have been addresseddifferently in the other of the two systems.

A. Pre-packaged Administrations

One of the elements in common in Canadian insolvency matters and United States commercialbankruptcy matters is a mechanism by which a debtor may arrange with its creditors the larger strokesof the debtor’s restructuring, while at the same time availing itself of court-ordered protection and anability to enforce those broad terms on creditors who could not–or would not–be consulted prior to the

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commencement of the formal proceeding. We refer to these collectively as “pre-packagedadministrations.”

In Canada, a pre-packaged plan of compromise and arrangement refers to a debtor, prior tocommencing CCAA proceedings, negotiating a plan with its creditors and obtaining the support ofsufficient creditors in order for that plan to be sanctioned by the court. In Canada, for a plan to bebinding it requires the approval of two thirds of creditors by value and a majority of creditors in eachclass, after which it must be approved by the court.26 For the court to sanction a plan, it must be “fairand reasonable”; there must have been strict compliance with all statutory requirements; and nothingmust have been done or purported to be done that was not authorized by the CCAA.27 The CCAA doesnot require that the court approve a plan simply because it received the support of the requisite majorityof creditors. However, the court places a heavy onus on parties seeking to upset a plan where therequired majority overwhelmingly supported it.28 Provided the majority of stakeholders support thetransaction that is contemplated by the pre-packaged plan, the sales process appears reasonable and themonitor is in support of the transaction, pre-packaged applications are encouraged and will likely beapproved.29

In the United States, such a process is known as a pre-packaged Chapter 11 case, and may present withall affected creditors having been solicited and the requisite acceptances having been obtained or, insome cases, only a subset of creditor constituencies having been solicited, with others still to besolicited under the formal process (the latter referred to as a “partially pre-packed plan” or, for short, a“partial pre-pack”). A lesser variant (known as a “prearranged plan”) is when no formal solicitationhas taken place, but some or all of the creditor constituencies having contractually agreed to vote (or“locked up” their votes) in favor of a particular plan.

The balancing of value maximization and integrity of process in each jurisdiction in the case of suchpre-packaged administrations is discussed in further detail below.

1. Canada

Introduction

In Canada, the pace at which debtors may wish the pre-packaged plan to be approved and implementedmay be met with resistance from courts, who wish to ensure that the process undertaken by the debtorin presenting the plan, and the plan itself, are fair and reasonable. This creates tension between theneed for certainty and speed in the restructuring, compared to the requirement of a fair process andplan.

Value Maximization v. Integrity of Process Concerns in Pre-Packaged Plans

The tensions between maximizing value and integrity of process in pre-packaged plans of arrangementusually relate to tension between time pressures on the debtor to complete the restructuring as quicklyas possible, and concerns of the court in regards to lack of court supervision in the course of thepreparation of the plan and the solicitation of creditors. We will examine these tensions in more detailbelow.

Speed vs. Proper Sales Process

A pre-packaged plan of arrangement is intended to achieve a consensual restructuring as quickly aspossible. The speed of the restructuring alone will often preserve value for the benefit of stakeholders.

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However, courts are alert to the risk that processes that are too hasty can leave value on the table, andprejudice stakeholders of the estate. In particular, the court is subject to the pressure that the majorityof the debtor’s creditors are willing to support the plan, which presumably means that in their view thesales process undertaken maximized the value available. On the other hand, due to the lack of courtsupervision in the sales process, it is proper for the court to examine such sale processes with additionalscrutiny compared to a process undertaken under the supervision of the court. The court is typicallyasked in these proceedings to make orders that permanently affects the rights of various stakeholders,often with very little notice. Further, as the court is seeing the plan for the first time after it hasreceived the approval of its stakeholders, substantive amendments to the plan to address any concernsof the court may not be possible without further creditor approval, which could result in costly delays.

In order to ensure that such processes are fair and fulsome, in many successful pre-packagedarrangements the prospective monitor becomes involved in the sales process prior to its appointment,so it is are able to make independent and credible recommendations to the court and give advice withrespect to the sufficiency of the sales process.

Maximizing Likelihood of Plan Approval vs. Improper Creditor Classification

Under a CCAA plan, creditors must be classified into classes with other creditors that have acommonality of interest, taking into account the nature of the debt giving rise to their claims; the natureand rank of any security in respect of the claims; the remedies available to the creditors in the absenceof the plan and the extent to which the creditors would recover their claims by exercising thoseremedies; and any other criteria consistent with the aforementioned.30

Unlike a standard CCAA plan, a pre-packaged plan is not placed before the court before it is presentedto its creditors for approval. In order to ensure that the creditor classes vote in support of the pre-packaged plan, there is an understandable tendency on the part of debtors to classify creditors in such afashion as to ensure that any creditors likely to vote against the plan are categorized in classes that limittheir influence. In pre-packaged plans, this is a particular concern because the court is in the somewhatawkward position of having an approved plan of arrangement before it, in which the damage from animproper creditor classification already may be done. It also means that a court may be even morereluctant to set aside the plan due to the time pressures associated with the restructuring and the workundertaken up to the date of the sanction hearing. Further, due to the pace at which these cases canproceed, it is also possible that such creditors have not yet had an opportunity to fully consider theirpositions, or attempt to mobilize any opposition to the classifications by the time the plan is beingpresented to the court for approval.

This risk also can be mitigated in CCAA proceedings through involving the prospective monitor increditor classification decisions, and obtaining its opinion with respect to the reasonableness of thoseclassifications.

Negotiated Releases in Plans vs. Potential Opposition to Releases Being Granted

Another issue that can arise in the course of approving pre-packaged plans relates to the inclusion ofreleases in the plan.

In Canada, it is possible to include in plans of arrangement language that releases the debtor, as well asits directors, officers and even third parties, from various liabilities.31 The scope of those releases canbe broad, and the subject of considerable debate and opposition. Due the pace at which pre-packaged

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arrangements can proceed, courts may be concerned that not all parties with an interest in theproceeding are before them. To address this concern, a court may slow down the pace of theproceeding in order to ensure that all parties have an opportunity to make submissions to the court withrespect to the scope of such releases. While such adjournments may be appropriate, this could result inadditional delay and uncertainty to the proceeding, which in turn may jeopardize the recovery that isavailable under the proposed pre-packaged plan.

2. United States

Pursuant to Chapter 11 of the Bankruptcy Code, a debtor or debtors may streamline the solicitation andvoting processes applicable to plans in a number of different ways. Further many of the larger courts,more accustomed to complex Chapter 11 issues including Chapter 11 pre-packs, have adopted localrules streamlining the bankruptcy process. Chief among these provisions, the Bankruptcy Codeexpressly permits pre-pack plans by permitting a debtor to file its plan at the time it petitions forbankruptcy relief.32 The Bankruptcy Code expressly accounts for votes solicited in contemplation of abankruptcy case to be counted toward confirmation of such plan in bankruptcy, so long as certainconditions regarding those votes and the solicitation are met.33

Thus, a debtor may propose its plan, solicit it and receive acceptances on it prior to commencing itsChapter 11 case. This permits the debtor to both know whether or not the Chapter 11 is feasible, but tocontrol the length of time regarding the debtor is in Chapter 11 as well as to enable positive messagingto affected constituents (e.g., employees or critical vendors).

The control of timing comes into play under Federal Rule of Bankruptcy Procedure 2002(b), whichrequires 28 days’ notice of a hearing on a Chapter 11 plan hearing to approve the solicitation anddisclosure’s adequacy, and an additional 28 days’ notice of a hearing to consider confirmation of theplan. In certain instances, these periods can be overlapped. The Bankruptcy Code also expresslypermits continuity between prepetition committees of creditors and postpetition ones, thus permittingcommittees formed for the purposes of pre-pack solicitation, and paving the way for such pre-packs tobe administered efficiently.34

Under extreme circumstances, the timing can be reduced even further. In the pre-packaged Chapter 11proceedings of the Blue Bird Body Company (“Blue Bird”), the Bankruptcy Court for the District ofNevada confirmed the plan of reorganization of Blue Bird after a 32 hour stint as a Chapter 11 debtor.

One January 26, 2006, Blue Bird and certain of its affiliates, debtors and debtors-in-possession filedvoluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code.35 Blue Bird alsofiled a Joint Pre-packaged Plan of Reorganization of Blue Bird Body Company and Certain Affiliates,dated January 24, 2006 (the “Plan”). In September 2005, Blue Bird concluded that it was financingmore debt than it could support. As a result, Blue Bird began negotiating with its lenders and equitysecurity holders to restructure its balance sheet. In furtherance of this effort, Blue Bird and itsstakeholders discussed all available restructuring alternatives, including a complete out-of-courtrestructuring, a sale, a traditional Chapter 11 case and a liquidation. Ultimately, Blue Bird and itsstakeholders concluded that an out-of-court restructuring was the most viable and sensible option.However, the out-of-court restructuring could not be consummated because it lacked the unanimousconsent of its lenders. The lack of consent compelled Blue Bird to use the Chapter 11 process toconsummate its proposed transaction. Although the recalcitrant lender voted against Blue Bird’sChapter 11 plan of reorganization, 92.56% in amount and 90.91% in number of bank group claimsvoted in favor of Blue Bird’s plan of reorganization, making it clearly confirmable.

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In order to ensure a speedy trip through Chapter 11, on Blue Bird’s petition date, it requested that thecourt conduct an emergency hearing to consider plan confirmation the very next day. The court agreedand an order was entered confirming Blue Bird’s plan of reorganization on January 27, 2006.

B. Asset Sales

As in the case of pre-packaged administrations, most assets sales in insolvency proceedings arguablyare conducted with the intent of rescuing the business, if not the debtor or debtors themselves.Midstream assets sales have in the past been frowned upon in the United States, as there existed anerroneous preconception that the failure to rescue the debtor was a failure to rescue the business.

Such thinking no longer holds sway. In fact, as alluded to above, recent amendments to theBankruptcy Code have significantly tightened the time frames under which debtors may receive full,unrestricted shelter of Chapter 11 of the Bankruptcy Code while attempting their own rescue. Inparticular, time frames around commercial property leases have been so severely shortened that largebusinesses with significant lease exposure may all but be forced to sell – generally a significantlyshorter process than confirming a plan of reorganization – in order to rescue at least the business of thedebtors.

Similar problems do not exist in Canada, as there is no time limit requiring a debtor to disclaim realproperty leases or any other contract within a certain period of time after the commencement of theproceeding.

Further, as discussed in more detail above, the changing nature of the parties and the types of rescuerecoveries they are entitled to receive necessitates both quicker processes and ones which monetizeassets, as opposed to grant ownership and a long-term attitude toward recovery.

1. United States

In Chapter 11 matters in the United States, non-plan sales of assets are governed by Section 363 of theBankruptcy Code.

Section 363(b)(1) of the Bankruptcy Code provides, in pertinent part, that the “trustee, after notice anda hearing, may use, sell, or lease, other than in the ordinary course of business, property of theestate . . . .”36 This section applies when a debtor is attempting to sell all or substantially all of itsassets. Notably, nothing in the statute itself requires adherence to any particular process by which theassets may be sold. Although most sales involve an auction, the Bankruptcy Code does not requireone. In fact, Federal Rule of Bankruptcy Procedure 6004(f)(1) states expressly that “[a]ll sales not inthe ordinary course of business may be a private sale or public auction.”37

In that regard, in the cases of Lehman Brothers, Chrysler and General Motors, the assets of thecompanies were sold either without a formal auction process in the case of Lehman Brothers, or withan extremely abbreviated one in the case of Chrysler and GM. In these cases, because the process wasflexible, courts were able to extract value from the so-called “melting ice cube.”

A flexible process can also be beneficial and maximize value when a unique asset is being sold. In2007, two debtor-affiliates of Calpine Corp. (together, “Calpine”) debtors-in-possession in a Chapter11 proceeding, became the owners of a $140 million allowed general unsecured claim against Solutia

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(the “Claim”), also a debtor-in-possession in a Chapter 11 proceeding.38 Since Calpine was nearingconfirmation of its plan of reorganization and anticipating an exit from Chapter 11, it believed that itwould be in the best interest of its stakeholders to monetize the Claim rather than wait for a payout inSolutia’s bankruptcy case.39 In furtherance of this goal, Calpine’s investment bankers marketed theClaim to those banks and funds that routinely purchased and sold distressed debt.40 According toSolutia’s plan of reorganization and disclosure statement, the estimated recoveries for generalunsecured claims was between 69.8 and 81.3 cents on the dollar, although allowed general unsecuredclaims had been trading at more than plan value.41 Since the market for general unsecured bankruptcyclaims is time sensitive and volatile, Calpine sought an expedited and streamlined sale process.42 Theprocess contemplated was designed to mimic the process that occurs on the trading room floor: sealedbids were solicited and Calpine retained the option to proceed with the sale in the absence of anauction.43 Additionally, the purchase documentation was a form typical of that used in the claimstrading market, rather than a formal asset purchase agreement. Calpine believed that valuemaximization would be achieved if the distressed traders were “bidding” on the Claim within theconfines of a familiar process.44 Indeed, in part because of the flexible process, Calpine received96.75% of its Claim – an amount far in excess of the projected recoveries for general unsecuredcreditors.45

Since the United States sale process is loosely defined, the tensions between various stakeholders canbe exacerbated. This tension typically manifests itself as a push and pull between those stakeholdersthat favour a speedy process and those that believe that additional value can be extracted if the saleprocess is prolonged. These tensions can infiltrate every aspect of the sale process and create questionsabout whether: (a) the marketing efforts were sufficient; (b) stalking horse protections were anti-competitive; (c) the time frame for soliciting bids was sufficient; and/or (d) an auction is the best wayto create the greatest value.

Although the sale process is not outlined in the Bankruptcy Code, the Bankruptcy Code does containcertain safeguards for the integrity of the process. The most basic safeguard is the requirement ofnotice and a hearing prior to a sale outside of the ordinary course of business. Typically, parties mustbe given at least 30 days notice prior to a sale under Section 363(b) of the Bankruptcy Code. However,even this basic requirement can be modified for cause shown. On a more substantive level, theBankruptcy Code also contains an anti-collusion provision that is designed to ensure the integrity of thesale process. Finally, the credit-bidding provision protects the unique interests of a secured creditor inmaximizing the value of an asset.

Section 363(n) of the Bankruptcy Code provides that “the trustee may avoid a sale under [section 363]if the sale price was controlled by an agreement among potential bidders at such sale . . . .”46 Thisprovision is universally understood as creating a prohibition against collusion among potential biddersat a 363 sale.47 Courts have articulated three elements that are necessary to prove a violation of Section363(n) of the Bankruptcy Code: (1) the presence of an agreement; (2) between bidders; (3) thatcontrols the price at auction.48

From a value-maximization lens, an interesting aspect of Section 363(n) concerns the parties that havestanding to challenge a sale as the product of collusion. One might think that the issue of standingwould be relatively straightforward. However, this is not the case. The general rule as to standing isthat only a “person aggrieved” may raise a Section 363(n) claim.49 Most courts have held that a personaggrieved does not include an unsuccessful bidder because an “‘aggrieved person’ is ‘one who isdirectly and adversely affected pecuniarily by the challenged ruling of the bankruptcy court.’”50 Sincean unsuccessful bidder’s only pecuniary loss is speculative lost profits, they are not aggrieved persons

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and they lack standing.51 This rule seems to highlight that although the anti-collusion provisionfacially seems to address integrity of the process, the integrity of the process is secondary to theparamount goal of value maximization.

Section 363(k) of the Bankruptcy Code provides that “at a sale under subsection (b) of this section ofproperty that is subject to a lien that secures an allowed claim, unless the court for cause ordersotherwise the holder of such claim may bid at such sale, and if the holder of such claim purchases suchproperty, such holder may offset such claim against the purchase price of such property.”52 Incolloquial terms, this provision provides for credit bidding.

The allowance of credit bidding in the Bankruptcy Code clearly demonstrates that Congress recognizedthat secured creditors with recourse against the asset being sold have a particular interest inmaximizing value. Moreover, by including the credit bidding provision Congress also seeminglyrecognized that the integrity of the process could be jeopardized if the secured creditor’s rights againstthe assets were not formally recognized. Indeed, at least one court has recognized that the right tocredit bid “gives the secured creditor protections against attempts to sell the collateral too cheaply; ifthe secured party thinks the collateral is worth more than the debtor is selling it for, it may effectivelybid its debt and take title to the property.”53 However, consistent with the theme of flexibility that iscommon to asset sales in United States bankruptcy, the text of section 363(k) expressly authorizes thebankruptcy court to obviate credit bidding for cause.54 Thus, the credit bidding provision furtherillustrates the tensions that may arise between different stakeholders that seek value maximization.

It is not unusual, of course, for bidders to seek variation from the rules set forth in the BankruptcyCode or those established by the debtor(s) upon order from the Bankruptcy Code. It is a longstandingprinciple of law in the United States, accepted in most jurisdictions, that such aggrieved bidder lacksstanding to challenge the process or the results of such a sale.55

Occasionally, however, it is the debtor and/or other parties that will seek a variation from the rules. In2002, for example, it was the debtor, as well as its official committee of unsecured creditors and anunsuccessful bidder together who asked the bankruptcy court to revise – post auction – the proceduresat play so as to allow the debtor to accept a higher bid than that which had won the auction. InComdisco, the Chicago bankruptcy court was asked to accept a post-auction rebid and reject thewinning bid from the debtor’s auction. Judge Barliant refused, stating “The value of bankruptcy is theintegrity of the process. Absent that integrity and ability to rely, bankruptcy becomes a much lessvaluable tool and may become a sham, a cover, for clever business practices.”56

2. Canada

Unlike in the United States, in Canadian insolvency proceedings assets are typically sold by a closedtender process rather than an auction process. In a closed bid process, each bidder submits its best bidwithout knowledge of the contents of other bids, with the hope that bidders will tender their highest bidin order to be selected as the winning bid.57 The risk of proceeding in this manner is in the absence ofan unbiased third party running the process, it will either be unfair or the outcome predetermined.Over the course of time, this perception could erode confidence in the insolvency system and, in turn,reduce the value that could be generated through these processes.

To address these risks, Canada has several different levels of procedural safeguards built into mostinsolvency sales processes. The protections attempt to bring sufficient protection to those involved inasset sales, and in turn maintain the confidence required in the insolvency system in order to generatevalue for its participants. Those procedural protections include the involvement of an independent,

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court-appointed insolvency professional in most sales processes; a high degree of deference to thedecisions of those court-appointed officials; and court-supervision of the entire process.

Significant asset sales in Canadian insolvency proceedings typically occur in CCAA or receivershipproceedings. In receivership proceedings, the receiver effectively assumes control of the debtorcompany, which means that the receiver will typically conduct the debtor’s asset sale, and negotiatewith potential purchasers, on behalf of the debtor’s stakeholders. This is in contrast to a CCAAproceeding, in which management of the debtor remains in possession and control of the business.However, in all CCAA cases, and unlike in the United States, an independent insolvency professional isappointed as a “monitor” by the court to monitor the debtor company’s business and financial affairs,and report to the court with respect to those matters, as well as carry out any other functions in relationto the company as the court may direct.58 These duties can extend to running the debtor’s sale processin certain circumstances.

a. Canadian Asset Sale Process

There are no prescribed rules in Canada requiring that asset sales follow any particular procedure. Theprocess selected in a particular case will vary subject to, inter alia, the nature of the debtor’s business,the views of the stakeholders and insolvency professional, and the nature of the assets being sold.However, as the asset sale ultimately must be approved by the court, most processes are a closed tenderprocess, and follow similar steps in order to maximize the likelihood of court approval.

This process does not typically provide for an auction, or the disclosure of the content of the bidsamong potential purchasers. Rather, it presumes that the integrity of the sales process is fosteredthrough confidentiality. For example, while conducting a sale, a receiver or monitor will not usuallydisclose the bid that a party needs to beat in order to be successful or remain in the sales process.Further, one party’s bid is not “shopped” to other bidders.59 It is also common for accepted bids to bedisclosed in a redacted form and sealed in court, in order to preserve the confidentiality of any sensitiveinformation of the debtor company.

Further, in Canada bidders are not typically given an opportunity to submit a higher or better bid oncethe successful bidder has been recommended to the court, in the interest of maintaining integrity in thesales process.60 Some practitioners are of the view that it is less likely there will be a true competitivebidding process under the CCAA compared to a Ch. 11 process, due to a perception of lack ofprotection for bidders and lack of transparency in the bidding process, which they argue results in asales process that is far less efficient and generates fewer beneficial offers.61 As will be addressed infurther detail below, a recent cross-border case in which an auction under Section 363 of the U.S.Bankruptcy Code that was added on to the end of a traditional Canadian sales process resulted indramatically increased recoveries, providing some support for the position of these critics.

As the foregoing illustrates, without the involvement of an independent insolvency professional, theasset sale process typically followed in Canada could lack the credibility necessary in order to obtainthe court’s approval, or the approval of the marketplace. This is particularly the case in CCAAproceedings, where the debtor’s management remains in possession and control of the business, and inwhich cases distrust of the debtor can sometimes be a major issue. In those circumstances, themonitor’s role, if sufficiently empowered, can add much needed credibility and transparency to adebtor-in-possession asset sale.

However, as an officer of the court, a receiver and monitor both have duties to the court, that candirectly conflict with value maximization. For example, each participant in a Canadian asset sale is

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effectively asked to assume the risk that a non-compliant or late bid is rejected by the receiver ormonitor, despite the potential for increased recovery. The basis for this rejection would be acceptingthe bid would undermine the integrity of the sales process and the insolvency system as a whole. Thiscan be a bitter pill for some creditors to swallow if a non-compliant or late bid would result in animproved recovery.

b. Court Approval of Asset Sales in CCAA and Receivership Proceedings

i. CCAA

Section 36 of the CCAA provides that a debtor company may not sell or otherwise dispose of assetsoutside of the ordinary course of business unless authorized to do so by a court. On an application forcourt authorization to sell assets, notice of the application must be given to the secured creditors whoare likely to be affected by the proposed sale or disposition.62 The factors to be considered by the courtin determining whether to grant the Order permitting the asset sale are, without limitation, whether theprocess leading to the proposed sale or disposition was reasonable in the circumstances; whether themonitor approved the process leading to the proposed sale or disposition; whether the monitor filed areport with the court stating that in their opinion, the sale or disposition would be more beneficial to thecreditors than a sale or disposition under a bankruptcy; the extent to which the creditors wereconsulted; the effects of the proposed sale or disposition on the creditors and other interested parties;and whether the consideration to be received for the assets is reasonable and fair, taking into accounttheir market value.63

That section also provides for a sale to a person who is related to the debtor company, provided that thecourt is satisfied that good faith efforts were made to sell or otherwise dispose of the assets to personswho are not related to the company and the consideration to be received is superior to the considerationthat would be received under any other offer made in accordance with the process leading to theproposed sale or disposition. A “related person” is defined as a director or officer of the company; aperson who has or who had direct or indirect control “in fact” of the company and a person who isrelated to any person in those capacities.64

Section 36 of the CCAA reflects several of the tensions inherent in efforts to both maximize value in anasset sale and to maintain integrity of the sales process. Consistent with prior practice, this sectionvests considerable influence in that regard in the monitor with respect to whether a court shouldultimately approve an asset sale.

Most fundamentally, s.36 reflects a policy decision by Parliament that in certain instances, principles ofcreditor democracy should be sacrificed in the interests of value maximization. The quid pro quo forthat sacrifice are the various protections contained in s.36. However, this is not an entirely equal trade.Section 36 is missing a requirement or burden of proof that requires the debtor to establish that a saleof assets should be preferred to a plan of arrangement. Rather, it only provides that the court considerthe extent to which creditors were consulted in approving the asset sale. This effectively provides thedebtor with the ability to avoid a creditor vote and reduce the influence of creditors in the restructuringby limiting their forum to a court rather than controlling the debtor’s ability to restructure under a planof arrangement. The reality, however, is there are many restructurings where a debtor cannot affordthe time or risk associated with a plan or arrangement, in which the ability to conduct a fast asset salemay result in the best recovery for stakeholders.

As court approval is required to complete the sale, the court remains the ultimate supervisor of the salesprocess. The factors to be considered by the court under s.36 in approving a sale also suggest that

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various “hallmarks” of independence are necessary for the process to be legitimate, includingconsideration of whether the monitor approved the sales process, as well as the requirement that salesoccur to related persons only in limited circumstances. This section also requires certain elements ofprocedural fairness in the process, such as service on affected secured creditors. None of theseprocedural protections, in and of itself, should in theory reduce the quantum of value realized.

However, this legislation could act, in some instances, as a governor or brake on value realization. Forexample, the court’s consideration of the effects of the proposed sale or disposition on creditors andother interested parties could, in some circumstances, be interpreted as permitting a court to accept abid which results in less value being generated in the interests of secured parties in exchange forprotecting the interests of other parties whose interests would normally be subordinate in interest. Forexample, in Re Pope & Talbot65, which preceded the inclusion of s.36 in the CCAA, the SupremeCourt of British Columbia approved a sale of assets in a CCAA proceeding to a new company in whichcertain former employees were shareholders. The only secured creditor with any prospect of recoverywas the DIP lender, who opposed the motion on the basis that there was evidence that there were otherviable alternatives which would have likely resulted in significantly greater recovery for the DIPlender. However, the court instead considered the interests of the 300 employees at the mill, the mill’ssuppliers and surrounding community, and approved the sale.

However, to mitigate the risk of notions of “value” being interpreted too broadly, this section alsorequires the court to consider various objective factors to make a monetary based assessment inconsideration of an asset sale. For example, the requirement that the court compare the recovery in thesale process to a liquidation scenario in a bankruptcy provides a legitimate, value-based benchmarkupon which the court may exercise its judgment. Further, the requirement that a related party sale mustinclude superior consideration is one that clearly attempts to limit related parties from improperly usingthe sales process to acquire discounted assets to those circumstances in which they are truly the besteconomic option for stakeholders.

ii. Receivership Proceedings

Receivership asset sales are not subject to s.36 of the CCAA, or any other legislation. This is in partbecause there is no receivership legislation in Canada that applies to all insolvencies, but also largelydue to the fact that there is no longer any debtor-in-possession in receivership sales. Aside from thefact that those tensions are not present, most of the remaining tensions that exist in a CCAA asset saleare present in a receivership asset sale.

The well-acceptance criteria in Canada to be applied by a court in approving an asset sale in areceivership proceeding are: whether the receiver has made a sufficient effort to get the best price andhas not acted improvidently; the interests of all parties; the efficacy and integrity of the process bywhich offers were obtained; and whether there was an unfairness in the workout of the process.66

c. Stalking Horse and Credit Bids

i Stalking Horse

There are also no legislated guidelines in Canada with respect to stalking horse bids for either CCAAor receivership proceedings. As with standard sales processes, questions of value maximization andintegrity of the process are ultimately determined by the court, with the recommendation and advice ofthe receiver or monitor.

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In the absence of legislative guidance, Canadian courts have adopted various criteria to assess whethera stalking horse sales process should be approved and authorized in a particular proceeding. InBoutique Euphoria Inc. v. Lingerie Studio Inc.67, the Quebec Superior Court considered those criterionto assess whether or not a stalking horse bid process should be approved and authorized. The court’sdiscussion of the various considerations illustrate some of the tensions at play.

The first consideration is whether there has been some control exercised at the first stage of thecompetition (namely that to become the stalking horse bidder) and if so to what extent. In describingthe basis for this concern, the court noted that on one hand the stalking horse bid establishes thebenchmark to attract other bids and its accuracy is therefore key to the integrity of the process. A bidthat is valued too low may send a signal to the market place that the assets at issue are not desirable. Abid that is too high or difficult to quantify may “chill” the process, due to a lack of certainty regardingthe value of the stalking horse bid. Further, as the stalking horse bid is normally subject to a break-upfee, its accuracy is even more important, not only because economic incentives could flow to thebidder, but also because some conditions require that minimum “overbid” amounts have to exceed acertain margin, over and above the stalking horse bid. 68

The second factor considered is whether there is a need for stability within a very short period of timefor the debtor to continue operations and the restructuring contemplated to be successful. With respectto this factor, the court noted that this consideration is explained by the fact that the stalking horse bidprocess is generally more stringent and less flexible than a traditional call for tenders process. Toresort to a stalking horse process, time should therefore normally be of the essence.

A third factor the court discussed was whether the economic incentives for the stalking horse biddersuch as the break up fee, and over bid increments protection were fair and reasonable. With respect tothis factor, the court noted that this was justified by the fact that excessive economic incentives maychill the market and deter other potential bidders, which would render the process inefficient and, infact, inadequate in terms of meeting its goal. The concept of fairness to all bidders must bemaintained.69 In Canada, a fee payable to a stalking horse bidder, including expenses, are typicallybetween 1% to 3% of the transaction value.70

The fourth and final factor considered by the court, was whether the timelines contemplated by thestalking horse process were reasonable to ensure a fair process at the second stage of the competition,namely that to become the successful over bidder. The court noted that this consideration was linked tothe fairness of the bid process to ensure, in as much as possible, an equal opportunity to all interestedbidders.

One issue that remains unresolved in Canada is the role of the monitor in CCAA stalking horseprocesses. Some commentators have pointed to potential conflicts of interest in CCAA stalking horseproceedings, as the debtor is often the party that is imposing timelines, controlling the definitions ofwhich parties are qualified bidders, and in some instances negotiating key employee retention plans orbonuses from which they will benefit, in circumstances in which those same parties may be responsiblefor the circumstances that create the very timelines that result in courts feeling obliged to accept suchproposals.71 Commentators have suggested, as a solution to this problem, that the monitor or anothercourt-appointed official conduct or have significant input into the stalking horse process.72 Provided astalking horse bid is being advanced as part of an asset sale rather than a plan of arrangement, s.36 ofthe CCAA goes a long way towards ensuring that involvement.

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ii. Credit Bids

Canadian credit bids in asset sales are subject to the same considerations as any other asset sale unders.36 of the CCAA, or generally in a receivership. However, the optics of a credit bid may result insome of the integrity of process concerns being amplified in certain circumstances.

One of the major concerns in any credit bidding scenario is that the senior bidding creditor not use itsinfluence to truncate or manipulate the sales process, resulting in reduced recovery for subordinatecreditors. This is especially important in circumstances in which the credit bidder is also a shareholder,or is involved in the day to day management of the affairs of the debtor, and in some instances mayhave provided DIP financing on the basis that it was not realistically available elsewhere. Similar toconcerns with respect to stalking horse proceedings, some commentators have suggested that monitorstake a more active role in these proceedings, or that the court appoint a chief restructuring officer orinvestment banker/financial advisor to work in conjunction with the monitor to establish andimplement the sales process, including the vetting and analyzing of offers. These concerns can beamplified in Canadian proceedings, in light of the historical absence of unsecured creditorcommittees.73

IV. CASE STUDIES

A. Canada

The cross-border case of the WellPoint Systems Inc. (“WellPoint”) and its affiliates serves as anexcellent illustration of how the Canadian and American asset realization processes can not only becoordinated, but even integrated and merged, all without damaging their integrity while at the sametime maximizing the return of value to stakeholders of the estate.74 The facts reveal multiple conflicts,both actual and potential, as between the integrity of the sales process undertaken and valuemaximization.

WellPoint was a publicly listed corporation incorporated pursuant to the laws of Alberta, Canada, witha registered office in Calgary, Alberta. WellPoint was the ultimate Canadian parent of WellPointSystems, Inc. (“WPS US Hold Co.”), WellPoint Systems (U.S.A.), Inc. (“WPS BOLO”) and WPSSystems, Inc. (“WPS Ideas”) (collectively, WellPoint, WPS US Hold Co., WPS BOLO and WPS Ideasshall be referred as the “WellPoint Group”). WPS BOLO, WPS Ideas and WPS US Hold Co. were allentities incorporated pursuant to the laws of the United States.75

On January 31, 2011, Ernst & Young Inc. was appointed Receiver and Manager (the “Receiver”) of theproperty assets and undertakings of the WellPoint Group by the Court of Queen’s Bench of Alberta(the “Canadian Court”). At that time, WellPoint had approximately 18 employees and oversaw thefinancial accounting of all debtors. It owned intellectual property that was utilized by its subsidiariesin providing services to end user customers.

WellPoint did business in the United States through WPS US Hold Co, which in turn owned 100% ofthe issued and outstanding shares of WPS BOLO and WPS Ideas. WPS US Hold Co. conducted nobusiness other than as a holding company. WPS Ideas operated primarily in Europe, Africa, Asia andSouth America. WPS BOLO operated primarily in North America. 76

At the time of the Receiver’s appointment, the WellPoint Group’s debt structure included securedliabilities of approximately US $40,000,000. The relative priorities as between WellPoint’s secured

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creditors were established pursuant to an Amended and Re-stated Priority and Inter-creditorAgreement, as follows:

(a) Comerica Bank (“Comerica”) in first position, in the amount of approximatelyCDN $882,000 and US $52,000;

(b) Quorum Oil & Gas Technology Fund Limited (“QOGT”) and Sirocco HoldingsInc. (“Sirocco”) in second position pari passu, with QOGT owed approximatelyUS $18,951,441 and Sirocco owed approximately US $2,420,000 for a totalsecond position of approximately US $21,371,279; and

(c) Sirocco, Quorum Investment Pool Limited Partnership (“QIP”) and QuorumSecured Equity Trust (“QSET”) in third position, on a pari passu basis, with QIPowed approximately $8,819,669; QSET owed approximately $1,828,468 andSirocco owed approximately $6,998,012 for a total third position ofapproximately $17,646,149.

The Receiver was appointed without opposition on the application of QOGT. The receivership order(the “Receivership Order”) entered by the Canadian Court stipulated that the Receiver’s powers andauthorities with respect to the U.S. companies was limited solely to commencing and prosecutingproceedings in the United States for the purpose of obtaining an Order granting recognition of theCanadian proceedings under Chapter 15 of the Bankruptcy Code. That recognition was obtained fromthe United States Bankruptcy Court for the District of Delaware (the “United States Court”) onFebruary 25, 2011.

In the January 31, 2011 hearing in Alberta, and the February 25, 2011 hearing in Delaware, theReceiver sought and received approval of a two stage sales process, which would use as a benchmarkbid a draft asset purchase agreement from WellPoint Acquisition Co. Inc. (“WAI”), a Delawarecorporation formed by QOGT and Sirocco for the purpose of acting as the “stalking horse” in the sale.Sirocco consisted of members of the WellPoint Group’s management team, while QOGT included inits management team a former director of WellPoint.

WAI’s asset purchase agreement (the “WAI APA”) provided that it would acquire substantially all ofthe assets of the WellPoint Group for a purchase price of US $28,000,000 plus amounts owning toComerica and any priority charges relating to the Receivership.77 The US $28,000,000 portion of thepurchase price comprised a credit bid portion of approximately $21,900,000, which represented thesecond tier debt with the remaining portion comprised of preferred shares to be issued by WAI,distributed to QIP, QSET and Sirocco pari-passu in exchange for their third tier indebtedness.78 TheWAI APA also provided for a break-up fee payable to WAI of US $750,000.79

As is typical in stalking horse sales, the approved process provided that the sale to WAI would proceedif there were no “superior offers”80 received by the Receiver, but did employ a unique, two stageprocess to determine whether any such superior offer existed. Phase 1 of the sales process involved thesolicitation of non-binding indications of interest (each, a “Non-Binding LOI”) from prospectivestrategic or financial parties. At the commencement of this phase, the Receiver coordinated with theremaining management of the WellPoint Group and completed a “teaser document” outlining the salesopportunity and certain aspects of the process. The Receiver also performed market research and haddiscussions with industry individuals to collect a list of logical potential bidders. In excess of 30potential bidders were directly contacted by representatives of the Receiver or were sent the teaserdocument. The Receiver received three Non-Binding LOI’s as a result of these efforts.

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After completion of Phase 1, the Receiver reviewed the Non-Binding LOI’s received, and concludedthat there was a reasonable prospect of obtaining a superior offer to that contained in the WAI APA.Phase 2 of the sale process was therefore commenced on March 16, 2011. In Phase 2, the Receiverprovided qualified bidders with access to an electronic data room and additional confidentialinformation as well as access to remaining company management. The bidders who participated inPhase 2 were each requested to deliver a copy of a final, binding bid by April 5, 2011. At thecompletion of Phase 2, the Receiver concluded that the final bids received from two bidders constitutedsuperior offers to that contained in the WAI APA.

Having received superior bids, the Receiver was required under the sales process to conduct an auction.Such auctions, while not unheard of, are rare in Canada, particularly at the end of a two stage salesprocess, but as discussed above, are not uncommon in the United States.

The sales process did not set out any rules with respect to the auction. On April 6, 2011, the Receiveradvised WAI and the two bidders that the auction would be held on April 11, 2011 in the Receiver’soffices. The Receiver also advised each potential bidder that the Receiver had determined the currenthighest and best bid was contained in an offer from Party A (the “Starting Bid”). The Starting Bid wasUS $32.5 million in cash, an improvement over the equivalent of the cash consideration payable underthe credit bid component of the WAI bid of over US $10 million.

The Receiver provided a copy of the asset purchase agreement of the Starting Bid to the other bidderand WAI. The Receiver further advised all parties wishing to participate in the auction to inform theReceiver by April 8, 2011. Two bidders so advised the Receiver, but WAI advised the Receiver that itwould not participate. WAI ultimately received its $750,000 break-up fee and the payment of its legalfees from the estate, as permitted by the terms of the receivership order and sales process.

Immediately prior to the Auction, with input obtained from counsel to QOGT, Sirocco, QIP and QSET,the Receiver drafted auction procedures.81 The procedures also incorporated significant input from theReceiver’s U.S. Counsel so as to be compliant with Section 363 of the Bankruptcy Code and localpractice convention in Delaware.

The auction process required that bidding would start at the Starting Bid and continue for severalrounds. Subsequent bids were required to be at least equal to the Starting Bid or the leading bid fromthe previous round plus a minimum overbid increment of $500,000. The overbid increment wassuggested by the Receiver, and was not required by WAI as part of its bid protection. The Receiverhad the discretion to increase or decrease the minimum overbid increment at any point during theauction. All bids that were to be made and received on a fully open basis, including the disclosure atthe auction to all parties in attendance, including other bidders, of all material terms of each bid.

The Auction was held on April 11, 2011, in the presence of a court reporter. Prior to thecommencement of the Auction, the Receiver advised all parties that it reserved the right to value anynon-cash consideration received in any bid and to advise all bidders of the Receiver’s valuation. This,of course, presented a potential point of dispute as such valuation was, in part, subjective butnonetheless was used for the objective purpose of determining whether the bid in question met theoverbid increment requirement, and what benchmark a subsequent bid must obtain to in turn meet itsoverbid increment requirement.

After several rounds of bidding, a bid presented included a purchase price that was comprised of bothcash and non-cash consideration, which was an earn-out provision. Not surprisingly, the bidder’svaluation indicated that it met the minimum overbid increment for the round. After some deliberation,

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however, the Receiver’s analysis of the bid indicated that the bid did not meet the minimum overbidincrement in light of the inclusion of an earn-out, to which the Receiver ascribed a value of zero. Thebidder (the “Partial Cash Bidder”) was allowed to revise its bid to reflect the Receiver’s valuation of itsbid, which gave rise to a dispute, as the other bidder (the “All Cash Bidder”) advised that the Auctionshould be concluded as no higher bids had been received according to the terms of the Auction. TheAll Cash Bidder argued that its previous bid should be declared the winning bid.

The Receiver nonetheless permitted the Partial Cash Bidder to revise its bid given the Receiver’svaluation of the non-cash consideration. The Partial Cash Bidder ultimately revised its bid to meet theminimum overbid increment with an all-cash bid of US $35.5 Million. In the next round of bidding,the All Cash Bidder put in an all-cash bid of US $36.0 Million, with a reservation of rights that itsprevious bid in the amount of US $35 Million should have been declared the winning bid. TheReceiver advised the All Cash Bidder that this bid did not meet the minimum overbid increment inlight of the reservation rights. This decision of the Receiver was the subject of some debate at theauction. The All Cash Bidder argued that the Receiver was effectively asking the All Cash Bidder tosurrender its legal rights to challenge the auction process, which was inappropriate. In response, theReceiver argued that they were not asking for such a surrender, but the All Cash Bidder’s reservationof rights affected the value of the bid due to the uncertainty associated with the reservation.

Ultimately, the commercial desire of the All Cash Bidder to acquire the WellPoint Group’s assetstrumped its procedural concerns. The Receiver afforded the All Cash Bidder the opportunity to reviseits bid based upon the Receiver’s valuation. This was objected to by the Partial Cash Bidder. Overthose objections, the All Cash Bidder ultimately made an all-cash bid of US $36 Million with noreservation of rights. The Partial Cash Bidder chose not to make a further bid and as such the saleconcluded in the amount of US $36 Million.

The asset purchase agreement from the All Cash Bidder, as well as the auction process, wassubsequently approved by the Alberta court on April 21, 2011, and by the Delaware court on April 26,2011. The marketing and sales process of the WellPoint Group, from the beginning to Alberta courtapproval, took 80 days.

1. Analysis

The recovery using this process represented US $8 Million in excess of the value prescribed to theWAI APA, and approximately US $14 Million more than the cash equivalent of the WAI APA. TheAuction itself resulted in increased proceeds to the stakeholders from the Starting Bid of US $3.5Million, or 10.7%. Although such auction procedures are relatively rare in Canada, they are commonin the United States, and the value that appeared to be generated from the auction process wasundeniable.

The various interests at play in this proceeding illustrate numerous tensions between the valuemaximization and integrity of the process. In the Auction itself, the potential purchasers’ interestswere in acquiring WellPoint for as little money as possible (contrary to the interest of creditors), yetthey shared a desire with the creditors to maintain the integrity of the auction process (though theymight differ as to what form such integrity should take). At different points in the Auction, both thePartial Cash Bidder and the All Cash Bidder attempted to use the process as a sword, in order toprevent bidding by other parties when bids were deemed non-compliant by the Receiver. The Receivercould have, had it chosen, allowed the process to trump value maximization and not permitted anyrebidding. Instead, each time, it chose to permit the bidders to revise their bids. As the process was

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intended to generate maximum value, and each party had a chance to increase or amend their bids, thisdecision seems appropriate.82

The timing of the preparation of auction procedures also presents several interesting questions. Whateffect did the non-existence of the auction procedures until immediately prior to the auction have onthe auction procedures themselves? Clearly, the preparation of the procedures is a different task whenthe leading bids, including their amounts, are known, as well as the number of potential participants inthe auction. In those circumstances, overbid increments, the number of rounds and various other rulescan be tailored to meet the competitive environment. Had auction procedures been prepared anddisclosed prior to the Phase 2 bid deadline, what effect would that have had upon the value generatedin the Auction? Is it possible an auction would not be required at all, as participants in Phase 2 of theprocess would “reserve” less value from its bid for the auction, having comfort in the rules of theauction at an earlier time? Further, as secured creditors, Sirocco and QOGT have a clear interest invalue maximization (up to the point of the obligations to them), and as such it is appropriate that they atleast be consulted with respect to the auction process selected. However, would that be different ifSirocco and QOGT had, through WAI, elected to participate in the auction? Would their consultationregarding the rules of the process impugn its integrity?

Another interesting tension presented by the facts relates to the flow of certain information regardingthe WellPoint Group during the course of the sales process. As secured creditors, Sirocco and QOGTwould normally be entitled to information regarding the status of the sales process. However, as WAIwas also a bidder, the integrity of the sales process likely required that this level of access be limited inorder to preserve its perceived integrity. While that is clearly important, there is no sales process in theworld that could ever entirely level the playing field when a bidder is the existing companymanagement, and they have years of knowledge and experience regarding the debtor’s business. Atsome point, each insolvency professional in similar circumstances must make a judgment callregarding where knowledge of the ongoing status of the sales process becomes power in the hands ofan insider creditor (and can be used in order to legitimately assist in the sales process itself to extractadditional value), and when that knowledge becomes a liability to the process.

2. Comparison to the United States

From a U.S. perspective, not much of the process implemented in WellPoint would be consideredextraordinary. U.S. courts would generally hesitate to allow the debtor-in-possession to not proceed toan auction when additional bids were in hand. In such, the U.S. courts would not permit a process –regardless of how sensible – to trump the opportunity to maximize value. However, such apresumption may be founded in the overall integrity of the U.S. process. Most bankruptcy auctions areconducted by debtors-in-possession, and not third parties such as the Receiver. Thus the courts’hesitation would, at least in part, be the result of their perception that such a process would lackintegrity if not conducted openly.

The bidding and rebidding process would not have been unusual in the United States, nor would thereservation made by the All Cash Bidder. Given that the ultimate result is heard by the court, theprocedures themselves in the United States tend to evolve in the midst of the Auction. The court mayalways resolve issues at the end. Creative forms of non-cash consideration are de rigour, and willcause delay in the Auction as the bids are assessed as some form of monetary measure. Ultimately, itwill be the court that determines whether the result was fair.

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Courts, however, will hesitate to involve themselves in intramural disputes between bidders. U.S.auction procedures tend to provide enough structure to allow bidders to be comfortable thatcommercially reasonable measures and procedures will be used, while at the same time providingenough flexibility so as to never encounter a situation such as in Comdisco where the procedures keepthe debtor-in-possession from adjusting on the fly. A longstanding principle of U.S. (as noted above)and Canadian bankruptcy jurisprudence is that aggrieved bidders, absent another form of standing suchas being a pre-existing creditor, have no standing to be heard in such disputes. The integrity of theprocess should be preserved by the oversight of the unsecured creditors committee, if any, and thesecured creditors, if any.

B. United States

A case that directly wrestled with the tension that can exist between value maximization and theintegrity of the process was In re Bigler, LP.83 On October 30, 2009, Bigler LP, Bigler Land, LLC,Bigler Petrochemical, LP, Bigler Plant Services, LP and Bigler Terminals, LP (collectively, the“Debtors”) filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code inthe Southern District of Texas.84 On May 11, 2010, the Debtors filed a motion with the bankruptcycourt seeking authorization to sell approximately 180 acres of real property (the “Property”).85

Pursuant to the bidding procedures approved by the bankruptcy court, an auction was to be held at thelaw offices of Debtors’ counsel on June 16, 2010. After the auction, the Debtors were required to file anotice disclosing the results of the auction by no later than noon on June 18, 2010 and a hearing wasscheduled to take place on June 23, 2010 to seek the bankruptcy court’s approval to sell the Property tothe party that made the highest bid at the auction.86

The bidding procedures explicitly stated that “[u]pon the conclusion of the bidding, the Auction shallbe closed, and the Debtors . . . shall immediately (I) review each Qualified Bid on the basis of the BidAssessment Criteria and the financial terms and factors affecting the speed and certainty ofconsummating the Proposed Sale; and (ii) (sic) upon such review, the Debtors shall immediatelyidentify the highest, best, financial or otherwise superior offer for the Assets . . . and advise theQualified Bidders of such determination.”87 On June 16, 2010, the Auction was conducted inaccordance with the Bidding Procedures. According to the transcript of the Auction, Debtors’ counselstarted the Auction with the following remarks: “[w]hen the bidding is completed, we will adjourn sothat the debtors, in consultation with the [secured lender] and the creditors’ committee, will come backand announce on the record the identity of the successful bid or bidders and the backup bid or bidders.At that point, the auction will be closed . . . .”88

After over eleven hours or spirited bidding, Intercontinental Terminals Company, LLC (“ITC”)submitted the highest bid in the amount of $20.5 million.89 The next highest bid was made by VopakTerminals North America, Inc. (“Vopak”) in the amount of $20.3 million.90 At the Auction, Vopakhad an opportunity to bid higher than ITC, but declined to do so.91 The auction closed at 9:32 p.m. onJune 16, 2010 and ITC was selected as the winning bidder.92 Notwithstanding, on June 22, 2010 – oneday prior to the scheduled sale hearing, Vopak filed a “Statement by Vopak to Notice of Final Bids andApproval and Closing of the Sale of the Debtors’ Assets with Intention to Tender Further Sealed Bid”(the “Statement”).93 In the Statement, Vopak expressed its intention to tender a sealed bid that wouldbe higher and better than ITC’s winning bid.94 At the sale hearing, Vopak expressed its view that theAuction should be reopened in court.95 After Vopak presented its new “bid” of $21 million, counselfor other parties-in-interest joined Vopak’s request to re-open the Auction.96 The only party thatopposed reopening the Auction was ITC.97

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According to the court, the foregoing facts highlighted the “clear tension between the two goals ofmaximizing value for the estate and preserving the integrity of the judicial process[.]”98 Althoughevery party with a pecuniary interest in the value of the assets supported the reopening of the Auction,the court did not reopen the Auction.99 Quoting a decision from the First Circuit Court of Appeals, thebankruptcy court explained: “[i]t might not only be thought improper for a bankruptcy court toproceed in an irregular fashion merely to gain a few extra dollars in one case, but in the long run such apractice would be penny wise and pound foolish. Creditors in general would suffer if unpredictabilitydiscouraged bidders altogether. At least such practices might encourage low formal bids.”100

In reaching its conclusion, the court discussed several cases where courts reached the opposite decisionand allowed auctions to be reopened.101 The theme that emerged based upon the court’s review ofprecedent is that auctions should only be reopened if there was some sort of unfairness or irregularityin the first auction.102 The first case discussed was First National Bank v. M/V Lightning Power.103 InFirst National, the bank obtained an order allowing it to sell a vessel at a public auction.104 After anauction, the bank attempted to pay $5,000 for a vessel valued at $90,000 because due to a technicalissue during the auction the opposing party was not able to bid on the vessel because it lacked requireddocumentation showing its ability to pay.105 Instead of approving the sale of the vessel to the bank for$5,000, the court reopened bidding.106 In doing so, the Fifth Circuit stated that “[a]uctions should notbe empty exercises. The public policy of inspiring confidence in court-ordered sales favorsconfirmation of the sale to the highest bidder at the auction if it is fairly conducted. The court mustalso consider, however, the purpose of the judicial sale, which is to benefit both creditors anddebtors.”107

Taken together, the remainder of the cases discussed by the court stand for the proposition that auctionsshould only be reopened in extraordinary circumstances. These circumstances include unfairness inbidding, irregularity in the auction process, fraud or collusion.108

1. Analysis

Interestingly, the court proposed its own suggestion for addressing the tension between valuemaximization and integrity of the process.109 Specifically, the court stated that it “believes that themost appropriate approach to maximizing value for the estate – and also the soundest method ofmaintaining confidence in the system – is to hold auctions in the courtroom, on the record, with theCourt serving as auctioneer. In this manner, all participants will know that there will be one – and onlyone – time when bids may be submitted. No party could reasonably conclude that the process isbifurcated, with an out-of-court auction to be held first, and then a subsequent hearing in Court withhigher bids to be made. This approach will also inspire participants to prepare to make the absolutehighest bid because they know that they will not have a second chance. Thus, this method willgenerate maximum proceeds for the estate.”110

2. Comparison to Canada

A Canadian court would have disposed of this matter in a similar fashion. A court in Canada wouldnot re-open the bidding process or set aside the leading bid simply because a subsequent and higher bidwas made.111 Canadian law grants wide discretion to the court appointed official supervising theauction in order to exercise a process that it deems fair and reasonable. In addition, similar to theUnited States, disappointed bidders generally have no standing to challenge the sales process, andcourts wish to avoid a process that will result in chaos and confusion at the approval motion.112

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One difference between the United States and Canada is it is unlikely that a court would suggest that anopen auction take place within the courtroom. This difference is due to the involvement of courtappointed officials throughout the course of restructurings and receiverships. While courts in Canadahave permitted auctions to proceed before them using a sealed bid process, that is typically inresidential real estate foreclosures, in which there is no court-appointed insolvency professional toadminister such an auction.

CONCLUSION

Tension between value maximization and integrity of process usually arises when the interests ofcertain stakeholders conflict with the interests of other stakeholders, or when the interests of certainstakeholders conflict with perceptions of the integrity of the insolvency system as a whole.

Due to the relative similarities between the Canadian and American legal systems, tensions betweenintegrity of process and maximization of value usually arise out of similar facts, such as time pressuresor unexpected developments in the course of the implementation of sales processes. However,differences do exist between those legal systems with respect to the processes each country endorses asgenerating maximum value (ie. closed tender vs. auction process) and the approach that each countrytakes with respect to regulating conduct within those sales processes (ie. specific legislated guidelinesvs. court-appointed insolvency professionals).

In both Canada and the United States, it is difficult to strictly apply both value maximization andstakeholder theories to insolvencies. The number of stakeholders and the diffuse nature of theirinterests in insolvencies renders insolvencies difficult to compare to a strict value maximization theory,which typically involves a single solvent corporate entity. Further, unlike value maximization theory,insolvency law recognizes various intersecting legal duties and obligations which are owed to largegroups of stakeholders, each with diverse views and interests, and with pre-existing legal rightsorganized into a hierarchy, tempered by the rule of stare decisis and the policy concern of courts thatunrestrained value maximization is self-cannibalizing over the long-term. Strict stakeholder theory isalso difficult to apply in the context of insolvencies, as the collective debt recovery process effectivelyforces participants in the process to utilize the avenues available to them within that process to pursuetheir interests, and those avenues are typically difficult ones in which to advance claims motivated byunrestrained, individual interests.

Ultimately, for value to be maximized in any sales process, the process must be credible. In turn, ifcommonly used insolvency sales processes cannot generate sufficient value to attract the interest of themarketplace, those sales processes will lose their credibility. As integrity of process and valuemaximization are co-dependent, they are most accurately examined and analyzed on a case by casebasis, rather than on a macro level, as each case will present a different and unique set of stakeholders,with different legal rights, as well as different assets and businesses. Within each case, to generatevalue and preserve integrity of process, each insolvency process must recognize the pre-existing legalrights of each participant in that process and respect the interests of other stakeholders. However, eachprocess also must be consistent with broadly held perceptions of integrity of process, both to survivejudicial scrutiny within that proceeding, but also to maintain interest in the process in the marketplaceamong its participants.

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* Timothy A. Barnes is a United States Bankruptcy Judge for the Northern District of Illinois in Chicago, Illinois, and aformer partner in the New York and London offices of Curtis, Mallet-Prevost, Colt & Mosle LLP. Jeffrey Oliver is anassociate in the Calgary office of the international law firm Gowling Lafleur Hendersen LLP (Gowlings). Both JudgeBarnes and Mr. Oliver are Fellows of INSOL International. Judge Barnes and Mr. Oliver gratefully acknowledge theassistance of Cindi Giglio of Curtis, Mallet-Prevost, Colt & Mosle LLP.1 Michael Jensen, Harvard Business School: Value Maximization and the Corporate Objective Function (Jan. 2000)2 Sarah Pei Woo, Regulatory Bankruptcy: How Bank Regulations Cause Fire Sales, 99 GEO. L. REV. 1615, 1622 (2011).Ralph Brubaker, The Chrysler and GM Sales: § 363 Plans of Reorganization?, 29 No. 9 BANKR. LAW LETTER 1, (Sept.2009) (“Aggregate value maximization, is, of course, a central concern of the Chapter 11 process as its entire existence ispremised upon an ability to produce more aggregate value (and, consequently, greater individual stakeholder recoveries)than through a Chapter 7 liquidation.”); In re GSC, Inc., 453 B.R. 132,169 (Bankr. S.D.N.Y. 2011); In re Farmland Indust.,289 B.R. 122, 126 (B.A.P 8th Cir. 2003).3 Alon Chaver, Managers’ Fiduciary Duty Upon the Firm’s Insolvency: Accounting for Performance Creditors, 55 VAND.L. REV. 1813, 1815 (Nov. 2002).4 See In re Lionel, 722 F.2d at 1071 (“In fashioning its findings, a bankruptcy judge must not blindly follow the hue and cryof the most vocal special interest groups; rather, he should consider all salient factors pertaining to the proceeding and,accordingly, act to further the diverse interests of the debtor, creditors and equity holders, alike.”).5 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), s. 59(2); Re Scanwood Canada Ltd., 2011 NSSC 189 at para26 (“The Receiver must consider the interests of all creditors, and then act for the benefit of the general body of creditors.”)6 Brubaker, supra note 2, at 4.7 Chaver, supra note 3, at 1816.8 Id.9 Farmland, 289 B.R. at 127.10 R.S.C. 1985, c C-34 (“CCAA”).11 BIA, ss. 50 to 66.12 BIA, ss. 54(2) and 58; CCAA s. 6.13 Nicholas F. Kajon, Credit Crisis Limits Options for Troubled Companies: The Coming Rise in Distressed M&A May 8,2008.14 Id.15 Woo, supra note 2, at 1647.16 For an interesting discussion on the tensions of choice between sales and reorganizations, including the economic theoriesin support of or against each, see Douglas G. Baird, The Hidden Virtues of Chapter 11: An Overview of the Law andEconomics of Financially Distressed Firms, Chicago Working Papers in Law & Economics (Second Series).17 The authors are not aware of the availability of similar statistics for Canadian filings. Anecdotally, the general Americantrend with respect to larger filings appears to also be the case in Canada.18 UCLA-LoPucki Bankruptcy Research Database, http://lopucki.law.ucla.edu/bankruptcy_research.asp.19 Id.. See also Kenneth Ayote, David A. Skeel, Jr., Bankruptcy or Bailouts?, 35 J. CORP. L. 469, 477 (2010) (“A recentempirical study . . . finds . . . that roughly two-thirds of all large bankruptcy outcomes involve a sale of the firm, rather thana traditional negotiated reorganization in which debt is converted to equity through the reorganization plan.”); Robert E.Steinberg, The Seven Deadly Sins in § 363 Sales, AM. BANKR. INST. J. (2005) (“Asset sales under § 363 of the BankruptcyCode have become the preferred method of monetizing the assets of a debtor company”); Neil Devaney, Lynn Hiestand &Stephen Williamson, Pre-packs Spike in U.S., U.K. Following Bankruptcy Reform, Tunraround Management Association,(July 1, 2007).20 Kajon, supra, note 13.21 Harvey R. Miller and Shai Y. Waisman, Is Chapter 11 Bankrupt?, 47 B. C. L. REV. 129, 152-155 (2005).22 Id. at 153.

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23 Id.24 Id. at 152.25 Id.26 CCAA, s.6(1).27 AbitibiBowater Inc., Re 2010 QCCS 4450 (CanLII) at para 19.28 Id. at para 34.29 Royal Oak Mines, Re, 1999 CarsWell ONT 625.30 CCAA, s. 22(2).31 Metcalfe & Mansfield Alternative Investments II Corp. (Re), 2008 ONCA 587.32 11 U.S.C. § 1121(a).33 11 U.S.C. § 1126(b).34 11 U.S.C. § 1102(b)(1).35 In re Blue Bird Body Company, et al., No. 06-50026, 2006 WL 2955663 (Bankr. D. Nev. Feb. 15, 2006).

36 11 U.S.C. § 363(b)(1).37 Fed. R. Bankr. P. 6004.38 In re Calpine Corp., Case No. 05-60200 (Lifland, J.) (Dec. 20 & 21, 2005) [Docket No. 6372] (the “Sale Motion”).39 Id.40 Id.41 Id.42 Id.43 Id.44 Id.45 In re Calpine Corp., Case No. 05-60200 (Lifland, J.) (Dec. 20 & 21, 2005) [Docket No. 6434] (the “Sale Order”).46 11 U.S.C. § 363(n).47 Jason Binford, Collusion Confusion: Where do Courts Draw the Line in Applying Bankruptcy Code Section 363(n)?, 24Emory Bankr. Dev. J 42, 44 (2008).48 In re Sunnyside Timber, LLC, 413 B.R. 352, 363 (Bankr. W.D. La. 2009).49 Binford , supra, note 47, at 51.50 Id.51 Id.52 11 U.S.C. § 363(k).53 Beal Bank, S.S.B. v. Waters Edge Ltd. P’ship, 248 B.R. 668, 680 (D. Mass. 2000) (quoting 7 COLLIER ON BANKRUPTCY P.1129.05[2][b], at 1129-34 (15th ed. rev. 1998)).54 See In re Fountainebleau Las Vegas Holdings, LLC, Case No. 09-21481 (AJC) (Bankr. S.D. Fla. Dec. 7, 2009) (courtmay find “cause” to limit credit bidding under § 363(k) when practical considerations dictate that only cash bidding shouldbe allowed, denying a motion to allow credit bidding at a § 363 sale mechanics’ and materialmen’s lien claims when the netresult would be to require the court prior to the scheduled sale to determine the amount and priority of more than 300 lienclaims).

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55 Prior to taking the bench, Judge Barnes and Steven J. Reisman of Curtis, Mallet-Prevost, Colt & Mosle LLP representedCygnus Business Media in a Delaware Chapter 11 case where, due to overlapping time frames, the total time spent inChapter 11 for the debtors was 34 days..56 Bret Rappaport, Calvinball Cannot Be Played on This Court: The Sanctity of Auction Procedures in Bankruptcy, 11 J.BANKR. L. & PRAC. 189, 199 ( 2002). As stated, “[M]ore than a century of well-reasoned case law has established thebedrock principle that court-established bidding procedures should not be ignored by approval of sales that disregard thosebidding procedures. Such a practice destroys the confidence of potential bidders in bankruptcy sales, the integrity of thebankruptcy bidding procedures and chills bidding to the ultimate detriment of future creditors.” Id. at 203.57 Daniel R. Dowdall and Jane O. Dietrich, “Do Stalking Horses Have a Place in Intra-Canadian Insolvencies”, Janis P.Sarra, ed. Annual Review of Insolvency Law, 2005 (Toronto: Carswell, 2006) at 4.58 CCAA, s. 11.7.59 Steven L. Graff and Ian E. Aversa, “Insolvency Aspects of the Purchase and Sale of a Distressed Business in Canada”,available online at: http://www.airdberlis.com/templates/Articles/articleFiles/508/Insolvency%20Aspects%20of%20the%20Purchase%20and%20Sale%20of%20a%20Distressed%20Business%20in%20Canada.pdf, at 7.60 Ben-Ishai & Lubben, supra, at para. 77.61 Id.62 CCAA, s.36(1)63 CCAA, s.36(3)64 CCAA, s.36(4) and (5)65 In the matter of Pope & Talbot, Supreme Court of British Columbia, Vancouver Registry Action No. S077839, see onlineat http://www.pwc.com/ca/en/car/poptal/court-orders-receivership.jhtml; Alan H. Brown, “Liquidating under the CCAA: anOverview of Recent Developments in Cliffs Over Maple Bay and Pope & Talbot”, in Credit and Banking Litigation, 2008(Toronto: Federated Press) at 690.66 Royal Bank v. Soundair Corp. (1991), 7 C.B.R. (3d) 1 (Ont. C.A.) at para. 1667 Boutique Euphoria Inc. v. Lingerie Studio Inc. 2007 Q.C.C.S. 712968 Id. at para. 3769 Id. at para 3770 Philippe H. Bélanger,, Alain Tardit and Jocelyn T. Perreault, “Stalking Horse Bids in Quebec: a case comment of theBoutique Euphoria Decision”, Janis P. Sarra, ed. Annual Review of Insolvency Law, 2007 (Toronto: Carswell, 2008) at465.71 Id. at 120, citing Dowdall and Dietrich, supra, at 872 Id. at 12373 Pamela Huff, Linc Rogers, Douglas Bartner and Craig Culbert, “Credit Bidding – Recent Canadian and U.S. Themes”, inJanis P. Sarra, ed. Annual Review of Insolvency Law, 2010 (Toronto: Carswell, 2011) at 11.74 Mr. Oliver and Tom Cumming of Gowlings LLP represented Quorum Oil and Gas Technology Limited, SiroccoHoldings Inc. and WellPoint Acquisition Co. Inc. in this proceeding.75 For copies of all relevant pleadings and reports of the Receiver in this proceeding, see: http://documentcentre.eycan.com/Pages/Main.aspx?SID=172.76 Another subsidiary was located in South Africa, for which no formal insolvency proceeding was required.77 These amounts included the fees and disbursements of the receiver and its counsel; amounts owed on account of unpaidemployees pursuant to the Wage Earner Protection Program Act, R.S. 2005, c. 47, s. 1 (as am.) and amounts payablepursuant to a key employee retention plan.78 The value prescribed to the preferred shares for the purpose of the WAI APA was their redemption value of US$6.1million. The Receiver took the position that no formal valuation of those shares was necessary if it was required in order tocompare the value of the WAI APA with other bids received. No formal valuation was ultimately performed.

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79 The WAI Preferred Shares were Class B Preferred Shares with non-voting status; had a fixed dividend of 6% per annum,calculated and paid quarterly; were redeemable at the request of WAI for a price equal to the paid-up capital plus anyunpaid dividends; had provisions requiring mandatory redemption upon the occurrence of a Class B liquidity event or uponthe fourth anniversary of the issuance thereof, whichever comes first, for the redemption price of the paid up capital plusany unpaid dividends. A “Class B Liquidity Event” was defined as either the completion of WAI of its initial publicoffering for a minimum amount of US $30,000,000 and a listing of its common stock on any recognized stock exchange ora change of control concluded in consideration of either cash and/or shares freely traded on an organized stock market and apublically traded corporation having a stock market capitalization of at least US $500,000,000 and for consideration no lessthan the aggravate paid-up capital of the Class B Preferred Stock.80 The sales process procedures defined a “superior offer” as a credible, reasonably certain and financial viable third partyoffer for the acquisition of all of the properties of the Companies, the terms of which offer are no less favorable and nomore burdensome or conditional than the terms contained in the WAI APA.81 A copy of those auction procedures can be found at http://documentcentre.eycan.com/eycm_library/WellPoint%20Systems%20Inc/English/Receiver's%20Reports/Wellpoint%20-%20Receiver's%203rd%20report.pdf, page24.82 It should be noted, however, that the element of the procedures permitting the Receiver to adjust bidding incrementscould have been used as justification for allowing the Auction to continue – at least as to the Partial Cash Bidder. Ratherthan allowing the Partial Cash Bidder to rebid, the process allowed for the Receiver to simply allow the bid to be acceptedby adjusting the bidding increment.83 443 B.R. 101 (Bankr. S.D. Tex. 2010).84 Id. at 102.85 Id. at n.186 Id. at 103.87 Id.88 Id. at 104.89 Id.90 Id.91 Id.92 Id. at 105.93 Id. at 106.94 Id.95 Id.96 Id. at 107.97 Id.98 Id. at 115.99 Id. at 112.100 Id. at 109 (quoting In re Gil-Bern Indust., Inc., 526 F.2d 627, 629 (1st Cir. 1975)).101 Id. at 108-112.102 Id. at 112.103 Id. at 108 (citing First Nat’l Bank v. M/V Lightning Power, 776 F.2d 1258 (5th Cir. 1985)).104 Id.105 Id.106 Id.

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107 Id. (quoting First Nat’l Bank, 776 F.2d at 1261).108 See id. at 109-112.109 Id. at 115-16.110 Id.111 Lee v. Geolyn Inc., 2009 ABQB 261 at para. 22 – 23.112 Cobrico Developments Inc. v. Tucker Industries Inc., 2000 ABQB 766.

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