Asset Sales and Secured Creditor Control in Restructuring: A Comparison of the UK, US and Canadian Models

• Author: Alfonso Nocilla
• DOI: http://doi.org/10.1002/iir.1269
• Published date: 01 March 2017
• Date: 01 March 2017

Asset Sales and Secured Creditor Control in

Restructuring: A Comparison of the UK, US

and Canadian Models

Alfonso Nocilla*

,†,‡

University College London, London, UK

Abstract

The primary insolvency restructuring mechanism in the UK is administration un-

der the Insolvency Act 1986, as amended by the Enterprise Act 2002. In an

administration, an insolvency professional known as an administrator, who is

accountable to the insolvent company’s creditors as a whole, is appointed to

oversee the restructuring. The administration process was designed to rehabilitate

distressed but viable companies and businesses and to maximize creditors’recover-

ies. Increasingly, however, insolvent companies are using this process to sell

substantially all of their assets through pre-packaged administrations or ‘pre-

packs’. In a pre-pack, the insolvent company and its senior creditors negotiate

the terms of the sale prior to initiating administration proceedings and appointing

an administrator. The administrator then implements the deal, often with little or

no input from junior creditors or other stakeholders.

Both the US Bankruptcy Code and the Companies’Creditors Arrangement Act

in Canada permit insolvent companies to sell substantially all of their assets under

the auspices of the restructuring legislation. This article compares pre-packs with

these US and Canadian processes, arguing that they are all functionally equivalent

in that they facilitate quick realizations for secured creditors by bypassing

traditional restructuring processes. This analysis suggests that pre-packs may give

too much control over the restructuring process to secured creditors, encouraging

rent-seeking and other value-destructive behaviours that undermine the

fundamental goals of insolvency law. Copyright © 2017 INSOL International

and John Wiley & Sons, Ltd.

*E-mail: alfonsonocilla@gmail.com

†

Of the Bar of Ontario. Ph.D. Student (Law)

‡

This paper received the 2015 Ian Strang Founders’

Award from INSOL International. Earlier drafts of

this paper were presented at the 2015 Canadian Law

and Economics Association Conference and INSOL

International’s 2016 Academics’Colloquium. I am

grateful to the organizers and attendees of both confer-

ences, as well as to Riz Mokal, Iris Chiu and Adrian

Walters for their comments on earlier drafts.

Copyright © 2017 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 26: 60–81 (2017)

Published online 11 March 2017 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1269

I. Introduction

Scholars on both sides of the Atlantic have observed a trend towards the use of

restructuring procedures to sell substantially all of the assets of insolvent

companies. In the UK, these sales are carried out primarily by way of pre-

packaged administrations (‘pre-packs’) under the Insolvency Act 1986, as amended

by the Enterprise Act 2002. Meanwhile, similar quick-sale procedures exist under

Section 363 of Chapter 11 of the US Bankruptcy Code

1

(‘363 sales’) and the

Companies’Creditors Arrangement Act

2

in Canada (‘liquidating CCAAs’). This

article compares these three procedures and assesses their appropriateness in light

of the underlying goals of insolvency law and the empirical evidence to date on

restructuring outcomes.

Part II of this article sets out a basic formulation of the goals of insolvency law.

Part III then compares pre-packs, 363 sales and liquidating CCAAs, suggesting

that these procedures are functionally equivalent in that they facilitate swift

recoveries for secured creditors through sales. In particular, I argue that these

procedures may give too much control over the restructuring process to senior

secured creditors, thereby encouraging rent-seeking and other value-destructive

behaviours.

II. What Should Corporate Insolvency Law Do?

Thomas Jackson’s well-known account holds that insolvency law’s primary goal is

to resolve a common pool problem. Specifically, the law imposes a collective and

compulsory process on the creditors of an insolvent debtor in order to prevent

them from racing to enforce their individual claims against the debtor’s assets,

dismembering the insolvent enterprise piecemeal when the assets would have been

worth more if they had been kept together.

3

Jackson argues that the law is justified

in imposing a collective resolution mechanism because preventing the creditors’

race preserves value for the creditors as a whole. Accordingly, any rationally

self-interested creditor would have agreed to submit to the collective process if it

had been given the chance to bargain with the other creditors from an

appropriately defined ex ante position.

4

For a number of reasons, Jackson’s thesis falls short of offering a complete and

coherent account of insolvency law. Firstly, there are fundamental problems with

the way Jackson sets up the hypothetical ‘creditors’bargain’model. In particular,

Jackson’s creditors are not placed behind a true Rawlsian ‘veil of ignorance’

because they are well aware of their own individual characteristics at the time that

they strike their bargain –they are not hypothetical characters who are equal in all

respects, but real-world creditors with very important differences:

5

1. 11 USC 101, et seq.

2. RSC 1985 c C-36.

3. Thomas Jackson, The Logic and Limits of Bankruptcy

Law (Harvard University Press, 1986) 10.

4. Ibid 13.

5. Thomas Jackson and Robert Scott, ‘On the Nature of

Bankruptcy: An Essay on Bankruptcy Sharing and the

Creditors’Bargain’(1989) 75 Va L Rev 155, 160 (empha-

sis added).

Asset Sales and Secured Creditor Control 61

Copyright © 2017 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 26: 60–81 (2017)

DOI: 10.1002/iir