Debt restructurings, debt grifting and the limits of contractualism

• Published date: 01 December 2023
• Author: Gerard McCormack
• Date: 01 December 2023
• DOI: http://doi.org/10.1002/iir.1523

RESEARCH ARTICLE

Debt restructurings, debt grifting and the limits

of contractualism

Gerard McCormack

School of Law, Leeds University,

Leeds, UK

Correspondence

Gerard McCormack, School of Law,

Leeds University, Leeds, UK.

Email: gmccormack@leeds.ac.uk

Abstract

This article critically ex amines corporate restructu ring

plans and schemes in the United Ki ngdom and

United States and third-pa rty releases in the context of

such corporate restructuri ngs. So far, the practice has

been more extensively examin ed in the United States

rather than the United Kingdom and the p ractice has

been castigated as ‘debt grifting’, that is, third part ies

getting the benefit of a bankrup tcy discharge without

going through the formal ba nkruptcy process. This

article acknowledges som e of these criticisms. It also

suggests that, if third-part y releases become more

widespread in the United King dom, this is likely to

militate against the succe ss of the United Kingdom as

an international corporat e restructuring venue. This is

particularly the case if the underl ying debt is disputed

or gives rise to social or political co ntroversy. The arti-

cle is divided into five parts. After the first introductory

part, the second part will exami ne how debts are res-

tructured in the large corpo rate context in the

United Kingdom and how third -party releases are

important for this endeavour. T he third part will

examine the equivalent pos ition in the United States.

The fourth part explores how th e restructuring solu-

tions currently on the tab le push up against the limits

of contractually derived solutions. The final part

concludes.

Received: 24 February 2023 Revised: 15 August 2023 Accepted: 16 August 2023

DOI: 10.1002/iir.1523

© 2023 INSOL International and John Wiley & Sons Ltd.

474 Int Insolv Rev. 2023;32:474–496.

wileyonlinelibrary.com/journal/iir

1|INTRODUCTION: THE UNITED KINGDOM AND

INTERNATIONAL DEBT RESTRUCTURINGS

It is a trite proposition that a company, even a company within a group of companies, is a sepa-

rate legal person with rights and liabilities peculiar to itself. It is equally trite to say that a com-

pany may be a member of a group of companies and that international business is invariably

conducted through a corporate group structure. There may be a network of parent and subsidi-

ary companies. Borrowing on behalf of the group as a whole may be done through a separate

financial arm with funds then passed on to other companies within the group.

1

Viewed from a

business angle, everything is done on a group basis. Individual companies enter separate insol-

vency proceedings and there is no legal concept of group insolvency proceedings, though in

practice the solvency of the corporate group as a whole may be intertwined.

2

The insolvency, or

lack of solvency, of one group member may impact on the solvency on other members of the

corporate group. Legal practice is formally different. If one of the weakest subsidiaries falls into

insolvency, the parent company and the other subsidiary companies may prosper to the benefit

of its shareholders unencumbered by the liabilities of the insolvent subsidiary.

Templeman LJ put the point colourfully in Re Southard & Co Ltd,

3

when he said:

‘English company law possesses some curious features, which may generate curi-

ous results. A parent company may spawn a number of subsidiary companies, all

controlled directly or indirectly by the shareholders of the parent company. If one

of the subsidiary companies, to change the metaphor, turns out to be the runt of

the litter and declines into insolvency to the dismay of its creditors, the parent com-

pany and the other subsidiary companies may prosper to the joy of the share-

holders without any liability for the debts of the insolvent subsidiary.’

It should be acknowledged, however, that, whilst it is unquestionably the case that companies

in the United Kingdom (even as part of a group) do enjoy separate legal personality, there have

been recent cases that have somewhat dented this corporate shield without leading to piercing

the corporate veil.

4

UK law, or English law, is not alone in having a single company focus. European insolvency

law also contains a single company focus. Under Regulation 2015/848, main insolvency pro-

ceedings in respect of a debtor company with its centre of main interests (COMI) with the

European Union (EU) should be commenced in the EU country where the debtor has its centre

of main interests.

5

The focus is on the individual debtor or debtor company. It does not matter

1

See generally Richard Squire, ‘Strategic Liability in the Corporate Group’(2011) 78 U Chi L Rev 605; Henry

Hansmann & Richard Squire, ‘External and Internal Asset Partitioning: Corporations and their Subsidiaries,’in Jeffrey

Gordon and Wolf-Georg Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford, OUP 2018).

2

See generally Sarah Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-First Century’(2016) 36 Oxford

Journal of Legal Studies 697.

3

[1979] 1 WLR 1198 (CA) 1208, 1218.

4

See Vedanta Resources Plc v Lungowe [2019] UKPC 20 finding an arguable case that the UK parent could be liable for

the operations of its overseas subsidiary and Okpabi v Royal Dutch Shell plc [2001] UKPC 3 to the same effect. For an

analysis, see generally Mukarrum Ahmed, ‘Private international law and substantive liability issues in tort litigation

against multinational companies in the English courts: recent UK Supreme Court decisions and post-Brexit

implications’(2022) 18 Journal of Private International Law 56.

5

Article 3(1). It is stated that the ‘centre of main interests shall be the place where the debtor conducts the

administration of its interests on a regular basis and which is ascertainable by third parties’.

MCCORMACK 475