Sistema Compuesto de Formación Profesional: Inglaterra

The official title given to the Cork Report is the Report of the Review Committee on Insolvency Law and Practice (Cmnd. 8558, 1982). This Report contributed more to the area of insolvency law and practice than any other that has been formulated since. The report, which devoted a chapter to administration¹³⁰, drew particular attention to the change in attitudes that had occurred. The Committee sought to define the characteristics of a good modern insolvency law¹³¹, by looking at the existing procedures in place and seeing how they could be amended to address the fallacies in the law. The Report drew attention to these problems and proposed a procedure by which the court could appoint an administrator to manage the company, with the same powers as a receiver and manager. The Report was keen to promote the idea that the grant of an administration order would have the effect of freezing the enforcement of rights against the company, whether secured creditors or otherwise, thus facilitating the simple regime of voluntary arrangements proposed in the report. It must be noted that the Cork Report does not set out the aims of a corporate rescue model. Rather it is necessary to take a holistic approach whereby all the aims contained within the passage should be reviewed as a whole and once they have been collectively understood, it reflects, between the lines its ideology, what has been described as the rescue culture¹³², a philosophy of restoring companies to profitability and avoiding liquidation¹³³. Whilst there are a few options provided within the report to achieving this end, the focus in this thesis is on       

130 Insolvency Law and Practice, Chapter 9. 

131 Insolvency Law and Practice: Report of the Review Committee Cmnd. 8558 (London: HMSO, 1982), para.198.  

132 The phrase has now passed into English jurisprudence. See the speech of Lord Browne-Wilkinson in Powdrill v. Watson [1995] 2 A. C. 394 at 442, 445, 446. 

133 Paragraphs 191-8; 203-4; 232; 235; 238-9; See also R. M. Goode, Principles of Corporate Insolvency Law, 4^th edn, (London: Sweet & Maxwell, 2011), at 57-59. 

administration¹³⁴. It must be stressed that despite the introduction of the rescue culture, many companies still end up in liquidation. Nevertheless, notwithstanding this potential

shortcoming rescue proceedings have played a vital role even if it was just to increase the value received on the sale of assets before the company entered liquidation.

The Report recognised the pessimistic approach of the law towards rehabilitation and accepted that liquidation should not be the only option¹³⁵. It found that when compared with other systems the UK’s position was unfavourable as others had procedures that promoted rescue¹³⁶. As such one of the aims to emerge from the discussions was how to develop a corporate insolvency system that embraced a rescue culture. To this end a group of objectives were created, which gave the new system a sense of direction as well as allowing the

flexibility to add further if required¹³⁷. The objectives set out in the report are intentionally vague to capture an array of situations, yet contain enough substance to protect specified interests. The objectives are set out below; once listed, closer attention will be paid to dissecting the nature and purpose of each. The aims are:

(a) To underpin the credit system and cope with its casualties;

(b) To diagnose and treat an imminent insolvency at an early, rather than a late, stage;

(c) To prevent conflicts between individual creditors;

(d) To realise the assets of the insolvent which should properly be taken to satisfy debts with the minimum of delay and expense;

(e) To distribute the proceeds of realisations amongst creditors fairly and equitably, returning any surplus to the debtor¹³⁸;

(f) To ensure that the processes of realisation and distribution are administrated honestly and competently;

(g) To ascertain the causes of the insolvent’s failure and, if conduct merits criticism or punishment, to decide what measures, if any, require to be taken; to establish an investigative process sufficiently full and competent to discourage undesirable       

134 The other options been CVA under Part 1 of the IA 1986; s. 425 of the Companies Act 1985; and the contract –based “workout” an arrangement concluded outside any statutory framework, such as the “London Approach”. 

135 See D. Milman, ‘Moratoria on Enforcement Rights: Revisiting Corporate Rescue’, Conveyancer and Property Law, (2004), 89, at 91. 

136 See USA, Chapter 11 of the Federal Bankruptcy Code. 

137 It will also be noted how these objectives may come into conflict with each other, see S. Frisby, ‘In Search of a Rescue Regime: The Enterprise Act 2002’, Modern Law Review, (2004). 

138 On the importance of fairness to creditors given the mandatory, collective nature of proceedings, see also para 232.  

conduct by creditors and debtors; to encourage settlement of debts; to uphold business standards and commercial morality; and to sustain confidence in insolvency law by effectively uncovering assets concealed from creditors, ascertaining the validity of creditors’ claims and exposing the circumstances attending failure¹³⁹;

(h) To recognise and safeguard the interests not merely of insolvents and their creditors but those of society and other groups in society who are affected by the insolvency, for instance not only the interests of directors, shareholders and employees but also those of suppliers, those whose livelihoods depend on the enterprise of the

community¹⁴⁰;

(i) To preserve viable commercial enterprises capable of contributing usefully to national economic life¹⁴¹;

(j) To offer a framework of insolvency law commanding respect and observance, et sufficiently flexible to cope with change, and which is also:

(i) Seen to produce practical solutions to commercial and financial problems (ii) Simple and easily understood

(iii) Free from anomalies and inconsistencies

(iv) Capable of being administered efficiently and economically

(v) To ensure due recognition and respect abroad for English insolvency proceedings.

An important aspect to derive from these objectives is the importance of preserving viable economic enterprises which contribute to the economic prosperity of the country. Conversely it also recognises the intertwined relationship that failure has on a community; the so called

“ripple effect” that will financially unsettle people and companies beyond the distressed company¹⁴². Paragraph (h) and (i) when combined together illustrate the significance of preserving communities that are dependent on a core company by implying that is not just about saving companies which are economically viable, but also the possibility the company enjoying economic success at a later stage if it is in the interests of the community¹⁴³. The objectives collectively recognise that the law cannot exist in ignorance of the wider       

139 See para 198(h) and amplification in paras 235 and 238. 

140 See para 198(i) and amplification in paras 203-4. 

141 See para 198(j) and amplification in para 204.  

142 Cork Report, para. 204. 

143 See M. Hunter, ‘The Nature and Functions of a Rescue Culture’, Journal of Business Law, (1999), 491, at 497-9; and on the social costs see B. G. Carruthers and T. C. Halliday, Rescuing Business: The Making of Corporate Bankruptcy in England and the United States, (Oxford: Clarendon Press, 1998), pp 69-70. 

implications; it must endeavour to do its best to consider all eventualities in the interest of maintaining wealth in what would otherwise become deprived areas (jobs and local wealth).

Taking account of these wider issues, corporate rescue must strive to bridge the divergences between theory and application. Achieving this aim however involves understanding that corporate rescue was embraced in a politico-legal dimension, thereby providing a trans-disciplinary flavour to the concept¹⁴⁴. Whilst this approach may assist in greater knowledge being obtained about how rescue operates and increase awareness in how corporate

insolvency is integrated in everyday life, it can invariably lead to and cause confusion¹⁴⁵. A clear example of this can be found with the approach the court took¹⁴⁶ in Powdrill v

Watson¹⁴⁷, which stated:

...the rescue culture which seeks to preserve viable businesses was and is fundamental to much of the Act of 1986. Its significance in the present case is that, given the importance attached to receivers and administrators being able to continue and run a business, it is unlikely that Parliament would have intended to produce a regime as to employees’ rights which render any attempt at such rescue either extremely hazardous or impossible¹⁴⁸.

Amid this tension between providing a stable insolvency system for a rescue strategy to occur against the reputation that insolvency receives in the UK, political forces have been keen to promote a rescue model based loosely on that of the United States (Chapter 11). The aim for adopting the characteristics of another model would be to eradicate the stigma that is

associated with insolvency in the UK and replace it with a confident system that encourages risk taking for the promotion of enterprise¹⁴⁹. The importance of sustaining the attitude of       

144 See Insolvency Service, ‘A Review of Company rescue and Business reconstruction Mechanisms, Report by the Review Group’, (DTI, 2000), (IS 2000), at 12-23. 

145 The failure to formulate a limited number of core principles to which others may be treated as subservient has in some ways caused confusion regarding the direction in which the law should take, see The Justice Report,

‘Insolvency Law: An Agenda for Reform’, (London, 1994).  

146 And notably the British Banks Association endorsed corporate rescue in their 1997 paper, ‘Banks and Business Working together’, (London, 1997), para 3 which states that: ‘Banks have long supported a rescue culture and thousands of customers are in business today because of the support of their bank through difficult times’. Whether this statement remains accurate after the financial troubles that were manifested by the Northern Rock episode in 2009 remains to be seen.  

147 [1995] 2 AC 394. 

148 [1995] 2 AC 394, at 442; quoted in V. Finch, Corporate Insolvency Law: Perspectives and Principles, (CUP, Cambridge, 2002), at 191; and M. Hunter, ‘The Nature and Functions of Rescue Culture’, Journal of Business Law, (1999), 491, at 511. 

149 Peter Mandelson then the Trade Secretary in 1998 went to great lengths to discuss with the hope of reassessing business perception on failure and move it towards risk taking; see M. Hunter, ‘The Nature and

taking risk and encouraging unsuccessful entrepreneurs to try again has been an imperative stance that the government has been eager to promote¹⁵⁰, and something which the Enterprise Act 2002 seeks to strengthen. In essence the new regime was about providing the necessary framework to permit “a culture in which companies that can be rescued, are rescued”¹⁵¹. The reality of the situation however means that the problem is not the law, or even the means to implement change, but the inherent attitude that failure is something that could and should be avoided¹⁵². This attitude has been critical to presenting the type of corporate insolvency model that has developed in the UK. Little distinction has been made between a company that has become distressed due to extrinsic events that were not foreseen (“honest failure”)¹⁵³ and cases where the failure was the result of poor management decisions¹⁵⁴. Depending on how the difference has been interpreted creates either a management displacement rescue regime or one that permits the management to remain in control of the company. The latter will now be explored.

2.4. A Comparison with Chapter 11 of the US Bankruptcy Code

The research conducted within the historical overview section above notes that different perspectives on bankruptcy exists, and it is perhaps nowhere better demonstrated than observing the corporate insolvency laws that exist on both sides of the Atlantic. The US approach could be best described as endorsing an optimistic view, characterised as recognising that failure does not need to rule out future successes of incumbent

        Functions of a Corporate Rescue Culture’, Journal of Business Law, (1999), 49, at 519; see also a comment by the Parliamentary Under-Secretary of State for Trade and Industry, Melanie Johnson who stated that ‘the insolvency reforms will help address the fear of failure that is a significant barrier to enterprise and help prevent companies in difficulty from going under unnecessarily. Together, the reforms will help make the UK become a better place to do business...’, HC Deb. April 10, 2002, col.111; see also V. Finch, Corporate Insolvency Law:

Perspectives and Principles, (Cambridge: CUP, 2002), pp.127-34, 284-86; A. Keay, ‘Balancing Interests in Bankruptcy Law’, CLWR, (2001), at 225. 

150 Patricia Hewitt, the Trade and Industry Secretary, House of Commons Debate, second reading of the Enterprise Bill, April 10^th, (2002), col. 44. 

151 Insolvency Service (IS), ‘An Update on the Corporate Insolvency Proposals’, (January 14, 2002), see http://webarchive.nationalarchives.gov.uk/+/http://www.dti.gov.uk/enterprisebill/index.htm (accessed 9th February 2010), at 1. The IS have made the objective of the EA, particularly the purpose of the administration process as “to facilitate the rescue of viable companies and, if this is not reasonably practical, a better return to the creditors”; see J. Alexander, ‘The Enterprise Act 2002’, 3 Insolvency Law & Practice, (2003), para.2.7. 

152 See B. G. Carruthers and T. C. Halliday, Rescuing Business: The Making of Corporate Bankruptcy in England and the United States, (Oxford: Clarendon Press, 1998), at 246.  

153 This term shows a gradual move away from old ideology to a more open and forgiving commercial system that would encourage fairness and reduce the penalties for hard strapped companies, see HM Treasury Press release, 8^th June 2001 as presented by the then Chancellor Gordon Brown; see also the second reading of the Enterprise Bill, where the Trade and Industry Secretary, Patricia Hewitt stated that the aim of reform was to

‘strengthen the foundations of an enterprise economy by...establishing an insolvency regime that will encourage honest but unsuccessful entrepreneurs to try again’, HC Deb. (April 10, 2002), col.44. 

154 See N. Martin, ‘Common-Law Bankruptcy Systems: Similarities and Differences’, American Bankruptcy Institute Law Review, (2003), 367, at 374. 

management¹⁵⁵. Bankruptcy law constitutes a way for creditors to sort out their claims

collectively by liquidation of the debtor’s assets or by reaching agreements with regards to an outcome. There are various options that a failed company can take. This thesis is interested in the most well known of the reorganisation provisions, namely Chapter 11 of the US

Bankruptcy Code for it represents the preferred mode for US public corporations¹⁵⁶. The proceedings are usually initiated by management, but can also be initiated by creditors as well¹⁵⁷. The advantage to be gained from voluntary bankruptcy petition (initiated by management as opposed to creditors) is that it appears to favour reorganisation, despite incumbent management remaining in post as well as sustaining the value for the company.

What the US model acknowledges is the value of human capital – management should stay in place if their value adds to the firm. Assessing positive valuations on human capital is a difficult process but the Chapter 11 model at least gives the option of whether to keep it or not.

Observing the UK’s rescue regime it has remained more favourable towards the treatment of insolvents, at the expense of perhaps the treatment of true economic delinquents¹⁵⁸. Who exactly are the true economic delinquents entirely depends on the model being researched and when and who is asked. Unlike the “Debtor in Possession” (DIP) model evident in the US which allows for the existing management to remain in control of the ailing company during the reorganisation period, the UK with its management displacing model opts for an external administrator – an IP often appointed by a secured creditor with security over the whole of the assets of the company¹⁵⁹. It would appear that the UK by adopting a creditor driven regime has provided a highly unsympathetic stance against the notion of corporate rescue.

This is further emphasised in the divergence between how the two systems treat failure, with the element of penalty becoming associated with the UK’s insolvency regime. This has not only been fundamental in contributing to the creditor friendly type of rescue model that we       

155 M. Brouwer, ‘Reorganization in US and European Bankruptcy Law’, European Journal of Law &

Economics, (2006), 5, at 11. 

156 S. Gilson, Creating Value through Corporate Re-structuring; Case studies in Bankruptcy, Buyouts and Breakups, (New York: John Wiley and Sons, 2001), at 23. 

157 Petitions filed by management made bankruptcy proceedings voluntary. Involuntary bankruptcy petitions filed by creditors are overwhelmingly chapter 7 (liquidation) petitions, see S. Block-Leib, ‘Why Creditors file so few Involuntary Petitions and why the Number is not too small’, 57 Brooklyn Law Review, (1991). 

158 M. Hunter, ‘The Nature and Functions of Rescue Culture’, JBL, (1999), 491, at 498. 

159 See Insolvency Act 1986, para 64.  

have today, but it has also ensured that failure would be classed as something undesirable by the general public which in turn has had the effect of ensuring that management displacement was the only option¹⁶⁰. Despite the apparent friction between the two models as to which is the preferable notion neither is able to produce a clear and more convincing argument.

Notwithstanding this stalemate, what is clear is that some of the mutual characteristics that they share can be viewed as embracing an equal understanding in that they are both dedicated to saving viable companies; preserving jobs, satisfying creditor’s claims and to produce a return for its owners¹⁶¹. Essentially assessing which model offers the best outcome is impossible to certify as there are some commentators who will suggest that it is inevitable that the UK will eventually come to resemble the US¹⁶², whilst others, will suggest, equally robustly, that the US model will tilt towards the British system given the increasing influence that creditors are enjoying in Chapter 11 by means of provisions in DIP financing

agreements¹⁶³.

Whether any alteration or morphing of legal systems will occur is academic. That said if the US was to adapt the UK’s model it would involve a change in attitude. The traditional

principles in the UK dictate that debts must be paid; insolvency is morally wrong and culprits should be punished¹⁶⁴; that on the failure of the debtor to satisfy its contractual obligation, in order to make sure the debt is paid, the company should be wound up¹⁶⁵. In addition the US would have to consider the meaning of certain concepts. In the UK there has been much debate surrounding the two mechanisms of rescuing and liquidating, with some

commentators suggesting that these are in conflict with the goal of keeping businesses in operation¹⁶⁶, stating that this has been highlighted as a separate goal to that of insolvency       

160 For further reading on the history of Insolvency law in England see P. Omar, ‘The Mutual influence of French and English Commercial Laws in Insolvency’, International Company and Commercial Law Review, (2008), 136, at 136. 

161 See E. Warren, ‘In Bankruptcy policymaking in an Imperfect World’, 92 Mich L Rev., (1993), 336, 354-5;

and for a UK perspective see Powdrill v Watson [1995] 2 AC 394, 442. 

162 See J. Armour, B.R. Cheffins and D.A. Skeel Jr., ‘Corporate Ownership Structure and the Evolution of Bankruptcy Law: Lessons from the United Kingdom’, 55 V and L Rev., (2002), at 1699. 

163 G. McCormack, ‘Control and Corporate Rescue – An Anglo-American Evaluation’, 56 ICLQ, (2007), 515, at 516. 

164 As previously noted there is a presumption in the UK that when a company becomes insolvent it is due to the failure of the management and those who were last in control, see R. Goode, Principles Of Corporate

Insolvency Law, 3^rd edn, (London: Sweet & Maxwell, 2005), at 328. 

165 The DIP regime has been likened to leaving ‘an alcoholic in control of a pub’, see G. Moss, ‘Chapter 11: An English Lawyer’s Critique’, 11 Insolvency Intelligence, (1998), 17, pp 18-19. 

166 The aim of rescuing a distressed company and keeping a company in operation should be seen as two distinct paths which do not necessarily lead to the same outcome. The question entirely depends on substance – the extent that the company survives intact from a rescue strategy. Substantial changes to a company’s operations invariably means the company will also change, but this will not reflect rescue in the true sense of the word.