L'esprit de l'Insolvency Act 1986

(Deuxième partie)

 

 

 

Mark Anthony Armstrong, Lecturer, Lancaster University


Alexandrine Cerfontaine, Lecturer, Leeds University

     

    Reposant sur une appréciation économique de la défaillance, l'essence de l'Insolvency Act 1986 réside dans une approche tendant à réhabiliter le débiteur par l'instauration de procédures de redressement tout en s'appuyant sur le rapport d'obligation original entre le débiteur et ses créanciers. La réforme de 1986 présente des caractéristiques originales, et parfois complexes pour une audience française, dont les lois de 1985 et de 1994 reposent sur la volonté manifeste de prévenir et de traiter les difficultés des entreprises. La finalité de la réforme anglaise s'accommode mal de la fragilité financière des entreprises, en particulier des PME, les méthodes juridiques de sauvegarde de l'entreprise défaillance s'avérant inefficaces face au contrôle des créanciers privilégiés. Le principe d'égalité entre les créanciers, pilier du droit de la faillite anglais a perdu ses lettres de noblesses et si l'on envisage les relations entre les différents intéressés aux affaires de l'entreprise, l'Insolvency Act 1986 génère un droit très inégalitaire et une justice peu équitable. L'Insolvency Act est une loi de circonstance, dont l'étude du contexte économique et politique de son élaboration aident à comprendre le phénomène d'injustice vécu en Angleterre depuis 1986.

    3. The Political Constitution of Credit
    "..Capital is not a thing, it is a definite social relation of production pertaining to a particular historical social formation, which simply takes the form of a thing and gives this thing a specific social character."1

    Corporate insolvency law is, like company law,2 about capitalism - the fragility of capitalism. More specifically, corporate insolvency law is about the socio-political constitution of money, of which credit is just one form, albeit an important and necessary form, and the regulation of the credit relationship once it starts to break down, particularly in times of "crisis." Indeed, the Cork Committee were clearly aware of the importance of credit as "the lifeblood of the modern industrialised economy."3 Given this, it is surprising that there are no pathologies of credit breakdown nor "...scarcely any detailed study....into what happens when the credit relationship breaks down and insolvency occurs."4

    The categories of money and credit should not, we suggest, be understood in purely economic terms; rather, they can be viewed as historical materialist categories developed to illuminate the structure of social conflict in capitalist society and the forms and conceptions (economic or otherwise) generated by that structure. 5 The separation of the "economic" and the "political" from each other and from the social is anathema and a contradiction which the state tries to reinforce; that is the state's role is viewed negatively here. The economic and the political are both, if you will, forms of social relations, forms assumed by the capital relation. This logic would imply that an economic or juridic concept of rescue or rehabilitation is a fetishised6 form of appearance of social relations.7 Insolvency is a social process and as a social phenomenon has manifold determinations, existing in and through other phenomena as a movement of contradiction; that is, as a movement of their own historical constitution. As Bonefeld states:

    "In the social process of value, productive, commodity and money capital are forms taken by capital-value in its self-contradictory process of self-valorisation."8

    Value and credit, therefore, can only be grasped as a dynamic movement of contradiction and not as static forms - capital is always in the process of recomposing itself. Similarly, "crisis" cannot be understood in purely economic terms. Rather, crisis also manifests itself politically, so that crisis is understood as a crisis of the total social relations of production. Crisis is not, as Smith suggests,9 the result of domestic policy failures but an intrinsic feature of the capital relation. The crisis of the capital relation is simultaneously a crisis of the international state system. The historical emergence and development of corporate insolvency law can be understood, we suggest, in the context of an analysis of the various forms taken by capital, of which money and credit are the most important,10 and within the context of the regulation of one particular juridic form of capital, the corporation. Regulation is a particular feature of advanced capitalist economies marked by the predominance of private property ownership, the allocation of resources through the market11 and the sanctity of contractual relations. As the Cork Committee made clear:

    "The foundation of the whole credit world and the maintainence of respect for the legal structure surrounding it, rests upon a belief in the sanctity of contract."12

    In capitalism, social relations appear as relations between things, as relations of free and equal individuals (citizen, property owner) thereby concealing their social character and content. This fragmentation of the capital relation into economic and political forms is an important aspect of (commodity) fetishism. Similarly, it is also a fundamental tenet of modern western legal doctrine and legal ideology that human beings appear as equal subjects before the law. As Cotterell explains,

    "they relate to eachother typically on the basis of free agreement between legal equals, through contract. Outside the realm of law and legal ideology we experience the fact that individuals...are not equal, but grossly unequal in power and capacities. Yet the concept of property makes it possible for the law to accommodate and guarantee these inequalities while maintaining the ideology of equality. This is because the idea of property treats those attributes which make human beings grossly unequal as separate from them and conceptualised as 'things' which they own."13

    Private property and the ideology of equality are fundamental presuppositions of the 1986 insolvency legislation, so we can perfectly understand the cynical statement that"...most unsecured creditors left in bankruptcy are treated 'equally'. They all receive zero."14 Private property, therefore, appears as the external embodiment of the individual will in things. Social antagonism is therefore mediated through exchange, that is, through the sale and purchase of labour power as a commodity on the free market. The individual legal subject becomes essentially the bearer of commodities, the owner of an economic asset (property) which produces a revenue. But, it is only through social struggle that the emergence of a political subject of law corresponding to the economic subject (property owner) is accomplished: surface categories always constitute mere formal equality, while the material inequality posited in the production of surplus value continually calls this apparent equality into question.

    We would argue that there is no clear dividing line between the economic, political and ideological dimensions of insolvency law; that is, there is no firm basis in the immediate struggle over the distribution of the debtor's assets for the conscious separation of these dimensions. The unsecured creditor or the employee experiences his/her dismay not simply as "economic" but as inseparably economic, political and ideological. The attempt to regulate the breakdown of credit relations (and simultaneously reinforce), based on the sanctity of contractual and private property relations, is an attempt to render invisible the collective dimensions of the social conflict over the distribution of assets and an attempt to both contain and pacify this struggle for recognition. Because the state must guarantee the relations of exchange, the state is an interventionist state. Once the relations of exchange break down, the state must regulate that breakdown and it is in these terms that we can understand corporate insolvency law. Insolvency law cannot be an exclusively private matter between the debtor and creditor.

    Our analysis earlier of Conservative macro-economic policy during the 1980s and 1990s alluded to the fact that control over labour was crucial in the fight against inflation. If this analysis is correct, then we must address conceptually and empirically the precise nature of the link that exists between the guarantee of commercial credit, the intensification of labour and corporate failure. Our argument is premised on an affirmative answer to the perennial question: Do labour costs really matter ?15 The distressed sale of Rover confirms this. Accumulation can only be sustained by the extension of credit as it expands the limits of the market through the issue of a claim on future settlement. Credit expansion defers the manifestation of crisis only by stimulating greater over-accumulation as profits are realised on an increasingly fictitious or inflationary basis. Productive accumulation has to succeed in order for money capital to be sustained, while the failure to turn credit into effective command over labour reasserts the limits of the value form in terms of insolvency and bankruptcy. Credit exists as a claim on a proportion of surplus value, representing abstract labour in the form of a claim on the future exploitation of labour. In order to maintain financial solvency, to keep up with interest payments and to 16 transform credit into means of payment, capital needs to exploit labour more effectively in order to increase surplus value not yet produced by labour. The measure of credit worthiness is the ability of functioning capital to control their workers for the purposes of expanded exploitation. During the 1970s and 1990s higher interest rates meant that a higher percentage of industrial profit had to go towards servicing corporate debt. As in the 1980s, employers have responded to the "financial" crisis by shedding labour, redistributing the share of the value-added fund from labour to capital. The deflationary periods between 1973 and 1983 both led to a dramatic restructuring of the UK's industrial capacity. As Bonefeld and Burnham point out,

    "During the first deflationary period, 45% of industrial employment was lost and, although the productivity of the remaining labour force increased during the 1980s, industrial production in 1994 was not significantly higher than in 1979."17

    4. The Floating Charge: Facilitating Corporate Finance or Precipitating Corporate Failure ?


    "It is arguable that secured credit was always given priority: there is not much point in the existence of secured credit if it does not grant a preferential right in insolvency. But secured credit played a minor role in the early days of commerce: the existing forms of security were the mortgage and the pledge...."18

    Underpinning the expansion of credit and the facilitation of corporate finance since the mid-nineteenth century, it is argued, has been "one of equity's most subtle creations,"19 the floating charge. Such an argument is commonplace in the secondary literature without, it seems, little attention being paid to two questions: firstly, why did the floating charge assume prominence in facilitating corporate finance and secondly, and perhaps more importantly, what role does it play in precipitating corporate failure and distress ? The Cork Committee were "satisfied that the floating charge has become so fundamental a part of the financial structure of the UK that its abolition cannot be contemplated,"20 and yet four paragraphs later, after consultation with the Committee of London Clearing Banks, stated that:

    "The Committee of London Clearing Banks refuted the suggestion that even the outright abolition of the floating charge would lead to a significant withdrawal of credit from companies which would otherwise obtain it; though they thought that it might lead to the introduction of alternative forms of security."21

    The Government's 1984 White Paper shared the Cork Committee's diagnostic that outright abolition of the floating charge was unnecessary; instead, they expressed the hope that the new rescue procedure - administration - would replace receivership. Unfortunately, the statistics confirm that this hope was misplaced and administrative receivership appointments outstrip company voluntary arrangment and administration order appointments; in fact, as the Fourth SPI Survey testifies: "Receivership continues to be the most successful ‘rehabilitative' insolvency procedure..." 22 The legal status of the floating charge, whether it is a right in rem, is a matter of some controversy and a number of different theories have been put forward to explain its basis, such as the defeasible charge theory, the licence theory, the mortgage of future assets theory, the contingent charge theory and the "revised" licence theory. We postpone our discussion of these debates until later but for now we would like to pose a question and suggest an answer. Our question is this: should the floating charge be abolished completely or something else put in its place, for example, a unified personal property security interest modelled on article 9 of the American Uniform Commerical Code as Goode argues ?23 Our answer [in theory] is yes, the floating charge should be abolished but [in practice] the abolition of this anachronism may prove difficult. From this, it follows that administrative receivership should also be abolished regardless of whether, statistically at least, it has proven to be the most successful rehabilitative insolvency procedure.

    As we will see later in our discussion of the proposed European Union cross-border insolvency convention, it is appears that English law does not recognise administrative receivership as an insolvency proceeding because in the English annexes to that Convention there is no mention of the administrative receiver or administrative receivership. Strictly speaking, its purpose is to enforce the floating charge or debenture for the holder's interest on the basis of a contractual agreement. That is, administrative receivership is a "...private law remedy whereby an invariably secured creditor enforces its security against the charged assets of a company."24 It is also not a class right. The recommendation by the Cork Committee to introduce a 10% fund for unsecured creditors out of the assets subject to a floating charge25 was an attempt to give administrative receivership a semblance of collective proceedings, and it has never been introduced. Additionally, whilst the definition of an administrative receiver is provided for in section 29(2) of the 1986 Insolvency Act, unlike the other corporate insolvency procedures, administrative receivership is not a creature of statute: the law on the subject is essentially based on contractual relationship and derives its force from both common law and equity, as supplemented by the Law of Property Act 1925 and superimposed by the Insolvency Acts 1986 and 1994. In this sense, administrative receivership represents "a true legal maelstrom."26 Having said that, in practice it is regarded as an integral part of the UK's insolvency system, despite Oditah's claim that the "..valiant attempt to integrate what is essentially a machinery for the enforcement of security into the mainstream of insolvency proceedings has not been successful,"27 and is closely linked to liquidation; it should not be seen, therefore, in isolation as simply a debt recovery mechanism.

    If, as the evidence seems to suggest [and we discuss this later], bank lending practices are changing with respect to small companies in terms of the lack of requirement for propery-based security and that small companies rarely enter into administrative receivership, then it seems to us that, as far as small companies are concerned, there is a case to be made for the abolition of administrative receivership. Although Milman may,ultimately, be justified in asserting that "it is....unlikely that the U.K. will give up this flexible form of security notwithstanding the doubts harboured by our European partners ?"28 the empirical evidence would appear to confirm the conclusion drawn by the Committee of London Clearing Banks and, perhaps, the question which should be addressed is the extent to which the floating charge has disappeared as a result of the stautory preferences created by the 1986 Insolvency Act, as the Cork Committee thought it would ? Additionally, with the globalisation of credit relations and the phenomenon of "disintermediation" new and more complex forms of security are emerging, suggesting that the floating charge no longer underpins the facilitation of corporate finance. Although there are both economic and technical legal reasons for abolishing the floating charge and corporate receivership, which of course we shall elaborate on in due course, our ultimate justification is ethical and political and has to do broadly with the normative obligations that must be kept between all creditors; that is, we see the rights which the state, insolvency practitioners and creditors have towards each other as form of mutual recognition. The distinction between ownership and obligation, between proprietary and personal rights is at the heart of insolvency law;29 that is, insolvency law upholds the ideology of private property rights and in so doing thereby promotes a struggle for recognition and entrenches misrecognition.

    The Cork Committee were adamant that

    "so widespread has the use of the floating charge become, that today it is thought that the greater part of the loan finance obtained by the corporate sector, particularly in the case of the finance obtained from the banking sector, is raised upon the security of such charges...."30

    Similarly, Goode suggests that the floating charge has made "..a major contribution to the ability of companies to raise secured finance." 31 The reason he offers for this is the fact that the floating charge gives its holder a global security over both existing and future assets to secure present and future indebtedness, providing an incohate security but leaving the debtor free to deal with the assets charged in the ordinary course of business. Although there is a risk of subordination to subsequent secured and execution creditors, to an extent this can be overcome by the use of "negative pledge" clauses noted on the register and by provision for automatic crystallisation of the charge as regards those assets against which an execution is initiated.32 If the floating charge is still the main vector in facilitating corporate finance today, then we need to ask what percentage of total corporate debt is secured and address the question of why creditors take secured rather than unsecured debt. Although we have not yet compiled a comprehensive source of information on secured commercial lending within the U.K, in the U.S.A the available data suggests that a substantial percentage of total U.S.corporate debt is secured and that small and medium-sized companies rather than large, publicly traded companies are the major borrowers on a secured basis.33 Additionally, Frankel and Montgomery suggest that over the period 1985-1989 nearly 70% of total business funds within the UK were raised through securities and bank loans.34

    Why do debtors give and creditors take security ? Is there a global evolution towards a wider use of secured credit, as Garrido suggests ? 35 According to Bridge36 following his review of the financial economics literature, a willingness to give security has a "signalling" function; that is, it demonstrates a company's conviction that credit can be safely extended to it. In addition, the provision of security restricts future borrowing opportunities, gives secured creditors more leverage over the company's future behaviour and makes it more difficult for financially distressed companies to reschedule corporate debt at a later date.37 However, as Bridge comments,

    "Empirical observation would suggest that companies will only give security if they have to, preferring to exhaust first all the possibilities of unsecured credit."38

    And it seems that secured credit is more likely to be taken where the financing required is medium to long term. The Modigliani-miller theory of stratification (or the irrelvance theorem) holds that in perfect capital markets a company's value will not be affected by the mix of debt and equity in its capital structure and when extended to the field of credit, the theory holds that the mix of secured and unsecured credit will not affect the overall cost of credit to the company. However,as Bridge argues, in the [continued] absence of a perfect credit market, a creditor will thus want to take security to avoid the insolvency risk that comes with lining up alongside unsecured creditors.39 This we suggest is the primary reason for taking security.

    5. Freedom of Contract, respect for property rights and the limits of the pari passu principle
    "It is a fundamental objective of the law of insolvency to achieve a rateable, that is to say pari passu, distribution of the uncharged assets of the insolvent among the unsecured creditors. In practice, however, this objective is seldom, if ever, attained...[and] the principle of pari passu distribution has been greatly eroded during the last century or so until today it remains as a theoretical doctrine only, with scarcely any application in real life."40

    As we will see later, in our discussion of the political constitution of credit, the law of security entrenches two fundamentally opposed principles of credit and insolvency: on the one hand, freedom of contract, priority and the recognition of private property rights, and, on the other hand, the pari passu principle or the principle of equality of treatment among creditors. The dilemma is that in recognising the principles of freedom of contract and respect for property rights, the pari passu principle is severely diminished and eroded by, what some would call, a laissez-faire approach to the creation of security and by the interventionist policy of favouring preferential creditors,41 particularly when Governement agencies have preferential status. As Oditah comments, "...every extension of the concept of property erodes the debtor's estate and thus diminishes the significance of the pari passu principle.."42 One must ask, therefore, just how fundamental this principle is "when secured creditors are able to eviscerate an insolvent's estate prior to it investing in [for example] the liquidator"?43 So important "that in corporate insolvencies one looks for it in the Insolvency Rules and not in the body of the Act itself."44 Despite the apparent importance of this principle, it is subject to a number of exceptions such as mutual credit and set-off45 (rule 4.90, Insolvency Rules 1986), preferential unsecured creditors, pre-preferential unsecured creditors (for example, winding-up expenses) and deferred creditors, so that insolvency law largely respects rights acquired pre-insolvency. Furthermore, with the infiltration of equitable doctrine into English commerical law,46 such as the use of Quistclose trust devices and equitable tracing,47 as Oditah comments, "Equity has done much to disappoint unsecured creditors by blurring the distinction between rights in an asset and rights to an asset."48 49

    Although the principle of equality between creditors is eroded by the granting of security rights, retention of title rights and by the creation of preferential rights, the House of Lords in British Eagle International Airlines Ltd v Compagnie Nationale Air France 50 held that it is contrary to public policy to attempt to opt out of an equal distribution of assets on a debtor's insolvency, thereby indicating that the pari passu principle was fundamental to English insolvency law. And yet, the use of purely contractual remedies to achieve unequal distribution, the use of debt subordination agreements,51 as for example in Re Maxwell Communications Corp plc (No 2) (1994),52 and the discovery of the light-weight floating charges,53 which Vinelott J held were not contrary to the policy underlying the administrative order procedure in Re Croftbell Ltd (1990),54 suggests that attempts to contract out of it are well and alive and illustrate the fact that insolvency has long been an "inspiration for the creation or private rights designed to insulate creditors from the consequences of insolvency."55 Like Finch, we must ask what, therefore "the Insolvency Act et al.offer the unsecured creditor "56 if it should not generally pursue redistribution goals ? If it were to pursue such golas, would it give unsecured creditors a "perverse" incentive to make strategic use of insolvency proceedings, thereby encouraging opportunism and parodying the principle of equality of treatment ?57 Would the abolition of security lead to, as Bridge suggests,58 bilateral subordination arrangements between unsecured creditors, thereby replicating the abolished secured credit system ?

    Can preferential status be justified ? The UK is not alone in the controversy surrounding preferential status and Ireland, for example, considered its abolition at the time of the introduction of the 1988 Bankruptcy Act and the 1990 Companies (Amendments) Act.59 As we shall see later in our discussion, we are forced to share Oditah's conclusion that it is "hornbook law that the assets of an insolvent must be distributed pari passu among creditors."60

    The availability of circulation61 or recycling credit62 to enable financially distressed companies to service interest on existing credit facilities,63 is, we argue, a short-term response to the potential threat of insolvency and marks, amongst other things, an attempt to integrate or contain labour within the capital relation on the basis of debt:

    "...credit offers the individual capitalist...an absolute command over the capital and property of others, within certain limits, and, through this, command over other people's labour. It is disposal of social capital, rather than his own, that gives him command over social labour."64

    Circulation credit alleviates illiquidity by enabling debtors to meet the difficulties in servicing interest on credit without defaulting. That is, credit exists as a means of payment or, in the threat of insolvency, as a means of deferring corporate liquidation. The speculative dimension of this credit maintains solvency on a fictitious basis, necessitating effective command over the means of production in terms of wage restraint and increased productivity to service the increased debt. In order to prevent insolvency, credit is guaranteed as a claim on surplus value. As a guarantee on future surplus value, the existence of circulating or recycling credit entails, in a large number of cases, a speculative deferral of corporate insolvency. The inability to repay debt implies that credit cannot be turned into effective command over labour and either labour is shed or insolvency ensues.

    Consider, for example, the collapse of Maxwell Communications Corporation plc (MCC), an English formed company whose principal assets were American and probably the "most significant international insolvency case in recent history." 65 The acquisitions by MCC in 1988 of Macmillan Inc, for approximately $2.6 billion, and the Official Airline Guide, an information service business, for $750 million was only made possible by MCC selling some of its businesses and assuming new debt to consolidate and refinance its existing corporate debt so that it could service the interest payments on the debt. As Flood and Skordaki state, MCC's major debt came through a "Jumbo Bank Facility," an unsecured credit facility comprising:a $990 million short-term loan, a $1,260 million medium term loan and a $70 million standby revolving credit facility.66 On 16 December 1991 the board of MCC filed for Chapter 11 protection, with respect to its US assets, and four days later, on 20 December, its directors petitioned in the UK for an administration order under section 9 of the Insolvency Act 1986 to protect its UK assets. The collapse of the Maxwell "empire" of public and privately-held companies after November 1991, and the collapse of the BCCI corporate banking "empire" raise intriguing questions of Private International Law, in the absence of an international convention, about the nature of co-operation in cross-border insolvencies, and these collapses starkly highlight the precarious nature of any attempt to devise international regulatory arrangements for cross-border insolvencies.67

    Similarly, the recent refinancing of Eurotunnel, which has been described as the "most complex in corporate history,"68 vividly illustrates the extent to which corporate refinancing is potentially a speculative deferral of insolvency. The refinancing proposals, which took over a year to negotiate, involves over 225 banks and 750,000 shareholders. The refinancing is complex, but basically comprises the following elements: firstly, a £1 billion debt for equity swap resulting in the issue of 769 million shares at an issue price of £1.30, primarily giving the banks a 45.5% equity stake; secondly, the exchange of a further £1 billion debt for "equity notes," with a conversion price of £1.55, and the simultaneous issue to shareholders of free equity warrants on a 1-for-3 basis, entitling them to purchase Eurotunnel shares at £1.50 until the end of the year 2003; if the warrants are converted the proceeds will be used to redeem the convertible bonds; thirdly, interest on the remaining £6.7 billion debt will be reduced through a number of mechanisms involving inter alia the exchange of loans worth £1.5 billion for "resettable bonds," continuation of the remaining £4 billion "junior debt" and the exchange of a further £1.26 billion debt for participating loan notes. The £400 million "senior debt" remains unaffected. Although the restructuring plan will not be completed before Spring 1997, the new financing terms come into effect from 15 October 1996. As a result of the refinancing, there will be a £2 billion debt reduction and lower interest repayments on the balance of the debt with a loss to the syndicate of 225 banks of £2.5 billion in interest payments over the next seven years. Although Eurotunnel is expected to face a funding deficit over the next couple of years, this can be filled by issuing up to £1.85 billion of "stabilisation notes,"also convertible into shares, which initially defer interest payments up until the year 2006 - "a last double-safety net."69 One of the main problems with the refinancing is that there are a number of diverse variables affecting future cashflows and which could seal Eurotunnel's fate in the year 2003 when the refinancing terms become tougher: a speculative deferral of the largest ever international insolvency ?

    6. Insolvency, Finance and "Small" Companies: Is Corporate Insolvency A Small Company Problem ?
    As we mentioned previously, the October 1993 Consultative Document conceded two things: firstly, that the two rescue mechanisms introduced under 1986 Insolvency Act were failing small companies, otherwise why bother to propose a new company voluntary arrangement scheme and, secondly, that approximately 81% of all corporate insolvencies involved small companies.70 In addition, the administration procedure in the 1986 Insolvency Act is known to be expensive and time-consuming, thereby ruling out the possibility of its use by small companies. 71 As Milman and Chittenden comment:

    "Although the administration order is theoretically available for small companies, in reality its utility in that regard is severely restricted by its start-up costs. Figures as high as £20,000 have been quoted as a minimum initial outlay to secure a favourable report from an independent accountant supporting the petition for the administration order and then to obtain the sanction of the court. This Achilles heel has been recognised both by the Department of Trade and Industry, and also by the courts72 themselves."73

    Furthermore, the February 1996 Consultative paper on "Facilitating Administrations" makes it clear that even if the procedure was available, a floating chargeholder can, even if his/her security is not in jeopardy, appoint an administrative receiver and veto the application. One must also question the role that the judiciary have played in promoting this "rescue" procedure 74 and the extent to which they have facilitated or hindered the use of administration in the UK. Statistically, the figures appear to confirm that the small business sector is particularly vulnerable and that the 1986 legislation has failed to address their needs. The Fourth SPI Survey confirms this conclusion:

    "Measured by case numbers alone, Britain's smaller businesses continue to be the most numerous victims of insolvency. Companies with under £1 million turnover accounted for 77 per cent of insolvencies (up from 71 per cent in the third survey). 88 per cent of insolvencies were amongst companies with liabilities of less than £1 million; 3 per cent higher than the previous survey. When numbers of employees are considered, insolvency continues to look like a small business problem. 83 per cent of the sample employed less than 15 people at the date they went into insolvency - only one per cent more than in the last survey."75

    Even allowing for an increase in new company registrations, the statistics suggest a growing incidence of small company insolvency. The incorporation statistics for 1994-5 show that there were 132,000 company registrations and that during the same period there were 129,000 companies removed or "struck-off"76 the register.77 Compared with the total numbers of company liquidations in an average year and the fact that company voluntary arrangements and administrations are not available to most small companies, there is a possibility that "the quiet fade-away is a more popular mode of exit for the insolvent small company than the formal liquidation"78 though one cannot, of course, make the assumption that those small companies struck-off had ceased to trade because of insolvency. But such a conclusion is tempting because as Rajani points out, in practice, company directors have used this alternative as a cheaper and more simple way of dissolving a company than that through winding-up.79

    Macro-economically there is case to made for addressing the needs of the small business sector. In the UK, and in the United States, it is widely recognised that this sector has played a crucial role in creating employment and in stimulating technological development.80 As the Bank of England notes in its third report, Finance for Small Firms, at a time when competitive pressures are causing larger companies to downsize and to contract-out certain operations (and shed jobs ?), "..small firms are seen as a source of dynamism, innovation, wealth creation and employment."81 In 1993, firms with fewer than 500 employees accounted for 63.5% 82 of private enterprise employment which is predicted to increase to 72.5% by the year 2000 and closer examination reveals that all this increased share will be created by businesses with less than 50 employees rather than by medium-sized companies.83 Given that, in 1993, for example, the total business population was estimated at 3.58 million, with small businesses84 accounting for 99.5% of all business, there appears to be a strong case for legislative intervention in the insolvency sphere. For example, in America, as we have already discussed, the Bankruptcy Amendments Act 1993 introduced a new Chapter 10 into the 1978 Bankruptcy Code specifically geared towards the reorganisation of small businesses with liabilities less than $2.5 million. Similarly, in France, the 1994 insolvency reform has provided for the extension of the "prevention" procedures to small and medium size enterprises.85

    Although this could imply that both systems were also failing small companies, positive legislative intervention has been deemed necessary either to correct the perceived difficulties with their respective corporate rescue cultures or to strengthen existing procedures. Milman and Chittenden have suggested that, within the context of company voluntary arrangements in the UK, some form of Government funding should be available to compensate creditors for their sacrifices in allowing financially distressed companies to undergo a voluntary arrangement or alternatively, they have suggested that the state give up its preferential rights as a creditor.86 Although both proposals have some merit, we would suggest that their proposals are not radical enough and unlikely to increase the success rate of the voluntary arrangement procedure. This procedure cannot be considered in isolation from the administration procedure and from the insolvency process as a whole. We discuss these claims later.

    It is also possible that the legal form for small companies is unduly rigid and inflexible and that the regulatory burden on small companies, in part, contributes to the failure of those companies, therefore necessitating alternative legal structures and deregulatory initiatives.87 We postpone discussion of these debates for now and instead address a fundamental issue, although related, and that is the issue of the sources of finance available to small companies. There are two ways of looking at this issue. Firstly, one could argue that the lack of alternative sources of finance and capital available to small companies acts as a constraint on future profitability and growth or that, secondly, if alternative sources of finance were available, small companies would increase their corporate debt capacity and merely postpone insolvency. Of course, this argument is rather crude and ignores other causes of corporate failure including inter alia loss of market, fraud, imprudent accounting, erosion of profit margins, product obsolescence and mismanagement. 88

    The empirical evidence suggests that UK small companies appear to suffer from a severe shortage of both long-term and medium-term financing, a problem which recession seems to exacerbate.89 Additionally, despite the emergence of a pan-European stock exchange for rapidly-growing small companies (EASDAQ),90 modelled on NASDAQ the U.S. market for young high-technology companies, to complement the UK's Alternative Investment Market and the launch of the Nouveau Marche in February 1996 in Paris, the small company's lack of access to finance on the international capital markets appears to be a significant factor in their illiquidity problems and their reliance on short-term sources of finance such as banks and trade creditors.91 Given small companies' reliance on short-term funds, the efficient management of working-capital then becomes crucial to both prosperity and survival.92 Willcock argues that, in fact, economic recovery may be impaired in consequence of overtrading problems, as smaller firms expand credit sales without sufficient capital to finance the expansion.93 The Fourth SPI Survey statistics also indicate that management failure and bad debts have become more important as an overall cause of insolvency, that is, 20% of all corporate failures.

    What sources of finance are available to small companies ? According to the Bank of England's Third Report in January 1996, "Banks continue to be the most significant source of external finance for small firms"94 and this is confirmed by the British Bankers Association statistics which show that in June 1995, £35.91 billion of bank finance was outstanding to small firms.95 In the main, small company start-ups and expansion have been traditionally financed by overdraft finance but the trend appears to be moving towards term loans with variable interest rates, which now account for 63% of all bank lending to the small business sector. Additionally, there is evidence to suggest that banks are now basing lending decisions on business plans and cash-flow, with the availability of property-based security becoming a secondary, but still important, consideration. 96 This is potentially very important as far as prevention and cure is concerned in small company insolvency. It suggests that banks are becoming more familiar with the dynamics of the companies to which they lend and given that recent surveys97 of small companies show evidence of a more positive relationship between small companies and banks, this raises the possibility of bank equity investment in those companies,98 a possibility which McGee has canvassed. 99

    Empirical research, particularly on Japanese companies,100 suggests that banks which take equity stakes in financially distressed firms are more likely to facilitate their rescue and survival 101 and in Germany and Japan, informal reorganisation procedures tend to predominate over formal banktuptcy procedures so that banks often take responsibility for organising creditor coalitions for financially distressed companies. In the UK, although there is an informal rescue mechanism, the "London Approach,"on the whole, banks have chosen to restrict or discourage the assumption of "insider" roles in financially distressed companies because of, for example, the wrongful trading provisions in the 1986 Insolvency Act which make a financial firm liable, as a "shadow director," for any of its directions that contradict the objective of minimizing the potential loss of all the company's creditors.

    The London Approach, brokered by the Bank of England, is an informal, flexible set of guiding principles, established during the 1970s and 1980s, that have evolved through the handling of bank-supported company rescues,102 committed to "sharing pain on an equitable basis."103 The Bank of England acts as "part missionary, part peacemaker" and relies purely on the authority vested in it by the banking community; that is, it has no statutory powers to ensure a successful work-out. During the 1980s and early 1990s recession, it was involved in over 200 multi-lender workouts, including for example, Brent Walker, Berisfords News Corporation, WPP and Ratners.104 Recognising that how banks respond to appeals for assistance by financially distressed companies is crucial not just for their own profitability, but also at a national level for future levels of productivity, and that the Insolvency Act 1986 rescue mechanisms are impracticable and national in scope, the Bank of England advocated this informal rescue procedure. Its main tenets include inter alia banks being initially supportive, by keeping financing facilities in place and not rushing to appoint receivers; taking decisions about a company's long-term future only on the basis of reliable information; banks working together to reach a collective decision on the work-out and how best to extend a financial life-line to the distressed company. 105 The key to the apparent success of the London Approach is co-operation, persuasion and trust,106 but when one of the central aims is to maximise value for financial creditors, primarily secured creditors, and when shareholders, employees and unsecured creditors are excluded, it is not surprising that it has been an "economic" success.

    In the U.S.A. the concept of "equitable subordination" tends to deter banks from active control of a financially distressed corporate borrower and American law also inhibits informal reorganisations,107 but there have been moves for lenders to specialise in debt lending, also known as "debtor in possession" finance.108 It is common practice in Germany, for example, to finance a company by means of equity rather than debt,109 because the corporate sector tends to rely heavily on banking institutions for external finance and accordingly German banks have a dominant role in the corporate governance of the top 100 companies.110 However, there are a number of possibly insurmountable problems with a bank equity investment proposal, including the questions of how to encourage or compel banks to adopt this practice and how to entice small companies to open up the ownership of their firms, even when future growth or survival depends upon it, and it is not altogether clear that it works in practice.111 As Freedman comments,

    "Small business research has shown clearly that one of the major barriers to growth of small firms is the desire for independence and the unwillingness to part with control,particularly by the alienation of equity in a company. A structure which enforced this reluctance by requiring all members to be involved in management could have a negative impact on the small business community."112

    Similarly, in recent years, many providers of mezzanine finance [middle-ranking financial instruments such as subordinated debt and preference shares] have been diversifying into new lending fields, and becoming less reliant on Management Buy-outs, such as the financing of "middle-market" companies. The latter companies are typically private companies needing funds for expansion but despite having insufficient assets to support further conventional bank borrowing are unwilling to dilute their equity ownership. Banks are already showing interest in this market and have begun provding mezzanine-type financial instruments, such as "equity overdrafts" or "royalty overdrafts" in which interest payments are linked to profits or sales.113

    7. The Internationalisation of Capital: Opening up Pandora's Box in Cross-Border Insolvency ?


    "Capital, by its very nature, knows no spatial bounds."114

    UK Corporate insolvency law, nor indeed any national insolvency system, should not be understood in purely domestic terms or, more specifically, within the confines and boundaries of the nation-state. That is, capitalist change[s] within one country can only be properly understood within the context of changes in global capitalism: capital has an inherent national and international moment.115 Nor should the internationalisation of capital be viewed in purely economic terms. As Picciotto notes, an "important role in shaping it was played by the internationalisation of a framework of state structures which have generally guaranteed the internationalised ownership of capital and its reproduction primarily through the corporation."116 The emergence of the Eurodollar markets 117 in the 1960s acted as one of the catalysts for the emergence of the global financial markets in the mid-1970s. Since then financial services globally have been characterised by a sharp intensification of competition and the rapid transformation of markets.118 This new competition consists of a number of diverse but interrelated factors, including market saturation, deregulation of the financial markets and internationalisation. 119 One aspect of the new competition, which is particularly important for our analysis, was the progressive shift towards financial "disintermediation," that is, the corporate sector by-passing the more traditional "intermediate" channels of refinancing existing debt and raising capital. Listed companies abandoned traditional bank borrowing and turned to the international commercial paper markets for short-term funds,120 and later to the bond markets for long-term financing. One of the most important factors in this move was the inflation wave of the mid-1970s.

    Additionally, the growth in securitisation by commercial banks, that is, the packaging and disposal of financial assets on the international capital markets, typically by transferring the original loan obligation into a marketable note or certificate of the holder's entitlement to an interest in the obligation, adds a new, more complicated dimension to the financing of companies in distress. Nat West's recent £3.2 billion corporate loan securitisation121 appears to confirm that banks have been struggling for some time with the uncomfortable fact that lending to large multinationals is not profitable enough in itself given that they can borrow more cheaply in the commercial paper and bond markets. Previous large-scale securitisations have been associated with the restructuring of financially distressed companies such as Credit Lyonnais and GPA. The emergence of a secondary market in the UK trading in distressed debt 122 also throws into doubt the future of the non-statutory, market-led London Approach. As work-outs become more international ( Heron, GPA and News International, for example) and embrace an increasingly diverse range of financing techniques, the flexibility and dynamism of this approach could begin to falter. As far as corporate work-outs are concerned, the evolution of the secondary debt market represents something of a two-edged sword for the Bank of England. On the one hand, trading in distressed debt can be a useful exit route for lenders unwilling to participate in a potentially painful restructuring, leaving those lenders/creditors with a genuine desire to add "value" to agree to the terms of the restructuring; conversely, on the other hand, it could delay the process of agreement and even undermine it. Furthermore, the timing of trades can have an unsettling effect on restructuring discussions and the lack of statutory protection against creditor demands introduces pressures to conclude the work-out as quickly as possible, suggesting that some sort of convention be drawn up for use when trading the debt of a company subject to the London Approach. As Bird notes,123

    "bond-holders, secondary debt traders, the US private placement market, joint venture partners, special creditor and supplier groups and intermediate investors have all discovered a voice and a willingness to intervene in one way or another....the centre of gravity is moving and the London Approach is at risk of becoming a rock in the river around which the surge of activity passes rather than a weir that can balance the flow"

    thereby leading to conflict and the possibility that restructuring does not occur. Although the London Approach is by no means dead, it has "arthritic symptoms" requiring more than a walking frame to prolong its life. Its joints need replaced and its cataracts cleared so that there is new mobility and new vision:124 recomposition of the capital form ? Time will tell, but if the London Approach teaches us any lessons, it is surely that of how "to prevent a re-occurence of the credit failures of the early 1990s."125 A sobering thought, but should the role of informal rescue mechanisms be geared towards preventing the re-occurence of credit failure ? Unfortunately, prevention tends to imply deferral. We would suggest that formal or informal rescue mechanisms should not have a policing function. International states have, in part, a moral responsibility for such failures. As Marx comments,

    "The credit system hence accelerates the material development of the productive forces and the creation of the world market, which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction,crises, and within these the elements of dissolution of the old mode of production."126

    8. Harmonisation, Insolvency and the European Community: The art of the Possible or a Drama of Comic Misrecognition ?
    "It is sometimes argued that the function of insolvency law is simply the distribution of the proceeds of the insolvent's assets amongst his creditors....This has never been the English Approach."127

    Insolvency is, perhaps, the "most crucial indicator of the attitudes of legal systems"128 because it obliges the law to choose and to distribute the assets the debtor company among a number of diverse and competing secured and unsecured creditors. As Garrido argues:

    "It is probably fair to say that distribution is one of the most complex questions in insolvency..moreover, differences in distributional outcomes are perceived as a major obstacle to co-operation in the field of international insolvencies."129

    Accepting for the moment that distribution is a universal and essential feature of insolvency law then it seems to us that the obligation to choose then becomes overtly political,130 reflecting a number of often contradictory particular cultural and socio-economic perceptions as to the role played by insolvency legislation and131 revealing some crucial insights into the differing conceptions of the role that credit plays in the insolvency process. To compound matters, insolvency law contains a system of statutory created priorities whose effect is to regulate distribution in favour of certain categories of creditors: creditors gain priority not by contract but by operation of the law. So, even if certain priorities are considered to be "economically inefficient" that inefficiency does not neutralise the value-judgments and prejudices lying behind the creation of these priorities. Furthermore, the intrusion of trusts law and equity into UK and other Commonwealth systems, where the trust device is used as a means of circumventing the statutory priorities, and the practice of using debt subordination agreements to re-prioritise, means that insolvency law cannot be apolitical. The pari passu rule of distribution or the solutio per soldum et libram is political in origin.132 The general domestic law[s] - non secundum ius dictat -of credit protection and the [insolvency ] system of creating priorities are inextricably linked. Credit then is at the heart of the distributional question which we suggest is one of the main problems confronting the regulation of international insolvency. As Garrido asserts, "[t]he distributional question is caused by the proliferation of preferential credits, and the extension of secured credit"133 so that an effective solution to the problem of international insolvencies first of all necessitates a consideration of the domestic problems facing nation-states.

    Given the volume of leveraged buy-outs and merger and acquistions and activity during the 1980s134 and their rise during the 1990s,135 the issue of transational or international insolvency has become something of a political hot potato during the 1990s as the number of high profile insolvency default cases has risen, and yet, as Westbrook comments, we manage "these world-wide defaults through a political system of nation-states." 136 Why has so little progress been made ? Todate, apart from the 1933 Nordic Convention, 137 only private international law and a series of ad hoc bilateral treaties attempt to offer a solution to the problems caused by international insolvencies, so that it is in all probability accurate to describe the legal treatment of troubled multinationals as "primitive and chaotic." 138 Perhaps, this chaotic state of affairs was responsible for the 1968 Brussels Convention on civil and commercial jurisdiction explicitly excluding from its application bankruptcy and analogous proceedings139 or, perhaps, there are more fundamental issues involved. Due to the absence of an internationally agreed framework for co-operation and mutual assistance, inevitably there is conflict, inconsistency and competition between the different jurisdictions. Uncertainty is created for investors, shareholders and employees, their legal rights varying from one jurisdiction to another and the "economic" losses which these interests lose is aggravated by the injustice created by the absence of a regulatory framework.

    Given the fragility of the international state system and the fact that harmonisation in company law matters at a European level has been woefully tortuos and unproductive it really comes as no surprise that developments at the international/European level have been precarious to say the least. It appears that the EC and the international community more generally cannot get to grips with the more "difficult" aspects of international business regulation. The EC is an important catalyst in the global dynamic of regulatory re-ordering and yet this dynamic appears to be tempered by the contradictions which emanate from the diversity of regulatory styles and cultures among its Member States. The EC, with its more elaborate institutional structure, provides a more formalised basis for the legitimation of co-ordinated regulation or harmonisation but, the main impetus behind integration is the opening of markets which has a deregulatory dynamic. Our most recent history has seen a frenzied spate of national deregulatory measures which have sharply contrasted with calls at the international level for more effective co-ordination without formal regulation. Germany and France, for example, have launched broad-based campaigns for deregulation and privatisation, drawing heavily on the British Government's deregulation initiative, in an attempt to secure sustained economic growth, to bolster investment led growth and to immobilse capital within its state borders. 140 The problem is that attempted co-ordination at the international level has been based upon a growing network of semi-formalised administrative co-operation between national regulators rooted in domestic structures which lack legitimacy. As Wolfe stated in 1977:

    "The compromise that have shaped the EEC, far from making the supranational state stronger through pragmatism, have made it much weaker through opportunism."141

    The problems faced in the attempts to achieve harmonisation in corporate taxation and company law matters within the EC and, for example, the inability of the EC to get Member States to ratify an Arbitration Convention on transfer pricing disputes between Member States pinpoints the difficulties involved in any attempt to reach a consensus on cross-border insolvency. 142 It is interesting to note that the Community has apparently fundamentally different attitudes towards co-operation in cross-border insolvency and the harmonisation of company law. They have not thought it necessary to consider the European Convention on Insolvency Proceedings in relation to the process of company law harmonisation, 143 thereby implying that they view insolvency and company law as two distinct subjects. Although it is commonplace in the literature to hear about the impressive progress which has been made in company law harmonisation,144 one must pose a simple question: What does "freedom of establishment" actually mean in the 1957 Treaty of Rome ? Given the important practical and commerical consequences which flow from this concept, given the rigid, possibly mypoic, approach adopted in the 12 Directives with respect to the scope of company legislation and the compartmentalisation of those areas of law affecting the company, then the question posed assumes a more complex form. More importantly, however, has been the UK's intransigence and its affirmation that it will not abandon it's macro-economic agenda in order to accomplish European integration. The continued absence of a common understanding as to what, in fact, "European" company law embraces and how it is conceptualised is reflected in the superficiality and piecemeal nature of the harmonisation process itself. If a common definition could be reached on the nature of the company and the interests involved therein, this would possibly be a step towards the attainment of a consensus on the principles which should govern cross-border insolvency. So, what principles could be applied and what sacrifices should be expected from creditors ? 145

    The European Community has been struggling for the last 30 years to establish a shared set of criteria and principles for dealing with cross-border insolvencies, principles which would reconcile the conflicting interests of the differing Member States and respond to the expectations of the diverging national cultures which are brough to bear on international insolvency. Given the opposition within the Community between "pro-debtor" and "pro-creditor" countries, as to the fundamental principles upon which an insolvency procedure is based - such as the efficiency of securities, set-off, trusts, debtor rehabilitation - jurisdictions have shown distrust against foreign legal systems and have exorcised any spirit of co-operation, preferring instead to attempt to reassert national sovereingty and to protect their nationals involved in an international bankruptcy. 146 Choice of law and choice of forum in an international context implies multiple choices of law and fora and opens up a number of, perhaps, intractable problems, such as formal v informal resolution of financial crises, liquidation v reorganisation, distribution, avoidance of transactions and the recognition of foreign decisions, all of which, it could be argued, have had a divisive impact at the European level. As Westbrook points out, "the current rule governing these questions in most countries, in practice and often in theory as well, is the ‘grab' rule," 147 that is, creditors who use local procedures to seize or "ring-fence"148 assets or to initiate local insolvency proceedings are routinely favoured over all other foreign creditors. Therefore, in the distribution of the insolvent debtor's assets there is inequality of distribution and what a creditor receives depends, among other things, primarily on the locality of the debtor's assets at the moment of financial crisis. Viewed in these terms, the European ideal of a convention on cross-border insolvency could be characterised as the"quest for the Holy Grail."149

    The motivation for the proposed Convention on Insolvency derived from, as Fletcher notes,150 the requirement imposed on Member States by Article 220 of the Treaty of Rome, in particular the fourth paragraph of that article. This necessitates the conclusion of a convention to secure, for the benefit of Member state nationals, the simplification of the formalities which govern the reciprocal recognition and enforcement of court or tribunal judgments. Two opposing principles have been uppermost in the minds of the various committees formulating the different draft versions of the EC Bankruptcy Convention: universality [and unity of the procedure] and territoriality. The broadest conception of the principle of universality of bankruptcy can be summed up in the idea of the unity of bankruptcy, which simply means that one bankruptcy procedure only is open against all the debtor's activities; that is, the procedure is extended to all the debtor's assets wherever they are located. Lex fori governs this procedure. However, the principle of universality can also be separated/abstracted from unity of procedure and understood as a method of conceding transnational effect to insolvency proceedings opening in another foreign jurisdiction. The first Draft of the project convention [ a "double" or "direct" convention], conducted by a committee of experts drawn from the six Member states in tandem with Commission officials, was published in February 1970151 and did not reappear in a revised form until the publication of the second draft in April 1980 which in the face of strong opposition from some Member States (Germany in particular) collapsed in 1984. 152 But is this really surprising given Fletcher's comments that "...grand intellectual design, based upon theoretical ideals, encounter[s] the stringent realities of commercial and political practicality ?"153

    The problems encountered with an approach based on universality have encouraged a pragmatic approach to reform and possibly paved the way for opportunism. When the EEC project for an international insolvency convention lost political momentum in 1980, the centre of attention was switched from Brussels to Strasbourg and from 1981 onwards, under the ageis of the European Committee on Legal Co-operation, work began on successive drafts of a Convention on Certain International Aspects of Bankruptcy: The Istanbul Convention. Mindful of the practical problems of universality and the problems faced in the drafting of the EEC conventions, a rather attenuated version of the principle of territoriality came into play. Territoriality is the other alternative to the proposed solutions to cross-border insolvency, notwithstanding solutions halfway between the two conceptions. Territoriality implies plurality, involving the opening of several procedures with effect limited to the territory in which the procedure has been opened (which, although a more protectionist solution, is much simpler - in theory - to put into practice because of its attractiveness). When the Istanbul Convention was being drafted its originators were acutely aware that there were already attempts to prepare a special convention on cross-border insolvency and this fact was recognised in Article 38 of the Convention.

    Work on The European Union Convention on Insolvency Proceedings began with the creation of an ad hoc working party, set up in May 1989 under an initiative inspired by the Council of Europe's success in concluding the Istanbul Convention. The European Union Convention, signed on 25 September 1995 [but not yet ratified], is an attempt to steer a middle path between the best features of the Istanbul Convention and the draft EEC Conventions of 1970 and 1980, while attempting to avoid the pitfalls and problems which plagued the earlier draft conventions, what Johnson calls "controlled" universalism.154 However, the new Convention appears not to have succeeded to appease certain Member States and it is argued that the Convention is "...rooted in principles more facile to liquidation than rehabilitation, raising questions about its utility in the present day 'corporate rescue' culture". 155 Curiously, some might say, the UK annexes to the Convention mention neither the status of the administrative receiver nor administrative receivership which, given the reported success rate of this mechanism in rescuing companies,156 suggests that "English law does not recognise administrative receivership as a form of insolvency proceeding." 157 Assuming that this remains the case and that lex fori is not applicable, then the law governing the contractual agreement which created the floating charge is applicable. Additionally, the resemblance of the new Convention with the recent German Insolvency legislation158 is, perhaps, unfortunate given the different social and moral presuppositions which, for example, underly French insolvency procedures and the antagonism which this is likely to induce.

    On the wider international scene there have been tentative steps towards a model code on cross-border insolvency. For example, a model exists in the form of the Model International Insolvency Co-Operation Act (MIICA), drafted in 1988 by the International Bar Association 159 and accepted by the Council of the International Bar Association (IBA) in 1991, which aims for universality but not recognition. This model has its origins in section 304 of the 1978 US Bankruptcy Code, whose guiding principle is universality; that is, section 304 provides for a single administration of the insolvent debtor's assets, guaranteeing protection and an equitable distribution of the debtor's assets. But, the fatal flaw in this statutory scheme is section 304(c)[4].160 Numerous practical errors have been identified in the Model and so Committee J of the IBA developed a set of principles called the Concordat, accepted as offical policy by the IBA Council in September 1995. In addition, under an the initiative of INSOL and UNCITRAL work has begun on a project which aims to set up a legislative model for the provision of cross-border insolvency action.161

    The judgments in Interpool Ltd v Certain Freights162 and Felixstowe Dock & Railway Co v United States Lines Ltd163 highlight the obstacles which reformers must overcome if substantive progress is to be made on cross-border insolvency issues. Insolvency is not simply a procedural device in debtor-creditor dispute resolution but a complex mechanism for reconciling divergent social interests within the limits of the market and within the legitimating discourse of private property. Economic protectionism and a lack of appreciation of the inherently pluralistic nature of nation-states, expressions of national self-interest and the (re)assertion of political sovereignty all vividly highlight the contradictions inherent in any attempt to formulate a coherent solution to the problems of cross-border insolvency. Given this, is judicial co-operation based on domestic legislative provisions the way forward ? Fletcher argues that section 426 of Insolvency Act 1986, in particular subsection 4, "...offers considerable potential for the development of a network of arrangements for reciprocal assistance between insolvency courts in this country and overseas;"164 however, this section's potential is tempered by an important restriction and that is that the section only has effect for requests received from countries which have been expressly designated by order,165 which todate are predominantly Commonwealth countries.

    If judicial co-operation is not possible via domestic legislation, is judicial co-operation outside section 426 the way ahead, that is, via our common law principles of recognition ? Fletcher points to the "striking confirmation of the continued readiness of English courts to adopt an internationalist approach towards matters of cross-border insolvency"166 citing the BBCI and Maxwell Communications Corporation plc (MCC) insolvencies as evidence of this internationalism. The MCC insolvency167 illustrates the interaction between the US Chapter 11 procedure and the UK administration procedure but also the immense problems in attempting to achieve a degree of unanimity. In this case, a private treaty (Protocol) was stitched together recognising the the directors of MCC as its corporate governance with the power to file a Chapter 11 reorganisation plan, but whose powers were subject to the constraints of an Examiner who was granted investigatory powers and authorised to harmonise the Chapter 11 and administration proceedings in order to enhance the reorganisation. However, the case is,as far as we are concerned, a damning indictment of the lack of a corporate rescue philosophy and a concept of rehabilitation in the UK, a point which Fletcher alludes to himself168 and illustrates perfectly the shortcomings of an absolute "pro-creditor" philosophy. In the final analysis, even though the Protocol after MCC started to aquire the status of a blue-print for future cross-border insolvencies, as Flood and Skordaki pessimistically conclude:

    "...private treaties such as the Protocol are by definition expensive; they are a luxury item which cannot be transformed into a mass product. Again, by definition, private treaties are powered by commercial considerations and interests and cannot compensate for the lack of a public, internationally agreed regulatory system which should take into account the wider issues involved in cross-border insolvencies and the interests of all stakeholders."169

    9. Reconceptualising Corporate Insolvency Law: The Bankruptcy of the Insolvency Process170


    "...before commentators propose any sweeping changes or policy makers take seriously any suggestions to scrap the system, they must consider the impact of such proposals on a number of competing normative goals."171

    English corporate insolvency is in need of a radical overhaul. We are not talking about merely tinkering around at the edges with, for example, debt/equity proposals, facilitating administrations, protecting employees and unsecured creditors through legislative intervention, either in the Companies Act 1985 or the Insolvency Act 1986 or relying on the common law to protect those interests and ensure equality of treatment. Radical overhaul means abolition. The system erected in the mid-1980s should be scrapped in its entirety and something new constructed. However, we are not so naive to think that the entire credit system should or could be abolished and that the capitalist concept of credit should be replaced by, for example, a "socialist" concept of credit, even though it raises intriguing possibilities, nor that we will ever see a "world without bankruptcy."172 Even by completely re-designing the corporate insolvency system in the UK, some companies will continue to fail. In the absence of the perfect markets and perfect competition of neo-classical economics, companies will continue to fail and will continue to rely on formal or informal methods of reorganisation or liquidation. Creditors will continue to take security, by whatever means and in whatever form, and to enforce their proprietary claims by invoking whatever contractual, quasi-contractual or equitable devices that are available to them.

    However, this "realism" does not mean that pragmatic reformism is the only option open to us. Focussing simply on company failure as simply a statistical phenomenon misses the point entirely. Introducing a separate reorganisation procedure, within the existing Companies Act or through specific reorganisation legislation (The Companies [Reorganisation] Act), dealing solely with prevention, that is, with companies that are financially distressed by not yet terminally ill (insolvent), having a specific statute governing the treatment of financial diffculties or insolvency (liquidation) and, for example, having industry specific measures or separate legislation for small, medium and large private companies and plcs, are just some of the ways in which overhaul can be achieved. Furthermore, there is much that can be done to safeguard and promote the interests of those with less effective forms of security and property, those who are extruded from the means of production and those individuals and groups whose claims and voices are silenced. This does not necessarily mean that we embrace some notion of "stakeholder capitalism," whatever that means.

    Could anything be achieved by a reconceptualisation which eradicates the stigma attached to insolvency, for example, by simply removing the very words [in]solvency, debtor and creditor and replacing it with a less stigmatized, more social terminology ? The language, moods, and unspoken norms of corporate insolvency provides a paradise for the etymologist, the semiotician and scholars well versed in Lacanian psychoanalysis. Insolvency is rich in medical metaphor and allusion - sickness, terminal illness, death, cure, fracture, ailment, rehabilitation, surgery, diagnosis - and simultaneously conjures up powerful psychological and moral images of shame, guilt, exclusion, lack of esteem, disrespect, mistrust, humiliation and hoplessness. The direct association [linguistic, verbal or non-verbal] of an irremediable "economic" loss with "insolvency" is particularly entrenched in our everyday grammar, but such signifiers are more than simply economic. Our language and grammar is overtly moral and political. In France, however, the vocabulary and grammar of insolvency or bankruptcy is noticeably absent: insolvency law as a subject does not exist, only the law of enterprises in difficulties.173 Although the language and grammar used is still moral, it is less derisory and less aggressive. The French do not speak directly about "insolvency" but about the "law of companies in difficulties;" that is, there has been an attempt to remove the psychological connotations of failure and its attendant images from the realm of legal language. The change of terminology is indicative of an evolution towards a more flexible, a more positive and less stigmatized conception: the enterprise is facing 'difficulties'. This development implies that the French legal system has chosen, in theory, to attempt provide solutions (as opposed to sanctions) at the earliest possible stage, that is, before the irremediable economic loss occurs, before the 'difficulties' are translated into purely "economic" difficulties. But what is the precise link between consciousness, unconsciousness and language ? We address this later.

    However, before one even begins articulating concrete measures, in order to radically rethink corporate insolvency law, one must rethink a priori its underlying rationale. This necessitates an appraisal of the key philosophical and ethical presuppositions which were instrumental in the design of the 1986 insolvency legislation. However, much more than a simple reappraisal of the aims and objectives of the insolvency legislation is involved. It seems to us that little thought has been given to the [inter]relationship of insolvency and company law, as our discussion on the draft EC Insolvency Convention highlighted. Is the corporate legal form facilitative of corporate failure ? Should section 425 of the Companies Act 1985 be abolished ? Should all reconstruction, merger and acquisition provisions be amalgamated with the corporate rescue provisions in a single Act ? What is the relationship of directors' duties under the common law and the 1985 Companies Act to the 1986 Insolvency and Directors' Disqualification Acts ? Furthermore, corporate insolvency law cannot be thought of as a self-contained, self-referential autonomous subject. On cannot abstract it from its interaction with other areas of law such as employment law, securities law, EC law, international trade law, contract law, criminal law, property law and equity. For us, such compartmentalisation is anathema in theory and in practice. Therefore, in reflection of the underlying rationale of corporate insolvency law, one must firstly reappraise the rationale of the corporate law model itself and assess the extent to which the separation [if any] between insolvency law and company law can be forcefully maintained and justified. Secondly, the interaction between insolvency law and these other disciplines needs to be made explicit so that we can reflect upon and rethink the presuppositions underlying the corporate insolvency framework. Only then, and thirdly, are we in a better position to begin tentatively developing a normative (philosophical/ethical) framework for corporate insolvency law, but one which is backed up with empirical (sociological) insight. It is only after meticulous reflection and empirical research that proposals for radical change[s] to the UK's corporate insolvency law system can be made and justified. Such proposals demand a sensitivity to the explicit socio-economic and political context of corporate insolvency law, a context which is simultaneously normative and sociological.

    10. A Jurisprudence and Ethics of Insolvency


    Unlike the U.S.A, there is a paucity of jurisprudential work on corporate insolvency law, which is surprising given the profound ethical and philosophical issues it raises.174 The need to think about the purposes and perspectives of insolvency law is essential, particularly in times of crisis and it is felt most vividly when proposals for reform are put forward. Insolvency law does not exist in a vacuum. As Korobkin argues, insolvency law and, for example, the treatment of preferential creditors reveals fundamental moral and philosophical attitudes about trade, credit and private property relations. 175 Corporate insolvency raises important and intriguing social, political and moral issues and clearly has a normative dimension, as our discussion of the pari passu principle endeavoured to show. The pari passu principle is framed and constructed in such a way that it invites an economical analysis, usually equality of financial outcome. But the description and conceptualisation of equality of treatment as equality of financial outcome is in itself ideological, revealing deeply held beliefs, values and prejudices about the creation and protection of private property rights and the function of commercial credit in society. Insolvency law cannot, however, be pre-suppositionless: law is both fact and value. As the Cork Committee made clear insolvency is concerned with a multitude of commercial and social relationships and the conflicts which the breakdown in these relationships generates.176 Insolvency law is only one response to the many aspects of a company's distress - moral, political, social and economic - and, in particular to the grievances of those who are affected most by such distress. A normative account of insolvency law must be anchored in a definition of the problem to which that law responds. 177

    Our everyday language is invested with the intuitive knowledge that we owe our integrity to the receipt of approval or recognition from other persons. As Joel Feinberg argues, what is called human dignity may simply be the "recognisable capacity to assert claims,"178 that is, the object of respect and recognition is our capacity to raise and defend claims discursively as moral and social beings without reference to our status as, for example, the bearers of property rights. Indeed, it is only when such recognition is not forthcoming or violated that we feel a loss of respect and self-respect. The problem to which insolvency law responds is to this struggle for recognition. That is, insolvency law is conceived of as struggles for recognition, as attempts on the part of the social actors (be it shareholders, secured or unsecured creditors, suppliers, directors, employees or insolvency practitioners) involved to establish relations of mutual recognition on which the very possibility of redeeming their claims to identity, their claims to legal, moral and social recognition depend: that possibility is at the heart of social justice in its fullest sense. But insolvency law in reinforcing and re-ordering relations of private property, perpetuates the violation of basic rights and norms. Insolvency law attempts to re-interpret social conflict, in theory and in practice, in the purely individualistic terms of the rights, duties and obligations of single individuals, so that struggle is set up in terms of the neutral application of objectively given rules to particular disputes between discrete individuals, that is, between the formal legal duties and rights of this particular director or this particular creditor. The collective dimensions of struggle, of asymmetry in the specific interests of different groups becomes rendered invisible. Insolvency as a collective proceeding is glossed over. Struggle is social conflict. Insolvency law plays out this conflict as a tragic comedy of misrecognition.

    Recognition can only be acquired and maintained socially or intersubjectively, through being granted recognition by others whom one also recognises. That is, the relationships which shape the insolvency process are not ahistorically given, but have been established and expanded through social struggles, understood more broadly than mere conflicts of interest. The grammar of such struggles is moral in the sense that the feelings of outrage and indignation driving them are generated by the rejection and violation of claims to recognition. As such, they imply normative judgements about the legitimacy of the social arrangements of credit, debt and property. The normative roots of our approach are to be found in the model of the struggle for recognition developed by Hegel during his early period in Jena and in The Phenomenology of Spirit, and which has recently been seized upon and developed by the German political philosopher, Axel Honneth,179 and in Kant's phenomenology of respect in The Critique of Practical Reason. We shall have more to say on this later in this book.

    As Wheeler's work shows, creditors' meetings show up conflicting and fundamentally irreconcilable/incommensurable differences where any "expectations that creditors may have of the meeting bringing the director to account are pushed off the agenda by the insolvency practitioner present who uses legalistic reference simply as a tool for establishing their own credentials, without any intention of action." 180 But, conflict is by no means confined to a competition of economic interests, even if those individuals with substantial property rights and obligations have "economic" power, for property is also a social institution. Different creditors bring different values and expectations to the credit relationship and to some this relationship is not merely economical or financial. To some it symbolises deep bonds of trust and co-operation; to others, it may be an instrument to other ends, such as financial independence or reputation. And the community may look to the company as reflecting its moral, political and social values and not just the economic health of that community. All these dimensions are, we would argue, inseparable. As the Cork Committee recognised:

    "The failure of such an insolvent has wider repercussions, not only upon those intimately concerned with the conduct of the business, such as directors, shareholders and employees,but on other interests, such as suppliers etc."181

    Conflicts pose increasingly acute problems of co-operation - economic, moral, political and social problems which in turn raise questions about freedom, equality, fair treatment and justice. As a growing plurality of national groups presses for sovereignty and as networks of international exchange and interdependence grow, one must ask what constitutes the basis of moral co-operation ? 182 If insolvency law responds to the breakdown in the credit relationship and regulates the distribution of assets upon a debtor's insolvency, then a normative framework must address the issues of distribution and redistribution. If insolvency law responds to the resolution of conflict, then it must respect and recognise the legitimate claims of different individuals and groups without destroying the complex bonds that link those individuals and groups and without destroying the differences that mark their identity. Flood's work on company voluntary arrangements and the London Approach demonstrates how factors such as moral persuasion, trust, respect and recognition are inherent norms in corporate rescue work. 183

    Could one not argue that the tension which exists around the formal law on retention of title is because suppliers feel compelled to use retention of title clauses because of the law's failure to recognise the priority of their claims on corporate insolvency ?184 Preferential status is a direct contradiction of the pari passu principle which seems to against the equity of insolvency proceedings, thereby creating inequality, but that inequality and priority is already pre-established and, in any event, "the more priorities granted by general law, the more preferential creditors will be unpaid in insolvency."185 The effectiveness of priority is tied to their application in insolvency and either priority can be included itself in the insolvency rules of distribution, or alternatively, provision for priority can be made in insolvency by giving all the credits the treatment prescribed by general law - recognition. But the general law legitimates mis-recognition. As Adorno states:

    "Law is the primal phenomenon of irrational rationality. In law the formal principle of equivalence becomes the norm; everyone is treated alike. An equality in which differences perish serves to promote inequality....For the sake of an unbroken systematic, the legal norms cut short what is not covered, every specific experience that has not been shaped in advance; and then they raise the instrumental rationality to the rank of a second reality sui generis. The total legal realm is one of definitions. Its systematic forbids the admission of anything that eludes their closed circle, of anything quod non est in actis."186

    And what about the State's role in the insolvency process ? Can we justify the inclusion of the state and its various governmental departments as preferential creditors ?187 Can we say that, for example, the Inland Revenue and Customs & Excise have abnormal incentives to pursue their debts through a formal insolvency process ? How responsible is the State for the levels of corporate failure ? As McQueen notes:

    "It seems incredible that one Government department should deliberately set out to sabotage the intentions of another. In the writer's opinion the Enforcement Office of the Inland Revenue at Worthing has been ‘hooked' for too long on the bankruptcy axe and would benefit from some radical re-education on the subject."188

    Given the size of the Insolvency Services Account maintained by the DTI at the Bank of England,189 one can understand such comments and the dismay voiced in the 1994 Justice Report that the windfall profits made by the Government have "been made at the expense of ordinary creditors."190 But let us not forget as well the possible abnormal incentive on the part of the insolvency profession to initiate an insolvency procedure.191 In the 1982 Cork Report, the Committee stated that:

    "It is a basic objective of the law to support the maintainence of commercial morality and encourage the fulfilment of financial obligations. Insolvency must not be an easy solution for those who can bear with equanimity the stigma of their own failure or their responsibility for the failure of a company under their management."192

    What does the concept of commercial morality mean ? How is it different from [social] morality more generally ? Can legal procedures and mechanisms support and maintain commercial morality ? In France, the question of commercial morality has been high on the agenda since the early 1990s and has been formally recognised in the 1994 reforms. As Mehaignerie, the Minister of Justice, declared, the "moralisation (of rescue plans) is nothing else but respect for the ethical dimension which necessarily impregnates any collective proceeding."193 What was meant by the "ethical dimension" of corporate rescue ? Perhaps, the ethical dimension lies in the struggle for recognition. How should we consider the role of the capitalist state ? In its promotion of legislation and legislative reform, which agenda has priority ? Is it there as the hidden guardian of national interest, preserving fundamental values ? In Europe and elsewhere it appears that insolvency law is used as, explicitly or implicitly, a macro-economic tool in the fight against inflation and legislation has been framed in economic terms. Accordingly, once the legislation fails to promote rescue and aids and abetts failure, the legislation and hence the Government carries the moral culpability. All of us wait for the economical results of legislative reform - has the number of corporate liquidations been substantially reduced, has the number of corporate rescues increased, which is the more successful rescue mechanism in terms of numbers of companies saved and the numbers of jobs saved. But if our level of analysis remains at this economic level, what do we expect to achieve ? If recession is a major factor in the increase of company insolvencies, who do we convict or assign moral responsibility to?

    11. Rehabilitating Values: The social Dimension of Corporate Rescue and Distress


    Soinne raises an interesting point in French jurisprudence about the lack of commentary on the social dimensions of corporate insolvency law.194 This forces us to sit back and think deeply about the normative and philosophical assumptions which shape any insolvency legislation. Unfortunately, many jurisdictions remain [self-consciously ?] tied to an economical framework and a set of values which are couched in objective, economical terms. Accordingly, insolvency is then treated as a question of distribution, that is, a property law question and not a question of balancing the community's interests. As a justification for insolvency law, this theory is woefully inadequate and contradictory: to allow the functioning of the insolvency procedure, you must alter the initial contractual relation and therefore violate the creditors' rights over the debtor's property. A more acceptable approach to the subject would incorporate the social, political and economical. This recognises alterations to the debtor's property and rejects insolvency as a question of distribution only.195 Thus, the fate of the enterprise cannot depend only on the amounts of debts contracted as insolvency law then can introduce the notion of rescue seen as an economical and social challenge. In the long term, such an approach is problematic as insolvency law cannot only be the translation of socio-economical concerns. This would mean that we adopt a very narrow view on the function[s] of law which would just attempt to provide fair competition and eliminate from the system economically unviable businesses. If it is true that economy is an essential factor of business related subjects it certainly cannot be the only one. If we refuse the idea of an individual justice and instead seek social justice, then law should have the function of protecting the weakest, to reintroduce a certain balance in the contractual relations. As soon as protection is accepted, only then can we talk about a coporate rescue culture.

    Korobkin196 argues that we are accustomed to thinking of corporate failure or distress from the company's perspective, but the company, if perceived solely as an economic entity, only suffers distress in "economic terms" - the social dimensions of distress are missing. Similarly the concept of rescue or rehabilitation is tied into traditional economic criteria where success is guaged in terms of a particular economic concern, such as survival as a going concern but when a company is rescued is it merely the company which is rescued or can we say more profoundly that the values of the participants are also rehabilitated ? Can rescue be defined broadly as the avoidance of distress and failure or more narrowly, formally and legalistically as alternatives to liquidation under the 1986 Insolvency Act ? Should rescue be defined, as Belcher suggests, as "a major intervention necessary to avert eventual failure of the company" ? 197 Does liquidation entail complete failure ? The entire notion of insolvency, as we have already suggested, is stigmatized and "irrevocably tied to the concept of failure."198 That failure deserves moral opprobrium seems to be an entrenched characteristic of the insolvency process and enshrined in both the 1986 Insolvency and Directors' Disqualification Acts, where ousting directors from failed companies is perceived as "just deserts." But as Miller and Power argue, corporate failure is "more than a given statistical event or personal experience."199



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