The decade since the financial crisis has witnessed a proliferation of various ‘light touch’ financial restructuring techniques in the form of so-called pre-insolvency proceedings. These proceedings, at their core, inhabit a space on the spectrum somewhere between a pure contractual workout and a formal insolvency or rehabilitation proceeding. They are restructuring proceedings that corporate debtors can access before they become insolvent with the aim of avoiding insolvency. They entail a surgical debt restructuring and an early intervention at the first signs of distress, concentrating on financial creditors rather than creditors of the operating business, permitting no, or limited, court involvement, avoiding stigma and reputational damage. Such proceedings may preserve value better than later-stage intervention through formal insolvency proceedings that implicate all stakeholders, and almost invariably result in distressed asset sales of one form (liquidation, break up) or another (pre-pack designed to achieve a going concern, or at least a ‘better than liquidation’ outcome). Pre-insolvency proceedings are typically designed for use by debtors whose businesses are profitable, in that operating revenues exceed operating expenses, but whose balance sheets are overleveraged with the consequence that they will not be sufficiently profitable to repay their financial creditors as these creditors’ loans mature. They usually offer the prospect of effective early intervention in situations where contractual workouts are not possible because there is deadlock among creditors, by providing voting mechanisms that enable assenting majorities of creditors to bind dissenting ‘holdout’ creditors to the terms of a restructuring deal.
Across the spectrum, insolvency and restructuring law provides a comprehensive and dynamic series of ex post interventions. Viable companies with overleveraged capital structures can access deadlock resolution procedures and thus overcome obstacles to an informal workout. The businesses of companies that are more deeply distressed can be salvaged, and returns to creditors maximized, by means of a sale for the best price reasonably obtainable – be that at going concern value, ‘better than liquidation’ value or some point in between. Companies can attempt a restructuring and transition to a formal insolvency or rehabilitation proceeding to implement an asset sale if the restructuring is unsuccessful. Inevitably, though, there is blurriness in domestic legislative offerings – in other words, there are plenty of examples of hybrid proceedings that can function both as pre-insolvency restructuring proceedings and as formal rehabilitation proceedings that insolvent debtors and their creditors can use to salvage value at points further down the demise curve.
As capital structures have come to be dominated by secured credit, urgent questions have arisen about the impact of secured creditor control on the choice between a restructuring or a sale and, where a sale is pursued, the timing of the sale. The primary sorting question – which companies should be restructured and which companies should have their assets sold – thus looms large and justifies a clear analytic distinction of the kind that Sarah Paterson draws between, on the one hand, proceedings aimed at rewriting the bargain between the debtor, its finance creditors and shareholders, and, on the other hand, formal insolvency and rehabilitation proceedings aimed at realizing the assets. But while insolvency and restructuring law deploys a range of different tools − some that pursue a restructuring outcome, some that pursue a sale outcome, some that function as hybrids – altogether these processes nevertheless amount to a comprehensive, unified body of law. That law addresses coordination problems for which private ordering alone does not provide effective solutions, with the goal of maximizing enterprise value across a sliding scale of situations ranging from anticipated to actual distress.
Initiatives such as the EU’s Directive on Preventive Restructuring Framework are concerned with harmonization of domestic laws. But as many large restructurings transcend national boundaries, the purpose of our article is to consider the treatment of pre-insolvency proceedings in private international law. While, to date, cross-border insolvency instruments have tended to define insolvency proceedings quite expansively, discussion of the cross-border implications of pre-insolvency proceedings – and, in particular, the normative case for treating them under the same umbrella of formal insolvency proceedings in private international law – is only just beginning.
Our article maps the contours of pre-insolvency proceedings and reviews how insolvency and pre-insolvency proceedings are treated in current cross-border insolvency law. It then seeks to contribute to the normative discussion by considering whether pre-insolvency proceedings should (or should continue to) be characterized as related to insolvency and be governed by the leading specialized cross-border insolvency instruments and by the norm of modified universalism. The risk is over-inclusivity of cross-border insolvency law, which, where it is based on universality and unity, might defeat contractual expectations. Thus, the alternative is to treat pre-insolvency proceedings as ‘contract like’ for the purpose of private international law characterization. However, we advance reasons why, in our view, we should be slow to exclude pre-insolvency proceedings from cross-border insolvency law. At stake in the normative debate is the availability (or otherwise) of the tools and norms of cross-border insolvency law – foreign recognition, expansive foreign court relief, and international cooperation, coordination, and communication between courts and other actors (aspects of the overarching norm of modified universalism) – to assist and protect pre-insolvency proceedings overseas. At a conceptual level, we doubt whether legislatively mandated or ‘state-supplied’ deadlock resolution mechanisms can properly be analogized for private international law purposes to consensual contract modifications. At a practical level, foreign court recognition, relief, and cooperation provide a necessary antidote to overseas manoeuvres by holdout creditors and are mechanisms that accommodate hybridity while also disfavouring procedural fragmentation. However, we do not see the ‘contract’ or ‘insolvency’ question as purely binary. Instead, we argue that cross-border insolvency law’s dominant norm – modified universalism – is sufficiently flexible that it can evolve to accommodate the peculiarities of pre-insolvency proceedings successfully. Accordingly, while we suggest that cross-border insolvency law needs to be flexible, we see no compelling reason to change the current course or reinvent the wheel.
Irit Mevorach is a Professor of International Commercial Law at the University of Nottingham
Adrian Walters is the Ralph L Brill Professor of Law at IIT Chicago-Kent College of Law (USA)