• Selected
• Entire List

Abstract:
What happens to a company's property when it grants a charge over it? How, if at all, is this different from what happens when a company creates a mortgage over the same assets? What is it to own something beneficially, and how is it different from beneficially holding a proprietary right in it? What role is played by floating charges, and is there really no difference between a fixed charge and a floating charge that has crystallised? And what purpose is served by the proceedings which wind up a company? This paper considers all these questions against the background of the recent decision by the House of Lords in 'Buchler v Talbot, Re Leyland Daf'.

Their Lordships issued a simple ruling dealing with a simple question, whether the expenses incurred by a liquidator in winding up an insolvent company are payable out of the assets comprised in a crystallised floating charge in priority to the claims of the charge-holder. However, this simple ruling, if taken seriously, has devastating implications for our understanding of ownership and property, of mortgages and charges, and of several important issues in insolvency law.

This paper argues that their Lordships' decision is highly questionable at almost every conceivable level. It considers the judgment by examining (a) the juridical nature of charges, (b) the functional nature of floating charges and the empirical context in which they operate, and (c) the question whether the chargee derives benefit from a properly conducted winding-up.

The paper considers the implications of their Lordships' judgment, arguing that it cuts huge swathes across property and corporate insolvency law. Without really saying so, have their Lordships abolished the distinction between mortgages and charges? Not only do they seem to assume that there is no such distinction, but the new, unified security interest envisaged by them, in leaving the beneficial ownership of the collateral in the secured creditor, resembles the sort of mortgage that used to exist at law some hundred years ago, before equity intervened to insist that it was the mortgagor's equity of redemption that constituted beneficial ownership. Since the 'chargee' is the beneficial owner of the collateral in the post-Leyland Daf world, he presumably has the right to take possession of the collateral? And should he not be able now to benefit from an increase in the value of the collateral like any (co-)owner, recovering, in the appropriate case, even more than the amount secured? (And if all he gets is what he was owed, no matter how far the value of the collateral might rise, then in what sense is he a (co-)owner, rather than merely the beneficiary of a particular priority position for repayment of a fixed amount with respect to the proceeds of sale of another's property?) If the 'chargor' now only retains an equity of redemption, then the 'chargee' presumably has the right to foreclose? If floating charge holders as a group should not be required to pay for winding-up proceedings because such proceedings only benefit unsecured creditors, then presumably their Lordships were wrong to have held recently that each such proceeding brings benefits to a wider group which nevertheless must be paid for by the creditors of that particular company?

The paper concludes by suggesting how the issues addressed by the House of Lords in Re Leyland Daf might have been more satisfactorily resolved.

Transactions at an undervalue, Priority-based and priority-independent security interests, Public functions of liquidation proceedings, Funding of collective insolvency proceedings, Enterprise Act 2002

Abstract:
A version of this paper appears in two parts in (2006) 3 International Corporate Rescue, Issues 2 and 3.

It is often crucial to ascertain the value of a distressed company. Those interested in the company's undertaking require this information to determine what should be done with the company's business, and how the value in the company's estate should be distributed amongst them. This article, addressed primarily to the parties to corporate reorganisation proceedings in the UK and their advisers, provides a conceptual framework within which these questions might be answered.

The first part of the article identifies the bases on which a company's business might be valued. Drawing upon economic theory, empirical evidence, and the principles evolved by US courts with long experience of dealing with such issues, it explains the circumstances in which one or other of these bases might appropriately be adopted. The onset of corporate distress creates unique additional problems in attempting business valuations, whether carried out in a court context or out of court. Focusing particularly on the incentives of those interested in the outcome of reorganisation proceedings, the article seeks to distinguish between the 'structural' and the 'strategic' factors giving rise to these problems, and explains how these might impact upon the valuation process. It then draws on the US jurisprudence on business valuation to outline three methods for putting a value on a 'going concern'. It is submitted that the principles developed by US courts will prove helpful and persuasive as UK courts grapple more and more frequently with valuation issues. The second part of the article consists of a detailed analysis of the recent judgment of the English High Court in In re MyTravel Group Plc, which is employed as a case study in the application of the conceptual framework laid down in the first part.

Motivation costs, coordination costs, goving concern value, liquidation value, enterprise value, market value, economic distress, financial distress, fire-sale, adverse selection, large-block stock transactions, market comparison approach, comparable company approach, discounted cash flow approach

Abstract:
The objective of this extended paper is to produce a systematic and principled study of the theory of some of the most important aspects of English corporate insolvency law. It aims to present this body of law as a coherent whole, stemming from common fundamental principles, and amenable to being justified or criticised on that basis.

At a high level of abstraction, the principle which is argued to underlie the law governing corporate insolvency is that all the parties affected by it are to be regarded as worthy of equal care and concern. This implies that equal attention and respect must be accorded to the interests of them all. To the extent that it succeeds in being egalitarian in this way, the law is fair and just. The argument draws on the work of John Rawls and Ronald Dworkin to construct a framework within which the relevant rules and principles of insolvency law can be tested for compliance with this fundamental requirement. The argument is also very much alive to considerations of economic efficiency.

The paper consists of seven chapters. English insolvency law is of course very diverse and has evolved over a considerable period of time. It would be surprising if it did not reflect the influence of the numerous political and ideological struggles which would have been part of the legislative and judicial context at various stages of its development. Given this undeniable fact, the very notion that some common fundamental principles could be found woven into it as a whole has been questioned. The first chapter presents a way of understanding the project of the paper, and thus of meeting this objection. The second chapter examines and criticises the Creditors' Bargain, the best-known analytical and justificatory model in insolvency law. The third constructs an alternative (referred to as the Authentic Consent Model) while seeking to avoid the various shortcomings which it identifies in the Bargain and in other approaches extant in the literature. Chapters four, five, and six deploy the new Model alongside of economic analysis to examine three of the most basic features of English insolvency law, namely, the pari passu principle, the priority accorded to secured claims, and the liability of directors for wrongful trading. The seventh chapter concludes.

Insolvency law, fairness, efficiency, Creditors' Bargain, Authentic Consent Model, pari passu, security, equality, UK law

Abstract:
Whether they praise or (more frequently) condemn it, commentators do not generally realise how great a puzzle the floating charge is. Consider what we ordinarily expect of a security interest. Most obviously, the secured creditor would hope to enjoy priority in the proceeds of sale of the collateral over his debtor's other creditors. However, the floating charge does a very bad job, ranking behind not only a later fixed charge over the same assets, but also behind statutory preferential claims. Once the relevant provisions of the Enterprise Act 2002 come into force, the categories of preferential creditors will shrink. However, a particular proportion of the value of the collateral subject to a floating charge will be ring-fenced for general unsecured creditors, leaving the floating charge holder's position no better off. One might also wish a security interest to encumber the collateral, so that attempts by the debtor to pass on the assets subject to the charge would be unable to defeat the charge holder's rights. With a floating charge, however, the debtor may deal with or dispose of such property without the approval of, or even consultation with, the charge holder, and as long as this is done in the normal course of business, the transferee's title is unburdened by the charge holder's rights. At the very least, a secured creditor would wish to be able to tell how much collateral it had been offered in order to carry out a risk assessment on the loan. However, the creation of subsequent fixed charges and the accumulation of new preferential claims can dilute the floating charge holder's security, as can the debtor's ability to alienate the collateral free of the charge. So the floating charge holder cannot even know which assets it has security over, and how much they are worth! No wonder this has been described as a key weakness of this device.

Security is also often said to bring efficiency benefits by allowing the secured creditor to monitor the assets subject to the charge, with the aim of deterring financial agency costs. The existence of security is said to facilitate this monitoring by creating focal points for the monitoring effort: Instead of having to keep an eye globally on the debtor's affairs, the creditor may focus simply on the presence, value, and use of the assets given as collateral. This lowers monitoring costs, and on conventional reasoning, some part of these savings might be passed on to the debtor as lower interest rates. However, as Finch notes, floating charges are generally taken over the debtor's entire undertaking, which means monitoring in order to detect misbehaviour or calculate risks could involve scrutinising the whole business. In effect on this reasoning, much of the point of taking security as an aid in monitoring is thus negated. In the result, the floating charge may offer a relatively expensive method of securing finance.

So if the floating charge is such a thoroughly inefficacious way of securing a loan from the lenders' perspective, why is it more or less ubiquitous in corporate debentures? Critics offer a worrying explanation. Not only is the floating charge a terrible security device, it is also said to be exploitative. It is a mechanism peculiarly conducive to the transfer of insolvency wealth from unsecured to secured creditors, and most likely designed for this very purpose. It is a charge upon all future property, sucking in after-acquired assets into its ambit without the injection of fresh value by the original creditor. This creates a windfall for the charge holder and ensures that the rate on the secured loan is increasingly advantageous to it. These interest rates are excessively profitable because the floating charge holder's ability to exploit its positions ensures risks are loaded onto unsecured creditors. What is more, unsecured creditors may have insufficient notice of the effects of the charge, since it might be impossible to tell from the [company charges'] register how much the floating charges secure. This deceptiveness adds to the exploitative value of this device, which is sufficiently great to make it universally popular for powerful lenders (i.e. banks) despite its many disadvantages.

This is a damning indictment. In response, I want to suggest that the floating charge is not malignant, merely misunderstood. The floating charge is unlike other security interests, first and foremost, in that it provides a very poor priority to its holder in the debtor's insolvency. Focussing on this and yet keeping in mind its ubiquity encourages a search for its true function. It is suggested here that a theory claiming to reveal this function could be considered successful only if it could explain the development of the lightweight floating charge, the reason why floating charges are usually taken over the debtor's entire estate and why they are often coupled with fixed ones, the distinction between fixed and floating charges, and the desirability or otherwise of restricting the priority position of the holders of the latter. Removing the misunderstanding as to the actual role of the floating charge would also allow us to quiet concerns that its main value has been in its ability to exploit. However, while it might not have been exploitative in the past, it will be argued that its existence will become wholly exploitative after the coming into force of the relevant portions of the Enterprise Act. It will therefore be suggested that it should now be abolished.

Administration, administrative receivership, receiver and manager, concentrated creditor theory, registration, encumbrance, financial agency costs, monitoring

Abstract:
This practitioner-oriented paper provides a comprehensive synthesis of the factors identified in English case-law as relevant to the somewhat neglected question whether a charge over chattels is fixed or floating. The paper also conducts an exhaustive analysis of the situations in which a court might examine post-contractual conduct in order to answer this question. Further,

(a) it derives a test from the recent judgment in Ashborder BV v Green Gas Power Limited [2004] EWHC 1517 to ascertain whether particular assets subject to a charge are capable, in their nature, of being disposed of in the ordinary course of the debtor's business,

(b) it examines and criticises the problematic decision in Re Cimex Tissues Limited [1995] 1 BCLC 409 in the light of Holroyd v Marshall (1862) 10 HL Cas 191 et al, and

(c) in the context set by the Privy Council's advice in Re Goldcorp Exchange Limited (in receivership) [1995] 1 AC 74, it highlights the importance of identifying with sufficient specificity assets intended to be subjected to a fixed charge.

Agnew, Brumark

Abstract:
This paper argues that the English law of corporate reorganisations has been very significantly changed by the Enterprise Act 2002. The motivation for this change lies in the ways in which administrative receivership - the dominant reorganisation procedure under the old law - was destructive of social value (in terms of unnecessary job losses and other resource misallocations). Three such ways are identified, all linked with the fact that receivership ties the duties of the office-holder in charge of managing the distressed company to the interests of the debtor's main bank. This is undesirable: (a) The bank is usually oversecured and thus has little incentive, once receivership is underway, to ensure that distressed but essentially viable companies would not be wound up or their businesses not liquidated. (b) The bank also has the benefit of directors' guarantees, which weakens its incentives to ensure the maximisation of the value of the company's business even in those cases where its proprietary security over the debtor company's assets is insufficient to cover what it is owed. (c) The bank has little incentive in either of these cases to control the costs of receiver wastefulness or negligence. These problems are compounded by the fact that the market for the supply of banking services to SMEs is significantly monopolistic.

The paper explains that in order to remedy these defects, Parliament has imposed upon the administrator the duty to attempt a company or business rescue (as appropriate), if either one is in the interests of the company's creditors as a group. This duty is subject to the rationality test and is objective at its core, requires the administrator to account for his decision about which statutory purpose is to be pursued, and can be expected to be open to fairly intrusive court review. The paper provides an understanding of company rescue consistent with the explicit text and legislative history of the statute, and discusses the importance to the administrator's decision about whether to attempt such a rescue of the quality of the company's pre-distress management.

Finally, the mechanisms provided by the statute for an aggrieved party to hold the administrator to account are analysed. The paper highlights the importance of three factors: (a) Most administrators will be appointed by the company's main bank. (b) The Insolvency Practitioners who act as administrators would be the same individuals who have acted in the past as administrative receivers. (c) There has been a paucity of understanding amongst the professionals - lawyers and accountants alike - about the significance of the changes brought about by the Enterprise Act. The administrator's statutory duties to act in the interests of all the creditors as a group and to act with reasonable speed and efficiency are examined in the light of these observations.

Concentrated creditor, Company Voluntary Arrangement (CVA), financial and economic distress, company rescue as opposed to business rescue

Abstract:
English corporate insolvency law has been reshaped by the Enterprise Act 2002. The Act was intended to 'to facilitate company rescue and to produce better returns for creditors as a whole'. Administrative receivership, which placed control of insolvency proceedings in the hands of banks, is for most purposes being abolished. It is being replaced by a 'streamlined' administration procedure. Whilst it will still be possible for banks to control the appointment process, the administrator once in office owes duties to all creditors and must act in accordance with a statutory hierarchy of objectives. In this article, we seek to describe, and to evaluate, this new world of corporate rescue.

Corporate insolvency, corporate rescue, secured credit

Abstract:
What is the relationship between fairness, efficiency, accountability, and expertise? What role, if any at all, do these values play in answering the question whether a part of the law is legitimate? This paper provides an answer by introducing a distinction between the substantive and the procedural goals of any part of the legal system. Substantive goals are the ultimate ends of some part of the law, some values or objectives whose pursuit by that part of the law shows why it is desirable to have that law in the first place. Procedural goals are concerned with the methods the law adopts in pursuit of its substantive goals. It is argued that efficiency, accountability and expertise are procedural goals of the law, and can only make sense as benchmarks of legitimacy if they are connected to the accomplishment of some substantive goal that insolvency law could be shown to be committed to. Fairness, on the other hand, is a substantive goal of the law. One implication of recognising this distinction is that the common assertion that fairness might sometimes have to be traded off against the other three values, must be mistaken. Fairness (as an end) does not compete with efficiency, expertise, and accountability (which are all means), and so cannot be traded off against them.

This paper uses these arguments to provide a critique of Vanessa Finch's book, 'Corporate Insolvency Law - Perspectives and Principles' (Cambridge: CUP 2002). It is shown that Finch does not motivate her choice of technical efficiency (referred to in this paper as transaction cost efficiency) over other understandings of the concept of efficiency, does not explain the sort of costs it is meant to mitigate, nor the desired ends in pursuit of which it is to be harnessed. Because of these deficiencies, Finch fails to notice that expertise and accountability are in fact aspects or components of efficiency. The paper explains how the former is a function of coordination costs, the latter is a method for controlling motivation costs, and the mitigation of both types of cost is very much part and parcel of transaction cost efficiency.

Another implication is that Finch's normative framework would only make sense if she could provide a coherent and attractive theory of fairness, the ultimate end the pursuit by insolvency law of which is facilitated by the other, procedural, values. Having examined the notions of fairness Finch employs throughout the book, the paper concludes that two of them are question begging, a third is probably inconsistent with the others, and none of them withstands scrutiny.

Abstract:
The corporate insolvency elements of the Enterprise Act 2002 attempt to revitalise the 'rescue culture' in the UK. At the core of the new administration regime introduced by the Act lies a statutory list of objectives available to the administrator, the Insolvency Practitioner presiding over the insolvency proceedings. The insolvency proceedings must be directed towards the pursuit of one of these objectives. The list consists, roughly, of the attempt either to rescue the company, or (some of) its business as a going concern, or the liquidation of that business piecemeal for distribution to creditors. The aim of this paper is to consider the standard by which the administrator will be judged in making his choice about which of these objectives to pursue. In particular, how broad is his discretion to choose, and to what extent (if at all) is this discretion subject to legally binding requirements?

The paper argues that, in settling upon the correct objective for an administration proceeding, the administrator owes the distressed company fiduciary obligations. These obligations are shaped by the administrator's statutory duties not unnecessarily to harm the company's creditors as a whole, to act in their interests as a whole, and to perform his functions as quickly and efficiently as is reasonably practicable. In making the selection, the administrator is under the duty to act rationally, which requires him to inform himself of all the facts and factors reasonably available to him that are relevant to his decision, and to act only after taking into account all relevant but no irrelevant considerations. The paper compares the nature of the administrator's role with that of administrative (i.e. public) decision makers. In particular, it highlights the administrator's duty to explain his reasons for pursuing lower priority objectives, and to consult creditors about his decision. Given that meaningful consultation requires arming the consultees with all the information reasonably available which bears upon their decision, and given that this requirement for the administrator to account for his decision is explicit in the statutory text, we suggested that the decision is likely to be subject to fairly intensive review if challenged.

Rule in Hastings-Bass, Stannard v Fisons Pensions Trust Ltd, objective or subjective standard

Abstract:
Under the law as it existed in the UK before the coming into force of the Enterprise Act 2002, administrative receivership was the preferred mode of debt enforcement against distressed companies by banks holding fixed and floating charges over substantially the entire estate of the debtor. The debenture creating these charges reserves to the chargee the right to appoint an Insolvency Practitioner (IP) to manage the company and apply either its income, or the proceeds of sale of the company's business, towards the discharge of the secured debt. Perhaps the most distinctive feature of receivership is the fact that the receiver - while regarded as the debtor's agent - owes his primary (in some important respects, exclusive) obligations to the chargee. He may choose to deal with the company or its assets in a way that directly inflicts harm on junior claimants, as long as he acts in good faith in the chargee's interests. While security packages carrying the right to appoint an administrative receiver are held by a variety of creditors, banks and other financial institutions are by far the most important players in this respect, so it would be convenient to refer to creditors holding such global security generically as 'banks'.

It is because administrative receivership was regarded as not giving troubled but essentially viable companies or businesses a sufficient chance to be rescued that the Enterprise Act has severely restricted its availability. In the White Paper preceding the Act, the Government noted 'widespread concern as to the extent to which . . . receivership as a procedure provides adequate incentives to maximise economic value' by helping out distressed but viable businesses. The ability of the floating charge holder to block initiation of the pre-Enterprise Act administration procedure by appointing a receiver was taken as an important reason for the low uptake of administration. This was regarded as undesirable because (even) the old administration procedure was a self-consciously 'rescue' -oriented mechanism. The White Paper also highlighted concern about whether receivership provided 'an acceptable level of transparency and accountability to the range of stakeholders with an interest in a company's affairs, particularly creditors.'

This paper asks whether the Government was right to accept that receivership was inadequate both as a rescue mechanism and in providing transparency and accountability for junior claimants (viz., those ranking behind the security-holding bank in the distribution of value from the insolvent estate). These questions are important because the Government provided no evidence that this was in fact the case, and because several commentators have strenuously rejected such slurs on receivership. Also, if receivership was doing a good job in rescuing businesses, then the massive costs of consultation, legislation and displacement of familiar legal institutions and practices were and are entirely unjustified. What is more, the new administration procedure introduced by the Enterprise Act involves mechanisms of consultation and accountability to a variety of claimants which stand in stark contrast to the receiver's single-minded dedication to the bank's interests. Keeping that in mind, suppose that the law governing receivership was efficient in rescuing viable businesses and doing so cost-effectively. In that case, the switch to administration will increase the costs borne by the claimants as a group (as the administrator goes about complying with his more demanding duties to a broader range of stakeholders) while bringing (ex hypothesi) few additional benefits in terms of additional businesses saved from unnecessary liquidation.

Abstract:
The priority of secured credit has repeatedly and famously been attacked for allowing the exploitation of certain types of unsecured creditor. It has also been blamed for creating inefficiencies. This paper examines these arguments specifically as applied to this jurisdiction, and using both theoretical analysis and recent empirical data, suggests none of them can be sustained. It is argued that security is unlikely to lead to the exploitation of involuntary, 'uninformed', or 'unsophisticated' creditors, since the perverse incentives it allegedly creates for the debtor's management are likely to be outweighed by the managers' liquidation-related costs. It is then pointed out that both exploitation-based and inefficiency-based attacks on the priority of secured credit depend on the assumption that secured credit is generally cheaper than unsecured credit, and further, that this is why debtors prefer to borrow on a secured rather than unsecured basis. Recent evidence from this jurisdiction is used to challenge this assumption. This has dramatic implications for the attacks on security, which are discussed. The paper concludes with the demonstration that secured credit, by inducing creditors to lend when they would not do so without being offered priority, is mutually value-enhancing for all types of creditor, including unsecured ones.

Abstract:
The priority of secured credit has repeatedly and famously been attacked for allowing the exploitation of certain types of unsecured creditor. It has also been blamed for creating inefficiencies. This paper examines these arguments specifically as applied to the UK, and using both theoretical analysis and recent empirical data, suggests none of them can be sustained. It is argued that security is unlikely to lead to the exploitation of involuntary, "uninformed", or "unsophisticated" creditors, since the perverse incentives it allegedly creates for the debtor's management are likely to be outweighed by the managers' liquidation-related costs. It is then pointed out that both exploitation-based and inefficiency-based attack on the priority of secured credit depend on the assumption that secured credit is generally cheaper than unsecured credit, and further, that this is why debtors prefer to borrow on a secured rather than unsecured basis. Recent evidence from the UK (hereafter, "this jurisdiction") is used to challenge this assumption. This has dramatic implications for the attacks on security, which are discussed. The paper concludes with the demonstration that secured credit, by inducing creditors to lend when they would not do so without being offered priority, is mutually value-enhancing for all types of creditor, including unsecured ones.

Abstract:
The priority of secured credit has repeatedly and famously been attacked for allowing the exploitation of certain types of unsecured creditor. It has also been blamed for creating inefficiencies. This paper examines these arguments specifically as applied to the UK, and using both theoretical analysis and recent empirical data, suggests none of them can be sustained. It is argued that security is unlikely to lead to the exploitation of involuntary, "uninformed", or "unsophisticated" creditors, since the perverse incentives it allegedly creates for the debtor's management are likely to be outweighed by the managers' liquidation-related costs. It is then pointed out that both exploitation-based and inefficiency-based attack on the priority of secured credit depend on the assumption that secured credit is generally cheaper than unsecured credit, and further, that this is why debtors prefer to borrow on a secured rather than unsecured basis. Recent evidence from the UK (hereafter, "this jurisdiction") is used to challenge this assumption. This has dramatic implications for the attacks on security, which are discussed. The paper concludes with the demonstration that secured credit, by inducing creditors to lend when they would not do so without being offered priority, is mutually value-enhancing for all types of creditor, including unsecured ones.

Abstract:
The current insipid economy has created many an occasion for recent case law to draw out important connections between the CVA and administration procedures, and to investigate how these operate in the shadow of the liquidation regime. It is more or less axiomatic that a CVA does not bind all creditors. Some creditors are outside its ambit by legislative default, not by judicial design. Oakley-Smith v Greenberg sheds some light on that legislative default, provides an insight into the relationship between CVA, administration and liquidation, and highlights the danger of judicial approach overly enraptured by the liquidation regime. It also provides a case study of the malign influence of the pari passu myth.

In Part I of this paper, Mokal and Ho argue that in Greenberg v Oakley-Smith, Pumfrey J at first instance and the Court of Appeal, (a), violated the clear statutory implication that creditors not allowed to vote at the meeting to approve a Company Voluntary Arrangement (CVA) are not bound by it, (b), were wrong to hold that since the Greenbergs would have consented to the CVA if allowed to do so, that they would not be prejudiced if later, in effect, forced to participate in it, and, (c), that the Court of Appeal was wrong to hold that the parameters of what the Greenbergs could recover should be set by what they would have received either as parties to the CVA or in an immediate liquidation.

In the concluding Part, Mokal continues the argument by suggesting that the two courts also shared a fundamental misunderstanding about the structure of the liquidation regime, i.e. that it is based on the pari passu principle. The malign influence of this misunderstanding caused the courts to hold that there was no relevant difference between the CVA creditors on the one hand, and the Greenbergs on the other. Mokal argues that, properly understood, the several substantive relevant differences between the two should have figured prominently, as factors additional to those discussed in Part I, in the courts' exercise of their discretion as to what the Greenbergs should recover.

English insolvency law, pari passu, Company Voluntary Arrangement, administration, liquidation, tort creditors, formal equality, judicial cramdown

Abstract:
What is the appropriate way of theorising about corporate bankruptcy law? That lies, argues this paper, in rejecting Pareto and Kaldor-Hicks efficiency in favour of a particular conception of transaction cost efficiency, and in rejecting the 'contractarian' Creditors' Bargain Model in favour of the 'contractualist' Authentic Consent Model. The paper vindicates these arguments with an analysis of the automatic stay which characterises the collective liquidation regime, of the pari passu principle often said to be at the heart of this regime, and of the liability imposed in some jurisdictions on the managers of terminally distressed companies for failing to take reasonable steps to avoid further loss to their company's creditors.

Abstract:
A version of this paper appears in [2007] Singapore Journal of Legal Studies (July).

What is the appropriate way of theorising about corporate bankruptcy law? That lies, argues this paper, in rejecting Pareto and Kaldor-Hicks efficiency in favour of a particular conception of transaction cost efficiency, and in rejecting the 'contractarian' Creditors' Bargain Model in favour of the 'contractualist' Authentic Consent Model. The paper vindicates these arguments with an analysis of the automatic stay which characterises the collective liquidation regime, of the pari passu principle often said to be at the heart of this regime, and of the liability imposed in some jurisdictions on the managers of terminally distressed companies for failing to take reasonable steps to avoid further loss to their company's creditors.

Anthony Duggan, Thomas Jackson, Douglas Baird

Abstract:
An important purpose of this paper is to build a new model for the analysis and justification of insolvency law. So the first task undertaken here is to demonstrate why prior attempts at doing so might be considered inadequate. Focussing on the paradigmatic role of the automatic stay on unsecured claims in corporate liquidation, the analysis here starts with the Creditors' Bargain, the best-known of these attempts. It is argued that the Bargain model has neither descriptive nor moral force. The model relies on a confused and ultimately meaningless notion of consent. It seeks to appeal to the antecedent self-interest of creditors to suggest they would choose certain principles to decide how their debtor's assets should be dealt with in the latter's insolvency. But it suggests no privileged point of time from which the choice is to be made. Since the self-interest of creditors depends on how effective they would be (vis-a-vis other creditors) in each transaction in collecting what is owed to them in any insolvency regime not marked by the automatic stay, certain types of creditor would benefit but others would be worse off in any given transaction because of the stay. Further, the interest of each creditor would be different depending on when it is calculated. The Bargain model therefore fails to explain why all creditors equally would accept the automatic stay as a generally applicable rule.

What is more, the Bargain is built on the simple preferences creditors would express, based on their individual self-interest. But it provides no reason why preferences expressed at one instant in time ought permanently to be imposed on creditors by being enshrined in the law, when contrary preferences would be expressed by the same parties, based again on self-interest, at other times. The model thus provides no justification for the coercion inherent in insolvency law. And finally, the model allows the parties to be as different from each other during the bargaining process as they are in real life. This means stronger parties would be able to oppress weaker ones. Thus, the rules selected by the model are likely to be exploitative rather than just.

The paper then constructs an alternative contractarian model (the Authentic Consent Model, or ACM) to analyse and justify the principles of corporate insolvency law. This model builds on the assumption that all those affected by insolvency law are to be regarded as equals, with the consequence that their interests must be accorded equal care and concern in the choice of insolvency law principles. The notion of Dramatic Ignorance is introduced to accomplish this result. It is argued that, given the features of the Model, principles approved by the ACM can be regarded as being those that the relevant parties themselves would choose in exercise of their political autonomy, if given the chance to bargain with each other under the appropriate conditions. The automatic stay on the individualistic collection efforts of unsecured creditors, which defines the collective liquidation regime, is argued as passing the tests set by the ACM.

Another important part of the argument in this paper is addressed to defining the proper ambit of insolvency law. This point is made through a contrast of the approach of the ACM, with that of others, most notably of Donald Korobkin. Korobkin's Rawlsian model for the analysis and justification of (US) bankruptcy law seeks to address problems which, it is argued, are not unique to the context defined by corporate insolvency. This means his model would sometimes generate principles for inclusion in bankruptcy law which are inconsistent with the principles enshrined in other branches of the law, even though both sets of principles (bankruptcy and non-bankruptcy) deal with situations identical in all material respects. So some people might be treated differently from each other, depending not on any relevant difference in their situations, but simply because some of them did and others did not become subject to insolvency law. This violates the basic assumption of all reasonable legal systems, that people should be treated alike except when there is a good reason for treating them differently. The proposals of some other scholars in this area, including Elizabeth Warren, Karen Gross, and Venessa Finch, are also open to the same objection. To avoid this problem, the ACM requires a demonstration that a principle proposed as being suitable for inclusion in insolvency law deals only with some situation peculiar to (corporate) insolvency.

Abstract:
This paper seeks to demonstrate that, insofar as English insolvency proceedings are ancillary to foreign insolvency proceedings, the so-called pari passu principle would not constitute hurdles to English assets being handed over to a foreign insolvency official for distribution according to the foreign insolvency regime.

English insolvency law, English insolvency proceedings, ancillary proceedings, pari passu principle

Abstract:
In the context of the decision of the House of Lords in Re Bank of Credit and Commerce International S.A. (No. 8) [1998] AC 214, this short paper asks (i) whether the existence of a charge in one's favour over one's own indebtedness (a 'charge-back') destroys the mutuality necessary for insolvency set-off to operate, and (ii) whether the assets of the insolvent company are notionally collected before the set-off may operate. Both questions are answered in the negative. The paper concludes by suggesting that the reasons given by the courts in justifying the very existence of insolvency set-off also argue in favour of allowing it to operate in the appropriate case, even if there is a charge-back.

Abstract:
This paper takes the opportunity presented by the House of Lords' decision in Phillips v Brewin to examine the law governing the reversal of transactions at an undervalue entered into by a company which then becomes insolvent. The paper discusses the sequence in which issues related to ascertaining whether a transaction had been at an undervalue are to be approached, the proposition that contracts somehow "linked" with each other can be taken together as constituting a single "transaction" , and the prior question about when such contracts should be considered "linked" in the first place. Finally, the paper detects something of a tendency in the case law to use the notion of a transaction at an undervalue to brush aside inconveniences arising from the peculiarities in the way certain cases have been pleaded. Notably, it suggests that Phillips v Brewin might not have involved any transaction at an undervalue at all.

This is a somewhat updated version of the published article.

English law, corporate insolvency, bankruptcy, fraudulent preference law

Abstract:
When a company becomes subject to winding-up proceedings, it is widely thought to lose beneficial ownership of its property. The property is held, instead, on a 'statutory trust' to discharge the company's liabilities. The attribution of this 'proprietary' effect to the commencement of winding-up has, however, created significant confusion. Faring particularly poorly is our understanding of the status of those of the company's assets in which others held proprietary rights prior to this point, notably, assets the company's title to which is encumbered by security interests. The confusion takes many forms and infects several areas of analysis. First, the House of Lords has recently ruled that property subject to a floating charge is to be regarded, not as the company's assets, but instead, as part of a 'fund' beneficially owned by the secured creditor to the extent of the amount secured. Their Lordships' conclusion appears to be based on the proprietary nature of the floating charge as they understand it. Second, courts and commentators over the last several decades have asserted that encumbered assets do not fall in the statutory trust of the debtor company's property. This too appears to have been endorsed by the House of Lords decision mentioned above. Third and in what is put forward as a different explanation of their Lordships' ruling, it has been claimed that, at the point at which the company enters winding-up, the 'hindsight principle' of insolvency law causes beneficial ownership of encumbered assets to vest in the secured creditor. Fourth and finally, it has also been contended that the very notion of 'fund' as invoked by their Lordships supports the same conclusion.

This paper takes issue with each of these propositions. Firstly, it finds cause to highlight one of the many confusions surrounding insolvency law's (in)famous pari passu principle. A key reason for the problems that beset our understanding of the status of encumbered assets is the assumption that to distribute pari passu is to pay each claimant the same proportion of their debt as each other claimant. The argument here draws on long established case law and distinguished scholarship to point out that in fact, the principle requires merely that those classified by the general (pre-insolvency) law as being on par with each other be treated equally. This seemingly minor correction to our understanding of the requirement of pari passu distribution has far-reaching implications. Second, it is argued that the very nature of a security interest precludes the possibility that, at one and the same time, an asset would be beneficially owned by the secured creditor and yet be held by that creditor to secure the debtor's obligations. Third, the paper undertakes a fresh analysis of the origins and nature of the statutory trust to show that, on any reasonable view, assets subject to floating security fall in the statutory trust of the debtor's property, and further, that it is strongly arguable that the same is true of assets subject to fixed security. The fourth part of the argument demonstrates that, properly understood, insolvency law's hindsight principle simply cannot move the beneficial ownership of encumbered property to the secured creditor. Fifth and finally, certain elements of the theory of property law are analysed. The aim is to show that, on pain of the fallacy of equivocation, the relevant concept of 'fund' must be understood such that the encumbered and unencumbered assets of a company undergoing liquidation form one fund out of which both secured and unsecured claims are met in appropriate order of priority.

Buchler v Talbot, re Leyland Daf, John Armour, Adrian Walters

Abstract:
Can a payment in satisfaction of an antecedent debt be both a preference under section 239 of the UK Insolvency Act 1986 and therefore a transaction at an undervalue pursuant to section 238 of the UK Insolvency Act 1986?

Describing it as an interesting question of law on which there was no direct authority, the English High Court in Barber v CI answered in the affirmative. In this commentary, we evaluate that decision and submit that it is difficult to defend. Two main propositions emerge from our analysis: First, a transaction can never properly be reversed or adjusted pursuant to section 238 simply because it is liable to being challenged on some other legal ground (including section 239). And second, a transaction which is intrinsically at an undervalue is always properly susceptible to a successful section 238 challenge even though its constitutive facts also give rise to another cause of action (for example, a common law restitutionary claim arising from a mistaken payment).

Preference, Transaction at an Undervalue, Fraudulent Conveyance, Overlap between Sections 238 and 239 of the UK Insolvency Act 1986, Defences, Authorities on US Bankruptcy Code

Abstract:
A core objective of collective insolvency regimes is to preserve value in the insolvent estate. This value is then to be distributed in accordance with the appropriate statutory scheme. Value might be lost for any of a variety of reasons, including, in particular, (i) misuse of corporate assets by those with influence over the distressed company, and (ii) precipitate individualistic enforcement action by particular claimants, which dismembers the corporate estate and thus destroys synergetic values. The statutory liquidation regime attempts to counter this, in order not simply to benefit those with claims against the company, but also with a view to protecting the public at large from (among other things) abuse of the corporate form. It does so by (i) disabling certain types of dealings with the company's assets, (ii) arming the liquidator with investigative and recuperative tools, and (iii) empowering him to carry out synergy-preserving disposals of the company's property. While liquidation has long (though far from perfectly) performed all these essential functions, the virtual abolition of administrative receivership by the Enterprise Act 2002 had promised to energise the third of these in particular.

Unfortunately, however, the ability of the liquidation system to perform any of these functions is threatened by the lingering effects of a recent judgment of the House of Lords, and by some of the commentary this judgment has attracted. Their Lordships' decision has been used to contend that secured claimants 'stand outside' liquidation, in the sense that they are not entitled to participate in the winding-up process. It has further been contended that this remains true even though the actual effect of the judgment has been legislatively reversed. The extent to which these propositions, if true, undermine the core functions of liquidation may not have been fully appreciated by those seeking, even in the face of Parliamentary disapproval, to shore up their Lordships' decision.

This paper undertakes a fresh analysis of the liquidation process. On the basis of this analysis, it is argued that the proposition that secured claimants 'stand outside' liquidation in the relevant sense (i) is a product of a misunderstanding of the dual duality in the nature of liquidation proceedings, in that, in principle, they serve both public and private functions, and, they further the interests of both secured and unsecured creditors; (ii) overlooks, both, the ways in which secured creditors benefit from liquidation, and the ways in which unsecured creditors have a real interest in the proper administration of their debtor's encumbered assets; (iii) mistakes the secured creditor's choice in usually being able to gain immunity from the liquidation process, for a compulsion for it to stand exiled from this process; (iv) is incorrect as a matter of the history and practice of this institution; and (v) is rendered unsustainable by the statutory text. It is concluded that secured creditors have never 'stood outside' liquidation, and that this is a fortiori given that the judgment allegedly confirming their exile has been overturned by the Legislature.

The definitive version of this paper was published at (2008) 71 Modern Law Review 699-733, and is available at http://www.wileyinterscience.com. This version contains some material (particularly in Section 5.1) not included in the published paper.

Buchler v. Talbot, re Leyland Daf, John Armour, Adrian Walters

Abstract:
This paper analyses the pari passu principle of insolvency law (which provides that the creditors of a company ranked on par with each other under the general law should similarly be treated on par with each other in insolvency proceedings), and to ask how it relates to other principles available for the treatment of claims in insolvency proceedings. The discussion reveals that the principle has rather limited effect in governing distributions of the insolvent's estate. Not only do various types of secured claim fall beyond its ambit, even unsecured claims are often exempt from its application.

Nevertheless, the principle thrives both in judicial rhetoric and in academic arguments. For example, many a challenge to the different priorities accorded to different types of claim in a company's insolvency begins with an incantation of the pari passu principle. Commentators see an inherent tension between the 'two fundamental principles of credit and insolvency law', that of the freedom of contract which allows one to bargain for priority, and the mandatory pari passu principle. The pari passu principle is said to be 'the foremost principle in the law of insolvency around the world'. It is thought to be 'all-pervasive', and its effect is to 'strike down all agreements which have as their object or result the unfair preference of a particular creditor by removal from the estate on winding up of an asset that would otherwise have been available for the general body of creditors.' The principle is said to be supported both by the need for an orderly liquidation of insolvents' estates, and by requirements of fairness. So it is not surprising that its invocation as the starting point for, say, the debate on the priority of secured or preferential claims, weights the argument in a particular way. Since the pari passu principle has been recognised so widely and for so long as vital, and since it serves such desirable aims as orderliness in liquidation and fairness to all creditors, any deviation from it must be a cause for concern.

On this view, the priority (say) of secured or preferential claims is an abnormality, a pathology to be diagnosed and controlled, perhaps even 'cured'. Since 'equality' is the norm, the onus must be on those supporting differing priorities to justify their claim. To the extent that their efforts are unpersuasive, the case for priority must be considered not established, and the 'default principle' of 'equality' must prevail.

This paper seeks to overturn this order of things. It is suggested the pari passu principle does not constitute an accurate description of how the assets of insolvent companies are in fact distributed, has no role to play in ensuring an orderly winding up of such companies, does not explain or justify distinctive features of the formal insolvency regime, and has little to do with fairness in liquidation. The actual role of the principle, it is argued, is merely to provide a low-cost method for dealing with those types of claim which both Parliament and commercial parties themselves have decided should receive little or nothing in most insolvencies. The principle, long regarded as the core distributional principle in corporate liquidation, is more properly understood as a principle of non-distribution. To the extent that these arguments succeed, the initial onus of justifying their position shifts from those arguing in favour of the priority of secured credit, to those who support a more 'equal' distribution of the insolvent's estate.

bankruptcy, liquidation, insolvency, rateable distribution, pari passu, preferential claims, English law

Abstract:
This paper argues that the UK's wrongful trading provisions, enshrined in section 214 of the Insolvency Act 1986, are meant to ensure that hopelessly troubled companies enter the insolvency forum at the optimal time. This forum enables -- and forces -- those interested in the company's undertaking to forego aggressive and value-destroying individual action. Put differently, one of the functions of the collective insolvency regime is to minimise the co-ordination costs of the creditors of a firm threatened with insolvency. Section 214 is a tool enabling the regime to take over when these costs would be most acute. The existence of the collective regime might itself create motivation costs by producing incentives for parties who would lose out under it to try to prevent the company becoming subject to it. Directors would act for themselves and on behalf of shareholders to keep the firm out of the insolvency forum. The central insight offered into section 214 here is that the section assists in overcoming the co-ordination costs of creditors by controlling creditor/manager agency costs on the eve of insolvent liquidation.

The analysis in this paper operates on two levels. First, this paper shows that the wrongful trading provisions would be voluntarily accepted by all the relevant parties given the chance to bargain ex ante. Here, all the parties anticipate the incentives of managers to misbehave towards creditors when their firm is on the brink of insolvent liquidation. A provision like section 214 bonds managers to creditors when the firm is terminally distressed, and thus signals the credit and labour markets not to penalise shareholders and managers. On the other hand, where a market solution is available -- as it is in the shape of the discipline imposed by the market for managerial labour, and the existence of security -- the section 214 bond takes the back seat. On this basis, this paper suggests that wrongful trading claims would generally be brought against shareholder-managers of closely-held companies, and shadow directors, and examines "impressionistic" evidence which is not inconsistent with this hypothesis. It is shown that on this analysis, the English Court of Appeal's well-known decision in Re Oasis, directing section 214 recoveries away from secured creditors, is perfectly reasonable.

On another level, the well-established Law and Economics proposition -- that to redistribute in insolvency leads to perverse incentives -- is challenged. It is argued that the wrongful trading provisions are redistributive. They strip away the benefit of limited liability from the insolvent company's directors, making their assets vulnerable to a claim by the liquidator on behalf of the company's unsecured creditors. This takes place only within the specialised insolvency forum, and only because the distinct insolvency regime creates new rights and liabilities which are incapable of existing while the company is still solvent. Three types of perverse incentive which might potentially lead to unnecessary motivation costs are described. The analysis suggests that, far from creating perverse incentives, section 214 in fact encourages directors of troubled and healthy companies alike to operate with some much-needed regard for the company's unsecured creditors.

Abstract:
This article analyses the liquidation process, challenging the much repeated proposition that secured claimants stand outside liquidation. It is argued that this proposition (i) is a product of a misunderstanding of the dual duality in the nature of liquidation proceedings, in that, in principle, they serve both public and private functions, and they further the interests of both secured and unsecured creditors; (ii) overlooks how secured creditors benefit from liquidation, and also how unsecured creditors have a real interest in the proper administration of their debtor's encumbered assets; (iii) mistakes the secured creditor's choice in usually being able to gain immunity from the liquidation process, for a compulsion to stand exiled from this process; (iv) is incorrect as a matter of history and practice; and (v) is rendered unsustainable by the statutory text. It concludes that secured creditors have never stood outside liquidation, that liquidation is an important tool for the protection of their interests, and that it is right to require floating charge holders to pay their fair share of liquidation expenses.

Abstract:
This volume analyses corporate insolvency law as a coherent whole, stemming from common fundamental principles and amenable to being justified or criticised on that basis. The author explains why consistency of principle must be sought, and how it might be found in the relevant statutory and case law. He then constructs an egalitarian theory for the analysis of corporate insolvency law, based on the premise that all the parties affected by this law are to be treated as equals. He argues that this theory can reconcile the dictates of fairness with the demands of economic efficiency. The theory is employed to analyse some of the most important aspects of insolvency law. Why should the individualistic method of enforcing claims against solvent companies give way to a collective method during insolvency? Why are there different formal mechanisms for dealing with troubled companies? What role does the pari passu principle play in the distribution of an insolvent company's assets? The controversial issues of whether and when secured creditors should be accorded priority over others receives detailed consideration. The functional role of the floating charge and its relationship with receivership are also analysed in this context. The many questions relating to the operation of the new administration procedure introduced by the Enterprise Act 2002 are considered in the light of principle. The book also analyses the role of the wrongful trading provisions. It examines, finally, why insolvency law objects to certain transactions at an undervalue and those having a preferential effect.

The first chapter begins by sketching out the notion of equality employed here. In this book, equality is taken to be the central feature of a particular conception of the person. This conception is itself tied firmly to the notion of a society regarded as a fair system of co-operation amongst citizens who regard themselves and each other as free and reasonable, and therefore equal. The first task undertaken in the book is therefore to explain the role of insolvency law in such a society, and how that affects the ideal of equality crucial to the argument of the book. Two related objections are then considered, both of which deny that any consistency of principle can realistically be expected to be found in a diverse and long-evolving body of law such as that governing corporate insolvency. These objections are met by explaining how insolvency law is interpreted in this book. Since the book also concerns itself with the efficiency of the law, the relevant notion of efficiency is then described and defended. The chapter concludes with an overview of the remaining chapters.

Chapters 2 and 3 concern themselves with the principles that suspend (stay) unsecured claims in a company's insolvency. There are two broad themes underlying the arguments in these chapters. First, the analysis attempts to unearth and illuminate the principles underlying the stay on unsecured claims. But second, it trades on the longevity and uncontroversial character of this feature of insolvency law, setting it up as a paradigm or provisional fixed point that any theory of insolvency law must explain and defend. Since the stay on unsecured claims has been so widely accepted and for so long, very persuasive reasons indeed would have to be brought to show it should no longer be part of insolvency law. Till such reasons are adduced, a theory claiming to be that of our insolvency law, but which does not explain and justify the principles underlying the stay, must be considered a failure. Or at least that is what chapters 2 and 3 will claim.

Chapter 2 examines the Creditors' Bargain model of insolvency law. This well-known model asserts that the most prominent features of insolvency law are best seen as reflecting the notional agreement the creditors of a company themselves would strike if given the chance to bargain with each other before anyone lends anything. The perspective of the ex ante bargain is supposed to illuminate the deep structure of this law, and to confer justification on its rules by having reference to the virtue of autonomy. Chapter 2 asks if the model is consistent with its own premises, whether it can provide useful insight into insolvency law, and most importantly, whether it can generate normative appeal on egalitarian or indeed any other grounds. The principles underlying the stay on unsecured claims are used to demonstrate that the model has no explanatory or justificatory force. It seeks to rely on the self-interest of those subject to the stay to suggest they would consent to it. But it is based on nothing but creditors' hypothetical preferences, and provides no reason why these preferences should be considered binding. The model suggests no non-arbitrary time at which to make a determination of creditors' self-interest. Also, the point at which it asserts creditors would consent to the stay is such that creditors actually asked to bargain then would never come to any agreement. Or if they do, the agreement would be oppressive of weaker parties, would be strongly anti-egalitarian, and therefore would have no normative appeal. It follows that principles which can be argued for within the model have nothing to do with autonomy. Nor would they necessarily be efficient.

Chapter 3 develops an alternative model to analyse and justify insolvency law, referred to as the Authentic Consent Model (ACM). Consistent with the discussion above, its starting premise is that all (but only) those affected by insolvency law are to be given a choice in selecting the principles which would govern their rights, interests, and obligations. Once these parties have been identified, they are to be given equal weight in the selection process, since their legal status (whether they are employees, secured or unsecured creditors, etc.), wealth, cognitive abilities, and bargaining strength, all are morally irrelevant in framing rules of justice. The ACM operationalizes the constructive attributes described above by requiring all principles to be selected from its 'choice position'. Here, all the parties are deprived of any knowledge of personal attributes, and must reason rationally. It is shown that parties in the choice position would in fact choose the principles laying down the automatic stay on unsecured claims. The chapter argues that because of the construction of the choice position and the constructive attributes of the parties bargaining in it, the principles chosen are fair and just, and chosen in exercise of the parties' autonomy. As it happens, they are also efficient. The chapter concludes by highlighting how the egalitarian character of the ACM distinguishes it from the Creditors' Bargain.

Chapter 4 delves into the nature of the pari passu principle, which supposedly requires all unsecured claims of an insolvent company to be met proportionately from the insolvent's estate. The argument in that chapter suggests that there is widespread misunderstanding about the role of this principle. The principle is claimed by commentators to be responsible for the orderliness of corporate liquidation, to explain and justify the collectivity of the liquidation regime and the rules providing for the avoidance (or more accurately, adjustment) of certain types of transaction, and to ensure fairness to all of the insolvent's creditors. The central claim in the chapter, that none of these functions can properly be attributed to the principle, is illustrated by empirical evidence of how the estates of insolvent companies are in fact distributed, the statutory provisions which help put the principle in its proper place, and the case law said to support it. The ACM is deployed to demonstrate that the pari passu rule - often called the 'equality' principle - has little to do with 'real' equality. The chapter shows, finally, what it claims is the actual role of 'formal' equality of the sort enshrined in the 'equality' principle.

Chapter 5 addresses one of the most controversial issues in the literature of insolvency law, as to whether and how the priority accorded to claims secured by a fixed charge or mortgage against an insolvent company is justified. The arguments in the literature can broadly be construed in two ways. First and more obviously, they can be taken simply as contributing to the ongoing technical debate about the basis on which the priority of secured claims might be taken to be efficient. On this view, such arguments identify various such grounds (signalling, monitoring, control of creditor or debtor misbehaviour etc.), and suggest either that the priority of secured claims is efficient on some of these grounds, or that it has not been shown to be thus efficient. These arguments by themselves are of no direct interest to us here, since they seem to assume efficiency is a substantive goal of the law of secured transactions. To that extent, they are inconsistent with the view taken here, that efficiency could not be a substantive goal.

Second, however, some of this debate might be understood as being about, not whether the principles providing for the priority of secured claims serve the substantive goal of efficiency, but about whether they accomplish the objective of (say) controlling debtor misbehaviour (one variety of motivation costs) only in a wasteful way, or worse, whether they allow for the exploitation of some types of parties by others. On this view, these arguments obviously have a direct relevance to the project of this book. Exploited parties have not been treated as equals. And a rational scheme of fair co-operation would not tolerate waste. Such arguments also cohere with the rather simplistic pre-theoretical intuition that secured creditors are 'obviously' treated better than unsecured ones, which is unfair to the latter. So chapter 5 provides an analysis of the arguments construed in this second way. It uses economic theory and empirical data to find that these arguments are at best unproved, and more likely, false. It concludes by demonstrating that, taking into account the actual conditions under which security is demanded and offered, its priority over unsecured claims in the debtor's insolvency would in fact be part of a rational scheme of fair co-operation amongst equals.

Chapter 6 considers what it claims are the twin institutions of the floating charge and administrative receivership. It explains the distinctive role played by the floating charge by examining the empirical context in which it operates and by comparing the recoveries made by different classes of creditor in corporate liquidation. The analysis suggests that whereas the fixed charge in included in debentures so as to provide its holder with priority, the floating charge is a residual management displacement device. Its dominant role is to ensure the integrity of the debtor's estate when the latter becomes distressed and its management is displaced in favour of a specialist distress-oriented manager. This is where administrative receivership ('receivership') comes in. Traditionally, the replacement of the distressed company's management has been brought about by the appointment of a receiver (formerly, a receiver and manager). However, this chapter harnesses theory and evidence in favour of the argument that receivership is significantly destructive of social value, and that it is unfair and oppressive. Its virtual abolition by the Enterprise Act 2002 is therefore welcomed. However, the substitution of receivership with administration also, it is argued, signals the end of the usefulness of the floating charge. The chapter concludes by sketching out a case for the abolition of this type of charge.

Building on the understanding gained by the discussion in chapter 6 of the socially harmful features of administrative receivership, Chapter 7 discusses the administration procedure introduced by the Enterprise Act 2002. It explains how this procedure retains the only defensible feature of receivership, in that a selected creditor continues to be entrusted with the right unilaterally to displace the underperforming management of a distressed company. The chapter analyses the statutory hierarchy of objectives made available to the administrator and explains the standard to which he is expected to be held in choosing between them. Light is also thrown on the sort of factors that might justifiably be taken into account in making this choice. The relationship between the administrator's duties and the voting rights of creditors is examined, and the chapter concludes with a discussion of the sort of factors that might precipitate challenges by aggrieved creditors and members to the administrator's decisions and actions.

Chapter 8 considers the impact of insolvency on the obligations of the debtor's managers by examining the wrongful trading provisions in section 214 of the Insolvency Act 1986. It employs the tools of agency theory and the ACM to analyse the need for these provisions, their structure, role, and effect. It asks whether a scheme of fair co-operation about insolvency issues would include a section 214-type duty, and if so, why. The analysis reveals that the duty would not be equally relevant for all types of companies, and that the influence of the market for managerial labour ensures most section 214 actions are likely to be brought against directors of closely-held companies, and against shadow directors. The analysis utilises the insight that section 214 plays a role similar to that of security itself. An important aim of the chapter is to challenge the Law and Economics proposition that to re-distribute the rights of parties in a corporate liquidation creates socially wasteful incentives. After arguing that section 214 is redistributive in the relevant manner, the incentives created by those provisions for the managers of both healthy and distressed companies are examined. It is suggested that these incentives are generally socially efficient. In the result, the provisions would be acceptable to all those affected by them, regarded as equals.

Chapter 9, the concluding chapter of the book, analyses the rationale and structure of the provisions which reverse or adjust eve-of-insolvency transactions considered to have been tainted by the improper motives of either the directors or the creditors of a distressed company. The chapter identifies the three main norms underlying this part of the law, those of loss allocation, value maximisation and finality of transactions, and with reference to them, describes the general strategy that might be adopted in dealing with such tainted transactions. The law countering transactions at an undervalue is examined to determine whether some mutuality of intent is required in order to bring a transaction within the ambit of this law, the way in which a series of linked events might be treated as constituting a single transaction, and the extent to which events occurring after the conclusion of a transaction might be considered relevant in calculating the value received by the distressed company as a result of the transaction. The chapter also considers the notion of creditor equality underlying the law's objection to preferences, and concludes by sketching out the contours of a defensible preference law.

Abstract:
This paper takes the opportunity, presented by the House of Lords' decision in Phillips v Brewin Dolphin, to examine the law governing the reversal of transactions at an undervalue entered into by a company which then becomes insolvent. The paper discusses the sequence in which issues related to ascertaining whether a transaction had been at an undervalue are to be approached, the proposition that contracts somehow "linked" with each other can be taken together as constituting a single "transaction", and the prior question about when such contracts should be considered "linked" in the first place. Finally, the paper detects something of a tendency in the case law to use the notion of a transaction at an undervalue to brush aside inconveniences arising from the peculiarities in the way certain cases have been pleaded. Notably, it suggests that Phillips v Brewin Dolphin might not have involved any transaction at an undervalue at basall.

bankruptcy; undervalue transactions