Debt Restructuring and Notions of Fairness

Publication Date01 July 2017
Date01 July 2017
AuthorSarah Paterson
Debt Restructuring and Notions of Fairness
Sarah Paterson
This article examines concern for fairness in the way in which loss is distributed when a
company or financial institution facing financial difficulties is restructured. It shows how this
concern is often grounded in loose notions of fairness, or generalisations from one situation
to another, rather than in detailed analysis. Adopting an interdisciplinary approach, it builds an
analytical frame for the fairness debate in debt restructuring. It shows why rigour is important
in identifying fairness concerns, in weighing them against other considerations, and in applying
concerns which arise in one scenario to another, and illustrates the types of policy mistake or
policy incoherence which can arise if this is not done.
We think of fairness as an intuitive concept, confident that, as the colloquial
expression goes, ‘we will know it when we see it’. Substantive unfairness
is usually associated with some sort of imbalance: between how one person
is treated compared with another; between effort put in and reward gained;
between what we legitimately expect and what we get; between how losses fall
on the weak and upon the strong. Procedural unfairness, too, reflects this sense
of an uneven playing field: between the rights which different parties have to
participate in a process or between how favoured and unfavoured parties are
treated, or between the rights of those in a powerful bargaining position and
the rights of everyone else. But not every case of imbalance will be unfair, and
many factors may vindicate the situation. Closer examination reveals a slippery
concept, which eludes a single definition applicable to all contexts and which
suffers from various levels of abstraction unless it is applied to a real situation.
Indeed, if we rely on our intuition we face three risks. First, we risk gen-
eralising from one situation to another when the situations ought properly
to be differentiated from each other. Secondly, to the extent that we suggest
reform to address a fairness concern, that reform may be only weakly related
to the real fairness issues in the particular context. Finally, when we weigh
fairness concerns against other considerations, we may have a poorly defined
idea of what it is that we are putting in the balance. This article argues that
our repeated failure to identify systematically our fairness concerns in different
types of debt restructuring in English law has led us into all three of these traps.
Drawing broadly on scholarship from diverse fields such as moral and political
philosophy, biological sciences, psychology, organisation theory, group theory
and economics, the article seeks to unpack the principles and the procedural
demands which are bound up in some measure in our intuitive sense of what
is fair, and to apply them in a rigorous way to three different types of debt
Assistant Professor of Law, LSE. Earlier versions of this paper were presented in the Oxford Law
and Finance Lecture Series in February 2016 and at INSOL International’s Academic Colloquium
in July 2016. The author is grateful to participants at both events for comments. All views expressed
are the author’s own, and she is responsible for any errors and omissions.
C2017 The Author.The Moder n Law Review C2017 The Modern Law Review Limited. (2017) 80(4) MLR 600–623
Published by John Wiley& Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
Sarah Paterson
restructuring: a restructuring of a small or medium sized enter prise (SME); a
restructuring of a large corporate; and a restructur ing of a financial institution
in English law. In each case, a fairly typical scenario is described to ground the
analysis, which reveals repeated failure to distinguish one type of restructuring
case from another, to identify accurately where the fairness concerns are lurk-
ing, and to decide what we are putting in the fairness bucket of the trade-off
scales.1In short, it reveals the policy mistakes which may arise if we give ‘our
unscrutinised instincts an unconditional final say’.2
The analysis concentrates exclusively on fairness. It does not consider the
trade-off between fairness and other objectives (such as sustaining the putatively
unfair situation because another, fairer outcome would cost more than the
benefits it would deliver or would provide the wrong incentives for some of the
stakeholders), or utilitarian objections (because a situation which differentiates
between classes of stakeholder in its approach to the fairness of the case would
make the stakeholders worse off overall), or with arguments that what we
might consider to be questions of fairness should properly be reinterpreted
as economic questions. In short, its objective is not to argue that fairness
per se should prevail over other considerations, but rather to explore, as an
initial question, the quality of fairness in each of the situations with which
it is concerned. In each case the analysis has been divided between what are
termed ‘principles of f airness’, which are the principles we apply to a given
outcome to determine whether the result is fair, and procedural fairness made
up of the factors which determine whether the process by which the outcome
was arrived at was itself fair. This division proved no easier to handle than
the fairness notion itself, and the reader may on occasion take issue with the
allocation of principles between procedure and substance, but given the law’s
commitment to procedure some attempt to identify a line between outcome
and procedure seemed essential.
Finally, the extent to which notions of fairness can properly be said to be con-
tingent upon history, geography and culture is controversial, but many scholars
would argue that there are significant and important national value differences
as to what is fair.3As this article focuses on English law debt restructuring,
an in-depth cross-cultural analysis is not attempted and the literature which
is drawn upon focuses principally on England and the US. Further research
might usefully consider how the analysis maps onto other debt restructuring
regimes, but that is for another day.
In a typical (controversial) English law debt restructuring of a financially dis-
tressed SME, the owner/managers of the company launch an auction process
1 See also L. Kaplow and S. Shavell, Fairness versus Welfare(Cambr idge,Mass and London: Har vard
University Press, 2006) 79 fn 121 and accompanying text (discussing whether a mode of analysis
arguably appropriate in one context should be applied without alteration in another)
2A.Sen,The Idea of Justice (London: Penguin Books, 2010) 51.
3 See, for example, J.Elster, Local Justice: How Institutions Allocate Scarce Goods and Necessary Burdens
(Cambridge: CUP, 1992) 149.
C2017 The Author. The Modern Law Review C2017 The Modern Law Review Limited.
(2017) 80(4) MLR 600–623 601

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