Selective Corporate Restructuring Strategy
| Published date | 01 March 2023 |
| Author | Sarah Paterson,Adrian Walters |
| Date | 01 March 2023 |
| DOI | http://doi.org/10.1111/1468-2230.12767 |
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Modern Law Review
DOI:10.1111/1468-2230.12767
Selective Corporate Restructuring Strategy
Sarah Paterson∗and Adrian Walters†
This article engages with a fundamental, but under-theorised, fact: that modern UK and US
corporate restructuring plans frequently impair only selected creditors, and frequently treat im-
paired creditors of equal rank dierently.It starts from the premise that selectivity and dierential
treatment, while often justiable, raise normative questions about the boundaries within which
they ought to be permitted. It then reviews selective and dierential strategies in three UK
restructuring procedures, using US chapter 11 as a comparator. The core contention is that
selectivity and dierentiation are best regulated by the threat of independent review against a
menu of relevant cr iteria. A menu of cr iteria is developed, designed to distinguish legitimate and
illegitimate uses of selective and/or dierential strategies,and these cr iteria are mapped onto the
various UK restructuring law procedures and US chapter 11. The article concludes with some
limited suggestions for reform directed mainly at the UK company voluntary arrangement.
INTRODUCTION
This ar ticle engages with a fundamental, but under-theorised, fact: that mod-
ern corporate restructur ing generally, and UK and US corporate restructuring
specically, are frequently processes in which only selected creditors are im-
paired by the restructuring plan, and which frequently treat impaired creditors
who would have the same distributional priority in a corporate insolvency pro-
cess dierently.This contrasts with a view of corporate insolvency as a collective
process, in which individual creditors’ rights of enforcement are suspended for
the good of the general body of creditors; in which all creditors participate;
and in which the proceeds of realisation of the assets are distributed pari passu
in accordance with the order of priority prescribed by corporate insolvency
∗Professor of Law, the London School of Economics and Political Science.
†Professor of Law,Chicago-Kent College of Law,Illinois Institute of Technology;Professor, Notting-
ham Law School, Nottingham Trent University.We extend our thanks to participants in a virtual
symposium hosted by Arizona State University and a faculty workshop at Chicago-Kent;to Daniel
Bussel and his colleagues for assistance with materials on assumption; to Vincent Buccola and Chris
Howard for comments on earlier drafts;to Alan Kornberg for helpful views on the position on the
ground;to Caitlyn Worley (Chicago-Kentclass of 2022) for research assistance; and to our two anony-
mous reviewers for some excellent insights. All views expressed are, of course,our own and we are
responsible for any errors.
© 2022 The Authors. The Modern Law Review published by John Wiley & Sons Ltd on behalf of Modern Law Review Limited.
(2023)86(2) MLR 436–464
Thisis an open access ar ticle under the terms of the CreativeCommons Attr ibution License,which permits use,distr ibution and reproduction
in any medium,provided the original work is properly cited.
SarahPatersonandAdrianWalters
law.1It will be immediately apparent that a restructuring procedure in which
certain creditors are selected by the debtor to absorb the loss while others ride
through either wholly unaected or barely impaired raises very dierent issues
of distributional fairness from an insolvency procedure in which all creditors
participate. Moreover, the dierent treatment of creditors who would be of
equal rank in corporate insolvency law’s distributional order of priority raises
quite dierent issues from controversies over the distributional order of prior-
ity itself. Yet, with a few notable exceptions, selective corporate restructuring
strategies have received relatively little attention from corporate restructuring
law scholars.
One such exception, in the US c ontext, is Kevin Delaney’s excellent book,
Strategic Bankruptcy.2Delaney adopts a case study approach, analysing one case
in which the debtor turned to US corporate restructur ing law to compromise
the claims of tort claimants,3and another case in which the debtor turned to
US corporate restructuring law to compromise the claims of employees.4In
both of these cases, Delaney suggests that the debtor’s mobilisation of corpo-
rate restructuring law was illegitimate because it imposed losses on creditors
with weak bargaining power while allowing stronger, better informed credi-
tors to emerge reasonably unscathed, at a point in time when the debtor was
still meeting its liabilities in full. Another exception is work by Mark Roe and
Frederick Tung which engages with many of the mechanisms in US law which
can produce the dierential treatment of otherwise similarly situated creditors
with which we are concerned.5Roe and Tung focus on the ways in which
certain unsecured creditors are able to mobilise tools in the US Bankruptcy
Code to gain a distributional prior ity advantage over other unsecured creditors
who would otherwise rank equally with them.And a nal exception is Vincent
Buccola’s conception of two paradigms operating in US chapter 11: a paradigm
operating early in the case that prioritises keeping the business running over dis-
tributional consequences, and a second paradigm operating at the conclusion
of the case orientated towards observing distributional entitlements.6
Unlike Delaney, we do not focus on cases where selectivity and dieren-
tial treatment of otherwise equally ranking creditors uniquely harm creditors
with weaker bargaining power. Unlike Roe and Tung, we focus on the debtor,
and do not assume that all selective strategies are motivated by attempts by one
creditor to capture value from another. And, while our work inter sects with
Buccola’s,we suggest that the debtor should face the threat of court review of
1 See, for example, Leyland DAF Limited vTal b o t [2004] UKHL 9; [2004] 2 AC 298 at [28].
Of course, as one of our anonymous reviewers noted, the notion of collectivity in corporate
insolvency law has always been nuanced – for example,in a compulsor y liquidation in England
and Walessecured creditors are not bound by the stay (see Insolvency Act 1986, s 130(2) and In
re David Lloyd & Co (1877) 6 Ch D 339, 343-346) and,until it was largely abolished in 2002,
administrative receivership functioned primarily as a secured creditor enforcement remedy.
2 Kevin J. Delaney, Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to their Ad-
vanta ge (Berkeley and Los Angeles, CA: University of California Press, 1998).
3ibid, 60-81.
4ibid, 82-125.
5 Mark Roe and Freder ick Tung,‘Breaking Bankr uptcy Pr iority: How Rent-Seeking Upends the
Creditors’ Bargain’ (2013) 99 Va L Rev 1235.
6 Vincent S.J.Buccola, ‘The Janus Faces of Reorganization Law’ (2018) 44 J Corp L 1.
© 2022 The Authors. The Modern Law Review published by John Wiley & Sons Ltd on behalf of Modern Law Review Limited.
(2023) 86(2) MLR 436–464 437
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