Here, they must vote to approve or reject the plan within 10 days of its publication. Liquidation is commonly viewed as essentially involving foreclosure and a piecemeal sale of the business’s assets, while the heart of a rescue process is seen as involving the continuation of the business. The interests of creditors take primacy over the interests of all other groups when the company seems to be in financial distress. There were (a) to (l) aspects contained in the aims of a good modern insolvency law. Plan negotiations typically are conducted primarily between the debtor and one or more official committees appointed shortly after the filing of debtor’s bankruptcy petition, although any party in interest may seek to participate in negotiations. It is commonly acknowledged that the rationale of corporate rescue is to capture the surplus of going-concern value of the assets of the ailing company, in that the value of a company’s business operations is likely to be far greater than the scrap value of its assets.7 As has been noted: ‘[w]e have a going-concern surplus (the thing the law of corporate reorganisations exists to preserve) only to the extent that there are assets that are worth more if located within an existing firm. It can also be seen from the shift of the directors’ fiduciary duty of loyalty to the creditors of the company in the ‘twilight’ period and the administrator’s duty to act in the interests of creditors as a whole. 26 October, 2020 Lee Shih Leave a comment. This continues until the rescue process concludes, and no longer affects the company. As such, he may delegate responsibilities to the company shareholders and management body. The UK government had previously said that the … 197 accessed 30 July 2015, 4. They are accompanied by the uncertainty of the valuation on the financially distressed company.126. The basis of the modern economy has transformed from the traditional manufacturing activity to the information-based economy, in which the most valuable resource may be human capital and relationship networks.11 It is argued that going-concern value resides principally in various relationships ‘among people, among assets, and between peoples[sic] and assets’.12 Costs incurred in creating most of these necessary relationships will inevitably be lost if the business is scattered to the wind through a piecemeal sale of assets,13 and starting a business from scratch is expensive and time consuming and entails a large degree of entrepreneurial risk.14 These points have been well made by the legal department of the International Monetary Fund: in the modern economy, the degree to which an enterprise’s value can be maximised through liquidation of its assets has been significantly reduced. It lowers the capital cost. The site will be up and running soon, in the meantime if you require assitance use the contact details below: Speak to Us 0401 466 238. When the business rescue process is underway, there will be considerable changes. Under the Proposals, MSC is defined to include holders of subsequent charges over the whole or substantially the whole of the company’s Formal rescues, on the other hand, involve the use of legal procedures designed under insolvency legislation where the compromises and arrangements for restructuring are made under the supervision of the court or a formal legal structure. The administrator is required to first consider rescuing the company as a going concern, unless in the administrator’s view, that is not reasonably practical and/or it is not in the interests of creditors as a whole. 2010-1249, JORF No. MS Kirschner et al., ‘Prepackaged Bankruptcy Plans: The Deleveraging Tool of the ’90s in the Wake of Old and Tax Concerns’ (1991) 21 Seton Hall Law Review 643, at note 7. V c. 59). The formal rules in this context impose considerable limits on departing from the pre-insolvency entitlements of claimholders and on how far they can go in response to the substantial obstacles caused by the inherent uncertainty in the progression of rescue work. But what exactly, is the SOS meaning? Administration - this is a collective corporate rescue procedure run for the benefit of all creditors, under which the company's assets are protected by virtue of a statutory 'moratorium', or stoppage, of any forms of creditor action. Under English administration procedure, the administrator’s proposals are passed when support is obtained from a majority in value of those present and voting creditors, either in person or by proxy. See further V Finch, ‘The Dynamics of Insolvency Law: Three Models of Reform’, (2009) 3 Law and Financial Markets Review, 438. Professor Belcher defined the term ‘corporate rescue’ as ‘a major intervention necessary to avert eventual failure o… A corporation can continue as an enterprise: as an enterprise, it can change its personality and, perhaps more importantly, whether the corporation continues and how it changes its personality affects people in ways that are not only economic.34, Professor Elizabeth Warren has criticised the creditors’ bargain theory for facilitating the externalisation of costs. 102 J Armour and SF Deakin, ‘Norms in Private Insolvency Procedures: The ‘London Approach’ to the Resolution of Financial Distress’ (2000) ESRC Centre for Business Research, University of Cambridge, Working Paper No. This means observing its affairs, property, financial standing, and operations. Should piercing the corporate veil by means of common law then fail, there exist the provision of section 20(9) of the Companies Act. What conceptual, legal and practical problems arise in relation to corporate rescue? The popularity of pre-pack restructuring in the UK and the US has been recognised by other jurisdictions in Europe and these are countries starting to introduce their own versions of pre-pack procedures, such as the Accelerated Financial Safeguard procedure (Procédure de Sauvegarde Financière Accélérée) in France124 and the new Protective Shield Proceedings (Schutzschirmverfahren) in Germany.125 Despite the gradual recognition of the efficacy and efficiency of pre-pack practice in maximising the going-concern value of distressed businesses, the rescue-oriented rules offered in different jurisdictions differ as to how far they can go in seeking to promote a more cooperative and risk-taking attitude among different parties from their respective standpoints. Both provide a collective way of settling the fate of the company when the claimants cannot resolve the company’s financial troubles through private negotiations. Regardless, there can be a certain leeway provided for these reporting periods. What does CSR stand for? ️ Print as many copies as you need. 114 The court may grant extension of this exclusive period up to 18 months after the petition date. But, this must also be in line with the terms and conditions set out before the process started. 118 Such as the UK administration procedure or the US Chapter 11 reorganisation. 100 Creditor committees reduce information asymmetries that would endanger trust and cooperation between creditors and the debtor. 23 Jackson and Scott, ‘An Essay on Bankruptcy Sharing and the Creditors’ Bargain’, 159. Rescue definition is - to free from confinement, danger, or evil : save, deliver : such as. 89 For instance, financial creditors such as banks, or major trade creditors and bondholders. In this context, the banks may agree to provide new funding, especially where fresh loans and attendant liquidity are necessary for the debtor’s continued survival. The original administration model was not a complete rescue procedure, and its main effect was to impose a moratorium on the enforcement of creditors’ claims. The key challenge to efficient negotiation in the informal rescue process is the creditor coordination problem, especially for companies with a large number of creditors and complex debt structures (often a mix of public, private and bank debt). 105 The traditional domination of bank debt in financing large UK debtors is identified as one of the fundamental backgrounds of the prevalence of the London Approach. Under the new regime, the administration may function either as a gateway to winding up, a CVA or a scheme of arrangements, or as a stand-alone procedure, which may lead directly to dissolution. In order to reflect these different points of view, it is important to understand the diverse normative theories and hypotheses about the appropriate objectives and purposes of corporate insolvency law. While less than optimistic, it still serves as an alternative to insolvency. This introductory chapter will offer a brief overview of the above issues in order to provide the contextual background to the use of ‘pre-packs’ as a corporate rescue strategy. See more. Essentially they offer a collective way in which all the affected parties are participating equally and treated according to the size and seniority of their credits. In the US, claims and interests are dealt with by classes, specifying unimpaired and impaired classes. Yet pre-pack rescue also face challenges in capturing the going concern surplus in an uncertain state of corporate distress. What is the test for business rescue? 31 See DR Korobkin, ‘Rehabilitating Values: A Jurisprudence of Bankruptcy’ (1991) 91 Columbia Law Review 717, 762. Theoretically, the rescue process is all about preserving the so-called going concern surplus in those businesses that are financially distressed but still economically viable, and identifying and liquidating those economically distressed ones in a timely manner. CSR abbreviation. Underlining such differences is the distinction between ‘company rescue’ and ‘business rescue’. By now most people have heard about Business Rescues, but as an employee of a company are you aware of your rights when the company commence with business rescue proceedings?. American Chapter 11, commonly referred to as ‘reorganisation’, aims at promoting the economically viable company to recovery and maintaining the business as a going concern.113 By granting an automatic stay to prevent creditors from collecting their claims or enforcing their liens, incumbent management is allowed to retain control of the company and is granted the exclusive right to propose a plan of reorganisation within 120 days after the Chapter 11 filing date.114, Both countries take a view that corporate rescues can be justified by the fact that assets used by a going concern company are more valuable than if the company was liquidated piecemeal, but the legal rescue procedures in the two jurisdictions are very different in terms of orientation and institutional arrangements. 51 See Finch, Corporate Insolvency Law: Perspectives and Principles, 39–40. But, this plan is only approved upon approval by the creditors and shareholders. The aim is to move the company back towards normal operations, and a state of profitability. It recognises these problems as general problems, not as bankruptcy problems. After these introductory remarks, sections 2 and 3 provide essential definitions for the purposes of this book. But it remains debatable whether the directors will do ‘the right thing’, given that the theory is based on a ‘wholesale grant of unfettered power to directors’.61 It is asserted that directors would function less like disinterested trustees and more like representatives in a legislature who are expected to vigorously defend the interests of the particular constituents who elect them.62 It is explicitly accepted that team members trust directors not because they think directors will do a good job, but because team members lack better alternatives.63, Professor Elisabeth Warren considers that the creditors’ bargain theory, as a single, unified theory of bankruptcy, is more of an intellectual view of bankruptcy than a complex one and runs a great risk of providing answers that, while quite sensible within confined, abstract schemes, will not work in a complex real-life corporate environment.64 She has offered a ‘dirty, complex, elastic, interconnected view of bankruptcy’ from which outcomes cannot be predicted, and nor can all the factors relevant to a policy decision be fully articulated.65 She explained what she has offered is ‘a comprehensive statement about the various and competing goals that underlie the bankruptcy system’ so as to provide useful assistance to the legislative and judicial decision-making.66. A general advantage of private workouts is that they provide the debtor company and its creditors with a more flexible environment in which to negotiate the resolution of a company’s financial difficulties than under insolvency procedures. For example, many don’t know how the process assists companies in financial distress. 109 Armour and Deakin, ‘Norms in Private Insolvency Procedures: The ‘London Approach’ to the Resolution of Financial Distress’, 31–3. All this forms a part of the services provided by the business rescue practitioner. Practitioners in this field provide their services aimed at the rehabilitation of companies. The Enterprise Act 2002 (EA 2002) introduced a streamlined administration model to replace the original procedure. 66 ‘I have not offered a single-rationale policy that compels solutions in a particular case. From Reactive to Pro-active Corporate Social Responsibility: Marketing of Corporate Responsibility Efforts: Reasons for Corporate Responsability: Should CSR Lead the Fight against Global Inequality? See more. The differences in their institutional arrangements governing insolvency and corporate rescue reflect the differences in their culture, economic environment and political constraints. When the firm failed, those parties were left with the costs as the parties with formal legal rights against the debtor never completely internalise the full costs of a business failure.35 Therefore it is argued that insolvency law should look beyond pre-insolvency rights and recognise the interests of parties who lack formal legal rights in the pre-insolvency scenarios as the protection insolvency law gives to these parties is derivative in nature and limited in scope.36, In his later work, Professor Donald Korobkin offered an alternative contractarian model, insisting on his proposition that the main purpose of bankruptcy law is to exist as a distinct system that deals with the general problems of financial distress, and not to specifically address the problem of recovering debt.37 Instead of viewing insolvency law as the set of rules that contractual creditors would agree to from behind the veil of ignorance,38 Korobkin considered bankruptcy legislation to be ‘the product of social exigency, moral conflict, and political compromise’.39 He propounded a normative framework for bankruptcy law based on a hypothetical bargain struck by the representatives of all interests that might be affected by a company’s decline.40 There should be some ‘normative foundations’ of bankruptcy law on which conflicting parties develop their arguments. Korobkin, ‘Contractarianism and the Normative Foundations of Bankruptcy Law’, 581. Lee Shih Companies Act 2016, company law, corporate rescue, corporate rescue mechanism, insolvency, judicial management, judicial manager, lee shih, restructuring Case Update: The Interim Judicial Manager to Protect Assets in Jeopardy. 11 Bankruptcy Act 1914 (4 & 5 Geo. This has provided companies in financial distress with an alternative to insolvency. 113 It is said that the motive for introducing the Chapter 11 procedure was to increase the possibility that the company would emerge as a going concern from the reorganisation process. Corporate Restructuring Definition: The Corporate Restructuring is the process of making changes in the composition of a firm’s one or more business portfolios in order to have a more profitable enterprise.Simply, reorganizing the structure of the organization to fetch more profits from its operations or is best suited to the present situation. It is further argued that the contractarian approach fails to explain how agreements can be reached behind the veil as to who in a potential insolvency is most vulnerable and thus should enjoy priority of protection over those occupying less threatened positions.51, A team production theory of corporate reorganisation law has been recently developed by Professor Lynn LoPucki.52 It is based on the original team production theory of the corporation introduced by Margaret Blair and Lynn Stout in 1999,53 in which the interests of corporation are understood as ‘a joint welfare function of all the individuals who make firm-specific investments and agree to participate in the extra-contractual, internal mediation process within the firm’.54 The team membership may include: stockholders; company managers; other employees; suppliers; creditors; customers; local governments; regulatory agencies and others.55 In order to share all the costs and benefits of incorporation, and because of the impossibility of reaching that effect through direct contracts in some circumstances, team members can delegate an independent authority group – the board of directors – to divide profit and loss among them, based on each member’s contributions to the team.56 Under the team production theory, corporate reorganisation is viewed not as a regulation imposed by government but instead as ‘a contract term by which creditors and shareholders agree to subordinate their legal rights to the preservation of the going concern’.57 The preservation of the corporate entity is an independent value that partially accounts for the choice of reorganisation over liquidation.58. 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