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Broken companies or broken system? Charting the English insolvency valuation framework in search for fairness
Abstract
This article adopts a normative approach to investigate measurement of value in English insolvency and bankruptcy cases. The valuation techniques are assessed against a revised communitarian, fairness-orientated framework based on a modified version of Rawls, Finch and Radin's social justice concepts of fairness. This article explains the need for a revised communitarian, fairness-orientated framework to measure value in insolvency. Finally, it investigates if regulatory reforms are needed to improve fair measurement of value in insolvency and bankruptcy procedures.
This paper aims to provide an examination of the theories that underpin corporate insolvency as developed in the US and the UK, and apply that to the two novel corporate rescue mechanisms; the corporate voluntary arrangement and judicial management, which are embedded in the Companies Act 2016 (CA 2016) of Malaysia. This paper adopted a doctrinal and theoretical approach to law. The tension in the corporate rescue mechanisms in the CA 2016 between creditors and other stakeholders of a company affected the objectives on corporate insolvency in Malaysia. This paper identified the theories that are reflected in the corporate rescue mechanisms in the CA 2016-a gap within the provisions which was left out in the process that ranged from consultancy and leading up to the drafting of the CA 2016. In addition, the objectives of introducing the corporate rescue mechanisms were identified. These findings may pave the way to reform the corporate rescue law in order to enhance its conformity with the objectives of corporate rescue in Malaysia. This in turn would facilitate the recovery of financially distressed companies and the minimisation of the loss of employment.
Capitalism without Capital by Jonathan Haskel and Stian Westlake explores the changes in the types of investments that have occurred in almost all developed countries over the last forty years. If tangible investments predominated in the past, most investments are intangible at present, meaning that money is spent on buying and creating knowledgebased products, including computer software, research and development, design, works of art, market research, learning, and new business processes. The authors attempt to answer why the economy in which intangible assets are intensively used is so different from the economy where tangible assets dominate. The authors conclude that these changes are explained by the basic properties of the intangible assets and have resulted in long-lasting stagnation, lower economic growth, increasing inequality, and difficulties in public policies for economic and financial sectors. The Journal of Economic Sociology publishes the introductory chapter, ‘Valuation, the Old-Fashioned Ways: Or a Thousand Years in Essex’ from Capitalism without Capital, where the authors discuss the meaning of investments, define the distinctions between tangible and intangible assets, and explain why some basic properties of intangible assets generate such dramatic changes in the contemporary economy.
This collection uses economic analysis to study some of the most pressing issues in corporate law. The last decade has brought certain corporate transactions and arrangements to the forefront of public attention and public debate. At the same time, a new mode of corporate law analysis has been developed - one that uses the tools of economics to identify the consequences and desirable features of corporate law rules. By bringing together work at the frontier of this method of analysis, the volume provides a good picture of the power, current state, and future direction of the economic analysis of corporate law. Written by some of the most prominent contributors to the field, many of the chapters focus directly on the corporate control transactions that have recently attracted the most interest and controversy - corporate takeovers, buy-outs, recapitalizations, and reorganizations.
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.
The first part of this article, published in the previous issue of this journal, identified the bases on which a company’s business might be valued. Drawing upon economic theory, empirical evidence, and the sophisticated principles evolved by US courts with long experience of dealing with such issues, it explained 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 sought in its first part to distinguish between the ‘structural’ and the ‘strategic’ factors giving rise to these problems, and explained how these might impact upon the valuation process. It drew on the US jurisprudence on business valuation to outline three methods for putting a value on a ‘going concern’. It was 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 question of the basis on which to value a company subject to a proposed reorganisation has recently come before the English courts. In the light of the discussion in the first part of this article, the way in which the matter was dealt with is an eye-opener. The remainder of this article uses In re MyTravel Group Plc, as a case study to demonstrate the nature of the concepts and the operation of the principles elucidated thus far.
'This book offers a detailed, comparative critique of bankruptcy law in the United States and the United Kingdom. . . This book is an excellent introduction into corporate rescue law. The style is clear and easy to follow. The inclusion of academic and legal references throughout the text enables the reader to further investigate particular lines of argument. This book is recommended for both legal practitioners and law students.' - Michael Browne, International Trade and Business Law Review.
The concentration of political and economic power in bureaucratic organizations has long threatened to permit uncontrollable managerial discretion and to frustrate authentic self-expression in work and politics. Yet defenders of the bureaucratic form have argued that hierarchic social organization is inevitable and that its power is subject to adequate restraints. In this Article, Professor Frug examines the two principal bodies of legal doctrine devoted to justifying bureaucracy - corporate and administrative law. He describes four different attempts to defend corporations and administrative agencies, and explains why none of these theories can overcome the problems of managerial domination and personal alienation that exist in hierarchic organization. The very project of bureaucratic legitimation limits our ability to envision alternative, participatory forms of social organization, forms more consistent with the ideals of a democratic nation. By exposing the ideology of bureaucracy in American law, this Article is designed to be one step toward the realization of those ideals.
The American legal system has a problem with complex valuations. These valuations cannot be done without expertise, yet competing experts provide so little accurate information to courts that judges routinely pick an arbitrary value that falls somewhere between the extreme values suggested by the parties. This creates costly uncertainty and undermines the legitimacy of the court. While this problem has been recognized, the proposed solutions have become increasingly complex and convoluted. As a result, no solution has been effectively adopted and the problem persists. This article suggests that the valuation dilemma can be solved more simply by recognizing a basic legal imperative that has been ignored in this context. Our theory of valuation rests on the simple idea that valuations are nothing more than enterprises in routine fact finding. Valuation is not an ethereal question with no right answer. Rather, valuation is a process of inferring a fact about the value that a relevant community places on an asset. As simple as that point may be, it has been ignored in practice and received almost no attention in the academy. By reorienting the analysis of valuation around this foundational point, this Article reveals the potential for a shift in valuation practice that will both restore the legitimacy of the process and reduce the costs of uncertainty and biased testimony. We demonstrate that a return to traditional evidentiary rules, including attention to burdens of proof, will discourage courts from resorting to ad-lib spreadsheet calculations in favor of valuations arrived at through vetted methodologies that are shown to be reasonably accurate and supported by the record. We further show that this will lead to an improvement in the quality of information provided by expert witnesses.
This study compares the valuations of debtors emerging from Chapter 11 with the valuations of similar publicly traded firms. For each debtor in my sample, I collect valuation experts’ enterprise and equity valuations that are judicially confirmed and based on managements’ published financial projections. Then I compare these valuations with the valuations of similar publicly traded firms with respect to size and industry. I find that debtors’ enterprise and equity valuations are systematically undervalued by 10% and 20%, respectively, relative to their peers. The greatest discounts are for debtors with the lowest valuations, the widest valuation ranges, and a 2009 emergence. Widespread discounting may be evidence that management and senior creditors use the Chapter 11 process to capture value that might otherwise flow to junior creditors.
Determining a chapter 11 debtor's reorganization value is a critical part of almost every chapter 11 case. Unfortunately, neither the case law nor existing commentary adequately describes how this is done. This Article explains the main methodologies used in chapter 11 for determining reorganization value and discusses the issues that often arise.
Drawing on recent developments in regulationist economics and neoMarxist state theory, this contribution begins with a brief comment on the nature of social reproduction regimes and the importance of taking proper account of the ‘mixed economy of reproduction’.1 It then addresses four interrelated sets of questions about the recent restructuring and possible transcendence of the post-war social reproduction regime associated with Atlantic Fordism, especially in its north-West European guise of the Keynesian welfare state. First what is involved in theorizing ‘post-Fordist’ social reproduction regimes? Second, considering the latter in relatively abstract theoretical terms, what might its core features comprise? Third, moving to more concrete-complex terms, how might post-Fordist social reproduction regimes be distinguished one from another? And, fourth, what are the respective roles of the state (whether at supranational, national, or local level) and other forms of governance in such regimes? Unfortunately space constraints preclude a detailed answer to all these questions but I will at least try to suggest how they might be addressed.
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.
This article proposes a new mechanism for valuing firms in bankruptcy. Under the mechanism, a court would dilute the reorganized stock issued to senior claimants by issuing additional shares to junior claimants until there was no excess demand for the stock at a price that would implement absolute priority. This mechanism could also be adapted so that a court would issue additional debt to senior claimants until there was no excess supply of the debt at a price that would implement absolute priority. We show that the mechanism harnesses the private information of the claimants and of third parties to produce distributions consistent with absolute priority. The dilution mechanism can be superior to other information-harnessing devices (such as an option or auction approach) because it (i) is less susceptible to the problem of junior illiquidity than an option approach proposed by Lucian Bebchuk; (ii) is less susceptible to the problem of market manipulation and may better allocate control premia than a partial float proposal by Mark Roe; and (iii) may produce fewer transaction costs than a full auction approach proposed by Douglas Baird. Moreover, as a response to the Supreme Court's recent admonishment in LaSalle Street that bankruptcy courts employ market tests more often when creditors dissent to a reorganization plan, the dilution mechanism provides a uniquely workable solution within the current statutory framework.
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.
In many business bankruptcies in which the firm is to be preserved as a going concern, one of the most difficult and important problems is that of valuing the assets that serve as collateral for secured creditors. Valuing a secured creditor's collateral is needed to determine the amount of the creditor's secured claim, which in turn affects the payout that must be made to the creditor. Such valuation has generally been believed to require either litigation or bargaining among the parties, which in turn give rise to uncertainty, delay, and deviations from parties' entitlements. This paper puts forward a new approach to valuing collateral that involves neither bargaining nor litigation. Under this approach, a market-based mechanism would determine the value of collateral in such a way that no participant in the bankruptcy would have a basis for complaining that secured creditors are either over- or under-compensated. Our approach would considerably improve the performance of business bankruptcy and could constitute an important element of any proposal for bankruptcy reform.
This paper develops a normative theory of bankruptcy law. The core of the theory is that bankruptcy law exists in order to maximize the recoveries of and benefits for those who have legal entitlements ("rightsholders") in respect of a financially distressed debtor. It recognizes that bankruptcy law in the United States is a branch of civil procedure, in general, and the jurisdiction of federal courts, in particular; hence, I call the theory "procedure theory." Procedure theory holds that it generally is wrong in bankruptcy to redistribute a debtor's wealth away from its rightsholders to benefit third-party interests, such as at-will employees and the general community. It also is wrong to rearrange priorities in bankruptcy as among a debtor's rightsholders in a way that is inconsistent with nonbankruptcy entitlements. Procedure theory explains what bankruptcy law is supposed to achieve. It does not address how bankruptcy law is to achieve its proper ends (e.g., status quo, adoption of market-based or contract-based structures to maximize wealth, etc.).Procedure theory draws support from three perspectives. First, it argues that it simply is incoherent to provide different substantive rules in bankruptcy when those substantive rules are equally applicable outside bankruptcy (e.g., an employer's right to close a plant or a nonbankruptcy priority rule). This incoherence offends notions of justice as well as Dworkin's value of "liberty." Second, procedure theory is supported by the Erie doctrine in federal courts and considerations of federalism. Basic substantive law rules should not vary depending on the forum in which a proceeding is conducted (e.g., state court or bankruptcy court). Third, a public choice analysis reveals the enormous power of the bankruptcy bar over bankruptcy law, as formulated by Congress or as implemented in the courts. The Judiciary Committees in Congress and the bankruptcy courts, populated by bankruptcy mavens,
Sports Direct considers takeover bid for Debenhams
- J Eley
J. Eley, "Sports Direct considers takeover bid for Debenhams" (26 March 2019),
Financial Times available at: https://www.ft.com/content/aac9c1c2-4f2c-11e9-b401-8d9ef1626294 [Accessed 5 February 2020].
JD Sports calls for 'fairness and flexibility' in lease arrangements
- J Eley
J. Eley, "JD Sports calls for 'fairness and flexibility' in lease arrangements" (10
September 2019), Financial Times available at: https://www.ft.com/
content/8c83c578-d38e-11e9-8367-807ebd53ab77 [Accessed 5 February 2020].
- Cork
Cork, Report of the Insolvency Law Review Committee Insolvency Law &
Practice (1982), paras 191-198.
Other authors have developed frameworks to explain and develop the understanding of this area of law. The most prominent examples in England and Wales are
Other authors have developed frameworks to explain and develop the
understanding of this area of law. The most prominent examples in England and
Wales are: R.J. Mokal, "The Authentic Consent Model" (2001) Legal. Stud. 400;
- B Barry
B. Barry, Why Social Justice Matters (Cambridge: Polity, 2005).
A World Without Bankruptcy
An Essay on Bankruptcy Sharing and the Creditors' Bargain" (1989) 75 Vand. L.
Rev. 155; Baird, "A World Without Bankruptcy" (1987) 50(2) Law & Contemp.
Probs. 173; B.E. Adler, "The Law of Last Resort" (2002) 55(6) Vand. L. Rev.
1661.
Contractarianism and the Normative Foundations of Bankruptcy Law
- Korobkin
Korobkin, "Contractarianism and the Normative Foundations of Bankruptcy
Law" (1992) 71 Tex. L. Rev. 541, 570-571.
The Authentic Consent Model
- Mokal
Mokal, "The Authentic Consent Model" (2001) Legal. Stud. 400, 435.
Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue
- B Xie
B. Xie, Comparative Insolvency Law: The Pre-pack Approach in Corporate
Rescue (Cheltenham: Edward Elgar Publishing, 2016);
Corporate Reorganizations and the Treatment of Diverse Ownership Interests
- Jackson Baird
Baird and Jackson, "Corporate Reorganizations and the Treatment of Diverse
Ownership Interests" (1984) U. Chi. L. Rev. 97, 103.
) Vand. L. Rev. 741. 72 Among others: K. Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System
- L M Lopucki
L.M. LoPucki, "A Team Production Theory of Bankruptcy
Reorganization" (2004) 57(3) Vand. L. Rev. 741.
72
Among others: K. Gross, Failure and Forgiveness: Rebalancing the
Bankruptcy System (New Haven, CT: Yale University Press, 1997);
717 in the US; Finch and Milman
- . L Col
- Rev
Col. L. Rev. 717 in the US; Finch and Milman, Corporate Insolvency Law:
Perspectives and Principles (2017) in the UK.
Failure and Forgiveness: Rebalancing the Bankruptcy System
- Gross
Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System (1997).
Principles of EU Insolvency Law
- G Moss
G. Moss, "Principles of EU Insolvency Law" (2015) 28 Insolv. Int. 40.
- Radin
Radin, "Fair, Feasible and in the Public Interest" (1941) 29(4) Calif. L. Rev. 451,
454-455.
Company Law and Legal Theory
- M Stokes
M. Stokes, "Company Law and Legal Theory" in W. Twining (ed.), Legal Theory
and Common Law (Oxford: Blackwell, 1986);
Not all commentators agree on the distinction between old and new economy. For instance, then Federal Reserve Chairman Alan Greenspan, in what came to be known in the global financial markets as "the Berkeley Speech
- B Lev
- Intangibles
B. Lev, Intangibles (23 July 2018), p.2 available at: https://ssrn.com/
abstract=3218586 [Accessed 5 February 2020]. Not all commentators agree on
the distinction between old and new economy. For instance, then Federal Reserve
Chairman Alan Greenspan, in what came to be known in the global financial
markets as "the Berkeley Speech", said that the economy could be labelled as
"new" only if there had "been a profound and fundamental alteration in the way
[the] economy works that creates discontinuity from the past and promises a
significantly higher path of growth": A Greenspan, "Is There a New Economy?"
(1998) 41(1) Calif. Manag. Rev. 74, 75. Greenspan refused to give a final answer
to that question but observed that human psychology and the way in which it
affects the market had not significantly changed from the past.
Putting a Price on Intellectual Property
- S Mason
S. Mason, "Putting a Price on Intellectual Property" [Autumn 2011] Recovery 24.
A Theory of Absolute Priority
- E Warren
E. Warren, "A Theory of Absolute Priority" (1991) Ann. Surv. Am. L. 9, 13.
Valuation Issues in the UK Distressed Environment
- Wilton
Wilton, "Valuation Issues in the UK Distressed Environment" (2010) 3(6) C.R. &
I. 227, 227.
The Price is Right-or is It? US and UK Valuation Methodologies in Bankruptcy
- P M Gilhuly
P.M. Gilhuly et al, "The Price is Right-or is It? US and UK Valuation
Methodologies in Bankruptcy" (2013) 6(2) C.R. & I. 59.
Enterprise Valuation and the Puzzling Persistence of Relative Priority Outcomes in Corporate Reorganizations
- D G Baird
- D S Bernstein
D.G. Baird and D.S. Bernstein, "Enterprise Valuation and the Puzzling
Persistence of Relative Priority Outcomes in Corporate Reorganizations" (2004)
available at: https://escholarship.org/uc/item/0z7906ct [Accessed 5 February
2020];
Valuation of the Professional Sports Franchise in Bankruptcy: It's a Whole Different Ballgame
- P M Lopez
Bankr. Inst. L. Rev. 157; P.M. Lopez et al, "Valuation of the Professional Sports
Franchise in Bankruptcy: It's a Whole Different Ballgame" (2014) 18
The Price is Right-or is It?
- Gilhuly
Gilhuly, "The Price is Right-or is It?" (2013) 6(2) C.R. & I. 59, 59.
The Real Story of a Business
- P Hemming
P. Hemming, "The Real Story of a Business" [Winter 2014] Recovery 23.
The Courts Speak on Valuation in Restructurings: IMO Car Wash, SAS and Wind Hellas Lessons" (2010) 7(2) Int. C.R. 129; Wilton
- Re Bluebrook Ltd
Re Bluebrook Ltd [2009] EWHC 2114 (Ch); [2010] B.C.C. 209. See also E.W.
Purcell and A. Boyce, "The Courts Speak on Valuation in Restructurings: IMO
Car Wash, SAS and Wind Hellas Lessons" (2010) 7(2) Int. C.R. 129; Wilton,
"Valuation Issues in the UK Distressed Environment" (2010) 3(6) C.R. & I. 227.