Acceptance Remarks
James H.M. Sprayregen
Thank you for this distinguished award. It's an honor and a privilege to be included among the previous recipients of this award, who have contributed so much to contemporary bankruptcy law and practice. Like many of them, I've spent my career in the field of corporate restructuring. These restructurings are often carried out through chapter 11 filings or against the backdrop of a potential chapter 11 filing.
It's easy to take chapter 11 of the U.S. Bankruptcy Code for granted, but it was a novel piece of legislation when adopted and remains unique in some respects today. I want to talk a little this evening about what I'll call the "rescue model" of insolvency legislation. Chapter 11 embodies, and really pioneered, the rescue model. And now, outside the U.S., there is a growing trend toward the rescue model—and away from punitive, morality-based insolvency regimes, what I'll call the "punitive model."
The international trend toward the rescue model comes in various forms. Some jurisdictions have new legislation that deliberately adopts the rescue model, whereas other jurisdictions have developed ad hoc or extra-statutory processes that bend old, punitive-type insolvency statutes toward a more rescue-based regime.
The punitive model is as old as insolvency law itself.2 Insolvency regimes have historically been creditor-centric—focused specifically on liquidating assets for the benefit of creditors. Regimes in this model focus on equitably
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dividing debtor property among creditors and preventing debtors from engaging in detrimental conduct that would harm creditor recoveries.3 These factors ultimately led to insolvency processes that punished a debtor for its inability to pay debts—a colorful example being the "debtor's prisons" of old, which remained in use in the United States and Europe until the mid-1800s.4 Some relatively extreme elements of the punitive model are still in force today, for instance in Germany, where directors can risk jail time for holding off filing insolvency proceedings too long.5
Over time, the United States moved away from the punitive model toward a rescue model that promotes going-concern value and rehabilitation. The system encourages and rewards appropriate risk-taking and focuses on value-creating potential. As other jurisdictions shift to the rescue model, they have drawn on a number of chapter 11 hallmarks:
• The "debtor in possession" concept allows existing management of a company to stay in control and continue to operate the business, acting as the bankruptcy trustee.6 This is a powerful incentive to reorganize, although it's not always an entirely positive construct. In some instances, it leaves the group of people that caused the problem in charge of finding the solution. The extra-statutory correction that has developed in the U.S. is the chief restructuring officer, or restructuring advisors, to provide "brakes" and "governors" for the comfort of creditors.
• The automatic stay prevents creditor enforcement actions and provides the company a breathing spell during which to seek to rehabilitate.7 The worldwide effect of this provision makes it even more powerful, although it depends on creditors having some nexus to the U.S. Most major creditors do have that nexus, given the centrality of the U.S. economy and legal system.
• The concept of "cram down" allows approval of a plan of reorganization against the will of an entire class or multiple entire classes of creditors.8
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This is a powerful tool to encourage creditors to cooperate with a debtor's efforts to reorganize rather than liquidate.
• And chapter 11 provides multiple avenues to pursue value-maximizing strategies, such as a reorganization plan or a going-concern sale.9 It is a highly flexible regime, which makes reorganization all the more attractive.
Other jurisdictions have started to implement variations of these chapter 11 hallmarks as they move toward a rescue model. In many of these jurisdictions, old regimes provided little or no alternative to liquidation. It's useful to analyze some examples to understand the core chapter 11 principles that have resonated in other jurisdictions.
In Australia, insolvency laws recently underwent wide-ranging reforms to improve efficiencies in formal insolvency processes and foster a rescue culture.10 The old system penalized directors who continued to trade when an entity became insolvent.11 A new safe harbor for directors and officers marks a significant softening of this policy. The old law resulted in a chilling effect on actions that would otherwise preserve a debtor's value. Concerns around the penalties for insolvent trading influenced directors to act early to appoint an insolvency practitioner instead of exploring restructuring options and taking reasonable risks to maintain going-concern value.12 The new safe harbor protects directors and officers when their actions are "reasonably likely to lead to a better outcome."13
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On Thursday,14 the European Parliament is expected to formally adopt the "Harmonization Directive,"15 which is designed to, among other things, "enhance the rescue culture in the EU."16 The directive echoes chapter 11 on a number of fronts—most notably, the ability to create a restructuring plan outside formal insolvency proceedings. This includes the debtor-in-possession model that keeps the company in control of its assets.17 It also requires Member States to ensure debtors can benefit from a moratorium of up to twelve months.18 And it includes a cross-class cram-down feature that incorporates the best interest of creditors test and absolute priority rule.19 Although the timing for implementation remains uncertain, the U.K. recently announced proposed insolvency reforms that generally track the EU directive, including a new flexible restructuring plan construct and, for the first time, a standalone moratorium against creditor enforcement actions.20
These reforms should set the foundation for the rescue model across Europe. Key jurisdictions, such as the Netherlands, are expected to incorporate the directive into their existing insolvency frameworks by the end of 2019, though all jurisdictions have up to two years to do so. Upon implementation, significant differences will inevitably remain between...
