Enhancing Rescue in Chapter 11: Lessons from Reform Efforts in the United Kingdom

• Date: 01 June 2020
• DOI: http://doi.org/10.1111/ablj.12158
• Published date: 01 June 2020

American Business Law Journal

Volume 57, Issue 2, 227–279, Summer 2020

Enhancing Rescue in Chapter 11:

Lessons from Reform Efforts in the

United Kingdom

Robert J. Landry III*

School of Business and Industry, Jacksonville State University, Jacksonville, AL

This is a dynamic time for insolvency law. Many jurisdictions have

made or are considering reforms to their insolvency regimes. The

United Kingdom has proposed a new standalone restructuring mech-

anism that incorporates many attributes of Chapter 11, including a

cross-class cram down and the absolute priority rule. A distinctive fea-

ture of the UK proposal is the infusion of judicial discretion permit-

ting courts to deviate from the absolute priority rule. This discretion

is not permitted in the United States. This judicial discretion

addresses a key problem with the application of the absolute priority

rule in the United States—it may serve as an impediment to reorgani-

zation. This impediment is exacerbated by the recent U.S. Supreme

Court decision, Czyzewski v. Jevic Holding Corp., which impacts the

effective use of Chapter 11 rescue tools. This article explores the

absolute priority rule, the problems associated with it, and the effect

of Jevic in the United States. Drawing on the UK reform proposal, I

argue that the United States should implement reforms that infuse

judicial discretion into the application of the absolute priority rule.

Doing so will facilitate the underlying policy goal of rescuing the com-

pany in Chapter 11 and also promote a broader policy goal of rescu-

ing the business.

*Professor of Finance, School of Business and Industry, Jacksonville State University, Jack-

sonville, AL. Email: rlandry@jsu.edu.

©2020 The Author

American Business Law Journal ©2020 Academy of Legal Studies in Business

227

INTRODUCTION

We are in a dynamic time for insolvency law and proposed reforms

thereto.

1

Many jurisdictions, such as Spain and the Netherlands, as well

as the European Union,

2

are considering reforms to their restructuring

regimes that are influenced at least in part by the United Kingdom’s

scheme of arrangement and Chapter 11

3

in the United States.

4

Other

jurisdictions, such as Singapore, have already implemented significant

reforms to their restructuring regimes.

5

The United Kingdom

6

and the

United States

7

have both engaged in a review of their restructuring

regimes.

8

The U.S. review has not gained much legislative traction,

9

but

the UK review has resulted in a reform proposal that will add a new

1

See Sarah Paterson, Market Organisations and Institutions in America and England: Valuation in

Corporate Bankruptcy,93C

HI.-KENT L. REV. 801, 802 (2018) (noting reform activity in the

United Kingdom, European Union, and the United States) [hereinafter Paterson,

Market]. See also Bob Wessels & Stephan Madaus, Business Rescue in Insolvency Law in Europe:

Introducing the ELI Business Rescue Report,27I

NT’LINSOLVENCY REV. 255, 255 (2018) (“Since

the global financial crisis, insolvency and restricting law have been at the forefront of law

reform initiatives in Europe and elsewhere.”).

2

See Council of the European Union, Proposal for a Directive of the European Parliament and of

the Council on Preventive Restructuring Frameworks, Second Chance and Measures Designed to

Increase the Efficiency of Restructuring, Insolvency and Discharge Procedures and Amending Direc-

tive 2012/30/EU- General Approach, 12536/18 (Oct. 1, 2018), http://data.consilium.europa.eu/

doc/document/ST-12536-2018-INIT/en/pdf.

3

Chapter 11 as used throughout this article refers to 11 U.S.C. §§ 1101–1174 (2018).

4

Jennifer Payne, The Continuing Importance of the Scheme of Arrangement as a Debt Restructuring

Tool,15E

UR.CO.&FIN.L.REV. 445, 445–46 (2018) [hereinafter Payne, Continuing].

5

See generally Meng Seng Wee, The Singapore Story of Injecting US Chapter 11 into the Common-

wealth Scheme,15E

UR.CO.&FIN.L.REV. 553 (2018) (providing overview of reforms in

Singapore).

6

See infra notes 246–76 and accompanying text.

7

The U.S. review by the American Bankruptcy Institute (ABI) was completed in 2014 with

the issuance of a very detailed report. See AM.BANKR.INST.COMM’NTOSTUDY THE REFORM OF

CHAPTER 11, 2012–2014 FINAL REPORT AND RECOMMENDATIONS (2014) [hereinafter ABI

REPORT].

8

Payne, Continuing,supra note 4, at 446.

9

See,e.g., Peter C. Blain, Chapter 11 of the Bankruptcy Code: As It Was, As It Is, and As It May

Be,A

SPATORE, 2016 WL 676460, at *16 (Jan. 2016) (noting prospect of the ABI proposals

becoming law is unclear).

228 Vol. 57 / American Business Law Journal

standalone restructuring mechanism to the restructuring options cur-

rently available.

10

The standalone restructuring mechanism proposed in the United

Kingdom includes a cross-class cram down

11

as well as a statutory mora-

torium, both of which are not available in a single restructuring option

under current English law.

12

These features are generally viewed as posi-

tive attributes of a restructuring regime.

13

The Chapter 11 statutory

framework includes both features

14

and has influenced the UK proposed

reform.

15

However, the United Kingdom has not blindly replicated

Chapter 11. Notably, while the proposed cross-class cram down includes

the absolute priority rule (APR), it also adds flexibility, not available in

Chapter 11, for courts in the United Kingdom to deviate from the APR

in very limited circumstances.

16

Such flexibility addresses a key criticism

of a rigid application of the APR in Chapter 11—it can act as an impedi-

ment to reorganization of a company,

17

the traditional policy objective of

10

Jennifer Payne, Debt Restructuring in the UK,15EUR.CO.FIN.L.REV. 449, 468–71 (2018)

[hereinafter Payne, Restructuring].

11

“Cram down” is a phrase used in bankruptcy parlance referring to a court’s authority to

“cram” an “opposed plan down upon a creditor in a nonconsenting class.” In re Lett,

632 F.3d 1216, 1228 (11th Cir. 2011).

12

See Payne, Restructuring,supra note 10, at 459. Professor Payne notes that cross-class cram

down and a statutory moratorium are available together in the United Kingdom only when

two separate restructuring mechanisms, the scheme of arrangement, and administration

are used in conjunction with each other. Id.

13

See, e.g., Sarah Paterson, Reflections on English Law Schemes of Arrangement in Distress and

Proposals for Reform,15E

UR.CO.&FIN.L.REV. 472, 473, 478–88 (2018) (analyzing why a

moratorium and cross-class cram down may be beneficial to the UK restructuring regime)

[hereinafter Paterson, Reflections].

14

See 11 U.S.C. § 362(a) (2018) (automatic stay) and id. § 1129(b) (cram down).

15

Howard Morris, Not Chapter 11 but Chapter 11-ish,RECOVERY 32, 33 (Spring 2017)

(acknowledging the influence of Chapter 11 on the UK proposal). See also Tim Verdoes &

Anthon Verweij, The (Implicit) Dogmas of Business Rescue Culture,27I

NT’LINSOLVENCY REV.

398, 400 (2018) (noting the influence of Chapter 11 on recent reform proposals throughout

Europe).

16

See infra notes 270–80 and accompanying text.

17

See infra notes 129–33, 276–78 and accompanying text.

2020 / Enhancing Rescue in Chapter 11 229