By Riz Mokal
ABSTRACT
What is rationality and what role does it play in the bargaining in which parties engage as part of a restructuring? Is the outcome of rational bargaining fair? And, incidentally, what does ‘fair’ mean? How does reasonableness differ from rationality, and what is its role in restructuring negotiations? What conceptions of rationality and of reasonableness are enshrined in the restructuring jurisprudence? What does ‘the market’ know? What about the quasi-omniscient market that features in certain forms of the ‘Efficient Markets Hypothesis’? Is there any relevant sense in which ‘the market’ is reasonable, and if so, how do GameStop and Melvin Capital fit in? This paper addresses all these questions in the context of the UK court’s cramdown power pursuant to Part 26A of the Companies Act 2006 and in assessing two important papers by Professor Sarah Paterson. The concluding section provides a detailed summary of the arguments.
- INTRODUCTION
The UK courts’ ‘cramdown power’ arises as part of the restructuring plan (‘RP’) proceeding introduced in 2020.[1] The central case of an RP proceeding is one in which each stakeholder class invited to vote on a proposed plan votes in favour by the stipulated statutory supermajority. The court’s cramdown power is the power to sanction a plan even if the plan fails to attract the required level of support in one or more voting classes, so long as two conditions are met. The first is that the court is satisfied that no member of the (or any) dissenting class would be worse off under the plan than they would be in the event of the ‘relevant alternative’, which is whatever the court considers most likely to occur in relation to the debtor company if the plan were not sanctioned.[2] The second condition is that the plan has received the requisite support in at least one claimant class whose members would, in the relevant alternative, receive a payment or have a genuine economic interest in the company.[3] If both these conditions are met, the court has a discretion but no duty to exercise the cramdown power, and there is no legislative guidance as to the exercise of the court’s discretion.
In two important papers, written in 2022 (‘SP1’[4]) and 2024 (‘SP2’[5]), Professor Paterson has developed thoughtful and thought-provoking approaches to the exercise of the cramdown power. SP1 has become an integral part of the professional discourse about the UK cramdown and has been cited by several courts, including the Court of Appeal in AGPS.[6] SP2 will no doubt make a comparable contribution. It is therefore timely and important to assess the approaches advocated in these papers to understanding and using the cramdown power. While both papers engage with some of my published work, my purpose here is not to mount a response, but rather to assess each paper’s positive arguments on their own terms. I first set the scene, however, with a basic, thumbnail introduction to rationality and reasonableness, both of which crop up a lot in SP1 and SP2.
- RATIONALITY AND REASONABLENESS
Considered abstractly, the concepts of rationality and reasonableness overlap significantly. They both refer to responsiveness to the right reasons in the right way. Accordingly, they are occasionally treated as coterminous. It is, however, more common to distinguish them.
Starting with rationality, a standard way of understanding this concept, for example in economics and philosophy, is to take a person’s ends as given and to take rationality as applying to that person’s selection of the means to those ends. In an influential early discussion on the relation between rationality and reasonableness, the philosopher William Sibley explained that ‘[k]nowing that a man is rational, we do not know what ends he will aim at in his conduct; we know only that, whatever they are, he will use intelligence in pursuing them.’[7] Another standard move is to stipulate that a person’s ends are the pursuit of that person’s own aims and interests. To be rational in this sense is to pursue one’s aims and interests to the maximal extent by selecting and implementing the most effective means practicable. I will refer to this as the means-to-ends conception of rationality, and will use the term ‘maximisation’ and its variants to indicate pursuit and/or advancement of one’s aims and interests to the maximal extent practicable in the circumstances. In the context of a negotiation or bargaining, the relevant circumstances include matters such as one’s bargaining power relative to that of one’s bargaining counterparts, the need to strike an intelligent balance between immediate advantage on the one hand and forgoing such advantage for greater gain in the more distant future, and a factually appropriate choice between giving up some of one’s demands so as to facilitate a bargain on the one hand and walking away from the bargaining table on the other. This is how I have used the concept for over two decades in my analysis of English insolvency law,[8] including in explaining the nature of efficiency.[9] As I explain below, this means-to-ends understanding of rationality is, more or less, also enshrined in English restructuring law.
In this frame, while rationality takes ends as given and focuses on the means, reasonableness applies to the selection of ends.[10] In particular, to be reasonable is to select one’s ends with due regard to one’s relations with others. Sibley says that a person is reasonable if they are, both, ‘willing to govern [their] conduct by a principle of equity, from which [they and others] can reason in common’ and if they are willing to ‘admit data concerning the consequences of [their] proposed actions upon [others’] welfare as per se relevant to [their] decision’.[11] Similarly, in my academic work on English insolvency law, I have argued that to be reasonable is to be willing and able to pursue one’s aims and interests subject to fair terms of cooperation and, indeed, to select only those aims and interests which can be so pursued.[12] ‘Cooperation is based on reciprocity, and on not making demands against others which one would be unwilling (though able) to meet oneself.’[13] It will be obvious that this conception of reasonableness requires specification of a standard, a ‘principle of equity’ in Sibley’s words, by which to assess whether cooperation is on fair terms. As I explain below, this conception of reasonableness is different from that at play in English restructuring law to date.
- ‘TOO GOOD A DEAL (TOO MUCH UNFAIR VALUE)’
SP1’s core argument has three elements. First, in the exercise of its cramdown discretion, the court should ensure that ‘[a]ll creditors or members gain something by the compromise or arrangement’.[14] Second, the court should decide whether to use its cramdown power by satisfying itself that ‘no other class of creditor or shareholder is getting “too good a deal (too much unfair value)” under the plan’.[15] And third, ‘[t]here should have been an attempt to agree the restructuring plan with the dissenting class.’[16]
For the reasons explained below, I think each of these elements is unhelpful and at least partly mistaken.
III.A ‘Compromise Or Arrangement’
Starting with the first element, SP1 is clear that it takes the requirement that ‘[a]ll creditors or members should gain something by the compromise or arrangement’ as going to the court’s cramdown discretion. The requirement is introduced immediately following the statement that ‘it is possible to map out guidelines for the exercise of the [cramdown] discretion’ and that ‘[t]his is where we turn next’.[17] And SP1 concludes its discussion of the point by stating that ‘it is suggested that the first ground on which a judge may refuse to exercise their discretion to sanction a Part 26A restructuring plan is that a class gains no benefit under it.’[18]
This is a mistake. The requirement that the plan proposes some element of give and take, and that mere confiscation will not do, is not a matter of discretion but instead goes to the court’s jurisdiction. This was established no later than the Court of Appeal’s decision in In re Alabama, New Orleans, Texas and Pacific Junction Railway Co, in which, in the context of a scheme of arrangement, Bowen LJ said in no uncertain terms:[19]
‘I do not think myself that the point of jurisdiction is worth discussing at much length, because everybody will agree that a compromise or agreement [sic] which has to be sanctioned by the Court must be reasonable, and that no arrangement or compromise can be said to be reasonable in which you can get nothing and give up everything’.
The was never any significant reason to think that jurisdiction to sanction a restructuring plan, defined by the same statutory term ‘compromise or arrangement’, was any different.[20] This has now been confirmed (albeit provisionally and obiter) by Snowden LJ in AGPS.[21]
III.B ‘Too Much’ Compared To What? ‘Too Unfair’ How?
The second element of SP1’s argument is that the court should decide whether to use its cramdown power by satisfying itself that ‘no other class of creditor or shareholder is getting “too good a deal (too much unfair value)” under the plan’.[22] It is said that this exercise would be ‘fact-specific’ and ‘complex’, and that account should be taken ‘of any aspects of either party’s individual position which places it at either an advantage or disadvantage’ and of ‘the totality of the circumstances’.[23] ‘Overall’, it is said, ‘it is not possible to set down an inclusive test as to whether a class gets too good a deal (too much unfair value) when compared with another class’, though there are ‘some specific circumstances in which we can readily contemplate the argument that a class gets too good a deal’.[24] These specific circumstances are said to include, for example, the provision of new money, the position of creditors not made parties to the formal restructuring, and the treatment of shareholders.
I agree that no solitary ‘inclusive test’ will let the court decide whether or not to exercise its cramdown power, that the court should approach each case on its own facts, that it should bear in mind the complexity of the decisions it must make, and that it should take due account of the parties’ position and of the totality of the circumstances. Beyond this, I am less persuaded.
The phrase at the heart of SP1’s analysis, ‘too good a deal (too much unfair value)’, is taken from the judgment of Mann J in Bluebrook. Once introduced, this phrase is deployed verbatim 14 times over some 11 pages, with another three uses of ‘too good a deal’ and another four of ‘too much unfair value’. This suggests that the phrase and perhaps its constituent parts are intended to serve as guides to analysis. Regrettably, they serve as substitutes instead.
Taken seriously, as its repetition in SP1 suggests it is intended to be, the phrase raises three issues. I will address these in ascending order of importance since the last requires the most extensive treatment.
First and simply for context, Mann J does not, in my reading of the Bluebrook judgment, intend that phrase to guide analysis. Instead, he seeks to make a fact-specific and quite limited residual point about his assessment of the ‘Monte Carlo’ simulation put in evidence by the objecting creditors. This understanding is based on the context in the judgment in which those eight words appear, not least the fact that the Judge prefaces the phrase with: “The most that it [the Monte Carlo simulation] does in the present case is to give pause for thought on this point”.[25] That hardly signals the analytical centrality of what follows.
Second and more importantly, the phrase by its nature cannot, as a general matter, guide analysis. It would be odd for a court to state that it would order an unjust or inequitable outcome since there was not ‘too much’ injustice or inequity. It would be equally odd for a court to declare that it can sanction unfairness just as long there was not ‘too much’ of the stuff. And it may be awkward for counsel to argue for a plan on the basis that while it unfairly allocated value to a junior class, the court should nevertheless sanction it since only a little value was thus unfairly allocated. Such an argument might, and I think ought to, be met with the question why there should be any unfairness in the allocation at all. We at least aspire to live up to our principles. Why should the court not at least aspire to live up to the principle that there be no unfairness, simpliciter?
Third and most importantly on this point, in order to use the phrase ‘too good a deal (too much unfair value)’ as a tool of analysis, at least four questions must be answered. First, by what measure should fairness be assessed? Second, where should the line be drawn between unfairness that is not ‘too much’ and unfairness which is ‘too much’? Third, why should that line be drawn where it is? And fourth, how much unfairness is inherent in a proposed plan or in parts thereof? In short, does the plan cross that line from not ‘too unfair’ to ‘too unfair’? Only once all four questions were properly answered—and, as noted, only if a court thought itself in the business of sanctioning little bits of unfairness so long as it was not ‘too much’—could the court find this phrase of use. The problem is that SP1 does not address any of these four issues.
For example, SP1 asserts that certain landlords in the Virgin Active restructuring[26] appeared arguably to get too good a deal / too much unfair value compared to others.[27] SP1 outlines the returns to different classes of landlord and notes that those in Class C would do better under the plan than those in Classes D and E even though they would all be in the same position in the relevant alternative. On that basis, SP1 asserts that ‘it appears that it might have been possible for the secured creditors (vertically) and the Class D and E landlords (horizontally) to argue that Class C landlords were getting too much unfair value and that some of that value ought to be shared with them.’[28]
I think this a fallacy. SP1 does no more than notice a difference in outcome, but not all such differences result from unfairness, let alone from ‘too much’ of the stuff. That X beat Y in a 100 metres sprint is certainly a difference in outcome but that hardly establishes the existence of unfairness. Nor does SP1’s unexplained reference to the relevant alternative improve matters: the relative alternative may set baseline returns for the landlords in C, D, and E, but then sprinters X and Y also started from the same baseline.
What we are owed is a fleshing out of the notion of unfairness at play, an explanation of why the returns to the various classes in the relevant alternative would matter to fairness, and an account of why and when differences in outcome—that is, differences at the finishing line—should be taken as constituting unfairness. Further and if the ‘too much’ part of the apparently critical ‘too much unfair value’ formula is not mere surplusage reproduced over a dozen time, we need an explanation of how much unfairness should have been tolerable on the facts in Virgin Active and of how much inhered in that plan. SP1 says nothing on any of these points.
There is also a suggestion in SP1 that Class C landlords may have found it easier to relet their premises than landlords in Classes D and E,[29] but again, there is no explanation of why, and to what extent, this difference mattered to un / fairness.
Similarly, in its discussion of whether a plan may properly permit the debtor’s shareholders to retain equity, SP1 states that it would be difficult for the court to tell whether the favoured shareholder group will in fact contribute new value or whether the plan proposes to benefit them merely because it was designed by a coalition which included them. For that reason, ‘courts must be particularly alert to the danger of existing shareholders getting too good a deal (too much unfair value)’.[30] There are then observations on US case law and on the Virgin Active plan, followed by the conclusion that the ‘vexed question of whether the shareholders have made a sufficient contribution to justify retention of equity’ must be answered by the court on the basis of an ‘individualised review of specific cases’.[31]
I agree that the question of new value is vexed, that it must be considered on the facts, that it must relate in some appropriate way to how much new value is contributed, and that the courts should be alert against abuse. What is not clear to me, however, is how SP1 assists the analysis. Again, nothing is said about the criteria by which the court should go about assessing whether the favoured shareholders are to get ‘too good a deal (too much unfair value)’. And, again, why should the court not at least try to preclude unfairness simpliciter instead of setting its sights for the point at which unfairness becomes ‘too much’
III.C Rationality And The Pursuit Of Self-Interest
Turning to its third element, SP1 contends that the court should require evidence from the debtor of ‘rational bargaining’ with any dissenting classes or at least of the attempt to do so:[32]
‘in each case the [debtor] company should be able to show that it attempted to reach a deal cooperatively. Ultimately, the court should be satisfied that it is exercising its cross-class cram down power to impose a solution non-cooperatively which should have been achievable if rational bargaining had been possible. To put the point another way, the plan is one which a member of the dissenting class might reasonably approve. This is because the dissenting class is no worse off than it would be in the event of the relevant alternative and stands to gain something from the plan and because no other class gets too good a deal (too much unfair value) in the proposal.’
This proposal raises questions. In the extract above, rationality and reasonableness are treated as linked, in the sense that a solution achievable through rational bargaining is one that even dissentients may reasonably approve. Otherwise, neither concept is defined.
Perhaps SP1 takes rationality in the sense that it is deployed in English restructuring law. In the scheme of arrangement jurisprudence, for example, the premise of the rationality test is that ‘[t]he court does not impose its own view of the commercial merits of the scheme’, and the test is ‘whether the compromise or arrangement embodied in the scheme is one that “an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve”’.[33] The reader will notice that this test enshrines the means-to-ends conception of rationality, in which (i) the assumed end of the hypothetical class member is the pursuit of self-interest, though (ii) that self-interest is circumscribed by reference to membership of the relevant class, and (iii) the hypothetical person is imbued with intelligence in assessing (primarily) the question whether the scheme advances that relevant aspect of their self-interest and with honesty so as to ensure (primarily) that the person pursues only the relevant aspect of their self-interest.
With this understanding of rationality in mind, note that it is one thing to ask whether a single stakeholder class may rationally accept a plan. That is a simple application of means-to-ends rationality. The court envisages the hypothetical rational class member comparing their payoff under the plan to their payoff in the relevant alternative, and considers whether or not the plan improves class members’ returns compared to those in the relevant alternative. For parallel reasons, it is also unproblematic to ask whether something is rational for the debtor’s stakeholders as a group. What is rational for them as a group is to maximise the total value of the debtor’s estate, since that is what maximises their payoffs as a group.
Recall, however, that the core concern of the cramdown power is not the maximisation of the group self-interest of any one or more stakeholder classes. Instead, it is the distribution amongst classes of the ‘restructuring surplus’, which is ‘the value sought to be preserved or generated by the restructuring plan, over and above the relevant alternative’.[34] As Snowden LJ confirmed in AGPS, the exercise of the cramdown power ‘necessarily requires the court to inquire how the [restructuring surplus] is to be allocated between [assenting and dissenting] creditor groups.’[35] Questions of distribution are radically different from questions of maximisation, in ways which raise serious problems for this part of the argument in SP1.
III.D Bargaining Rationally
Stakeholders such as creditors and shareholders are not fiduciaries for the stakeholders as a group, since they are not under any duty of loyalty, that is, not under any duty to subordinate their own interests to the interests of the group.
With that basic proposition in mind, note that what is rational for each stakeholder is to seek to maximise their own payoff. By parity of reasoning, it is rational for each stakeholder class to seek to maximise its own payoff. Accordingly, it is no longer necessarily rational to seek to maximise the value of the estate. Instead, what is rational is for each stakeholder and, similarly, each stakeholder class, to ‘prefer a larger slice of a smaller pie to a smaller slice of a larger pie’.[36]
From the notional perspective of the stakeholders as a group, such divergence of group interest from the interest of some or other of the group’s members is a plain vanilla instantiation of a collective action problem. A classic example is of a spectator at a sports event for whom it may be rational to rise from their seat in order to get a better view. It does not follow that it is rational for all the spectators to rise from their seats, since that may leave each of them with no better a view. To insist that what is good for some individual members of a group must by that fact alone be good for the group as a whole is to succumb to the fallacy of composition.[37]
Therefore, it is not, contra SP1, the case that ‘[a]ll parties know that they will be better off if they agree to a restructuring rather than settle for the relevant alternative’.[38] In fact, a party or a class may perfectly rationally conclude that it is better off in the relevant alternative, even if that outcome is worse for all the stakeholders as a group. Using the terms common in the theory of rational bargaining, each stakeholder and each stakeholder class has an outside option, which is their payoff in the event that the bargain is not concluded.[39] Rational bargaining entails each party comparing its outside option with its expected returns if a bargain were struck. If the outside option is more attractive for a party or a group to which the party belongs, it is rational for them to walk away from the bargaining table. That is why a party’s outside option is sometimes referred to as its threat value:[40] each party gains bargaining power, in part, from the credible threat it can make to walk away unless the bargain promises it more than its outside option.
Therefore, it would be wrong to characterise this scenario, as SP1 does, as one in which ‘rational bargaining is not possible’.[41] A more apt characterisation would be that it was rational not to continue to bargain.
Similarly, it is entirely rational for each party to seek to maximise its returns by pulling every (lawful) negotiating lever available to it, including using its holdout power to the maximal extent. That may be objectionable from the perspective of the stakeholders as a group, but as we have seen, that is not a basis for considering the holdout to be irrational. Accordingly and contra SP1, it is wrong to characterise as an example of ‘why rational bargaining is not possible’ the scenario in which ‘a dissenting class may block a restructuring plan because it believes that if it does so the consenting classes will have no choice but to buy it off’.[42] To the contrary, whether holding out is rational for the holdout class depends on whether members of that class are right that holding out would likely get them a better deal.[43] Nor are holdout class members acting improperly in law, since they are competitors with, not fiduciaries to, those with whom they are bargaining.
III.E Rational Bargaining Is (Good But) Irrelevant
None of the previous discussion should be read to say that the principles governing the cramdown should be indifferent to the preservation and maximisation of the restructuring surplus; quite the contrary. Further and to be clear, I am in favour of rationality. I also, as a matter of principle, prefer bargaining as a means of dispute resolution over most alternatives.
The point, instead, is that the notion of rational bargaining, properly understood, does not do any of the work required of it by SP1. A party and a class bargain, and end bargaining, rationally when they seek to maximise their own returns. The court’s cramdown power is not concerned with whether a party or class has extracted the maximal advantage it rationally can from the restructuring estate. Instead, it is about assessing the distribution of (the relevant part of) that estate. Given this mismatch between the maximisational focus of rationality and the distributional focus of the cramdown, the former will not be of much help with the latter and may even cause diminution of that which is to be distributed.
In these circumstances, I am also unconvinced of the value of requiring the debtor to provide evidence of ‘rational bargaining’. It is not clear to me how, if presented with evidence of bargaining, the court would assess its rationality. It is even less clear how it is supposed that the outcome of ‘rational bargaining’ would ensure that no one gets ‘too good a deal (too much unfair value)’. There is, it seems to me, quite a difference between rational bargaining, which is about the pursuit of one’s self-interest, and any recognisable notion of un/fairness, which is about the in/appropriateness of the treatment of one in relation to others. Perhaps the suggestion is that the clash of the self-interest of competing stakeholder constituencies locked in rational bargaining combat would necessarily result in a ‘not too unfair’ outcome for all. In that case, it would have been desirable to include some treatment of the hoary chestnuts of information and other resource asymmetries, unequal bargaining power, closer and more distant relationships with the debtor and others with influence in the plan formulation process, and so on. These are amongst the types of issues which have long been recognised, including in the literature on English insolvency law,[44] as standing between the rational pursuit of self-interest by different stakeholders on the one hand, and a fair outcome for them all on the other. SP1 does not say much, if anything at all, on any of these issues.
Further and finally on SP1, the production of evidence of ‘rational bargaining’ would become a target or metric for a successful restructuring plan application, and there is a rich literature documenting and analysing the ‘gaming’ of metrics.[45] UK legal practitioners are, if I may say so, amongst the best in the world, and I have no doubt of the creativity and ingenuity with which evidence of ‘rational bargaining’ would be paper-trailed for the eventual consumption of the judge. For the reasons I have explained, I am not confident the costs of such paper-trailing would be worth any benefit to the court in the exercise of its cramdown power.
- ‘COOPERATIVE BARGAINING’ AND ‘COMMERCIALLY REASONABLE’ BARGAINS
SP2 concedes that rationality will not do the trick required of it in SP1.[46] Further, SP2 abandons the position that the requirement that a dissenting creditor must receive something in the plan’ is relevant to the court’s cramdown discretion and proceeds instead on the basis that it is a ‘jurisdictional hurdle’.[47] Nor is there insistence that the court be presented with evidence of ‘rational’ (or any other sort of) bargaining.[48]
Having given up on ‘rational bargaining’, SP2 focuses on ‘cooperative bargaining’ and on the imposition of a ‘commercially reasonable’ deal:[49]
‘cross-class cramdown in the UK exists not only to motivate cooperative bargaining but also to enforce a commercially reasonable bargain that the parties could have agreed if cooperative bargaining had been possible.’
We noticed that SP1 treats rationality and reasonableness as linked. SP2’s abandonment of rationality and new focus on reasonableness suggests that a different understanding of the relation between these two concepts has come into play. The quest is to understand that understanding.
In principle, the shift to reasonableness is promising. The cramdown power is about the distribution of the restructuring surplus amongst competing stakeholder classes some of whom object to that distribution, while reasonableness is about acting with due regard to others, here, presumably, those dissentients. What is required, then, is that ‘principle of equity from which [all the relevant stakeholders] can reason in common’ (in Sibley’s terms) which would make the cooperation in ‘cooperative bargaining’ fair. If the court is to consider whether the plan it is being asked to cram down makes demands of the dissenting classes which the assenting classes themselves would not be willing to accept, how does the court do that? What yardstick should be employed?[50]
SP2 appears to suggest four different approaches. The first is by use of the modifier ‘commercially’, the second is the standard used in the scheme of arrangement jurisprudence, the third is the standard(s) chosen by the relevant stakeholders themselves, and the fourth is the standard(s) which, it is said, would be evolved by ‘the market’.
In what follows, I unpack the key steps in this argument and argue that, in the end, SP2 does not represent progress over SP1.
IV.A ‘Commercially Reasonable’
The phrase ‘commercially reasonable’ is to SP2 what ‘too much unfair value’ is to SP1. It appears 16 times over 29 pages, with some additional ostensibly similar phrases, such as ‘perfectly sensible commercial deal’. However, there does not seem to be any explanation of how the qualifier ‘commercially’ affects reasonableness.
The problem for SP2 is that it is commercially reasonable for each party to aspire to act rationally, in the sense explained above, which means they may seek to advance their self-interest to the maximal extent. In the commercial domain, cooperation is downstream from and subject to the maximisation of self-interest. At least ostensibly, it is commercially reasonable for a party X to cooperate with another, Y, when cooperation promotes X’s interest, and to do the opposite—undercut through pricing or other terms; lure away key suppliers, customers, and employees; highlight the weaknesses of Y’s product and practices; and so on—when that works to X’s advantage. For Y, it is commercially reasonable to do likewise, mutatis mutandis.
In the context of bargaining as part of a restructuring, classes X and Y of equally commercially reasonable stakeholders would each seek to maximise their returns from the estate. If negotiations break down with X dissenting from the plan, it would not take the court very far to ask itself what it would have been commercially reasonable for X to accept. This heuristic would always recommend that the court refuse to exercise its cramdown power. By stipulation, X consists of commercially reasonable parties, and the cramdown power is at issue precisely because they have made clear they do not want that plan. That is a perfectly commercially reasonable position. In short, considered in and of itself, commercial reasonableness in SP2 leaves us more or less where we were with rationality in SP1.
I have so far focused on the qualifier, however. What about that which is qualified?
IV.B Reasonableness In Schemes of Arrangement
SP2 starts its examination of reasonableness with the way in which this concept is used in the scheme of arrangement jurisprudence.[51] In fact, it states that the cramdown is a development of that notion of reasonableness:[52]
‘I view the cross-class cramdown power as an incremental development of the [scheme] jurisdiction to impose a commercially reasonable compromise or arrangement that a group of creditors or shareholders is unreasonably refusing.’
In English law, the concept of reasonableness is often expounded using a ‘reasonable person’ heuristic. The court envisages a hypothetical reasonable person imbued with certain relevant characteristics (such as honesty, prudence, care, or skill) who is taken to be duly attentive to certain objective features of the very situation in which a party’s conduct is to be assessed. This is how reasonableness is used in the law of negligence, for example, where the question is whether the defendant has not acted as would have a reasonable and prudent person in the defendant’s shoes, and where the notion of a reasonable and prudent person is worked out by reference to objective features of the defendant’s situation.[53] Perhaps most pertinent is the ‘Bolam test’ for the exercise of professional judgement, by which the defendant is not negligent if they have acted in accordance with a practice accepted as proper by a responsible body of those skilled in the relevant profession,[54] though, pursuant to the ‘Bolitho exception’, the court must be satisfied that the practice has a logical basis.[55]
In order meaningfully to deploy the concept of reasonableness, therefore, it is necessary to specify the standard of assessment, that is, to say what it is to be reasonable in the circumstances.
In the scheme jurisprudence, that standard of assessment is quite clear. It is reasonable for class member X to sign up to a scheme which has been accepted by at least 75% by value and a majority in number of those who are relevantly similar to X, who have the capacity to decide whether the scheme is rationally in their interests, and who have made the decision knowledgeably and in good faith without influence from any class-adverse interests. If an analogy with the Bolam test might assist,[56] a vote in favour of the scheme by the statutory majority of those in X’s class shows the court that the scheme is accepted as a proper way of advancing class interests by a responsible body of those skilled in making such assessment. If the scheme has attracted the requisite support, then it is likely that X’s refusal to sign up to it is either marred by X’s own irrationality and/or is distorted by X’s class-independent interests. These grounds, unsurprisingly, are not good grounds for a refusal to sanction.
Put differently, the notion of reasonableness in play in the intra-class assessment with which the scheme is concerned focuses on the assessment of rationality and thus on constrained maximisation in the sense explained above, that is, by the pursuit of one’s self-interest as a member of the relevant class. This notion of reasonableness has no guidance to offer on issues of distribution, with which the cramdown power is concerned.
This insight is supported by several features of the jurisprudence. First, the assessment of reasonableness is preceded by the question of whether each class was fairly represented at the meeting, and whether the majority was coercing the minority in order to promote interests which are adverse to the class that they purported to represent. The primary issue is generally whether some of the stakeholders who voted in favour of the plan did so because they held special interests adverse to those of their class as a whole.[57] As Professor Jennifer Payne has pointed out, the question whether the class was fairly represented and acting in good faith necessarily overlaps with the question whether the plan is one that may be reasonably accepted by even the dissentients.[58] I respectfully agree, and think the vote of a class, thus represented and acting, is a key part of the relevant standard of reasonableness. The objective here is for the court to be satisfied that the supermajority is acting in pursuit of its interests qua members of that class. As Norris J has perhaps most clearly explained, ‘a class member is entitled to vote in accordance with his or her own economic interests’ on an issue common to the class, but it is ‘not legitimate…to vote in accordance with economics interests in relation to some matter other than the issue raised for decision, some matter that is not shared by the class as a whole’.[59]
Second, following from that, and as already noted above, the reasonableness assessment proceeds by reference to whether the scheme was one that ‘an intelligent and honest man, a member of the class concerned and acting in respects of his interests, might reasonably approve’.[60] Again, the point is to check whether the scheme can be rationally regarded as benefiting members of the relevant class, qua members.
Third and again relatedly, there is no absolute rule that the court must accept the verdict of the majority of class members; the court does not act as a rubber stamp. There is an analogy with the Bolitho exception: the court ‘ought to be slow to differ’ from the statutory majority but ‘should do so without hesitation if there is anything wrong’, that is, if ‘something is brought to the attention of the Court to shew that there has been some material oversight or miscarriage.’[61] Where, however, the plan has been approved by the requisite statutory majority of a class, and the class was fairly represented at the meeting, there is a presumption that the plan is fair in relation to the members of that class, including those who have not voted for the plan.[62] So long as (a) the members of the class are capable of understanding (i) what is proposed and (ii) the alternatives open to them, and (b) they have been provided with adequate information as to both these issues, the court accepts that the statutory majority is a better judge of the interests of its own class than is the court.[63] If these conditions are met, then as Professor Payne observes, ‘the court will be loath to overturn the decision’ of the supermajority.[64] Again, the tests of the adequacy of information provision and of cognitive capacity are tests of rationality, of whether the supermajority may be trusted to decide whether the scheme duly works to their advantage in the circumstances.
Fourth and again closely related, the court will consider whether and to what extent the intra-class support for the scheme exceeds the statutory supermajority threshold; it will also take account of the commercial nous of class members.[65] The greater the intra-class support and the greater the expertise or experience of those voting for the scheme, the more confident the court may be that the scheme advances class interests and that the dissentients are irrational and/or idiosyncratic.
To conclude on this point, the concept of reasonableness as developed in the scheme jurisprudence is concerned with the rationality of the majority’s decision, assessed by reference to whether it could be regarded as duly advancing the interests of the class, most obviously, by maximising its returns to the extent permitted in the circumstances. That concept has nothing to say about the appropriateness of distribution amongst classes. Accordingly, it does not shed much (if any) light on the use of the cramdown power. For this reason in my respectful view, the courts are quite right to have confirmed that the intra-class rationality test developed in the scheme jurisprudence does not apply to the exercise of the court’s cramdown power.[66]
For the same reasons, it is not clear to me how the cramdown power, which is essentially about assessing the appropriateness of distribution amongst classes, is an ‘incremental development’ of the reasonableness test for schemes, which is about class members’ capacity for rationally pursuing their class interests.
IV.C ‘I The MARKET Search The Heart’?[67]
Having started with the scheme concept of reasonableness, SP2 is confronted with the distributional question: ‘How much is enough to be commercially reasonable…’?[68] Indeed, and on this question, as I have explained, the scheme jurisprudence is silent.
At this point, SP2 appears to jettison that jurisprudence and to embrace whatever standards are preferred by stakeholders themselves:
‘Here I would suggest that the search is for the standards of reasonableness that the parties themselves would accept’.[69]
SP2 footnotes Roger Brownsword’s ‘very useful discussion of the parties’ own standards of reasonableness as distinct from the judge’s standard of reasonableness’.[70]
Plainly, this turn to the standards acceptable to the parties themselves constitutes a rejection of the scheme of arrangement standard of reasonableness, which is judge-made and which is not concerned with whether it would be acceptable to the stakeholders, least of all to the dissentients. Suppose the dissentients in a class object to a scheme because it envisages the debtor making greater investments in fossil fuels. The dissentients wish the debtor instead to disinvest from that sector and to invest in renewables, and they are willing to accept a cut to their returns if that is what it takes. Many might think this a perfectly reasonable standard for the dissentients to apply in deciding how to vote on the proposed scheme. Nevertheless and as explained above, that is not the standard of reasonableness enshrined in the scheme jurisprudence. This hypothetical also shows that the reasonableness standards held by some parties need not be held by all. Indeed, it would surprising if all parties held the same standards of reasonableness.
Further and in any case, information about the parties’ subjective preferences for any particular standard of reasonableness would not usually be available, and the parties’ revealed preferences—revealed by the very circumstances in which the cramdown power becomes relevant—is that they do not agree on what is ‘reasonable’.
Again, SP2 acknowledges part of the problem: ‘we have nothing to guide us on what [the parties’ chosen standard] might be in a cross-class cramdown situation where bargaining has collapsed’.[71]
It is at this point that SP2 takes perhaps its most surprising turn. It asserts that ‘the market’ will decide:[72]
‘My argument is that if the standard for cross-class cramdown is whether the parties that stand to benefit the most from the continued trading of the firm have shared a reasonable portion of that benefit with the class that is crystallising a loss, the market will rapidly develop rules of thumb for what is reasonable in different contexts.’
I underline that this appeal to the market does not represent an abandonment in SP2 of standards that would be acceptable to the parties themselves. Rather, the excerpt above constitutes the end of the very paragraph in which it is said that ‘the search is for the standards of reasonableness that the parties themselves would accept’. What is being suggested, it appears, is that ‘the market’ will intuit what would be acceptable to the stakeholders themselves, and that the ‘rules of thumb’ it will supposedly ‘rapidly’ develop would reliably track stakeholders’ own assessments of what it would be reasonable for them to receive.
If I have understood the suggestion correctly—and I accept that I have not found it easy to understand—then I query it. First amongst the problems is that no explanation is given of the ability of ‘the market’ to see into the hearts of the stakeholders of any given restructuring (in which cramdown becomes a live possibility).
At this point, many a reader will no doubt be put in mind of the quasi-omniscient market that features in the ‘Efficient Markets Hypothesis’ (‘EMH’).[73] The EMH is not referenced in SP2, but in any case, it does not help its argument.
The EMH comes in three forms. The first, weak form of the hypothesis focuses on the ‘random walk’ of asset prices, which references the well-substantiated fact that past movements in the prices of assets such as a publicly traded stock cannot provide a basis for predicting future changes in such prices. This phenomenon has been explained on the basis that any observable pattern in price movements is immediately exploited and thereby undone by market participants. For example, if the price of an umbrella manufacturer is observed to rise at the start of the rainy season, say, at time t1, traders will have an incentive to buy the stock somewhat earlier, at time t0, with a view to turning a profit by selling at t1. The raised demand at t0 will raise prices at that time, however, and the increased supply at t1 would lower prices at that later time, thereby eliminating the pattern. In this way, ‘the market’—that is, the combined effect of the behaviour of market participants—may be said to observe and assimilate information and reflect them in prices. In this weak form, the EMH appears to be true; hence the random walk of prices. The market envisaged by this form of the EMH, however, has no means by which to apportion the restructuring surplus amongst the stakeholder classes in any restructuring.
The second, semi-strong version of the EMH extends the argument from past price movements to all publicly available information. This version asserts that all such information is assimilated and reflected in market prices. The third, strong version asserts that private information available to traders is also thus assimilated and reflected in prices.
Both these strong versions of the EMH are belied by reality. For example, if either were true, then asset price bubbles would not exist. When such a bubble were observed to have started to inflate in relation to a particular stock or set of stocks – when market prices were observed as persistently and/or progressively exceeding fundamental values[74] – the holders of such stocks would sell, and short-sellers would sell forwards and futures in the expectation of being able to acquire the asset at a later date at deflated rates. This would stop the bubble from inflating. Yet, bubbles inflate, and persist for periods which have proved impossible to predict. As John Maynard Keynes almost certainly never said, ‘The markets can stay irrational longer than you can stay solvent’,[75] and sophisticated market participants, including gargantuan institutional ones, have lost their shirt betting the opposite. For a curious recent example, the reader should look up GameStop and Melvin Capital.[76]
At the same time and ostensibly paradoxically, if either strong form of the EMH were true, it would be impossible to make large profits on trading strategies since the market price at any given point would already reflect all public—and for the strong form of the EMH, private—information about the asset in question. Yet financial sectors explode in size—some might say metastasise—as the traders who constitute those sectors generate large profits for their employers and large bonuses for themselves.
IV.D If ‘The Market’ Knows, Then What Use Restructuring Law?
In any case, however, the EMH cannot help SP2. Indeed, any appeal to a quasi-omniscient ‘market’ of the sort made by SP2 is plainly out of place.
SP2 purports to explain certain aspects of restructuring, but if ‘the market’ knows whatever information SP2 considers relevant about the debtor, then restructuring is unnecessary. Why should the debtor’s stakeholders go to the effort and expense of trying to come to an agreement and, upon failing, come knocking on the court’s door to seek the exercise of its cramdown power? Instead, they should just bring about a market sale. If the debtor’s shares trade on a market, such sale should be particularly easy, and the genius of the financial markets should deliver to the stakeholders all of the value inherent in the debtor. If the debtor is not publicly listed, its business and assets should be exposed to the appropriate markets on the basis that those markets would price in everything they should and a sale, in whatever form, would again transfer all of the value of the business to its stakeholders. Stakeholders who consider the business (or some part thereof) to have greater value than is reflected in market prices can buy out stakeholders who take the opposite view. If either strong form of the EMH is true, restructuring is not needed in order to preserve the distressed business’s value. Instead, its role could only ever be to enable some stakeholders to (mis-)appropriate value from the estate that should go to others.
I take these observations to constitute a reductio of any adulation of ‘the market’, let alone in relation to distressed businesses. There are fairly well understood reasons why markets fall some way short of omniscience, why market prices do not properly reflect the fundamental value of the business, and why market sales do not capture all such value for the seller’s benefit. And it is these reasons that provide the raison d’etre for restructuring. Such reasons are explored elsewhere,[77] and I will not rehearse them here.
What matters here is that if restructuring plays a useful role in relation to distressed debtors, then it does so precisely because ‘the market’ does not do as good a job. And if the market does not do a good job of internalising all relevant information about the fundamentals of the business into prices, it is mysterious how it would go about what, at least ostensibly, is the more challenging task of creating ‘rules of thumb’ as to the reasonable distribution of some part of that value amongst stakeholder classes. By what mechanisms would ‘the market’ divine what it is reasonable for each of various stakeholder classes to receive? Further, what is the measure of reasonableness here? The response ‘Whatever the market has decided!’ would simply beg the question what it is about ‘the market’ that makes its pronouncements the measure of reasonableness. In addressing such basic issues, SP2 does not help.
Finally on this point, it is difficult to know how to understand SP2’s claim that what ‘the market’ comes up with would be ‘the standards of reasonableness that the parties themselves would accept’. We are, needless to repeat, concerned with cramdown, which would be unnecessary if all the parties themselves accepted whatever had been done by ‘the market’.
IV.E The Normative Weight Of Market-Developed ‘Rules Of Thumb’
This brings me to the final issue I will take up here. SP2 gives an example of the ‘rules of thumb’ it says would ‘rapidly emerge’ in ‘the market’. It says that allocation of a certain proportion of equity to the debtor’s pre-restructuring shareholders may: [78]
‘unlock the cooperative bargaining problem because it incentivises the existing shareholders to bargain over a corporate restructuring that they would be willing to support, increasing the chances that the company’s financial difficulties are addressed. Of course, we would expect the existing shareholders to share some of the upside that they expect to gain from the restructuring with the dissenting class. This may end up being a rough rule of thumb amount – for example, it may be that over time the market will settle on a proportion of the post-restructuring equity that is sufficient to compensate the dissenting creditors for sacrificing or impairing their rights so that the restructuring can go ahead, while leaving the shareholders with sufficient skin in the game to make post-restructuring monitoring of the firm, or any new money injection, worth their while. The important point is that the company would need to spell out clearly the basis on which the shareholders keep equity, and the reasons why this is fair, and the dissenting creditors would need to spell out clearly why they object, and what they would settle for instead.’
The final sentence in the excerpt above seems to me to be plainly right to the extent that the company as the plan proposer has the burdens of proof and of argument. But how does the ‘rough rule of thumb’ adverted to in the sentence I have italicised help?
Note the critical distinction here between the position of the stakeholders in a restructuring and of the court which is asked to exercise its cramdown power in that restructuring.
The stakeholders are of course free, in deciding whether to sign up to a proposed plan, to take whatever account, if any, of any ‘rules of thumb’ developed by ‘the market’ as they see fit. That is the position with the two ‘market rules-of-thumb’ provided as examples by SP2. The first is the ‘London Approach’ that had some influence over the two decades from the late 1970s over the restructuring of large distressed British companies which had borrowed from multiple City of London-headquartered banks. and the Land Tribunal’s valuation of ransom strips in a 1961 case, which SP2 says ‘is often taken to be the starting point in negotiations’ for the sale of ransom strips.[79]
The question whether the court should exercise its cramdown power only arises, however, if any such rules of thumb have not been sufficient to catalyse sufficient agreement in favour of the plan. What weight, if any, should the court attach to evidence that, say, the debtor’s pre-distress shareholders in several previous restructurings, were permitted to retain 15% of the equity as part of the restructuring plan,[80] but that this arrangement has been rejected by the dissenting junior creditor class in the present restructuring?
It seems to me that, absent further information, the court should refuse to attach any weight whatsoever to the allocations of value in previous cases. If it is to do anything at all with that evidence, it should ask, first, for what reasons that 15% figure was considered appropriate in previous cases, second, whether they are the sorts of reasons to which a court should give any weight, and third, whether those reasons hold in the present case.
If the main reasons given for the relevance of that 15% allocation are that this is how ‘the market’ does things, and/or that this is what the debtor’s professional advisors find it convenient to do because they and their peers have done the same in those previous cases, then any sensible court should have no hesitation in rejecting that evidence as irrelevant and inadmissible. Instead and needless to say, it should decide the case on its own facts, taking due account of the nature of the debtor, its business, affairs, and distress, of the details of the plan proposed, and of the quality and extent of support for and opposition to that plan, amongst much else. The allocations of value that passed muster in other cases, each no doubt decided by the relevant court with proper attention to the facts of that case, are neither here nor there. English restructuring law has accepted for at least 130 years that what is reasonable depends on the facts of the particular case. This was made clear in Re English, Scottish and Australian Chartered Bank, in which Lopes LJ explained:[81]
‘With regard to the word “reasonably” it must always be borne in mind the word “reasonably” is a relative term: it means reasonably with regard to the particular circumstances of the case. What is reasonable in one case might be unreasonable in another. The reasonableness must be always regarded with reference to other alternatives.’
Therefore, if the argument were that ‘the market’ had worked out that stakeholders in cases such as the present agreed that 15% equity should be given to shareholders, the court should ask why that mattered in the case it had to decide, in which at least one relevant stakeholder class did not agree. That, after all, would be the very reason that the court was being asked to wield its cramdown power.
And if the court were told that ‘the market’ had divined that 15% was the magic figure that was required in order to incentivise shareholders in that case to support the restructuring, a good question would be how ‘the market’ had worked this out on the facts of that case.
At all times and perhaps most important, the court should be on guard against the risk that references to ‘the market’ or to ‘market practice’ serve as veneer for the economic muscle of the best-resourced repeat participants in distressed asset markets.[82] This type of risk was highlighted by the Privy Council in Workers Trust & Merchant Bank Limited v Dojap Investments Limited. The issue there was whether a deposit paid and purportedly forfeited under a contract for the sale of land that was in excess of the customary 10% of the purchase price was reasonable and therefore to be upheld as earnest money or instead was unreasonable and therefore to be rejected as a penalty. Lord Browne-Wilkinson on behalf of the Board held that the correct approach was to treat as the default the customary 10% figure, notwithstanding that that figure itself was established ‘without logic but by long continued usage both in the United Kingdom and formerly in Jamaica’. His Lordship explained the Board’s reason for rejected the first instance court’s approach as follows:[83]
‘The Chief Justice tested the question of “reasonableness” by reference to the evidence before him that it was of common occurrence for banks in Jamaica selling property at auction to demand deposits of between 15% and 50%. He held that, since this was a common practice, it was reasonable. Like the Court of Appeal, their Lordships are unable to accept this reasoning. In order to be reasonable a true deposit must be objectively operating as “earnest money” and not as a penalty. To allow the test of reasonableness to depend upon the practice of one class of vendor, which exercises considerable financial muscle, would be to allow them to evade the law against penalties by adopting practices of their own.”
- CONCLUSION
This paper has assessed the arguments in SP1 and SP2 by examining the fundamentals of rationality, reasonableness, the nature of bargaining, and the role of the market, and by considering what the court should do with all these matters.
SP1’s core argument is that the court should use its cramdown power ‘to impose a solution non-cooperatively which should have been achievable if rational bargaining had been possible’, and that one of the checks is that no assenting class ‘gets too good a deal (too much unfair value)’. However, rationality in the relevant sense is concerned with the intelligent pursuit of self-interest. In circumstances where pursuit of their self-interest by some parties conflicts with the pursuit by other parties of their self-interest, rationality does not necessarily provide a response that is in the self-interest of all. This long acknowledged and much studied ‘collective action problem’ further entails that individualistic pursuit of self-interest by members of a group may result in detriment to the group as a whole, even though some group members come out very well and others very poorly.
The exercise of the cramdown power is concerned with the distribution of the restructuring surplus, in which the self-interest of some stakeholder classes necessarily conflicts with the self-interest of certain other stakeholder classes.[84] In short, a greater allocation of the restructuring surplus to one class necessarily leaves less for others, and vice versa. In this context, SP1’s focus on ‘rational bargaining’ is a red herring. Each party engaged in rational bargaining seeks to maximise its own returns from the bargain if concluded and should rationally sign up to a bargain only if doing so improves its returns compared to what it would receive in the absence of that bargain. In actual rational bargaining, parties – who, recall, are competitors with, not fiduciaries to, each other – ought to pull all lawful negotiating levers within their reach, including, most obviously, by refusing to agree to the deal. Accordingly, rational bargaining does not provide a basis by which the court may impose upon parties the very bargain that, acting in their self-interest, they have rejected.
Nor does this notion of ‘rational bargaining’ help flesh out SP1’s suggestion that the court should seek to preclude any class from getting ‘too much unfair value (too good a deal)’. SP1 provides no basis for considering that a bargain which results from rational bargaining between parties with necessarily differing bargaining powers, information and other resources, and influence over the debtor, etc., all seeking to advance their own self-interest at the expense of that of others, would be ‘not too unfair’. Further and in any case, the court should at least aspire not forcibly to impose, through its cramdown power, plans which it considers to have any unfairness. It should not cram down plans which it accepts are unfair but which, it is persuaded, are not too unfair. This is a fortiori since SP1 provides no help to the court in deciding what constitutes unfairness, what makes any plan a little but not too unfair, what makes it too unfair, and how much unfairness resides in the particular plan the court is asked to cram down.
SP2 concedes that SP1’s focus on ‘rational bargaining’ does not work. SP2’s core argument is that the cramdown power ‘exists to motivate cooperative bargaining’ and ‘to enforce a commercially reasonable bargain that the parties themselves could have agreed if cooperative bargaining had been possible.’ This paper has argued that there are conceptions of reasonableness, including those deployed in analyses of English insolvency law, which might indeed be relevant to the exercise of the cramdown power. Those are not, however, amongst the conceptions of reasonableness found in SP2, notwithstanding the apparent abundance of such conceptions on offer in that paper. SP2 appears to suggest four ways of fleshing out the notion of ‘reasonableness’: by use of the modifier ‘commercially’ for ‘reasonable’, by adverting to the conception of reasonableness at play in the scheme of arrangement jurisprudence, by referring to the parties’ own preferred conceptions of reasonableness, and by reference to ‘rules of thumb’ which, SP2 asserts, would ‘rapidly’ be developed by ‘the market’.
For the reasons explained in this paper, none of these four conceptions is particularly pertinent to the cramdown power. Commercial reasonableness is, at least ostensibly, about the pursuit of self-interest, which guides the commercially reasonable party as to when to pursue and when instead to reject cooperation with other equally commercially reasonable parties. Similarly, the reasonableness test in the scheme jurisprudence focuses on the pursuit of their class interest by a hypothetical ‘intelligent and honest man, a member of the class concerned and acting in respect of his interest’. In short, both these conceptions of reasonableness end up in the same place as does the rational pursuit of self-interest. To that extent, SP2 takes us no further than SP1.
The two other suggestions in SP2 as to how to flesh out the notion of reasonableness are more intriguing, not least since the suggestion appears to be that ‘the market’ would intuit reasonableness standards that would be acceptable to the parties to any particular restructuring. This paper strives to unearth a basis for these claims. It explores the ‘Efficient Markets Hypothesis’, not mentioned in SP2 but the only church these days devoted to belief in an all-knowing ‘market’ that is said to be able to look into devotees’ hearts.
The main problem for SP2 here is that if such a market exists, then restructuring is unnecessary. All the stakeholders of a distressed business who accept the standards of ‘the market’ would seek to bring about a market sale of the business, trusting in the market’s genius to release and deliver up all the value inherent in the business. However, SP2 purports to advise on the exercise of the court’s cramdown power, which is part of a restructuring regime. If restructuring plays a useful and indeed a defensible role, it does so because the market fails to price in the information which, the stakeholders of the business consider, is necessary in order properly to value the business. If this is right and the market cannot be trusted to price the business, it is mysterious how it can be trusted to decide how the gains from the restructuring ought to be distributed amongst stakeholder classes at least one of which has rejected the restructuring plan.
By Riz Mokal, Barrister, South Square, London; Honorary Professor, University College London; Honorary Research Fellow, University of Aberdeen School of Law. I am grateful to Johann Chen, Ronald Davis, Alisdair Macpherson, Stephan Madaus, Irit Mevorach, Janis Sarra, Ignacio Tirado, and Sally Trafford for helpful comments and advice. I am particularly grateful to Sarah Paterson for discussion and comments. The views expressed here and all the mistakes are mine alone. Email: [email protected].
[1] As Part 26A of the Companies Act 2006 (‘the Act’). The power is available throughout the UK. My focus in this paper is limited to the exercise of this power by the courts of England and Wales and to the jurisprudence of those courts. I will follow convention in referring to the statutory and common law applicable in England and Wales as ‘English law’.
[2] Sections 901G(3)-(4) of the Act.
[3] Section 901G(5) of the Act.
[4] Sarah Paterson, ‘Judicial Discretion in Part 26A Restructuring Plan Procedures’ (January 24, 2024), available at SSRN: https://ssrn.com/abstract=4016519 .
[5] Sarah Paterson, ‘The Conceptual Foundation of Cross-Class Cramdown’ (September 18, 2024), available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4959732.
[6] In re AGPS Bondco plc [2024] Bus LR 745 (CA), [122].
[7] William Sibley, ‘The Rational versus the Reasonable’ (1953) 62(4) Philosophical Review 554, 560.
[8] Mokal, ‘The Authentic Consent Model: Contractarianism, Creditors’ Bargain, and Corporate Liquidation’ [2001] Legal Studies 400, 429, citing John Rawls, A Theory of Justice (Cambridge, Mass.: Harvard University Press, 1971).
[9] Mokal, Corporate Insolvency Law – Theory and Application (Oxford: OUP, 2005), 72.
[10] Even in this frame, rationality is often relevant to choosing amongst ends each of which one has rationality-independent reasons to seek to pursue. For example, the pursuit of any end requires resources, in particular, attention, energy, and time. The extent of the availability of such resources and the calls upon them by one’s prior commitments to the pursuit of other ends may be important to one’s choice which amongst relevantly similar ends to pursue. The making of such choices falls within the realm of rationality. See Mokal, ‘On Fairness and Efficiency’ (2003) 66(3) Modern Law Review 452, 458-459.
[11] Sibley, ‘Rational versus Reasonable’, 560.
[12] Mokal, ‘Authentic Consent’, 428-429, citing Rawls, Theory of Justice.
[13] Mokal, Corporate Insolvency Law, 76.
[14] SP1, p 16.
[15] SP1, p 17 (emphasis added), citing Re Bluebrook Ltd [2010] BCC 209, [49] (Mann J).
[16] SP1, 25.
[17] SP1, 16.
[18] SP1, p 17.
[19] [1891] 1 Ch 213 (CA), 243 (Bowen LJ).
[20] See e.g. Mokal, ‘The Two Conditions for the Part 26A Cram Down’ (2020) 35(11) Butterworths Journal of International Banking and Financial Law 730, 731.
[21] In re AGPS Bondco plc [2024] Bus LR 745 (CA), particularly at [258]-[278], citing (amongst others) Jennifer Payne, Schemes of Arrangement (2nd ed, 2021), at 319
[22] SP1, p 17 (emphasis added), citing Re Bluebrook Ltd [2010] BCC 209, [49] (Mann J).
[23] SP1, p 19, citing Re SIAC Construction [2014] IESC 25 (Fennelly J).
[24] SP1, p 19.
[25] ‘All in all, therefore, I do not give the LEK valuation as much weight as I give the other exercises. As an exercise of assessing what a third-party purchaser would pay it is very unconvincing. One cannot assume that he would pay something in the high probability range. Purchasers do not work like that. Subjective assessments are much more weighty factors, and the scheme companies’ exercises tend to reflect that better. The most that it does in the present case is to give pause for thought on this point: are the purchasers in fact getting too good a deal (too much unfair value) because in the present market sales are unlikely to take place, and when economic conditions change the same group will be perceived to be more valuable, and the purchasers will ultimately reap the benefit of that? This is not quite the way the case is put, but I can see that in some circumstances it might be. It is, I suppose, another analysis of the “intrinsic value” which is said to differ from current market value’; Re Bluebrook Ltd [2009] EWHC 2114 (Ch), [49] (Mann J) (emphasis added).
[26] Re Virgin Active Holdings Ltd [2022] 1 All ER (Comm) 1023 (Snowden J).
[27] SP1, p 19.
[28] SP1, p 19.
[29] SP1, 19.
[30] SP1, p 23.
[31] SP1, p 25.
[32] SP1, p 26-27 (emphasis added).
[33] Snowden LJ in In re AGPS Bondco plc [2024] Bus LR 745 (CA), [122] (emphasis added), citing David Richards J in Re Telewest Communications plc [2005] 1 BCLC 772 (Ch), [21].
[34] In re AGPS Bondco plc [2024] Bus LR 745 (CA), [160] (Snowden LJ).
[35] In re AGPS Bondco plc [2024] Bus LR 745 (CA), [160].
[36] Mokal, ‘Contractarianism, Contractualism, and the Law of Corporate Insolvency’ [2007] Singapore Journal of Legal Studies 51, 75 (emphasis added).
[37] See Mokal, ‘Liquidity, Systemic Risk, and the Bankruptcy Treatment of Financial Contracts’ (2015) 10(1) Brooklyn Journal of Corporate, Financial & Commercial Law 15, 21.
[38] SP1, p 27.
[39] See the classic discussion in Jon Elster, The Cement of Society (New York: Cambridge University Press, 1989), 74–94.
[40] See e.g. Robert Cooter and Michael Gilbert, Public Law and Economics (Oxford University Press, New York, 2022), 14-15.
[41] SP1, p 27.
[42] SP1, p 27.
[43] For a version of this point, see Stephan Madaus, ‘Leaving the shadows of the US Bankruptcy Law: A proposal to divide the realms of insolvency and restructuring law’ (2018) 19 European Business Organization LR 615, 635. For points on which I diverge from some of the arguments in Madaus’s paper, see Mokal, ‘What is an Insolvency Proceeding? Gategroup lands in a Gated Community’ (2022) 31(3) International Insolvency Review 418, 422 et seq.
[44] See eg Mokal, ‘Authentic Consent’, pp 401-415.
[45] For a recent anthology exploring this phenomenon in academia, see Mario Biagioli and Alexandra Lippman (eds), Gaming the Metrics: Misconduct and Manipulation in Academic Research (MIT Press, London, 2020).
[46] The diligent reader finds the concession at SP2, p 19 n 89 (emphasis added): ‘In earlier work I used the term ‘rational bargaining’…However, several colleagues pointed out that it may be perfectly rational for dissenting creditors to behave in some of the ways that I describe as problematic in this section.’
[47] SP2, p 13, though there is no acknowledgement of the mistake as to this point in SP1. See also Sarah Paterson, ‘The State of Cross-Class Cramdown in the UK’ (2024) 39(11) Butterworths Journal of International Banking and Financial Law 719, 719 RHS – 720 LHS.
[48] Instead, there is the innocuous suggestion in Paterson, ‘State of Cross-Class Cramdown’, ibid, 720 LHS, that ‘co-operative bargaining should be incentivised and a consensual bargain preferred.’ It is hard to disagree, and I do not.
[49] SP2, pp 19-20.
[50] The bare bones of my answer were set out in Mokal, The Court’s Discretion in relation to the Part 26A Cram Down’ (2021) 36(1) Butterworths Journal of International Banking and Financial Law 12. Much flesh is put on those bones in Riz Mokal, Irit Mevorach, Stephan Madaus, and Ignacio Tirado, ‘The Cramdown: A Conceptual Framework’, in Jennifer Payne and Kristin van Zwieten (eds), Corporate Restructuring Law in Flux (Oxford: Hart Publishing, forthcoming July 2025), Chapter 4 (abstract available at https://ssrn.com/abstract=4990828).
[51] SP2, pp 4-6 and 17.
[52] SP2, p 20.
[53] See for example Andrew Tettenborn and Michael Jones, Clerk & Lindsell on Torts (24th ed incorporating 1st supplement) (Sweet & Maxwell, 2024), 7-163, who argue that reasonableness in this context is fleshed out by reference to (i) objectivity, (ii) a balancing of costs and benefits in considering who between the claimant and defendant should be required to bear the costs of particular precautionary conduct, and (iii) common practice and expectations.
[54] Bolam v Friern Hospital Management Committee [1957] 1 WLR 582 (QBD), 587; see now McCulloch v Forth Valley Health Board [2024] AC 925 (SC), [56], [66], and [83] (Lords Hamblen and Burrows).
[55] Bolitho v City and Hackney Health Authority [1998] AC 232 (HL), 241H-242A (Lord Browne-Wilkinson).
[56] I should note from an abundance of caution that an analogy highlights a relevant similarity in some respect between two (or more) matters but does not assert they are identical.
[57] Re Lehman Brothers International (Europe) [2019] Bus LR 1012, 1039-1045, at [85]-[106].
[58] Jennifer Payne, Schemes of Arrangement: Theory, Structure and Operation (2nd ed) (Cambridge, Cambridge University Press, 2021), at 2.4.3.
[59] Re Realm Therapeutics Plc [2019] EWHC 2080 (Ch), [54]-[55] (original emphasis) (Norris J).
[60] Re Telewest Communications plc (No. 2) [2005] BCC 36, [21] (emphasis added) (David Richards J); approved in the context of a restructuring plan in In re AGPS Bondco plc [2024] Bus LR 745 (CA), [122] (Snowden LJ).
[61] In Re English, Scottish, and Australian Chartered Bank [1893] 3 Ch 385 (CA), 409 (Lindley LJ).
[62] Re English, Scottish, and Australian Chartered Bank [1893] 3 Ch 385 at 409 (Lindley LJ); Re Telewest Communications plc (No. 2) [2005] BCC 36 at [22] (David Richards J).
[63] These points were illuminatingly crystallised by Miles J Re All Scheme Ltd [2021] EWHC 1401 (Ch), [100]-[102] and [134]-[141]; approved in the plan context In re AGPS Bondco plc [2024] Bus LR 745 (CA), [127] (Snowden LJ).
[64] Jennifer Payne, Schemes of Arrangement: Theory, Structure and Operation (2nd ed) (Cambridge, Cambridge University Press, 2021), at 2.4.3.
[65] Re Realm Therapeutics Plc [2019] EWHC 2080 (Ch), [66] (Norris J).
[66] In re Great Annual Savings Co Ltd [2023] Bus LR 1163 (Ch), [99]-[100] and [102]-[103] (but not [101]) (Adam Johnson J); In re AGPS Bondco plc [2024] Bus LR 745 (CA), [121]-[148] (Snowden LJ), though note the apparent qualification at [131].
[67] See Jeremiah, 17:10: ‘I the LORD search the heart, I try the reins, even to give every man according to his ways, and according to the fruit of his doings.’
[68] SP2, p 22.
[69] Ibid.
[70] Ibid, referring to Roger Brownsword, Contract Law: Themes for the Twenty-first Century (2nd ed) (OUP, 2006), p 105.
[71] SP2, p 22.
[72] SP2, p 23.
[73] For an accessible and enjoyably opinionated account on which I draw in the text here, see John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, Oxford, 2012), Chapter 2.
[74] Mokal, ‘Liquidity, Systemic Risk, and the Bankruptcy Treatment of Financial Contracts’ (2015) 10(1) Brooklyn Journal of Corporate, Financial & Commercial Law 15, 25 and 31.
[75] See for example Paul Krugman, ‘How Did Economists Get It So Wrong?’, New York Times, 2 September 2009 (available at https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html) ,which also provides interesting observations on the EMH.
[76] See for example Matthew Goldstein and Kate Kelly, ‘Melvin Capital, Hedge Fund Torpedoed by the GameStop Frenzy, is Shutting Down’, New York Times, 18 May 2022 (available at: https://www.nytimes.com/2022/05/18/business/melvin-capital-gamestop-short.html).
[77] In the English restructuring literature, see for example Michael Crystal and Rizwaan Jameel Mokal, ‘The Valuation of Distressed Companies: A Conceptual Framework – Part I’ (2006) 3(2) International Corporate Rescue 63; Michael Crystal and Riz Mokal, ‘The Valuation of Distressed Companies: A Conceptual Framework – Part II’ (2006) 3(3) International Corporate Rescue 123; and, Mokal, Stephan Madaus, Irit Mevorach, and Ignacio Tirado, ‘The Cramdown: A Conceptual Framework’.
[78] SP2, pp 25-26 (emphasis added, footnotes omitted).
[79] SP2, p 23 (emphasis added).
[80] SP2, pp 23 and 25-26.
[81] [1893] 3 Ch 385 (CA), 415.
[82] See for example Marc Davies, ‘Creditor Clashes over Ailing Firm’s Debts turn Ugly’, Bloomberg UK, 12 August 2024.
[83] Workers Trust & Merchant Bank Limited v Dojap Investments Limited Privy Council Appeal No 41 of 1991, at p 4 (emphasis added).
[84] For a variant of this point, see Stephan Madaus, ‘Leaving the shadows of the US Bankruptcy Law: A proposal to divide the realms of insolvency and restructuring law’ (2018) 19 European Business Organization LR 615, 632 et seq.
