Initial Observations on Valuation and Valuation Terminology

This chapter looks at valuation. It explains that in a restructuring a paper valuation exercise is needed to establish who still is entitled to value and who is not. In a liquidation, where the business is sold to the highest bidder in the market through a proper sale process, a valuation exercise is not required. In liquidation, the value available for distribution is determined by the market. The chapter then offers a high-level outline of the key steps of the valuation exercise in the context of a restructuring. Terminology is defined, such as asset value, cash flow value, going concern value, goodwill, enterprise value, reorganization value, liquidation value, fair market value, and option value.

Plan Governance: A Hybrid Model with Both a Democratic and a Judicial Component

Chapter 4 starts by setting out that a plan provides a mechanism for democratic decision-making. In other words, the legal subjects determine the matter themselves by majority decision. In purely democratic form, it further argues, a plan is not suitable as an insolvency instrument. To be effective as an instrument for dealing with insolvency, a plan mechanism needs to be supplemented by non-democratic coercive measures imposed by judicial decision. The chapter then looks at the advantages of democratic decision-making. These include the power of self-determination, the fact that a democratic system enables a distribution in non-cash through restructuring, and the ability to obtain a certain degree of deal certainty by reaching an agreement with the requisite majorities. The chapter then discusses the rationale and system of voting in classes in more detail.

Summary

This chapter provides a detailed summary of the contents of the eight chapters that constitute the main body of the text. It finally considers areas of future research on pre-insolvency proceedings—topics that this book has not considered—such as securities law, corporate law, labour law, tax law, and international aspects of pre-insolvency proceedings. The currently available individual and collective liquidation proceedings are far from optimal, the chapter argues. They provide only for enforcement against individualized assets. In more advanced economies more and more value is tied up in contracts and in the abstract capacity to generate cash flows with a complex of assets and activities that, as an operating whole, are worth more than their inactive constituent parts. Many insolvency systems are not adequately attuned to dealing with value in contracts or in the abstract notion of earning capacity more generally. Developing effective and efficient proceedings for the enforcement of claims against a business as an operational, cash-flow-generating whole, and enabling creditors to recover value captured in earning capacity constitute a field that is ripe for further research and an area in which significant improvement can be achieved.

The US Chapter 11 Plan Procedure

The chapter begins with an outline of the US Chapter 11 plan procedure. It briefly discusses the proposals of the American Bankruptcy Institute (ABI) for reform of Chapter 11. It then discusses the key features of the US Chapter 11 plan procedure, including the right to propose a plan, the permitted content of the plan, the voting in classes, and the criteria for confirmation and cramdown. Finally, it looks at criticisms of the US system, which include the costs and extent of judicial involvement, the duration of the automatic say, the exclusivity period, the best interests and feasibility test, the wording of the absolute priority rule, and the intrusiveness of the cramdown powers under US law.

The English Scheme of Arrangement

This chapter examines the English scheme of arrangement, which is laid down in sections 895–99 of the Companies Act 2006. It gives an outline of the procedure and looks at past attempts to reform the procedure. As with Chapter 6, it then goes on to discuss the key features of the procedure, including the right to propose a plan, the commercial content of the plan, the voting in classes, and the acceptance and sanctioning of a scheme. The chapter also considers criticisms of the English system. These include the costs and formalities of the procedure, the lack of the necessary flanking measures, the requirements of ‘give’ or ‘take’, the lack of a cramdown mechanism and the exclusive right to propose a plan.

Pre-Insolvency Proceedings: Objective and Justification

This chapter starts with a brief outline of the pre-insolvency plan in the conceptual form proposed in this book. It then goes on to develop a normative foundation for pre-insolvency proceedings and formulates the boundary conditions that must be satisfied for their application. As part of the analysis the concepts of fair market value and liquidation value are examined and the differences between price and value are discussed. The chapter explains why pre-insolvency proceedings are to be conceived as a collective debt enforcement instrument of the creditors rather than a rehabilitation instrument of the debtor. The chapter concludes by defining pre-insolvency as the stage at which insolvency has become inevitable and argues that this is the earliest possible triggering event for the use of a collective enforcement procedure, such as the plan mechanism in the proposed form.

Insolvency Law: Objective and Justification

This chapter aims to explain the objective of a plan procedure and the justification for the consequent infringement of individual rights of dissenting stakeholders. Chapter 3 will show that a plan procedure is purely an instrument of insolvency law. So, for that reason, this chapter starts off with a discussion of the objective and justification of insolvency law in general. Since the focus of this study is the design of a new legislative instrument, the approach is not based on the current objective of insolvency law in any particular national system. Rather, what should be the broader objective of insolvency law is explained, taking inspiration from the ‘creditors’ bargain theory’ developed in US literature.

Introduction

This first chapter provides an overview of the aims of the book. The main objectives of this text are to develop a normative foundation for pre-insolvency proceedings, outline the fundamental principles that underlie a pre-insolvency plan procedure, and set out a framework that outlines what a pre-insolvency plan procedure should resemble in an ideal world. The chapter anticipates the content of the subsequent chapters in the book and then looks at terminology. It defines terms such as plan, plan procedures, insolvency, bankruptcy, liquidation, pre-insolvency, and pre-insolvency proceedings. The chapter outlines pending legislative initiatives seeking to introduce pre-insolvency proceedings both in the Netherlands and at the European level.

Framework for a Pre-Insolvency Plan Procedure

This chapter provides a high-level outline of what pre-insolvency proceedings might look like in an ideal world, drawing from the discussion in the previous chapters and the lessons learnt from the US Chapter 11 procedure and the English scheme of arrangement. It outlines the general characteristics of the procedure and required flanking measures. These include speed and efficiency, flexibility, a temporary stay, provision to reject burdensome and retain valuable contracts, and the ability of the court to make early determinations. Key features of the proposed plan mechanism are then discussed, including entry to the procedure, the right to propose a plan, the appointment of a supervisor, the commercial content of the plan, the voting in class, acceptance of the plan, and the criteria for confirmation and cramdown. It also considers the ability to deal with third-party liabilities and disputed claims. Finally, it looks at the relevance of the proposed procedure in practice and the remaining need for efficient liquidation procedures.