What is an Insolvency Proceeding?
By Riz Mokal (South Square and Aberdeen University School of Law)
To the question in the title, one may be forgiven the innocent response ‘Who cares?’. In fact, the question matters for all the reasons that legal categorisation matters, and it matters particularly clearly in this context. In a recent and (no two ways about it) lengthy article, I explain the importance of the question and sketch out an answer drawing on functional, historical, comparative, and doctrinal analyses. Along the way, I offer good, clean fun (though the subject matter permits only so much) by taking on the key extant responses in the literature.
The categorisation of an event as the commencement of an insolvency proceeding or of the giving of an order in such a proceeding can be of profound significance. Such categorisation is often relevant in contractual contexts and may have significance for domestic law purposes. The article’s particular concern, however, is with a number of international instruments which mandate different treatment for insolvency and non-insolvency proceedings, and which permit, require, or prohibit the attachment of particular consequences to orders and judgments depending on whether such orders and judgments emanate from one or other type of proceeding. These instruments include three model laws promulgated by the United Nations Commission on International Trade Law (‘UNCITRAL’), two conventions issued by the Hague Conference on Private International Law, the ‘Brussels’ and ‘Lugano’ Conventions and related intra-EU insolvency and ‘civil and commercial’ instruments, and the ‘Cape Town Convention’ on International Interests in Mobile Equipment.
(My focus is on the original text of the international instruments themselves, and not on amended versions of that text which are incorporated in the domestic laws of certain states. For that reason, I do not take a position here on decisions such as that of the Court of Appeal of Singapore in Ascentra Holdings, Inc v SPGK Pte Ltd  SGCA 32, where, in constructing the relevant intentions of the Singapore Parliament, the Court, speaking through the Chief Justice, placed significant weight on the addition of the words “or adjustment of debt” to the definition of “foreign proceeding” as incorporated in Singapore law; see in particular , , [36(a)], , etc.)
Existing answers are plainly inadequate. Contemporary English lawyers tend to be particularly at sea. They characteristically start by committing the genetic fallacy: an insolvency proceeding is a proceeding pursuant to the UK Insolvency Act 1986, and generalising from that, a proceeding pursuant to a statute bearing the label ‘Insolvency’ or its cognates. On this view, proceedings to wind up solvent companies are insolvency proceedings since they take place pursuant to the Insolvency Act. Similarly, administrative receivership is an insolvency proceeding even though not generally regarded as such (on the basis, for example, that it operates predominantly in the secured creditor’s interests and is not a collective proceeding). Conversely on this view, England lacked any corporate insolvency proceedings at all over the 120+ years—starting with the consolidation of corporate insolvent winding-up law into the rest of company law by the Companies Act 1862, and ending with the coming into force of the Insolvency Act 1986—when insolvent companies were dealt with under ‘company law’ statutes rather than ‘insolvency law’ ones. This reductio generalises beyond England: corporate insolvency proceedings in some civil law jurisdictions during certain periods were governed by the commercial code, while the civil code governed natural personal insolvency proceedings.
Confronted with these obvious defects, proponents of this view attempt an ad hoc rescue: only a proceeding which is commenced by demonstrating a debtor’s insolvency is an insolvency proceeding. ‘Big, if true!’ would be an apt response. In English law, company voluntary arrangements (‘CVAs’) are generally accepted as paradigmatic insolvency proceedings though there is no need, and indeed no possibility, of demonstrating insolvency in order to commence a CVA proceeding. Administration proceedings pursuant to Schedule B1 to the Insolvency Act are also paradigmatic insolvency proceedings even though a ‘qualified floating charge holder’ may commence an administration, in or out of court, without demonstrating the debtor’s insolvency. The proceeding thus commenced is nevertheless an insolvency proceeding. Even winding-up proceedings in relation to an insolvent company may be commenced without demonstrating insolvency, such as on the basis of a special resolution of the company, on the basis of the company’s moribundity, or on the basis that it is just and equitable for the company to be wound up. Such proceedings are still insolvency proceedings if—and this is the key point—the company is insolvent. Conversely, if the company is solvent, the proceeding to wind it up is not an insolvency proceeding.
Other extant responses to the question in the title are considerably more thoughtful but, I argue, no more successful. Some years ago, in a paper summarised in this blog post, Professor Horst Eidenmüller argued that, as a ‘normative’ matter, only those proceedings which solve inter-creditor common pool problems are ‘fully collective’ and only such proceedings should be characterised as insolvency proceedings for the purposes of cross-border recognition. I think this a mistake. Amongst other things, while insolvency proceedings may solve common pool problems, this is not and cannot be a defining criterion. Insolvency proceedings do many distinctive and valuable things which may have nothing to do with any inter-creditor common pool problem. They may reverse antecedent undervalue transactions. They may discharge a natural person bankrupt. Or they may reinforce commercial morality, such as by holding directors to account for their management of the company during the ‘twilight’ period as the company sank deeper into distress. There is no normative attraction to withdrawing from any such proceeding the characterisation of, and consequent cross-border effects accorded to, insolvency proceedings.
Turning to my own approach, my article notes that insolvency is a scalar attribute, and that a debtor may be more or less insolvent. Further, insolvency is a vague concept, and it is often difficult to tell where along the solvency/insolvency spectrum a particular debtor is located at a given time. Insolvency law is that part of the law which addresses the circumstances peculiar to insolvency, and debtors lying on any point within a wide range on the solvency/insolvency spectrum may face such circumstances to some degree or other. A well-designed insolvency law may seek to respond seamlessly to the needs of debtors lying at any of these points. Further, the processes employed by insolvency law in relation to insolvent debtors are often also usefully employed in relation to fully solvent debtors. Nor is there any distinctive outcome that only insolvency laws and all insolvency laws attain or pursue.
It follows that the only sensible way of answering the question in the title is through an approach which is both purposive, i.e. responsive to the purpose for which the question is asked, and contextual, i.e. responsive to relevant features of the context of the particular proceeding in relation to which the question is asked. The approach must also be substantive, i.e. responsive to the substantive reasons why insolvency law exists as a distinct branch of law.
We must ask whether a proceeding operates (i) pursuant to a law capable of responding to circumstances peculiar to insolvency and (ii) in relation to a sufficiently insolvent (or insufficiently solvent) debtor. If the answer to both questions is yes, then the proceeding is an insolvency proceeding. This remains true even if a solvent debtor may be subjected to the same proceeding, in relation to which debtor the proceeding is not an insolvency proceeding. This understanding of the nature of an insolvency proceeding is consistent with the position taken by the official reports on key UNCITRAL and European instruments. Further, beware the English lawyers who, befuddled by the scheme of arrangement, speak prose like M. Jourdain. The position set out in this paragraph is also the standard position in English law.
The article outlines the development of the concordat in several civil law jurisdictions, starting with its roots in Justinian's Digest. It traces the development of the composition in England, starting with its status as a voluntary process incapable of binding dissentients, taking in the ‘protections’ granted by the Privy Council and the ‘bills of conformity’ issued by the Court of Chancery, and then considering statutory compositions. It shows how the statutory composition travelled from natural person insolvency law to corporate insolvency law. It draws on this analysis to characterise the scheme of arrangement as an insolvency proceeding when operating in relation to a (sufficiently) insolvent company.
The paper also assesses the most detailed critique yet of the Gategroup judgment of the High Court of England and Wales, which characterised the restructuring plan proceeding pursuant to Part 26A of the Companies Act as an insolvency proceeding for certain jurisdictional purposes. The critique of this judgment usefully exposes to the sunlight of public scrutiny—at length and independently of the exigencies of any particular litigation—the type of arguments which have been used to resist the conclusion that the scheme of arrangement is (quite plainly) a judicial composition which constitutes an insolvency proceeding for relevant purposes when deployed in relation to insolvent companies. The paper shows that these arguments are unpersuasive.
* A version of this post was originally published on the Oxford Business Law Blog and another version was republished in the Journal of International Banking & Financial Law ((2023) 4 JIBFL 234) at the invitation of that journal’s editor. The full paper can be accessed here (as a working paper) or at the International Insolvency Review ((2022) 31(3) IIR 418) in its published form).