Restructuring Moratoriums Through an Information-Processing Lens
By Sarah Paterson (LSE Law School)
In my article, ‘Restructuring Moratoriums Through an Information-processing Lens’, I argue that when moratoriums (or ‘stays’ as they are known in the US) are viewed through a signalling and information-processing lens, they are best conceived of as a tool to create liquidity and stabilise the business of a debtor in the later stages of distress—at least for large corporates. This pushes against the dominant conception of the moratorium as a tool to encourage early action and has important policy and design implications.
A moratorium prevents creditors from enforcing their rights against the debtor without destroying those rights. In other words, an individual creditor’s rights are suspended while the moratorium is in force unless the creditor can follow a process to have the moratorium lifted. This prevents a damaging ‘grab race’ for the debtor’s assets that may make it impossible to rescue the debtor or its business. The moratorium is also generally seen as part of a legal toolbox to encourage the debtor to seek corporate restructuring and insolvency law protection in the early stages of financial distress when it is more easily rescued. However, in the article, I draw on both UK and recent US corporate restructuring practices, informed by insights from complexity theory, to challenge the idea of the moratorium as a tool to incentivise early action. Indeed, my core contention is that the moratorium is of value when the benefits it brings outweigh the signalling disadvantages that are associated with it for large corporates in distress, and that this tipping point is reached in the later stages of distress. I focus on the dramatic rise of pre-packaged bankruptcies in the US and argue that this has been driven, in part, by an increased focus on the ways in which information is communicated to, and interpreted by, stakeholders in complex corporate reorganisations, and by the problems that the Chapter 11 automatic stay brings when it is viewed in this way. I argue that the use of the moratorium as a tool for large corporates in late-stage distress is plainly visible over the long-run history of UK corporate restructuring and insolvency practice.
With my core insight in hand, I analyse how well two UK moratoriums measure up: the Part A1 moratorium introduced into the Insolvency Act 1986 by the Corporate Insolvency and Governance Act 2020 and the administration moratorium. I argue that the Part A1 moratorium is well designed from a signalling and information-processing viewpoint but falls short when analysed and evaluated as a late-stage large corporate restructuring tool. The administration moratorium fares better but the historical associations of the administration procedure create a very real challenge when it is viewed through a signalling and information-processing lens. Moreover, there are some legal uncertainties associated with the use of the administration moratorium as a stabilisation and liquidity-creating restructuring tool. Overall, I do not find a moratorium that is entirely fit for purpose for financially distressed, large corporates. I then briefly turn the lens away from the company’s stakeholders and towards the company itself and consider whether the Part A1 moratorium may have a role to play as a company gathers information during the restructuring process, learns from that information, and evaluates its options. Finally, with the information-processing lens still trained primarily on the company, I ask whether small companies might find the Part A1 moratorium of greater utility than larger ones. I find that there may be strategic uses of the tool and that smaller companies may find it useful but that there are issues to be explored that go beyond the scope of the paper.
I then conclude. I admit, of course, that moratorium protection raises difficult questions about the balance of debtor and creditor interests. Indeed, the later a debtor seeks moratorium protection, the greater the risk that the moratorium is being used to delay an inevitable insolvency. I note, therefore, that there may have been a deliberate policy to restrict the utility of UK moratoriums in late-stage distress. However, if this is the case, I query whether we need to revisit the policy framework, identifying that there are reasons to suspect that late-stage distress may become a more frequent phenomenon over the next decade than it has been over the last. Ultimately, I aim to contribute to current discussions about potential improvements to UK restructuring moratoriums, not least in the recent CIGA Post Implementation Review. Yet, I also aim to raise more fundamental insights into the role of moratoria in modern corporate restructuring practice that I hope will be of interest to scholars, judges, practitioners, and policymakers around the world concerned with restructuring and insolvency law policy and design.
* This post was previously published on the Oxford Business Law Blog.
* The full paper can be found here.