Corporate rescue: a critical analysis of its fundamentals and existence

The current financial climate has created an unsympathetic environment for companies to trade. The economic shift has highlighted the fragility in which companies are financed, operate, and how they identify, analyse and attempt to neutralise financial distress. Given that the potential options available to a company are dependent on the conclusions drawn from the examination of the distress it has become imperative to determine at what point a company is in trouble. In conjunction with satisfying this point, effort must also be placed on defining “financial distress” and considering how this has had a bearing on the implementation of a rescue strategy. The array of problems that companies face do not all need to be fatal, and hence not all companies that have problems have to be liquidated. Corporate rescue is a variable term. How it is applied depends on a number of factors that range from the identity of the company to the philosophy and character of the insolvency practitioner. Currently corporate rescue follows a formal mechanism known as administration. This process is increasingly coming under challenge from an alternative model that addresses the fact that administration can be a lengthy and expensive process. This alternative model known as prepacked administration (“pre-packs”) offers to conduct “rescue proceedings” in secret and often result in selling the company to members of the existing management. How the prepack model operates and conflicts with many of the UK’s traditional principles such as transparency and fairness highlights the tension within the profession as well as a lack of legislative guidance on the matter. This thesis aims to consider a number of issues: to assess the characteristics evident within the UK’s corporate rescue model and determine whether they comply with the theoretical principles of rescue; to examine the relationship between corporate rescue theory and government policy and how this has developed within the current economic environment; to determine whether the UK’s rescue model, when evaluated in light of the efficiency rule, can be classed as a true rescue model; and to ascertain whether prepacks offer a viable and legitimate solution to the inadequacies of the current law governing corporate rescue. Chapter One will introduce the corporate rescue concept and set out the research questions and aims that will be examined in this thesis. The second chapter will take a closer look at the fundamental principles and characteristics that are essential to the UK’s corporate rescue model and help shed light onto how the rescue regime came to being endorsed. Chapter Three is constituted by two parts. The first part sets out to examine how rescue is implemented in practice, taking a look at the different philosophical divides in corporate rescue and the influence of the Cork report. The second part focuses on the role and duties of the insolvency practitioner, in particular the wide discretion afforded to them and how they may use this to their advantage. Chapter Four explores the theoretical concepts of efficiency and the relationship that this has with the UK’s administration process. The penultimate Chapter introduces the alternative “rescue” measure which this thesis will class at the pragmatic response to the inadequacies of the current corporate insolvency legislation. Finally Chapter Six reflects on the research questions and aims set out in Chapter One and highlights any areas that would benefit from further research.