The Rescue Delusion - Does the Rescue Culture actually exist or should it be more properly stated as a Recycling Culture?
Since the publication of the seminal Cork Report in 1982 and the subsequent enactment of the Insolvency Act 1986 (IA86) the so-called 'Rescue Culture' has been an axiom in English and Welsh insolvency law and practice. This approach to corporate insolvency has now existed for over thirty years and has as its roots paragraph 198 of the Cork Report and Sir Kenneth Cork's activities during the Wilstar receivership of the early seventies, if not before (for a full account of the development of the idea see the late Professor Muir Hunter QC's: The Nature and Functions of a Rescue Culture (1999) JBL 491). I have argued elsewhere on a number of occasions (e.g. one and two) that this rescue mind set or approach is meant to be prevalent in our practitioners of insolvency, whether accountants or lawyers, and it should inform the way in which they approach an ailing business (now company). For the sake of argument let us assume for the purposes of this blog entry that rescue is an appropriate aim for a good modern insolvency law.
But just as Professor Riz Mokal has convincingly shown that pari passu distribution is currently not and has not always been a fundamental distribution mechanism, might we also question the status of the 'Rescue Culture' ideal in modern insolvency practice and particularly in the context of how administration is now used following the amendments that were wrought by the Enterprise Act 2002.
It could be argued that the notion of rescue of the business (as required by s.8 IA86 as enacted) and now rescue of the company (pursuant to Schedule B1, paragraph 3 IA86, as introduced/amended) certainly does not now operate or exist in the same way that Sir Kenneth Cork (pictured above right) and the members of his committee intended the rescue culture to operate, although we must be careful not to judge law or history backwards with this proposition. What we might now say instead is that modern corporate insolvency practice (or restructuring or corporate recovery or whichever epithet it is given) has caused this global rescue aim to be relegated to a lower position within the various stakeholders priorities within any corporate insolvency (e.g. specific creditor outcome, officeholder remuneration, etc) and that instead we are seeing a mere recycling of business/company assets that achieves a less generally acceptable outcome than was originally envisaged by Sir Kenneth and the committee. We might call this change in outcome or approach or reduction in the true incidence of rescue, the Recycling Hypothesis.
This reduction in the rescue culture's importance (if it was ever fully adopted) or replacement of that culture with a recycling culture is most easily examined if we look at the recently modified administration procedure and the change in its role and usage. In some instances administration has now become synonymous with liquidation, and is used as such. This must go someway to diminish the hitherto main rescue tool's (administration) ability to foster a rescue culture ethos and approach. It is not that I believe a rescue culture cannot exist, but that the rescue aim is possibly unobtainable in its purest Corkian form. Instead, it might be better stated if we say that what we have in fact operating in practice is a recycling culture of viable businesses, namely the Recycling Hypothesis in operation.
One of the original aims of administration within s.8 IA86 was a more beneficial realisation of assets than on winding up. This is now reflected in Schedule B1, paragraph 3 IA86, where it is noted that one of the purposes of administration is: (b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration)... This is wholly different to the first purpose in the paragraph of: (a) rescuing the company as a going concern... To test the Recycling Hypothesis we need to examine the incidence of administrations falling under the above heads or purposes. Purpose (a) obviously goes a long way to rebut the Recycling Hypothesis, but does it in fact? With restructuring practice almost inevitably involving hive downs (the pre-packs of the 1990s) and reorganisations that manifestly change the substance and structure of the company in question, can we even say that this is actually Corkian rescue? Is it not just another form of what purpose (b) hopes to achieve, namely recycling the assets so as to obtain a higher value or relatively better outcome than if the company was placed immediately into liquidation. More work also needs to be done on this area as well, not least to take forward Mark Homan's work of the early 1990s on s.8 IA86 (now Schedule B1) and its effectiveness in causing a more beneficial realisation of assets than on winding up.
Picture Credit: http://cache.gettyimages.com/xc/3262275.jpg?v=1&c=ViewImages&k=2&d=10276273D480F6D8CBBC743211675BD6A55A1E4F32AD3138 - Sir Kenneth Cork.