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Problems, Principles and Solutions – Corporate Finance Lab

1. Economic and legal realities of corporate groups

The enterprise group is one of the primary forms of organising economic activity. In fact, virtually every major firm is organised as a group. From early precursors of business groups, such as the Medici system of partnerships of the 15th-16th centuries and the European colonial trading empires of the 17th centuries (e.g. Dutch and English East India Companies), to the emergence at the end of the 19th century of the first modern groups of companies characterised by multi-layered and hierarchical structures of ownership and control, groups have occupied an important place in societies’ economic and political life. Yet the enterprise group is a curious case. It combines separate entities, usually protected by limited liability, and often an integrated business enterprise facilitated through elaborate networks of financial arrangements. Some of these arrangements “perforate” limited liability (e.g. cross-guarantees), while others closely tie the fates of separate group members (e.g. intra-group loans, centralised cash management, intercompany cross-default and ipso facto clauses). Consequently, the idea of legal separateness, which underpins modern insolvency law, hardly reflects present-day economic realities.

In my PhD book “Intra-Group Financing and Enterprise Group Insolvency: Problems, Principles and Solutions”, I focus on financial arrangements common for enterprise groups and explore their influence on and treatment in insolvency and restructuring of corporate groups. On the one hand, these arrangements can have a positive effect in the form of risk mitigation – ex ante resulting in a lower cost of debt and greater liquidity. On the other hand, intra-group financial arrangements promote group inter-dependence and could magnify the risk of contagion and opportunistic behaviour within the group. In my thesis, I conduct a comprehensive analysis of contemporary commercial practices, case law and the legal tools offered by three prominent restructuring hubs: the UK, the USA, and the Netherlands.

The insolvencies of corporate giants like Lehman Brothers, Nortel Networks, Oi Brazil, and more recently, of Hertz, LATAM Airlines and FTX, with debtor entities scattered all over the world, attest that group entities not only “live” together, but also “die” or “recover” together. If insolvency law does not take into account the economic reality of group integration, it may result in the loss of value created by group synergies, organisational and financial links within a group.

Insolvency law should respond to the legal reality of entity separateness and the economic reality of group integration.

But how should insolvency law be designed to respond to the group reality in the context of intra-group financing? To answer this question, I rely on a principle-based approach, which involves studying rules (positive law) and assessing them through the lens of legal principles to develop optimal policy choices. Returning to the underlying legal principles (e.g. value preservation and maximisation, equal treatment of creditors, protection of legitimate expectations and freedom of contract) is a way to navigate the complexity of group structures and their financial arrangements.

However, legal principles often collide with each other. Consider cross-guarantees and intercompany ipso facto clauses (i.e. clauses in contracts that entitle the creditor to terminate or accelerate a contract with one group member if another group member files for insolvency). They are based on freedom of contract and aim to create certainty for the creditor and minimise counterparty risk. Yet their enforcement may have a detrimental effect on the survival of the group enterprise. This is why, in some cases, contractual freedom and enforcement rights could be limited in furtherance of the principle of estate value preservation and maximisation. As argued in the book, any such limitation should be guided by a proportionality analysis.

2. Book structure: connecting the dots

The book is divided into several key parts that build on each other and connect to each other, allowing the discovery of common patterns and considerations.

>> The first part introduces groups of companies, discusses their characteristics and types. It also describes how insolvency law tackles financial distress within enterprise groups and how it has evolved over time. The Global Financial Crisis (GFC) of 2008 and the rise of the so-called rescue culture facilitated this evolution and prompted the adoption of group-mindful solutions and tools. Finally, this part lays down the analytical framework used in the book. It explains a principle-based approach, defines a legal principle, identifies legal principles most relevant in the context of enterprise group insolvency, and investigates possible ways to balance conflicting legal principles.

That said, one should be extremely cautious (and rather unwilling) to accept group interest alone as a valid reason for infringing property rights of creditors of individual group members. This is a fundamental limitation for any group solution.

>> The second part of the book serves a dual purpose. First, it describes the financial arrangements commonly found in groups of companies. Second, it analyses the benefits of intra-group financing and underscores the problems which such financing, along with applicable rules, may pose for efficient group insolvency and restructuring.

Take, for example, cross-guarantees. In a crisis situation, they permit a group-wide “mass enforcement”, allowing the guaranteed creditor to foreclose on assets of the principal debtor and of the guarantor(s) or force them into insolvency. The threat of such enforcement may compel the debtor’s management to make selective payments in favour of the guaranteed creditors. For unsecured creditors, the enforcement of group guarantees may entail large costs, especially if it leads to a group disintegration. The existence of cross-guarantees may affect restructuring in other ways. For instance, under some national laws, a guarantor might be entitled to recover from the principal debtor the sums that it has paid to the creditor. This right of recourse (e.g. indemnity, regres) can “survive” the approval of a restructuring plan adopted with respect to the principal debtor. This is the case with English schemes of arrangement and Dutch bankruptcy proceedings. Filing a recourse claim by the guarantor against the restructured principal debtor could undermine the effectiveness of the restructuring in the first place. I call this the “ricochet problem”, following the terminology used by English courts to describe a recourse claim of a guarantor against the principal debtor.

Typical intra-group financial arrangements may significantly complicate group restructuring.

Another unique problem identified in the book relates to transaction avoidance. Should group guarantees be assessed in view of the group reality, or should their benefit be calculated based solely on the position of the guarantor without regard to a broader group context? The answer to this question is of great practical relevance, as it is likely to determine whether a cross-guarantee can be avoided in insolvency. I show that that under UK, US and Dutch law, group considerations can in principle be taken into account by courts. Yet the application of transaction avoidance rules to transactions involving group members and the evaluation of group interest are plagued by legal uncertainty. Legal uncertainty surrounding ex post review is harmful to the principle of protection of legitimate expectations. It can contribute to the increased cost of finance due to the risk of a guarantee being annulled ex post, and result in foregone transactions. This is undesirable if it leads to the underinvestment problem, as a result of which value-enhancing transactions and rescue attempts do not occur. How can insolvency law address this and other group-specific problems?

>> The third part of the book analyses potential solutions to the problems arising from or connected to intra-group financing for efficient resolution of financial distress within enterprise groups. It delves into various legal tools that have emerged in reaction to the economic reality of enterprise groups and to the patterns of their failures. Among these tools are third-party releases, extension of enforcement stays to non-debtor group entities, and the suspension or unenforceability of certain contractual clauses.

Some of the discussed tools embrace what I call an “extension effect”. They extend the effects of insolvency law and its protections to third parties. In other words, they give an “extension effect” to insolvency law, (i) enabling the restructuring of group liabilities in a single procedure (third-party releases), (ii) providing a temporary respite for group entities from enforcement actions (extension of a bankruptcy stay to debtor’s affiliates), and (iii) advancing restructuring and protecting a going concern value of the group’s business by depriving certain contract clauses of their force or otherwise mitigating their disruptive effects (limitations on intercompany ipso facto and cross-default clauses). These legal tools bridge economic and legal realities, preserving the separate legal identities of group entities while averting their complete insulation. Nonetheless, they inevitably raise questions about compliance with legal principles such as equal treatment of creditors, protection of legitimate expectations and party autonomy. The most acute conflict is usually between the preservation and maximisation of estate value, on the one hand, and the protection of legitimate expectations and freedom of contract, on the other hand.

Different intra-group financial arrangements and the distinct problems arising from them often call for different solutions. This is why the chapters in this part of the book contain separate recommendations or suggestions. For example, in the chapter devoted to third-party releases, I conclude that such releases are a welcome addition to the restructuring toolbox. They can help safeguard the continuity of a group enterprise against the destabilising effects of intercompany guarantees and other forms of cross-entity liability arrangements. However, while acknowledging the practical utility of third-party releases, I emphasise that they must not undermine the protective function of group guarantees. Therefore, I suggest the use of a “group best-interest-of-creditors” test, which would ensure that a guaranteed creditor is not deprived of its baseline entitlements and the benefits afforded by a valid security arrangement and its property rights (i.e. a claim against a third party). For the same reason, extending the protective shield of an insolvency stay to the debtor’s affiliates must not unfairly prejudice the rights of affected creditors or cause substantial detriment to them. This may require a possibility to lift the “extended” stay if its continuation harms the creditor.

Legal tools that extend insolvency law effects to group entities may be useful, but should be applied proportionately.

3. In search for guiding factors in group insolvencies

The division of a firm, representing a single interconnected economic ecosystem, into dozens, if not hundreds, of legal shells is a modern corporate reality. In my book, I aim to explore how insolvency law can better respond to the economic realities of corporate groups and their financial arrangements. Through this exploration, I have sought to dissect several general factors that might play a role in determining whether a group-mindful approach or tool should be adopted. These factors are not exhaustive, do not predetermine specific outcomes, and should not be seen as inflexible instructions. Instead, they can serve as key indicators, pointing in a certain direction or suggesting a decision while allowing for flexibility and case-specific considerations.

>> The first factor that can guide the application of various legal tools is group integration and interdependence. For fully integrated enterprises, where group entities essentially engage in a common business and depend on each other, and where the collapse of one company is likely to lead to the failure of other group companies or of the entire group, context-specific tools and solutions tailored to the group’s circumstances are justified.

>> The second factor relates to the financial situation of a group company seeking the benefits of extended insolvency law safeguards. If such a company is solvent and does not face cash flow or balance sheet insolvency due to a creditor action, the argument for employing insolvency law “superpowers” and extending insolvency law protections, such as debt discharge and adjustment, enforcement stay, and suspension or unenforceability of ipso-facto and cross-default clauses, becomes weak. After all, it is insolvency law and its principles, such as equal treatment of creditors, but most importantly, value preservation and maximisation, that serve to justify encroachment on creditors’ property and contractual rights. Without insolvency risk, sustaining this justification becomes difficult, and freedom of contract, in its broadest sense, should prevail.

>> The third factor pertains to the purpose and nature of the procedure. Two different scenarios should be distinguished concerning the purpose. The first scenario involves financial and/or operational restructurings or a going concern sale of the business to outside investors. The second scenario entails a piecemeal liquidation and closure of the business. It appears that in the context of a piecemeal liquidation, the rationale for preserving the debtor’s or the group’s going concern value is less compelling. Therefore, many of the discussed tools become less feasible or indeed unnecessary, as they would not achieve the goals for which they were designed. However, there may be some exceptions. For example, the extension of a stay to group companies may be warranted even in a liquidation and asset sale scenario, provided that it facilitates an orderly liquidation of an enterprise group and the coordinated sale of its assets, as in the case of Nortel Networks. As for the nature of the procedure, I argue that group-mindful tools are more defensible and justifiable in cases of financial restructuring involving group entities and sophisticated financial creditors, as opposed to non-adjusting or poorly-adjusting creditors.

>> The fourth and final factor concerns the prevalence of public interest. It is observed that the more prominent the role of the public interest, the greater the likelihood that law will acknowledge and give effect to a group’s reality in one way or another. In economic terms, the issue at stake is the (degree of) negative externalities. The larger these externalities, the higher the public interest concerns are, and the more likely the “groupness” is to be recognised and acted upon. Said otherwise, group-mindful solutions are powered by public interest. A good example is EU competition law, which utilises the concept of a “single economic unit”. The considerations of public interest also underpin post-GFC reforms in the field of bank insolvency and resolution, promoting the emergence of legal tools and mechanisms at a group rather than at an individual entity level.

When designing insolvency laws for enterprise groups, we should draw lessons from the regulation of banking groups, which tends to be more advanced and group-oriented, for good reasons.

On Tuesday, 14 November 2023, from 16:15 to 17:00 CET, I will be defending my PhD thesis. The PhD defence will be live-streamed, and you can follow it via the link: If you have any questions, please feel free to contact me by sending an email to:

Ilya Kokorin
Leiden University

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