What Liquidation Does for Secured Creditors, and What it Does for You
A core objective of collective insolvency regimes is to preserve value in the insolvent estate. This value is then to be distributed in accordance with the appropriate statutory scheme. Value might be lost for any of a variety of reasons, including, in particular, (i) misuse of corporate assets by those with influence over the distressed company, and (ii) precipitate individualistic enforcement action by particular claimants, which dismembers the corporate estate and thus destroys synergetic values. The statutory liquidation regime attempts to counter this, in order not simply to benefit those with claims against the company, but also with a view to protecting the public at large from (among other things) abuse of the corporate form. It does so by (i) disabling certain types of dealings with the company's assets, (ii) arming the liquidator with investigative and recuperative tools, and (iii) empowering him to carry out synergy-preserving disposals of the company's property. While liquidation has long (though far from perfectly) performed all these essential functions, the virtual abolition of administrative receivership by the Enterprise Act 2002 had promised to energise the third of these in particular. Unfortunately, however, the ability of the liquidation system to perform any of these functions is threatened by the lingering effects of a recent judgment of the House of Lords, and by some of the commentary this judgment has attracted. Their Lordships' decision has been used to contend that secured claimants 'stand outside' liquidation, in the sense that they are not entitled to participate in the winding-up process. It has further been contended that this remains true even though the actual effect of the judgment has been legislatively reversed. The extent to which these propositions, if true, undermine the core functions of liquidation may not have been fully appreciated by those seeking, even in the face of Parliamentary disapproval, to shore up their Lordships' decision. This paper undertakes a fresh analysis of the liquidation process. On the basis of this analysis, it is argued that the proposition that secured claimants 'stand outside' liquidation in the relevant sense (i) is a product of a misunderstanding of the dual duality in the nature of liquidation proceedings, in that, in principle, they serve both public and private functions, and, they further the interests of both secured and unsecured creditors; (ii) overlooks, both, the ways in which secured creditors benefit from liquidation, and the ways in which unsecured creditors have a real interest in the proper administration of their debtor's encumbered assets; (iii) mistakes the secured creditor's choice in usually being able to gain immunity from the liquidation process, for a compulsion for it to stand exiled from this process; (iv) is incorrect as a matter of the history and practice of this institution; and (v) is rendered unsustainable by the statutory text. It is concluded that secured creditors have never 'stood outside' liquidation, and that this is a fortiori given that the judgment allegedly confirming their exile has been overturned by the Legislature.The definitive version of this paper was published at (2008) 71 Modern Law Review 699-733, and is available at http://www.wileyinterscience.com. This version contains some material (particularly in Section 5.1) not included in the published paper.