12.3.3 Protecting the right to enforce (liquidate) and to reorganisation value

A restructuring necessarily means that creditors are required to surrender their statutory right of enforcement (liquidation). Imposing a restructuring deprives creditors of their right to enforce and to procure payment in cash. This is a major infringement of their enforcement rights, that goes much farther than merely exchanging individual enforcement rights for a collective enforcement process. Whereas exchanging individual for collective enforcement rights infringes only on procedural rights to enhance the realisation of substantive rights, imposing a restructuring instead of liquidation infringes on the substantive right of parties to payment in cash, often with a view to realising the aforementioned “delta” for the benefit of parties who in the event of liquidation would not be entitled to any distribution at all. As set out above, a restructuring may thus benefit one group but prejudice another. It can worsen the position of creditors who in the event of liquidation would have received cash but are forced to take non-cash under the terms of the restructuring.

A common thread running through this book is the proposition that the right of creditors to enforce and to procure payment in cash (i.e. liquidate) is a significant right that others should not readily be able to deprive them of. For a sufficient justification for a restructuring system, I therefore suggest as a first boundary condition that a restructuring may be imposed on creditors only if a majority of the relevant class agrees or if the creditors have the right under the terms of the restructuring to opt for a distribution in cash that is at least equal to the amount that they could expect to receive in a liquidation. If this boundary condition is satisfied, there is no subgroup that can reasonably be considered to be worse off under the terms of the restructuring than it would have been in a liquidation.

A second boundary condition for imposing a restructuring is that, where majority consent of a class is lacking and members of a dissenting class do not require distribution of their share of the liquidation value in cash, the value that is realised with the plan (i.e. the reorganisation value) is distributed in accordance with the applicable order of priority. This means that members of a dissenting class who do not opt for a distribution in cash on the basis of liquidation value, should have the alternative option under terms of the plan to receive their share of the reorganisation value in cash or in non-cash in accordance with their rank.