Global Insolvency and Bankruptcy Practice for Sustainable Economic Development

International Best Practice

Dubai Economic Council, Adrian Cohen, Tarek Hajjiri, Kenneth A. Loparo, Mockler, Mockler, Tarek Hajjiri

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781349561919, 9781137561749
• eBook ISBN: 9781137561756
• Topic: Business
• Subtopic: Business General
• Index: Business

This book is a comparative study of international practices in bankruptcy law, providing perspectives from a variety of specialisms including practitioners, lawyers, bankers, accountants and judges from the United Arab Emirates, the UK and Singapore.

1

Overview of Corporate Restructuring and Insolvency Law and Practice in England and Wales

Adrian Cohen and Gabrielle Ruiz

Introduction

An examination of the development of the law and practice in other jurisdictions is a useful exercise in the formulation of new laws. English insolvency law has a long and established history dating back to the nineteenth century. The English insolvency laws up until 1986 were considered very favourable to creditors, but in 2002, changes were introduced¹ which promoted a rescue culture more favourable to debtors. Despite this change, it continues to be the case that most restructurings are achieved in England, without formal recourse to the formal insolvency laws. Instead, insolvency laws are used as an incentive for restructurings to take place outside of the formal procedures, and creditors and debtors are therefore encouraged to participate on a consensual basis. Where consensus is impractical or impossible, restructurings are facilitated by the various tools available within the insolvency and companies legislation.

Over the last decade, there have been a number of dominant themes in the UK² restructuring and insolvency market. These themes include (1) a recognition on an international scale that the UK has an established restructuring and insolvency market; (2) a public and market familiarity with the rehabilitation of distressed companies in the UK which promotes a rescue culture and a co-ordinated approach to multi-creditor workouts; (3) the innovative use of implementation tools to address complex cross border and multi-tiered leverage situations; and (4) a market and legislation that has adapted and been developed as a result of the demands of the last economic downturn.

In this chapter, we consider both consensual and non-consensual approaches to businesses facing distress and the techniques used in England & Wales.

Rescue culture

Generally speaking, it is accepted that formal insolvency procedures are often value destructive; this means that stakeholders are often prompted to explore consensual restructuring options, but where this is not possible, then a non-consensual but structured insolvency may be able to minimise the negative effects on the business. It should be noted that given the public and market familiarity with the UK rehabilitation of distressed companies, restructurings often follow a consensual route, with formal insolvency procedures often being used as a plan B alternative.³

Consensual deals

In terms of the consensual approach to restructurings, much can be attributed to the “London Rules” (later more appropriately referred to as the “London Approach”), which emerged in the mid-1980s and were based on a letter written by a senior official at the Bank of England to the UK Clearers. This letter set out principles for the expected bank conduct, i.e., encouraging restraint and co-operation between banks when faced with borrowers in distress.

In the 1990s, when the UK lending market opened up and saw more involvement from overseas, INSOL⁴ then sponsored an initiative to develop the principles expressed in the London Approach which involved (amongst others) the UK clearing banks, certain leading US funds, and experienced UK and US advisers. The Bank of England (which hosted the working sessions), actively supported this initiative. This led to the publication, in 2000, of the INSOL Principles for a Global Approach to Multi Creditor Workouts (the “INSOL Principles”).

INSOL Principles

The INSOL Principles remain relevant to modern restructurings, in the sense that (with the associated guidance notes) they contain useful knowhow and an explanation of the usual standstill and due diligence process typically associated with multi-creditor restructurings.

The INSOL Principles also continue to provide a reference point for financial creditors and debtors for dealing with problems that often arise in a restructuring process, and to offer a blueprint for the process. The principal objective of restructurings remains to try and avoid uncoordinated and ill-considered actions by one or more financial creditors propelling a debtor into a premature insolvency process (to creditors’ collective disadvantage) and to give time for an investigation of the situation, to assess the options available to both the creditors and the debtor.

The INSOL Principles do not oblige creditors to agree to a particular restructuring solution, only to allow a process of evaluation and to seek to preserve the status quo in the meantime. The INSOL Principles recognised the mutual self-interest of financiers to have time to evaluate matters properly, and to work out the best route for at least a majority of creditors whose economic interests are at stake to pursue.

The INSOL Principles also advocate that lenders should lean towards co-operation and support for collective restructuring efforts, unless the suggested approach is obviously materially detrimental to the interests of a particular creditor bank (e.g., if it would mean loss of credit default cover). In other words, its bias is towards support of other institutions rather than opposition or obstruction. However funds are actively involved in restructuring efforts nowadays through debt acquired in the secondary market and tend to be only interested in the specific case. Banks regularly sell their exposures into the secondary market to parties who are prone to be opportunistic, which means that institutions approach restructuring in a more case specific way than in the past. It is not always obvious today that lenders will be supportive of each other. This can make achieving a consensus more difficult and, consequently, more costly.

It remains the case that the INSOL Principles are most relevant and useful in cases where lenders of a number of different financings are looking for common ground and a basis to take forward restructuring negotiations. The INSOL Principles do not oblige lenders to agree a particular outcome or a solution but merely to allow time for a proper investigation of options. The overriding assumption is that the mutual self-interest of different creditors is for order and co-operation, and while there may be differing creditor groups, the collective common interest will usually outweigh self-interest.

Multi-layered financing

The mid-2000s saw a growing proliferation of multilayered financings (which in turn reflected the development and experience of the high yield debt market). The multilayered debt structures were documented by ever more sophisticated inter creditor agreements, which sought to impose standstills on different tiers of debt holders, and to allow majority (usually senior) creditors to control enforcement processes. The tiered approach to debt holdings is somewhat at odds with theory of common interest between lenders. Rather, the emphasis is on differentiation (which, of course, supports differential pricing for different tiers of debt). It is not altogether surprising, therefore, that having emphasised the difference in creditors’ positions, the modern reality is that such differentiation permeates attitudes to restructuring, and that tiered debt restructurings have strategic plays between the different stakeholder interest groups.

While creditors in different tiers may still appear to support a UK restructuring process (at least initially), sometimes their interest in using the process is limited to establishing the dividing lines (in value recovery terms) between creditor groups. It is not uncommon for restructurings to proceed now, not in the spirit of general lender co-operation, but rather on the basis of confrontation between lender groups, including attempts by those who are “out of the money” to frustrate the restructuring process and/or bypass/renegotiate the contractual ranking of their debt.

Although it is a simplistic generalisation, tiered debt arrangements should ideally be supported by tiered corporate structures, with lower-ranking debt being structurally subordinated to the higher-ranking debt (and all financial debt being borrowed at levels above the level at which other creditors, such as suppliers, customers and employees claims’ sit).

It may be that in a market where tiered debt financings increasingly proliferate, self- regulation along the lines suggested by the INSOL Principles may no longer suffice with the sometime aggressive enforcement methodologies which sit uncomfortably with the rescue culture.

Although debtors tend to face similar challenges in restructurings, it should always be borne in mind that each business is different, and these differences often call for different approaches in the restructuring.

Valuation

In some businesses, values will deteriorate very quickly if the business is kept in a distressed state, so speed is of the essence. The goodwill of customers may be harmed and confidence lost if distress is known to exist; in other cases, much of the value of the business may lie in the know-how of key employees, and it is not uncommon for key employees to leave the business if they lose confidence in its future. In cases involving property companies (tax considerations apart), there may be less of an apparent downside to an insolvency process or enforcement of security, as long as a fire sale of assets can be avoided. By contrast, for businesses producing products or supplying services, a drawn out period of uncertainty, enforcement of security, or a formal insolvency process may be a disaster, in value recovery terms.

There is no statutorily imposed method of valuation in the context of a restructuring. Much will depend upon the nature of the business, the particular circumstances of the debtor, and the timing of any realisations. Different methodologies may be appropriate, which an expert valuer will normally determine. Even then, the values will not be certain or exact and may fall within a wide range. From the current jurisprudence in this area, it is clear that there are the benefits that can be obtained from a rigorous valuation analysis, and that stakeholders who do not have an economic interest in the company may be validly excluded from the restructuring process.

In addition, valuation may be key in determining which stakeholders have an economic interest in the valuation of the business going forward. This may determine the restructuring strategy ultimately pursued.

The jurisdictional location of assets can be another point for consideration, as the legal situs of an asset often impacts the enforcement analysis (i.e., determining the applicable insolvency regime in cross border cases). It should also be borne in mind that assets can move between jurisdictions and further complicate the analysis.

Trading creditors

Identifying the key assets in a business is important, as is understanding the “value drivers” of the business. It is essential to understand how the business generates its earnings and/or profit, and where values lie in the group structure (i.e., in which entity). Other relevant factors to consider may be third-party influences (e.g., credit from suppliers or dependencies on particular customers or suppliers), contractual termination rights (e.g., under supply contracts, intellectual property or regulatory licences), and book debts, which may be susceptible to set-off claims (particularly where they arise from long-term relationships involving future maintenance or warranty obligations).

Groups of companies

It should also be borne in mind that companies within groups do not necessarily operate autonomously. Quite often there are crucial dependencies (for example, if intellectual property rights for the group are held in a particular company or core services, personnel or data are located in or owned by one company in a group but used by others). The intra-group debt position can also have a significant impact upon the outcome in an insolvency (and any restructuring), and indeed, the ability of a company to continue as a going concern if other parts of the group fail.

Third parties

Claims by or a reduction in available credit from third parties (such as credit insurers or suppliers) may place additional stress on restructurings. Inevitably if third parties become aware of a debtor’s difficulties, they are likely to seek to protect their interests, often by seeking to reduce their exposures. This can cause issues in liquidity terms and exacerbate an already troubled situation. Occasionally, nonfinancial institutions can be included in a multi- party restructuring (e.g., key suppliers or credit institutions), but to achieve this, it must be clear that such third parties have a common interest with the financial institutions in seeing the restructuring achieved, and speed is usually of the essence, so they bring them into the restructuring before they can manage down their exposures.

New monies

Another factor to bear in mind is that so-called new money is relatively hard to come by, and financial institutions are generally averse to increasing exposure to a troubled debtor unless the case for doing so is clear and compelling. Furthermore, certain of the financial institutions participating in a restructuring may not be able to advan...

Table of contents

• Cover
• Title
• 1  Overview of Corporate Restructuring and Insolvency Law and Practice in England and Wales
• 2  Role of Insolvency Practitioners in Restructuring and Bankruptcy in the UK
• 3  Maximizing Enterprise Value and Minimizing Hold Up Value: Reorganizations in the United States under Chapter11 of the US Bankruptcy Code
• 4  The Role of US Judges and Courts in Enforcing US Bankruptcy Law
• 5  The Effects of Business Insolvency on the Duties and Liabilities of Directors and Officers A Comparative Analysis With Recommendations to Promote Good DecisionMaking
• 6  Global and Regional Practices in Financial Restructuring and Bankruptcy Laws: Lessons to Be Learned from Singapore
• Index