The Insolvency guide provides expert legal commentary on the key issues for businesses involved in Insolvency. The guide covers the important developments in the most significant jurisdictions.
Last Updated October 21, 2016
Chris Howard is head of Sullivan & Cromwell’s European Restructuring practice and a leader in cross-border restructuring and finance, with extensive experience working across a multitude of jurisdictions in Europe, the Middle East and the Americas. He advises international corporations, investment and commercial banks and financial sponsors on corporate restructurings, leveraged finance and distressed investments. Chris is the author of the leading international legal text “Restructuring Law & Practice”.
Sullivan & Cromwell LLP provides the highest quality legal advice and representation to clients worldwide. The firm’s record of success and unparalleled client service has set it apart for more than 130 years and made the firm a model for the modern practice of law. Today, S&C is a global leader in each of its core practice areas and geographic markets. The firm comprises more than 800 lawyers who practise through a network of 12, highly integrated offices located in key financial centres in Asia, Australia, Europe and the USA. The London office practises English, EU and US law. The bankruptcy and restructuring practice provides clients with the creative and commercially effective advice necessary to weather market changes. The group helps clients buy and sell distressed businesses, extend credit with less risk, protect their rights during counterparty bankruptcies, establish best practices for corporate governance insolvency and preserve the value of their businesses whilst changing capital structures.
Over the last 25 years the practice of restructuring and insolvency law has become highly internationalised and has evolved rapidly. Decades of globalisation combined with unprecedented growth in cross-border M&A and private equity has led to an exponential increase in the complexity of deals and the restructurings that proceed them, as cases inevitably touch the laws of multiple jurisdictions.
As credit discipline in the global debt markets continues to be relatively loose and monetary policy in most Western economies remains relatively liberal and permissive, it would appear from many of the contributions to this Guide that restructurings and insolvencies are starting slowly to increase, particularly in the oil and gas sector. As China continues to weaken and geo-political uncertainties increase, threats to the global economy remain. Accordingly, the propensity for the return of higher levels of restructuring activity (almost ten years post the financial crisis) remains in most of the jurisdictions covered by this Guide.
The last 25 years have also been characterised by an incredible growth in distressed investing and secondary loan trading, whereby strategic investors in the international debt markets have sought to acquire debt in distressed companies as a device for acquiring ownership of those companies through a transformational restructuring. The response of legislators and policy makers at both the national and supra-national levels has been to intensify the development of restructuring and insolvency laws to preserve jobs and industries and national and regional economies and wherever possible to (i) create a rescue culture whereby companies are rehabilitated as efficiently as possible through a restructuring and (ii) to minimise the economic and social damage caused by an insolvency, so that a substantial part of a company’s business can emerge as a going concern, even if the company itself is wound up or dissolved.
As a result of globalisation and both domestic and international legal reform, restructuring lawyers must work ever closer with legal advisers in many other jurisdictions to ensure that a restructuring or an insolvency is executed in the most optimal manner to maximise value, to ensure that advice is not being given in isolation, and to ensure that all factors affecting the restructuring and insolvency process have been identified. One of the fundamental objectives of the Chambers Insolvency Practice Guide is to facilitate and achieve this.
Understanding and appreciating the precise legal frameworks of various jurisdictions and their cultural and economic approaches to restructurings and insolvencies is also vital, and lawyers who are able to do this and transcend the inevitable complexity will be increasingly valuable. Lawyers in different firms who function as a team, who respect the intricacies and unique aspects of each legal system, and who recognise that an appreciation of language and culture is fundamental to successful cross-border work, will have enormous advantages over lawyers who see the multi-jurisdictional planning of a restructuring or an insolvency as a form of legal imperialism, or as separate pieces where each lawyer has responsibility only for his or her jurisdiction. The Chambers Global Restructuring & Insolvency Practice Guide is designed to help encourage and facilitate this cross-border co-operation and to enable professionals to exceed client expectations and be truly successful.
A few of the recent global trends in the law that relate to international restructuring and insolvency law and practice are discussed below:
The development of cross-border restructuring and insolvency policies, international codes and best-practice guidelines
The growth of international organisations such as the Turnaround Management Association (TMA) and the International Association of Restructuring, Insolvency & Bankruptcy Professionals (INSOL) has been a crucial step towards the professionalisation of restructuring and insolvency procedures and practice on a global level. Indeed, as restructuring has become increasingly global and more closely integrated, such organisations have been highly influential not only in shaping best practice, but also in promoting legal reform. As a result of the work of such bodies, many jurisdictions have changed legislation to facilitate value preservation by adopting better practices from other jurisdictions.
The TMA now comprises a worldwide professional community of over 9000 turnaround practitioners, attorneys, accountants, investors, lenders, venture capitalists, appraisers, liquidators and consultants, as well as academic, government and judicial employees. Headquartered in Chicago, Illinois, TMA has 57 chapters spanning five continents serving as a forum for the interchange of ideas.
Similarly, INSOL is a world-wide federation of national associations of accountants and lawyers who specialise in turnaround and insolvency. There are currently over 44 Member Associations with over 10,000 professionals participating as members of INSOL International. Individuals who are not members of a member association join as individual members. The impact of both organisations and the work they do in promoting best practice is evident in many restructurings and insolvencies as they play out.
INSOL also established a separate “Lenders’ Group” that in turn formulated the INSOL Global Principles for Multi-Creditor Workouts (the Principles). The Principles represented the culmination of valuable work undertaken by the World Bank, Bank of England, the British Bankers’ Association, UNCITRAL and the Asian Development Bank to articulate principles of best practice in restructurings that have been recognised at a global level. As can be seen in most of the jurisdictional chapters in this Guide, the INSOL Principles have evolved internationally to the extent that they now feature as a model in many jurisdictions for initially approaching multi-creditor debt restructurings.
The emergence of international treaties and regulations
As the activities of corporations have more and more cross-border effects, the restructuring and insolvency of such undertakings also affects the proper functioning of global markets. As a result, there has been substantial dialogue on the international co-ordination of the measures to be taken regarding the international restructuring of debtors and the management and distribution of an insolvent debtor's assets and estate. This has culminated in a number of international treaties and regulations that have facilitated an improvement in the execution and integration of international restructurings and insolvencies. In 1997 the United Nations Commission on International Trade Law (UNCITRAL) established the Model Law on Cross-Border Insolvency (Model Law) and when enacted into a country's legislation, it sets out when that country's national courts must recognise insolvency proceedings that have been started in a different country. Following recognition, the courts of other countries may also provide certain assistance to the foreign insolvency office holder.
In Europe, the Model Law was followed by Council Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation which came into force on 31 May 2002. It has direct effect (having automatic legal application and prevailing over domestic legislation) in all member states in the European Union, excluding Denmark. By introducing conflicts of law rules for insolvency proceedings concerning debtors based in the EU with operations in more than one member state and by giving pre-eminence to insolvency proceedings commenced in the member state in which a debtor has its centre of main interests, it has had a fundamental effect on the restructuring and insolvency landscape in the European Union.
The pace of reform in the European Union has not slowed down and the original Insolvency Regulation of 2000 is to be replaced by Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast and to become effective in Spring 2017)) which, importantly, provides recognition of pre-insolvency rescue proceedings to alleviate the need to file for a primary insolvency proceeding in order to gain such recognition. The Recast Regulation also controls (without prohibiting) COMI shifting to prevent more abusive forum shopping and for the first time introduces the concept of a voluntary group-co-ordinated proceeding.
On the international level these treaties and regulations have served to promote the rescue of economically viable, but distressed, businesses and the implementation of these measures in domestic, European and international law to achieve effective cross-border recognition of overseas proceedings is of fundamental importance. These developments are covered in each jurisdictional chapter of this Guide.
Liability management as a restructuring tool
Liability management tools have been widespread in the United States for many years, but are becoming increasingly relevant outside the United States as the European and Asian credit markets have become increasing disintermediated. As debt capital markets have grown in importance as a source of funding relative to the traditional bank loan market in Europe and Asia in the last decade, so too has the need for liability management tools akin to those long employed in the United States capital markets.
Liability management is a broad term that is used to refer to tender offers, exchange offers and consent solicitations for debt capital markets’ instruments, which are tools that can be used to effect a consensual balance sheet restructuring for distressed companies. A “tender offer” in this context refers to an offer by a company (or its affiliate) to purchase its outstanding debt securities for cash. Similarly, an “exchange offer” in this context refers to an offer by a company (or its affiliate) to exchange its currently outstanding debt securities for newly issued debt or equity, cash, or a combination of any of these. A “consent solicitation” is a mechanism used by an issuer of debt securities to solicit amendments to the terms of the governing document of the relevant instrument (ie the indenture or trust deed).
In a number of cases, conventional restructuring principles are likely to apply and market-based restructuring tools may be implemented without a court process, using the consent thresholds in the relevant documentation on a consensual basis. Indeed, orthodox liability management tools of tender offers, exchange offers and consent solicitations could be employed by distressed companies to manage the cost, maturity schedule and terms of their debt, and the legal regime applicable to such transactions is broadly similar. However, as liability management becomes more common in an era where many deals have been funded in the debt capital markets, there will be a number of jurisdictional nuances that will become increasingly important for practitioners as they attempt to use these techniques to restructure the securities issued by distressed companies. This Guide will hopefully serve practitioners well because as liability management is increasingly utilised by distressed issuers in Europe and Asia there is likely to be a greater diversity of restructuring tools adopted (such as schemes of arrangement) and a diverse range of laws and regulations that will be need to be navigated (such as European securities offering rules and regulations under the Prospectus Directive (2003/71/EC) (as implemented in national legislation)) in order to achieve restructuring goals of de-leveraging, extensions of maturity, covenant relief and equitisation of bond positions.
The “March of the Scheme” and the development of other cram-down devices in domestic laws
The use of an English scheme of arrangement and/or Chapter 11 of the US Bankruptcy Code to restructure the indebtedness of and/or to rehabilitate overseas companies which have the requisite connection with the English or US jurisdiction has increased significantly in the last five years. Such procedures have been used increasingly frequently because they enable a cram-down of dissenting minority creditors of such companies into a restructuring where those creditors are based in other countries, where (i) such countries either recognise the jurisdiction of the English or US courts or (ii) the creditors themselves are exposed to the jurisdiction of the English and US courts.
In order to reduce the scope of what is perceived to be forum-shopping by such companies, but also out of a recognition of the substantial benefits of such English and US cram-down techniques, a number of European, South American and Asian countries have recently developed their own cram-down devices under their own domestic law. This has been an important development and in each of the jurisdictional chapters contained in this Guide the contributing practitioners analyse the scope for using such cram-down techniques in their own jurisdiction.
All of the above trends and forces continue to evolve as both domestic and international law-makers strive to create legal frameworks that will facilitate the rescue and preservation of viable businesses as going concerns whilst also ensuring that insolvent entities are managed efficiently and on an expedited basis in order to maximise the value of their estates.
New challenges and developments are also emerging as jurisdictions outside the US consider the benefits of certain features of Chapter 11, such as a global automatic stay on claims and proceedings, the benefits of priority new money and the use of unencumbered assets as collateral and the ability to cram up, preserve and bind non-impaired creditors who will be adequately protected in the restructuring process.
It will also be interesting to see how the introduction of the new flexible framework for co-operation between office holders and courts dealing with the insolvency of a group of companies will play out. As intimated, the Recast European Insolvency Regulation adds a new procedure (to be known as a group co-ordination proceeding) to allow for co-ordination of insolvencies of groups of companies in which group members can choose to participate. This is an innovative development and the impact of this device will be monitored with interest across the European Union.
At the time of going to press, the UK has resolved to exit the European Union. In the immediate aftermath, Sterling fell to a 31 year low against the US Dollar. As foreign exchange traders rushed to sell the pound, Mark Carney the Governor of the Bank of England noted that this was "the largest two-day fall against the dollar since floating exchange rates were reintroduced almost half a century ago".
In the immediate aftermath, the only certainty for the UK economy has been enormous uncertainty. As economists have started to analyse how far Sterling could fall, a number have predicted potential parity with the US dollar. The fallout of Sterling's decline has started to be felt in the UK with food prices rising (as a result of US dollar denominated commodity prices surging) and the costs of importing raw materials also increasing substantially. This has instantly hit both consumer confidence and consumer demand with most commentators predicting a downturn in UK consumer cyclical sectors and those sectors dependent on discretionary spend.
The immediate aftermath of Brexit, which resulted in a downgrade of the UK by both Moody's and S&P has also seen a dramatic slowdown in UK economic activity with most commentators predicting the commencement of a recessionary cycle from Q3 2016.
There has been a run on UK property funds, with many funds, such as Standard Life, freezing redemptions and both the banking sector and the FTSE 250 have traded downwards. The construction sector has reported contract and project cancellations and redundancies have already started. The uncertainty and loss of confidence has already started to create enormous anxieties and the Confederation of British Industry, the British Chambers of Commerce and the Institute of Directors have all expressed serious concerns for the future of the UK economy as capex and inward foreign investment have diminished. Official trade statistics show that the EU is the destination for about half of all UK exports. The trade impact of Brexit is more significant if trade with other countries that hold an EU trade treaty is taken into account. These agreements mean that 63% of the UK's exports are related to the EU. Whilst replacement trade agreements may well be negotiated, this will take time and the uncertainty triggered by Brexit remains prevalent.
Perhaps the most fundamental structural concern relates to the impact of Brexit on the enormous UK current account deficit, which has suddenly been exposed by Sterling's fall and questions being raised regarding the country's capacity to attract capital to help pay down interest on the UK’s substantial sovereign debt.
Whilst Brexit has immediately seen the UK's predicted headline growth reduce substantially, the concern is that the domestic and geo-political turmoil and the economic uncertainty it has created may also adversely affect the stuttering Eurozone and any prospects of a sustained economic recovery at a European level. The UK is the leading export market for the largest European countries (especially for cars, machinery and chemicals) and the political pressure of preventing Brexit emulation and limiting the UK's access to the single market in order to preserve the European project and its institutions may result in a trade impasse, which adversely affects the Eurozone as a whole. More substantively, Brexit is expected to reduce EU GDP by an estimated 0.5% and is anticipated to have the most adverse impact in the tourism, automotive and industrial sectors.
Economists remain unsure as to what the implications of Brexit may be for the US economy and only time will truly tell. Britain comprises approximately one-sixth of the EU’s economy and any resulting destabilization has the potential to affect the US economy. The Federal Reserve recently acknowledged the possibility of Brexit as a reason not to raise interest rates further and that a “slower path” for future rate rises might be appropriate.
In a recent statement, the Federal Reserve announced, “The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the UK referendum on membership in the European Union. The Federal Reserve is prepared to provide liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the US economy.”
With the momentous change in Sterling exchange rates and the associated decline in the Euro dollar rate, it is also worth noting that US exporters will be confronted by a much more difficult export market driven by currency volatility, which increases the cost of US products and services and results in a softening of demand.
One thing is certain, these are tumultuous times and the resulting volatility triggered by Brexit is likely to present a myriad of interesting assignments for the global restructuring community, both in the short term but also in the medium and longer terms.