London schemes industry set back! Are we about to see an end to aggressive “schemes forum shopping”?
An extraordinary coincidence of timing at the excellent R3 Insol Europe International Restructuring Conference in London today. Global Turnaround Editor, John Willcock’s informative market update featured “London’s scheme Industry keeps on rolling” as a keynote topic. He pointed out the recent COMI shift objections in the Codere and Indah Kiat cases to what the court described in Codere as “… an extreme form of forum shopping” and “grabbing someone else’s debt just to get rid of it”. But just two days before reports had emerged that a German court, in ruling on bond holder claims written under Austrian law, whilst rejecting a German insolvency filing, had stated that Scholtz’s COMI was in Germany; this whilst Scholtz’s advisers have been active in migrating certain management functions to UK to establish a UK COMI and sufficient connection to proceed with an English scheme of arrangement to restructure Scholtz’s debt.
Whilst scrutiny of the detail of the judgment is awaited it is interesting that apparently “contrived” aggressive forum shopping is being seriously questioned by courts in both England and Germany. In a further conference session on developments from the European Union the concept of “COMI at the transaction date” was mentioned. Maybe this will appear in a forthcoming directive and further undermine post distress COMI migration. This would certainly be too late to affect the Scholtz restructuring but what is evident is that courts are alert to spurious forms of forum shopping and are taking a more demanding look at the underlying reality.
In the short term, the advisers of Scholtz may have to go back to the drawing board unless they can convince an English Court judge to take a contrary view to his German counterpart. Now that would be interesting!
Will the EU Regulation’s March 2014 recommendation to adopt more flexible pre-insolvency processes affect the UK?
In March 2014 the European Commission published its recommendation on “a new approach to business failure and insolvency” which set out minimum standards for a restructuring framework in each member state. The broad market reaction in the UK was mixed ranging from supportive from those sectors favouring facilitation of consensual restructuring ahead of formal process to “it ain’t broke don’t fix it”, particularly from the insolvency profession. The latter view was the dominant view in the UK Government response of March 2015 which followed a brief industry consultation. It cited the widely held belief that the UK system incorporating Schemes of Arrangement, CVA’s and pre-pack administrations was both flexible and efficient as demonstrated by the general direction of forum shopping to London. There seemed little government appetite for legislation change.
Some interested parties did take a different view, pointing to the gap between consensual restructuring where sufficient liquidity kept creditors at bay whilst solutions were negotiated (sometimes called Consensual Creditors’ Compositions), and any process signalling near insolvent distress to the customer and supplier constituency which damaged goodwill and therefore both value and recovery prospects. There were calls for a properly defined automatic stay, consistent methodology and independence in valuations, and post-petition super priority financing. Some influential parties pointed out the better recoveries for consensual restructuring but also acknowledging that once in formal process, the UK system with decisions undertaken by more commercially minded insolvency practitioners than the generally constrained Courts in continental Europe was fast, more predictable and more efficient than the continental counterparts.
Fast forward 12 months and we now see the EU is “assessing the state of play” to see whether further measures to strengthen the move to facilitate restructurings at an earlier stage and to allow debtors to restructure without recourse to formal procedures are required. A multi-jurisdictional panel has been established from across the spectrum of the restructuring professions. In short, are we going to see an EU Directive which could mandate the UK to close the gap between consensual creditors’ compositions and CVA’s?
Does European distressed debt represent a compelling investment opportunity for investors? Since the start of the financial crisis in 2007 this has been a recurrent question with no consensus among investors as to which answer is the correct one. Still today, despite the many examples of successful distressed transactions in Europe, many of these investors still are reluctant to answer with a firm “yes” when being asked this question.
There are in our view two key misconceptions when approaching European distressed debt which are framed as follows: (i) European banks do not sell NPLs and when they do they do not sell at distressed prices, and (ii) the European restructuring legal framework is not creditor-friendly and does not allow for the implementation of successful restructurings making liquidation the only possible outcome.
Despite the fact that we can appreciate that these concerns may have been applicable pre-2007 crisis we believe that at the present time these do not longer apply, or at least their weight has been substantially reduced.
The deleveraging process by European banks
The coming seismic shift in marketing and business development in law firms
As legal markets become even more competitive over the next ten years, commercial law firms everywhere will be forced to reconsider many of their long-held assumptions and practices about marketing and business development. Fast-changing client needs and perceptions of value, amplified by communications and knowledge technology, will make this a seismic shift. Some firms will anticipate and respond effectively. Others will not.
What type of law firm are you?
Understanding the distinctions between commercial law firms and retail law firms will be critical to selecting the best strategies and tactics for marketing and business development. Some marketing tools will become largely irrelevant to commercial law firms, but at the same time even more important for retail law firms.
A “commercial law firm” is one that offers sophisticated corporate and commercial legal services to corporations, government agencies, and high net-worth individuals. Most large law firms and many mid-sized ones can be characterised as commercial law firms, as well as boutique firms that specialise in offering similar services in limited practice areas or client sectors. By contrast, a “retail law firm” (also known as a “high street firm”) focuses more on relatively routine services to individual clients and small businesses.
These two categories actually are more like the ends of a spectrum than sharp definitions. Many law firms have a mixture of “commercial” and “retail” attributes; but even for these hybrid firms it is important to understand the overall orientation of the firm’s strategic and business objectives. Not knowing what type of clients and services drive the firm’s business, or an important part of it, can lead to wasted investments in the wrong type of marketing and business development efforts. In “full-service” law firms, the commercial-or-retail analysis often must be practice area by practice area.