When things go wrong under a financing arrangement, there is a considerable body of legal, commercial and practical guidance out there for lenders. By contrast, corporate borrowers are not so well catered for.
Our short note is intended to fill this gap by providing borrower focused guidance in the unhappy event that a material breach has (or is alleged to have) occurred under a funding document, leading to a potential or actual event of default and enforcement action.
Commercial and other practical concerns:
Political Lessons for Legal Risk Managers From the Brexit Vote
It would not be an understatement to say that the outcome of the Brexit vote surprised many legal risk managers worldwide.
1. Keep calm and carry on
Legal risk managers should not make any bold or brash decisions concerning operations or investment in the United Kingdom until things calm down and there is a clear political, economic and social understanding of what the true impact of Brexit will be for both the United Kingdom and the European Union as a whole.
2. It ain’t over til its over
There will be tough negotiations ahead between the United Kingdom and the European Union 27 remaining Member States to work out the divorce terms. This may take years to resolve. It is clear that the stumbling block is that there can be no access to the Single Market by the United Kingdom without freedom of movement for European Union workers. However, the cut from this hard and fast line will hurt French farmers and German automobile manufacturers as much as it does British bankers and airlines.
However, until Article 50 of the Treaty on the European Union (“TEU”) is triggered by the United Kingdom, the divorce is not a done deal. While the UK Government suggests that the Prime Minister has the authority to trigger Article 50 of TEU, it is clear that Parliament would have to pass an act repealing the European Communities Act 1972. The United Kingdom courts would then have to give effect to and follow such a major constitutional act. The question to be asked remains what aspects of European law will remain incorporated into United Kingdom law (England and Wales, Scotland and Northern Ireland) after a Brexit? Nobody knows.
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
GLB: Why are you interested in the theme of restructuring?
Wessels: In the second part of my professional career of some 40 years, I have written, taught and advised on insolvency - Dutch insolvency, but more specifically European and international insolvency. For a few years now, there have been trends in Europe towards the closer harmonisation of national insolvency laws. In March 2014 the European Commission presented its Recommendation on a New Approach to Business Failure and Insolvency. The objective is to shift the focus away from liquidation towards encouraging viable businesses to restructure at an early stage to prevent insolvency.
GLB: Can you tell a bit more about this recommendation?
Wessels: It is a non-binding instrument which contains 36 individual recommendations. The European Commission wants to give viable enterprises the opportunity to restructure and stay in business. The chosen method is to reform the national insolvency legislation of EU member states with the aim of helping viable firms to continue in business and safeguarding jobs, while simultaneously improving the situation of creditors, which will be able to recover a higher proportion of their investment than if the debtor went into formal insolvency proceedings.