The International Who's Who of Insolvency & Restructuring Lawyers has brought together four of the leading practitioners in world to discuss key issues facing lawyers today.
CHANGING LEGAL MARKET
Who’s Who Legal: Many interviewees commented on the increasing number of out-of-court restructurings and the continuing decline in large filings. Is this the case in your jurisdiction? Do you expect to see an uptick in formal proceedings and insolvencies in the coming year?
Patricia Godfrey: In the UK, we are seeing an increasing amount of out-of-court restructurings, in particular schemes of arrangements. An interesting trend has been the use of schemes without a COMI [centre of main interests] shift in the case of non-UK companies with underlying finance documentation subject to English law. It has proved the only viable way of saving the business in a number of these cases. On the formal side, retail is still suffering and we expect this to translate into an uptick in formal proceedings in the coming year.
Harvey Miller: I do not expect to see an uptick in formal proceedings and insolvencies in 2013. Rather, I see an increase in restructurings outside of the formal bankruptcy process. These restructurings will be primarily in the middle-market arena. Most likely it will involve a large number of privately held businesses, such as portfolio companies who may have been limping along for the past few years and now need to face the reality of restructuring. Because of the limited investor groups, these situations may be dealt with in a more expeditious, cheaper and more efficient manner. In some cases it may be necessary to effectuate a pre-arranged chapter 11 reorganisation or other similar types of insolvency processes.
Simon Powell: Whilst there are some nascent signs of a possible uptick in formal proceedings and insolvencies during the coming year, it is probably too early to tell whether this is a blip caused by the recent travails in the eurozone or something more serious and potentially longer-lasting, arising from a slowdown in the economy much nearer to home, across the border in China.
Since their peak in 2003, compulsory filings have steadily declined over the past eight years, the total for 2011 being less than one-third of those in 2003 and the lowest for almost 20 years. However, the most recent figures seem, at least potentially, to show the start of a possible reversal of this trend, with the monthly filings since March 2012 suggesting that formal filings are on the rise again.
There are no official figures for voluntary filings but anecdotal evidence appears to suggest that these might also be starting to rise, with some local companies finding it increasingly difficult to ride out the long-depressed economic climate and multinationals taking a more robust approach to reviewing their worldwide operations and being more prepared to make difficult decisions when necessary.
In terms of restructurings rather than formal insolvencies, Hong Kong suffers from the continued lack of a formal statutory procedure to assist the restructuring process. Whilst for a time nimble and creative practitioners made increasing use of the provisional liquidation process to provide a moratorium to enable a restructuring to take place without the threat of a renegade creditor bringing down the house, ultimately the Hong Kong Court reined in this practice, and so the vast majority of restructurings in Hong Kong continue to be out-of-court restructurings – the alternative (a scheme of arrangement under the Companies Ordinance) being both unwieldy and expensive. The long-proposed provisional supervision rescue procedure remains stalled, with the latest news being that a revised bill is planned to be introduced into the Legislative Council only in the second quarter of 2014. As it stands, we expect that most restructurings will continue to take place outside of the formal insolvency process in Hong Kong for the foreseeable future.
Sameer Huda: There are provisions within the UAE Commercial Transactions Law No. 18 of 1993 relating to concepts of “protective composition” which can be filed with a court in order to obtain similar protection to that obtained in other jurisdictions. However, debtors do not use this protection since it is general market practice for the security granted by them to a lender to create such acute issues that seeking protective composition becomes impractical. We would not expect to see more formal insolvencies under the current legislative system, but this area is undergoing significant reform with the upcoming issue of a new bankruptcy law.
“AMEND AND EXTEND”
Who’s Who Legal: The past year saw the continuance of the “amend and extend” philosophy, where the loans remain in place and banks extend the maturity for better terms – the rationale being that it allows lenders to wait and give their borrowers time to meet their obligations, avoiding defaults, in the hopes that the economy will soon recover. Can these temporary fixes be sustained? Have you seen any indication of banks becoming less supportive than before?
Sameer Huda: This is essentially the only route available to banks here, unless they wish to raise stakes significantly by trying to enforce all of the security they may hold against a borrower. In general, we believe that banks will continue to roll over debt and restructure terms, given the number of major commercial risks that any bank would create if it attempted to enforce against a borrower, not to mention the risks involved with trying to enforce using generally poorly drafted security documentation within a legal system that does not permit security registration, although the concept of security is underpinned by relevant law. However, many banks will have security cheques issued by the general manager (effectively the CEO) of a company and quite readily apply the threat of criminal sanctions against the person who issued the cheque in order to obtain payment. This threat can be, not unsurprisingly, quite successful, but a number of commentators in the market have criticised this practice for both its draconian nature as well as the negative effect that is has on being able to ensure debtors are willing to stay and negotiate a suitable restructuring. We don’t envisage this position changing in the near future.
Harvey Miller: The “amend and extend”, or “kick the can down the road”, is effective only for a limited period of time, unless there is an economic uptick. The worldwide economy continues to muddle along and that raises issues for these businesses. There is not enough growth to cure their problems. Ultimately lenders will press for solutions. As banks continue to be pressured by Dodd-Frank and Basel III to strengthen their financial statements, they will become less tolerant of these businesses. I see minor instances of that occurring now. Absent a major pickup in the economy, the intolerance of the banks may appreciate and force these businesses to restructure or take other appropriate action to cure their liquidity needs.
Patricia Godfrey: We are still seeing a lot of “amend and extend/pretend”, but sometimes the lender isn’t the only creditor calling the shots and directors need to ensure they don’t unwittingly worsen the position of other creditors where insolvency is inevitable by continuing without safeguarding their interests. In certain sectors the banks have been less supportive – for example retail – but in those cases where the business model simply isn’t viable, a more aggressive stance is to be expected.
Simon Powell: Shortly after the onset of the global financial crisis in 2008, the Hong Kong government introduced measures to assist small and medium enterprises (SMEs) in financing their operations – and to an extent it guarantees the same. Four years on those measures continue, albeit in modified form. In addition, the Hong Kong Monetary Authority (HKMA) and the Hong Kong Association of Banks (HKAB) have long encouraged banks operating in Hong Kong to “amend and extend” to allow borrowers time to meet their obligations to avoid defaults. There has long been a preferred philosophy in Hong Kong to avoid defaults and, wherever possible, to restructure debts as opposed to forcing debtors into insolvency. We do not see that philosophy easily changing, notwithstanding the deteriorating global economy.
The Hong Kong government is concerned about the difficulties faced by SMEs, which the trade and industry department (TID) has estimated constitute over 98 per cent of Hong Kong’s business establishments and employ about 50 per cent of Hong Kong’s workforce in the private sector. The TID provides SMEs with a comprehensive range of free business information, consultation services and facilities and administers SME funding schemes. The TID operates an SME loan guarantee scheme, which aims to help SMEs to secure loans from participating lending institutions – for acquiring business installations and equipment and meeting working capital needs – of up to HK$12 million, half of which is guaranteed by the government. This followed on from a special time-limited loan guarantee scheme that the TID had introduced in December 2008, which aimed to help Hong Kong enterprises to secure loans of up to HK$12 million for each enterprise to meet general business needs during the global financial crisis, with the government guaranteeing up to 80 per cent of approved loans.
Whilst banks’ lending policies are ultimately at their own commercial discretion, in 1999 the HKMA and the HKAB jointly published The Hong Kong Approach to Corporate Difficulties which set out formal, albeit voluntary, guidelines explaining how institutions should deal with borrowers in financial difficulties where the borrower is dealing with multiple banks. The HKMA and HKAB strongly support the guidelines and “expect” all members of the HKAB to follow them as representing accepted best practice of the banking community. The guidelines request that banks adopt a supportive attitude when a borrower experiences financial problems, and not to withdraw facilities or hastily put the borrower into receivership. The guidelines state “instead [banks] should endeavour to ensure that the borrower has sufficient liquidity to continue trading until a considered view of its prospects can be reached”.
In October 2008 and onwards, the HKMA adopted a series of measures to alleviate the difficulties facing businesses during the global financial crisis. This included issuing circulars to all banks, strongly urging banks to remain supportive and adopt a sympathetic attitude towards requests for temporary relief arrangements, such as extensions of repayment deadlines, and to take a proactive approach to help mitigate the wider financial consequences of the current economic turmoil, including the risk of rising insolvencies/bankruptcies. The HKMA urged banks to be as accommodative and flexible as possible to the funding needs of SMEs and to avoid withdrawing or curtailing credit indiscriminately, but introduce any necessary changes in a gradual manner to lessen the immediate impact. Banks were also reminded to follow The Hong Kong Approach to Corporate Difficulties.
To date, we have not seen any real indication of banks becoming less supportive than before, and, given the above, we do not see that changing unless the market experiences significant further stresses which make it all but impossible for banks operating in Hong Kong to continue to provide support to their customers.
Who’s Who Legal: With an increasing number of cross-border cases for global companies, lawyers commented that it is increasingly important to have a good network in place, with contacts around the world, and a good basic knowledge of the key insolvency principles in different jurisdictions. How have you responded to these challenges? Are there any additional skills which are necessary for insolvency and restructuring lawyers?
Patricia Godfrey: Many cases, even the smallest, have a cross-border element so we need to be suitably equipped to deal with whatever challenges present themselves. We work with our alliance network, and beyond those jurisdictions have long-standing relationships with firms who have both the specialised skill set and experience to deal with any situation where our clients may need their assistance.
Harvey Miller: In a smaller, more interconnected world, lawyers have to be diligent and more dedicated so that they understand the new economic order. Essentially all major businesses and financial institutions are interconnected and cross-border. Failure to understand the situation and the potential legal challenges will severely prejudice the ability of lawyers to perform and provide good legal advice and strategy. To meet these challenges, in my firm we have expanded required CLE [continuing legal education] and intensified in-house education of all lawyers in this practice area. In addition, we have expanded our international network. I don’t believe that there are any particular additional skills beyond those that should be possessed by lawyers who are involved in insolvency and restructuring matters. It is a question of dedication to expanding one’s knowledge base and maintaining and expanding that base.
Simon Powell: Today’s increasingly complex insolvency and restructuring transactions require the global coordination of substantive expertise from diverse practice areas. With 31 offices in every major business centre in the world, our lawyers come from all regions of the world to practice within our fully integrated, one-firm structure. As such, we have the breadth of practice that is required to represent any major participant in a restructuring transaction or insolvency proceeding, wherever it may take place across the world, working together with our colleagues from other parts of the world on cross-border cases when required. In order to deliver a successful restructuring, it is important, in the increasingly complex business world in which we operate, to draw on a wide range of legal expertise on global financial transactions: securities law, corporate, litigation, real estate, employment and pensions, environmental, regulatory and tax law, as well as having specialist and in-depth knowledge of insolvency and restructuring.
We have risen to the challenge presented by operating a fully coordinated restructuring, insolvency and workouts practice with broad geographic presence and resources to provide top-quality legal service anywhere in the world, especially on matters with significant cross-border challenges. In addition, our extensive involvement across the globe with every form of current finance structure gives our lawyers the necessary experience to design and implement the most complex financial restructurings.
In the increasingly inter-connected world, it is important for any major insolvency or restructuring that the firm handling the matter is able to call on resources geographically as well as from various practice areas. In the largest of cases no single lawyer can possess all the requisite skills, and so the focus for firms must be on recruiting and retaining quality lawyers in every region of the world, who can operate seamlessly with their colleagues from around the world and with experts in various different industries and practice areas. The culture and reach of our firm, coupled with our industry focus, strong practice groups and commitment to thought leadership, is the way in which this firm will thrive in this, and other, practice areas in the years to come.
Sameer Huda: We have had to address insolvency issues facing subsidiaries of UAE companies in other GCC jurisdictions. However, given the low volume of these and the very specific processes applicable in each jurisdiction, we would prefer to rely on our relationship firms in the relevant jurisdiction.
Who’s Who Legal: Our research noted that construction and real estate, shipping and consumer-related companies are faring worse in the current economic climate. Which industries are facing difficulties in your jurisdiction?
Sameer Huda: The construction and real estate sectors have experienced a significant level of distress in the UAE since the summer of 2008 and, like many of their counterparts internationally, businesses in these sectors have suffered the worst in comparison to other sectors by far. There have also been other well publicised events, such as the restructurings agreed by major operators in the shipping industry, which reflect a notable level of difficulty for this key industry sector for Dubai. The consumer sector has been more variable, with some businesses faring better than others but with no major notable restructurings having occurred. In the real estate sector in particular, a number of fraudulent activities were uncovered with corresponding action taken by the relevant UAE authorities.
However, due to the current insolvency law in effect, there have been no notable formal insolvencies as a result of any of the above. The relevant UAE authorities have recognised the urgent need to provide new insolvency legislation adopting best international practice – but law that is adapted to the local business culture and environment. Indeed, as a firm, we have worked on helping to draft this legislation in conjunction with Clifford Chance.
Until this new legislation is in place, we would expect to see the same types (but lower levels) of financial and corporate restructuring as those which have occurred over the past few years. This is the result of the business sectors of real estate, shipping and consumer goods having all seen some form of recovery recently. However, the possible longevity and depth of this recovery is still uncertain given the potential looming slowdown in international trade.
Patricia Godfrey: Real estate remains problematic, save for prime real estate around London where demand still exceeds supply. Real estate and construction have an obvious nexus and when one suffers the other tends to also. Construction is also currently affected by the squeeze on government demand and the fragile housing market. Beyond that, financial and professional services remain challenging in the current climate. Innovative and highly skilled manufacturing fares well in general, but competition in large-scale manufacturing continues to make this part of the sector vulnerable. Other sectors highly dependent on discretional consumer spending, including the hotel and leisure industries, are likely to remain under severe pressure.
Harvey Miller: In a troubled economic world and with a persistently high unemployment rate, consumer-related businesses are going to face ever-greater challenges. Competition for the consumer dollars will become more daunting and the weaker consumer-related companies will not make the grade. To a certain extent, the lack of a robust economy will have a similar impact on other industries – in particular construction and real estate, which are still trying to dig out of the effects of the financial debacle of 2008. As the net worth of consumers continues to decline, it is inevitable that it will affect all economic areas, not only construction and real estate.
The restructuring and insolvency areas are clearly tied to the economic circumstances of nations and the world. Continuing economic woes, whether generated by the eurozone crisis or other domestic ills, will precipitate a continuing need for restructuring services and appropriate insolvency proceedings.
Simon Powell: The industries most often mentioned as facing difficulties in Hong Kong and mainland China include construction and real estate, shipbuilding and consumer-related companies (especially retail and fashion), as in other parts of the world. On the retail side, some smaller local players reliant on consumer spending have already filed for insolvency, and there are clear stresses on others, including on some larger, more international names. In addition we have noticed stresses in the new energy sector, especially in the solar and wind-power sectors. In the hospitality arena, across Asia some airlines face significant operating difficulties, but other sectors of the hospitality sector (for example, hotels) appear to be holding up better – at least for the moment.
As in other parts of the world, the financial services players continue to feel the strains of an economy which continues to struggle.
We also envisage the potential for opportunities for insolvency and restructuring practitioners in Asia to arise across industry sectors if the ongoing financial crisis deepens and worsens, with such stresses uncovering underlying fraudulent activities and/or misfeasance leading to insolvency filings across the board, and the investigations and recovery actions that generally follow in such cases.