The International Who’s Who of Insolvency & Restructuring Lawyers brings together Susan Moore of Stephenson Harwood, Agustín Bou Maqueda of Jausas, Constantinos Klissouras of KP Law Firm and Alexander Klauser of Brauneis Klauser & Prändl to discuss the changing nature of work and growing internationalism of this sector.
Who’s Who Legal: According to several of our respondents, the nature of insolvency and restructuring work seems to have changed in recent years, becoming increasingly sophisticated and international in scope. Have you found this in your jurisdiction? How has your practice adapted to these challenges?
Susan Moore: Restructuring and insolvency mandates in the UK have become far more sophisticated and cross-border in nature over recent years. There are now very few material cases without a foreign element of some sort, reflecting the trend for globalisation. Also, capital structures have generally become far more complex and there is often fragmentation of creditor groups – there are now typically more stakeholders involved in a distressed situation. Distressed debt trading can also add a dimension, as can the existence of a pension deficit.
There have been huge advances in the law to facilitate cross-border restructurings both in the UK and abroad – notably the European Insolvency Regulation and the adoption by the UK and other key jurisdictions of the UNCITRAL Model Law on Cross-Border Insolvency. We have also seen significant growth in forum shopping, with many stakeholders choosing to utilise UK processes to implement a restructuring.
These developments promote restructurings and represent significant opportunity, as evidenced by the innovative and creative use of the restructuring tools available.
Agustín Bou Maqueda: I agree with this perception. Our practice is more sophisticated and with more international work. We have adapted by hiring lawyers who are proficient in foreign languages and training them on international insolvency matters.
Constantinos Klissouras: All these observations apply for Greece as well. The concurrent breakdown of the financial and real economies from 2010 onwards has meant that there was (and still is) minimal – if any – restructuring without a dominant cross-border element, even if only in the form of international finance and/or security.
Alongside increasing sophistication, we see increasing transparency in restructuring work (especially court-assisted work), resulting from the education of judges and lawyers, and improvement in the quality of filings. We have trained lawyers in basic finance and accounting, hired lawyers with an MBA or other training in finance.
Alexander Klauser: The scope of insolvency practice has indeed become more sophisticated, with the following two aspects: the legal implications and problems have become more intricate, and a lot more legal brainpower is being invested in the practice. It is not only insolvency law proper, but also company and antitrust law as well. The international dimension has, of course, increased with European markets integrating over time.
The second aspect is the business and restructuring work. Here, also due to the increasing complexity of business cases and their international scope, the challenge for insolvency practitioners has increased tremendously over the past 10-15 years.
The European Insolvency Regulation (EIR) has of course added to this complexity. Additionally, we are confronted with an increasing number of cross-border insolvencies which extend beyond the European Union.
Who’s Who Legal: Have you seen new law firms involved in this type of work, or has the pool of firms with an expertise in this sector shrunk in recent years? What other practice groups complement the restructuring and insolvency group? Is an international network a prerequisite?
Susan Moore: The main developments in the UK legal market are twofold. Firstly, a number of US firms have sought to establish restructuring and insolvency capability, as a result of a transatlantic merger or through the opening or expanding of a London branch. Secondly, consistent with the changes in the identity of stakeholders in distressed situations, certain law firms – typically those who represent the newer players – have more prominence.
Most material restructuring and insolvency mandates involve other practice areas, and the identity of those practice areas will of course depend upon the nature of the distressed business and the issues arising. However, it is common for a selection of the corporate, real estate, environmental, tax, litigation (including fraud and asset tracing), employment and pensions practice areas to be involved.
A single firm with offices across many jurisdictions is not a prerequisite to dealing effectively with cross-border matters, though an international network of contacts is very important. The key is that the team is comprised of lawyers who have the necessary expertise for the job and who are able to work together. Having the flexibility to select the appropriate lawyer in a particular jurisdiction can be an advantage.
Agustín Bou Maqueda: In Spain, the restructuring practice has increased drastically as a consequence of the economic situation, with many new players – some of them with a very low degree of knowledge about insolvency.
Our insolvency group is complemented with accountants and tax advisers in order to be able to deliver the appropriate, full advice.
Constantinos Klissouras: Established firms, rather than new ones, have invested in developing insolvency and restructuring capabilities. It is fair to say that the pool of practitioners has grown overall, albeit not with any notable vertical specialisation (eg, creditor v debtor v consumer work, etc).
As elsewhere, insolvency and restructuring in Greece is driven by litigation and finance, and it calls on other skill sets (labour, real estate, environment, tax) according to the particulars of each case.
As a result of Greece’s huge privatisation programme, privatisation law interacts strongly with general insolvency and restructuring law, and will continue on this path for the next four to five years.
Alexander Klauser: In Austria, the number of firms active in insolvency has not increased dramatically; however the number of practitioners active in the space has increased, as firms have grown in size. This is also owing to the fact that legal work around insolvency cases has increased (vide infra). Ancillary services such as due diligence accounting, M&A consultancy and asset appraisal are increasingly being employed.
Being part of an international network – such as, for example, the insolvency section of the International Bar Association (IBA), INSOL or the International Insolvency Institute – can prove extremely helpful in quickly identifying experienced practitioners in other jurisdictions when needed in the context of an international insolvency.
Who’s Who Legal: All over the world, lawyers have reported an increase in restructuring work and a strong refusal by struggling companies to accept bankruptcy. Is this the case in your jurisdiction? How long do you think clients will be able to continue to “amend and extend”?
Susan Moore: In the UK, consistent with the experience of many other jurisdictions, we have seen a large number of sticking plasters applied to distressed situations by amending and extending. However, the driver for this strategy is not coming from only distressed corporates; it has also been favoured by many banks.
This approach, together with the underlying economic conditions (low interest rates, lack of liquidity to fund solutions) has contributed to a phenomenon of “zombie companies”, whereby a company can service its debt but ultimately will not be able to refinance when the loan matures.
There is likely to be a continuation of the “amend and extend” approach – but to a lesser degree. As banks address their own issues, they may be more willing to tackle problem loans. Some of the traditional lenders have sold or are selling large parts of their loan books and, given the changed economics post-sale, the new lender may be quicker to seek longer terms solutions through restructuring activity. Also, we have seen a number of large successful restructurings, so it may even be that companies themselves will be more willing to address problems.
Agustín Bou Maqueda: In our jurisdiction the opposite has happened. In the past, companies were very reluctant to file for insolvency; now, however, the economic situation is so bad that they have understood that, in many cases, they have no choice.
Constantinos Klissouras: Absolutely. Alongside a generalised failure to enforce director liability rules, “amend and pretend” has not only been the preference of debtors, but the dominant response of domestic commercial banks (themselves heavily distressed). Greece is quite replete with “zombie companies”. In a similar vein to the UK, but for different reasons, “amend and pretend” is drawing to an end. The recapitalisation of domestic banks has completed successfully, and international consultants and auditors are now auditing stressed commercial finance portfolios, as part of Memorandum III legislation. Banks are being encouraged to unload bad assets as well as to support the use of insolvency and restructuring law.
Alexander Klauser: Of course, business people in Austria are just as keen to avoid formal insolvency proceedings as elsewhere around the globe. The Austrian law of insolvency and restructuring is, however, very restructuring-friendly and up to 35 per cent of insolvency cases lead to a debt rescheduling for the owners, which lets them keep the business. So, restructuring has for the last three decades been the foremost aim of Austrian insolvency law and practice. There is in fact little headroom for any further increase in restructuring of businesses in Austria.
Who’s Who Legal: Have you seen an increase in out-of-court or pre-packaged insolvency? Is this popular in your jurisdiction?
Susan Moore: There has been a very significant increase in recent years in out of court restructurings and pre-packaged insolvencies. The availability and flexibility of the relevant regimes is a forceful selling point for restructuring in the UK, and explains the number of foreign companies choosing to restructure here.
Pre-packaged administrations (commonly used to rescue a business as a going concern) are an extremely effective tool. Schemes of arrangement and CVAs also continue to be popular (and although they are court supervised, they do not amount to formal - and possibly terminal - insolvency regimes). In recent years, schemes have increasingly been used to restructure the debts of foreign companies (and this can be done in appropriate cases without the need for a COMI migration to England).
There have also been several out-of-court restructurings facilitated by powers and rights in inter-creditor agreements, where security trustees have entered into restructuring agreements to alter the rights of senior and mezzanine lenders.
Agustín Bou Maqueda: This is not the case in Spain, as the pre-pack scheme is almost impossible to apply because of the requirements and the majority rules applicable.
Constantinos Klissouras: Yes, we have seen this in Greece. All “amend-and-pretend” restructurings of the past three years have been out-of-court. Pre-packs were only re-allowed (after having been abolished in 2007) in 2012, and are now starting to take hold. Significant court-assisted restructurings are prepared, in large measure, out of court as well (by stakeholder groups, such as new money lenders).
Alexander Klauser: Yes, following one very large out-of-court restructuring around 2001, which turned out a tremendous success, Austrian banks have for the last decade or so been quite willing to restructure debt in an out-of-court manner; the general public of creditors have not been involved in these operations and little factual proof is therefore available. The motto of these out-of court restructurings can be simply coined thus: “The most successful restructuring is the one which never made it to the surface of public attention.” According to estimates by bankers involved in restructuring work, the figure of debt rescheduled out of court far exceeds the total of debt of all official insolvency cases.
On the other hand, debtors and their advisers attempting an out-of-court restructuring are inevitably confronted with the limits of the regulatory framework in Austria. Austrian insolvency law provides for a statutory deadline of a maximum 60 days for filing insolvency, counting from the point in time when the insolvency has become apparent to the debtor’s management. Disregarding this statutory duty to file can lead to personal liability of the directors and officers for damages that result from such late filing.
Who’s Who Legal: The recent economic turmoil has revealed crucial gaps in the insolvency and restructuring regulations in many jurisdictions. Have there been any new regulations in your jurisdiction? Are these effective? Are new regulations needed?
Susan Moore: English law-based restructuring and insolvency regimes are already mature and well developed. However, in response to the financial crisis, there have been a number of changes in the banking sector. The government has introduced a special resolution regime for banks and certain financial institutions to enhance the stability of the UK financial system and to protect certain stakeholders. In addition, a special administration regime for investment banks was created in 2011. This regime is currently being reviewed and some enhancements may be made.
Furthermore, we may see some changes to the legislative landscape to deal with specific issues which have arisen due to recent decisions of the English court, such as in connection with the ranking of liabilities imposed by the UK pensions regulator and the ranking of claims of landlords.
The government is also consulting on a proposal for a restructuring moratorium, so that companies can obtain a moratorium while putting in place a restructuring (by negotiation, CVA or scheme of arrangement).
Agustín Bou Maqueda: In Spain, since a law entered into force in 2003 we have had three amendments – the most recent in October 2011 – in order to improve the aspects that did not work. As a result, the law has improved but there is still an urgent need for real pre-insolvency schemes.
Constantinos Klissouras: Greek insolvency and restructuring law went through a succinct but radical reform in 2012 (the old law, enacted in 1990 and abolished in 2007, was re-enacted), introducing: pre-packs and efficient rules for cramming down accelerated, court assisted debt and equity (so-called “article 99 proceedings”); and going concern sales of the assets of insolvent debtors (so-called “article 106.11 proceedings”). These two proceedings will dominate the insolvency scene over the next several years (as had been the case in the recession of the late 1980s).
Our restructuring laws desperately need one pump-up: the right of creditors (in addition to the debtor) to apply for a restructuring or workout in the case of zero or negative equity (in addition to the right to apply for the winding-up or going concern sale, which now exists). Shareholder egos often pose complex problems to the restructuring of viable businesses, and creditors standing to apply for workouts will be a very useful tool in overcoming it.
Alexander Klauser: Austrian insolvency law was widely revamped in 2010 and these amendments have proven quite successful. Insolvency law – along with many other areas of the law – has to adapt to changes in the real world which have been taking place faster and faster over recent decades. An ever-changing insolvency regime is therefore the rule, rather than the exception. In Austria, the amendments have been shaped as additions and improvements of the existing regime rather than a totally new beginning. It is therefore the case that insolvency practice in Austria is both fast and cost-effective, as well as successful in restructuring businesses. There is little adverse criticism or publicity around Austrian insolvency cases. New ideas are always there to be evaluated and tested, and it may well be that further amendments to the Austrian insolvency regime will take place in this decade. For the time being, however, there are none being contemplated.
There is some room for improvement, however, on an international level. Since the EIR is only applicable to debtors which have their COMI (center of main interest) in an EIR member state, there is an increasing need for harmonisation of cross-border insolvency rules on a global scale. At present, most EU member states have differing rules on cross-border insolvencies that involve non-EU countries. The UNCITRAL Model Law on Cross-Border Insolvencies could be useful to harmonise these rules on a global scale. As of now, five EU member states (Greece, Poland, Romania, Slovenia and the United Kingdom) have implemented the UNCITRAL Model Law into their national law, in addition to being member states of the European Insolvency Regulation (EIR). This could also be a model for Austria.