London has been a leader in international rescue culture since the Insolvency Act came into effect in 1986. But with Brexit on the horizon and other jurisdictions catching up (particularly in the EU and Asia) what lies in store for the UK’s future as a cross-border restructuring hub?
In November 2016, the first GRR Live conference by Who’s Who Legal’s sister publication, Global Restructuring Review, examined this question over the course of an afternoon at Norton Rose Fulbright’s offices in London, bringing together lawyers, insolvency practitioners and other professionals from the city and beyond.
Chaired by Stephenson Harwood’s Susan Moore and Willkie Farr & Gallagher’s Graham Lane, the programme stirred up lively exchanges of ideas during a roundtable discussion and a panel based on the BBC’s ever-popular current affairs show Question Time. But first, it opened with a keynote speech from Mr Justice Snowden of the England and Wales High Court’s Chancery Division, who set the scene.
The UK’s long-established rescue culture and “pre-eminent” expertise in pre-insolvency procedures will help maintain its position as a centre of restructuring against future jurisdictional challenges and strong competition from Europe and Asia, argued Snowden J.
He explained that when the European Insolvency Regulation (EIR) came into effect in 2002, it “played right into the hands” of UK insolvency practitioners, who had already been perfecting rescue culture, brought to them in the UK Insolvency Act 1986, for more than 15 years. The UK’s experienced specialist lawyers and judges, and accountants well versed in the role of administrators, knew how to move quickly in insolvency matters to save viable parts of businesses. What’s more, these professionals had few competitors in continental Europe, where lengthy winding-up proceedings were still the order of the day.
Snowden J explained how this natural advantage allowed the UK to offer its services to EU companies in financial difficulties. Techniques used included moving the centre of main interests (COMI) to Britain to take advantage of its more flexible procedures, as well as helping European corporate groups overcome the failure of the EIR to deal with group insolvencies, by making a unified appointment of administrators to each group company on the basis that the COMI of each of the group companies was in England.
Automatic recognition under the EIR allowed UK practitioners to enter into protocols preventing disruptive secondary proceedings on the continent by agreeing to treat local creditors at least as favourably as they would have been treated in a domestic insolvency. Meanwhile, the establishment of the UNCITRAL Model Law in non-European countries, particularly in the US in 2005, further served to expand the advantages offered by the EIR.
However, Snowden J noted that the EU and some countries in Asia, particularly Singapore, are now starting to play catch-up with the UK and are competing for business.
He highlighted how the recast EIR, due to come into effect in June 2017, formally adopts some of the methods for dealing with group insolvencies that UK practitioners had developed informally. He also noted the European Commission’s “ambitious” plans for harmonisation of insolvency laws across the EU, revealed in a proposed directive from Strasbourg just hours after his keynote speech.
He correctly predicted these proposed rules would introduce a court-supervised, pre-insolvency procedure providing for the compromise of creditor claims – something that looks a lot like a UK scheme of arrangement – and noted that successful implementation of harmonising measures would require training of specialist judges and insolvency practitioners on the continent. The Commission has indeed recognised specialisation as one of several key principles to ensure pan-EU insolvency and restructuring laws are consistent and efficient.
Snowden J declined to comment on Brexit, given his role as a judge. However, he said it was a fact that if the UK stopped applying the EIR after leaving the EU, the common law jurisdictional test of “sufficient connection to the UK” and benefit to creditors would apply to winding-up proceedings in England.
He also reflected that where insolvency proceedings in EU member states would still be recognised in the UK under the 2006 Cross-Border Insolvency Regulations – the UK’s embodiment of the Model Law – UK insolvency proceedings would not be entitled to recognition in many EU member states, since very few of them have adopted this law.
The same will be true for UK schemes of arrangements, traditionally afforded automatic recognition in the EU under Part III of the Judgments Regulation, if the UK is no longer a party to that regulation.
Snowden J considered whether foreign jurisdictions would recognise UK schemes of arrangement where the courts had accepted jurisdiction over the case via the “sufficient connection” test or by relying on the English governing law of the debt restructured as a connecting factor to the UK. Civil jurists accustomed to codified law may be less willing to accept a jurisdictional decision based on a flexible test like sufficient connection, which is much less defined than COMI, he warned.
Recalling the words of Lord Collins in the UK Supreme Court judgment in Rubin v Eurofinance, where the sufficient connection test was rejected as a basis for recognition of a default judgment in Chapter 11 proceedings, because the defendant wouldn’t know in advance whether its connections with the foreign proceedings would be deemed sufficient enough for the foreign judgment to bind them, Snowden J raised the question of whether it might be said there was a parallel with the position of foreign creditors of an overseas company using an English scheme.
On English governing law as a basis for recognition, Snowden J said there was no assurance other jurisdictions would adopt a similar view to the UK courts on the significance of this connecting factor, which stems from the common law principle in the 1890 case Anthony Gibbs v Société Metaux: that a compromise or discharge of debt can only be recognised as effective if done in accordance with the debt’s governing law.
In the Victorian era, the British Empire traded far and wide, and many foreign companies had a large cohort of English creditors, so it was considered important that foreign assets should be brought under the control of the English courts and that other countries observing English law should recognise the primacy of an English liquidation. In the modern era, this is no longer relevant, Snowden J emphasised.
In September 2016, the Singapore High Court in fact ruled in Pacific Andes that Gibbs was outdated and refused to apply it in scheme proceedings. The EIR, meanwhile, already provides that compositions in accordance with the law of the COMI will be recognised irrespective of the debt’s governing law.
“It would seem to be only a matter of time before Gibbs will fall to be revisited by the Supreme Court in a restructuring context,” Snowden J predicted.
Elsewhere in his keynote, Snowden J explained that some European jurisdictions, most recently the Netherlands, have already enacted pre-insolvency processes borrowing features from UK schemes and the US’s Chapter 11. The EU’s new harmonisation proposals would now roll out such processes to the rest of Europe, reducing the commercial need for overseas companies to continue to seek schemes in the UK anyway.
Snowden J painted a positive picture overall of the UK’s ability to meet jurisdictional challenges in Europe going forward, saying the “expertise and ingenuity” of its lawyers and insolvency practitioners would enable it to continue providing a first-class service.
Chairs Susan Moore and Graham Lane opened the roundtable discussion after Snowden J’s speech by asking what makes a jurisdiction attractive from a restructuring perspective.
“We can all agree that for a jurisdiction to be attractive it needs to maintain the support of stakeholders in its ability to deliver fair results,” said Lane. “But what characterises this?”
“Predictability is a key driver of choice of jurisdiction,” according to Alastair Beveridge, an insolvency practitioner at Alix Partners in London.
Echoing the sentiments of historian Niall Ferguson – who in his book Civilisation names the rule of law as one of six “killer apps” that have allowed the developed West to become the dominant power in global affairs since the 15th century – Beveridge said the long-established certainty and confidence inspired by English law has ensured the UK’s central place in the restructuring world so far.
Further to this, Beveridge said the ability to raise and deploy capital in a way that works for companies, as well as having an experienced legal profession and judiciary that are able to deal with big cases, are also decisive factors. In both instances the UK has established a leading position, he said.
William Trower QC of South Square agreed: “The level of judicial experience is absolutely core to the confidence people have in the system: you’ve got to have confidence that lawyers know what they’re talking about and are capable of responding to any situation.”
The efficiency of the legal process is also vital, Trower said, noting the importance of speed in achieving a result for companies during restructurings, as well as in dealing with any issues that arise during the process. An essential part of the UK scheme of arrangement is that cases are treated as urgent business and are resolved quickly, he said.
“One of the strengths of common law generally is its quick and efficient responses,” added Trower. “Civil law is less known for this.” Common law countries also have a material advantage in how they deal with the secured rights of creditors, he said, citing the system in the UK that offers users the choice of in-court restructuring, where rights can be varied, and out-of-court processes under which there is no authority to interfere with the rights of secured creditors. “This kind of flexibility adds to the appeal of a country,” he said.
Speed is also important in keeping costs down, which is a small but important consideration according to Hamish Anderson of Norton Rose Fulbright. “Nobody would choose a jurisdiction purely because it was the most expensive, but neither would you choose the cheapest: you’ve got to look at the speed and certainty of outcomes, which helps decide the cost-effectiveness of a particular system.”
Referring back to Snowden J’s keynote, Catherine Balmond of Freshfields Bruckhaus Deringer said recognition was” absolutely key” to a jurisdiction’s favourability for restructuring work. “When restructuring a business you need to know that the courts’ decisions will be recognised in relevant overseas jurisdictions,” she said, noting that the Brexit vote has thrown previously predictable recognition processes into uncertainty.
Having laid out these “key ingredients”, the panel turned to the latest developments outside the UK to see how other jurisdictions were competing.
Hamish Anderson, who was tasked with reviewing the situation in Asia, listed what he considers the key indicators that a jurisdiction is making progress in developing its cross-border restructuring system. Among these were: the availability of specialist courts, or specialist judges within the general courts, that are able to deal with complex restructurings; the extent to which domestic laws can be used to deal with problems with foreign companies; how much a country regulates, or overregulates, insolvency practitioners; and the ease of recognition.
“Singapore absolutely stands out” when these assessments are applied, Anderson said. He pointed out that the current proposed amendments to the Singapore Companies Act – which would expand the courts’ jurisdiction over foreign debtors, develop the country’s rules on group insolvencies and promote debtor-in-possession finance – would be largely consistent with the UK’s approach, and in some cases would go further than UK.
Balmond suggested that there has been a recent trend across Europe towards company rescue, with many countries putting pre-insolvency processes into place.
In Germany this trend began around 2011, she said, with the introduction of protective shield proceedings, under which companies that have a prospect of restructuring and avoiding insolvency are given a three-month grace period in which an adviser is appointed to monitor the company and enforcement against the company is prohibited.
Spain, meanwhile, has seen a “flurry of new laws” in recent years, mainly with a view to implementing cram-down procedures to deal with dissenting creditors; and in France, it has become possible to perform a debt-for-equity swap without shareholder support. The new EU insolvency directive will further develop these trends, Balmond said.
While change is afoot in Asia and Europe, Beveridge noted the relatively static situation in the US. “Chapter 11 has been around forever,” he said, and while Chapter 15 has become popular more recently, it is still largely the preserve of large companies, and remains quite closed off to small and medium-sized entities because of its cost.
While in 2014 the American Bankruptcy Institute produced an exhaustive report on the use of Chapter 11, in which it made several recommendations on how the process could be innovated, the findings gained “zero political traction”. Whether or not the US’s new president-elect Donald Trump will focus on bankruptcy reform is unclear, Beveridge said: “He’s been through the process himself, so it’s possible, but there are no imminent changes.”
Trower offered a tour of ex-Commonwealth and offshore jurisdictions, many of which model their procedures on the English system, but implement their own regional “tweaks”.
“Schemes are almost universally available,” he said. However, he noted that in jurisdictions such as New Zealand, Canada, Gibraltar and South Africa there are different (or no) statutory value or numerosity thresholds for creditor approval. Malaysia and Singapore – which Trower said qualified as ex-Commonwealth nations for the purpose of his contribution – had specific statutory provisions to facilitate applications for moratoria on creditor actions against companies during restructurings. The British Virgin Islands and Gibraltar use company creditors’ agreements while the Cayman Islands doesn’t; however, it does follow many jurisdictions in having provisional liquidation measures.
Taken together, there has not been much of a move to replicate the US model among these jurisdictions, Trower said. However, Australia is in the process of consulting on the introduction of similar measures to render ipso facto clauses – which allow for the termination of agreements as a result of bankruptcy – unenforceable, as well as creating safe harbour provisions for directors who are involved in good faith restructurings.
With all of this activity in mind, alongside the UK’s imminent exit from the European Union, Lane asked the panel whether the UK could still be competitive or was soon to become “yesterday’s news”.
Trower encouraged the audience to take some consolation from the fact that the UK’s current place in the world actually has little to do with its EU membership. “English law is certain, stable and predictable,” he said. “It is also responsive to the needs of commerce and capable of being flexible, thanks to its common law antecedents.”
Trower also praised the reliability and incorruptibility of the English courts – “which you can’t say of some courts, even in developed countries” – and the wealth of legal expertise in the City, with which other jurisdictions find it hard to compete. Restructuring practices in the UK flow from these underlying principles and high standards, he said, and while there are a lot of difficulties ahead in light of Brexit, “bear in mind that a lot of what we deem to be essential in EU law, such as the Rome I regulations, was derived from English common law or is consistent with it.”
Referring to the European Commission’s proposed business insolvency directive, which as mentioned above was unveiled while GRR Live was in progress, Anderson joked that he had found himself in a “nightmare” scenario of having to speak about a subject on the same day as a major announcement relating to it was made.
“The harmonisation directive may well prove to be a sideshow for the UK because, quite apart from Brexit, its requirements may not call for anything over and above what the UK already has or intends to introduce as part of its own reform agenda,” Anderson said.
One difficulty that will arise post-Brexit is that the measures in the recast European Insolvency Regulation (EIR) are a “moving target” in that they are constantly evolving and a potential bilateral agreement between the UK and the EU will mean they are not replicated in the UK as they change. “The recast EIR, when it gets going, will start a 10-year clock in which they’ll be reviewed, as well as a five-year clock on group proceedings, so while we’re imagining an UK/EU treaty we don’t know what this will mean.”
If there was a complete absence of EU regulation, he added, the UK could have to start relaxing jurisdiction requirements.
Balmond noted that the government had previously said it was committed to the UK being in the top five of the World Bank’s ease of doing business rankings, but that in fact the resolving insolvency score had slipped from seven to 13 since 2014. The UK Insolvency Service’s May 2016 review of domestic regulations included recommendations for further developments in pre-insolvency rescue measures, which she said she hoped to see happen as they were very much the “direction of travel” for regimes around the world.
At the day’s second panel, a conversational Q&A based on the BBC’s Question Time, the theme of whether the UK can maintain its place as a global centre of restructuring came up again.
Philip Hertz, head of restructuring at Clifford Chance, was positive that UK schemes of arrangement would maintain their place among the pre-eminent tools for international restructuring practitioners. “Schemes have made more comebacks than Frank Sinatra,” he joked, adding that since their inception they have evolved and their boundaries have been pushed to keep them relevant to changing circumstances.
Hertz said that practitioners should be wary of treating them as a panacea, and mindful of protecting the integrity of the scheme system as a whole – but that does not mean they are likely to become less well-used.
Adam Plainer, head of restructuring at Weil Gotshal & Manges, agreed with Hertz’s points, adding that UK practitioners should perhaps be wary of competition from other jurisdictions. There is a risk that schemes are a more “cumbersome” tool than Chapter 11, he said, meaning that bolstering and reforming them should continue to be discussed.
KPMG's new global insolvency head Richard Heis suggested an area that must be looked at in the UK is the question of valuations in restructuring. Valuations, the panel agreed, represented an area of uncertainty, given that a challenge to a valuation can upend a restructuring.
“This uncertainty could undermine the UK," Plainer offered. He pointed to the US framework, where court-sanctioned valuations are part and parcel of Chapter 11, as one the UK could learn from.
At the end of the roundtable discussion, Moore conducted a straw poll – first among the panel, then among the room at large – as to whether the UK would retain a competitive advantage in the coming years.
Balmond summed up the mood of the panellists: “We have the chance to, and I hope we do.” The show of hands in the audience carried a small majority for the optimists, though around a third of the room abstained. Clearly there is work still to do.