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Sarah is a Senior Consultant in the Restructuring & Insolvency team at Slaughter and May. She is also one of the authors for the Encyclopaedia of Banking Law.
The hugely experienced guardians of modern insolvency law in the UK who were so generous to me when I took my first, faltering steps in the profession – notably, Mark Hyde from Clifford Chance, Nick Segal, now at Freshfields and Jonathan Rushworth and George Seligman from Slaughters.
Without a doubt, the change from restructurings agreed in the market in the shadow of insolvency law, but without a real role for the law unless a debt restructuring could not be agreed, to the need for law to play a real role in solving the deadlock problem between creditors so that a debt restructuring can be implemented – in short the arrival of what we might call “restructuring law” as well as “insolvency law” in England.
The arrival of the distressed debt traders in England has had a profound effect on the way in which restructurings and insolvencies are conducted. Gone are what the distressed debt traders might call the “clubby” days of the English restructuring market in which lenders negotiated not just by reference to their own position but also with an eye on the dynamics of the creditors as a whole. Instead, restructurings are negotiated in a “hyper rational” way, with a far more individualistic approach. Critics argue that this new negotiating paradigm produces its own inefficiencies and fans argue that it is altogether more professional but whatever your take on it, it means that the outcomes at law assume a far greater significance than perhaps they once did.
In the vast majority of cases Eurosail has no significance because the creditors are able to trigger a financial covenant breach leading to cash flow, rather than balance sheet, insolvency. But it might become very significant indeed if we see a continued growth in bond financing with incurrence covenants and covenant lite loans.
The financial crisis has shown us all how fragile confidence is and how devastating the wholesale destruction of confidence in financial markets can be. The Act seeks to put in place procedures which are adapted to the unique challenges of financial institution distress so that market confidence is not destroyed by early failures in the system.
There is an inherent tension at the heart of dealing with the risks of financial institutions and this tension pervades not just the Act but other policy initiatives. On the one hand, we need to make sure that robust systems are in place to deal with financial institution failure to preserve the integrity of the financial system. But, at the same time, financial institutions need to raise capital and we need to ensure that we do not put in place laws which apply in distress which affect the willingness of investors to provide capital to healthy financial institutions. My view is that the Act does balance these competing objectives but vigilance is needed in post-crisis policy responses.
As financial markets converge, so that the distinction between dispersed credit markets in the US and concentrated bank-led credit markets in Europe disappears, all European countries are slowly recognising the need for the law to deal not just with resolving the situation when creditors have decided that they are no longer willing to support a company but also in assisting creditors to agree a new bargain when the debt needs to be restructured. We might, then, expect that we will see fewer efforts to use the insolvency laws of other jurisdictions as domestic laws are made more fit for purpose. But I wonder whether there will not be a continuing role for English schemes because of the highly commercial and agile approach which our courts have taken to debt restructuring. We know two things for sure. First, once a business is in distress, the sooner we can get on and fix the problem the better. Secondly, the period in which a company is in restructuring talks is highly inefficient: cash is drained which could be used to provide stakeholders with a return and management are focused on the restructuring talks rather than running the business. Thus markets will focus not just on the law on the books but also on the law in action in determining how to implement a restructuring.
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