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Our panel of experts examines the impact of 2014’s legislation on restructuring and insolvency lawyers and their clients.
Jennifer Marshall, partner, and Helen Pattinson, PSL, Allen & Overy LLP
David Steinberg, restructuring and insolvency partner, Clifford Chance LLP
Jennifer Marshall and Helen Pattinson: The extension of the special resolution regime under the Banking Act 2009 to investment firms, recognised central counterparties and banking group companies is key. Other legislative developments, whose impact is yet to be fully felt, include:
David Steinberg: As far as our firm’s restructuring and insolvency practice is concerned, the key legal developments in 2014 have arisen in the fields of cross-border pre-insolvency restructuring and post-2008 financial crisis fall-out. Further, 2015 and beyond seem to promise more of the same.
In the UK, we saw the continued roll-out and expansion of the statutory regime for the resolution of banks and other financial institutions. These first saw the light of day in the Banking Act 2009 (which introduced a number of stabilisation options which can be invoked by the responsible UK regulator once it becomes clear it is likely that the relevant financial institution will fail to meet its capital requirements). However, the most radical and draconian stabilisation mechanic in the regulator’s armoury—bail-in—was included in amending legislation towards the end of 2013 and should become effective in December 2014. It will enable the responsible regulator to impose a mandatory subordination or equitisation of unsecured creditors’ claims in order to restore the financial institution to solvency.
Now, this outcome is by no means a novelty for creditors of UK banks. As recently as December 2013, the holders of Tier 1 and Tier 2 bonds issued by the Co-operative Bank plc saw their debt holdings converted to a mixture of equity and new subordinated debt through implementation of a complex restructuring involving linked exchange offers and a creditors’ scheme of arrangement under the Companies Act 2006, Pt 26. However, the Co-op Bank restructuring (while it featured the ‘cram-down’ mechanics of the scheme) was essentially consensual.
Creditors were given choices: to accept or reject the exchange offer; to vote for or against the scheme, and in the case of the scheme—the approval of the High Court was required at two stages, so creditors could have their day in court too, if they wished.
In stark contrast, the bail-in mechanic requires no creditor vote, no court hearing. It happens purely by action of organs of government. That is what makes this new remedy so novel and so draconian. Of course, the responsible regulator does not have a ‘free hand’ in determining when and how to use the bail-in power and there are statutory protections for creditors built into the process (such as the ‘no creditor worse off’ concept, which essentially requires the responsible regulator to exercise its bail-in powers in such a way that the outcome for an affected creditor can be no worse than what that creditor would have received in an insolvent liquidation of that financial institution. To assist the responsible regulator to satisfy this objective, one of the statutory instruments which has been introduced this year provides for the responsible regulator to pay compensation to any affected creditor who would otherwise have been worse off as a result of the bail-in.
In order to access the resolution regime, the responsible regulator must first be satisfied that the financial institution’s failure could not be averted by other means. Thus, for so long as a consensual restructuring seems achievable, the responsible regulator will be required to hold off from invoking the exercise of its resolution powers. This will introduce a novel and fascinating dynamic into any restructuring negotiations between a financial institution and its creditors. Until now, the ‘plan B’ in any restructuring negotiation has usually been entry into some form of insolvency proceeding or a non-consensual enforcement process launched by creditors. The parties who could deploy that ‘plan B’ were thus invariably the same parties who were sitting at the negotiating table. In the case of a financial institution which is eligible to be resolved, however, the ‘plan B’ will be resolution and, crucially, the party who is empowered to deploy that mechanic will not be sitting at the negotiating table at all.
The availability of ‘bail-in’ as a means to impose a solution upon creditors will significantly reduce the leverage of so-called ‘hold-out’ creditors, who threaten to withhold their consent to a restructuring or to challenge a scheme of arrangement in court (for example, on the grounds of ‘class’ or ‘fairness’) unless they are given what they want. That is probably a good thing. However, the new bail-in powers certainly present the regulators with a dilemma—to what extent do they engage with the parties in a restructuring discussion in order to divine whether a consensual deal is really achievable and, if so, on what terms? Hitherto, the regulators have largely avoided getting involved in discussions with a financial institution’s creditors. Their preferred posture is to observe from afar and interact almost exclusively with the financial institution itself, relying upon the financial institution to keep them abreast of the progress in the restructuring negotiations. However, now that the regulator is the party with its finger on the ‘plan B’ trigger, the regulator may increasingly feel constrained to also be seated at the negotiating table—if only to bang that table and warn the other parties seated around it of what will befall them if they fail to reach agreement.
At the European level, the BRRD became effective this year, requiring the implementation of a common set of bank recovery and resolution procedures across the EU. The objective is to ensure that failing banks across the EU will be resolved according to a common set of rules and standards.
Jennifer Marshall and Helen Pattinson: Bank resolution remains a key focus with the recapitalisation of the Co-op Bank showing that bail-in can be done without a statutory framework, although the BRRD should assist in a cross-border context.
David Steinberg: From our perspective as legal practitioners, we are already being asked to advise clients who are habitual counterparties to banks and other financial institutions on how the resolution regime—and in particular the bail-in provisions—are likely to affect them and whether they can address some of the perceived risks (eg by drafting their contracts to maximise their prospects of accessing the various ‘safe harbours’ provided for in the new regime (eg for derivative contracts and for set-off rights) or by taking some form of security so as to elevate themselves above the ranks of potential ‘bailed-in’ creditors).
Interviewed by Nicola Laver.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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