Restructuring & Insolvency end of year review—a look forward to 2016

Our panel of experts considers what lies ahead for restructuring & insolvency lawyers in 2016.

The experts:

Nick Hood, business risk adviser, Opus Restructuring, chartered accountant and former insolvency practitioner

Andrew Wilkinson, partner, Weil, Gotshal & Manches

Jennifer Marshall, partner, Allen & Overy

Chloe Poskitt, solicitor, Browne Jacobson

A view from the market

What are your predictions for the restructuring & insolvency market for 2016?

Nick Hood: It seems likely that 2016 will be another tough year for insolvency and restructuring professionals. There is little reason to expect any significant pick up in volumes or asset values and the plethora of changes brought in this year will make earning a decent profit even more difficult. More firms will merge or close down and more insolvency practitioners will leave the market. Those who survive and thrive will be the most efficient and the most flexible, as well as those with a modest level of fixed overheads. Fixed fees quoted at the outset will become the norm, not just for formal processes, but also for consensual workouts. One potential new source of work may be the crowdfunding peer to peer market, but the lack of workout expertise among these platforms will pose real problems for IPs who look for work in this sector, who are likely to run into the sorts of problems traditionally faced in the past when dealing with private debenture holders.

Andrew Wilkinson: Going into 2016, default rates are low and the European restructuring market as a whole is looking relatively benign. We will be watching the response of the credit markets to a Fed rate rise. If markets tighten substantially, weaker issuers will struggle to refinance themselves and we could see an uptick next year in the default rate. Sector specific, the extractive industries generally and oil and gas in particular will continue to feature in the restructuring market next year. Also, we expect to see more restructurings of emerging market issuers, particularly those with foreign currency exposure or in the extractive industries.

Legal developments and practical impact

How is 2016 shaping up in terms of important cases and legislative developments?

Andrew Wilkinson: In the past ten years, the courts have incrementally expanded the international scheme jurisdiction of the English courts. We have reached inflection point in that trend with the Van Gansewinkel case this year (Re Van Gansewinkel Groep BV and others [2015] EWHC 2151 (Ch), [2015] All ER (D) 241 (Jul)), which will make it more challenging for European companies to use a UK scheme of arrangement as a restructuring tool. A number of English judges clearly appear to believe that some of the previous decisions that expanded the scheme jurisdiction of the English court were wrong. So in 2016 we will see whether the courts continue to cut back on scheme jurisdiction.

Jennifer Marshall:

Schemes of foreign companies

The popularity of the English scheme of arrangement in relation to foreign companies is likely to continue in 2016. Even though potentially competing compromise procedures are being introduced across Europe (for example, in Spain and the Netherlands), the English scheme still remains popular because of its flexibility, predictability, the speed of access to, and the commercial attitude of, English judges. However, in light of comments made by English judges in recent cases (and in particular, the newly appointed Mr Justice Snowden), there are bound to be more cases in 2016 in which the jurisdiction of the English court in relation to foreign companies will be carefully considered (including the interplay between the European Regulation on Insolvency Proceedings (Regulation (EC) 1346/2000) and the European Judgments Regulation (Regulation (EC) 1215/2012)). Increased scrutiny (not confined to cases involving foreign companies) of other aspects of the scheme of arrangement procedure is also likely (see further below).

Directors’ duties

The key driver behind the recent legislative changes to the wrongful trading regime under the Insolvency Act 1986 (IA 1986) (brought in by the Small Business, Enterprise and Employment Act 2015) seems to be to increase the number of wrongful trading claims against directors. The extension of the regime to administrations, and the introduction of the ability to assign such claims, is aimed at attempting to remove certain perceived ‘barriers’ (eg, the potential costs of litigation or of flipping the company into a liquidation to pursue a claim, etc) under the previous regime and it is possible that more cases will now be brought against directors in 2016.

‘Pre-packs’

As part of a package of reforms into pre-packaged administration sales and in an attempt to increase transparency, a revised Statement of Insolvency Practice(SIP) 16 (pre-packaged sales in administrations) and the new voluntary ‘Pre-pack Pool’ for sales to a ‘connected party’ have recently been introduced. The success of these reforms will undoubtedly be monitored by the Insolvency Service throughout 2016 to determine if any further measures are required to address the concerns highlighted by the Graham Review into Pre-pack Administration 2014.

Entitlement to surplus monies in administration

Several applications in the administration of Lehman Brothers International (Europe) (in administration) (LBIE) were heard in 2015 covering a number of related questions concerning entitlement to the surplus funds existing in that administration (the so-called ‘Waterfall’ applications). Permission to appeal has been granted in respect of a number of these issues so this litigation will continue in 2016 (and no doubt 2017). It could well be, however, that the LBIE estate will finally be resolved in the next couple of years.

Cross-border assistance

Pending any possible extension of the UNCITRAL Model Law on Cross Border Insolvency (the Model Law) to cover recognition of foreign insolvency-related judgments (and any corresponding amendment to our Cross Border Insolvency Regulations 2006 (CBIR), SI 2006/1030) (see further below), it is possible that further cases will be heard in 2016 concerning the scope of ‘any appropriate relief’ under CBIR, art 21 or the common law.

Chloe Poskitt: 2016 is set to be an interesting year for the insolvency profession as the legislative developments are and continue to be significant.

There have been a number of key changes to IA 1986 which were introduced in 2015 and further changes are expected in 2016. In 2016, we are likely to see the impact of those changes.

There is also the planned introduction of the Insolvency Rules 2016 and a move to an online portal for bankruptcy applications.

Changes to the IA 1986

The changes brought about by the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015), the Deregulation Act 2015 and Enterprise Regulatory Reform Act 2013 have been significant and will take some adjustment.

Two of the important changes focus on:

  • increasing director accountability, and
  • the assignment of office holder claims

Increasing director accountability

SBEEA 2015 prohibits companies, and other corporate entities, from becoming directors (subject to limited exemptions). The reason for the change is to stop corporate structures from hiding illegal activity.

The prohibition on corporate directors is scheduled to come into force in October 2016, with a transitional period of one year. After that time, existing corporate directors will automatically cease to be directors.

In addition, SBEEA 2015 updates the regime which deals with disqualified directors by simplifying the process to pursue directors who have not complied with their legal obligations. Some of the changes brought into force as of 1 October 2015 include:

  • the ability of administrators to bring a claim against directors for wrongful or fraudulent trading
  • increasing the period of time to apply to the court for disqualification of an unfit director of an insolvent company from two to three years
  • widening the matters of misconduct that the court may take into account such as the conduct of directors in relation to overseas companies and more than one company, including any overseas companies, and
  • the court may make a compensation order against a person who is the subject of a disqualification order if their conduct has caused loss to one or more creditors of an insolvent company

Companies wishing to retain corporate directors will need to assess whether they fall within one of the exemptions in SBEEA 2015 or, if not, adjust their arrangements to ensure compliance.

These changes together with the provisions making the statutory duties of directors applicable to shadow directors and the requirements for insolvency officer holders to report on all directors’ conduct demonstrate that the legislature’s increasing focus is to ensure that those in a position of management are held accountable for their actions.

Assignment of office holder claims

One of the potential positive changes is the introduction of provisions allowing the assignment of office holder claims. This creates an additional avenue for potential recoveries by office-holders in circumstances where a claim may have good prospects of success but the estate lacks the funds to pursue it.

The changes are likely to bring about an increase in the number of office holder claims. We will have to wait to see whether creditors begin aggressively pursuing directors’ for their own purposes or whether directors seek to acquire the claims to ring-fence their own potential liability.

Insolvency Rules 2016

The Insolvency Rules 2016 (expected to be implemented in April 2016) are intended to:

  • reduce the burden of red tape
  • modernise and simplify the language, and
  • consolidate the existing rules and their amendments into a single set of rules

Intended changes include:

  • removing meetings of creditors as the default position in insolvencies
  • the abolition of final meetings
  • the ability for creditors to opt out of further correspondence
  • allowing an office-holder to pay a dividend in respect of a debt of less than £1,000 without the need for the creditor to submit a formal claim, and
  • all applications for bankruptcy on the petition of the debtor will be submitted to an adjudicator (who will be a person appointed to that role by the secretary of state)
How will these developments affect your cases and working life?

Andrew Wilkinson: 2015 restructurings stand out for their complexity in implementation. The variety and complexity of high yield capital structures, combined with the diverging goals of market participants (eg, distressed investors versus real money investors), means complexity is unlikely to diminish in the near term. Further scaling back of scheme jurisdiction will increase that complexity by reducing the availability of the scheme as a restructuring tool.

Jennifer Marshall: The anticipated increased scrutiny of judges in respect of schemes of arrangement is driven, at least in part, by the desire to protect the international standing of the scheme of arrangement as a respected restructuring tool. The scheme of arrangement is not (and should not be) a commoditised product and considerable care should be taken when drafting the relevant documentation and considering, and sufficiently addressing (both in the relevant documentation and to the court itself at the hearings to convene and sanction the scheme of arrangement), any potentially contentious issues in the specific case. Examples of areas that may come under judicial scrutiny include the comparator analysis if the scheme fails, class composition and the impact of any lock-up fees (to name just a few).

It is possible that the recent legislative changes to the wrongful trading regime will increase the directors’ focus on this potential liability. However, the extension of the wrongful trading regime appears to be more aimed at the SME market and, therefore, it is not clear how much the changes will affect the cases on which we generally advise. Similarly, it is not yet clear to what extent the new Pre-pack Pool will be used in larger cases where the relevant parties have typically been involved in negotiations and advised by appropriate professionals.

Although it is rare for there to be a surplus in an insolvency proceeding, the Waterfall applications could clarify some questions regarding the construction of key derivative agreements (such as the ISDA Master Agreement and German Master Agreement).

The overhaul of the Insolvency Rules 1986 will permeate a number of areas of our core practice. A large number of precedents will need to be updated and procedures (such as those involving creditor meetings or other decision making processes) will need to be revised. Furthermore, although the reforms are intended to be more procedural than substantive, they touch upon some key areas (such as the meaning of administration expenses and the notice to be given when appointing an administrator).

What would you like to see in 2016?

Andrew Wilkinson: Further movement towards the harmonisation of European national insolvency regimes. The European Regulation on Insolvency Proceedings provide for recognition of national insolvency proceedings in other Member States, but do not seek to harmonise national law. In light of the EU proposals for reform, this is a key opportunity to create a single cohesive European insolvency regime. Such an insolvency regime would make effective restructuring tools available across all Member States, permit earlier resolution of over-indebtedness and reduce losses to creditors, while increasing the prospects of recovery for debtors. This would in turn reduce the cost of capital, encourage cross-border investment and remove the incentive for forum shopping.

Jennifer Marshall: Assistance in cross-border insolvency cases is an area which has been addressed by the courts in a number of key decisions in recent years. The current state of English law is deeply unsatisfactory in this respect. Although the English court can assist an overseas liquidator by providing (as a matter of its discretion) certain powers and remedies that would be available to a liquidator under English law, the Supreme Court in Rubin and another v Eurofinance SA and others [2012] UKSC 46, [2012] All ER (D) 258 (Oct) made it very clear that the English court will not assist by recognising a foreign insolvency-related judgment or by applying foreign insolvency law. This is somewhat ironic given that we expect other jurisdictions to recognise and give effect to our English scheme of arrangement when used in relation to a foreign company. It should be noted that the US is able to give effect to an English scheme, pursuant to its implementation of the UNCITRAL Model Law pursuant to Ch 15 of the US Bankruptcy Code.

There is currently a project being undertaken by UNCITRAL to consider extending the Model Law to cover, among other things, recognition and enforcement of insolvency-related judgments. An extension of the Model Law in this area would be welcome to provide greater clarity on what assistance can be provided in cross-border insolvencies outside the scope of the European Regulation on Insolvency Proceedings and to avoid unnecessary parallel proceedings in different jurisdictions. Extending the Cross Border Insolvency Regulations 2006, SI 2006/1030 to allow recognition of similar insolvency-related judgments of other jurisdictions (eg, a plan of reorganisation ordered by the US Bankruptcy Court in relation to Ch 11 proceedings) would bring the assistance available in the UK in line with the assistance available in a number of other jurisdictions. As always, the devil will be in the detail and the project is likely to take time to reach a conclusion, so it may be 2017 (or beyond) before any relevant legislation is enacted in the UK.

Chloe Poskitt: An increase in the number of office holder claims and, of course, the highly anticipated outcome in the Horton v Henry [2014] EWHC 4209 (Ch), [2014] All ER (D) 193 (Dec) pension litigation.

Clients and business developments

How might the expected developments in the market in 2016 affect your business and clients?

Jennifer Marshall: It is possible that the increased judicial scrutiny regarding English schemes of arrangement could lead to a greater consideration of European alternatives, particularly as those jurisdictions seek to improve their laws to compete with the English scheme. However, until such new laws have been tried and tested, it is likely that the English scheme will retain its popularity, particularly when dealing with English law-governed finance documents.

In terms of market developments, the increased issuance of European high yield bonds in recent years, coupled with the spike in maturity of European high yield bonds in spring/summer 2016, means that we are expecting to see more European high yield bond restructurings in 2016. The structures, documentation and terminology involved in high yield bond issuances may not be familiar to some of our clients, who may be more used to leveraged finance transactions and an understanding of the differing structural considerations will be necessary to evaluate which enforcement or restructuring tools and options are available in these types of transactions.

Chloe Poskitt: The market continues to be benign with the latest statistics showing a decrease in corporate insolvency—the lowest level of compulsory liquidations since Q3 1989. Interest rates are unlikely to significantly change and so it is unlikely that there will be a severe reverse in the downward corporate insolvency trend. Insolvency professionals will need to continue to be flexible and provide alternative solutions.

The changes allowing the assignment of the office holder claims plus the conditional fee arrangement exception for those types of claims gives both the office holder and creditors more flexibility when considering how to pursue claims. An insolvency practitioner can be more creative and remove obstacles to access alternative funding, thus increasing the level of claims and potential recoveries.

As for the Horton v Henry litigation, the outcome could have far reaching effects if the Court of Appeal rule that an income payment order can be attached to a bankrupt’s personal pension payment scheme which has not yet crystallised. Moreover, significant changes to the pension rules were introduced in April 2015 allowing pensioners with defined contribution savings immediate access to their pension pots upon reaching 55 years old. If the Court of Appeal overturns the High Court decision in Horton v Henry, bankrupts could see their entire pension pot at risk from trustees through income protection orders.

Interviewed by Lucy Trevelyan.

The views of our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Schemes of arrangement—process and statutory framework

The Insolvency Rules 2015

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First published on LexisPSL Restructuring and Insolvency

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