Restructuring & Insolvency—looking ahead to 2017

Our panel of experts considers what lies ahead for R & I professionals in 2017.

The experts

Chris Laughton (CL), partner in the corporate advisory services group at Mercer & Hole

Frances Coulson (FC), senior partner and head of insolvency & litigation, Moon Beever

Mark Sands (MS), partner in the creditor services division at RSM

Nick Hood (NH), business risk advisor at Opus Business Services

Legal developments and practical impact

What are going to be the most important R&I cases in 2017 and why?

CL: Several areas of R & I activity strike me as being amenable to development as a result of case law. A confident prediction is that we will continue to see innovative schemes of arrangement, especially with cross-border dimensions. They meet many of the requirements of global restructuring participants, including the need for the UK profession to demonstrate its skills and maintain its lead.

Interest rate hedging product and other mis-selling and similar claims against banks will certainly hit the headlines, although those that reach trial will probably be the weaker ones. Banks settle good claims to avoid uncomfortable precedents.

Another field where settlement is the norm is professional negligence claims against insolvency practitioners (IPs). Both the general litigation appetite and the cyclical rise in insolvency litigation, when the number of insolvencies is low, have been contributing to this activity. Whether or not the individual claims have real merit is a separate issue, but there will be some to defend and pursue.

Allen & Anor; Re Longmeade Ltd (In Liquidation) (Rev 1) [2016] EWHC 356 (Ch), [2016] All ER (D) 259 (Feb) is unlikely to open the floodgates and submerge the Department of Business, Energy & Industrial Strategy (BEIS) under claims where the Official Receiver (OR) has been liquidator. However, the ingenuity and enthusiasm of insolvency litigators being what it is, we might reasonably expect BEIS to be held to account for any such negligence. Policy changes in relation to the OR’s activity and regulation could, of course, limit that risk.

My wild card prediction is wrongful trading claims. They have always been tough. But while cases such as Grant & Anor v Ralls & Ors (re Ralls Builders Ltd) [2016] EWHC 243 (Ch), [2016] All ER (D) 142 (Feb) might discourage some liquidators, I wonder whether they might also encourage some defence complacency, bearing in mind the ingenuity of insolvency litigators (and IPs) I have mentioned.

FC: The new Insolvency (England and Wales) Rules 2016, SI 2016/1024 (IR 2016) take effect in April 2017 so we might expect a certain amount of action around those as we all get used to them—that and any sort of confusion caused by the removal of prescribed forms.

IR 2016 finally bring in some of the heralded but to date un-activated parts of the 2015 insolvency reform legislation. We may see some challenges around the deemed consent provisions in sections 122 (Abolition of requirements to hold meetings: company insolvency) and 123 (Abolition of requirements to hold meetings: personal insolvency) of the Small Business, Enterprise and Employment Act 2015. I think they will lead to abuse. We already have the costs estimating and it remains to be seen whether creditors will be more active in this regard as they get used to the regime.

We will continue to see the litigation funding model settle down with new and different entrants to the market hopefully bringing prices of funding and after-the-event (ATE) insurance down and returns to creditors up. IPs will need to consider the benefits of the different options, including simple conditional fee agreements (CFAs) from solicitors, or even paying them. We are already seeing even solicitors seeking to buy claims. Whether this is for the benefit of creditors will no doubt become clear, but not soon.

We will see a further swell of cases surrounding bank behaviour and insolvencies not limited to the RBS Global Restructuring Group (GRG) activities and outside the further redress scheme.

We will also see more HMRC action around tax avoidance cases. As accelerated payment notices work through tribunal, we may see more insolvencies as a result. HMRC’s new powers might give cause for concern to professional advisers involved in tax planning schemes.

And, of course, it now appears that the Lehman litigation will take us through to 2022. Life wouldn’t be the same without it.

MS: The personal and contentious insolvency arena has seen an increasing number of cases proceed to the Court of Appeal as more cases need policy guidance and decisions rather than being more simple fact-specific cases. Whether those decisions transpire to be pro trustee/liquidator or not, clarity from the upper courts can reduce costs while opening opportunities for practitioners to recover funds for creditors. I will be watching these developments with interest—Green v Wright [2015] All ER (D) 223 (May), Sands v Singh [2016] EWHC 636 (Ch), the Maud cases and Armstrong v Onyearu [2015] EWHC 1937 (Ch) to name a few.

What are likely to be the most significant legislative and regulatory developments in this sector and why?

CL: IR 2016 come into force on 6 April 2017. They consolidate the Insolvency Rules 1986, SI 1986/1925 (IR 1986) and 28 amending instruments (so far, so good) and, in the language of the explanatory memorandum that accompanies them, they ‘restructure’ and ‘modernise’ IR 1986. The result is 448 pages of statutory instrument with 22 Parts and 11 Schedules for us to learn and find our way around over the next few months.

Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the Recast European Insolvency Regulation) applies to insolvency proceedings opened after 26 June 2017. Running to a mere 54 pages, with 89 Recitals and 92 Articles, the Recast European Insolvency Regulation is significantly more verbose than its predecessor. Its greatest advance is in legislating for the insolvency of members of a group of companies.

FC: We may finally see a single regulator in 2017–18. It is certainly what the Insolvency Service has wanted, and it would like to be it. My concern there is that they are a competitor—an unregulated one at that. If they are to take work on, they need to be as regulated as the profession and train their staff to similar standards. They will no doubt divide themselves notionally between the IS regulator and the OR office-holders. My own preference is for the Institute of Chartered Accountants in England and Wales (ICAEW) to cater for the larger accountancy firms and the Insolvency Practitioners Association (IPA) to take the pure insolvency practitioners. I think an element of competition maintains the balance between effective regulation and over-zealous box ticking (which in the end costs creditors and practitioners alike).

The OR’s new charges will bed in and will affect the personal insolvency market, as well as debtors who could achieve annulment. I do not think it is the right way to fill a self-perpetuating hole in the Insolvency Service finances.

The Great Repeal Bill will keep lawyers busy, if it goes ahead, working out whether what is directly applied works in isolation from the EU or doesn’t. The principal concern of insolvency lawyers is the EU Regulation on Insolvency 1346/2000 (the European Insolvency Regulation). The loss of that is being anticipated to cause greater cost and inbuilt delay and potentially affect England and Wales as a forum of choice. Still we managed before and no doubt will again. Cancelling automatic recognition of UK insolvency practitioners’ powers across the EU however would be a great loss.

MS: IR 1986 have been completely restructured by IR 2016 and will come into effect in the spring of 2017. While IR 2016 do not provide the fundamentals for the recovery of assets and other funds for creditors, this long overdue revision should reduce red tape and simplify the rules. Anything which can reduce costs, so the focus of any investment in a case can be on the recovery of assets, is to be welcomed. There will, of course, be a cost in adapting to IR 2016. As someone who remembers pre-Insolvency Act 1986 cases, I am confident the profession can quickly adapt once more.

The regulatory landscape for IPs will continue to evolve. The bedding in of the arrangements between the IPA and the Association of Chartered Certified Accountants (ACCA) for the regulation of ACCA-licenced IPs will deliver increased consistency. There are reputational threats to the profession that will increase if there are further failures in the consumer debt advice sector or should high profile cases bring any insolvency professionals into disrepute.

NH: Insolvency litigation is likely to be dominated by the introduction of the updated IR 2016 from April 2017 onwards. As always with amending legislation, the courts will be busy ironing out those unintended consequences, which bedevil new regimes, as IPs reach for the wisdom of judges to clarify issues or bring practical solutions to impractical provisions. This is unlikely to be high value litigation, but it will be of fundamental importance to the smooth working of the UK’s insolvency regime.

How is Brexit likely to affect these cases and developments?

CL: The Supreme Court has heard the Article 50 case (R (on the application of Miller & Dos Santos) v Secretary of State for Exiting the European Union [2016] EWHC 2768 (Admin), [2016] All ER (D) 19 (Nov)), whichconfounds my uncertainty about the consequences of Brexit. What I can predict, however, is that, based on the balance of economic forecasts and despite some peoples’ reported reluctance to believe experts, the short-term (ie, 2017) economic consequences of Brexit will be negative. Indeed, recent reports forecast Brexit costing the UK tens of billions of pounds per year and £100bn over five years. There will, I think, be more formal insolvencies in 2017 than in 2016. That this is likely is suggested by the numbers of both company and personal insolvency rising in the quarter July–September 2016.

Any change in the insolvency litigation trend will lag on an uptick in new appointments, so many of the case predictions above will not be affected by Brexit. Cross-border schemes might encounter more continental resistance, but equally, there may well be a push to use such mechanisms over the next two years or so before Brexit is likely to bite.

Of course, the UK leaving the EU will mean that the Recast European Insolvency Regulation will cease to apply. The idea that, as generally reported, a ‘Great Repeal Bill’ will keep the regulation (and all others) in place initially, to be removed and replaced at the UK government’s leisure, pays no heed to the regulation’s reciprocity. It would be a nonsense that we in the UK chose to be bound by foreign insolvency proceedings while our own were not recognised in the EU. To be fair, the Insolvency Service is already consulting about use and experience of the European Insolvency Regulation and benefits it has brought in the UK.

FC: I am afraid I have given up going to talks on Brexit all of which conclude that the answer is ‘we don’t know’ and ‘Brexit means Brexit’ (unless the courts say otherwise). The European Insolvency Regulation is the most important thing, and whether we lose our leading role as home of the effective scheme and restructure.

MS: Insolvency professionals benefit from the European Insolvency Regulation, which sets out a structure for dealing with insolvency estates in multiple jurisdictions and provides recognition of UK trustees and liquidators in other European countries. Contentious insolvency cases are those most likely to involve an overseas action—insolvency professionals use their skills and powers to follow funds moved offshore in an attempt to evade creditors. Any reduction in the recognition of insolvency estates in other European jurisdictions would add to costs and delays, and so reduce the likelihood of an action being brought at all. This would be to the detriment of the creditors, many of which will be UK based, including the Crown departments (HMRC in particular).

NH: The Brexit vote is bound to have an impact, if only because of the uncertainty it has created. Litigators will not want to be caught the wrong side of the loss of automatic recognition of our insolvency proceedings under the European Insolvency Regulation or to find that a judgment awarded in the UK is suddenly unenforceable within the EU. These events may or may not happen, transitional arrangements will probably be unclear and the timing of any changes could be near or far away. However, the mere threat is likely to prompt a certain degree of renewed urgency in case management, especially once Article 50 of the Treaty on the European Union (TEU) has been triggered.

The recent Hanjin container shipping collapse has once more highlighted the complexity of restructuring global businesses and dealing with the practicalities of multi-jurisdictional failures. The fragile economic climate around the world means that there are bound to be similar cases in 2017, bringing London into play as one of the few havens for legal certainty, relative speed and reasonable cost in resolving international business issues. The Brexit uncertainty should not affect this, not least because so much restructuring work relates to regions outside the EU.

Clients and business development

How do you think the practice of restructuring and insolvency law is going to develop in 2017?

FC: The role of the litigation funders and claims purchasers will bring the biggest change to the market. There are already firms exiting the market altogether but I think we will be busy.

There will be more of a rapprochement between the ‘insolvency’ and the ‘turnaround’ elements of the professions. The European Commission’s new directive on corporate insolvency reform (Directive 2012/30/EU (COM) (2016) 723 ) has been welcomed as likely to improve business rescue procedures across Europe, but while we are up in the air on Article 50 TEU and negotiations, we don’t know how long the directive will apply for. There is already a good focus on restructuring and early intervention as part of the insolvency regime in the UK, and an EU-wide framework for this type of work would make it much easier to handle cross-border cases—but will we be on the sidelines?

We might be getting nearer to a ban on pre-packs as the government has given itself until 2020 to look at that. There has been a lot of noise around pre-packs, which in my view is undeserved given that, in its final review of SIP 16 compliance before handing over responsibility to the RPBs, the Insolvency Service reported that for the period January to October 2015, 96% of all SIP 16 statements were fully compliant or contained only minor breaches, and only 1% of all complaints received by the Complaints Gateway related to SIP 16 statements/pre-pack administrations. The pool, as a sop to those who complained so vociferously, doesn’t seem to me to have added much.

CL: There will be somewhat more restructuring and insolvency work for the profession. There will be a variety of economic and legislative changes (and let’s not forget the US Presidential elephant in the room). Moreover, given the greater than usual levels of political uncertainty in the UK, Europe and the world generally, there are likely to be unpredicted developments.

MS: Contentious insolvency lawyers, alongside their IP clients, will have to adapt to the post-Jackson reforms environment for litigation funding. The Jackson reforms mean that the costs of ATE insurance and the uplift arising from any CFAs will no longer be recoverable from the opposing parties, even when the IP achieves a complete, and often predictable, win. It is hard to envisage a contentious insolvency case where there is not some risk to the professionals of their costs not being recovered and so some form of results-based reward has rightly become a part of the litigation landscape. IPs, as well as risking the recovery of their time, often also risk being personally liable for adverse costs and it is only fair that they put in place adequate protection or, if they choose to accept the risks, are rewarded when they are successful. The practice of R & I law must evolve to address these changes.

NH: With the cost budgeting provisions of the Jackson reforms continuing to unravel and capacity of our civil courts being generally under such pressure from cost cutting and procedural issues, it seems likely that dispute resolution mechanisms will grow in importance as an attractive alternative to formal litigation and indeed as an absolute necessity in more and more instances.

The past year has also seen the introduction of Insolvency Express Trials (IETs), alongside the new form of Shorter and More Flexible Trials Scheme which emanated from the recommendations of Briggs LJ in his Chancery Modernisation Review. Insolvency litigation is well suited for these expedited regimes. The amount of disclosure is relatively limited because the source of documentation is usually confined to the debtor’s records and other items held by the office-holder and is often common to both parties. Interlocutory case management is less important, because the case turns on evidence rather than complex pleadings. The initial success of IETs is likely to grow and their volume increase in 2017.

What do you think the key challenges are going to be?

FC: The same as they always are, getting the work in, doing it and getting paid. Some things never change. The doing it bit is the easy part. However, I think the litigation funding market and the uncertainty caused by Brexit both present challenges, but also opportunities (as in any era of uncertainty).

CL: Many businesses, especially domestically focused SMEs, responded to the Brexit referendum result with shock, went on holiday in the summer and then came back to carry on business as normal. Much the same happened, but more mutedly, on the US election. Those businesses are nevertheless going to be affected increasingly by those events. Larger, more globalised business will already be affected and may well be considering their restructuring requirements.

In practice, IR 2016 are likely to take some digesting by almost everyone in the profession. The restructuring and modernising of the rules will no doubt have a number of unintended consequences with which we will need to grapple.

The biggest challenge for R & I professionals will be what it always is—persuading people to recognise and deal with the problems of distressed business with which we are so familiar, but which many stakeholders both fail to understand and fear.

MS: The challenge for the legal and insolvency professions, working as a team, will be to come up with funding solutions that enable litigation to be commenced while providing some prospect of a return to the creditors net of costs. In my experience creditors will rarely fund actions, but of course in appropriate cases they should still be approached, as they are intended to be the end beneficiaries. The litigation funding market has seen a flurry of new entrants with new ideas, new enthusiasm, new funds, and the same need to make a return on their investments. Many are as yet untested in cases which have proceeded beyond the early stages. The increased choice of funders provides not only an opportunity to run a risky case past two or three funders, but a variety of solutions, from vanilla ATE, through to disbursement-only funding, to funding most costs and with the alternative of a sale of the right of action in many (but not yet all) scenarios—why are liquidators but not trustees allowed to sell the right to pursue antecedent transactions? Both solicitors and IPs can be rewarded with a share of the proceeds, if they are happy to take on the risks, or they could have their costs paid, usually in part, by a litigation funder who will then take a share of the proceeds or an uplift on their investments. Most importantly, litigation funding can provide cash for those costs of parties who will not or cannot be paid on a contingency basis, such as expert witnesses. So there are plenty of options. My area of practice involves litigating for what some may see as relatively modest sums—often below £250k. Taking such cases forward in a cost effective manner will be particularly challenging. So perhaps the challenge is to provide a more efficient (or perhaps simpler/faster/narrower) solution where the sums at stake are limited. However, litigation is not something one can enter into half-heartedly.

So what will the answers be? As always, an early assessment of the prospects of a case will be essential. Not easy when records may be incomplete and witnesses uncooperative, as is often the case. The investigation powers of an IP are key, but will be an added layer of expense if they need to be deployed to their fullest extent before an assessment of prospects can be performed. Mediation and other forms of ADR may be increasingly used—however some parties will only engage once proceedings are issued, so perhaps there is the need for a funding solution which takes a case to the issue of proceedings and the first attempts at ADR and then the matter is assessed once more?

The worst outcome for the professions and our creditor clients will be if the number of cases pursued falls. I am confident that will not happen; we will find solutions and adapt to the new regime.

NH: The legal profession is in a state of flux. The past few months has seen a myriad of failed, forced and occasionally friendly mergers, especially in the middle market. This trend is also driving the creation of specialist boutique firms, which emerge from these combinations as certain legal disciplines fall out of favour with new and more commercially driven ownership structures. It would be a surprise if this trend did not soon produce independent insolvency, restructuring and banking houses, which may then pull specialists out of other firms as they contemplate life as a marginal legal service line provider in a merged mega firm. Insolvency specialists are also likely to find themselves under pressure to broaden their expertise, so that they can offer a wider set of options for their firms to pitch to their clients.

Interviewed by Lucy Trevelyan.

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

First published on Lexis®PSL Restructuring and Insolvency

Filed Under: Brexit , Reform

Relevant Articles
Area of Interest