The next five years in restructuring and insolvency

With the political dust settling from the general election, Helen Kavanagh of Squire Patton Boggs, Frances Coulson of Moon Beaver, and Chris Laughton of Mercer & Hole consider what the election result could mean for the restructuring and insolvency sector.

What does the result mean for your practice?

Frances Coulson (FC): I am hopeful that this will be good news for our team.

Chris Laughton (CL): A Conservative majority government will do more to strengthen the UK economy than other outcomes. Restructuring and insolvency is more constructive when the economy is strengthening, as there is more appetite to invest in stressed and distressed businesses and assets. This suits my approach of the constructive use of the insolvency process. I think it’s crucial that as the economic recovery continues, businesses and assets achieve maximum potential and create value—if necessary by eliminating debt burdens and attracting entrepreneurial investment—even if insolvency is required to achieve that result.

At a more detailed level, we need to see who will have direct ministerial responsibility for insolvency matters. Sajid Javid’s appointment as Secretary of State for Business may suggest a less regulatory approach from the department as a whole than during the time of his predecessor, Vince Cable. However, we don’t know who will have the insolvency brief and there are several policies, such as the Jackson exemption (allowing conditional fee agreements and after-the-event insurance cost recoveries in insolvency litigation) and the pre-pack pool that a new minister might want to consider.

The promised referendum on Europe will be important, but even more so will be the renegotiated position in Europe that the Conservatives have said they will establish first.

Helen Kavanagh (HK): As the Conservatives have won the election and are forming the next government, we can expect business as usual for the UK restructuring profession. The past few months have seen a great deal of new legislation in our area which will be coming into force on 1 October 2015, principally the Deregulation Act 2015 and the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015). The restructuring profession will begin lobbying for the temporary exemption from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO 2012) to be made permanent so no win no fee conditional fee agreements in insolvency proceedings will continue to operate on a pre-LASPO 2012 basis.

From the manifesto pledges, what is on the horizon for your area?

FC: The Conservatives' manifesto pledges focus on fraud—insolvency professionals are able to provide good weapons and resources to tackle fraud (and we do a lot in that arena). We will also be pushing the reforms suggested by the R3 Fraud Group. I am also hopeful that we get a fresh and pragmatic BIS minister and that some of the less sensible parts of the very rushed Cable baby, the SBEEA 2015, can be tempered—likewise, the recent attitude being shown towards pre-packs which are an important tool in restructuring and saving jobs.

However, it is a challenging time for insolvency teams with the changes to appointments, fees, and bankruptcy petition levels all looming. An upturn in the economy would mean better quality work in the insolvency and restructuring arena and the predicted rise in interest rates may also increase the number of cases. It is still likely to be a tough market for some time.

We will also of course be looking to secure in stone a commitment to a permanent exemption from LASPO 2012.

I hope a Conservative government will be more favourable to the private sector which is vital, especially when public sector costs still have cuts to come. Although, of course, many in the public sector do a valuable job in difficult circumstances. HMRC was promised more resource to tackle tax avoidance and so I expect that will happen—which is good. I hope to see more public/private sector cooperation, particularly from the Insolvency Service which will be sole adjudicator of many appointments under the new legislation. Creditors’ wishes need to be honoured, and the more complex cases dealt with in the private sector where the skills and resources reside in greater number.

CL: None of the manifestos mentioned insolvency explicitly, but the Conservatives’ clear economic plan and their emphasis on the economic benefits of the EU (while limiting political union in Europe) gave rise to my above comments.

HK: The Conservatives have pledged to eliminate the deficit and be running in surplus by 2020. Technically, the country is no longer in recession—meaning two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for real GDP—but it doesn’t feel like that for most businesses. If it wasn’t for the effects of the massive fall in the price of oil, more businesses would be going into formal insolvency processes. The latest insolvency statistics released in April 2015 highlights that the liquidation rate for companies was at its lowest level since Q4 1984 and personal insolvencies are at 2005 levels. Hopefully, the Conservatives will continue along the path started by the coalition which will lead to an improved economy.

The main area of concern is the Conservatives’ pledge to hold an ‘in-out’ referendum on Britain’s renegotiated EU membership by 2017. The European Parliament is about to adopt the new text of the recast Insolvency Regulation (Regulation (EC) 1346/2000 on insolvency proceedings) at its sessions in May or June 2015, which would then come into force two years later in 2017. This is all good news for businesses that operate across Europe. The recast Insolvency Regulation contains changes aimed at rescuing companies in distress including:

  • in an attempt to prevent forum shopping (which adversely affects creditors), a company’s centre of main interest will be presumed to be where its head office is located, but only if this has not been moved within the three months immediately before an insolvency is commenced
  • introducing a set of procedural rules aimed at ensuring the efficient administration of insolvency proceedings relating to different companies forming part of a group, and
  • a requirement for member states to publish relevant information in cross-border insolvency cases in a publicly accessible electronic register to improve the information for creditors and courts involved and prevent the opening of parallel insolvency proceedings

This all looks good news for UK companies, but the question is whether the UK will still be part of the EU in 2017 when the recast Insolvency Regulation comes into force. If the Conservatives hold a referendum and the UK votes to leave the EU, what would the effect be on cross-border restructurings involving UK companies if the UK was not a party to the recast Insolvency Regulation?

Denmark has never been party to the Insolvency Regulation. Instead, it is a member of the Nordic Bankruptcy Convention of 1933 with Sweden, Norway, Finland and Iceland. It is also party to the original Brussels Regulation (EC) 44/2001, which does not apply to insolvency but does deal with certain related matters (such as retention of title disputes). However, they have not yet passed the necessary Danish legislation to adopt the recast Brussels Regulation. It is likely to be more complicated for the UK actually leaving the EU after being a party to the EU Insolvency Regulation for 17 years. We may have to rely on the Cross Border Insolvency Regulations 2006, SI 2006/1030 which implement the UNCITRAL Model Law on Insolvency into UK—which is mainly used for recognition of insolvency proceedings with non-EU countries (such as the US).

Is there any immediate action practitioners should take in light of the result?

FC: As to immediate action, apart from paying into your pension quick, I think watch the next few months carefully and voice your support for the profession’s lobbying. It will be interesting to see how prepacks, fees and appointments work under the coming changes and how the draft Insolvency Rules evolve. Maybe get involved in pressing for sensible and proportionate practice under the headlines. The devil is usually in practical application.

Also I was sad to see another non-lawyer Lord Chancellor but think his focus will be the Human Rights Act 1998 to start with.

CL: No urgent steps—let’s explore this when the ministerial portfolios have been allocated.

HK: Given the election result, it is ‘business as usual’ for the time being. Hopefully, the new government will take a ‘steady as she goes’ approach for the foreseeable future, facilitating the recovery in the economy, and enabling insolvency professionals to do what they do best.

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

 

Filed Under: Insolvency , Reform

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