When Schefenacker – the world’s biggest maker of car mirrors – ran into trouble in 2007, it became clear that the German manufacturer would need outside restructuring expertise and that it would have to look to the UK. Its City of London-based lawyers, Allen & Overy, moved the corporate headquarters to Hampshire by incorporating a new English company and transferring its assets and liabilities. Through this device, the business effected a rescue under the more flexible English legal procedures. According to Jenny Marshall, a partner in Allen & Overy’s London restructuring team, this set the ball rolling.
“The Germans said, ‘That’s not right – we’re losing business to England. We’re going to make it easier to do restructurings in Germany,’” says Marshall, who notes that the same sentiment is now gradually spreading across the rest of Europe. “Reforms are springing up like mushrooms across the whole of Europe.”
Looking at the pan-European trend, Jo Windsor, partner and insolvency specialist at London-based law firm Linklaters, notes a trend towards greater convergence, with “the intention over time to flatten distinctions in the hierarchy from more to less creditor-friendly regimes”. This process is creating minimum acceptable standards across the EU, say debt fund managers.
“Regulations governing restructuring are definitely progressing in Europe as a whole,” says Nicolas Nedelec, a Paris-based managing director at Idinvest Partners. “It’s no longer the case in international deals that a small local creditor could leverage a position to get preferential treatment – we are in a more balanced environment.”
Distinctions will be flattened further by the EU Preventive Restructuring Framework Directive, agreed by member states in December 2018. This compels every nation to create rules that enable early restructuring, before a company falls into insolvency. “The directive is an important step in creating greater legal certainty,” says Muge Adalet McGowan, senior economist at the Organisation for Economic Cooperation and Development, in Paris, who notes that present procedures can be complex, convoluted and lengthy in some countries.
Analysts retain a healthy dose of scepticism about the pace of change, however. “Even if you have the best insolvency regime on paper, if you don’t have an efficient judicial system, it will not yield the results you want,” says Adalet McGowan. Observers often lament the law’s delay in Italy, for example, where insolvency cases can take years. “This will be very much a gradual process, particularly as member states are being offered a wide range of options when it comes to exactly how they will implement this directive,” adds Windsor of Linklaters.
Moreover, the directive will not suit all creditors. Member states must provide for an optional moratorium before the creditors seize control of the company, to be granted by a court or other arm of the state for a maximum of four months. This is similar in some ways to the Chapter 11 provision in the US, which is designed to allow companies to work out a plan to save the business before creditors start selling off assets. However, there is enthusiasm for reform, and several member states are already agreeing to changes ahead of the directive. Here we look at a few examples.
UK insolvency lawyers are doing battle with the government over plans to allow a moratorium for borrowers, initially for 28 days.
As the chair of the City of London Law Society Insolvency Law Sub-Committee, Jenny Marshall of Allen & Overy has led resistance to plans for a “monitor” to oversee the moratorium.
“Under the current proposals, the monitor has all the responsibility but none of the power: they have no teeth,” says Marshall. If they are worried about an abuse of the moratorium by the borrower, such as the transfer of assets to an offshore jurisdiction where they cannot be touched, “the only thing the monitor can do is to bring the whole house of cards down, by stopping the moratorium. They can’t say during the moratorium: ‘You have to do X, Y, and Z.’”
The sub-committee has suggested instead adapting the existing procedures so that the responsibility for overseeing the moratorium could be given to an administrator, who under current insolvency law has clearer duties and powers.
Marshall says that if this idea is accepted, the UK will remain, along with Ireland, Europe’s most creditor-friendly regime. But under the present proposal for a monitor, “the UK would fall somewhere down the order. I doubt we will ever be as debtor-friendly as France, but we might end up more on a par with Germany.”
Changes since 2005 have made it progressively easier for borrowers and creditors to facilitate restructurings before the business slides into liquidation.
Fabrice Damien, head of origination at Hayfin Capital Management in Paris, and the person responsible for investment opportunities in France, notes that in recent years the law has increased the rights of creditors in court-supervised restructuring processes, and facilitated the execution of these processes. This includes the ability for creditors holding two-thirds of the debt to override the objections of dissenters to any restructuring plan.
Damien says that restructurings can at times take place within a few months, but acknowledges that on average they tend to take slightly longer in France than in the UK. He adds: “The process may be a bit more protracted, a little different and maybe a bit more French, but at the end of the day, the end result tends to be the same. For instance, if there is a significant liquidity issue, either the sponsor commits additional capital or they cede control to the lender or a new third party that wants to put money in.”
He also notes there is “the very well-trodden path of consensual restructuring, through out-of-court procedures under the aegis of a mandataire ad hoc”. The latter plays the roles of facilitator and umpire, and usually of administrator, should the business end up in insolvency. Damien points to the large number of precedents overseen by a relatively small number of these experienced professionals, which creates predictability for creditors.
Outside formal insolvency proceedings, a restructuring is currently only possible on a consensual basis with the support of all parties.
This means that every minor hold-out creditor, as well as equity holders, can frustrate the process. However, under the current proposals, a restructuring plan could be created to prevent the debtor going insolvent, or to facilitate a controlled liquidation and distribution of the debtor’s assets. These plans could include deferring or partially releasing payment obligations, amending the terms of debt instruments, or offering debt-for-equity swaps. The debtor could also amend the terms of onerous contracts, such as leases.
Once approved and confirmed by the relevant percentage of creditors and the court, the restructuring plan will be binding on all creditors and shareholders. Subject to certain safeguards, creditors and shareholders who have voted against it can be bound by a “cross-class cramdown” – the process by which creditors across all classes of debt, and other parties, are compelled to accept a restructuring plan devised by a majority of creditors.
“The options to successfully restructure financially distressed, but viable, businesses in the Netherlands are about to widen substantially,” concludes Sigrid Jansen, partner at Allen & Overy in Amsterdam.
“On the European continent, Germany is the most creditor-friendly jurisdiction,” says Frank Grell, chair of the German restructuring and special situations practice at law firm Latham & Watkins’ Hamburg office.
“We still have some small changes to do, but in general we have a process that works,” says Grell. He acknowledges that the Netherlands will move ahead of Germany once its proposals are in force. However, he believes Germany will then catch up with its neighbour when it adjusts in response to the EU directive.
In some respects, Germany is even more creditor-friendly than the UK, asserts Grell. For example, creditors with only 51 percent of the debt can cram down dissenting creditors, and dissenting classes can be bound by the restructuring plan as long as the majority of creditor classes approve it. In the UK the current threshold is much higher at 75 percent, and this threshold must also be met by all classes.
There are, however, still issues that might irritate a lender used to UK restructurings. For example, creditors extending a fresh loan that delays an insolvency filing by breathing new life into the business can be held liable for any damage to new creditors and suppliers caused by that delay. For this reason, creditors unfailingly hire a third-party expert such as an auditor to protect them from liability by providing a long “restructuring report” to furnish evidence that the restructuring plan is viable.
Italy is introducing an updated insolvency regime to improve efficiency and encourage
the rescue of distressed companies.
Ongoing reforms aim to make liquidation the last resort. These include improving the judicial procedure that allows restructuring solutions with widespread creditor approval to be imposed on dissenting creditors.
“How efficient and effective these reforms will be, and how quickly they produce results, will depend on both the individuals implementing them, and the courts overseeing the procedure,” says Jo Windsor of Linklaters.
“A cynic might wonder how much things will really change in practice, but it is important to bear in mind the context of these reforms,” he continues.
“They are intended to address identified concerns which impact the Italian economy and, importantly, they must be seen in the context of a wider initiative, of which the recently published EU Insolvency Directive forms a part, to make insolvency regimes across the EU more effective.”
Windsor thinks this will put Italy under pressure “to try and raise the standard if, for any reason, the new regime in Italy is perceived as falling short of other jurisdictions”.