European Revolution vs. English Evolution

Update on Case Law Developments in English Restructuring

This client alert will focus on three of the key recent cases of the past six months, each of which features the use of English law restructuring tools for non-English companies. Whilst the wave of recent restructurings has slowed in recent times given the uptick in the European economy, these cases are likely to be cited as precedents in the future and the case law developments will be of assistance in the event there is rise in the number of restructurings which may be expected as interest rates rise in the next few years.

In the decade leading up to the Great Recession which commenced in 2008, many European jurisdictions took significant measures to update their antiquated insolvency regimes. The Spanish updated their 1898 insolvency laws in 2003, the Italians updated their 1942 bankruptcy laws in 2005, the French updated their 1984 laws in 2005, the Germans amended their regime in 1999, and finally the UK made radical changes in 2002. The effectiveness of the reforms were mixed and when the stresses of the Great Recession collided with the new regimes, a second wave of reforms, forged by the reality of experience, occurred in every major European country save the UK. In recent years a dichotomy has arisen between European radical change and English gradualism when it comes to restructuring law practice.

In the UK there have been no significant legislative insolvency developments since the Enterprise Act of 2002 did away, for the most part, with administrative receiverships. In the recession of the early 1990s, banks in the UK would use the private law remedy of the appointment of an administrative receiver over a defaulting company who would sell the company to the highest bidder, without court intervention. In practice little has changed in the UK in the sense that many companies are sold by administrators in pre-pack processes not wholly dissimilar to the administrative receiverships prior to the Enterprise Act.

Another development occurring in the 2000s related to the use of schemes of arrangement ("schemes") as a tool to rescue companies in many high value cases, in the energy and telecoms sectors in particular, including for example the restructuring of British Energy and Marconi. Schemes were often attractive as the legislative regime governing them falls under the UK Companies Act, not the Insolvency Act 1986, and so the cost and taint of insolvency is avoided.

Since the commencement of the Great Recession schemes have been revived once again. A practice has arisen where a distressed company is placed into a UK administration process and its assets, usually shares of operating companies, would be sold, its senior debt would be amended under the terms of a scheme, and its junior debt and corresponding security and guarantees released via the intercreditor agreement. Accordingly, the key developments in English law relating to restructuring have been occurring on a piecemeal basis within the practice and case law relating to UK schemes of arrangement, and administrations.

One important development in recent years has been the use of schemes to restructure European companies. This trend has undoubtedly been one of the drivers pressing many European jurisdictions to improve their own laws to retain restructuring cases. None of the major European jurisdictions view themselves in isolation and competition amongst the regimes has led to radical improvement. European insolvency practice, whilst not perfect, has made a quantum leap in recent years and we are moving far closer towards the ideal of a "rescue culture" for businesses in distress compared to the liquidation and value destructive model which previously prevailed.

Conclusion – the way forward for high yield restructurings?

The revival of the scheme occurred as a response to the wave of defaults of high yield bonds in the early 2000s. Restructuring professionals needed to find a way of compromising debt of companies which often had their operations across Europe where it would be close to impossible to contact let alone negotiate with hundreds if not thousands of individual bondholders and where individual insolvency cases in numerous countries would make the restructuring highly likely to fail. The high yield product was a US invention made famous in the 1980s merger boom and when it made its way to Europe it often included standard high yield amendment terms which either required a 100% consent from bondholders to change key "money terms" or close to 100% agreement. Whilst debt compromises could be made in the US using Chapter 11, in Europe it is still likely that, notwithstanding significant improvements in insolvency laws, local insolvency processes will be still be seen as value destructive compared to some of the techniques described above. Given the massive wave of high yield issuance in recent years and the likelihood of a return to an average default rate there is every possibility that restructuring professionals will be using these helpful precedents of the past six months in the important work of saving companies from uncontrolled and value destructive insolvencies in the coming years.