This edition of Global Insight comes to you shortly after the United Kingdom voted to leave the European Union.
The morning after the vote we provided clients with a summary of its immediate impact, stressing that the most important point to note is that nothing will change legally until legislation is passed. That is likely to take at least two years while the UK negotiates the terms of its exit. The UK’s departure from the EU (after the period of negotiations) would remove the automatic recognition of insolvency proceedings and judgments between the UK and European member states. Consequently, as with so many other areas of law, the UK will need to negotiate new parameters for such recognition.
For now and despite the monumentally uncertain political landscape (at the time of writing, the government is looking to appoint a new prime minister and considering the extent to which it requires parliamentary approval, which some consider it may not get, to trigger the formal exit process) for UK restructuring professionals it is business as usual. Interest in UK schemes of arrangement as a fast, cost-effective and efficient means to restructure domestic and foreign companies’ debts remains keen. The UK prides itself on providing some of the world’s leading business rescue tools. Not content to rest on its laurels, shortly before the UK referendum, the government initiated a public consultation to consider enhancements to fill perceived gaps in the existing regimes: a three month moratorium for all financially distressed but not necessarily insolvent companies; greater flexibility to compel the continued supply of essential services; the introduction of a new rescue plan procedure; and a request for further information to consider methods by which routes to post-commencement finance might be improved. We shall wait to see the outcome of the consultation but I am confident that having invested in the provision of flexible, dynamic solutions, the UK will take whatever measures it considers necessary to continue supporting the European drive for better recognition and coordination of cross border business rescue and insolvency solutions.
In such historic times, it is more important than ever to remember that despite recent forum-shopping trends favouring England’s regimes, it is but one island. The global economic crisis highlighted deficiencies in the insolvency and restructuring regimes of many countries around the world and prompted large-scale reform. Lawyers from our Global Restructuring group are involved both openly and confidentially in the legal reform agenda of several nations.
Common themes run throughout the reform efforts, including:
- Promoting a rescue culture as an alternative to terminal liquidation proceedings
- Improving efficiency by reducing formalities and timescales
- Improving recovery rates for creditors
- Introducing increased regulation of insolvency practitioners
- Increasing out-of-court options
Since the financial crisis, almost all countries have taken steps towards introducing changes to insolvency laws. The following three, recent developments provide good examples of the general direction of travel.
In the wake of the Cypriot 2013 banking crisis, in April 2015 its parliament approved new insolvency laws aimed at promoting a rescue culture and making the existing regime more efficient. A new restructuring-based regime (examinership) was introduced, which is similar to the UK’s administration process. Under the regime, an insolvency practitioner (also now subject to greater regulation) is appointed to develop and agree proposals for the company’s restructuring, with four months’ protection against creditor action. Cyprus’ reforms saw it rise from 51st to 17th place in the World Bank Group’s Doing Business reports which rank countries by their ease of doing business. In relation to restructuring and insolvency, rankings are by reference to factors such as average recovery rates, the time it takes for each process to run its course and the degree to which the process provides for creditor participation.
Since the start of this year, Poland and India have each introduced significant reforms. On 1 January 2016, Poland brought in separate acts for bankruptcy and restructuring laws, thus keeping rescue proceedings away from the stigma that can attach to bankruptcy proceedings.
A number of options have been introduced for the restructuring of potentially viable companies, including a procedure to agree a plan with the company’s creditors.
In India, as recently as May this year both Houses of Parliament passed the landmark Bankruptcy and Insolvency Code. The Code consolidates, in one place, aspects of legislation currently featured in an array of separate pieces of legislation and features greater regulation and measures to enhance efficiencies as well as the introduction of a new 180-day corporate insolvency resolution procedure. A stay on creditor action arises throughout the currency of the procedure (which can be extended once, for up to 90 days). For insolvency proceedings, and echoing a step taken by the UK in 2003, the Code provides a new payment waterfall, with the Indian Government now sitting behind unsecured creditors and relinquishing its first-ranking position.
The importance of staying abreast of legislative developments should not be underestimated. The World provides a global shopping centre for restructuring solutions. Each company’s financial difficulties are unique and it is incumbent upon global restructuring professionals to consider the best forum for resolving the peculiar challenges of each.
In our legislative reform work, we are seeing increased importance placed by governments on the World Bank’s ranking of insolvency proceedings, each displaying a keen desire to ascend in the rankings. Corporate recovery legislation presents a challenging dichotomy: competition between governments helps to drive innovation; and yet the lack of harmonisation between the insolvency laws of different countries presents potential barriers to investment. The theme of harmonisation brings me back to the start. Shortly before the UK referendum, the latest EC public consultation on insolvency proceedings was specifically aimed at exploring the scope for areas of insolvency laws around Europe to be brought more in line with each other. If the UK proceeds to trigger the formal exit process, it will need to consider whether to replicate or adopt any harmonised principles which emerge from the consultation exercise. The right to choose to implement unique and World-leading solutions will no doubt continue to be attractive, but for cross border enterprises, even gold-plated restructuring regimes will only be of relevance if they are afforded cross border recognition. In restructuring law, as much as so many other areas of law, the nature of the UK’s new relationship with the rest of Europe will be key.
Kazakhstan has undergone reform in stages since 2012, when its insolvency laws were limited and liquidation was the most common and available option for insolvent companies. Since then, numerous rounds of reform have introduced measures for the reorganisation of companies, supporting the raising of finance by insolvent companies, promoting sales of assets as a going concern and clarifying and simplifying existing procedures.
Consequences of reform
It is clear that many countries are taking big steps to reform and improve their insolvency and restructuring regimes. However, it will be interesting to see whether these efforts will be enough to encourage insolvent companies to use their home regimes, or whether they will prefer to use the more tried and tested, established regimes of other jurisdictions.
The World Bank Group’s Doing Business reports rank countries by their ease of doing business, including in relation to restructuring and insolvency. The reports take into account various factors, including average recovery rate, time, cost and creditor participation.
The effects of recent reform can certainly be seen by some jurisdictions’ sharp rise in the restructuring and insolvency rankings between the 2015 and 2016 editions of the report.
Cyprus’ reform saw it rise from 51st place to 17th, Jamaica also jumped up the rankings from 60th to 35th following its reform efforts, including the introduction of a reorganisation procedure, and Slovenia rose from 41st to 12th after the introduction of 2015 reform measures aimed at simplifying insolvency proceedings.
Slovenia’s rise pushed the United Kingdom down to 13th place, a surprisingly low result for a jurisdiction widely viewed as an attractive and flexible place for instigating restructuring and insolvency proceedings. Other countries ranking ahead of the United Kingdom include the United States, Portugal and South Korea.
The Jordanian Government announced the Jordan Economic Legislation Reform project in February this year, with insolvency laws forming part of the main focus. The current regime in Jordan is predominately focused on liquidation, and so introducing a rescue regime could be one of the possibilities considered.
Even jurisdictions with more established insolvency and restructuring laws, such as Australia, Switzerland and the United Kingdom are currently undertaking reform. With insolvent companies shopping around for the most beneficial jurisdictions, countries must ensure that their regimes are keeping up with the competition.
DLA Piper has been consulting with governments in a number of countries and providing advice as they develop their restructuring and insolvency regimes. With dedicated restructuring lawyers across the Americas, Asia Pacific, Europe, Africa and the Middle East, we have the knowledge, experience and resources to address clients’ restructuring and insolvency needs on a national and international basis.