As the nights draw in and the new year approaches, we take stock of the state of play for European restructuring and look ahead at potential trends for 2024.
Completion of legal reforms
The last stragglers in the EU will continue to introduce a restructuring framework in line with the 2019 EU Directive on preventive restructuring frameworks. Germany and the Netherlands came out of the starting blocks early, others have since followed suit including France, Spain, Italy and (most recently) Belgium and Luxembourg. The list of new regimes will continue to grow as the remaining member states implement their reforms.
More restructuring plans at home and abroad
In 2024 we expect to see a continued build-up of the body of precedents in some jurisdictions (UK, Germany, Netherlands, France and Spain), in others we are still seeing the first big cases (Italy, Belgium).
The courts in each jurisdiction will continue to grapple with the appropriate boundaries of these powerful new restructuring tools. To name a few possible hot topics that may come before the courts in various jurisdictions next year:
- Is it possible to artificially structure a transaction to establish restructuring forum, and are there any limits to this?
- In what circumstances is it appropriate to depart from the absolute priority rule, or for existing shareholders to retain their equity stake, or for pari passu creditors to be treated differently?
- How should the court timetable and process be managed in order to strike a balance between urgency on the one hand and procedural fairness on the other? How much time do dissenters need to make their case, and how can this be accommodated if there is a burning bridge? We are starting to see the UK courts pushing back on aggressive timetables (see comments in McDermott and Aggregate).
- Should third party releases be permitted and in what circumstances? This is a topic that has been vexing judges on both sides of the Atlantic this year.
More cases across different jurisdictions will flush out the differences in how each member state has adopted the EU Restructuring Directive, and how each court applies the law. This may play into choice of forum and, as we discuss further below, could lead to more recognition headaches if some regimes go further than others would permit.
The rising tide of challenges looks set to continue, meaning a litigation lens should be applied to restructurings from the start. Challenges are also becoming more credible as dissenting creditors take on board judicial criticism of “shouting from the sidelines” rather than advancing a fully argued case.
In the UK, the restructuring plan has hit the Court of Appeal for the first time and the Adler judgment is eagerly awaited. Whatever the outcome, it will establish binding precedent that first instance judges will need to adhere to.
2023 has seen a take off in interlocking restructuring plans – think Cimolai, Vroon, McDermott. Each case involves the implementation of an English restructuring plan or scheme in parallel with one of its continental cousins (Italian concordato for Cimolai and the Dutch WHOA for McDermott and Vroon).
One of the key drivers for interlocking plans is the so-called “rule in Gibbs”, which provides that obligations governed by English law cannot be discharged by foreign law proceedings but will instead require an English law process (unless the creditor agrees to the foreign law discharge of the obligations owed to them).
The UK Insolvency Service ran a consultation on implementing the Model Law on Recognition and Enforcement of Insolvency-Related Judgments in July 2022 (see our blog here) and announced the outcome in July 2023 (see our blog here). While the government remains of the view that enacting the model law will enhance the UK’s highly regarded insolvency regime, it will continue to develop the detail of the implementation proposal. One of the key questions will be how to square the model law with the rule in Gibbs. The Insolvency Service devoted an entire panel at its Forward Thinking Conference in November 2023 to a debate on the rule in Gibbs, and policy discussions continue.
In the meantime, it seems likely that the trend in interlocking plans will continue, especially given the prevalence of English law finance documents. This gives rise to certain challenges given the different regimes don’t necessarily dovetail, and there is not always a formal framework for court-to-court cooperation. It will be interesting to see how practical workarounds develop to facilitate interlocking processes as the trend continues in 2024.
Will 2024 be the year that recognition of the English restructuring plans is tested in earnest?
In the UK to date, recognition has largely been dealt with “on paper” by debtors obtaining favourable recognition opinions. There is also a well-trodden path to obtaining Chapter 15 recognition where there is US debt in the structure, or US assets.
However, it is possible we will see dissenting creditors take the fight to the foreign courts by trying to stop recognition. As noted above, arguments could centre on the divergence between different regimes, and whether it is appropriate to recognise a plan that could not have been implemented locally. For example, this could become a live debate in relation to third party releases if decisions currently pending in front of the US courts move Chapter 11 further away from the English regime in this regard.
It is hard to overstate the scale of change to the restructuring landscape in Europe in recent years, and there is a lot more still to come.
Don’t hesitate to reach out if it would be helpful to discuss anything further, and stay tuned to our blogs to find out more.
The rising tide of challenges looks set to continue, meaning a litigation lens should be applied to restructurings from the start.