Downturn keeps insolvency lawyers in top gear
20 October 2008
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High-profile insolvencies are keeping law firms’ financials afloat.
There’s probably never been a better time to be an insolvency lawyer. Their services are in such demand that 48-hour stints in the office are commonplace and top partners can command up to £900 an hour.
“I’ve never felt so popular,” jokes Freshfields Bruckhaus Deringer partner Richard Tett, who in recent weeks has worked on the collapse of two Icelandic banks and one high street holiday brand.
No wonder restructuring lawyers are losing sleep, with the global financial crisis moving insolvency work into a different gear. Previously, companies lurched slowly towards collapse over many months and both accountants and lawyers would be on board by the time insolvency was declared.
Now, though, the end can be alarmingly swift. Lehman Brothers, the collapse of which triggered panic in the banking sector, fell apart over the course of one weekend, having previously seemed immune to succumbing to the credit crunch (see box).
Linklaters corporate partner Matthew Middleditch, who is working on the administration, admits: “Normally these things don’t happen quite so quickly.”
With some of the biggest instructions of the decade up for grabs, the spotlight has fallen on the way these mandates are handed out and the relationship between law firms and the accountants drafted in to carry out administrations.
The big insolvency specialists – Deloitte, Ernst & Young (E&Y), KPMG and Pricewaterhouse-Coopers (PwC) – do not have panels or even general counsel to appoint legal advisers. So who decides which law firm to instruct?
That responsibility falls to individual insolvency accountants, who usually have relationships with a number of partners.
“They’re astute buyers of legal services and they have huge influence,” says Clifford Chance head of insolvency Mark Hyde.
Often the administrators simply instruct the usual advisers of the company or the law firm with the most detailed knowledge of its problems.
Freshfields’ mandate from E&Y to help wind up the UK businesses of Icelandic banks Kaupthing Bank and Landsbanki this month is a good example. The firm is advising the Bank of England (BoE) from behind a Chinese wall on both administrations and received the call from E&Y because of the Icelandic bank knowledge it gained through doing other work for the BoE.
However, it is a two-way arrangement. ;Law ;firms sometimes find themselves in the position of advising the company on which accountancy firm to use. This usually happens when a longstanding client gets into financial trouble and asks its lawyers for help.
Hyde at Clifford Chance says: “It’s a relationship that works both ways. In some cases the lawyers will have an incumbent position, but it may well be in their gift to advise the company which firm of accountants to go to.”
It should come as no surprise that magic circle firms have been the biggest beneficiaries of the insolvency boom, with two in particular forging ahead.
Linklaters won the biggest insolvency case of the decade thanks to a call from Lehman European legal chief Peter Sherratt (see box). And Freshfields advised the administrators of XL Leisure, which went bust last month, leaving thousands of holiday- makers stranded abroad, as well as the Icelandic banks.
There are notable exceptions. In September DLA Piper was given the lead role by BDO Stoy Hayward on the administration of investment group Dawnay Day. The firm has a global team of 80 lawyers working on breaking up Dawnay’s real estate empire.
Lovells has also won a couple of key mandates, being drafted in by Deloitte to advise on the administration of buy-to-let hotel group GuestInvest, while E&Y has instructed the firm on the collapse of structured investment vehicle (SIV) Sigma Finance.
Clifford Chance has, by Hyde’s own admission, not won any of the major insolvency instructions since Lehman’s demise. The firm does have form when it comes to winding up SIVs though.
Earlier this year Clifford Chance acted for the receivers of the Whistlejacket fund, and more recently advised Goldman Sachs on the restructuring of distressed fund Cheyne Finance. In the latter restructuring Lovells advised receiver Deloitte.
Allen & Overy (A&O) has been conspicuous among the magic circle by its absence on insolvencies, although it has been advising Kaupthing in the UK and also acted for the counterparties on the Lehman insolvency.
One City restructuring partner confirms: “A&O has historically been right up there, but has had a quiet time recently.”
Another ;key ;reason ;for the magic circle dominating insolvency work is the sheer scale of the work involved in winding up a global company.
“The size of the team you need to be able to deploy very quickly renders it very challenging for anyone outside the magic circle,” says Freshfields’ Tett.
Then there is the increased risk of litigation. As Tett points out, investors are more inclined to go to their lawyers when they are losing money. A business that is likely to be the subject of mass litigation will want the peace of mind of knowing it has used one of the best firms around.
This ;is ;not ;to ;say ;that restructuring practices outside the top four are struggling.
The travails of airline Zoom, furniture chain Ilva Furniture and home furnishings retailer MFI have seen instructions for firms as diverse as Ashurst, CMS Cameron McKenna, Eversheds, Salans, SJ Berwin, Speechly Bircham and Shepherd and Wedderburn.
For the first time in years there are enough companies going bust to keep everyone busy – which is good news for the insolvency industry, if nothing else.
As Tett says: “A little over a year ago everybody was scrambling for the same restructurings. Now there are plenty to go around.”
Brothers in Arms: How Linklaters won Lehman
It is the insolvency mandate of the decade and could net Linklaters £20m in UK fees alone. And yet it came from nowhere – “out of the blue yonder”, as one magic circle partner puts it.
Here is a rundown of events that led to Linklaters being instructed on the administration of Lehman Brothers.
Linklaters has had close links with Lehman for nearly a decade, a relationship led by banking partners Matthew Middleditch and latterly David Ereira. When the bank realised it was in trouble it called on Linklaters for preliminary advice, although a firm spokesman will not reveal how long before Lehman’s collapse this occurred.
At some point over that fateful weekend in early September, Lehman appointed Pricewaterhouse-Coopers (PwC) and went into administration on Monday 15 September.
So the firm helped appoint the administrators rather than vice-versa.
One magic circle partner reveals: “Linklaters called PwC late on Saturday night and said, ‘Can you clear conflicts? We think there’s a role for you as administrators of Lehman.’”
A partner at Linklaters confirms that the firm had advised Lehman on its options for appointing an administrator and that it had selected PwC.
“Lehman believed up until the last moment that insolvency was an extremely remote possibility,” he adds.