Insolvency: Go for broke

Restructuring firms anticipate a boom when UK interest rates get jacked up and from mandates coming from Asia

The Bank of England’s hint that interest rates could rise soon has restructuring lawyers anticipating a busy 2014.

“An upturn in the economy and a possible increase in interest rates means activity in the restructuring market is likely to increase in 2014,” predicts Taylor Wessing restructuring partner Neil Smyth. “More money in the market will create opportunities for enforcement and sale, and any interest rate rise will put more pressure on all concerned to act.” 

litigation

After nearly five years of base interest rates at a record low of 0.5 per cent, an earlier than expected rise could see more high street casualties from increased pressure on cashflow. Last year alone saw the collapse of Jessops, HMV and Blockbuster (see box, right) in the UK, with Linklaters, Ashurst and legacy Salans among the firms to win work from the turmoil. 

But the prospect of higher interest rates also points to a wider turnaround in fortunes. According to a recent survey of 1,500 firms by Lloyds Bank, business confidence is at its highest since 2008.  

“Businesses are beginning to regain confidence about trading prospects after years of hesitation and concern,” Lloyds’ managing director of SMEs David Oldfield says of the results. “We hope this optimism will lead to growth for the UK economy.” 

Thomson Reuters data also points to a significant dip in debt volume: Emea distressed debt volumes fell by 87 per cent in 2013 compared with 2012, buoyed by the $260bn (£160bn) restructuring of Greece’s sovereign debt. Meanwhile, completed distressed debt and bankruptcy restructuring activity totalled $99.6bn in the first nine months of 2013, a 74.3 per cent drop on the same period the previous year, despite the number of completed deals going up from 257 to 342. 

Calmer waters

So is the economic gloom finally lifting? While a rise in interest rates may result in a short-term spike in insolvencies, a less turbulent economy will mean big changes for insolvency lawyers. 

“Just as 2013 saw a gradual emergence from a sustained period of financial difficulty, the restructuring market has shown a steady increase in activity in the same period,” observes Smyth. “Money in the markets is [now] being spent by the private equity houses and debt funds in buying distressed debt from the banks. The attitudes of those entities to either working situations out or enforcement will be different, with less PR and fewer mis-selling issues than previously.” 

Looking ahead, others hope foreign firms will take advantage of the restructuring process in England. Last September the High Court sanctioned a scheme of arrangement proposed by the Vietnam Shipbuilding Industry Group (Vinashin) to restructure its defaulted $600m syndicated loan facility. 

“This was the first time a Vietnamese company has taken advantage of this restructuring process in England,” points out Mayer Brown co-head of restructuring Ashley Katz. “We’re working on a number of similar situations and I expect the English courts to be the chief restructuring forum for foreign companies.” 

A report published by Vinashin’s auditor KPMG adds that the UK is likely to become a hot spot for restructurings of Asian companies.

“We will in all probability see the English courts – already regularly used by European companies as a favourable venue for restructuring by way of, typically, administration – being used more by Asian companies,” writes KPMG’s co-head of Vietnam restructuring, Phil Smith. 

If so, it would bring good news for Europe-based restructuring lawyers. While Emea distressed debt volumes dropped 87 per cent in 2013 compared to 2012, Asia Pacific volumes rose by a whopping 130 per cent to $20.7bn. Energy and power was the most active sector, capturing almost half the market. 

So as the UK economy starts to stabilise, now may be the time to look East. Happy new year after all.

Law firm casualties in 2013

The legal market also saw its fair share of insolvencies in 2013.

By far the largest was Cobbetts. On 6 February DWF secured a pre-pack deal to take on the bulk of Cobbetts’ assets, a sale brokered by KPMG and Pinsent Masons. Property costs were perhaps the most critical factor in Cobbetts’ collapse, after several years of falling revenue.

The administration ended up costing £1.7m, with legal and administrators’ fees a sizeable chunk of the total.

In March Scottish firm Semple Fraser followed in Cobbetts’ footsteps and filed a notice of intent to appoint administrators. A steep downturn in revenues was cited as the cause behind the firm’s troubles, with a strategy review failing to rescue it. RSM Tenon were appointed as administrators.

Several firms, notably Dundas & Wilson, Maclay Murray & Spens and Weightmans, pounced on separate parts of Semple Fraser’s business.

RSM Tenon also picked up the mandate to advise Midlands firm Challinors on its administration and sale in August. A total of 14 firms took teams of lawyers from Challinors, but 46 people lost their jobs in the process. Challinors’ senior partner Paul Griffiths also found himself slapped with a bankruptcy petition by a former client.

In September HMRC issued a winding-up petition against Truro’s Follett Stock over outstanding tax. After several weeks, the High Court liquidated the firm following the failure to pay the tax bill or find a buyer in a pre-pack administration. David Standish and John Milsom of KPMG were appointed joint compulsory liquidators, and the SRA appointed Lester Aldridge to take over Follett Stock’s live files.

The inability to find professional indemnity insurance(PII) was the cause of litigation boutique Harris Cartier’s collapse – and more firms are understood to be in a similar position, following changes to the PII rules. Pinsent Masons and Zolfo Cooper were appointed as joint administrators for Harris Cartier in October, arranging a sale to Gordon Dadds and personal injury firm Neil Hudgell. Herts and Beds firm HilliersHRW went into administration, for the same reason, in December.

PII was also an issue for Manches, which was sold in a pre-pack administration to Penningtons in October. PII concerns and an HMRC notice of action were threatening Manches, but Penningtons, which was already interested in a merger, picked up the firm in a £500,000 deal. PricewaterhouseCoopers partners David Baxendale, Zelf Hussain and Stuart Maddison brokered the transaction.

Financial issues are understood to remain for other firms and last year’s collapses may, sadly, be followed by more in 2014.

Joanne Harris

High street casualties: who advised who

Jessops 

In January Ashurst partner Giles Boothman advised Jessops in the run-up to its administration, while SNR Denton partner
Rachel Anthony and managing associate Robert Spedding
acted for administrators at PricewaterhouseCoopers on
the filing and takeover of the camera retailer’s brand by Dragons’ Den’s Peter Jones, advised by Lawrence Graham partner Brett Israel.

HMV

Days later, the HMV administration gave roles to Linklaters partners Richard Hodgson and Richard Bussell for the Deloitte administrators, while banking partner Chris Howard advised the company’s banks. Salans partner Jonathan Polin advised Hilco in its purchase of HMV’s £176m debt. 

Blockbuster 

Meanwhile, CMS Cameron McKenna partner Rita Lowe advised another Deloitte team
on the administration of Blockbuster UK, the video rental chain, while Linklaters partner Dan Dufner acted for its US parent. The company was acquired by private equity house Gordon Brothers. HowardKennedyFsi partner Paul Glassberg led the firm’s
team acting for Gordon and the firm continued to advise Blockbuster until its second administration in November, when the joint administrators instructed the London office
of US firm Locke Lord. The firm’s London office went on to instruct rugby league club London Broncos in its administration weeks later. 

Barratts 

Shoe retailer Barratts went into administration on the same day as Blockbuster (11 November), with the administrators appointing Shoosmiths to advise. Manchester partners Mark Dawson and Sarah Teal
led the firm’s work for the joint administrators, Duff & Phelps partners Philip Duffy and David Whitehouse.