This scenario is neither hypothetical nor exceptionally large. Debt was just short of £100m before the successful restructuring. The group's turnover was less than the debt.
There has never been a more interesting or varied time to be a workout lawyer and recent changes mean it is also a challenging time to be a pure insolvency lawyer. What is the reason for all the interest in this area?
Large restructurings are getting increasingly complex due to the wider stakeholder groups involved. The new corporate financing world has affected the role lawyers and accountants play as corporate recovery advisers. We must identify the exposure and interests of all groups quickly: who are they?; how much have they bought in (particularly relevant in bonds)?; what angle are they coming from? Trading levels in distressed debt, for example, provided valuable information about the likely motivation of creditor groups in the above case. Bonds are the biggest challenge for lawyers – almost all European bond issues use a structure designed for the US market, and US investors are the major players in Europe. The lack of familiarity of these parties with European processes can lead to frictions in any restructuring – step-in the advisory legal teams.
The opportunities are not confined to large restructurings: in certain cases an insolvency process is ultimately needed, but UK stakeholders are wary of 'free-fall' insolvencies – those where there are no concrete plans in advance of what outcome will be reached – of any variety. You can see this clearly in the falling number of appointments coming from clearing banks.
The result is that professionals dealing with distressed companies need to put on both corporate finance and corporate recovery hats. The insolvency process normally reduces the business's value, so the longer we can keep it solvent the more value can be retained. But if a buyer for the business has been identified, an insolvency process (the so-called 'pre-packaged sale') may be the only way to deliver a solution that is acceptable to the buyer and maximises value for the other stakeholders. Inevitably, this results in more work for lawyers while the buyer is found, including guiding directors through the choppy waters of potential wrongful trading. We have seen recent trends towards trust accounts to protect directors in such cases.
The distressed M&A product, working closely with stakeholders' lawyers, has now become a big part of the restructuring professional's kitbag. A further tool is found in the Enterprise Act 2002, with which the Government intends to radically alter the UK insolvency landscape. Again, there should be scope for a wider range of legal services. The act emphasises the survival of the company as the overriding objective of new-style administrations. Survival rarely happens with current administrations, in which a sale of the business and decent burial for the corporate has tended to be the pattern.
This emphasis on company survival points to the objective of preserving some shareholder value, which can be delivered through business regeneration techniques being applied to the corporate inside the protection of the administration. Lawyers must be at the cutting edge of developing mechanisms to ringfence the problem parts of the business to enable the corporate to survive and escape insolvency. Debt-for-equity swaps are obvious parts of this survival culture and a look at the US model suggests that there are yet more opportunities for lawyers, for example to reorganise the corporate's different classes of share.
There are a number of other areas where the scope for the legal adviser is growing: the EU directive on cross-border insolvency can be used more innovatively than experts first imagined, for example to place a business registered on the Continent into a UK administration process.
The challenges – new processes, new financing structures, increased responsibilities within corporates – are there for the taking at all levels, whether a business is underperforming, distressed or formally insolvent.