26 February 2001
Lawyers whose only acquaintance with insolvency is the monthly contemplation of their credit card bill, could be forgiven for thinking that the bull market of the past seven years has killed off the work of the insolvency lawyer altogether. Not a bit of it. There is, and has been, a great deal of activity, albeit that the nature of the activity has changed and the manic times of the late 1980s to mid 1990s are much rarer these days.
Much of the work for insolvency barristers during recent years has been focused on advising on transactional and other technically complex issues in an attempt to restructure and salvage ailing companies.
There has been much less enthusiasm for expensive insolvency litigation and a growing appreciation from those active in the last recession that protracted litigation rarely produces value for creditors. The unsuccessful Nemgia litigation provoked Mr Justice Lightman to issue a warning to insolvency practitioners about the dangers of embarking on costly litigation without the necessary evidence to support their case. And there is a general expectation that the forthcoming House of Lords ruling in the claim against the Bank of England in respect of the collapse of BCCI will yet again demonstrate that big-ticket litigation rarely pays dividends.
The prevailing, more cautious attitude has been accompanied by a more sympathetic lending environment in which banks and other institutions are more receptive to restructuring and recovery techniques. Formal insolvency regime is now regarded as the last resort rather than a preferred option.
In recent years there have been more schemes of arrangements that rarely involve contentious litigation. Schemes have been used particularly by insurers both solvent (Osiris), insolvent (North Atlantic) and even those teetering on the brink of insolvency (Chester Street). Until recently, schemes were considered too expensive to merit much attention in other fields. But the courts have responded creatively by breathing new life into a flexible restructuring device that may find favour outside insurance, particularly where there are difficulties in obtaining shareholder approval for a corporate voluntary arrangement.
The last recession was fuelled by the high level of lending into an inflated property market. The counterpart today is the speculative investment in telecoms and dotcoms. Both sectors have had their casualties. In the telecoms field, Ionica was an early victim whose collapse sparked an acrimonious battle fought in London and New York between US noteholders and the Ionica parent company. That case reinforced that practitioners need to have the capability to address the cross-border issues that will arise in modern insolvency involving new technology. Ionica also demonstrated that a scheme of arrangement may represent an effective means of packaging the compromise of a dispute that has already reached the litigation stage.
The experience of Ionica has been instructive in dealing with more recent technology collapses. Because of the multinational content of almost every technology group, early identification of cross-border issues and disputes is vital. Advice in relation to such issues has involved close liaison with foreign insolvency law experts in places as far-flung as South America.
There has also been a spate of dotcom collapses - Boo.com being the most obvious. The trick in that case, and practically every other dotcom venture that comes unstuck, is invariably to put the company into administration and to sell any value that is left in the business (usually only the domain name and website) within a few days. In the T&D Industries case, Mr Justice Neuberger's confirmation that prior to the administrators' sale of a company's business leave is not required, eliminates an obstacle.
So what does the future hold? With the US on the brink of recession there is a real prospect that it will impact here. Even a small downturn is likely to expose the fragility of much of the new economy, which during the boom times has been able to hide its weak capitalisation, poor business plans and reckless management. The real testing time for restructuring as an insolvency technique will be if (or, more likely, when) the good times end.
Richard Hacker QC and Lexa Hilliard are barristers at 3-4 South Square