Simon Johnson, partner, Freshfields Bruckhaus Deringer
Restructuring and Insolvency
17 December 2009 | Updated: 17 December 2009 2:17 pm
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Insolvency law governs the process by which companies (and individuals) can be subject to formal legal processes to, among other things, rescue the company, give the company breathing space from its creditors to restructure or bring the company to an end and distribute its assets to creditors.
What’s it all about?
Insolvency law in England and Wales is primarily governed by the Insolvency Act 1986 and the Insolvency Rules 1986, together with extensive subordinate legislation. Restructurings can involve a simple refinancing of loans, but increasingly some form of insolvency process is implemented to facilitate a sale of all or part of a company’s business or to implement a debt for equity swap, whereby creditors of the company exchange their debt for shares in the company or in a newco vehicle that has acquired the assets of the company.
What is the working culture like in a restructuring and insolvency team?
There is often a buzz around the team, particularly when big deals come in that are attracting significant amounts of media coverage through the negative implications associated with companies in trouble. The credit crunch has naturally meant that restructuring and insolvency lawyers have been putting in longer hours, but the lawyers take great satisfaction from their roles, particularly when advising companies who are heavily reliant on their advice and expertise to navigate them through the issues. Lawyers also will be commercially focused, constantly looking at what is happening in the markets and where clients may be facing difficulties.
What is the typical makeup of a restructuring and insolvency lawyer’s client base?
It includes a variety of clients - ranging from advising the company itself that is going through a restructuring or insolvency process, working closely with accountants and financial advisers who are also working with the company, to representing those on the creditor-side of the relevant corporate, which can include financial institutions and funds. You also have to work closely with law firms in other jurisdictions (or other offices of your firm) when the process has a cross-border European aspect to it.
Which other practice areas do you work most closely with?
As restructurings often utilise a scheme of arrangement under the Companies Act 2006 or involve a sale of shares or assets, the corporate department is often involved. The implications of a sale, debt for equity swap, debt write off or insolvency necessitate the advice of specialist departments such as tax, employment, regulatory, real estate and pensions. If an insolvency process involves a court application, litigators will also be brought in.
What skills make a good restructuring and insolvency lawyer?
A commercial approach and an ability to be pro-active are key attributes of a good restructuring lawyer. The nature of restructurings means that solutions need to be found to often complex legal problems involving both the competing interests of the parties involved and the constraints of the documentation. Good legal and analytical skills are a must, as well as the ability to see the bigger picture and the other advice that will be required from specialist departments.
What impact has the recession had on your practice area?
The restructuring and insolvency team are encountering the busiest downturn in memory. Some of these transactions have arisen as a result of the unprecedented turmoil within financial institutions. The economic environment has also presented challenges to highly vulnerable sectors exposed to discretionary spend within the real economy. We have seen (and are still experiencing) high volumes of restructurings of major corporates across Europe in such industries as real estate, shipping, retail, leisure, automotive and media. Insolvency work has also become more prevalent in this market with several significant casualties including Lehman Brothers and Woolworths.
Which prominent restructuring and insolvency cases has your firm been involved in?
Within the financial institutions sector, we have been involved with key roles on Lehman Brothers and the complex restructurings of the Icelandic banks: Kaupthing Singer and Friedlander Plc (a subsidiary of Kaupthing Bank HF), Heritable Bank Plc (a subsidiary of Landsbanki). We also played a central role advising Northern Rock as well as having an advisory role to the Bank of England on the rescues of Bradford & Bingley, Dunfermline, and Halifax Bank of Scotland. In relation to other sectors that have been hit the hardest by the downturn, we have advised a number of housebuilders, retailers, shipping companies and leisure institutions including Crest Nicholson, McCarthy & Stone, Eimskip and Independent News & Media. We also worked on the administrations of Woolworths and the tour operator, XL Leisure Group.
What do you think will be the future shape of restructuring and insolvency departments?
In terms of reputation, the downturn has transformed this area. Previously, many outside of this area of law thought of such lawyers as ‘grim reapers’! However, these lawyers are regarded as a necessity in dramatic economic times to try and rescue companies, through the restructurings. The pipeline for this type of work will continue for many years to come, given the complexity of some of the casualties that have arisen so far, and such teams will now have more focus within their firms. These departments will also need to factor in mobility, given the likelihood of further regions to be affected in this downturn.
Which phrase is a restructuring and insolvency lawyer most likely to use and what does it mean?
“Value break” or “out of the money”. Where a company has distressed debt and is considering restructuring, there are a number of different stakeholders that may need to be taken into consideration. Typically a company will have several layers of debt e.g. senior and mezzanine debt and junior debt such as intercompany and shareholder loans. The order in which these debts are repaid is governed by the terms of a contractual agreement between all these different parties known as an intercreditor agreement. Which party has the loudest voice in a restructuring is usually determined by where in the debt structure the value of the company is determined to break. Creditors with debt below the value break are considered to be “out of the money” and thus typically have less leverage in a restructuring situation.
A phrase that Ken Baird, head of our restructuring an insolvency practice, has also been known to use is “volatility is the mother of opportunity”!