You scratch my back…

The world economy is not in great shape. The UK is bearing up, but it is gloomy news in the US, Japan and most of Europe. Restructuring lawyers, then, are in demand.
The nature of restructuring and insolvency work for lawyers has changed over the years to become more cross-border, reflecting the increasingly global nature of the businesses with which they are dealing. The range of stakeholders has widened, with most businesses having operations, bank lenders, bondholders and shareholders in other countries.
But has the law kept pace with these developments? While businesses have become global, insolvency laws governing troubled companies are local. This is where Insol International comes in. This 20-year-old organisation represents the leading insolvency trade bodies from 64 countries around the world. It is also the leading forum for tackling these cross-border and multijurisdictional problems. In 2000, Insol, with the backing of the World Bank, produced its 'Statement of Principles for a Global Approach to Multi-Creditor Workouts', which provides an orderly framework for debtor companies and their creditors to find solutions to the problems of financial difficulty across the world.
However, despite the multijurisdictional nature of the market, there is currently no possibility of a set of global or even EU insolvency laws to harmonise procedure. Indeed, even within the UK, Scotland has separate laws to England. Respect for other countries' laws is the way forward, and two current initiatives are important to note: the United Nations Commission on International Trade Law (Uncitral) model law on cross-border insolvencies, and the EU Bankruptcy Regulation. Both have a similar aim – to enable foreign insolvency procedures to be recognised by local courts. At the moment, if a UK liquidator wants to pursue assets in Belgium, for example, they may have difficulty in gaining recognition from the local courts, let alone a legal claim over those assets.

“The regulation at least creates a level playing field in the EU”

Uncitral, based in Vienna, is funded by the UN. It started work on its model law in 1994 and completed it three years later. The law sidesteps the issue of harmonisation; it recognises differences between countries' laws but works with the grain by enabling easy recognition of the foreign proceedings. It is not a convention and has to be enacted country by country. Melanie Johnson, the UK Government minister responsible for the insolvency profession, opened the Insol quadrennial conference in July; she declared that the Government intended to enact the Uncitral model law, but no specific date was given.
The EU has also taken an interest in cross-border harmonisation of insolvency laws. For almost 40 years attempts have been made to produce a European convention. A previous attempt fell victim to a beef war over BSE and Anglo-Spanish sensitivities over Gibraltar. But from 31 May 2002, the EU Bankruptcy Regulation applies to all EU member states.
The EU regulation will enable all insolvency office holders from member states to be recognised in any relevant court in the EU. A Greek liquidator, then, can be recognised as such by English courts and can pursue assets here, and vice versa. There are also provisions for cooperation between primary and secondary insolvencies. Up until now, UK insolvency law has on the face of it not appeared to give much in the way of recognition to officeholders outside the old Commonwealth. Section 426 of the UK Insolvency Act 1986 gives recognition to former Commonwealth and British Empire countries, such as Canada, Australia, Malaysia and South Africa.
English judges would say that foreign insolvency representatives can be recognised under the common law, but there is little doubt that the existence of a regulation like section 426 – and the model law when it comes in – will make recognition easier.
Some hold reservations about the type of 'automatic' recognition implied by the regulation and the model law. “What's in it for us?” and “What if the foreign practitioners don't operate to the same standards?” are typical questions. It was a shock to some to find that countries given recognition under section 426 had in most cases not introduced similar reciprocal legislation in their own jurisdictions. But the regulation at least creates a level playing field in the EU. The model law must be passed into law by a country before UK practitioners will be able to take advantage of it there. But the concerns about the quid pro quo and fears that foreigners may turn out not to play cricket are perhaps misplaced.
First, simple recognition in the UK should cut insolvency costs, which should improve returns for all creditors, including UK creditors, whether or not reciprocal laws are in place in the other country. And if the other party turns out to be less than forthcoming, then it is likely that they will be doing the most damage to the assets of the company under their control in their home jurisdiction, which they would be doing model law or no model law (moral: do not lend to companies in those jurisdictions if that is your worry), and if there is evidence of fraud, the English courts will not be found wanting.
So, in conclusion, in a time of ever-increasing globalisation, the EU Bankruptcy Regulation and the Uncitral model law are to be warmly welcomed.
Gordon Stewart is a partner at Allen & Overy

Where joint ventures go wrong

Recent high-profile collapses of a number of joint ventures (JVs) should prompt corporations to wonder how it could all have gone wrong. Corporate lawyers might worry privately whether their advice on JV structures and exit provisions has been up to the mark.
Marriage can, of course, be a wonderful union, surviving the many challenges that emerge over time. If both parties are committed to a lasting relationship, a prenuptial agreement might be seen as an invidious distraction.
When JVs are put together, dealmakers, too, often focus on the upside, salivating at the prospect of their creation's potential profitability. The voice asking what happens if things don't work as planned is drowned by the sound of popping champagne corks. Provisions of the JV agreement that deal with disputes and exits are often considered too difficult, expensive and time-consuming to be paid the attention that they deserve.
Not to sound the voice of gloom, but despite euphoria and heady optimism, proper analysis must be made of the areas where the JV could go wrong. Agreement should be reached on what will happen in the unfortunate event that something does go wrong. Some trouble spots are more difficult to foresee than others.
At the root of most JVs is a desire for partners to access – or pool – markets, capital, technologies or skills. The fact that each party wants something the other already has means that although they will enter the deal for similar reasons, they will want different things out of it. If one party's aim is to access technology or skills, what happens once they have got what they need?
JVs often find that they need more capital than originally planned, and arguments commonly occur about who should provide this additional capital. The agreement needs to anticipate this possibility. If capital is to be provided by way of assets – plant and machinery, for example – then consideration needs to be given to how such assets are valued.
By their nature, JVs have to satisfy more than one master. Differences in corporate or national culture might affect how each party measures and rewards success and how management deals with undesirable outcomes. Such differences often create stumbling blocks, which again need to be anticipated. Misunderstandings caused by language differences are all too common and can exacerbate problems.
Problems can also be caused by the way in which management control is structured and exercised. Does one party have management control of the JV or are decisions made by discussion and agreement between the parties? Senior management may not be used to running a venture by consensus and may not always agree with its partner. If neither party is able to outvote the other at shareholder or board level, there is a real risk of deadlock. And where this occurs, the JV's inability to make decisions can cause significant operational difficulties, or at worst even a collapse.
Accounting issues also cause problems. There are other ways of reporting results; this is particularly true of multinational JVs, where treatment of items in accounts may differ, notwithstanding the development of international accounting standards.
If the JV does fail, it is in neither party's interest for assets to be locked up while lengthy litigation ensues to determine financial severance. Mediation or commercial negotiation are often the speediest and most sensible ways of arriving at terms on which the JV can be divided up.
In an ideal world, disputes would not arise because the principles on which the JV is dismantled would have been agreed from the start. This requires lateral thinking at the outset and an unyielding commitment to confront all the painful possibilities that may confront the JV during its lifespan. The parties should understand each other's motivation and objectives and make sure they are compatible. There is no perfect solution – no one has a crystal ball – but serious consideration of the issues can save much grief in the end.
Far from indicating a lack of faith or commitment to a joint venture, a prenuptial agreement is an essential part of making it work.
Andrew Palmer is a partner in the forensic services practice of PricewaterhouseCoopers, and leads the acquisition and shareholder disputes resolution team