Vol 1 (2004) - Issue 5

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Practical Difficulties in Handling Group Insolvencies

In the second half of the 20th century there was an explosion in the use of multiple companies within a single economic business concern. Driven by the forces of globalization, not just one or two subsidiaries but tens, hundreds or, in some cases such as Enron, thousands of companies locked together legally in a series of subgroup shareholdings and economically though complex funding arrangements. It would be a mistake to assume that these are created to avoid transparency (although the major frauds that hit the headlines do indeed involve complex group structures). There are many sound business reasons why trading through subsidiaries is appropriate including:

- National requirements, e.g. in order to hold real estate;
- Requirements of regulators, e.g. utilities and financial sectors;
- The demands of the capital markets requiring special purpose vehicles for fund raising;
- To maximize tax efficiencies and access to government grants and other funding;
- To hold employment contracts for local workers;
- And of course to ring-fence high-risk businesses, although this is rarely the dominant factor when creating multiple entity structures.

This paper will then consider some of the real practical difficulties that arise and why current insolvency law and practice is not always conducive to a successful outcome. There are many possible solutions to these problems but it is the author’s preference to avoid extensive rewriting of basic insolvency law and therefore this paper concludes with some suggestions that focus on practice at least as much as on the law itself.
Unfortunately national laws in Europe have not kept pace with developments. Most laws remain based around the concept of a single trader or entrepreneur and although the definition will now include legal as well as natural persons they are not geared towards businesses made up of more than one entity. Indeed many laws will allow for the definition of legal person to include a branch of an overseas company, thus adding to the possible conflict and permutations of law. When one then considers the lack of harmonization of laws or even agreement on best practices between countries, it is little wonder that, when faced with an international group in financial difficulties, the problems of finding the best outcome for the stakeholders can never be underestimated.

Issues faced by advisors to international groups

It is well known that all the countries of Europe have different insolvency laws. But this is only part of the problem for the practitioner. Indeed the practitioner is part of the problem!
In most parts of Europe, insolvency practitioners are appointed by a court. These courts tend to be very local and for the most part appoint local lawyers to act. As a result the practitioners are rarely appointed to cases outside their immediate locality and therefore it is not uncommon for two companies in the same group but in different parts of the same country to have different insolvency practitioners appointed.
An unfortunate side-effect of this is that the local cases are too small in number and varied in size and industry so that insolvency practitioners cannot build experience, expertise or resources.
Only in the UK and similar systems have practitioners been able to build large practices based on an ability to take on cases across the country. It is not a co-incidence that it is in these countries that the creditors play a crucial part in the selection of the practitioner to handle the case. This is not a role of the court in these systems.
The UK has a licensing system supported by a monitoring unit to ensure that practitioners look after the interest of all stakeholders and not just the creditors that appointed them.