Vol 11 (2014) - Issue 2

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Insolvency and Restructuring in the UK: An Insolvency Practitioner’s Perspective

One of my current bugbears is that so much of our restructuring and insolvency efforts have to be focused on finding ways to work around inefficiencies or gaps in English legislation. In a way, the more creative our deals, the more we notice these areas and the more energy we expend working around them.
I write as a restructuring and insolvency practitioner, not a lawyer. This is designed to be a practical view on a number of stubborn areas. It does not seek to go into a full legal analysis of what needs to change or how legislation could be amended. In fact, I hope you find no specific references to legislation or cases in this article. My focus is on creating value or, at least, not destroying existing value by streamlining some of the processes we come across in our work.
I thought I would start in this article to highlight my view of some of those areas, my top three if you like. I would be really interested in hearing from others with their views both on my bugbears and any additional ones.

1. Enforced topco (parent company) insolvencies to be avoided by the ability to disenfranchise ‘out of the money’ equity in distressed groups
I regularly see restructuring cases where (1) a topco is forced into insolvency simply to disenfranchise shareholders who, on any conventional assessment, are 'out of the money'; or (2) the topco plans for an administration while discussions continue with equity until a compromise is reached and that adds to timetables (which generally need to be kept short), costs and well frayed nerves.
During either of these processes the operating companies are assumed to stay intact trading irrespective of the fight at the top of the group. Then due diligence finds some parent guarantees, common directors, contracts in the name of the topco used by the whole group and discussions become more tense.
Most of these debates are simply ransom discussions between creditors and shareholders where the creditors will arguably lose value if the topco is put into insolvency and shareholders attempt to extract a price because they feel they can, not because they have any share of the economic cake.
The price demanded by shareholders often boils down to the costs or inconvenience for creditors of an actual insolvency process-fees, indemnities, tax, loss of value in the operating companies. The last area is very judgmental but potentially the most significant. The topco directors’ or creditors’ riposte is often to put the topco into administration so that an administrator can sell the shares and bypass the (normally illusory) share of enterprise value claimed by shareholders.
This of course (again) adds cost, stress, uncertainty and inequity into the process. It also puts a strange type of pressure on administrators, who are encouraged to take a view on value, often without a formal marketing M&A process, because it is ‘obvious’ (sic) that there is no equity value and a prepackaged sale should be easy to effect.
How much easier would it be to have the benefit of a court blessing or process as often happens in the USA where pre-packaged Chapter 11 sales – the closest analogy I can think of – are debated and blessed by a bankruptcy judge, with all sides able to provide valuation evidence. This provides the opportunity for a very clean transaction, hopefully without months of wrangling and debates about indemnities and such.
As my friend Tom Salerno quotes, 'all battles are won before they are fought because of proper planning' and he talks about the ‘good company, bad capital’ structure. What a tool this would be in the English jurisdiction.

2. Wrongful trading – developing a clearer framework
There are limited ways in which a business in distress can solve its problems solvently – it can raise cash-debt, equity, etc, it can seek a buyer or it can trade out of its difficulties. There are no others. Otherwise it is likely to go into an insolvency process (I will leave out CVA’s here since their effectiveness is an enormous subject in its own right).