Vol 6 (2009) - Issue 2

Article preview

Breaking the Insolvency Mould

The arguments regarding the merits of various insolvency regimes have raged for some time. Yet the difficulties associated with these differences have never been more apparent than in the recent and ongoing international restructuring of Lehman Brothers. With dozens of insolvency proceedings pending across the globe, US bankruptcy judge has identified the Lehman case as ‘undoubtedly the most massive cross-border insolvency in the history of the world’. International insolvency regimes are being tested like never before. Calls for lawyers to establish protocols on a global level have been loud.

The Lehman situation has highlighted the raft of issues that typically arise in a multi-jurisdictional restructuring and the varying stances between administrators and restructuring officers. It has raised numerous questions for all businesses with globally integrated business models – not just complex financial services organisations, but also multifaceted industries such as automotive, chemicals and others. We will examine the challenges and advantages presented by the varying regimes in the UK, the US, Germany, Japan and Korea, with reference to the Lehman case.

Back in September 2008, administrators and restructuring specialists in numerous jurisdictions – including an international team from Alvarez & Marsal of more than 150 full time professionals who have taken over the daily operations of Lehman Brothers Holding Inc. (LBHI) and several of its key US subsidiaries – began to look at Lehman entities and manage them at a local level in accordance with their own laws. The overarching objective has been to realise as much value as possible for the benefit of the creditors.

Despite a recognition by most parties that global coordination to manage the task with consistency would lead to a better result for creditors overall, the differences in the restructuring and insolvency processes in each country are stark and will, quite obviously, add complexity to an already enormous task. In addition, when you take into account, for example, different labour laws, the task becomes even more complicated.

US versus UK

Two key geographic areas which have been of particular focus in the Lehman’s case have been the US and the UK. The Chapter 11 liquidation of LBHI in the US was immediately followed by the administration of key Lehman Brothers entities in the UK, Lehman Brothers UK Holdings Limited. The differences between restructuring and administration have been widely documented, although in the majority of cases both procedures have broadly the same purpose and desired objectives: rescuing the company as an ongoing concern (‘reorganise and re-emerge’) or achieving a better result for the company’s creditors as a whole than would be achieved if the company was wound up.

The advantages of the US system are multiple. Firstly, the debtor remains in possession, meaning that the debtor is authorised to continue its operations, and existing and new management can remain in office. This differs from UK insolvency law, where a licensed insolvency practitioner is appointed to take over the management of the business. In the case of Lehman, this meant that the existing Board continued in its operations, along with three Alvarez & Marsal Directors who were appointed to the Board. Arguably, the Chief Restructuring Officer (CRO) appointed to the Board spends less time trying to implement new systems and controls, and more time trying to establish and realise value at the beginning of the case. With the management retaining control of the company, its systems continue to operate, enabling ongoing supervision of live transactions and thereby sustaining value in the assets.