13th Annual Joint R3 and INSOL Europe Conference Report
EU forges ahead with restructuring reforms, despite Brexit vote
A recent international restructuring conference in London highlighted an abundance of developments in EU restructuring and insolvency laws, including steps towards harmonisation, despite the UK's upcoming Brexit referendum.
The EU is consulting on converting its earlier Recommendations on business failure and insolvency into an EU-wide Directive. The recast European Insolvency Regulation (EIR) comes into force next year. And even if the UK votes for Brexit, it will probably negotiate to remain within the EIR.
These and other developments were debated by around 100 restructuring professionals from around the world who converged on London for the 13th annual joint R3 and INSOL Europe conference on international and cross-border restructuring.
The conference was chaired by Glen Flannery, who is a partner in the London office of international law firm Nabarro, and Nico Tollenaar, who is a founding partner in the Dutch law firm, RESOR.
The conference chairs have summarised the main themes:
EU Recommendations may become a Directive by the end of 2016
As part of its ambitious goal to achieve the building blocks of capital markets union within the EU by 2019, the European Commission has commenced a fresh legislative consultation.
Although cryptically worded, this may result in conversion of its earlier Recommendations on business failure and insolvency into an EU-wide Directive. The Recommendations, previously adopted on 12 March 2014, aimed to establish minimum standards across all member states for preventive restructuring procedures and discharge periods to give honest bankrupt entrepreneurs a second chance.
Responses to the consultation must be submitted by 14 June 2016.
Recast EIR coming soon
It is just over one year until the majority of the ‘recast’ European Insolvency Regulation (EIR) comes into force, on 26 June 2017.
Consistent with the EU's desire to promote rescue over liquidation, the recast Regulation will encompass a broader range of pre-insolvency and debtor-in-possession type proceedings, provided that they derive from insolvency law rather than company law.
It will also provide access to progressive new features such as ‘synthetic’ secondary proceedings, first invented by UK practitioners in Collins & Aikman, and group co-ordination proceedings using an independent group co-ordinator.
Brexit not necessarily end of the EIR for the UK
Although the UK had ‘opt-out’ rights, successive UK governments have opted-into the EIR and the recast version of it, presumably on the basis that it is in the national interests.
Accordingly, it seems likely that if the UK votes to leave the EU in its referendum on 23 June 2016, the UK will negotiate to remain within the EIR by treaty. The extent to which this would limit the UK's ability to influence future reforms is unclear.
Abundance of important CJEU judgments
The Court of Justice of the European Union (CJEU) has been busy delivering judgments on aspects of the (EIR) beyond the COMI issues that were commonplace in its earlier days.
Recent cases include Lutz v Bauerle and Nike v Sportland on the EIR Article 13 exception - the so called ‘double actionability’ rule which provides a defence to an avoidance action if an act detrimental to creditors as a whole can be shown to be subject to the law of another member state and its law provides no means of avoiding the act.
Explosion in commodities cases, particularly oil and gas
Although the slide in oil prices and slow-down in China were already underway at the time of last year's conference, we were still speculating about the extent to which this would generate restructuring needs and opportunities.
The consensus was that this has now translated into a restructuring boom, particularly in commodity rich parts of the World, such as the US, Canada, Africa and Australia.
Recent filings include Goodrich Petroleum, a Houston based oil and gas producer now under US Chapter 11; Peabody Energy Corp, the world's largest privately owned coal producer, also under Chapter 11; and Arrium, one of Australia's biggest steel producers, now in Australian administration.
Long arm of US bankruptcy laws
A case study panel session highlighted the broad jurisdiction of US Chapter 11 and how this can be used to resolve shortcomings in the EIR, even in cases that have little or no initial connection with the US.
For example, although an EU-wide insolvency moratorium may arise under the EIR from the opening of insolvency proceedings in a particular member state, relying on the Article 5 exception and local conflict of law rules, a secured creditor may still be able to enforce its security in another member state.
In an appropriate case, this issue may be overcome by instead opening US Chapter 11 proceedings in respect of the EU debtor.
If the debtor does not have an existing connection with the US, one can be created simply by the debtor entering into a retainer with a US law firm. Although not necessarily technically bound to recognise a US Chapter 11 stay when enforcing in a country outside of the US, a secured creditor which has activities in the US may nonetheless honour the stay for fear of being in contempt of the US court.
Rapid rise of litigation finance in cross-border insolvency cases, not just to fund claims but increasingly to fund the estate
As the industry matures, practitioners have access to more funders, more funding products and more precedent.
Jurisdictions such as the US, the UK and Germany are more advanced, but their models are now being followed in places such as the Netherlands.
In other places, barriers remain. For example, in a recent high profile Irish case, Persona Digital Telephony Ltd. v. Minister for Public Enterprise, a litigation funding agreement was disallowed on the basis of archaic ‘champerty’ and ‘maintenance’ laws developed to discourage third parties from meddling in disputes and encouraging vexatious litigation.
No let-up in forum shopping for English schemes
Despite extra scrutiny of proposed schemes by Mr Justice Snowden in cases such as Indah Kiat and defensive legislative reforms in other countries, foreign companies continue to look to the UK to restructure using its trusty scheme of arrangement.
At least 30 foreign companies have restructured using the English scheme over the last 5 years, almost one third of which have been Russian/Ukrainian.
United Nations progresses provisions for dealing with cross-border enterprise groups
The United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Insolvency Law contains principles that member states should ideally adopt in their national insolvency laws, taking into account the local context.
Part 3, adopted on 1 July 2010, addresses enterprise group insolvencies.
More recently, UNCITRAL Working Group V (Insolvency Law) has been working on legislative provisions for the insolvency of cross-border enterprise groups, which may be implemented in the form of an extension to the existing UNCITRAL Model Law on Cross-Border Insolvency or by some other means.
A compilation of principles and draft articles was produced for further consideration at Working Group V's annual session in New York between 2 and 6 May.
Initiative on global cross-border insolvency convention
A sub-group of the insolvency section of the International Bar Association (IBA) is exploring the merits of developing an international insolvency convention, partly because of the lack of traction achieved by the UNCITRAL Model Law on Cross-Border Insolvency over almost two decades.
The Model Law has only been adopted by less than 20 of the 60 UNCITRAL member states.
Some within the IBA sub-group believe that the way forward should be an international insolvency convention modelled on the successful EIR.
A delegate survey revealed that almost two thirds thought a convention should be drafted for consideration. We will have to "wait and see" whether this gathers momentum!
Glen Flannery, a partner with Nabarro in London who chaired the conference, commented:
“It’s interesting to observe how the EC’s appetite for a capital markets union is influencing the pace of insolvency law reform across Europe.
“Before the year is out, we could have a minimum standards directive building on earlier non-binding recommendations.
“This would be a step towards harmonisation – a topic which remains sensitive and warrants further consideration and debate, perhaps at a future R3 and INSOL Europe conference!
“Looking beyond the EU, the case study session highlighted major problems which can arise in cross-border cases which are outside the scope of the EIR and the UNCITRAL Model Law.
“Although practitioners have come up with some novel practical solutions to the challenges, there is little doubt that better outcomes would be achieved by further advancements in international frameworks for the recognition and enforcement of insolvency proceedings and judgments.
“It was encouraging to hear that progress is being made, with various initiatives such as UNCITRAL’s work on enterprise group insolvencies and fresh exploration of an international insolvency convention. “
“It was also interesting to hear about the sustained popularity of UK schemes for restructuring foreign companies, despite enhanced judicial scrutiny at home and competition from abroad in countries which have reformed their own laws to provide for more flexible restructuring – some modelled on the UK scheme. “
Next year's R3/INSOL Europe conference will be held in London in April/May 2017.