These days insolvency lawyers would like to see themselves portrayed as company doctors prescribing medicine that might taste bad but will cure the patient rather than as the right-hand hatchet men of the corporate grim reaper. The extent to which the managements of companies that come into their hands accept this self-image is unclear. What is certain is that in the present dismal economic climate insolvency lawyers look likely to experience a mini-boom in demand for their services. “It’s the endless debate of the cocktail party – how busy are we going to get?” says Nigel Barnett, a partner in insolvency with London law firm Denton Wilde Sapte, “I think that generally the perception is that we will get busier.”
There may, however, be a few obstacles in the way of firms that are tempted to try to capitalize on this slump-induced boom by, for example, “repurposing” their underemployed M&A lawyers as restructuring specialists. The world has changed since the last recession, and the work of the restructuring and insolvency lawyer has changed with it.
The increasing internationalization of legal practice has not been confined to disciplines more readily associated with periods of business expansion. Many international deals that have been put in place over the past few years are now being restructured, and those firms that are able to coordinate activity across several jurisdictions will be best placed to operate in this expanding market.
Gordon Stewart, global head of insolvency at London law firm Allen&Overy, says that the international aspect of insolvency work is now vitally important: “Finance is no longer a respecter of boundaries, and most deals are inevitably international,” he says. “Firms need to be able to marshal international resources and ensure that they have the ability to pass know-how throughout their network.”
European companies’ increased access to US capital markets means that when they find themselves with financial problems, they have a new group of investors to deal with when it comes to working out difficulties. The impact of US investors, particularly holders of high-yield bonds, means that achieving a settlement that works for all parties is no longer a relatively straightforward matter of dealing with the banks.
Barnett at Denton Wilde Sapte, which along with Allen&Overy is widely regarded as the leading City of London insolvency practice, says that the composition of the interested parties has both diversified and grown more complex: “We have increasingly seen the importance of note-holders in international insolvency. In the last recession the banks were the main drivers of the process. This time around it’s different, and that is because the nature of finance has changed. Whereas it used to be the case that many people would regard note-holders and the like as being little more than unsecured creditors, they have been very vocal and very aggressive at securing themselves a place at the table and in asserting that they are as much secured creditors as the banks are.”
Of course, it is still the case that strong relationships with banks will greatly enhance the success of a law firm’s restructuring department. However, the depth of expertise in other areas of finance, and the ability to demonstrate that expertise internationally, is vital.
Allen&Overy’s Stewart points to the sheer variety of financing techniques that have to be understood: “There are much more complex structures and products in use today than there used to be, and not every firm can deal effectively with those; you really need to have a depth of financial expertise. Often, when it comes to restructuring the deals, it’s imperative to have an understanding of these, and in may cases to devise more imaginative solutions than would be the case with more straightforward financing.”
The leading firms in insolvency work have been kept busy throughout the whole of the 1990s – many have seen their Asian practices inundated with the fallout of the 1997 crisis – and have kept up their lawyer numbers throughout the boom period. This clearly leaves them in a strong position to pick up work now, but how will their competitors fare in trying to reposition some of their underemployed corporate lawyers as restructuring specialists?
Allen&Overy’s Stewart thinks that without the depth of experience, and the willingness to invest when there is less demand for their services, new entrants are likely to find this a hard market to crack. “I liken the process to making cider – you can’t do it without apples, so you should have been growing the apple trees some time ago,” he says.
Nigel Barnett at Denton Wilde Sapte takes a similar view: “I’m not sure that rebranding in that way works. My experience of seeing company lawyers trying to do restructuring work has generally not been very satisfactory because their approach is different. To a large extent, the insolvency world requires people whose concern is to get the deal done quickly and practically above all other considerations.”
The diversity of regimes governing insolvency in Europe, the US and the UK means that UK firms have generally benefited from their role as a halfway house between US and European markets. The lack of consistency between European jurisdictions has made European practice particularly testing. However, the introduction of the EC directive on cross-border recognition next year will greatly ease harmonization of insolvency procedures and will lead to an increase in European-wide coordinated insolvencies.
However, just as the last 10 years has seen a steady shift from the banks being far less keen to traumatize a company’s assets through insolvency, and more inclined to try to effect some form of rescue or recovery, so too have lawyers adopted a more enlightened attitude.
This has meant that insolvency lawyers have had to equip themselves with a new range of skills and abilities. Stewart believes that transaction management, coupled with an ability to engineer consent and, in his words, “to understand where everyone is coming from and then to get everyone to act with enlightened self interest” have become vital skills for restructuring lawyers to acquire.
In the UK, the government has published an insolvency white paper that promises to overhaul the existing system of administrative receivership that at present does much to give banks and lenders sufficient security to provide finance. The white paper proposes replacing administrative receivership (which gives a bank the right to enforce its security over a company’s assets ahead of any other unsecured creditor) to a court-controlled administration process that balances the rights of secured and unsecured creditors.
Some commentators believe that this change amounts to a fundamental misconception about the present insolvency system, particularly with regard to banks’ willingness to disregard a distressed company’s requirements and place it in receivership.
Though the proposed procedure is – by adopting a more transparent process and apparently balanced view of various secured and unsecured creditors’ rights – designed to limit the amount of legal contest that will arise from insolvency proceedings, it may, ironically, have the opposite effect and produce an increase in litigation.
Denton Wilde Sapte’s Barnett explains: “If you end up with having large exposures to companies who then have administrators appointed from less reputable practices and they, in turn, ride roughshod over the banks, it is unrealistic to expect the banks to take that lying down. You may very well find that there is going to be litigation regarding the identity of administrators. All this may be good for lawyers, but I am not sure that it’s what ailing companies or their creditors need.”
