Article - Chambers Student Guide

Restructuring/Insolvency

In a nutshell

Insolvency law governs the position of businesses and individuals who are in financial difficulties and unable to repay their debts as they become due. Such a situation may lead to insolvency proceedings, in which legal action is taken against the insolvent entity and assets may be liquidated to pay off outstanding debts. Before a company or individual gets involved in insolvency proceedings, they will likely be involved in a restructuring or an out-of-court arrangement with creditors to work out alternative repayment schedules. The work of lawyers in the field can therefore be non-contentious (restructuring) or contentious (insolvency litigation), and their role will vary depending on whether they act for debtors or their creditors. What follows are some of the terms you’ll come across.

Debtor: an individual or company that owes money. Creditor: a person or institution that extends credit to another entity on condition that it is paid back at a later date. Bankruptcy: term used in the USA to describe insolvency procedures that apply to companies, but not in the UK, where the term applies to individuals only. Restructuring: a significant modification made to the debt, operations or structure of a company with its creditors’ consent. After a restructuring, debt repayments become more manageable, making insolvency proceedings less likely. Insolvency proceedings: generic term that covers a variety of statutory proceedings aimed at rescuing or winding-up an insolvent company.

Insolvency proceedings include the following actions. Company voluntary arrangement (CVA): if it is clear that a business could survive if debt repayments were reduced, it can enter a CVA agreement with its creditors. Under this legally binding agreement, a struggling company is allowed to repay some, or all, of its historic debts out of future profits, over an agreed period of time. Administration: when in administration, a company is protected from creditors enforcing their debts while an administrator takes over the management of its affairs. If the company is fundamentally sound, the administrator will implement a recovery plan aimed at streamlining the business and maximising profits. If it is apparent that the company has no future then it can be sold or liquidation can commence.

Receivership: unlike administration, this is initiated by the company’s creditors, not the company itself. A receiver is appointed by the court and must look to recover as much money as possible in order to settle the claims made by creditors. Under receivership, the interests of the creditors clearly take precedence over the survival of the company. Liquidation: procedure by which the assets of a company are placed under the control of a liquidator. In most cases, a company in liquidation ceases to trade, and the liquidator will sell the company’s assets and distribute the proceeds to creditors. There are two forms: voluntary liquidation brought about by the company itself, or compulsory liquidation brought about by court order. Distressed M&A: the sale of all or a portion of an insolvent business is an efficient way to preserve going-concern value and avoid the potential for substantial loss of value through a piecemeal liquidation. Pre-pack sale: refers to a deal made with an interested buyer to sell the insolvent company’s business and assets, negotiated before an administrator is appointed and completed immediately on appointment. Such schemes are becoming increasingly popular and more frequently used in the current economic climate.

What lawyers do

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Debtors’ lawyers

Meet with clients to assess the gravity of the situation, highlight the available options and advise on the best course of action to follow.
In a restructuring, advise the insolvent company on the reorganisation of its balance sheet (such as closing down unprofitable businesses or refinancing its debt) and assist in negotiations with creditors.
Assist in insolvency filings, and once proceedings have commenced, work closely with the insolvency officeholders (ie those appointed as administrators, receivers or liquidators) and accountants, to achieve the goals set for the insolvent company.
Provide advice to directors of insolvent companies, explaining their duties to creditors.
Advise on the sale of assets or mergers and acquisitions of troubled companies.
Assist clients in insolvency litigation and appeals. Provide preventative advice to debtor clients on liability management and ways to avoid insolvency proceedings.

Creditors’ lawyers

Meet with creditor clients to assess the validity of their security over the insolvent company, the strength of their position in the creditors’ pool and the best course of action to ensure full recovery.
Assist in negotiations with debtors and insolvency officeholders.
Represent clients in insolvency litigation and appeals.
Assist in the tracing and valuation of debtors’ assets.
Provide training to their clients on how to deal with insolvent companies.

The realities of the job

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Large City firms deal almost exclusively with large-scale corporate restructurings and insolvencies, and the representation of creditor groups in these matters. Smaller regional firms mostly assist on smaller corporate and personal insolvency cases.
Corporate insolvency as a practice area is extremely varied, as proceedings affect every aspect of the insolvent company. Lawyers therefore need to be conversant in a variety of legal disciplines or know when to refer matters to specialists in employment, banking, property, litigation, corporate, etc.
When financial difficulties arise in companies, the rapid deployment of a legal team is necessary to provide immediate assistance. This area of law is extremely fast paced, and lawyers are often asked to deliver solutions overnight.
Insolvency and restructuring involves mountains of paperwork, so lawyers need to be organised and able to prioritise their workload, particularly when dealing with multiple assigments. With so much at stake, attention to detail is paramount when drafting asset sale agreements or documents to be filed at court.
Restructuring and insolvency situations are understandably tense for both debtors and creditors, and lawyers sometimes need to deal with difficult people, so they must be able to hold their ground and show they are not easily intimidated.
You will need to immerse yourself in both the financial and corporate worlds. Get started by reading the FT or City pages of your daily newspaper.

Current issues

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Although the UK economy started to recover from the financial crisis in 2010 and early 2011, the restructuring market remained busy.
As the financial crisis unfolded, more and more businesses went bust. The predicted massive wave of formal insolvency instructions never came though, with many business restructuring without going into administration.
Sovereign debt defaults form an increasing threat to the world economy. More volatily in this market is having a marked affect on banks and investors. Major restructurings in the private now appear inevitable.
There's also a looming wall of highly leverage debt acquiring during the financial crisis which will mature in 2011 and 2012. If businesses are unable to deal with this debt, restructurings and possibly insolvencies will follow.
Banks have been sitting on debt rather than litigating it, as assets aren’t worth what they once were and litigation is expensive. This has meant less work than expected for insolvency lawyers, so far. If debts continued to built up, this too will likely mean more restructurings.
HMRC’s Time to Pay (TTP) Scheme means debt-laden small and medium entrepreneurs have been treated leniently in the last few years. As this scheme is cut back – the number of TTP requests refused rose by 50% in the first quarter of 2011 – it is likely to be very harmful to small businesses.
The sectors hardest hit by the recession – and therefore the busiest in relation to restructuring – were construction and property. Nonetheless, insolvency have cropped up everywhere, so lawyers need to be up to speed with a wide range of industry issues. As a result, firms are adapting a more cross-departmental, integrated approach.