Restructuring and 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 to banks and creditors. Before a company or individual gets involved in insolvency proceedings, they will probably 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 in this practice area.

Restructuring and Insolvency

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: a term used in the US 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 a portion or all 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

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 (that is, 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.

Realities of the job

  • 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 assignments. 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 shaken or intimidated.

Current issues

  • The UK's restructuring and insolvency legislation is not taken from EU regulations so leaving the EU would have little effect on domestic cases. Brexit would, however, complicate the processes for implementing cross-border restucturings and insolvencies, undermining the UK's reputation and attractiveness as a location for international restructuring and insolvency. International companies may increasingly seek to commence proceedings in an EU member state rather than the UK, to ensure automatic recognition across the EU.
  • The EU introduced a new directive (2019/1023) in June 2019 to reduce the likelihood of insolvency and the need to place companies into administration. The directive puts several preventative measures in place to, among others, provide access to information and early warning to at-risk companies.
  • Jack Wills, a high-street clothing retailer, was bought by Sports Direct for £12.8 million, after Jack Wills fell into administration in early August. Jack Wills were advised by Fried Frank.
  • The recently promoted Bury football club faces expulsion from the English Football League, due to unpaid debts and the threat of administration. The EFL claim that owner, Steve Dale, has not provided proof that he is able to furnish the substantial debts the club owes. Dale has contested this. The High Court dismissed a winding-up petition, but the club has already been forced to postpone its opening fixtures due to the financial crisis it is facing. Among those, Bury are alleged to have to have failed to pay for their use of Manchester City’s Carrington Training Ground.
  • New insolvency directions were introduced in April 2018. These were rustled up to modernise the process (by allowing things like electronic communication with creditors) and consolidate the existing rules as set out in the Insolvency Rules 1986.