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Legal Developments in the The Legal 500 United Kingdom 2011
Which approach to take?
When insolvency law and arbitration meet, the question arises as to how the commencement of the insolvency proceeding affects the ability to arbitrate, the arbitration agreement, the arbitration proceeding and the setting aside proceeding, as well as the recognition and enforcement of the arbitral award.
In a global context, international arbitration meets international insolvency law, which brings into play the two following issues:
The ‘failing firm’ defence in difficult times
Given the current economic climate, competition authorities are expecting a possible increase in the use of the ‘failing firm’ defence. The doctrine provides potential opportunities for businesses to acquire competitors, which in normal circumstances would be regarded as anti-competitive. The basic rationale behind the doctrine is that since the failing firm would have left the market anyway due to its financial collapse, any harm to competition caused by the loss of an independent market player would arise regardless of the merger. The doctrine therefore potentially allows a business to acquire its struggling competitor, which is on the brink of administration or liquidation. The defence is worth considering by any administrator or liquidator of a business. Competitors are likely to pay the highest prices for assets and so a merger with a competitor could be an appropriate solution to save a deteriorating business.
European cross-border insolvency: an overview and update
The EC Regulation on Insolvency proceedings does not make particularly easy reading.1 It is a Brussels-made law in the form of a Directive, which took effect in all EU member states (except Denmark, which opted out) on 31 May 2002. Making sense of its provisions involves understanding some slightly unfamiliar concepts, some containing a rather circular logic. That is why there is a rapidly growing body of case law on the key issues. On the positive side, one issue that has been significantly clarified is the meaning of the debtor’s centre of main interests (COMI), the most fundamental concept of the EC Regulation.
Administrators, landlords and tenants: three key cases
Since the introduction of the Insolvency Act 1986 (the 1986 Act), there has been a standard way of dealing with the leasehold premises of a company in administration as part of the sale of the business. Typically, the business sale agreement provides for the purchaser to occupy the leased premises on the basis of an informal licence. The sale agreement places the onus on the purchaser to obtain the landlord’s consent to the assignment of the lease. It also provides that the consequence of this formal breach of the lease is to be at the risk of the purchaser alone. In the majority of cases, this method of dealing with the company’s leased business premises is effective because the landlord will prefer to have the purchaser or assignee in occupation paying the rent and will usually work with the purchaser to formalise the assignment of the lease.
Will company voluntary arrangements become the UK’s most popular rescue procedure?
A Financial Times journalist reporting on the successful approval of a company voluntary arrangement (CVA) by the creditors of JJB Sports plc (JJB) in May 2009 referred to CVAs as:
‘The previously obscure legal process… tipped to become one of the UK’s most popular corporate lifelines.’
To describe the CVA process as ‘obscure’ is something of an exaggeration, but is there any basis for this prediction? After a couple of false starts in CVAs by Powerhouse Ltd (Powerhouse) and Stylo plc (Stylo), a model for the rescue of large retail companies using stand-alone CVAs has been developed. Three recent high-profile cases in the retail sector, involving JJB, Focus (DIY) Ltd (Focus) and Blacks Leisure Group plc (Blacks), have shown that the CVA procedure can be more useful than administration in rescuing a retail business. JJB and Blacks were both publicly listed companies, and JJB was the first such company to use a stand-alone CVA, without the protection of the administration moratorium, as a rescue procedure.
The effective use of liens to protect against the collapse of corporate customers
Logistics service providers need to have an effective contingency plan to deal with the prospect of their retailer customers experiencing severe financial distress, defaulting on payments, or going into administration or liquidation. Although good credit control is essential, especially given the recent disappearance of several household names in the retail sector, this article will focus on the need for the protection afforded by well-drafted contracts that give the service provider effective liens.
With effective liens in place, if (in accordance with Murphy’s Law) the worst does happen, the service provider will be far better off from a legal point of view and the risks to its own business associated with a customer’s default can be minimised. This article is written with the logistics service provider in mind, but several basic points will also apply to service providers in other sectors.
The twilight zone: legal issues for directors
there is no legal definition of the term ‘twilight zone’ (perhaps derived from the cult TV series, the writer would like to think), which is now widely used to describe a period of trading when a company has, or is predicted to have, insufficient cash to pay its debts as they fall due. This might be an immediate cash-flow crisis or the problem might be anticipated many months ahead.
The twilight zone continues until the company is put back on an even keel, meaning a positive cash flow and balance sheet, usually achieved by restructuring, rescue and turnaround techniques, often involving refinancing. Alternatively, the business or shares of the company might be sold. A company might come out of the twilight zone, only to dip back into it from time to time. Unfortunately, many companies in the twilight zone are incapable of rescue and have to be put into administration or liquidation. The date of the commencement of the formal insolvency procedure then triggers the vulnerable period in English law, governing claw backs in relation to preferences, transactions at undervalue, floating charges and other matters, which come under the scrutiny of the liquidator and the creditors in a winding up.
Samsun Logix and developing cross-border insolvency issues
With the ever-increasing trend towards globalisation, it is often observed that there are few businesses of reasonable size that do not trade across borders. At this difficult economic time, many are likely to have overseas suppliers, contractors, counter-parties and customers undergoing financial difficulties. For these businesses, cross-border insolvency issues are cropping up frequently. At the same time, the law is rapidly developing, with cases on cross-border insolvency issues regularly brought before the English and foreign courts.
Pre-packs:a coming of age?
The pre-pack administration, after some difficult formative years, appears to have emerged as a legitimate restructuring tool. Criticisms levelled by creditors, certain that they are getting a bad deal, have been numerous and, as a consequence of actions by creditors, the pre-pack has been put under the microscope in court. Out of all this has emerged something that appears to be seen by the court as a process that is compliant with statutory rules and policy. This article looks at the development of the pre-pack and asks whether it has now ‘come of age’.
Bluebrook/IMO restructuring: a wash out for the mezzanine lenders
Every economic downturn brings in its wake a series of restructuring cases, when the mistakes made during the previous boom are called to account and hard lessons are learnt. Mann J recently gave judgment in the High Court in Bluebrook Ltd, Re [2009]. The matter came to court on the application to sanction three schemes of arrangement.1 It was opposed by the mezzanine lenders on the basis that their interest was unfairly prejudiced. Bluebrook provides a helpful insight into the Court’s approach to the use of schemes of arrangement in restructuring. It also deals in some detail with the issue of determining where value breaks, a crucial issue in a restructuring for the purpose of deleveraging a business overburdened with debt.
The CVA – a retailer’s new best friend?
JJB Sports plc (JJB) is a high street retailer which had fallen into diffi culties and couldn’t determine a mechanism for dealing with the lease costs of its closed stores, which created cash pressures. A rescue of the business would only be possible if its landlords consented to a compromise. However, there had already been other high-profi le failures to achieve landlord consent. We developed a tailored Company Voluntary Arrangement (CVA) which was approved by 99% of creditors. Blane Leisure Ltd’s CVA (a wholly owned subsidiary) was approved by 98% of creditors. No one in attendance at the Creditors’ Meeting on 27th April 2009 voted against the proposal.
Two more years of recession: a crisis of confidence
When asked how long the current credit crisis will last, Mick McLoughlin, Global Head of Restructuring at KPMG, tends to take issue with the question. He maintains that we are no longer in the grips of a credit crisis. Instead, he maintains that we have moved on to something far more difficult to escape from; a crisis of confidence.
Financial market participant insolvency
In the aftermath of the initial credit crunch storm, smaller market participants are feeling the pinch. It is possible that some of these will have insufficient liquidity to continue to trade, or will fail to meet their capital ratios, and may have to seek support from a stronger participant or wind themselves down. However, it is also possible that some will follow Lehman into insolvency.
FACTORING ECONOMIC CONDITIONS INTO BUSINESS PLANS
The current recession is unprecedented, which makes the outcome difficult to predict. But one thing is certain: it is very dangerous to keep talking down the economy. We do not want to see a deep, prolonged recession. What we actually need, after the excesses of the last four or five years, when too much finance was available, is a correction or readjustment of the economy, not a wholesale recession.
International Corporate Rescue
This article discusses the way in which the CVA, a highly flexible UK insolvency procedure, was used to implement a complex cross-border restructuring without damaging the operations of a global Tier One automotive supplier.
The importance of preserving cash in a downturn
Insights from 2008 research into cash and working capital management
Firing up the internal cash generator
This time a year ago you probably looked forward to phone calls from your bank. They tended to be from the friendly relationship manager inviting you to another cricket match or perhaps a convivial catch up over lunch. Today the same bank may find you slightly less enthusiastic about their calls.
Restore asks KPMG’s Simon Whicker about the potential impact of the collateralised debt crisis
According to some commentators, the credit crunch possibly represents the worst financial crisis since the Great Depression. Outside the financial sector, however, in the ‘real’ economy, employment is holding up, many companies are predicting continued growth and talk is of a period of readjustment rather than deep recession
In a downturn, cash really is king
‘Cash is king’ is one of those phrases that business executives often pay lip service to, but relatively few really mean it and even fewer really understand what it means. For many of those executives, cash has never been a real issue. It has always turned up when it has been needed.
Taking down the Sword of Damocles: Definition of Illiquidity
‘Damocles was an excessively flattering courtier in the court of Dionysius II of Syracuse, a 4th Century BC tyrant of Syracuse, Italy.
Schefenacker
In the spring of 2007, the English coastal village of Portchester welcomed a new corporate citizen. Schefenacker, a manufacturer of mirrors and lights for the global automotive industry, relocated its headquaters from the German town of Schwaikheim near Stuttgart to Hampshire in the UK as part of a wide-ranging restructuring operation. It was more a move that enabled a troubled company to ward off German corporate law and the German Insolvency Code, while implementing a rescue plan that would satisfy the demands of its financial backers. That the strategy succeeded was good news not only for Schefenacker itself, but also for its car-industry customers.
Thorn in your side
Underperforming business units depress enterprise values and consume cash that could be better used elsewhere, but it is easy to waste resources on ineffective fixes. Roger Bayly, a Partner in KPMG’s UK Restructuring practice discusses how to spot these problem areas and how to decide what to do.
Restructuring: An overview of services
KPMG's Restructuring practice can help to solve complex problems that may threaten a company's value. Working alongside lenders, stakeholders and all levels of management, our professionals are able to plan and deliver restructuring actions that can provide real improvements to the cash flow, profit & loss and balance sheet.
The Pensions Bill, March 2004
New duties on trustees and employers with Defined Benefit Schemes will make restructuring more complex. This covers key points for lenders and their concerns (Briefing Sheet)
Pensions Act 2004 - Clearance an overview, May 2005
The Pensions Regulator ("the Regulator") has issued guidance on the matters to consider when corporate transactions requiring clearance, i.e. those which might materially affect the recovery to a pension scheme if the employer became insolvent, are proposed. Failure to consider whether to seek clearance may result in financial contributions to the company's pension scheme being sought not only from parties to the transaction but also from their associates. This could undermine the commercial justification for a transaction or impose an inflexible cash drain. (Lender Briefing - 212717)
Pensions Act 2004 - Pension Scheme Creditors - A force to be reckoned with, May 2005
Where a pension creditor exists in a distressed situation, other creditors may have to get used to the pension trustees and / or their advisors becoming considerably more assertive. This situation will arise as trustees must ensure that they do not allow the pension scheme to have fewer assets that would support the benefits available to members under the new Pension Protection Fund regime ("the PPF"). (Lender Briefing - 212717)
Pensions Clearance - Sense and sensibility. Share sales from an administration, Oct 2005
A welcome decision from the Pensions Regulator may give comfort to lenders and corporate groups in distressed situations. Where circumstances allow, clearance may be available to protect subsidiary companies from Financial Support Directions (FSDs) where the holding company is insolvent, thus allowing viable companies to be subject to share sales. Lenders and corporates can also be reassured that the Regulator is displaying a reasonable and proportionate attitude. (Lender Briefing - 212716)
Spectrum Plus versus the Pensions Act, Jan 2006
Where a company alters its security from an existing debenture to factoring or invoice discounting arrangements, this may require negotiation with the pension trustees or clearance from the Pensions Regulator. (Lender Briefing - 300082)
Pension Restructuring - A great leap forward, June 2006
The CVA of Pittards Plc (Lender Briefing/Case Study - 301732)
Pensions a roadmap for users Recovery Magazine, Nov 2006
Much has been written about the powers of the Pensions Regulator (tPR), the safety net provided by the Pension Protection Fund (PPF), and we are becoming familiar with a whole new dictionary of jargon that previously resided soley on the bookshelves of the actuaries. But in all this complexity - what does it all mean? (Article)
The CVA - Your flexible friend, Nov 2006
An unusual and progressive use of a Company Voluntary Arrangement ('CVA) (Lender Briefing - 304090)