The rise of multi-purpose restructuring
June 3, 2024
The development of cross-border restructuring
We are nearing the end of the third decade since cross-border recognition of insolvency proceedings was codified through the UNCITRAL Model Law on Cross-Border Insolvency, which was adopted in 1997 to create some order in the chaotic world that insolvency professionals faced when working on multi-jurisdictional failures or restructurings.
The Model Law was never intended to harmonise insolvency processes in different jurisdictions, but instead it addressed four specific and essential features of conducting such complex cases: access, recognition, relief and both cooperation and coordination.
Insolvency regimes differ widely from country to country, largely reflecting local business ethics and practices, as well as the relevant legal system. Despite this, cross-border insolvency was flourishing up to 2020 and was coping with some extraordinarily complicated collapses and had facilitated some remarkable rescues.
The impact of the pandemic
Then came Covid, which threatened to devastate businesses of all sizes and shapes worldwide and which prompted a modernisation surge aimed at making insolvency and restructuring regimes fit for the purpose of protecting viable entities and facilitating business rescue under the most challenging of circumstances.
Cross-border ‘hubs’
The result has been a global trend towards more debtor-friendly, rescue-orientated restructuring regimes inspired by US Chapter 11 proceedings. This means that in larger cross-border assignments, there is now much more often a range of possible venues to attempt the rescue of struggling debtors. The traditional cross-border hubs in the USA and the UK remain available, but now there are additional options in jurisdictions like the Netherlands or Ireland. The ‘home jurisdiction’ of the debtor is also more likely to have the necessary restructuring tools.
More multi-process strategies
A combination of increased venue options, the complexity of modern restructurings and issues concerning international recognition of various restructuring tools is behind a noticeable increase in multi-process restructurings, where procedures in two or more jurisdictions are necessary for the implementation of a single group restructuring. Typically, there are three possible approaches.
Main & secondary proceedings
This is the most familiar multi-process restructuring: a main restructuring process, which is then recognised in another jurisdiction. The classic example is a UK Scheme of Arrangement or Restructuring Plan, coupled with Chapter 15 recognition in the US. One of the best known recent examples was the Virgin Atlantic restructuring in 2020.
Parallel proceedings
This is when separate restructuring procedures are conducted in two or more jurisdictions with similar legal systems. An example was the 2022 Hong Kong Airlines restructuring, where an English Scheme of Arrangement ran alongside a Hong Kong Scheme of Arrangement.
Interlocking proceedings
This is the newest kid on the business preservation block, when separate restructuring procedures are implemented in two or more jurisdictions with different legal systems and where each process is inter-conditional upon the other. A recent example is Cimolai, where an Italian Concordato procedure was paired with a UK Restructuring Plan.
The rationale for multi-process restructuring
At first glance, implementing a restructuring through a single process is the most obvious and simplest solution. So why go the multi-process route?
- There are limits to what can be achieved by single-process restructurings: an example would be the practical problems in delivering a debt-for-equity swap where the debtor is in one jurisdiction but equity in a holding company in another jurisdiction is to be given to creditors.
- The recent rapid growth in the number and sophistication of European restructuring tools now available gives debtors and their advisers options to play jurisdictional arbitrage games to maximise benefits by deploying a combination of procedures that can deliver a far more flexible outcome.
- Cross-border recognition issues can arise in a single restructuring process. It could be that the debtor company has assets in another jurisdiction, which are subject to some kind of enforcement restriction there, nullifying the effect of the ‘home’ jurisdiction process and blocking recognition.
Recognition of English procedures in Europe
This is an increasing issue due to post-Brexit complications, and so many more jurisdictions now have effective pre-insolvency restructuring tools, meaning there is less need to turn to an English process to rescue a foreign entity from failure. In this latter scenario, courts in Europe may look at these recognition issues much more closely. It’s important to remember that despite the huge amount that has been written and said about recognition of English processes abroad, this principle has not been tested extensively in practice.
The future of cross-border insolvency
Domestic insolvency regimes are constantly under review and being reformed both via updating legislation or through judicial interpretation. This reflects changes in commercial behaviour and practice and ongoing major developments, such as the switch to digital communication or the creation of cryptocurrencies as a medium of exchange.
Globalisation and international trade change regularly, too, much like the domestic business environment, but also in terms of government policy and shifts in public opinion towards insolvency and business rescue.
Cross-border restructuring is generally more complex than domestic workouts, but history teaches that new techniques are developed as and when required to deal with changing business landscapes. Multi-process restructuring is fascinating, but it is destined to be just another step along the business rescue path. Where that will lead in the future is anybody’s guess.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.