English schemes of arrangement must adapt to avoid being left behind in a post-Brexit world, according to a panellist in a question and answer session at last week's GRR Live in London, who suggested that schemes have been "stretched to the limits of their tolerance" and must be replaced altogether.
At the London offices of Weil Gotshal & Manges on 25 May, Weil's London head of restructuring Adam Plainer and Linklaters co-chair of restructuring Rebecca Jarvis put audience-sourced questions to four eminent restructuring practitioners from consulting firms, private practice and the bar.
Felicity Toube QC of South Square, Paul Hastings partner David Ereira, McKinsey senior vice president Joanne Holland and FTI Consulting's senior managing director Simon Granger discussed a range of topics in a format based on the BBC political programme Question Time.
The opening question concerned developments that the panel would anticipate in restructuring over the next five years.
Ereira said that restructuring lawyers should be broadly aware of the changing landscape of fiscal policy - notably a waning of quantitative easing and low interest rates internationally - which could affect the returns that investors get from restructuring efforts.
But more directly, Ereira predicted that UK restructuring will face increased competition from other jurisdictions. This, he emphasised, should be seen as a good thing, forcing the UK to improve and "driving global practice towards new and better standards."
Granger struck a similar note, adding that the fact companies from around the world have been able to take advantage of English schemes of arrangement has been a positive development. He said he expected the UK to improve as a forum for restructuring further over the next five years.
New types of creditor
The panel were asked about the changing make-up of creditor groups, particularly the rise of activist funds and litigious investors, and how this had changed restructuring.
It was difficult to offer a straightforward answer to that, suggested Holland, pointing out that different parties bring different mindsets and priorities, as well as different skills and resources to the table at a restructuring.
More activism in creditor groups does not necessarily make restructuring harder, the panel agreed. Holland pointed out that these investors bring a "buy and build" mentality, whereby they want to improve the prospects of the company in the long term to maximise their investment, whereas traditional creditors such as banks are more passive.
Granger added that greater diversity in creditor groups has spurred innovation and increased roles for advisors in restructurings. On the downside, he pointed out, businesses lose the long-term relationship they have developed with their banks if the debt is sold to a hedge fund or other distressed investor - and some of these parties can be "mercenary".
Following up on the same topic, Jarvis suggested that funds are becoming more circumspect about the jurisdictions in which they invest in debt, having been burned in the past by investing in debt in jurisdictions that cannot be relied on to enforce their rights.
Granger agreed, adding that investors have lost money investing in debt in emerging markets, and they have become concerned about "going too deep" in these jurisdictions.
Staying on top post-Brexit
Turning inevitably to Brexit, the panel were asked which jurisdictions will benefit from the UK leaving the EU, and what the UK can do to stay competitive.
The uncertainty over Brexit makes that question difficult to answer, suggested Toube. She said the UK needs to clarify the status of the Rome Convention and how judgments will be enforced in its absence, as, without certainty over these and similar issues, businesses will stop using English law to govern contracts - a change she said she had already observed.
On the other hand, restructuring frameworks elsewhere have their drawbacks, Toube pointed out. Spain's regime, while being very modern on paper, is hampered by overstretched courts and is currently slower than the UK's, she said.
To stay near the head of the pack, UK practitioners must keep using innovative schemes, said Toube.
But Ereira warned that schemes are under serious threat of being superseded by mechanisms from competing jurisdictions. He said the UK's regime should at least be improved to support schemes, and pointed out that a number of proposals, such as a moratorium, cram-down and more effective minority creditor protection, are either already in the works or under consideration.
In reality though, Ereira argued, schemes have evolved over many years and have possibly been "stretched to the limits of their tolerance". What the UK really needs is to adopt the aforementioned improvements in a brand new restructuring process that would replace schemes, he said.
Plainer next asked the panel whether bad management should still, broadly speaking, be blamed for business failures.
"Almost always," agreed Holland. There has been a change in the culture of many large companies, she said, whereby senior managers are not being developed as they have been traditionally.
The existing senior managers, meanwhile, find it difficult to keep up to date with fast-moving technology and are facing increased competition from start-ups that can offer the latest developments.
Granger agreed, saying that there are numerous examples of major companies that have collapsed rather than evolve in industries that have moved forward.
Another side to this issue is that entrepreneurs and managers are invariably too optimistic and creditors too pessimistic, said Granger. When a manager initiates a restructuring proceeding, the optimal time to do so has often passed.
Toube raised the suggestion that directors' disqualification limits entrepreneurship in the UK - in the US, managers are encouraged to take calculated risks, whereas in the UK they are warned to be cautious.
Ereira countered that disqualification is not linked to business failure, but misconduct.
While that may be the theory, Toube responded, "It's certainly not the practice."
As a counterpoint, Ereira suggested that the real problem is governance, rather than management.
Plainer pointed out that US companies often have retired lawyers on their boards to strengthen oversight: something that is generally missing from corporate governance in the UK.
Holland agreed, adding that diverse boards are proven to improve corporate governance and company survival rates.
The second GRR Live conference also featured a keynote address on court-to-court communication from Lord Justice David Richards and a discussion on how to increase leverage in restructuring.
For a gallery from GRR Live, click here.