INSOL International, London: practical tips from the bench
A panel of judges from Europe, the US, Asia and the Cayman Islands compared how valuations issues are treated in their respective jurisdictions, and warned delegates to INSOL International’s London conference in June that urgency really needs to mean urgency when it is flagged – or parties risk damaging their credibility.
The panel, titled “Practical Tips from the Bench”, was moderated by Mr Justice Zacaroli from the England and Wales High Court and took place at INSOL International’s 2022 conference on 28 June.
In addition to the English High Court Judge, it also included Mr Justice Nick Segal from the Grand Court of the Cayman Islands, Judge Elizabeth Stong from the US Bankruptcy Court for the Eastern District of New York, Judge Elsbeth de Vos from the District Court of Amsterdam and Justice Sanjay Kishnan Kaul from the Supreme Court of India.
Kicking off the session, Mr Justice Zacaroli explained there is a common tension in restructurings around the world between two things – the need to ensure all interested parties are treated fairly both procedurally and substantively, and the need to complete the restructuring at “sufficient speed” and low enough costs that “the patient is not killed in the process”.
Fundamental to any restructuring, he said, was where the value breaks in the restructuring, which is often critical in determining whether there is a fair allocation of value in the plan.
He asked the panel what procedures exist in their respective jurisdictions to allow a debtor or creditors propagating a restructuring to present valuation evidence and the opportunity for those challenging it to present their own.
Valuations in different jurisdictions
In India, Justice Kaul explained, a resolution professional appoints two registered valuers that estimate the fair value of a company and the liquidation value to the court.
Fair value is based on the realisation that an arm's length transaction between a willing buyer and seller would take place, while the liquidation value is based the value of the debtor that can be realised when the company is liquidated, he said.
Only the liquidation value used to be required, but that drew criticism from debtors, shareholders and creditors that they were taking “very large haircuts”, the judge noted.
He said there are “strict timelines” that must be adhered to in India, with the resolution professional having to submit an information memorandum within two weeks of his appointment, but no later than 54 days from the insolvency commencement date, whichever is earlier.
Justice Kaul explained that getting the real value of assets is challenging because under Section 19 of the Indian Insolvency Code an obligation is imposed on the debtor and associated parties to cooperate with the resolution professional, but no such corresponding obligation exists for creditors.
He also said that if a situation arises where the distance between the two valuations is “too far apart” then there is a possibility of having a third valuation report.
In the UK, Mr Justice Zacaroli observed that it's up to the debtor to provide evidence in the first place and information to the creditors, though the rules are non-prescriptive and “fairly flexible”.
The English court has a very important role at the beginning of a proceeding to scrutinise the adequacy of information that’s being provided by the debtor in order to convene meetings, he added.
Meanwhile, anybody objecting can produce their own evidence and the court has a range of case management powers to order expert evidence and disclosure.
The process is “pretty much the same” in the Cayman Islands, Mr Justice Segal said, because the Cayman Islands Companies Act follows and essentially adopts Part 26 of the English Companies Act.
The judge said there had never been a serious valuation fight in a Cayman or English scheme of arrangement, prior to the introduction of the UK restructuring plan under Part 26A, because schemes are pre-negotiated restructuring processes where value is dealt with “well in advance” of the case coming to court.
“We’ll have to wait and see whether it’s an issue we have to deal with [going forward],” Mr Justice Segal added.
But he noted that Cayman Financial Services Division judges are used to dealing with valuation fights in the context of statutory mergers, where full detailed expert evidence on valuation is “core and centre”.
“We're used to ploughing our way through usually four or 500 pages of valuation evidence, and dealing with extensive cross examination of experts on valuation over a number of days,” Mr Justice Segal said. “So as and when it becomes a live issue in Cayman schemes, I think we're ready to deal with it.”
Giving the US perspective, Judge Stong said the issue of valuation would surface early in the case management of a contested Chapter 11. “Everyone would be aware that there is going to be a fight because there is going to be a breakpoint where values want to make a big difference,” she said.
All the evidence from lawyers, witnesses, experts and valuators “will be teed up and there would be a big record made” and an evidentiary hearing would probably be planned, Judge Stong said.
But she added, “those issues seem to tend to get worked out”, even if there are going to be “twists and turns” going forward.
The Netherlands has a slightly different system from the UK, US, India and Cayman procedures, Justice De Vos pointed out, adding the Dutch were “the new kid on the block” because the Dutch Restructuring Act only came into power on 1 January 2021.
Court involvement is at the discretion of the parties, she said, with the procedure offering a flexible toolkit that doesn’t have obligatory court involvement at any time of the procedure.
Under the Dutch scheme or “WHOA” procedure, there is no convening hearing. If, during the process, there are issues, then a debtor or the restructuring expert – an independent court-appointed official – can approach the court for a decision, which once given, is binding for the duration of the restructuring process, Justice De Vos added.
She admitted that “it’s not a watertight system,” however, because creditors that were not informed of the process are not bound by the decision and can raise questions at a later stage.
The judge also explained that the Dutch court can appoint an expert to advise it on particular aspects, such as valuation, class formation and information issues. A discussion on valuation can be brought forward as a ruling on an aspect concerning the plan, Justice De Vos said.
But she pointed out that there have not been many valuation discussions in the Netherlands just yet. The judge said the most common scenario for now is for the restructuring expert to ask a valuer to draw up valuations as a going concern and in liquidation.
If those valuations are disputed, a debtor or creditor will have to have “very good reasons to deviate” to convince the court, she added. “In that sense, life is relatively easy for a Dutch judge, because we already have this restructuring expert.”
In cases where there's no restructuring expert and there is a dispute, then the court can appoint an expert to advise it on the matter, Justice De Vos added.
When everything is urgent, nothing is
Mr Justice Zacaroli turned the discussion toward “the second half of the tension”, urgency.
He said judges are used to debtors and creditors saying a matter is “extremely urgent” and if the court doesn’t deal with it by a certain date, usually a few weeks away, then “the sky will fall in” and the group will collapse into insolvency.
The UK court is used to dealing with schemes and hearing dates can be obtained quickly, which works well for “run of the mill” cases, he said. But its more challenging in complex cases because the court time required is uncertain as hearings are more susceptible to adjournments due to objections, the judge explained.
He said that was likely to be a growing problem with the Part 26A restructuring plan in particular, because the court deals with more substantive questions than it would with schemes.
Parties will always be “interrogated by the court” on the real need for urgency, because judges are aware of “particular interest groups” creating “self-serving deadlines”, he added. But in a truly urgent case the court will accommodate the parties and their “need for speed”.
The more difficult question, Mr Justice Zacaroli said, was how the court can permit interested parties to present their own evidence to challenge a scheme and obtain adequate disclosure within a sufficiently short timeframe.
There is “a heavy onus” on the debtor at the outset in a scheme or plan to present sufficient information for creditors to take an informed view, he noted, adding that one reason for refusing to convene meetings on a scheme will be that there was insufficient information on which parties could decide.
Mr Justice Zacaroli pointed to then- Mr Justice Snowden’s Virgin Active decision in May last year, where certain creditors objected on the grounds they did not have proper disclosure or sufficient time to instruct an expert to deal with a valuation issue. But Mr Justice Snowden found that the objecting creditors were sophisticated entities with access to real advisors and the money to pay for it, and they had not taken steps early enough to seek disclosure, when they could have done.
The judge said a very different approach might be taken if there is a disparate group of creditors without access to sophisticated legal advice, or the money to do so. “There, I think is where the real challenge will lie,” he explained.
On the Cayman front, Mr Justice Segal said that all judges will test the claim that a hearing is urgent and that a judgment has to be handed down “incredibly quickly”. Professionals should not be telling judges a matter is urgent when it turns out to not be so, as they won’t get a sympathetic court and their credibility will be damaged, he added.
The court will be “very anxious” to ensure creditors and other stakeholders have been given the proper opportunity to participate in the process, and will balance that need with the urgency of a judgment.
Mr Justice Segal explained that Cayman judges have a degree of “additional flexibility” because they have a docketing system where a judge is assigned to deal with a particular case from beginning to end and has a “good degree of control” of the schedule and listings.
Speaking from his own experience in the 2017 restructuring of China Agrotech, where he recognised the appointment of Hong Kong liquidators, the judge urged practitioners to “try and mention” to the court if there is an urgent deadline at the latest during a hearing, rather than afterwards, because it helps the judge produce an urgent judgment if required.
In China Agrotech, he told delegates, he was informed of a Hong Kong Stock Exchange deadline after the hearing and just a day before it was due – and told that if he did not hand down his judgment a five-year restructuring would collapse.
The cost of a “case can crush” it, Judge Stong added, explaining that the passage of time may be the difference between a successful restructuring and a “nice process where… the operation was a success but the patient died”.
The US judge explained that it’s on the courts and counsel to be responsive to a situation. She said the US system works well and is used to cases where a hearing needs to be held within 48 hours of it being filed as it can be bona fide urgent.
But there is also the kind of urgency that can be presented by parties, where they have the deal in place, but a very short time frame to complete it, which the judge called a “constructed urgency”.
Judge Stong said that the US has “a lot of tools in the toolkit, to adjust as necessary in a substantive, thoughtful, responsive, respectful way”. However, she urged practitioners to “do your best not to put the judge in a box, lock the box and throw away the key” by giving extremely short deadlines, which would make everything fall apart if not met, because there is only so much judges can do.
“When everything is urgent, then nothing is urgent,” she added.
Judge Stong also said counsel should use the case management process in the US to alert interested parties “as soon as something is on the horizon”.
Justice Kaul said Indian law prescribes a total time limit of 180 days “from the cradle to the grave” that can be extended by no more than 90 days. The statute prescribes an obligation on the Indian tribunals and appellate tribunals to dispose of all pending cases before them as soon as possible.
Indian courts have been liberal in granting the additional days, he added, provided the applicant is not deliberately trying to do something not permissible.
A resolution professional and the committee of creditors will have an opportunity to adjust the time, but the 270 days is “absolutely sacrosanct and cannot be varied”, the judge explained.
In the Netherlands, the debtor and the restructuring expert set the timetable and the speed, Judge De Vos said. As the court gets involved on request, it can’t plan ahead – but Dutch judges have self-imposed a 10-to-15-day period to hold a hearing once it’s been requested, she explained.
Although that time frame is short, the judge pointed out that Dutch courts wants to adhere to the principle of due process, she said, noting that after a hearing, the court will usually give a ruling within seven days.
The only time limit “set in stone” is when a request is made for the confirmation of a plan, where under the law the court must hear it within two weeks of the request, she added.
Despite the self-set time limits being “very short”, the Dutch judge said the courts usually manage to meet them.
Mr Justice Zacaroli then steered the panel to what he called “the essential role” of the English court – to protect the interests of those in the minority that either are not engaged or voted against the restructuring.
Judge De Vos noted that an observer can be appointed by the court in the Netherlands to protect the interests of all creditors, especially small creditors that have no means to employ experts themselves.
The role of the observer is to see that the whole restructuring is done in line with due process rules, including whether creditors have been informed properly and if they’ve received all the relevant information. But the observer’s role is to observe what’s going on, ask questions and inform the court – not to draft the plan, which lies with either the debtor or the restructuring expert.
If an observer comes to the court and says a restructuring is “hopeless, costing money, a bleeder”, Judge De Vos said, then the court can end all protective measures leaving a debtor in the “open again”. But it is not in the court’s power to end the restructuring.
According to Dutch law, an observer must be appointed when there is a request for confirmation of a plan against a dissenting class and no restructuring expert. The observer then has up to two weeks to investigate the plan and inform the court whether its fair and equitable and in the interests of creditors, she explained.
The judge said no one knew why the Dutch WHOA has been predominantly used by SMEs to date.
Some reasons may be that the thresholds are relatively low, there is no obligatory court involvement and because the stay creates breathing room for small companies, she said.
In the US, Judge Strong explained that courts run a collective process where everyone can come in – there are public dockets so anyone can access a case and find information. “Information and knowledge are not everything you need to protect yourself, but it's a pretty good start,” she noted. “It would be very difficult to protect your interest or even be aware you have an interest at risk without that kind of access.”
Judge Stong also pointed out that the disclosure statements in a Chapter 11 do a “good job of telling anyone who’s interested and able to vote on the plan” what happened and what’s proposed.
She also noted the importance of players like the US trustee, which is a party-in-interest in every case and who doesn’t take an economic position, but needs to be attentive to the integrity of the process, and to the official committee of unsecured creditors, which can retain counsel.
Under subchapter V of Chapter 11, which is for debtors with debts of up to US$7.5 million, a consulting trustee can also be appointed, the judge explained. Although the financial cap “doesn’t sound like much”, subchapter V accounts for 80% of the cases that are filed, she noted.
Justice Kaul pointed out that India published an amendment to its rules in April 2021 that brought into force an insolvency resolution framework allowing MSMEs to resolve financial stress through a semi-formal regime. That regime permits out-of-court resolution to a degree, while preserving “the sanctity of a formal insolvency process under the law,” he said.
Before the defaulting MSME can formally initiate the process, it has to approach its creditors with a base resolution plan and obtain their approval to initiate a sale, the judge explained.
This pre-package process is a hybrid mechanism, he said, allowing out-of-court resolutions to be recognised under the Indian insolvency regime with appropriate safeguards for stakeholders. It also provides a debtor with greater control.
Judge Kaul explained there is a shorter time limit of 120 days for completion of the MSME process, since one of the key criticisms of the regular Indian insolvency process is the long time it takes. At the end of March last year, 79% of the 1,723 ongoing insolvency resolution proceedings in India had crossed the 270-day threshold, he told the panel.
Speaking about the increased use of technology in court proceedings, such as virtual meetings, Mr Justice Segal said that the Cayman courts were already used to using remote technology for interlocutory hearings, because some permanent non-resident judges may not always be in the jurisdiction.
He added that a lot of cases running through Cayman use leading counsel based in London, and requiring the parties to have everybody on the Islands for even short hearings would be a “real cost”.
During the pandemic, the Cayman courts embraced remote hearing as all courts did, the judge added, noting they worked “remarkably well”.
“I think we will want to use remote hearings frequently and more than we did before,” Mr Justice Segal said, noting they can save time and the costs of flying people in for hearings.
Justice Kaul agreed it would be a “complete waste” to let go of the technology that has already been installed in court rooms, particularly because not everybody has “a deep pocket”, and a lot of proceedings can easily be handled through the system. It should just be fine-tuned, he noted.
Allen & Overy partner Jennifer Marshall said in the final remarks that what she took away from the discussion was urgency means different things to different people.
“I have a very simple solution for the panel on that topic – if it is my client that is proposing the scheme or the restructuring plan, then it will genuinely be urgent; if my client is the dissenting creditor, you should feel free to ask all of those very hard questions,” she concluded.