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Over two years after the onset of the covid-19 pandemic, the world economy has largely weathered or accounted for the effects of the pandemic on the macro-economy and specific businesses; however, both individual companies and the larger economy continue to plan for and react to various factors contributing to the world economy. Various positive trends exist in the global economy as pandemic-related pressures begin to recede: the economy has experienced recovery following pandemic-related slowdowns; the workforce is largely returning to in-office settings, making use of long-empty real estate spaces and increasing spending as people leave their homes; and certain industries that suffered most profoundly during the pandemic, such as the service industry, have reversed negative trends. Looking back, many companies appear to have managed through the pandemic – in part due to significant government aid programmes – such that the wave of pandemic-related corporate bankruptcy filings that many practitioners predicted never fully arose. However, those same rescue programmes, coupled with improving business economics, have led to inflationary pressures that are now causing governments to adopt policies to tap the brakes on their local economies. Lingering and long-term effects from the pandemic, ongoing geopolitical conflicts and shifting economic trends also continue to create instability in the global economy. The war in Ukraine and the related global political response has impacted, among others, the energy and food sectors in Europe in particular, with secondary global effects. Labour shortages and lingering supply-chain disruptions also have contributed to pressure on the price of consumer goods. Rising inflation rates are similarly putting pressure on individuals and on companies that hold floating-rate debt or that need to raise new financing.
In addition to these more global trends, specific industries continue to struggle to manage the residual effects of the pandemic: the travel industry has largely recovered but still faces periodic unplanned disruptions, for example, and although retail companies largely survived the pandemic, supply-chain disruptions and changing consumer habits continue to place stress on the industry. The article titled ‘Mexico: The Pandemic Aftermath’ notes that Mexico’s banking and financial sector, as well as the air transportation industry – which saw its flag carrier airline Aeromèxico seek restructuring relief under Chapter 11 in the United States during the pandemic – have yet to fully recover. Similar lingering issues continue to percolate in other countries as well.
As policies put in place to aid struggling companies during the height of the pandemic begin to lapse, industries still experiencing pandemic-related insolvency risk may struggle to remain profitable. The Bermuda article discusses, for example, that for pragmatic reasons many creditors in Bermuda granted forbearance to debtors that were unable to repay their debts during the pandemic. As such creditors begin to pursue formal enforcement remedies again, companies that have yet to fully recover from the pandemic’s effects may face significant insolvency risk. The confluence of these various global and industry-specific economic stressors puts pressure on corporations trying to remain profitable, and companies will continue to turn to restructuring solutions to alleviate this pressure.
This volume includes articles by experienced bankruptcy practitioners discussing insolvency regimes around the world. These articles include, among other things, comparative analyses of different jurisdictions, an overview of new developments in domestic bankruptcy legislation, and noteworthy new jurisprudential developments. These articles also include insights into trends in the restructuring space that may continue in the coming year as the global economy navigates the long-term effects of the pandemic and evolving geopolitical developments.
Insolvency regimes continue to advance and modernise to better meet the needs of companies pursuing restructuring solutions
As discussed in various articles throughout this volume, domestic insolvency regimes continue to advance and modernise to meet the evolving needs of distressed companies. Experienced and specialised courts that are sensitive to the complexities of large corporate restructurings, efficient procedures that reduce restructuring costs and the ability to reach a global resolution are increasingly important for companies seeking to effectuate a successful restructuring. Legislatures in many jurisdictions have started to implement changes in these areas, which tend to be aimed at improving the overall success of corporate restructuring efforts. The article titled ‘Mexico: Interim Injunctions in Bankruptcy Proceedings,’ for example, highlights Mexico’s recent establishment of the First and Second District Courts in Bankruptcy Matters, which are specialised bankruptcy courts that have jurisdiction to hear all insolvency proceedings. Such specialised courts may be more sensitive than a generalist court to the financial and administrative issues that can arise in a complex corporate restructuring, increasing the likelihood of a successful restructuring. Indeed, in the Dominican Republic article, the authors note that restructuring courts have developed judge-made law to fill certain voids in the Dominican Republic’s insolvency regime and provide more predictability to restructuring proceedings. Likewise, the Cayman Islands article discusses the recent addition of rules allowing for, among other things, the appointment of a dedicated restructuring officer and imposition of a stay without first requiring a company to present a winding up petition to the Cayman Islands’ restructuring regime. Although these changes, as the authors note, are unlikely to be revolutionary to the Cayman Islands’ insolvency regime, they will likely improve upon the current regime and benefit companies seeking a restructuring solution in particular. EU member states have also implemented changes geared towards improving restructuring proceedings. As the article titled ‘The EU Adaption of Important Chapter 11 Provisions’ notes, EU member states have been updating their respective insolvency regimes in compliance with the EU’s July 2019 Directive on Insolvency, Restructuring, and Second Chance, which incorporates certain mechanisms of Chapter 11 to facilitate the needs of companies seeking to restructure. Likewise, the Brazil article highlights the major innovations provided for in the 2020 amendment to the Brazilian Bankruptcy Law, which are aimed at facilitating more efficient and effective restructuring proceedings, such as additional protection for providers of debtor-in-possession and exit financing, the ability for creditors to propose a competing plan of reorganisation when a debtor is unable to garner sufficient support for their plan, and mechanisms to expedite reorganisation proceedings.
Even with many positive changes to many insolvency regimes, however, there is always room for improvement because of ever-changing economic conditions and corporate needs. The Chile article exemplifies this in its discussion of a 2014 change to Chile’s insolvency laws. Although the 2014 law has improved many features of Chile’s restructuring process, the Chilean Congress is currently considering a bill to further improve upon it.
Cross-border insolvencies involving companies with a global presence continue to present unique and complex issues
As the article titled ‘Corporate Insolvency and Restructuring in the Wider Commonwealth Caribbean’ highlights, different jurisdictions, even within the same region, can and often do take fundamentally different approaches to their insolvency regimes. Advancements in domestic insolvency regimes often have the benefit of creating more cohesion and consistency in insolvency legislation across jurisdictions, which can be beneficial in complex, cross-border corporate restructurings. In the case of the recent updates to insolvency regimes of EU member states, for example, ‘The EU Adaption of Important Chapter 11 Provisions’ article notes that the UK, despite having formally left the EU, still largely modelled the 2020 changes to its restructuring laws on the EU’s Directive in order to maintain consistency with the EU’s restructuring regime. The British Virgin Islands article likewise notes that the British Virgin Islands, in recent years, adopted the practice of appointing provisional liquidators in support of a restructuring plan, a practice already in place in other offshore jurisdictions such as the Cayman Islands and Bermuda.
Despite the many ways in which recent revisions to domestic insolvency regimes have created more consistency across jurisdictions, tensions between the laws in different jurisdictions remain an issue for corporations seeking a global restructuring resolution that implicates the laws of multiple different jurisdictions. The Gibbs rule, a judge-made doctrine in the UK providing that contracts and obligations can only be discharged pursuant to the laws governing that contract or obligation, has highlighted these tension in recent years. The rule, in effect, means that a debtor’s obligations governed by English law can generally only be extinguished through an English proceeding, which may create unwanted complications for entities that wish seek to restructure in a particular jurisdiction outside of England, but have obligations governed by English law. Among other complications, the Gibbs rule may require such entities to initiate parallel proceedings in multiple jurisdictions to effectively discharge all of its obligations. The article titled ‘Implications of the Rule in Gibbs on the Effectiveness of Schemes of Arrangement to Compromise US Law-governed Debt’ illustrates another such complication. Hong Kong also applies the Gibbs rule, and, as the article discusses, a Hong Kong court in the In Re Rare Earth case recently posited that it could refuse to recognise an offshore scheme of arrangement designed to compromise debt governed by US law on the ground that the United States would not recognise the discharge of the debt as a matter of law through the scheme of arrangement and Chapter 15 recognition. A United States Bankruptcy Court subsequently made clear that the Hong Kong court’s reasoning misinterpreted United States law in In re Modern Land, but the case nonetheless demonstrates how the potential tensions between the regimes in various jurisdictions may jeopardise a company’s restructuring efforts.
Specific practice developments and market trends
Many of the articles in this volume also highlight specific practice and market trends that are impacting the landscape of corporate restructurings in various jurisdictions. Some of the trends discussed in this volume illustrate the ways in which practitioners and lenders operating in the restructuring space are leveraging creative solutions to meet the evolving needs of companies seeking to restructure. The increasing use of debtor-in-possession (DIP) financing structured in a non-traditional fashion, discussed in the article titled ‘Recent Developments in DIP Financing for International and Domestic Debtors’, is but one example. The article discusses the increasing use of ‘roll-ups’, whereby a DIP lenders’ pre-petition debt may be repaid by the proceeds of the DIP financing or rolled into DIP obligations, and equity conversions, whereby DIP obligations remaining at the end of the debtor’s Chapter 11 case convert into equity of the reorganised company rather than requiring repayment in full. These DIP structures may be particularly attractive to restructuring companies experiencing liquidity issues in the aftermath of the pandemic, for example, and provide practitioners with a wider variety of tools to use in addressing a restructuring company’s need for post-petition funding. Similarly, the ‘Investment Fund Activity in US Debt Restructurings’ article highlights the increasingly prominent role that private equity and hedge funds are playing in Chapter 11 restructurings in the United States, particularly during periods of economic crises when more traditional lenders may be unwilling to invest in distressed companies, and the creative investment strategies employed by such funds. Investment funds’ flexible approach to lending allows them to respond quickly to economic fluctuations and adapt to meet the needs of restructuring companies as they change in response. Other articles focus on debtor-side trends. The British Virgin Islands article, for example, discusses the increasing use of schemes of arrangement and light-touch provisional liquidations following legislative changes adopted several years ago that allow for the appointment of provisional liquidators.
This volume provides an informative and interesting overview of recent developments in insolvency regimes across jurisdictions, current practice and market trends, and the present economic challenges facing companies, practitioners and lenders. A common theme emerging from these articles, however, is the tendency of insolvency regimes, restructuring practitioners, lenders and debtors to adapt to meet the evolving needs of restructuring companies. The current economic climate is likely to continue demanding flexibility and adaptability from the insolvency world, which seems equipped and inclined to continue rising to the challenge.