The new EU directive for dealing with banks and financial institutions is what we in UK have been doing for years, says Tony Groom, CEO of K2 Business Rescue
Six years after the onset of the global financial crisis the European Council and Parliament has adopted The Bank Recovery and Resolution Directive (BRRD) to establish a fund and provide the framework and tools for the recovery and resolution of financial institutions – an attempt to ensure that a similar global contagion can never happen again.
It sets out a Europe-wide mechanism for dealing with a potential bank failure known as the Single Resolution Mechanism (SRM) and details the creation of a fund, the Single Resolution Fund (SRF) which will tie up billions of Euros across Europe in preparation for supporting the resolution tools.
Individual governments are required to implement the SRM framework by the end of 2014. The SRF is due to be in place by end of 2015 but it is contentious both in terms of who will provide the funds and concerns that it may promote moral hazard by lenders.
The SRM is divided into three phases: preparation & prevention; early intervention; and resolution.
Four resolution tools are defined as: sale of business, asset separation, bridge bank and a bail-in tool. These allow authorities to take action without shareholder consent such as selling assets, separating them by allocating them to a good bank or bad bank, transferring (bridging) assets to another institution, or restructuring liabilities by either writing them down or converting them into equity.
These are all tools that insolvency and turnaround professionals in UK are familiar with. The key difference relates to agency and mandate where in UK these tools are only available in a formal insolvency procedure.
They are however similar to the abandoned London Approach and the more recent Vienna Initiative. The London Approach worked in the 1980s when the Bank of England was able to exercise authority over lending institutions by coordinating banks during a restructuring. This however became almost impossible to manage when alternative lenders were prepared to adopt a hold-out or ransom approach during negotiations.
The Vienna Initiative was a European Bank Coordination response in 2009 to non-performance and out of the money loans that emerged following the 2008 crisis. It was updated in 2012 but fundamentally it was only ever advice without the ability to enforce its proposals, unlike the BRRD that must be enacted by EU countries this year.
The BRRD offers scope for the UK insolvency and turnaround profession which has been experiencing a lack of work over the past few years.
The SRM requirement for European financial institutions to carry out preparation and prevention is an opportunity to do what insolvency and turnaround practitioners have long advocated. Prevention plans must be credible and will be scrutinised by regulators which is ideal for a highly regulated industry. While strategy and scenario planning may have been the preserve of consultants, insolvency scenario planning is different and unlike most management consultants, practitioners understand regulation and compliance.
Early intervention is also high on the wish list of practitioners who want to save businesses or at least optimise the outcome for creditors. Banks have been reluctant to request independent business reviews which has resulted in bank panel firms experiencing a decline in work. Such a directive could result in this decline being reversed.
The restructuring tools available for resolution involve legal, financial and operational experience that already exists in UK. The BRRD provisions for writing down and compromising debt and for debt-to-equity conversion might be new elsewhere in Europe but they are familiar tools that are often used by UK practitioners.
The framework would seem to want to provide for powers that avoid formal insolvency. This is similar to the rarely used provision in most debentures that allows for the appointment of a “special manager” to act alongside or even replace existing managers. This is similar to the role of a chief restructuring officer and again is an area where UK has a considerable number of experienced practitioners.
Our challenge is to promote the skills and experience of UK practitioners to financial institutions throughout Europe and take advantage of the BRRD as an opportunity.
Much is made of how much money is invested within the football world, but when a club is faced with administration, things can go very wrong very quickly. Richard Obank, partner at DLA Piper, examines the recent administration of Scottish club Heart of Midlothian
Partner, national restructuring team
The takeover of Hearts of Midlothian plc (in administration) was completed successfully on 9 May 2013 after months of speculation that Scottish businesswoman, Ann Budge (dubbed “The Queen of Hearts”) would step in and save the football club from liquidation and extinction. DLA Piper restructuring partners Richard Obank and Graeme Henry and corporate partner John Gallon acted for Bidco, the special purpose vehicle set up for the acquisition, alongside financial advisers, Deloitte LLP.
Hearts was placed into administration in June 2012, with Trevor Birch and Bryan Jackson of BDO LLP being appointed as joint administrators. The appointment was made by the secured creditor of Hearts, BAB Ukio Bankas (ABUB), itself subject to bankruptcy proceedings in Lithuania, following a notice of intention to appoint having been filed by the directors in breach of ABUB’s security arrangements.
In November 2012, a company voluntary arrangement (CVA) was proposed by the administrators. This was approved by the requisite majorities of Hearts’ creditors and members, enabling the takeover to proceed. Had this been rejected, Hearts would have ended up in liquidation and more than likely suffered a similar fate to Rangers Football Club plc. In the case of Rangers, HMRC’s opposition to its CVA led to a deal being transacted in a matter of days whereby the business and assets of the club were acquired by a newco established by Charles Green, while the “oldco” Rangers ended up in liquidation. As a consequence, Rangers were forced to enter the Third Division of the Scottish Football League in time for the 2012/13 season. This was a fate which Hearts was most anxious to avoid, and this meant that it was critical to preserve the existing club entity by means of a successful takeover.
The Hearts deal involved the acquisition of the 79% shareholding held by another bankrupt Lithuanian entity, BUAB Ukio Banko Investicine Grupe (UBIG). This was the only way open to Bidco to make the acquisition given that the remaining minority shareholdings were held by numerous individual fans and a Swiss-based entity. The shareholding situation was complicated by the fact that there had been a fundraising by way of subscription in 2012, prior to the administration, but no shares in Hearts were issued.
Successful completion of the deal involved the bringing together of several interlocking arrangements:
Given the urgent need for decisions to be made regarding the playing and coaching staff, it was agreed that immediate appointments to the board of Hearts would be made on completion of the acquisition by Bidco notwithstanding the fact that the administrators would need to stay in office. Arrangements regarding the on-going management of football-related matters needed to be agreed to suit the requirements of all parties.
The outcome in the end was the best that could be achieved in the circumstances despite Hearts’ relegation from the top flight of Scottish football. The result means that the existing entity has been preserved and Hearts can look forward to starting the 2014/2015 season having emerged from administration and free from further sporting sanctions. Heart’s continued success, of course, now lies in the hands of its supporter base and the pragmatic stewardship of its enigmatic new owner, Ann Budge, who has ushered into Scottish football a new era of austerity, a move that has been mostly welcomed amongst fans and the Scottish football authorities since Hearts desperately needs a period of stability to rebuild for the future.
The deal was certainly challenging given the various dimensions and regulatory requirements. However, it should serve as a useful precedent for, very unusually it has to be said, any future takeover of an insolvent listed football club.
What the graphic shows: The number of administration appointments won by the top 10 performing firms during the month ending 31 May 2014 across England & Wales as listed in The London Gazette.
Begbies Traynor topped the chart once again in May, collecting almost twice as many administration appointments than any other firm, despite the overall drop in administrations. The firm collected appointments throughout the South East and Midlands during the month, across a range of market sectors. Begbies Traynor has so far been appointed to 68 administrations so far during 2014, more than any other firm.
Mid-tier firms Baker Tilly, BDO, Leonard Curtis, Duff & Phelps, and FRP Advisory all collected between three and five appointments apiece during May, demonstrating that despite the overall decrease, appointment levels stayed generally flat month-on-month.
Of the ‘Big Four’, only PwC appeared in the May chart, with five appointments, while EY and KPMG collected two and one appointments respectively. Deloitte collected no appointments during May.
What the graphic shows: The percentage increase and decrease in case numbers by firm month-on-month between April and May 2014.
What the graphic shows: The percentage increase and decrease in case numbers by firm year-on-year between May 2013 and May 2014.
What the graphic shows: Administrative appointments per market sector in England and Wales during the month ending 31 May 2014 as listed in The London Gazette.
Administration appointments in England and Wales dropped by over one-third (34%) between April and May 2014, from 140 to 93. There were month-on-month decreases across almost all market sectors, with the exception of the construction sector which saw a 40% increase in administrations between April and May.
The greatest decreases occurred within the property, health and social care, manufacturing sectors, which saw decreases of 87%, 83%, and 48% respectively.
What the graphic shows: The busiest regions for administration appointments in England and Wales during the month ending 31 May 2014 as listed in The London Gazette.
What the graphic shows: The split of administration appointments and receiverships between the clearing banks for the month ending 31 May 2014, based on floating charges register at Companies House.
What the graphic shows: The number of appointments taken by insolvency practices by different banks for the month ending 31 May 2014, based on where those clearing banks held floating charges registered at Companies House.
With the introduction of new rules surrounding Industrial and Provident Societies (IPS) and insolvency, Rebecca Hazeldine, solicitor at Geldards LLP, reviews the new provisions for IPSs
A wealth of organisations from working men’s clubs to football supporters’ trusts to the Royal British Legion, can now benefit from an insolvency “safe haven” should they find themselves serious financial difficulty.
Many such organisations are set up as Industrial and Provident Societies (IPSs), a business form which has its origins in social philanthropy, self-help and the cooperative movement.
Until this year, the “safe haven” of Company Voluntary Arrangement (CVA), administration or Scheme of Arrangement (SoA) was not open to an IPS. Now legislation in the form of the Industrial and Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order 2014, has been implemented to open up these insolvency provisions to IPSs.
IPSs have a separate legal personality, limited liability for participants and are regulated by the Financial Conduct Authority (FCA). There are two types: the ‘bona fide cooperative’ mutual model and the society for the benefit of the community.
If an IPS became insolvent in the past, the only options were dissolution or liquidation. There was no opportunity to use a formal insolvency process to rescue or restructure the venture. The new provisions mean that IPSs (except private registered providers of social housing or social landlords) now have the ability to use formal insolvency procedures which all aim at “rescue” and bring new flexibility, in that:
However, an IPS will not be subject to administrative receivership (in this respect there is no change in the law). This is a further option available to companies whereby a secured creditor can appoint an administrative receiver (as opposed to an administrator) in a limited range of circumstances. The main advantages of this are that an administrative receiver works only for that creditor, not the creditors as a whole.
If any one of these new procedures is to be used, it will be important for an IPS to check the modifications which have been made to the procedures, for example, there may be particular requirements as to the level of engagement required with the Financial Conduct Authority.
There have been a number of other recent developments relating to IPSs. Since April 2014, the Company Director Disqualification Act 1986 now applies to IPSs. The Co-operative and Community Benefit Societies Act 2014 has also been enacted and will come into force on 1 August 2014. This Act consolidates the legislation relating to co-operative societies, community benefit societies and other IPSs with minor amendments. It is also worth noting that from 1 August 2014, all new societies registered will be known as co-operative societies or community benefit societies rather than IPSs.
Director of litigation funding specialists TheJudge, James Blick, assesses the options available to insolvency practitioners when it comes to litigation funding.
One of the basic principles of third party litigation funding in the UK market is that the funder cannot take an assignment of the claim. Therefore, the traditional model of third party funding sees the funder invest in the claimant, but without being able to take over and control the litigation. However, the insolvency exemption provides an interesting alternative, where the funder instead buys the claim outright and conducts the litigation as assignee of the cause of action.
This approach clearly offers certain benefits – a funder buying a claim will often be willing to make an immediate cash payment, as well as agreeing to hand over a percentage of any recovery made. This enables the IP to secure an immediate recovery for creditors irrespective of the outcome of the case, as well as a further windfall if a recovery is made, all without having to commit time and resource to pursuing litigation.
When considering litigation, third party funding (or selling the claim) is only one of the potential methods of funding that IPs will wish to consider. It is equally vital to consider whether the law firm may be willing to share risk by way of a conditional fee agreement (CFA) and whether After-the-Event (ATE) insurance should be obtained, either to cover the risk of having to pay the defendant’s costs, or to indemnify some element of the own side’s costs.
A crucial benefit of these arrangements is that IPs can potentially recover the cost of the insurance premium and/or CFA success fee from the defendant as part of costs. If the defendant is good for the money, this may enable these funding options to be used effectively at no cost to creditors, as well as providing significant tactical benefits.
However, things may be changing. There is now less than 12 months left of the two- year exemption from the rule changes on recoverability of ATE premiums and CFA success fee and there is still no clear guidance on what 1st April 2015 will bring. We must assume and prepare for the worst – that from 1st April 2015, IPs will potentially no longer be able to recover these costs from the defendant as part of costs.
It is important, therefore, for IPs to observe and be aware of what is happening in the wider market, as this will give an indication of things to come, if a further temporary or permanent exemption is not secured.
The first thing to say is that the lack of recoverability has not significantly damaged the ATE insurance market, nor has it stopped the use of CFAs. On the contrary, 12 months post implementation of the LASPO Act 2012, the commercial litigation market has started to normalise and we have seen a steady rise in the volume of insurance applications, such that we are at around the volumes we saw in 2012.
However, the key challenge is making the economics work. There were undoubtedly cases funded under the old regime, where the funding arrangement (CFA and ATE) was only viable because of the ability to recover the success fee / premium, but where under the new regime, the damages simply are not large enough to make this work.
IPs will be familiar with this scenario. The ultimate recovery in many cases will be determined by the defendant’s available assets, whether or not costs are technically recoverable. Therefore, whilst the margins in some cases will be squeezed, the analysis about the cost of a funding arrangement versus the likely level of recovery will often be very similar.
The combination of the ability to sell claims to potential funders, or retain the claim but benefit from recoverable CFAs and ATE premium, means that IPs in the UK market currently have the widest and most flexible range of funding options available.