In both the UK and EU there will soon be substantial changes to current insolvency legislation, with jurisdictions aligning their restructuring frameworks much more to the US Chapter 11 regime. It is likely, therefore, that just as in the US, arguments around valuation will play a much greater role in restructuring cases in the UK and EU than to date.
The UK Government issued a consultation in 2016 on the corporate insolvency framework following the Conservative Party’s 2015 election manifesto pledge to get the UK in the top five in the world, and number one in Europe, in the World Bank’s annual “Doing Business” report. The issue has been kept firmly on the political agenda as a result of a number of high profile corporate collapses since then. Following the consultation, proposals to reform the UK debt restructuring regime were published in August last year with legislation to be introduced “as soon as parliamentary time permits”.
The proposals introduce a potentially powerful new mechanism – the restructuring plan. The plan will bind all creditors, including secured creditors, and will permit a “cross class cramdown” in other words the ability to bind dissenting classes of creditors who vote against a restructuring plan. However, while this introduces a feature of the US Chapter 11 process, the absolute priority rule, under which the dissenting class of creditors must be satisfied in full before a more junior class may receive any distribution, is not being followed without modification. This is often seen as too inflexible under the US regime and under the UK proposals the court can confirm a restructuring plan even if it does not comply with the absolute priority rule where that non-compliance (i) is necessary to achieve the aims of the restructuring and (ii) is just and equitable in the circumstances.
In order for the court to assess whether the absolute priority rule has been met, a valuation based on the use of the “next best alternative for creditors” must be used. Arguments about valuation have played a relatively small role in restructuring cases in UK scheme cases to date but many commentators feel the proposed restructuring plan will place a significant burden on English judges to deal with this issue with courts having to take a commercial view on valuation.
The UK proposals were also driven by a need to reflect changes being proposed by the European Commission in its draft Restructuring Directive. This directive, introduced to achieve convergence of insolvency and restructuring proceedings in the EU, was endorsed by the European Parliament at the end of March. It must be implemented by member states within two years.
The EU’s proposals also take their lead from US Chapter 11 bankruptcy laws and, like the UK proposals, include a restructuring plan with cross class cramdown, an element not yet present in most European procedures. Like the UK, the EU directive ‘softened’ the absolute priority rule but with the introduction of a new concept, the ‘relative priority rule’.
Inevitably, each Member State’s government will interpret and enact the Directive slightly differently and the impact will be greater for those Member States currently without restructuring processes who will need to introduce them.
But with valuation playing a critical role throughout the entire bankruptcy process, valuers throughout Europe should ensure they are aware of the changes to the insolvency regime that are on the way.