New data from the Insolvency Service points to a potential surge in corporate restructurings – so how should in-house legal teams ensure they are prepared?
Restructuring partners have been predicting a surge in corporate restructurings and insolvencies for years. But despite covid, conflict and rising inflation the boom in such work has yet to materialise to any significant level.
The latest monthly figures from the UK Insolvency Service suggest this may be about to change though, with the number of registered company insolvencies in June standing at 2,361 – 16% higher than the previous month and 17% higher than June 2023.
Certainly, even against a backdrop of dipping inflation and expectations of interest rate cuts, London restructuring partners predict that activity is about to pick up.
Howard Morris, the former head of London restructuring at Morrison Foerster, now a senior adviser with Birch Risk Advisors: says: ‘While the rate of inflation may have eased, the spike in costs and its consequences is still working through the system. With a potential easing of interest rates, there is nearly $6tn poised for investment, which could boost restructuring deals as companies seek to deploy this cash into higher-return asset classes.’
Here, private practice partners share insights for in-house legal teams and businesses navigating markets that remain challenging.
Sector focus
No industry is entirely immune to macroeconomic influences, but partners predict some sectors will feel the pinch more than others.
Philip Hertz, global head of restructuring and insolvency at Clifford Chance, comments: ‘Everyone will have told you for the past three years that the next quarter will be the big tsunami of restructurings, but that hasn’t happened. But there have been various sectors that have experienced issues, not necessarily economic and cyclical issues, just particular to that industry.’
Hertz points to the electric vehicle industry, which is facing challenges after the UK government delayed the phase-out of petrol cars from 2030 to 2035. ‘Companies that provide electric points for electric vehicles are therefore also suffering,’ he explains.
In a similar space, the Financial Conduct Authority (FCA) began an investigation into car finance earlier this year, Hertz says.
He adds that in 2021 approximately 90% of all car sales were purchased on finance; with so many loans under scrutiny, the estimated compensation bill could potentially reach £10bn. ‘There could be a blowback to the lenders and potentially the manufacturers. It’s all up in the air, so it depends on what happens,’ he says.
Meanwhile Greenberg London restructuring chair John Houghton highlights challenges within the retail and hospitality sectors. ‘Sectors that have seen increased activity include retail. Superdry and Tasty both followed the Prezzo blueprint for restructuring leasehold estates through Restructuring Plans in preference to pre-packs.’
Hertz and Morris point to the UK real estate office sector as another area of concern. According to data from property group CoStar, in the first half of 2024, not a single investor in the City of London bought office space valued at more than £100m – the first time this has happened since 1999.
‘The office real estate market remains under pressure due to overbuilding and over-leverage. Despite a gradual return to offices, many markets are still struggling with excess inventory,’ explains Morris.
Proactive steps
So, what should in-house counsel be doing if they find themselves in a company that is experiencing difficulties? Partners suggest it’s important that companies avoid burying their heads in the sand and instead try to come up with solutions more quickly.
A shift to private credit and alternative capital sources instead of traditional banks has offered companies more flexibility and often quicker access to capital, providing a potential lifeline to many companies.
As Morris summarises: ‘The shift from traditional bank loans to private credit is continuing, driven by a significant amount of corporate debt coming due. This trend allows companies to explore more creative financing options, increasing competition for assets.’
Kon Asimacopoulos, a partner in Kirkland & Ellis’ restructuring group in London, agrees: ‘The recent wave of LBO-related recapitalisations and restructurings in Europe (brought about by the combination of high rates, high inflation and low growth) has steadied, but has been replaced by special situations financings and liability management, given the continued massive flight to alternative capital and companies still facing the effects of multiple macro headwinds.’
Global tools
For those corporates that are in trouble, partners underscore the continued importance of London as centre for cross-border restructurings.
The UK Restructuring Plan, enacted in 2020, offers companies an alternative to a Scheme of Arrangement, aiming to prevent businesses from collapse by facilitating restructurings. Notably, German property developer Adler and oil and gas group McDermott both engaged in the English Part 26A Restructuring Plan, alongside multiple procedural and parallel proceedings in various jurisdictions.
Mark Fennessy, who co-heads the finance, restructuring and special situations group at McDermott Will & Emery in London, states: ‘We’re coming up to the fourth anniversary of the Restructuring Plan, which has been generally well received and adopted by the market. It is becoming a tool for active consideration and use in restructuring the debts of both large and mid-sized companies which is set to continue.’
Alongside the UK framework, Germany’s Corporate Stabilisation and Restructuring Act (StaRUG) and the Dutch WHOA have also gained traction in recent years.
In June 2023, international auto parts manufacturer Leoni received court approval for a plan under StaRUG, marking the first major restructuring using this 2021 tool. Likewise, South African retail conglomerate Steinhoff secured court sanction of its WHOA restructuring plan in the Netherlands, becoming the first major international Dutch case.
Asimacopoulos comments: ‘On the legal implementation front, the continued “bedding in” of the leading European restructuring tools have also brought about greater optionality and procedural clarity for stakeholders, although there is still a fair way to go.’
Hertz goes further, suggesting that the development and adoption of European restructuring tools may indicate a shift away from the US as a restructuring hub, with other jurisdictions gaining prominence.
He highlights the US restructuring of opioid maker Purdue Pharma, in which a recent Supreme Court decision struck down the general principle that entering a restructuring allows for nonconsensual third-party releases for directors, shareholders, and related parties.
‘Following Purdue, it seems as if it is no longer possible to get third-party releases, with the result that the centre of gravity for restructurings (to the extent it was ever in the US) may be moving from the US and Chapter 11 into different jurisdictions with better tools.’
He continues: ‘We’ve already seen that – even this month we’ve had some inquiries for US companies looking at some connection to the UK or other European jurisdictions so they can use the restructuring procedures available here such as schemes and restructuring plans.’
Understand your responsibilities
For companies that do find themselves in difficulty; early preparation is crucial, with partners emphasising the need for GCs to understand their roles and act promptly.
Quinn Emanuel partner David Ereira highlights the recent High Court decision involving the directors of failed high-street store BHS, which collapsed into administration in 2016 as exposing important governance issues for GCs to take into consideration. Last month, the High Court ordered two former directors – including one who served as in-house counsel – of BHS to pay creditors a minimum of £18m to creditors for their involvement in the collapse of the retail giant representing one of the largest wrongful trading penalties since the UK Insolvency Act of 1986 was enacted.
‘If I were the GC of a company in trouble, I would want to read that judgment very carefully,’ explains Ereira.
‘You have to be very clear that you understand what you’re doing, where your responsibilities lie. Have a clear and reasoned belief as to why you think your business is viable and how it’s going to survive and prosper moving forward. It’s not enough to just live in hope; you need to have solid reasons for holding that view. If you have those reasons, you’re fine.’
Fennessy adds that GCs should always act decisively. ‘Do not wait until your creditors are banging down the door. Early engagement through trusted advisers is always the number one piece of advice that I would give any GC of a struggling company.’