Founder: Turnaround Talk
In the first featured article, we started to look at a panel discussion that was held at the INSOL International London Conference earlier this year.
We saw that urgency is always used as an excuse in the turnaround profession, but when dealing with this, some parties may get the raw end of the deal. This is the focus of today’s second featured article.
Minority protection
The article points out that 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.
The article adds that, 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.
Collective process
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.
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The article points out that 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.
The article adds that 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”.
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Embracing innovation
The article points out that 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.
