Founder: Turnaround Talk
One of the turnaround professions biggest industry events is the INSOL Conference which is held annually in London. The event was back this year after suffering two years of setbacks while the world dealt with the Covid Pandemic.
Predictably, there was a lot of interesting talks on hand as the world is facing a level of disruption that it has not experienced in the modern age. Many companies are facing financial distress which has created a lot of growth within the turnaround and business rescue profession.
Below are some of the major highlights that took place during a very interesting panel discussion.
Important conversation
The article points out that a panel of judges from Europe, the US, Asia and the Cayman Islands compared how valuations issues are treated in their respective jurisdictions, and warned delegates at the INSOL conference that urgency really needs to mean urgency when it is flagged – or parties risk damaging their credibility.
The panel was moderated by Justice Zacaroli from the England and Wales High Court. In addition to Justice Zarcoli, the panel also included Justice Nick Segal from the Grand Court of the Cayman Islands, Judge Elizabeth Stong from the US Bankruptcy Court for the Eastern District of New York, Judge Elsbeth de Vos from the District Court of Amsterdam, and Justice Sanjay Kishnan Kaul from the Supreme Court of India.
The article added that, kicking off the session, Justice Zacaroli explained there is a common tension in restructurings around the world between two things – the need to ensure all interested parties are treated fairly both procedurally and substantively, and the need to complete the restructuring at sufficient speed and low enough costs that the patient is not killed in the process.
The article points out that, fundamental to any restructuring, he said, was where the value breaks in the restructuring, which is often critical in determining whether there is a fair allocation of value in the plan.
He asked the panel what procedures exist in their respective jurisdictions to allow a debtor or creditors propagating a restructuring to present valuation evidence and the opportunity for those challenging it to present their own.
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Valuations in different jurisdictions
The article adds that, in India, Justice Kaul explained, a resolution professional appoints two registered valuers that estimate the fair value of a company and the liquidation value to the court.
Fair value is based on the realisation that an arm’s length transaction between a willing buyer and seller would take place, while the liquidation value is based the value of the debtor that can be realised when the company is liquidated, he said.
The article points out that only the liquidation value used to be required, but that drew criticism from debtors, shareholders and creditors that they were taking “very large haircuts”, the judge noted.
He said there are strict timelines that must be adhered to in India, with the resolution professional having to submit an information memorandum within two weeks of his appointment, but no later than 54 days from the insolvency commencement date, whichever is earlier.
Justice Kaul explained that getting the real value of assets is challenging because under Section 19 of the Indian Insolvency Code an obligation is imposed on the debtor and associated parties to cooperate with the resolution professional, but no such corresponding obligation exists for creditors.
The article adds that he also said that if a situation arises where the distance between the two valuations is too far apart then there is a possibility of having a third valuation report.
In the UK, Justice Zacaroli observed that it’s up to the debtor to provide evidence in the first place and information to the creditors, though the rules are non-prescriptive and fairly flexible.
The English court has a very important role at the beginning of a proceeding to scrutinise the adequacy of information that’s being provided by the debtor in order to convene meetings, he added.
Meanwhile, anybody objecting can produce their own evidence and the court has a range of case management powers to order expert evidence and disclosure.
The article points out that the process is pretty much the same in the Cayman Islands, Justice Segal said, because the Cayman Islands Companies Act follows and essentially adopts Part 26 of the English Companies Act.
The judge said there had never been a serious valuation fight in a Cayman or English scheme of arrangement, prior to the introduction of the UK restructuring plan under Part 26A, because schemes are pre-negotiated restructuring processes where value is dealt with “well in advance” of the case coming to court.
“We’ll have to wait and see whether it’s an issue we have to deal with [going forward],” Mr Justice Segal added.
The article adds that Justice Segal noted that Cayman Financial Services Division judges are used to dealing with valuation fights in the context of statutory mergers, where full detailed expert evidence on valuation is core and centre.
“We’re used to ploughing our way through usually four or 500 pages of valuation evidence, and dealing with extensive cross examination of experts on valuation over a number of days,” Mr Justice Segal said. “So as and when it becomes a live issue in Cayman schemes, I think we’re ready to deal with it.”
Giving the US perspective, Judge Stong said the issue of valuation would surface early in the case management of a contested Chapter 11. “Everyone would be aware that there is going to be a fight because there is going to be a breakpoint where values want to make a big difference,” she said.
The article points out that all the evidence from lawyers, witnesses, experts and valuators “will be teed up and there would be a big record made” and an evidentiary hearing would probably be planned, Judge Stong said.
But she added, “those issues seem to tend to get worked out”, even if there are going to be “twists and turns” going forward.
The article added that The Netherlands has a slightly different system from the UK, US, India and Cayman procedures, Justice De Vos pointed out, adding the Dutch were “the new kid on the block” because the Dutch Restructuring Act only came into power on 1 January 2021.
Court involvement is at the discretion of the parties, she said, with the procedure offering a flexible toolkit that doesn’t have obligatory court involvement at any time of the procedure.
The article added that, under the Dutch scheme or “WHOA” procedure, there is no convening hearing. If, during the process, there are issues, then a debtor or the restructuring expert – an independent court-appointed official – can approach the court for a decision, which once given, is binding for the duration of the restructuring process, Justice De Vos added.
She admitted that it’s not a watertight system, however, because creditors that were not informed of the process are not bound by the decision and can raise questions at a later stage.
The article points out that the judge also explained that the Dutch court can appoint an expert to advise it on particular aspects, such as valuation, class formation and information issues. A discussion on valuation can be brought forward as a ruling on an aspect concerning the plan, Justice De Vos said.
But she pointed out that there have not been many valuation discussions in the Netherlands just yet. The judge said the most common scenario for now is for the restructuring expert to ask a valuer to draw up valuations as a going concern and in liquidation.
If those valuations are disputed, a debtor or creditor will have to have “very good reasons to deviate” to convince the court, she added. “In that sense, life is relatively easy for a Dutch judge, because we already have this restructuring expert.”
In cases where there’s no restructuring expert and there is a dispute, then the court can appoint an expert to advise it on the matter, Justice De Vos added.
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When everything is urgent, nothing is
The article points out that Justice Zacaroli turned the discussion toward the second half of the tension, urgency.
He said judges are used to debtors and creditors saying a matter is “extremely urgent” and if the court doesn’t deal with it by a certain date, usually a few weeks away, then “the sky will fall in” and the group will collapse into insolvency.
The UK court is used to dealing with schemes and hearing dates can be obtained quickly, which works well for “run of the mill” cases, he said. But its more challenging in complex cases because the court time required is uncertain as hearings are more susceptible to adjournments due to objections, the judge explained.
The article added that he said that was likely to be a growing problem with the Part 26A restructuring plan in particular, because the court deals with more substantive questions than it would with schemes.
Parties will always be interrogated by the court on the real need for urgency, because judges are aware of particular interest groups creating self-serving deadlines, he added. But in a truly urgent case the court will accommodate the parties and their need for speed.
The article points out that the more difficult question, Justice Zacaroli said, was how the court can permit interested parties to present their own evidence to challenge a scheme and obtain adequate disclosure within a sufficiently short timeframe.
There is a heavy onus on the debtor at the outset in a scheme or plan to present sufficient information for creditors to take an informed view, he noted, adding that one reason for refusing to convene meetings on a scheme will be that there was insufficient information on which parties could decide.
The article adds that Justice Zacaroli pointed to Justice Snowden’s Virgin Active decision in May last year, where certain creditors objected on the grounds they did not have proper disclosure or sufficient time to instruct an expert to deal with a valuation issue. But Justice Snowden found that the objecting creditors were sophisticated entities with access to real advisors and the money to pay for it, and they had not taken steps early enough to seek disclosure, when they could have done.
The judge said a very different approach might be taken if there is a disparate group of creditors without access to sophisticated legal advice, or the money to do so. “There, I think is where the real challenge will lie,” he explained.
The article added that, on the Cayman front, Justice Segal said that all judges will test the claim that a hearing is urgent and that a judgment has to be handed down “incredibly quickly”. Professionals should not be telling judges a matter is urgent when it turns out to not be so, as they won’t get a sympathetic court and their credibility will be damaged, he added.
The court will be “very anxious” to ensure creditors and other stakeholders have been given the proper opportunity to participate in the process, and will balance that need with the urgency of a judgment.
The article points out that Justice Segal explained that Cayman judges have a degree of “additional flexibility” because they have a docketing system where a judge is assigned to deal with a particular case from beginning to end and has a “good degree of control” of the schedule and listings.
Speaking from his own experience in the 2017 restructuring of China Agrotech, where he recognised the appointment of Hong Kong liquidators, the judge urged practitioners to “try and mention” to the court if there is an urgent deadline at the latest during a hearing, rather than afterwards, because it helps the judge produce an urgent judgment if required.
In China Agrotech, he told delegates, he was informed of a Hong Kong Stock Exchange deadline after the hearing and just a day before it was due – and told that if he did not hand down his judgment a five-year restructuring would collapse.
The article added that the cost of a case can crush it, Judge Stong added, explaining that the passage of time may be the difference between a successful restructuring and a nice process where… the operation was a success but the patient died.
The US judge explained that it’s on the courts and counsel to be responsive to a situation. She said the US system works well and is used to cases where a hearing needs to be held within 48 hours of it being filed as it can be bona fide urgent.
But there is also the kind of urgency that can be presented by parties, where they have the deal in place, but a very short time frame to complete it, which the judge called a constructed urgency.
The article points out that Judge Stong said that the US has a lot of tools in the toolkit, to adjust as necessary in a substantive, thoughtful, responsive, respectful way. However, she urged practitioners to “do your best not to put the judge in a box, lock the box and throw away the key” by giving extremely short deadlines, which would make everything fall apart if not met, because there is only so much judges can do.
“When everything is urgent, then nothing is urgent,” she added.
Judge Stong also said counsel should use the case management process in the US to alert interested parties “as soon as something is on the horizon”.
The article added that Justice Kaul said Indian law prescribes a total time limit of 180 days “from the cradle to the grave” that can be extended by no more than 90 days. The statute prescribes an obligation on the Indian tribunals and appellate tribunals to dispose of all pending cases before them as soon as possible.
Indian courts have been liberal in granting the additional days, he added, provided the applicant is not deliberately trying to do something not permissible.
A resolution professional and the committee of creditors will have an opportunity to adjust the time, but the 270 days is “absolutely sacrosanct and cannot be varied”, the judge explained.
The article points out that, in the Netherlands, the debtor and the restructuring expert set the timetable and the speed, Judge De Vos said. As the court gets involved on request, it can’t plan ahead – but Dutch judges have self-imposed a 10-to-15-day period to hold a hearing once it’s been requested, she explained.
Although that time frame is short, the judge pointed out that Dutch courts wants to adhere to the principle of due process, she said, noting that after a hearing, the court will usually give a ruling within seven days.
The only time limit set in stone is when a request is made for the confirmation of a plan, where under the law the court must hear it within two weeks of the request, she added.
Despite the self-set time limits being very short, the Dutch judge said the courts usually manage to meet them.
In todays second featured article, focus on the conclusion of this discussion.
