With the UK rivaling the Dutch in providing the most delegates, there was plenty of reflection inside and outside the conference hall on Brexit, whether hard or soft, whether now or never. It was clear however that whatever happens in the UK, Europe and particularly the EU will be developing innovative techniques to allow for business rescue couched in language that many a UK insolvency practitioner will find very familiar.
The New Directive and New Ways of Thinking
In May this year the EU adopted the snappy title: Directive on preventative restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directice (EU) 2017/1132. Two sessions were dedicated to the Directive but throughout the conference its presence loomed large. Numerous examples were given of how new processes and procedures are being adopted in Member States, allowing distressed business to be restructured, not through traditional court driven processes but by new out of court 'rescue culture' type solutions.
Traditionally, many continental insolvency regimes impose on company directors an obligation to file for protection/bankruptcy on entering "the twilight zone" thereafter using a court controlled process to regulate the affairs between a company and its creditors. The Directive derives from the difficulties faced in Europe following the financial crisis of 2007/2008 and the knock on effects in the Euro zone. A session on non-performing loans (NPLs) pointed to the fact that in Europe, NPL's have still not returned to pre-crisis levels, while in contrast the US took just four years to work out solutions.
The slow and costly court driven solutions have caused particular problems for European SME's. SME's account for 99.8% of the 20.4 million non-financial enterprises in the EU, providing 85% of all new jobs. SME's are particularly poorly served by a court based system which imposes upon them both delay and cost which they can ill afford. As a result the Directive seeks to give entrepreneurs a second chance, to avoid the stigma of bankruptcy and allow consensual restructuring within a flexible framework. This sounds achingly familiar to the language used when the UK introduced the Enterprise Act in 2003.
Member states have two years in which to introduce legislation which gives effect to the framework and which will allow some form of out of court plan of restructuring.
In the Netherlands, a new hybrid scheme of arrangement/Chapter 11 type procedure will allow for restructuring which can either filed publicly (in Court) or remain confidential (out of Court). Further innovation is expecting to specifically support SME restructuring.
In Denmark an early assistance process, with funding from Cosme (The EU Programme for Competitiveness for Enterprises and small and medium sized enterprises) has enabled businesses to use the 'free' services of professional advisers to assist them in their restructuring.
In Italy a new code will see the appointment of a statutory board auditor (SBA) to supervise and assist a struggling business in putting forward a restructuring plan to creditors. The SBA role will significantly differ from the regular auditor who is concerned only in historic reporting.
Each of the processes outlined above provide an ability to plan for the restructuring of the business on a voluntary out of court basis with creditors. It is moving away from a court processes, and is deigned to be quicker and cheaper and available to SME's. A further session on SME businesses referred to the academic Bowen Island Group's working paper and subsequent book on a modular approach to SME restructuring. The detailed proposals included the concept of "scream or die" giving individual creditors a very short time in which to take action or otherwise lose rights.
It is clear that much European thinking will see a move to debtor in possession processes, with a key focus on business rescue, more aligned to the US than perhaps the UK. Would a hard Brexit and non-application of the Directive provide the UK with an opportunity to do things differently? Or will the UK be seen as out of line an increasingly 'unfriendly' place for companies to do businesses?
Cross Border Problems Ahead
Irrespective of whether continental Europe offers new and more attractive rescue processes, it is likely that in the area of cross border enterprises, a migration from the UK will occur should a hard Brexit leave the UK insolvency officeholder without ability to be recognised as such within Europe.
In the race to provide an alternative centre for debt resolution, Ireland and the Netherlands seem to be leading the way. Since 2016 4,000 UK lawyers have applied to the Irish roll, 1,000 seeking practicing rights. While mostly confined to anti-trust and competition lawyers it was thought that restructuring lawyers may follow. 29 financial services companies have migrated from London to Dublin. It was recognised that there will be a shift of banks to Paris and Frankfurt and insurance to Luxembourg. That a shift of businesses would occur was not questioned, but presumed by European delegates, as a consequence of Brexit.
An interesting parallel theme was within a global economic market, it was felt that geography will have significantly less importance as to governance of jurisdiction. Rather jurisdiction will be driven by a global businesses need to be centred in the best place in which to conduct business on both a legal and financial basis. It is therefore thought that countries such as Ireland and the Netherlands were competing in offering this 'best in class' role with offshore jurisdictions. Indeed as EU Member States they may enjoy significant advantage as US and EU tax authorities turn their attention to offshore structuring.
Imitation is the Sincerest Form of Flattery
Sessions on litigation funding and employee rights showed how close other European jurisdictions are moving towards the UK thinking. It was quite rightly recognised that the US and the UK have established a mature market for litigation funding with approximately 90 participants. The use and acceptance of third party funding is now seen as necessary and indeed welcomed through most European jurisdictions.
Pre-packs are something that caused European agitation some 10-15 years ago, now it was interesting that practitioners from both the Netherlands and Belgium have been distressed to see the ECJ intervening and preventing the cherry picking of employees through the pre-pack rescue processes they have adopted. This was leading to calls to reform TUPE and allow for the continuation of pre-pack processes which will enable cherry picking of staff and the greater rescue of businesses.
It was interesting how closely the development of thinking in Europe has moved towards UK processes and procedure. The concern must be that as we lose a voice in European development, formerly seen as an innovator in business rescue, the UK could soon find itself left behind in the slow lane.
SoMe was a complimentary session to the key note presentation of Professor Vincent Hendricks, director for the Centre for Information and Bubble Studies at the University of Copenhagen. Both sessions dealing in the concept of data, its management and use, and manipulation, revealed some fundamental fault lines in present political systems. The key note presentation was indeed the most thought provoking and potentially contained the most concerning message from this Year's Conference.
For the uninitiated, such as me, SoMe refers to social media, while 'the Bubble' refers to the proliferation of information, data and the investment bubble in sectors seeking to exploit this expediential growth. Facebook has some 2.23 billion monthly users; it has acquired 1 billion users from Instagram while YouTube, acquired by Google has 1.9 billion monthly users. The message from Prof. Hendericks was simple "if you're not paying, you are the product".
Accordingly the use of social media, what we put on it, the data we use, the information and content that we access is highly valuable to businesses and ultimately to politicians. Social Media has created an unprecedented ability to inform one another but it is clear that messages that provoke anger and fear are more likely to proliferate. Professor Hendricks declared that democracy is now in a post factual phase where information is shared at such a rate that it doesn’t need to be verified. The truth simply doesn’t matter. Misinformation and manipulation, in parallel with attacks on traditional media outlets for peddling "fake news" has meant that a genie is well and truly out of the bottle.
While this message was perhaps not insolvency focused, its sombre warning, perhaps for a while at least, put the UK's Brexit travails in some perspective.