The new Insolvency 2022 guide features 44 jurisdictions. The guide provides the latest legal information on the various types of voluntary and involuntary restructurings, reorganisations, insolvencies and receiverships; out-of-court restructurings and consensual workouts; secured and unsecured creditor rights; international/cross-border issues and processes; and the duties and personal liability of directors and officers.
Last Updated: November 22, 2022
Insolvency: An Overview
This 2022 Insolvency Global Practice Guide is a guide for legal and non-legal professionals to the differing legal regimes that apply to business restructurings, reorganisations, rehabilitations, insolvencies and liquidations in the 44 jurisdictions covered by this publication. The contributing firms and authors are well versed in the restructuring and insolvency practices and laws of their respective jurisdictions. They provide concise, high-level summaries of country-specific debtor and creditor rights and legal alternatives (statutory and non-statutory) for the restructuring and resolution of financially distressed and insolvent businesses. The contributors also provide all-important professional insights into current trends and developments in their local markets.
The information and summaries in the Guide are not provided as legal advice or opinions of any kind, and should not be relied upon as such. Readers should consult the contributors or other qualified legal and non-legal advisers when seeking to identify and understand what rules and practices might apply in particular situations and jurisdictions.
Evolution and State of Financial Restructuring Markets
The Guide summarises legal regimes that often reflect an evolution towards current best restructuring and insolvency practices. Local laws and related practices that apply to creditor rights, financial restructurings and business insolvencies are typically unique, complex and jurisdiction-specific. Such laws and practices may be long-standing or reflect recent changes and global trends. While it is difficult to generalise about global trends, the following observations may be of interest.
Globalisation of Practice
Best practices in financial restructuring and insolvency-related practices have evolved over several decades to address the globalisation of business, financial markets and debt-trading. Legal regimes in many jurisdictions have adapted and changed in response to cross-border M&A activity and private equity investments; the immense growth in distressed investing and secondary loan trading in international debt markets; and the development of cross-border and international restructuring and insolvency laws, treaties, regulations, organisations and best practices.
The international nature of today’s capital markets and business enterprises requires that legal, judicial and professional practices recognise and resolve cross-border issues arising when a company’s domestic and foreign investors, creditors and operations are impacted by an insolvency or financial restructuring. Differing foreign legal rules, regimes and policies may apply simultaneously and must be harmonised.
Thirty years ago, few restructuring professionals and firms were known to have the significant international restructuring contacts, capabilities and expertise needed to navigate cross-border insolvency situations. Since then, the cross-border restructuring and insolvency practice has grown and matured. The International Association of Restructuring, Insolvency & Bankruptcy Professionals (INSOL) and the Turnaround Management Association (TMA) are both worldwide associations of thousands of restructuring professionals focused on international capabilities and best practices for cross-border situations.
Uniform laws and practices for cross-border insolvencies and financial restructurings have been advocated by professional associations and enacted in various jurisdictions. INSOL formulated the INSOL Global Principles for Multi-Creditor Workouts. In 1997, the United Nations Commission on International Trade Law (UNCITRAL) established the Model Law on Cross-Border Insolvency (Model Law). The Model Law has been enacted in 50 countries. It provides that a country’s national courts must recognise insolvency proceedings that have been commenced in another country.
There is a continuing need for laws that foster business rehabilitations rather than liquidations, because rehabilitative and “rescue” regimes preserve jobs and the going-concern value of insolvent companies.
New Participants and Competition
Over the last two decades, there has been a fundamental change in who typically holds “debt for borrowed money” in financially distressed company situations: traditional, institutional commercial bank lenders have been replaced by hedge funds and other strategic, private distressed debt investors.
In years past, the senior creditors of an insolvent company often were its relationship bank lenders. Banks predictably continued to hold distressed debt through workout or other restructuring or insolvency negotiations and proceedings. Over time, new and different types of strategic and opportunistic investors, including hedge funds, entered restructuring markets to acquire distressed company debt from banks and other traditional lenders.
The impact of hedge funds and other non-traditional investors on financial restructuring and insolvency processes was mixed. On the one hand, they often made restructurings more complicated and litigious as well as unpredictable because such investors often sell and assign (or acquire) their debt positions during a pending restructuring, thereby potentially upsetting restructuring negotiations and agreements between a company and its creditors. The practice of using “restructuring support agreements” and “lock-up agreements” was developed to manage risks posed by debt trading; such agreements bind a debtholder and its successors and assigns to restructuring terms agreed to by the debtholder, thereby providing certainty to those who negotiate and reach restructuring agreements, and flexibility for debtholders who may want to trade their claims freely.
On the other hand, hedge funds and other non-traditional investors brought money, speed and sophistication to the restructuring landscape. They are creative investors, particularly well suited to driving restructurings to conclusions, and have the wherewithal to invest new money to expand the solutions to a distressed company. They provide liquidity to a market that may otherwise be constrained.
Sophisticated US hedge funds and other strategic investors who previously focused primarily on distressed US company debt (using the US Chapter 11 process to achieve outsized returns and debt-to-equity conversions giving them equity control of reorganised companies) have expanded the scope of their investment activities and strategies to target financially distressed foreign companies worldwide. While many non-traditional investors remain focused on debt of North American companies because distressed debt markets there are more developed than in other jurisdictions, opportunistic investors are now active in non-US jurisdictions where distressed debt markets are less mature. In recent years, major debt funds have been raising significant capital earmarked for deployment in Europe and elsewhere globally in anticipation of expected economic changes and foreign financial distress situations that will present opportunities for such investors.
It is important to note that the increased numbers of non-traditional restructuring and distressed debt-market participants have increased competition for sometimes limited investment opportunities. As a result of such competition, risk is sometimes underpriced when distressed debt is acquired.
Thirty years ago in the USA, distressed companies often commenced traditional Chapter 11 bankruptcy cases under the supervision of a federal bankruptcy court without any pre-negotiated outcomes or reorganisation plan terms in mind at the outset of a case. In traditional Chapter 11 cases, it typically took a year or much longer to negotiate and confirm a reorganisation plan. Over the past three decades, more efficient, speedy and less expensive Chapter 11 bankruptcy case strategies have developed. There is now a general trend in favour of consensual strategies negotiated out of court for efficient in-court resolution of financial distress, in place of lengthy, formal, non-consensual judicial proceedings. A company and its lenders and other major stakeholders may employ a “prepackaged” or “pre-negotiated” Chapter 11 case strategy to achieve relatively rapid case progress milestones and deadlines, and outcomes that in the past might have taken several years to accomplish in a traditional Chapter 11 case. Restructuring professionals, companies and major financial stakeholders often prefer out-of-court workouts and prepackaged or pre-negotiated restructurings rather than disorderly, uncertain and often litigious bankruptcies, liquidations or receivership-type insolvency proceedings that may result in high professional fees, delay, unnecessary litigation and loss of going-concern values.
With the entry of non-traditional distressed debt investors and other opportunistic participants, litigation has become a much more common strategy for achieving or negotiating recoveries in insolvency and restructuring proceedings. When there is uncertainty about available value or who is entitled to it, valuation litigation and inter-creditor disputes may dominate insolvency proceedings. Likewise, avoidance actions and litigation claims against third parties (including former owners, management, directors, officers and auditors) may represent meaningful sources of recovery. The settlement or assignment of complex litigation claims during a proceeding may be the basis of a plan of reorganisation or liquidation. The frequency of litigation may increase as specialised investment funds that are focused on insolvency-related litigations become more active; they invest in and fund litigations in return for a share of litigation proceeds.
Sales of Financially Troubled Businesses More Common
Sales of all or substantially all of an insolvent business’s assets as a going concern “free and clear” of liens, claims and encumbrances are now common in Chapter 11 cases and other formal proceedings when a standalone reorganisation or rehabilitation of a business is impractical or impossible. Proposed sale transactions may be market-tested and negotiated before formal insolvency proceedings are commenced. In the USA, a pre-negotiated sale process for an insolvent business may be proposed and effectuated quickly with court approval following commencement of a Chapter 11 case, especially when a sale has affirmative support of senior secured creditors. Senior creditors often provide funding for a pre-planned Chapter 11 sale case in order to preserve a business’s going-concern value that may be lost in the absence of such funding. After a court-approved sale, a Chapter 11 company and its creditors may negotiate and seek bankruptcy court approval of a Chapter 11 plan of liquidation that distributes sale proceeds to creditors.
What May Lie Ahead
The COVID-19 pandemic initially triggered a spike in business restructurings and insolvencies in jurisdictions around the globe. Following the rapid rise in insolvency filings early in the pandemic, there was a rapid plummet in insolvency filings in 2021 and early 2022, largely due to the expansionary fiscal and monetary policies adopted by many countries. In response to the lockdowns, quarantines and travel restrictions brought on by the COVID-19 pandemic, governments and central banks around the world enacted robust stimulus policies, increased expenditures and lowered interest rates to avoid a catastrophic economic collapse. By way of example, in the USA, the Federal Reserve (the “Fed”) cut interest rates to near zero and implemented aggressive quantitative easing measures. Congress enacted more than USD5 trillion in emergency legislation. Outside the USA, the International Monetary Fund (IMF) reports that in 2020, Japan, for example, adopted fiscal packages worth JPY307.8 trillion, or 54.9% of its 2019 GDP.
Records levels of M&A activity in 2021 also limited restructuring activity. The historic year for M&A activity was driven by the strategic needs of companies and supported by affordable financing, strong markets, and growing levels of private equity “dry powder”, to name a few. M&A activity remains strong in 2022, but has slowed compared to 2021.
While sweeping actions taken by governments ushered in a remarkable economic recovery in 2021, inflation, rising interest rates, and global risk have contributed to significant uncertainty in the world economy and the looming possibility of a recession. Inflation in the USA surged to 9.1% in June of 2022, the highest in decades. While inflation may be on the decline, the Congressional Budget Office expects high inflation to persist into 2023, forecasting the consumer price index to rise 6.1% in 2022 and 3.1% in 2023, while the IMF expects personal consumption expenditure inflation to fall back towards 2% by late 2023. In response to rising inflation, the Federal Reserve enacted its third consecutive 75 basis point interest rate increase in July 2022, up to the 3.0–3.25% range, and the Federal Reserve has expressed a need for further increases in the near future, with expected hikes up to the 3.75–4% range by the end of next year. These hikes will make it more difficult for debt-laden companies to refinance.
In addition to higher interest rates and inflation, companies that survived the COVID-19 pandemic continue to face workers shortages and supply chain issues. And some experts do not expect either problem to abate within the next year. More than 47 million workers quit their jobs in 2021, and record high resignations continued into 2022. Some experts predict that labour shortages may last for years to come.
As inflation remains high and interest rates continue to rise, financially distressed companies that were able to stay afloat via stimulus programmes and lender deferments may finally be pushed into bankruptcy. The retail sector may be particularly susceptible, with consumers tightening their belts as consumer debt mounts and a potential recession looms. Labour shortages have also hit the retail sector hard, making it difficult for retailers to staff their stores and warehouses, causing distribution, inventory and operational problems. The health care sector is also vulnerable, due in part to a national nursing shortage and related increased labour costs. The travel, commercial real estate, consumer and entertainment, midstream oil and gas, and power industries also face uncertainty.
Many corporations entered the COVID-19 pandemic highly leveraged and, during the pandemic, corporate borrowings have increased. Looking forward, observers will monitor whether lasting inflation and rising interest rates will usher in the next wave of restructurings in 2023 and beyond as debts become due.