Brexit and Cross Border Insolvencies
It is clear that there will be a need for legislative certainty post Brexit, once the reciprocal recognition of proceedings and determination of member states’ jurisdiction via the EC Regulation on Insolvency Proceedings is lost. The UK Withdrawal Bill currently removes the mechanism of reciprocal recognition and it is yet unclear whether or not UNCITRAL and/or domestic legislation would be relied upon post Brexit, or whether the more legislative certainty via, for example, bilateral treaties, will be available going forwards. Without such treaties in place it is feared that the economy on both sides of the Channel could suffer, particularly if this affects lender confidence as to what may happen in the event of an insolvency.
In a year where we have seen retail, the casual dining sector and construction industries suffer significant distress, the spotlight shone on the charities sector as the latest sector “stretched to breaking point”. Where the Charity Commission in the UK are supervising in excess of 167,000 registered charities in England and Wales, it is thought the primary regulator of this sector is significantly under resourced. In addition, research has shown that more than a quarter of registered charities operate within their reserve of less than 3 months, meaning they are significantly exposed to market fluctuations. It is possible that, in light of the new powers of the Charity Commission being able to wind up charities, without having to request that this is undertaken by the trustees of such charities, this could potentially create new restructuring opportunities.
Lessons from Carillion
From what was easily the biggest insolvency of 2018 (to date), it was fascinating to hear from those on the front line of the collapse of Carillion. The primary messages that were taken away from this historic insolvency were considered to be as follows:
Management culture and transparency – as had been widely publicised, management focus was kept on winning new contracts to ensure cashflow to service existing contracts, whilst the quality of performance of existing contracts suffered. In addition, notwithstanding significant profit warnings, management did not consider there to be any liquidity issues.
There needs to be an interrogation of true debt levels and whether particular types of finance should fall within “supplier finance” or be accounted for differently.
Documentation is key and the usefulness of security reviews cannot be over stated. In Carillion, one of the primary lenders found itself secured against topco only (none of the operating companies) and in a subordinated position behind the pension. Further, despite the eye watering profit warnings, the documentation in place did not expose a covenant breach at this time. A review of facilities and security could have identified and potentially remedied these issues.