An effective and well-equipped insolvency and restructuring regime gives confidence to investors and financiers, enabling credit to flow through to businesses and boost economic activity, growth and innovation.
In 1999, following the Asian financial crisis, the World Bank carried out a review of the international regimes to establish a set of key principles for effective insolvency regimes (see the report online here)
So, how well-equipped is the UK regime and what challenges does it face? Will the UK remain a good place to do business? This article reviews the UK’s performance against some of the key principles identified by the World Bank Group (WBG) as being necessary for an effective creditor/debtor restructuring and insolvency system.
Efficient enforcement and collateral systems
Efficient systems for enforcement of debt claims (crucial for unsecured credit) and for the owning, transferring and granting of security interests in property are both recognized as key requirements for a credit system in a credit based economy. The UK has a well-established system and legal framework for the creation, registration and enforcement of security rights and, whilst some may argue the capacity to handle the volume of claims in UK courts could improve, the UK does have a world-renowned legal system for the enforcement of debt claims. A big risk to the UK’s stature as an integral global restructuring centre is the uncertainty surrounding what will happen to the current pan-European legislation which currently applies following Brexit. As its stands, the UK benefits from the European Insolvency Regulation and the Recast Brussels Regulation which allow automatic recognition of UK insolvency procedures and judgments across the EU.
The UK has also been at the forefront of facilitating global restructurings via English schemes of arrangement. Multinational companies regularly use English schemes to structure debt reorganisations of financially distressed businesses. If the UK were to lose the benefits of the Recast Brussels Regulation, it may be more difficult to enforce against creditors in European jurisdictions.
If the benefits of the EU regulations are lost, the efficiency of enforcement and mutuality of recognition could be seriously impacted and have a massive detrimental impact on the UK insolvency regime. R3 has reported 60% of R3 members’ work involved cross-border EU work, an increase from 49% in 2015.
Risk management and informal workout systems
Access to good credit information systems operating within a robust legal environment which protects sensitive data and privacy (especially for individuals) whilst providing accurate, timely and complete information to credit providers is seen as must have for today’s credit-based economy. The UK surely ticks the box here, with its well-established credit reference agencies (e.g. Experian, Equifax and CallCredit working with US partner TransUnion) which are bound by the Data Protection Act 1998 (and the GDPR https://www.squirepattonboggs.com/en/insights/publications/2017/05/gdpr-mapping-the-best-course-for-compliance and https://www.squirepattonboggs.com/~/media/wp-content/uploads/sites/21/insights/publications/2017/05/gdpr-are-you-ready-for-may-25-2018/26870gdpr-one-yearhandout.pdf) the Consumer Credit Act 1974 and regulated by the Financial Conduct Authority.
Similarly, with informal corporate work outs, the UK arguably has the right culture (supported by organisations such as the TMA and R3) and restructuring tools to encourage lending and investment to viable distressed businesses, whilst having adequate legal safeguards for creditors and strong insolvency laws to support investigations and stamp out abuse.
Insolvency law system
The WBG identifies a number of aims and objectives for an effective insolvency system such as:
- maximizing returns to creditors (the WBG notes the UK system has one of the highest recovery rates, recorded at 85% in June 2017);
- provide for a timely, efficient and impartial resolution of insolvencies (in terms of returning money to creditors, the UK has one of the quickest regimes, recorded alongside the US at 1 year and ahead of most EU countries). R3 reports that the UK insolvency regime returns money more quickly and cheaply than regimes in the US, Germany and France;
- preventing the improper use of the insolvency system and the premature dismemberment of a debtor’s assets by individual creditors. The UK’s insolvency regime, with the availability of a moratorium in administration and targeted insolvency legislation to challenge actions which prefer certain creditors, provides key tools in protecting a debtor’s assets with a view to rescuing businesses and maximizing returns to creditors. The UK’s existing legal framework, together with its regulatory bodies, specialist insolvency judiciary and highly skilled insolvency professionals, work together to address impropriety. A large number of insolvency practitioners in the UK are either trained accountants or lawyers. All insolvency practitioners in the UK are qualified and regulated.
The UK has an impressive insolvency regime which regularly delivers effective returns to creditors and supports an enviable rescue culture. Businesses worldwide rely on the UK insolvency regime as a user friendly jurisdiction which has a pool of highly specialised firms and individuals available to provide advice in distressed situations, as well as a specialised judiciary providing fair and efficient management of the judicial process. Whilst there are some hurdles to overcome, in particular as a result of the vote to withdraw from the European Union, it is hoped that agreements will be reached with the EU to ensure continued reciprocity and maintain the position of the UK as a great place to invest and do business.