Video transcript: Act Now - Insolvency. Much more than a last resort

Transcript

Steven Moll: Welcome to today's Act Now webcast. My name's Steve Moll, and I'm a restructuring partner focussing on complex and international situations. The underlying market environment has remained incredibly turbulent over recent years, as businesses have grappled with the challenges of a global pandemic, supply chain collapses, the war in Ukraine and soaring inflation and interest rates. In this context, over the course of the next hour, we'll seek to shed a light on levels of insolvency, but also how broader insolvency skills and experience are being applied internationally to preserve value for a range of rapidly evolving court led processes. We'll give particular focus to the dynamics introduced by multi territory processes, and the ever evolving question of fairness. There'll be time for questions at the end, if you'd like to submit questions as we go, please feel free to type them into the box that you should see at the side of the screen. So, before we get underway, some quick introductions to those with me today. I've got David Kelly, who leads our UK insolvency practice. I've got Catherine Atkinson, a director in our restructuring team, I've got Nigel, a director in our restructuring team, and Koos Beke, who's flown in from the Netherlands and is a restructuring partner there. So, to get things going I'll turn to you David first of all, as the head of insolvency. So, with insolvency levels at all time highs, is it right to say insolvency is more than a last resort, as it clearly is a last resort for many companies?

David Kelly: Steve, you're on my level, you are correct. The current twelve month rolling insolvency average is for 25,000 companies going into an insolvency process, and that's a 10% increase on a year on year basis, so clearly for those companies, insolvency very much is the end of the road. But what is important to do is to actually examine that data and that information a little bit more clearly, and to interrogate things in a little bit more depth, and when you do that, you find that 97% of all insolvencies in the UK are for companies where their annual turnover is less than a million pounds. And that trend has broadly been the same for the last three or four years, so what you are seeing is insolvency is very much focussed at that micro end of the market, and so what you can draw from that data is that for mid and larger sized corporates, what they are able to do is to successfully re-negotiate or restructure their debt facilities. And there is an argument that says the reason for that is that all of the stakeholders are very aware and alive to the consequences of an insolvency if they are unable to restructure the facilities, and that's a path that they don't particularly want to go down at this point in time. Now clearly if you hit examples like FTX, Signa, not all large companies are immune from an insolvency process, and we have also seen that here in the UK with some of the retail situations, where I think the underlying issues with the business model are what has brought about the failure So it's not as though large companies are immune, but certainly most of the focus at the moment has been at that smaller end of the market.

Steven: Got it, so that's something about insolvency levels. I suppose insolvency's always developing, there's always new things. I'm hearing an awful lot about water regime, lots of people are talking about that and changes to the special administration regime there. Catherine, I know you've spent a lot of time thinking about what can we take from that?

Catherine Atkinson: Well, I think as many people will be aware, and similar to a number of other strategically critical sectors in the UK, the water industry's had its own bespoke insolvency regime for some time now, albeit one that's never actually been put into practice. There's been changes in the legislation that have been put into place this year that are seeking to bring that bespoke special admin regime more closely aligned with the standard in general insolvency framework that we've had in the UK, particularly around greater flexibility. So an example being the special administrator now being able to rescue the regulated entity itself as the going concern. So, the three key areas that we've seen the updates are, the first in respect of purpose. So really as well as the obligation to continue to deliver those critical water services and those critical services uninterrupted, a new primary purpose has been inserted, and that, as I say, is in respect of the special administrator being able to rescue that regulated entity, as opposed to previously, where it was focussed around those regulated activities being transferred to a new provider. There's also been an introduction, an ability to transfer certain assets from the (mw 05.05) via a hive down, and also, the special administrator now is going to have access to the broader restructuring toolkit that we use every day, such to the amount that they would be able to propose a CBA, a scheme of arrangements or a restructuring plan.

So I think from our perspective, by broadening that purpose, allowing the greater flexibility and giving access to these broader restructuring tools, we would anticipate that would allow greater latitude to identify, maybe implement a restructuring solution, which ultimately should see greater returns to creditors, whilst also being able to continue to deliver those critical services.

Steven: Got it, so more flexibility, more ability to deliver the right outcomes. David, how else are we seeing insolvency tools and techniques being used in broader restructuring processes?

David: So I think what we are seeing is financial creditors are becoming more familiar with insolvency processes both here in the UK and overseas, and what they are also doing is recognising the importance of taking the time to undertake that counterfactual or contingency planning analysis. A, to keep the restructuring discussions alive, but also if the restructuring discussions fail, then having to turn that contingency plan into an insolvency execution plan. And I think as a consequence of all of this, they are becoming more confident in terms of the underlying risks of going through an insolvency process, and are now more willing to use an insolvency to enforce a debt for equity or whatever other restructuring is being contemplated. And indeed, we have seen that more recently, or most recently, I should say, on Southend Airport in terms of the situation there. But what we are also seeing is UK insolvency tools and techniques being exported into other territories, and last week, for example, the Singapore court for the first time sanctioned a pre-pack scheme of arrangement for the Vietnamese construction group Novaland, which again was breaking new ground in Singapore. What we are also starting to see is in situations where you are unable to agree a valuation or you are unable to undertake a valuation in sufficient time, advisors looking and re-examining the merits of that post-pack technique, in order to at least facilitate a transaction. But recognise there is still that ongoing obligation around establishing value.

But clearly, as you alluded to at the start, one of the areas where insolvency experience and insolvency views and perspective are becoming increasingly important is in restructuring plans and the European liability management tools, where it is an integral part of the assessment of what the relevant alternative might be. And I know that that's an area that you're very interested in and very keen on.

Steven: \Well, exactly, and it's just that constant discussion isn't it, as a team, we're constantly talking to you and Catherine and others about insolvency stuff. That is definitely an area where that critical lens is being applied in terms of us evaluating particularly restructuring plans. I think if I look back, we've had schemes for a number of years. It was a pretty standard practice to be developing a scheme alongside a consensual solution, recognising certainly in some of the bigger, more complex situations, you needed a plan to cram down a minority or a holdout number of creditors to deliver the best solution for the majority. I suppose now we're in a world, and we'll come onto the restructuring plan and equivalents across Europe, which is essentially a turbo charged scheme which gives you the ability to cram down a greater group of creditors. And the case law around that is continuing to evolve to protect fairness, to make sure the counterfactual is properly explored, and we'll talk about that a lot more, but I think before we do that, we thought it would be really helpful just to come back a step and go back to schemes, and think about the schemes. Particularly the fact that they're been around for a long time, the case law has developed significantly there, but also, importantly there's lots of practical examples where schemes have delivered great solutions. So perhaps just Nigel, turning back to you, or turning to you for the first time actually, given the history and volume of case law that exists around schemes of arrangement, what do you think are some of the learnings that we might be able to take from that into restructuring plans?

Nigel Rackham: You're right Steve, schemes have been around a long time, a bit like I've been around a long time as well, and so there's a lot of (TC 00:10:00) learning and very historic case law there, it goes back to the 19th century, but also, there's been quite a lot of evolution and fresh thinking and innovation recently. And yes, I'd be interested to see how some of those learnings will make their way into the restructuring plan world. Just two or three little examples or situations I suppose where you can think about that. Class constitution, really important from the outset in terms of getting your restructuring sorted out, and addressing the threshold legislative regime, and obviously going to be really important in a world where you can cram down classes, so getting the classes right, a lot of learnings in schemes going back many years. I was involved in the first equitable life scheme, where we had in theory, or not in theory, but we had a multitude of creditor outcomes, but the court was very reluctant to bifurcate the class, and was very keen on keeping one class together. We saw it again in Hawk, where again, it went to a court of appeal in that case, another case I was involved with which gave rise to the practice statement letter on trying to flush out class issues. But I think some of that historic case law around can the creditors consult together in their common interest, and is there more to unite than divide, it'd be interesting to see whether actually, some of these get a bit more tested in the restructuring plan world.

Steven: I was going to ask that, because I suppose the cynic in me sees a world where it always used to be in the scheme you tried to get everybody into the same class, now you're in a world where you try and bifurcate into as many classes as possible, and you might be surprised that there hasn't been more challenge on that. But that's your view is that is an area you can see more challenge?

Nigel: It certainly may well come, and you're right, some of it is around sheer practicality. I think the courts were reluctant to see a situation where a very small minority could hold up a solution for the majority, and I do recall the testing in Hawk was, well what's the common interest? The common interest is, well you're all facing a distress situation, you need to find a solution, and that was the common interest. It was pretty basis in that case, so yes, interesting. Another example which I've been involved in quite recently, in particular with some redress schemes for consumer redress, is dealing with contingent claims, contingent creditors, and the evolution there I suppose from insurance cases. How do you value contingent claims, how do you address the contingent liabilities in the counterfactual, how do you do with voting, how do you do with set off? So, some interesting learnings there coming out of some of those more recent cases we could well see applied in the restructuring plan world. And last but not least, dealing with third party releases, so how can you give effect to maybe a wider group restructuring or bring another party to underwrite (ph 12.43) the involved, maybe our guarantors, and giving them a release as part of a scheme. We've seen the evolution there, again my experience is with some insurance cases. But then the car protection redress scheme was a case in point where a whole load of high street banks, who were actually brought into that restructuring, they were given a release against what could be been some difficult liabilities and claims, and avoided the issue for them, which was default under ISDA clauses and that sort of thing. So, that ability to buy in third party is a really useful tool.

We're seeing that already in restructuring plans with the likes of an SPV scheme co or equivalent, and by the same token, just thinking slightly more broadly, in the link Woodford redress scheme I was involved with most recently, actually it was the other side of the coin. We were trying to find a mechanism to enable creditors to retain their rights to pursue third parties where appropriate, whilst avoiding the ricochet claim which was always the danger that was always guarded against. I think in some of these cases where you would say, well you give release broadly because that will avoid these parties being able to come back and sue the debtor, so being able to preserve rights against third parties and avoid the ricochet claim involved some quite careful drafting in that particular scheme, but it was quite innovative.

Steven: Okay. We're going to come onto fairness, and we've talked a lot about fairness in preparing for this. Fairness is a big topic. I suppose some of the things you've been involved with, Nigel, have addressed that in terms of not so much focussing on the value question, again which we'll come onto, but this variability of potential options and creating structures that can solve for that. I think some of the cases you've been involved in, and Amigo in particular is a good example of that, perhaps you could talk us through how you dealt with that?

Nigel: Yes, sure. So Amigo loans, interesting little case to tell you of a restructuring. We had two goes at it, so there was Amigo one, which was a rather more vanilla looking scheme, it was a pence and the pound solution, again to a group of redress creditors. It was a sub-prime lender, had hundreds of thousands, if not millions of customers who had potential redress claims. That first scheme, actually talking about fairness, and this is where I think you can distinguish schemes from restructuring plans, because in a scheme, fairness was always an implicit test, it was never an explicit test. The view always used to be that the court should really respect the views of the voting majority. If they voted on it, you should respect their views, you'd be very slow to differ from their judgement. And although the Amigo's first scheme, it had 95% consent by the creditors on the vote with not a huge turnout, but none the less, you know, the argument being put against that scheme was around fairness. In reality, where the judge got to was he found that actually, these creditors were not very financially sophisticated, and probably didn't understand the full implications of the scheme and what it meant for them, and what it meant for other stakeholders. The argument was the equity was being left intact in that case, and that was a fairness issue, but actually the judge did reject the scheme, but he rejected it on procedural grounds. He found the explanatory statement was not full and frank in terms of disclosure, and therefore the creditor didn't understand what they were voting on, and therefore it invalidated the vote, so quite a, you know, got to the conclusion which probably you would say he was looking at fairness, but he was looking at it through the historic case law lens.

So yes, that was an interesting, we'll see how that plays out in the restructuring plan context where I think it's much more explicit, the tests that are being developed now. Obviously Amigo then we came back for a second bite of the cherry, tried to have another go at this restructuring. On this occasion recognising though the difficult landscape, the fact that creditors didn't necessarily love this company. The preferred option was to carry on trading, but recognising that they may not have been voted upon. There was a parallel scheme put in place that basically said well if you don't like plan A, here's plan B. Plan B we'll go into wind down, it's still better than the counterfactual which is an uncontrolled insolvency, but you've got two alternatives you can then vote on, and that seemed to work. It got understood despite the fact that it was quite complicated, so yes, just another a bit of innovation, and maybe we'll see it elsewhere.

Steven: Okay. Thanks Nigel. Lots of learnings there in terms of an overriding objective, I suppose, to preserve value and fairness, but breaking to broadness away from the UK, we've got Koos flown in specially. An additional thing we've seen in the larger multi territory situations is that different territories have quite nuanced requirements, I know Koos, you join us having been involved and led our team on a very complicated and high profile, multi jurisdictional situation. Why don't you talk us through your experiences there?

Koos Beke: Yes, and probably good to mention what Nigel said, that schemes have been around for a long time, and he's been around for a long time. In continental Europe, schemes have not been around for such a long time. I've not been around for such a long time as Nigel has, but the generation is catching up quickly, the new generation, so we're learning quickly in continental Europe as well, and we see more and more parallel tracks, cross border restructuring. So, also if you look at the Netherlands, we've had the (inaudible 18.05) case, Diebold Nixdorf, also Steinhoff, and most recently McDermott (ph 18.09), where we advise the quarter point restructuring expert in the Dutch WHOA process. And I think McDermott is a good example where you see the multi-jurisdictional parallel tracks being executed. There was a Dutch WHOA running parallel to a UK restructuring plan, and in the end, they went to the US to get the Chapter Fifteen recognition. And I think if you look at all the different examples that there are there in the market, one thing that's really clear is that you have to be careful with your speaking up, planning one jurisdiction and releasing it in the other and just hope that it finds its way. Because as you already mentioned, there are definitely nuanced differences in the different jurisdictions that you need to be mindful of, especially also on how you position certain things, but also where the key discussion topics will be. Because I think one example to illustrate that, if you look at the UK restructuring plan, a lot of the conversation is about the relevant alternative, so what is the relevant alternative.

On a Dutch WHOA (ph 19.18), the discussion is non-existent because the outset of the, the starting point prescribed by the law is that they compare there is an insolvency scenario, and obviously there are different flavours within an insolvency scenarios, but we're not having the discussion is this an insolvency issue? No, because we are actually already beyond that point. And then also, one of the other examples where you have to be mindful of, is that the way that you the OUS allocates it is very important in the context of the fairness which we will talk about in a minute, and therefore, you see that in the Dutch WHOA context. A lot of effort (TC 00:20:00) and substantiation is put in to underpin the re-organisation value of the business, but also especially the liquidation value, whereas in our UK restructuring plan, it might be a bit easier with some more or less rough estimates in terms of their restructuring plan being better than the relevant alternative that's on the table for the various stakeholders. So I think also that is something to keep in mind before you bring one plan to the other, because you need to make sure that you're prepared for the different discussions, the different games of chess that you'll need to play in the different jurisdictions. There is, I guess, also a common denominator there, right? Because you do see that the insolvency scenario in one way or the other plays a role in many of the jurisdictions. And that's also why I think that having that insolvency knowledge is so important, so that you understand how an IP would act in a certain jurisdiction, and you can take that on board in the comparitor (ph 20.57) that you put on the table or in the scenario that you put forward on the table.

And I think that's also one of the reasons why we're good at it, because we've got that knowledge and we've got those capabilities. But again, the key message I like to reiterate, and that you see in all those multi jurisdiction parallel tracked schemes is be mindful of what you are doing in one jurisdiction, how that might differ from what you're doing in the other, and be sure that it remains a consistent message, because otherwise it will look a bit silly.

David: Yes, and (inaudible 21.28), I mean, Koos made such a valid point, when you have any form of cross border restructuring or insolvency scenario, it's really important to have that deep familiarity with local rules, customs and practices. It is a mistake to think one size fits all in terms of how to approach or to assess a particular insolvency scenario. The duties, the responsibilities, the obligations to court are very different, and so if you think about the role and the approach that a UK administrator would take, it is going to be completely different to counterparts in the Netherlands, in Germany, Luxembourg, France etc. And so it is very important to understand the mindset and the approach if your counterfactual or if your insolvency analysis is to actually have a bearing with real life custom and practice, and as we will touch on later, given the evolution of responsibilities, particularly in the UK around part 35 etc, that is going to be key. But it's also not just looking at it from a restructuring plans perspective, we are seeing more cross border businesses face failure. I've mentioned Signa (ph 23.06), we've spoken about FTX, and it is important to have that understanding. We have so many examples in the UK and Europe where a US parent has gone into Chapter Eleven, and it's important to understand the consequences of that. And also on a couple of occasions I've also mentioned FTX, where again, as liquidators in Bahama (ph 23.33), we were facing off against Chapter Eleven process, and it's really important to understand how the interactions work, because it is very different.

Steven: And I would echo that, I suppose putting my own perspective on that in terms of some of the live situations I'm involved with at the moment outside the UK, there is very much that point. It's almost the comedy comment about the Samuel L Jackson, the little differences that are interesting from Pulp Fiction. But it's absolutely true both on the big picture, because some of these processes are quite untested, so when you're evaluating in a particular territory whether you use a different process or a process outside that, having a local practitioner that can give you the best commercial view at that point in time about the achievability of the solution with that process is really important. But then as you go into the minutiae, what we are doing, it's often quite creative, you're trying to find a bespoke solution to deliver the value in a particular situation. And some of the little building blocks in there, the differences in a territory are really important to getting to that solution, and there's certainly real life examples we're involved in at the moment where perhaps you're drawing on case law from years back in that particular territory, but then dropping it into a current restructuring panel or the equivalent. So yes, jurisdiction's massively important. I suppose we've left it towards the end, but fairness, I suppose I'd say it's a point we've all debated both as we've prepared for this and more generally with clients over the last year or so, but turning to that, obviously the Adler appeal talked about that a lot, and there's been a lot of debate following that. But we thought we'd start with Koos, because it's so enshrined in principle in the Dutch WHOA, perhaps you could start us off by bringing your perspective on fairness in the context of the Dutch WHOA and more broadly?

Koos: Yes, and I have to say it wasn't easy also for the Dutch legislator to get to that point to be honest, so indeed we have fairness more or less embedded in the law and prescribed in the law, but also political choices have been made when that law came into force on what actually fairness is. And one of the things we'll touch on a bit later as well is that in the end, parliament said we need to give more value to unsecured creditors or to smaller creditors in a re-structuring, to make sure that they also benefit, and that they are not the ones who need to take the majority of the pain. So there is also a clear political factor embedded in the fairness that we currently have, and essentially what it comes down to is that we've got two tests for the fairness. One is the no creditor worse off, which essentially means that each creditor should at least get its liquidation value, and I think that's where a lot of people think that it stops, but actually that's where it more or less starts, because why are you doing a re-structuring, you're doing a re-structuring because you want to create a surplus value, right? Because otherwise, it wouldn't be in the interests of parties to have all these discussions. And the second test sees on how is that surplus value then subsequently allocated to the different creditors, and we call it the Dutch absolute priority rule, because it's largely similar to the chapter eleven, but slightly different. And it's in the Netherlands, so we put Dutch in front of it so it's clear that it's different obviously, and that especially comes into play when there is cross class cram down, because that's probably where you really need to test the fairness.

And essentially what it then says is if there's value realised through the re-structuring, then that needs to be allocated along the lines of priority that are normally applicable, so essentially that means if the shareholders have the money, the shareholders should not get value on the re-structuring plan unless all the other creditors are fully paid ahead of that shareholder. One important aspect that they also brought into that discussion is on the bifurcation and we mentioned in terms of the glass competition but it's also important in the value allocation because in the end what they said, or Parliament said, is if you are a secured creditor then, yes, on the reorganisation values, on the value that's being realised for the restructuring, we will also give you priority, but only to the extent that you are secured, so only to your liquidation failure, essentially. So, that means that any uncollateralised part of your claim has to share pro rata burden with the other unsecured creditors. With that, they wanted all the creditors to benefit from doing restructuring, and not only those who have a certain security right. I think that's also why you see that, especially in our jurisdiction, there's a lot of focus on that insolvency scenario. It's sometimes even more important than the restructuring scenario because you can already see the tension between the secured creditors who want to say, 'Hold on, this is my liquidation value. It's, like, up here,' and the unsecured creditors who are saying, 'Oh, it should actually be here.' Because then there's a larger surplus on which they can put a claim on.

I think that also shows that the discussions, and linking back to the point I made earlier, if you see the discussions that you're having in different territories, even with the same scheme, are actually quite different. We've already been able to read it on Netwire (ph 29.06) but a lot of the conversation on McDermott in the UK's court was on what is the relevant alternative? It wasn't only issue in the Dutch process. In the Dutch process, it was much more about the valuation, so how to treat the bank guarantees in a valuation perspective. That's, in the end, where, yes, also the decisions were taken by the court and where the focus was of the different parties because they're-, yes, it could really hurt them through the value allocation that needed to be agreed on. Luckily, here we could solve this by giving essentially shares to the opposing creditor so we, kind of, took it away from the theoretical debate on the value and gave it back to reality, essentially, and, yes, then time will just have to tell how it works, how it will work out. (TC 00:30:00) So, those tests are obviously really important and then we've got the safety nets, you could call it, that you can always deviate if you have to write justifications. So, for example, if the shareholder puts in new money, that could obviously be a justification to deviate from the absolute priority or if there is a family-owned business where the family is absolutely critical in realising the restructuring value, then they say, well, then it's also fine to give some value to that creditor.

So, wrapping up on the fairness side from the Dutch perspective, two main tests, insolvency but, probably even more importantly, the value that's created through restructuring also needs to be allocated fairly according to everyone's rank essentially.

Steven: Thanks, Koos, and I suppose that the interesting thing there, as you (mw 30.54), the subjectivity that's there, the process has been constructed in such a way a fairly spicy valuation debate is, kind of, inevitable, isn't it, I think is what you're saying, which is interesting. I think probably a good time to pick up on one of the questions that's come up and I'll probably turn to Catherine on that one. Please can you explain the relevance of the horizontal and vertical comparators for achieving fairness? Which I think flows a bit from what Koos was saying.

Catherine: Yes, yes, as you say, it's a massive crossover in terms of some of the points Koos has just been making. I mean, in short, you're looking at the creditors return in the relevant alternative, the vertical, and the creditors comparative return in the restructuring, the horizontal. Whilst I guess it's not necessarily enshrined in our legislation, so many of the things that Koos has just been saying really resonates, particularly some of the outcomes that we've heard from the (inaudible 31.44) judgement and I guess how we are thinking about our approach to our payees. But I guess whilst it hasn't been in the legislation necessarily, they are core principles that we use and are familiar with for some time. For example, if we're looking at unfair prejudice in a CVA analysis. Expanding on that a little bit more, so that vertical comparator, so that position of the creditor or that class of creditors in the restructuring plan compared to the (mw 32.14) alternative is really where we see the counter-factual play out and, again, whilst I've been agreeing a lot with what Koos has said, I might slightly disagree with this point a little bit, that we do a lot of rough analysis. Certainly the projects we're working on at the moment, there's a huge amount of time thinking through those assumptions, the building of that APM and what goes into making a really robust counter-factual analysis.

That assessment in itself, particularly, and consistent with what Koos was saying, isn't enough in a scenario where you've got the cross-class clampdown (ph 32.44). At that point, the horizontal comparator then would also come in, so looking at how that class compared to the position of other creditors in the RP. Again, the key reference point there is also actually the relevant alternative, particularly the order of priority in that relevant alternative and the court will need to consider how that restructuring surplus is distributed in the plan, and to the extent there's a materially different way that that's been allocated across the (inaudible 33.16) creditors, for example, it's really going to need to make the court-, needs persuaded around what the justification for that is and it's been made clear that particularly where the RA, that relevant alternative, is a liquidation, the priority and payments to those unsecured creditors really must be complied with, as I say, unless there's a very good reason for not doing so.

Steven: Okay. In terms of just we're getting near the end and we need to make time for questions because we have got quite a few questions coming through, but I suppose just to come back to the underlying theme of this, which is insolvency, David, how are we thinking about fairness in UK restructuring plans and how does that link, I suppose, particularly to insolvency outcomes?

David: Well, I suppose, you know, of course I'm going to say this. Yes, I think, you know, from a UK perspective, most insolvency practitioners are very familiar with the concept of fairness because on one level you could argue that so much of what is contained within the insolvency act is all around fairness and fairness to creditors in terms of how you engage with them, how you communicate with them, how you assess their claims, etc. So, you know, it is something that we are all very used to and understandably are very comfortable with. You know, I think where it becomes more complicated, certainly in a wider restructuring concept is where you have financial creditors potentially looking to use a restructuring to give themselves an advantage. By definition, you know, if someone is going to win, then someone has to lose, and I think one of the things, if we go back to our insolvency experience is creditors are very prepared to litigate if they think the concepts of fairness are being abused or certainly not adhered to. You know, I think if we reflect on some of the Lehman (ph 35.31) litigation, a lot of that was different creditor groups with different concepts of fairness but looking to litigate and get the court's view and opinion on what was fair. I think if we also look at it from a restructuring plan, sort of, perspective you can see already with examples like Virgin Active and examples like Hurricane that stakeholders who are involved in these situations are prepared to litigate or at least to challenge a restructuring plan if they don't believe those concepts of fairness have been adhered to.

The court is giving them, you know, a hearing and so hearing Koos' comments about fairness being enshrined in the legislation in the Netherlands, I think it'll be very interesting, Steve, just to see how that plays out in the UK and whether we leave it to the courts or whether there is some intervention in terms of just an adjustment to the existing legislation.

Steven: Okay. So, before we start working through some of the questions, I suppose just to summarise some of the points we've covered, I suppose, as we've heard from David and Catherine, insolvency stats dominated by smaller businesses with larger businesses succeeding largely and avoiding insolvency and finding consensual solutions. We hear insolvency regimes are continuing to develop to deliver flexibility and, again, preserve value and optionality. We're also seeing insolvency tools and techniques being used more broadly in restructuring solutions so that bridge from insolvency into restructuring. Certainly, as we heard from Nigel, lots of learnings we can take from scheme evolutions as we seek to protect value and preserve fairness in the newer processes we're now all using. In multi-jurisdictional situations, properly understanding the specifics of local regimes is critical for successful outcomes and, I think we'd agree, efficiency of process. No doubt fairness will continue to be scrutinised, specifically valuations, counter-factuals and sharing of recoveries and the restructuring surplus will be core to that, as Koos touched on. So, getting into some questions, I'm going to jump straight to one there, David, because I guess I don't have to decide who it goes to but I think it's reasonably provocative. So, David, do you think lenders are afraid of using insolvency?

David: Well, of course, as, yes, Head of Insolvency, I'm going to say no but I think, look, it is, you know, important to recognise that actually the lender landscape has evolved and changed quite significantly over the course of the last ten years or so with a number of new entrants coming into the market and different ways of corporates accessing capital. If we just, sort of, think about some of the mainstream lenders here in the UK, they are very comfortable using insolvency processes and they're very experienced using insolvency processes. I think a consequence of all of that is that they have got great experience in terms of the consequences of insolvency and the insolvency should always be, you know, a last resort. So, I think I wouldn't want people to misunderstand or misinterpret, you know, where we are in terms of the insolvency statistics as being the lenders are being soft on corporates. I don't think that is the case and I think it'll also be very interesting to see what happens when the transaction market, you know, bounces back a little bit more from where it is at the moment. When that happens, and when there is more appetite in the market, we might, sort of, find that that market appetite gets tested a little bit more by lenders and other financial stakeholders.

Steven: Okay. Next one, I think probably to Catherine, there's also been a lot of discussion around procedural fairness and timing in relation to some RPs. What are your views on this? Not a lot you can say on that aspect.

Catherine: I guess the procedural fairness are really looking at the way in which that process is run, so has the right information been provided to creditors-, sufficient information been provided to creditors? Has it been provided in a timely way? I guess, looking at the overall (TC 00:40:00) timing of the restructuring plan and the timing of when a process, for example, is launched. So, I think, from my perspective, the key elements as well as that information is just all really around timing. Whether you're using the RP maybe as a stick or not, I think there are usually quite-, well, there are usually quite broad implications and incremental cost of launching an RP. We've seen on a recent case it's around balancing-, you know, the company is really focussed on trying to deliver that plan A actually and trying to actually deliver that consensual solution and balancing that with, I guess, not waiting too long and then being potentially called forth-, you know, fall foul of that timing and leaving it and being accused of leaving it too late. I guess in parallel with all of that, you've then got practical elements. I guess that course availability, trailing performance, what the liquidity requirement is doing and director's duty. I know the director's assessment of their own duties all really coming into play, so I think it's quite easy necessarily to point the finger round timing, but actually there's a huge amount that needs to be going into that thought process.

Steven: Yes, there is. There is but I suppose pick up on Koos' point around the liquidation value and the huge impact that can have on value for different stakeholder groups. Do you think we could ever get to a world where people could be pointing the finger at directors, maybe even going as far as saying they've failed in the fiduciary duties because they haven't left enough time to run a market testing process to give us that true market benchmark in terms of value?

Catherine: I mean, so, for example, the one case we looked at, there would be an issue around, you know, listing requirements and actually the implications of doing all of that sort of thing as well. I think if the directors can really be focussed on delivering that consensual solution then, you know, there is that liquidity runway and there's that chance of doing it, I personally think that you can carry it on, you really can try and deliver that consensual solution whilst maybe working up the RP, as opposed to necessarily automatically reverting to market testing.

David: I think there's also the whole, sort of, question about, well, do you also have to build in sufficient time for an appeal if something is going to get challenged? So, again, you know, that creates some challenges for the directors. Sorry, Koos.

Koos: No, no, I just want to add also, if you think about what's the purpose of these restructuring tools? They're merely an implementation tool in the end, so I think that having a focus on a consensual deal as management is probably the right focus, as long as you also keep in mind, 'Well, I can achieve the same deal if I would use an RP or a scheme or a Dutch roll-out,' so I think that's also important from their fiduciary duties perspective to, yes, keep in mind.

Steven: Okay. I suppose it's touching on that a little bit, I think maybe this is one for you, David, or Catherine, but what are the expectations of the company's FA and the counter-factual provider? I think that's probably in the context of any of these things but part of structuring (talking over each other 42.57).

David: Yes, but I suppose in some respects that, sort of, builds on the rather snide comment that Koos made about the approach we have in the UK in terms of, look, I think they've obviously taken account of Koos' views and the days of the have a go hero in terms of a counter-factual assessment and the quantification is over. I think there is now an increasing expectation that where you are doing the, sort of, counter-factual, the relevant alternative assessment, that there will be a very thorough and detailed assessment undertaken and that the party undertaking that assessment should expect that they will be asked to be a part 35 expert with all that that entails, including going to court and being prepared to stand up and explain to the court the basis of the assumptions that you have made and why you believe that that is an appropriate outcome. I think that, sort of, links to the first aspect of the question. I think if we're trying to talk about, sort of, fairness, I think it is very difficult for the company's financial advisor to then opine on the fairness of the counter-factual, the relevant alternative, which is why we are starting to see a trend of moving to someone who is not the company's financial advisor undertaking that work. Just recognising that, you know, as the market is maturing, the expectations of people who are giving their views and opinions are also maturing.

Steven: Does that take us to a, sort of, point on cost though, which is whether it's an elephant in the room but I suppose there's a view that schemes, particularly restructuring plans, are now the premise of the larger situations, I suppose, that that bifurcation means more costs. I mean, is that-,

David: Yes, but there's also though, you know, an argument that if you have the right people with the right experience and the relevant scar tissue undertaking the work, then you should be able to get to the answer quicker and because they have the experience and they are able to articulate why they have reached this solution or the conclusion that they have, that it should be less likely to be subject to challenge. So, I think with all of those factors, you would hope that the process is more efficient and more streamlined than perhaps, you know, what folks have experienced with some of the restructuring plans to date where, as we've heard from Koos, some of those jurisdictional differences have caused some anxiety and also introduced delay.

Steven: Okay. Probably turn to Koos for this one. What are your views on the treatment of equity in restructuring plans or WHOAs, if you choose to go to your home process, and their equivalent valuable tools?

Koos: I think I would distinguish between two types of equity, I would also want to say. I would say that you've got the old and you've got the new and, for the old equity, I think it's difficult to lever (ph 46.20) then if they're out of the market, right, because I do feel for the fairness that you should not get a free ride as a shareholder and you are taking the risk. At same time, I do think that, with new equity, you should be able to buy yourself a seat at the table and to make sure that you can actually contribute to getting to a restructuring plan or even funded if you need to repay certain class of creditors a specific percentage of their claims. I also think that if there is this new equity or this new money ask in these restructurings, that's where it really gets interesting, right, because without any money ask, you always have the theoretical valuation and, of course, that's where-, that you can use but suddenly, if there is new equity that's being required or new money, then an external party needs to put in that money. So, that external party will actually value the business, the restructured business, probably with some of the stress discount in it and that's where you get the interesting debate, 'Okay, which value will we then have to believe?'

Will you have to believe the theoretical reorganisation value or should we go with the equity provider who puts in the new money and essentially says, 'I'm only willing to put this in assuming that that goes down to a level of X,' you know, without actually saying that there's a different variation. That will then make the fairness test even more complicated and I think that's where then the market testing will become more important because if you have not done any market testing in terms for the new equity, for the new money, and there's only the old equity who is saying, 'Well, I'm willing to put in a bit more,' but then everybody (talking over each other 48.06).

Steven: It's a sudden new money thing.

Koos: Yes, I mean, then I think I would expect, or I'd hope, that the courts would really challenge that but at the other end of the spectrum, if you've done a full-fledged market testing, and apparently this is what the market is willing to pay for this business, and then you've got your valuation.

Steven: This might be unfair, Nigel, but I'm going to throw this one at you because it's a topical question. In the examples spoken about, was AI used to help navigate an appropriate solution for the company and its creditors? If you want to cheat, obviously some of your examples are quite legacy so perhaps reflecting on where we're using AI at PwC and how you might be able to use it.

Nigel: Well, yes, I mean, you can do that. Actually we did look very closely at using AI in the recent example to help evaluate some votes, very large volume of creditors. I think the conclusion was that the tools were there and the tools would work. The reason why it wasn't used was we just felt we didn't have the confidence to take that into a courtroom and say, 'This has been tested to death and this is reliable,' because, you know, we just weren't quite there yet. I think, you know, maybe we're just a few months too early in the evolution of AI. I think maybe a little bit more development down here. Maybe we can use some of these techniques but, you know, going in and saying, 'Well, yes-, it's a bit like, you know, all the work that someone has put in on producing financial analyses and counter-factuals-, sometimes AI can be used in these sort of areas but I think until we've got a bit more confidence that we can stand behind our own AI and go into court and say, 'Yes, we're absolutely robust on this,' it may be a little bit earlier, but it's definitely going to come. We won't all be redundant just yet.

David: I think you can also see, particularly in, sort of, scheme situations where you're looking to make payments to creditors and where you're then potentially dealing with volumes of (TC 00:50:00) queries, you can use AI to be able to triage a large volume of queries in relatively short order. Hopefully, you know, respond to creditors perhaps more quickly than with existing tools and techniques, so you can certainly see it being an adjunct to what we're doing.

Steven: Maybe, David-, sorry, Catherine.

Catherine: No, no, that's me.

Steven: Maybe an artificial input, there's a question, do any of the speakers think restructuring plans will be used by more SMEs UK in the future, or are they for large companies? I think you, sort of, touched on that but I guess AI must be a bridge into that, mustn't it? The more you can make the process efficient, the more efficiencies you can find with things like AI, the more scope there is, I guess, to deploy them in more medium-sized and smaller companies, but I guess there's always going to be a cut-off, isn't there? I think, Catherine, you might be-,

Catherine: Yes, I mean, I sense there are going to be scenarios and I am sure we will continue to see some in the mid-market but I think notwithstanding AI, given all of the things we've talked around, around the robust analysis needed on the counter-factual, I can only really see some of that, kind of, element isn't-, it can't see that going down yet so I do see, in the main, at the moment it is primarily going to be on the, you know, upper mid-market and larger companies but there are always going to be exceptions to that.

Koos: Perhaps interesting to share from-, because originally when we got our scheme, the idea was this is for the bigger companies, it's not for the smaller companies. So, we're now, I think, three or four years in and what we basically see is that 80% of the Dutch roll-outs, more or less, are SMEs, even businesses with only a couple of hundred thousand euros of turnover. One of the reasons why it works for both small and larger companies is that we see that the court takes a, let's say, tailored approach to some way, that they different levels of quality tests, you could say, or that they ask different things from different kinds of borrowers so that you don't need to have all these big reports, but you can also offer it less, as long as the other stakeholders can still understand what's happening. We're also trying to see which parts can be more standardised or can we indeed use tools to make the process more efficient? So, funnily enough, actually, in the Netherlands, it's, kind of, the other way around, so it's much more used for SMEs than for the bigger companies.

David: Sorry, I don't suppose-, just in case the audience aren't aware, that's clearly Koos' sales pitch.

Koos: Yes, (talking over each other 52.31). Well, if you like, the perspective that also in the UK you should be able to make it work. If we can do it in Netherlands, you can definitely do it in the UK with all the experience that you have.

Nigel: We've used schemes for SMEs in the right circumstances and if you know you're not going to have opposition, we've used them where it's like we're trying to herd cats, we're just trying to get a solution. It's very, very difficult. You know, you push them into a process and there's a time frame and you get a result. I think if you're going to have opposition then clearly, you know-, and as we touched upon, you know, many financial creditors, they're prepared to litigate if it's right and, of course, by going down one of these roads, you're opening the court doors and saying, 'Come in if you've got anything to say here.' So, you know, it's horses for courses, isn't it, really?

Steven: Almost done but there's one more question. David, do you want to answer this? I mean, so the question is, 'As an independent turnaround director, I've noticed an increase in directors prepared to be less than truthful with Companies House returns and creditors' distress intensifies. This is probably not going to get any less. What levers do the panel recommend in these circumstances?'

David: Well, actually, I'm not sure entirely, you know, which circumstances or how the directors are not being truthful but certainly what we are seeing is Companies House themselves are being much more aggressive in terms of filing deadlines, expectations, etc. So, you can see that they themselves are, sort of, taking action but I think we're also seeing the insolvency service under more pressure to disqualify directors where, again, behaviour is not what the market would expect from directors. So, I can see pressure potentially coming from two sources, you know, both Companies House and the insolvency service to try and address some of those concerns that have just been shared.

Steven: Okay, well, thank you all, we're up to time so, to draw things to a close, many thanks for joining us this afternoon and thank you to those of you that have posed questions. Some really good questions coming through there. As you all heard, whilst large-form insolvencies remain rare, insolvency skills and thinking continue to be central to more and more restructuring situations, so it just leaves me to thank the panel, with David, Catherine, Nigel and Koos, and we look forward to connecting with you all soon. Thank you.