Call to update UK insolvency law
London’s status as a leading financial centre could be diminished unless the UK reforms its insolvency regime ahead of the next economic downturn, according to an influential group of restructuring professionals.
The warning comes from the European High Yield Association, which represents institutional lenders and which has set up a working group representing banks, investors and law firms.
The EHYA has written to the government arguing that the UK Insolvency Act (1986) is not up to the task of handling the complex restructurings that are expected to characterise the next downturn.
While the UK remains a favoured venue in Europe for restructurings, the lobby group says legislation has failed to keep up with market developments.
“Ensuring an efficient debt restructuring process is just as important to the continued pre-eminence of London as other aspects of its financial markets,” the Treasury submission says.
“The ability of a legal system to adapt to the needs of investors is critical to London’s status as a global financial centre, with all the benefits for the economies of both London and the UK that this necessarily implies.”
The association says the next cycle of large corporate debt restructurings will be substantially more complex than the previous cycle due to the rapid growth in European leveraged lending. Buy-out debt is no longer held by a handful of banks, but is traded among a mass of institutional investors typically dominated by hedge funds.
That increases the need for a “predictable, supervised restructuring process” handled by a court, the association says.
It is proposing amendments to the Insolvency Act to curb the short-term power of customers and suppliers when a company is in administration, as well as removing the power of veto over a restructuring for shareholders and creditors who no longer have an economic interest.
The association’s concerns chime with comments in a special supplement to Tuesday’s Financial Times by officials at the Financial Services Authority. Thomas Huertas and Sally Dewar, who oversee the monitoring of wholesale firms in London, warn the increasingly fragmented pattern of credit investing could make it hard to organise traditional restructurings.
“The wider dispersion of debt may make traditional workouts unworkable,” they say.
They argue that market-driven restructuring could be an effective alternative, but this would require clarity about how a distressed company’s credit derivatives will be settled.
Source: ft.com
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