Businesses worldwide are feeling the pressure of historic inflation and rising interest rates. UK insolvencies have reached their highest level since 2009, while numbers are also increasing in Australia, Canada and China.
This article examines the latest restructuring and insolvency trends – including zombie companies, landmark court decisions, and new legislation in Canada and the EU.
‘Zombie companies’ could lead to a wave of insolvencies
Concerns are mounting over the surge in ‘zombie companies’ – unprofitable companies that can’t service their debts with earnings but are not yet insolvent. Zombie numbers have been growing since the global financial crisis, a trend which briefly reversed in the late 2010s but has now resumed.
As interest rates and inflation rise, many of these zombies are now buckling under the weight of their debt burdens, which may drive up insolvencies.
Courts rule on legal status of cryptocurrency
In the landmark decision Re Gatecoin, a Hong Kong court ruled that cryptocurrencies are ‘property’ and can be held on trust. The decision provides welcome certainty on the legal status of cryptocurrencies and indicates that the interests of cryptocurrency creditors will be protected during insolvencies. Cryptocurrencies have already been recognised as property in several other common law jurisdictions, including Singapore, New Zealand, and England and Wales.
However, creditors may face difficulties in recovering cryptocurrency debt if legislation makes specific reference to fiat currency. In Algorand Foundation Ltd v Three Arrows Capitals Pte Limited, the Singapore High Court dismissed a winding-up application from a creditor owed cryptocurrency debt. The court held that the creditor did count as a ‘creditor’ with standing to bring an application, but that cryptocurrency did not count as ‘money’ for the purposes of the application.
Third-party releases come under scrutiny in the US
The US Supreme Court will hear a challenge to the Purdue Pharma bankruptcy settlement which would have granted legal immunity to the company’s former owners, the Sackler family. The Sacklers had agreed to pay US$6 billion to be protected from further lawsuits over the company’s opioid painkiller OxyContin.
The decision will determine whether the Bankruptcy Code allows courts to grant third-party releases. Lower courts have scrutinised the use of third-party releases in several other recent cases, including Boy Scouts of America, Gulf Coast Health Care and Ascena Retail Group.
Cross-class cramdown mechanisms grow in popularity
Cross-class cramdowns are taking hold across the EU following implementation of the Directive on Restructuring and Insolvency. Spain has already seen the new mechanism tested in a contentious battle between Celsa creditors and shareholders which resulted in approval for the creditors.
Of the 14 restructuring plans sanctioned by English courts since the introduction of the UK Corporate Insolvency and Governance Act, seven made use of the cross-class cramdown mechanism. Courts have paid particular attention where HM Revenue and Customs (HMRC) is a dissenting class, including in Re Nasmyth Group Limited, Re The Great Annual Savings Company and Re Houst Ltd.
Lawmakers strengthen restructuring and insolvency regimes
Canada’s new Pension Protection Act (PPA) gives ‘super priority’ to pension plan deficits over other creditors, including secured ones, in insolvency proceedings. While previous legislation contained some pension protections, the PPA has significantly bolstered these. Employers with existing pension plans will have four years to adjust to the new rules.
Chinese legislators are planning to revise the Enterprise Bankruptcy Law. While changes have not yet been confirmed, the revisions are expected to cover personal bankruptcy, pre-packs, consolidated bankruptcy and cross-border bankruptcy.
The EU could soon see another round of reforms under a directive proposed by the European Commission. The draft directive aims to harmonise insolvency law across member states and would introduce UK-style pre-pack proceedings, establish grounds for avoidance actions and require directors to file for insolvency if they know the company is insolvent, among other changes.
For more on restructuring, read the recently published 16th edition of Lexology In-Depth: Restructuring (formerly The Restructuring Review) or listen to our audio series with editor Peter K Newman.
For more on insolvency, read the recently published 11th edition of Lexology In-Depth: Insolvency (formerly The Insolvency Review).
