2474 Pinsent Masons Magazine Alastair Lomax May12 (web version

Restructuring BusinessSummer 2012

Too much red tape!Is regulation killing restructuring?

We are delighted to launch the first issue of Restructuring Business at an exciting time for Pinsent Masons and our Restructuringteam.

Our national team – already one of the UK's largest - just became a lot bigger. Steven Cottee, Nick Pike, Tom Withyman, BhalMander and Serena McAllister have all joined our London team. Also, following Pinsent Masons' merger with McGrigors on 1 May 2012, Pamela Muir and Laurence Spencer join the team to lead our offering in Scotland and Northern Ireland. All arehighly experienced Restructuring specialists and clients have already commented that they consider these developments to be a "game-changer" for us.

We are really excited about these developments, which will significantly enhance our ability to support our clients, working onassignments across the UK. Indeed, following our merger, we are the only major law firm in the UK with offices in all three UKlegal jurisdictions.

We are pleased to welcome all of the new members of our team and look forward to introducing them to friends old and new.You will find further details on all of them in our opening New Faces article. Further news (and some revealing material fromBhal and Pamela) appears in our regular Team News and Diary Room features in the concluding sections of this edition.

The theme for our Summer 2012 edition is regulation. There is no doubt that we are facing a prolonged period of regulatorychange – much of it seeking to address the sins of the recent past. Following the government's recent – and welcome –abandonment of pre-pack legislation, the focus has shifted to regulation of the insolvency profession. This is just one example ofhow we are seeing moves to regulate in all areas of the restructuring market. From financial services to health and safety issues,the regulators are here to stay. With this in mind, our opinion pieces comprise a series of articles on the hot topics for

restructuring professionals working in a highly-regulated environment.

For those to whom it is relevant, we have included in our Brief Case feature a summary of keylegal developments from the past few months. Looking forward, against a backdrop of

continued concern as regards the impact of the so-called "refinancing wall", in our Horizon-Watch graphic we have highlighted what is coming down the line for the

remainder of 2012.

We hope you enjoy this first edition and would welcome your feedback on the issuescovered and suggestions for future articles. We also look forward to working withyou over the coming months.

Jamie WhitePartnerHead of Restructuring

T: +44 (0) 207 418 9550M: +44 (0) 7900 823400E: [email protected]

Foreword

I Restructuring Business

Contents

It’s a Wrap!

James Cameron looks at the techniques being used to deliver sales at best valuein situations where a pre-pack is not an option

An Inconvenient Truth

Richard Williams explores the fall-out from October's Court of Appeal ruling onPensions Regulator claims in the Nortel and Lehman administrations.

Aardvarks and Slotting

Michael Lewis and Alastair Lomax explain the finer points of financial servicesregulation and why we all need to know about it.

Horizon Watch

Our projections for legal developments in the restructuring market and beyondfor 2012.

Pinsent Masons' Restructuring Team news and developments.

Horizon Watch

Banking & Restructuring

Commercial and IP

ConstructionCorporate

Employment & Pensions

Apr 2012Abolition of Infrastructure Planning Commission transfer to MPU (Major Infrastructure Planning Unit

09 Jul 2012Changes to regime for Energy Performance Certificates – enactment of Directive due

Apr 2012CRC Energy Efficiency Scheme – first sale of allowances

2012

Insurance

Litigation Property, Planning & Environment

Regulatory

Tax

Jan 2012Future of UK GAAP second consultation

01 Oct 2012New regime on registering charges

31 Jul 2012Prospectus Directive changes: deadline for implementation.

Feb 2012Interim Kay report on UK equity markets and long term planning

Jul 2012Kay review final report in equity markets and long term decision making

End 2012Interest rate hedging potentially more expensive due to central clearing

Oct 2012start of auto enrolment of workers into schemes from 10/12

Jan - Apr 2012Public sector duty to publish info on eliminating discrimination

Dec 2012 - Sep 2016Automatic enrolment in pension scheme starts.

Spring 2012Law Commission Paper due on pre contract disclosure, misrep and warranties in business insurance

Mid 2012Financial Services regulatory architecture reform - Bill likely to be passed

Sep 2012Access to infrastruc-ture on land: comms code paper due

Autumn 2012Market Abuse Reg expected to be passed.

Jan 2012New European data protection proposals due out

2012Changes to regulation of Settlement and clearing processes

Early 2012 - New form of LMA recommended facilities agreement for real estate finance transactions. Expected to encourage greater standardisation of terms for real estate finance loans - Proposals may include reforms to protect the interests of creditors on a pre-pack administration

Autumn 2012Flexible funding - damage based agreements (aka contingency fees)

2012Third party can recover from bankrupt's insurer

31 Jan 2012Proposals include sweeping changes to the procedures for company winding up petitions including electronic applications

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2012

New Faces for Summer 2012

Introducing the new members of our team.

Restructuring Business I

Brief Case

The team examines recent legal developments in the restructuring arena andtheir implications.

Risky Business

Dr Simon Joyston-Bechal dispels the myths about health and safety issues for IPsand explains why the restructuring market needs a wake-up call.

Team Update

Diary Room

Restructuring Business is delighted to start a series of in-depth interviews withmembers of the team.

New Faces forSummer 2012

Before getting into the really seriousbusiness of regulation and legal updates,we thought that you might like to meetthe new members of our team.

1 I Restructuring Business

Introducing our new starters

Pinsent Masons' Restructuring team is going through the largest expansion in its history. With three new partners and two seniorassociates in London and new teams in Scotland and Belfast, we are delighted that we have been joined by some of the finestlawyers in the industry.

Steven Cottee has experience in advisory transactional and contentious aspects of restructuring work and

acts for banks and financial institutions, creditors and officeholders. Recent assignments have included theadministrations of Nevada Bob and gaming chain Agora group and he has developed a niche in advisingstakeholders in distressed professional partnerships, including Halliwells and Hextalls LLP. Steve speaks atrestructuring seminars throughout the UK and has spent two spells on secondment to major banks.

Nick Pike has twenty-five years experience of restructuring and insolvency work, specialising in contentious

work, (including fraud and asset tracing) directors' advisory assignments and regulatory issues. He isrecommended as a leading individual in both Chambers' Guide to the Legal Profession and the Legal 500 and islisted as one of the World's Leading Restructuring Lawyers in the International Financial Law Review.

He brings a wealth of knowledge to the team and is working on the receivership and administration ofenvironmental land investor Sustainable Group, with investigations in the UK, Cambodia, USA, Senegal andPhilippines. He is a frequent speaker and commentator on restructuring and insolvency issues and is on theeditorial board of Finance and Credit Law.

Tom Withyman is another very well known restructuring and insolvency lawyer with 20 years experience.

He acts for banks, officeholders, underperforming companies, directors and creditors. Tom's recent experienceincludes advising banks on recovery strategies in the real estate, retail and education sectors. He also regularlyprovides advice to directors of distressed companies. Tom is currently acting for the interim manager on one ofthe Charity Commission's most high value appointments.

Bhaljinder Mander is a senior associate. He has extensive experience of restructuring transactions and

corporate and personal insolvency, advising not only banks and officeholders but also creditors (secured andunsecured) and directors of distressed companies. Recent assignments include Halliwells LLP, Agora group andHigh and Mighty.

Serena McAllister is a senior associate. She specialises in transactional work for banks and officeholders.

Her career as a solicitor has included two secondments at a major clearing bank and two years as an in-houselawyer at a boutique turnaround investment house.

Pamela Muir is a legal director. Pamela has spent the last 15 years specialising in restructuring matters.

Pamela's primary expertise is in the sale and purchase distressed businesses. She also advises clients on widerasset protection, reorganisation and restructuring matters.

Laurence Spencer is a senior associate. Laurence has been dealing with corporate recovery and

restructuring work in Northern Ireland and England for over 10 years. He is also qualified to practice in theRepublic of Ireland. He regularly acts for insolvency practitioners and for creditors and directors of insolventcompanies. He has particular expertise advising on business disposals. Recent high-profile assignmentsincluding Pizza Hut (Ireland/Northern Ireland), PT McWilliams and Future Residential Developments.

2Restructuring Business I


It's a Wrap! Pre-Packs, Post-Packs and the future ofinsolvency M&A

In a move which has been widely welcomed by the restructuring market, the Government hasnow abandoned plans to introduce legislation aimed at further regulating pre-packagedinsolvency sales. While the Insolvency Service was proposing a regime of prior notice tocreditors, the restructuring market was trying to develop other ways to allow IPs to maximisevalue through the use of conditional sale arrangements. Bearing some similarities to the USChapter 11 Stalking Horse process, in the UK such deals are generally referred to as Post-Packs.

James Cameron looks at the techniques being used to deliver sales at best value in situations where a pre-pack is not an option


The good old days

Back in the day, many IPs could expectto earn their keep executing a steadystream of trading receiverships andadministrations. The plan was simple:get appointed, run the business for aperiod, find a buyer, keep creditors in theloop and sell when ready.

The rise of the pre-pack

Some years ago – nobody is exactly surewhen – trading insolvencies went out offashion. It was a bit like the guest at aparty turning up with four tins of mildonly to find everyone is drinkingJägerbombs. Pre-packs were the new bigthing. If you were not doing them,preferably with a dose of acceleratedM&A on top, you were not "in".

It started with administrativereceiverships and, with the blessing ofthe courts, pre-packs found their wayinto administrations. Businesses whichconventional wisdom suggested werefine to trade in insolvency weresuddenly vulnerable, needed protectionand most of all needed a pre-pack. With a few notable exceptions, classictrading insolvencies became a rarity.Pre-packs are the norm.

Image problems

However, like many who have successthrust upon them, pre-packs have foundit very difficult to adjust to the trappingsof fame and to shake off the perceptionthat they are a bit gauche. Still worse,they have always carried with them awhiff of something slightly unpleasant.Unfairly but understandably, manyaffected by them but not involved innegotiating them (usually the unsecuredcreditors) regard them with profoundsuspicion.

The reality is that the only practicaldifference between a pre-pack and anyother sale undertaken by an IP should bethat, with a pre-pack, the terms arenegotiated pre-appointment andexecuted immediately after it, ratherthan during a period of trading in thehands of the IP after their appointment.However, where trading insolvenciesgave IPs plenty of time for an open andthorough marketing process, pre-packshave often been executed without anyprior marketing, often to existing ownersor management. Indeed, for many inbusiness the word "pre-pack" has cometo mean "a dodgy sale back to directorswho created the mess, leaving creditorsto suffer".

The introduction of SIP16 went someway towards addressing those concernsby requiring that IPs disclose marketingactivity and valuation advice in relationto every pre-pack administration.

The search for an alternative

To their credit, the restructuringcommunity have recognised the pre-pack problem and are increasinglyseeking to resolve it. There wasconsiderable opposition – and rightly so– to the government's proposals tointroduce a three-day notice period tothe pre-pack process (to what end otherthan value destruction?!). However, theresponse to plans to raise the bar forsales to connected parties (for exampleby requiring an exit through compulsoryliquidation with a requirement for a newIP to be appointed) was more moderateand an indication that the restructuringcommunity is open to looking at theissue seriously, particularly if a viablealternative to the pre-pack might befound.

IPs are in an invidious position. Taskedwith finding a party who is prepared tooffer the best price to buy the insolventbusiness or its assets (and therebyoptimise returns to creditors), IPs knowthat in many cases a period of tradingpost-appointment could be destructiveof value. The risk is that, as soon as theyknow that an entity is insolvent,stakeholders (who are not bound to actcollectively) take action to protect theirindividual exposures: customersterminate or re-source; suppliers refuseto supply and seek to recover stock; andhigh value staff leave to find alternativeemployment before it is too late. Many,including R3, have argued that a changein the law (similar to the provisions ofChapter 11 in the US) which locks insuppliers or at least prevents them fromholding insolvent companies and IPs toransom could play a key part in reducingthe number of pre-packs. While thismight help, it would be a significant shiftfrom the current position. Realistically,it would not provide a completesolution.

As matters stand, pre-packs have beenthe best solution available to IPs toachieve sell and restore stability tobusinesses for the optimal price, using aseamless transfer into new ownershipsuch that reassuring words from thebuyer effectively accompany the badnews from the administrators.

IPs have also worked more closely withtheir Corporate Finance colleagues todevelop more sophisticated pre-insolvency marketing procedures,adopting teasers, confidentialityagreements and online data roomsamongst other tools.

But what if the very search for a buyeritself could be destructive of value? Forinstance if the only likely buyers are thevery suppliers or customers who candamage the business with theirdecisions? Is it possible to combine thevalue-protecting "quick solution"characteristics of a pre-pack with thevisible market-testing of the traditionaltrading insolvency? A solution of sortsmay lie in the post-pack.

Trading Administration Sale

Pre-pack Administration Sale

Post-Pack Administration Sale – Conditional Sale

Post-Pack Administration Sale – Complete and Rescind

Post-Pack Administration Sale – Complete and Novate

Post-packs explained

In a post-pack transaction, a buyer isidentified who proposes to pay a pricewhich the IP considers good value. The

sale is structured, negotiated and agreedupon by an "administrator in waiting"and the buyer before the appointmentof the administrator takes place. Onceterms are agreed, the administrator isappointed, the sale contract is executed,money changes hands and the buyertakes control of the business or assets.This follows the tried and tested pre-pack formula.

What happens next is different. The salecontract contains special provisionswhich make the sale conditional upon ahardening period post-signature duringwhich the sale to the buyer (A) fallsaway if a better offer is forthcomingfrom buyer B (or C, D etc) and buyer A isunable to match or better it. Typically,in our experience, the hardening period

comes out at about 28 days. In somedeals, the IP is restrained from activelymarketing the business, although it ishard to see the benefits of this and,more commonly, the arrangement ispredicated on the IP's ability properly totest the market. As such a post-pack isnot a way around SIP 16; rather it is away to demonstrate that the saleprocess was robust and obtained thebest value possible.

The mechanism for effecting the post-pack will vary from a split exchange andcompletion (with the buyer allowed inunder licence) to rights to rescind ornovate. The differences between thedifferent models are perhaps bestexplained by reference to the chartbelow.


Appoint Market Test Negotiate Complete sale

Market Test Negotiate Appoint Complete saleand pay

Negotiate AppointExchange andLicence

Market Test Complete saleand pay

Negotiate AppointComplete saleand pay

Market Test Rescind orRelease

Negotiate AppointComplete saleand pay

Market Test Novate orRelease


n

James Cameron is a Senior Associate in our Restructuring team and has led a number of assignments involving theinnovative use of post-pack procedures.

James CameronSenior Associate


Underlying these basic structures aredetailed provisions in the sale contractproviding among other things for:

• What the buyer can do with thebusiness or assets during thehardening period.

• What the administrators can do vis-à-vis marketing in the hardeningperiod.

• What the IP can or must do in theevent of an approach.

• The rival bidder's rights to undertakedue diligence.

• The buyer's rights to match or bettera rival bid.

• The mechanics for unpicking the saleto the buyer (release/repayment ofthe price and transfer of control ofthe business and assets).

• Apportionment of theadministrators' costs and the tradingreceipts and losses in the meantime.

Post-Packs – the risks

Post-packs carry with them potentiallysignificant risks. Every deal will bedifferent and the terms and mechanicsused will often require very carefulconsideration so as to ensure that alleventualities are covered.

The biggest risk to the IP in deployingthis process is the loss of control overthe underlying business and assets,particularly if the contractual

arrangements include loopholes or areotherwise inadequate to recover controlwhen required – a real risk despite thebest efforts of the parties to anticipateall outcomes. This is particularly anissue in the case of a split exchange andcompletion where less than the full pricemay have been paid by way of deposit atcompletion.

In all cases there is a practical concernabout what happens if the original buyerrefuses to relinquish control. Once insitu, the capacity is great for theincumbent buyer to delay and damagevalue or take steps which act as adisincentive to rival bidders.

Consideration needs to be given to howto prevent this and to mitigate the risk(perhaps through collateral orguarantees) if problems arise. Indeed, ithas been argued that these risks are soserious that they could have the effectof discouraging alternative biddersaltogether. Most turnaround investorswould think twice about bidding for abusiness which has just been put intothe hands or a rival investor.

For these reasons, as the law currentlystands (i.e. without a statutoryframework to support a post-packmethodology), the post-pack approachperhaps is best suited to share sales andsales to connected parties, in both casesbecause there is unlikely to besignificant change in the day-to-daymanagement and operation of thebusiness during the hardening period.

Legislative reform

stalk·ing-horse (stô k ng-hôrs ) n.

1. Something used to cover one's truepurpose; a decoy.

2. A sham candidate put forward toconceal the candidacy of another orto divide the opposition.

3.a. A horse trained to conceal the hunter

while stalking.b. A canvas screen made in the figure of

a horse, used for similar concealment.

Post-packs share a number ofcharacteristics with the Chapter 11"stalking horse" process; which involvesa binding contract with a preferredbidder – the stalking horse – who setsthe base price in a court-sanctionedauction. The procedure offers stabilityto the business and protects valuebecause third parties recognise that abuyer is waiting. They are more likely tobe supportive as a result. An additionalincentive is provided to the stalkinghorse, who is entitled to a break-up fee ifthey are outbid.

Post-packs are far from a panacea but inthe right circumstances could help torestore the faith of creditors ininsolvency M&A. As such they areworthy of further consideration by IPsand investors, as well as by theInsolvency Service who have the meansto look at the possibility of introducinglegislative reforms which might providegreater protection against the downsiderisks to this approach. Although, in lightof the government's recent decision, thepressure appears to be off. For now.

An inconvenienttruth:Defined benefit pension schemes in deficit have long been a matter of concern. The outcome inOctober 2011 of linked appeals by the administrators of the groups of both Nortel and LehmanBrothers were a notable triumph for the UK Pensions Regulator and scheme trustees. However,the adverse consequences of these cases on lenders and insolvency practitioners, created by the"oddities, anomalies and inconveniences" of a "legislative mess" are also likely to generateimportant knock-on effects for corporates and scheme trustees.

Richard Williams and Alastair Lomax explore the fall-out from October's Court of Appeal ruling on PensionsRegulator claims in the Nortel and Lehman administrations.


pensions in the UK have priority ranking


The problem with pensions

Unfortunately, as we live longer and themarkets are in turmoil, the UK's privatesector defined benefit (DB) schemes willremain, stubbornly, in aggregate deficit.£217bn and counting.

Meaningful state regulation of thepensions problem in the private sectoronly began with the Pensions Act 1995,which arrived in the wake of the deathof Robert Maxwell. In the context of therecent Nortel/Lehman cases, mostnotable of the surviving aspects of thatregime is the triggering of a debt whichthe employer of a DB scheme is liable topay in the event of its insolvency. This iscalculated on the basis of theemployer's responsibility to meet thebuy-out cost of the scheme (i.e. the costof securing members' benefits bypurchasing annuities from an insurancecompany). It has come to be known as aSection 75 debt.

Parliament passed the Pensions Act 2004in order to address the deficiencies ofthe 1995 regime. In so doing, itdramatically ramped up protections forDB scheme members. The 2004 Act (asamended in 2008) created the PPF; a"lifeboat" scheme which guarantees aminimum level of pension for membersof DB schemes whose employer hasgone bust; and which is funded,controversially, by a levy on other UK DBscheme employers. The Act also createdthe office of the Pensions Regulator,with a remit actively to policecompliance of employers' obligations tofund their schemes. Recognising the“moral hazard” of giving unscrupulousemployers a way out by dumping theirDB schemes on the PPF, Parliament gavethe Pensions Regulator powers toimpose either:

• Financial support directions (FSD)– a requirement to provide financialsupport to an under-funded DBscheme (which might be anythingfrom cash to a parent companyguarantee) in circumstances wherethe employer is either a “servicecompany” for other companies in itsgroup or if it has insufficient netassets to meet at least 50% of itsobligation to pay a Section 75 debt;or

• Contribution notices (CN) – arequirement to pay immediatelyanything up to the full amount ofthe employer's Section 75 debtobligations where there has been anact or a failure to act: (i) which hasbeen "materially detrimental" to thelikelihood of accrued schemebenefits being received; or (ii) whereone of its main purposes was toreduce the amount of any Section 75debt (or prevent it from becomingdue). A CN can also be issued fornon-compliance with a FSD.

Of critical importance for lenders tocorporate groups is the fact that thesepowers can be exercised not onlyagainst defaulting employers but againstentire corporate groups and others,simply by virtue of their connection orassociation with the employer.

The Lehman and Norteladministrations

Lehman collapsed in September 2008.Its UK arm entered administration.Among those companies was theprincipal employer in the LehmanBrothers Pensions Scheme. Theadministration triggered both a £140mSection 75 debt on the scheme'semployer and an assessment period forthe scheme's entry into the PPF. TheRegulator began to investigate andidentified that the employer was aservice company, providing employeeson secondment for most of the group'sEuropean activities. Eventually, itsDeterminations Panel confirmed inSeptember 2010 that an FSD should beissued against several group companies.Nortel, a Canadian-owned telecomsgiant, went bust in early January 2009.At that time, Nortel's principal operatingcompany in the UK was placed into

administration, along with its UKsubsidiaries and various Europeanentities (on the basis that their centre ofmain interest (COMI) was in England).That company was also the principalemployer in the group's DB scheme forUK employees. The scheme had 42,000members and a buy-out deficit of £2.1 bn. The Regulator began toinvestigate around the time of thegroup's collapse and matters followed asimilar course to the Lehman case,culminating in a determination issued inJune 2010 that an FSD should be issuedagainst various companies, including theEuropean entities in administration.

The priority ranking of “moralhazard” claims

The administrators in both cases werefaced with the question of how an FSD(and any subsequent CN) should betreated in the waterfall of distributionsfrom the administration. They appliedto the High Court for directions on thepoint. The Regulator, the PPF and thescheme trustees were respondents. Inbroad terms, the options put to thecourt were that the FSDs should betreated as follows:

• Administration expenses – aspecial category of super-priorityclaim, ranking ahead of any floatingcharge, preferential debts and (withinthe expenses category) ahead evenof the administrators' remuneration.Such claims only rank behind debtssecured by fixed charges;

• Provable unsecured debts – a lowpriority debt category, rankingbehind any secured claims, save tothe extent of any ring-fencedPrescribed Part fund set aside fromfloating charge realisations; or


• Non-provable claims – a rathernebulous "black hole" category ofclaim, ranking for payment only outof any (very unlikely) surplus afterpayment of provable debts.

The administrators contended that theFSDs were non-provable claims. Therespondents argued that the claims wereadministration expenses, with a fallbackthat they were provable debts.

With evident reluctance, Briggs J, in ajudgment delivered in December 2010,held that, on the facts of these cases,the FSDs were administration expenses.In essence, the issue was a matter oftiming. He noted that the FSDs (andCNs) were statutory liabilities and wereimposed after the administrations hadcommenced. In such a case, he heldthat he was bound to follow theprinciple, laid down by the House ofLords In Re Toshuko Finance UK plc[2002] 1 WLR 671, that such liabilitieswere administration expenses. He wenton to note that, had the FSDs beenissued before the commencement of theadministrations, they would have rankedas provable unsecured debts.

Briggs J went on to criticise what hedescribed as a "legislative mess" createdby the conflicting regimes underpensions and insolvency legislation. Oneparticularly curious consequence of theruling was that, through a mere accidentof timing, Section 75 claims whichwould rank only as provable unsecureddebts in an employer's administration,would effectively have super-priority asan FSD or CN in a connected-partyinsolvency if they arose after theadministration had been commenced.

Unsurprisingly, the administratorsappealed to the Court of Appeal onessentially the same issues. On 14October 2011, the Court of Appealunanimously upheld the decision of theHigh Court (despite the "oddities,anomalies and inconveniences to whichthis gives rise") and, in large part, thejudge's reasons, although without thesame degree of reservation.

The Court of Appeal has now granted tothe administrators permission to appealthe matter to the Supreme Court. In sodoing, it recognised the implications ofthis case and the fact that the Supreme

Court would not be bound by theToshuko principle in the same manner asthe junior courts.

Implications for lenders andinsolvency practitioners

While welcoming the "clarity" of theresult, the UK Pensions Regulator hasbeen at pains to play down theconsequences. Despite the Regulator'sgood intentions, pending a reversal onappeal, the outcome is of seriousconcern to lenders and advisers whendealing with cases involving a DBscheme in deficit, for the followingreasons:

• Lenders with inadequate fixedcharge security risk a shortfall inrecoveries on insolvency – Section75 debts, and therefore Regulatorclaims, are potentially large enoughto wipe out any value in the floatingcharge.

• In practice many (if not most)FSDs and CNs are likely to beissued after the commencement ofan insolvency process – TheRegulator has the duty and power touse these powers but has limitedresources to do so. In practice,insolvency is the most likely triggerfor an investigation by the Regulatorand the process is time-consuming.

• Protections for lenders in facilitydocumentation offer littleassistance and might in factcrystallise the problem – Theability for lenders to intervenequickly is often vital. The difficulty isthat, the very act of enforcementcould be the catalyst which “flips”the priority of putative Regulatorclaims from unsecured to super-priority.

• Lenders will need to factorinsolvency practitioners’ concernsinto any insolvency strategy –Before accepting a formalappointment in respect of a groupwhich is at risk of claims from theRegulator, insolvency practitionerswill require comfort that they canmake distributions to creditors anddraw payment from available assetrealisations.

• There might be clarity but there isno certainty – The appeal process islikely to take at least a year withlittle comfort that the SupremeCourt will reach a differentconclusion. Alternatively, Parliamentmight reverse the effect of theserulings through amendments toprimary or secondary legislation butpoliticians will be reluctant to beportrayed as choosing banks aheadof pensioners!

Wider implications

Unless and until the position is reversed,the consequences highlighted above willinevitably drive lender behaviours with aknock-on effect for corporates andtrustees dealing with UK DB schemes indeficit.

• Due diligence – Prevention beingbetter than cure, the outcome of thiscase highlights the importance tolenders of robust due diligence on DBschemes, both before and after acommitment to lend is made.Corporates can expect lenders tolook harder than ever at the risksposed by this issue beforecommitting funds.

• Documentation – It is only humannature that, despite the “triggerproblems” highlighted above, creditcommittees will demand morestringent terms to ensure that earlyintervention (where sensible) ispossible.

• Pricing – Where lenders are unhappywith the risk and the availablesolutions, the outcome in these casesis likely to push up the cost offinance for corporates associatedwith DB schemes in deficit – and inthe worst cases, corporates willstruggle to find finance onacceptable terms.

• Fixed charges – Realisations madeunder valid fixed charge security rankahead of administration expenses.The pressure on lenders to procureeffective fixed charge security fromcorporates over a wider range ofassets will doubtless increase.Trustees and the Regulator may haveconcerns over such activity, to theextent that this impacts on thestrength of the employer covenantand their outcomes in insolvency.

• Asset based lending – Assets ownedby or validly assigned to lenders byway of outright sale are not securityand therefore are not subject todeduction of administration orliquidation expenses. The decision islikely to stimulate a push fromlenders for these forms of funding.

• Assets overseas – Questions remain(particularly in Nortel) over theenforceability of the Regulator'spowers outside of the UK but theoutcome in other cases might bequite different where the COMI isoutside of the UK. One consequenceof these cases might be to promote"forum shopping" amongstcorporates to satisfy lenders that therisks to them are remote.

• Receiverships – Where available,administrative receiverships might bea preferred alternative because ofthe lack of an equivalent expensesregime under that process. Lenderswill, however, need to be careful; anFSD or CN issued pursuant to aliquidation of the same entities(running concurrently with orsubsequent to the receivership)would still give rise to the same issueand could prevent (or even result inclawback of) floating chargedistributions made by the receivers.

• Clearance – It is highly likely thatthis case will reinvigorate the processof engagement between corporates,their lenders, the Regulator andtrustees prior to completion of anyround of financing or a disposal,particularly in the context of arestructuring. Such discussions arelikely to represent an opportunity fortrustees and the Regulator todemand improved terms for thescheme (in effect the provision bythe corporate of the sort of support

which might otherwise be requiredunder an FSD). Given the strategicimportance of timing, it is likely thatthe parties will seek to use this totheir advantage in any engagementpre-insolvency.

• Application to court – As pointedout by the Regulator and the courts,administrators (but, curiously, notliquidators) have the right to applyto court to vary the order of priorityof payment of expenses out of theavailable assets. This will certainlynot convince a wary lender tocommit funds but it is foreseeablethat the court appointment routemight become the mode of choicefor administrators seeking anappointment conditional on thecourt's approval of a variation of thepriorities.

The options available to parties will varysignificantly from one case to the nextand the risk can be driven as much bythe timing of events as any other factor.Regrettably, we are in the hands of theSupreme Court and, potentially,Parliament. In truth, clarity andcertainty are unlikely to be achieved anytime soon.

Richard WilliamsPartner


In the matter of Nortel GmbH (In administration) & Others, sub nom Bloom & Others v The Pensions Regulator &Others and In the matter of Lehman Brothers International (Europe) (In Administration) & Others, sub nom Lomas &

Others v The Pensions Regulator & Others [2011] EWHC 3010 (14 October 2011).

Richard Williams is a Partner and head of our London team. He is also a member of Pinsent Masons joint pensionsrestructuring group , REACT.

n


Aardvarks, Slotting, Financial ServicesRegulation


and why they matter to us

Regulatory change in the financial services sector is already driving activity in the restructuringmarket. Here we look at the impact of slotting – a phenomenon with which the banks havebeen wrestling for some time and which is only now coming to the attention of a broader rangeof restructuring professionals.

Michael Lewis and Alastair Lomax explain the finer points of financial services regulation and why we allneed to know about it.


Regulatory change in the financialservices sector is already drivingactivity in the restructuring

market. Here we look at the impact ofslotting – a phenomenon with which thebanks have been wrestling for sometime and which is only now coming tothe attention of a broader range ofrestructuring professionals.

Have you ever sat in a meeting whensomething – let's call it the "AardvarkPrinciple" – was raised and you sat therenodding sagely and praying that nobodysuggested you give a view on it? On anintellectual level we realise that theAardvark Principle is very important andwe really should swot up on it. On anemotional level we would far rather talkabout the weather or the football. TheAardvark Principle remains a mystery toall but the most ardent aardvarkspecialist.

Slotting, it seems, has knocked tax andpensions off their perch as the newAardvark. So what is slotting and whydoes it matter to us in the restructuringmarket? To answer that, we need tohold our breath and get to grips with thethorny aardvark of financial servicesregulation.

Financial Services Regulationfor dummies

Banks work on the basis of trust andconfidence – As we all know, banksaccept deposits and make loans andderive a profit from the difference in theinterest rates charged and paidrespectively. Now for the tricky part;banks effectively create money (which isperhaps different from creating wealth!)in the economy by making loans. Forexample, of £100 deposited with a bank,although it is credited to the customer'saccount (and therefore “owed” by thebank to the customer), the bank mighttypically loan £90 to its other customerswho might deposit it with another bankuntil it is required and in turn that bankmight loan £80 to its customers and soon. In so doing, banks help to facilitatethe flow of money through the businessand wider community more rapidly andin greater amounts than actually exists.

Of course, trust is an essential ingredientof this process; depositors and investorsmust trust banks that they will lend

their money responsibly and willtherefore be able to repay it when thedepositors and investors want it back.

What happens when the trust goes

As any fan of the movie It's a WonderfulLife will appreciate, the fundamentalflaw in the system is that if everyonewent to the bank at the same time todemand repayment – which mighthappen if trust in the bank hadevaporated – the bank would only beable to repay a fraction of what it owedto its depositors. The results areworryingly familiar to us. Only the statehas the capacity to bail out problems onthat scale and in an age of globalbanking, sovereign debt crises andausterity cuts, even the state is havingto check its back pockets for loosechange. Passing the burden of a failedbank on to the tax payer is not a vote-winner. Arguably, it is this rather thananything more noble that has drivenregulation of the financial servicessector and of banks in particular.

The regulatory framework

Globally, the regulatory framework forbanks and other financial institutions isfounded on the principles of the BaselAccord; a non-binding set of principlesnow adhered to by most developed

economies worldwide, including the UK.

Changes to Basel and related bestpractice guidance – and there have beenmany, particularly after the horse hadbolted in 2008 – are led by aninternational body of bankingsupervisors called the Basel Committeeon Banking Supervision, or BCBS. Withinthe EU, the Basel principles have largelybeen adopted into national law bymember states under the terms of theCapital Requirements Directive or CRD.

Every time that there has been a changeto the Basel principles, there have beenconsequent changes to the CRD. We arenow in the process of adopting Basel IIIunder the guise of CRD IV! No doubtconcerned about the size of the EUacronym mountain, CRD IV is alsoknown as the CRR, short for CapitalRequirements Regulation – withreference to that part of CRD IV whichwill have direct effect in EU memberstates without the need for enablingnational legislation. The majority of therules implementing the CRD (andtherefore Basel) insofar as they relate tobanks and other credit institutions andinvestment firms are set out in the FSA'shandbook, snappily entitled ThePrudential sourcebook for Banks,Building Societies and Investment Firmsor (confusingly) BIPRU for short.

The regulatory principles

The whole point of banking regulation isto avoid or at least mitigate future crisesby ensuring that banks have enoughassets to stay afloat in stormy waters sothat depositors and investors (andultimately the tax payer) are protected.The regulatory framework thereforeprovides for the following:

• Eligible regulatory capital – Rulessetting out what constitutes the


capital (such as cash reserves, equityand so forth) that banks can takeinto account when assessing thestrength of their balance sheet(based on its loss-absorbingcharacteristics).

• Risk weighted assets (or RWAs) –The total assets held by a bank(principally rights to payment underloans and other financialinstruments), where their value hasbeen adjusted according toprescribed rules to reflect the risks tothose assets.

• Minimum capital ratio – Rulessetting the minimum level of capitalthat banks must hold as a proportionof their assets whose value has beenadjusted to reflect risk. The currentminimum level of capital is 8% ofthe bank's RWA.

In other words the formula is:

Minimum capital ratio = Eligible CapitalRWA

Under the existing regulatoryframework, banks are required to holdcapital equivalent to 8% of RWAs. Touse an example, Aardvark Bank has £100of capital and other reserves which areeligible to be included as regulatorycapital and £1000 of value in its loanbook, having taken into account thevarious risks to those loans. Aardvark'scapital ratio is 10% (100 ÷ 1000) and,having (very simplistically and assumingoperational and market risk thresholdsare met or ignored) followed the currentrules, it is adequately resourced.

Taking this into account, the regulatoryframework is based on three principles,called the Three Pillars:

• Pillar 1 – Banks must calculate theireligible regulatory capital andminimum capital requirements byreference to credit risk, operationalrisk and market risk (see below).

• Pillar 2 – Supervisors (currently theFSA in the UK – although that ischanging) must assess how wellbanks are assessing their capitalrequirements relative to the risks towhich they are exposed (i.e. their

capital ratio) and must intervenewhere necessary.

• Pillar 3 – Banks must disclose keyinformation to market participantswho deal with them in order toachieve market discipline.

The risks to which the banks areexposed – Understanding risk is vital tounderstanding slotting and itsimplications for the restructuringmarket. For the purposes of assessingthe value of RWAs the following risks arethe most important:

• Credit risk – the risk to banks thatcounterparties to the transactions ithas entered into will default (mostobviously its borrowers under loanagreements).

• Market risk – the risk to banks oflosses arising due to pricefluctuations of financial instruments(such as exchange rate swaps) intheir trading books.

• Operational risk – the risk of lossesresulting from inadequate or failedinternal controls or from externalevents.

Of these, it is to credit risk that we haveto look to understand the significance ofslotting.

Measuring credit risk

Now for the really technical bit. Staywith us and you will really know youraardvarks. Banks can choose to calculatethe credit risk to their assets using oneof two methods:

• The standardised approach – As thename suggests this method follows astandard approach to categorisingassets (such as exposures tocorporates, sovereign states orbanks) and applying risk weights(discounts to value, basically) which

in the UK are set by the FSA, broadlyon the basis of credit ratingsprovided by External CreditAssessment Institutions.

• The internal ratings based (or IRB)approach – This method permitsbanks to make their own assessmentof credit risk exposures on the basisof their internal models and methodsfor assessing and managing risk.Banks must satisfy their nationalsupervisor that their application ofthe IRB approach meets minimumrequirements and that their creditrisk management practices areconsistent with guidelines from theBCBS or the supervisor.

The Basel II text states that "subject tocertain minimum conditions anddisclosure requirements, banks that havereceived supervisory approval to use theIRB approach may rely on their owninternal estimates of risk components indetermining the capital requirement fora given exposure".

It further states that: "The IRBcalculation of risk-weighted assets forexposures to sovereigns, banks, orcorporate entities uses the same basicapproach [as the standardisedapproach]. It relies on four quantitativeinputs: (1) Probability of default (PD),which measures the likelihood that theborrower will default over a given timehorizon; (2) Loss given default (LGD),which measures the proportion of theexposure that will be lost if a defaultoccurs; (3) Exposure at default (EAD),which for loan commitments measuresthe amount of the facility that is likelyto be drawn if a default occurs; and (4)Maturity (M), which measures theremaining economic maturity of theexposure."

A foundation IRB approach is availableto banks who pass the basic measuresrequired to use IRB and allow banks touse their own risk assessment models tocalculate PD, leaving the supervisor todetermine LGD and EAD. Banks whosatisfy supervisors that they operateparticularly strong internal measurescan input their own data for all of thesefactors to derive risk weights for assetswith minimal supervisor involvementunder the advanced IRB approach. Thelarger UK banks generally have


sophisticated internal systems whichallow them to follow the advancedapproach.

Under both the standardised and IRBapproaches, in order to calculate theirminimum capital requirements, banksare required to categorise their assetsinto pre-determined assets classes withdifferent risk profiles and to whichdefined risk weights must be attached.We will confine ourselves to the IRBasset classes (which tend to followaccepted market practice) and, moreparticularly the asset class comprisingexposures to Corporate counterparties.Corporate exposures are divided into fivesub-classes of "specialised lending".

Specialised lending is termed in BIPRU aslending where:

• The exposure is typically to an entity(often a special purpose entity (SPE))which was created specifically to

finance and/or operate physicalassets;

• The terms of the obligation give thelender a substantial degree of controlover the asset(s) and the incomethat it generates; and

• As a result of the preceding factors,the primary source of repayment ofthe obligation is the incomegenerated by the asset(s), rather thanthe independent capacity of abroader commercial enterprise.

The four sub-classes of specialisedlending identified in BIPRU are:

• Project finance – these are largeprojects where repayment will bederived from completion of theproject and operation of theunderlying asset (such as funding forpower plants, transportinfrastructure and mine).

• Object finance – funding thepurchase of physical assets (such asships and aircraft).

• Commodities finance – structuredshort-term lending to financereserves, inventories and receivablesof exchange traded commodities(metals, crops, oil and the like).

• Income-producing real-estate(IPRE) – funding for income-producing real estate (such asoffices, industrial or retail space)where repayment of the fundingcomes from the income derived fromthe underlying asset (typically, rentunder a lease);

Basel II identified a 5th category of(effectively speculative) "Highvolatility commercial real estate"(HVCRE) lending. The FSA determinedthat it was not necessary to include thisin BIPRU as it was not relevant to the UK market.

Slotting and the art ofbalance sheet maintenance

Banks are required by regulation toplay the slots – Banks that do notmeet the requirements for theestimation of PD under the IRBfoundation approach for their corporatespecialised lending assets must maptheir internal risk grades to fivesupervisory risk categories. Thesecategories are associated with a specificrisk weight (i.e. discount to value) whichincreases with the level of riskassociated with the asset, broadly in linewith external credit rating agencyassessments, as follows (with someflexibility for particularly strong assets):

BIPRU requires that banks “slot” assetsin these categories on the basis of fivecriteria comprising: financial strength,

political and legal environment,transaction characteristics, strength ofsponsor and security package. Fulldetails of what these criteria mean foreach of the specialised lending assetcategories are set out in an annex to theBasel text. These are the slottingcriteria and the process of assessingthem is called the “supervisory slottingcriteria approach”.

As noted above, banks that meet therequirements for PD can use thefoundation IRB approach for thecorporate asset class to derive riskweights for specialised lending assets.Similarly, banks that meet the

requirements for PD, LGD and EAD canuse the advanced IRB approach. UnderBIPRU, banks seeking to apply riskweights that are more favourable thatthose in the table above mustdemonstrate to the FSA that theirinternal standards exceed the slottingcriteria.

In December 2010 the FSA publishedguidance on the PD models used bybanks using the IRB approach for IPREportfolios. The guidance casts doubt onthe suitability of the models used bythose banks because, according to theFSA, there was an "observed disconnect"between the banking industry and the

SL Asset Class Strong Good Satisfactory Weak Default

≥2.5yrs to maturity 70% 90% 115% 250% 0%

<2.5yrs to maturity 50% 70% 115% 250% 0%


FSA as to what constitutes a compliantrating system for IPRE. This is anobvious flaw in the IRB approach for allspecialised lending classes, not just IPRE;banks looking to reduce the level ofcapital “tied up” by the regulations, mayhave an interest in slotting assets moreoptimistically than the FSA thinksshould be the case. The guidance actedas an alert to banks that in cases ofunremedied material non-compliancewith the regulations the FSA would actto require a compliant approach – mostlikely using the supervisory slottingapproach.

Why does slotting matter tothe restructuring market?

Most recently, the UK has pushed toimplement measures which go aboveand beyond those required in the EUunder existing law. The process ofimplementing Basel III (and CRD IV)begins on 1 January 2013 and willfurther ramp up the level of pressure onbanks.

In a climate of toughening regulation itis becoming increasingly difficult (or atleast more expensive) for banks toleverage off the assets in their portfolioswhere those assets are "risky" – at leastby the measures imposed by regulation.In the language of Basel, the CRD andBIPRU, the minimum levels of capitalthat banks are required to hold are goingup because: the definition of whatconstitutes eligible capital is narrowing;and the amounts that banks are requiredto hold against their exposures isratcheting up. This may or may not be agood thing, depending on your view ofwhether banks need the means to fundour economy out of the crisis or

whether lax banking regulation was asignificant cause of the state in whichwe now find ourselves.

Either way, from the perspective of therestructuring community all of this ishighly relevant because these pressuresare forcing banks to consider whetherthe possible returns on their riskierassets are truly worth their while tyingup significant amounts of capital in themeantime – capital which might bemore productively employed in otherareas. This factor as much as anythingcoming down the line in the wake of theVickers report may force a divergence ofthe so-called retail and casino banks.

Many lenders have found it attractive inan illiquid market and with depressedasset values to leave the sleeping dogsin their portfolios well alone. Quiteapart from the implications ofregulation on how banks structure theirbusinesses, increased regulation makes a“do nothing” approach to particularproblem exposures less and lessattractive to lenders even if it isavailable as an option. Heightenedregulation (particularly the impact ofhaving to slot assets into higher risk-weight categories), is likely to pushsome lenders (banks and asset funders)towards an exit strategy on their higherrisk assets through:

• Debt sales – disposing of theseassets outright (at portfolio or anindividual customer level) – providedthat buyers are not themselves putoff by the cost to their own balancesheets of hold such assets;

• Debt restructuring – debtforgiveness, whether throughcapitalisation or waiver which allows

(not without pain) lending to returnto acceptable levels against assetvalue and, potentially, may facilitatea refinance;

• Realisation on enforcement – incertain cases in the real estate sectorit has made sense to do this on aportfolio basis but the lack ofoptions and the hold cost to lenderswith such assets makes formalinsolvency more likely;

• Gradual withdrawal – allowing arun-off of the portfolio (no doubtmaking use of the above strategieswhere appropriate).

Continued weaknesses in the UKeconomy generally suggest that assetsin all categories of specialised lendingare potentially exposed to such activity.The real estate sector in particularappears vulnerable, in large part becauseof the additional levels of risk weightingto which such assets are potentiallysubject.

These factors undoubtedly presentchallenges for corporates andturnaround executives operating inthese sectors and businesses – not tosay real headaches for the incumbentlenders. Nonetheless they are likely toprovide interesting opportunities forinvestors, secondary lenders and cash-rich corporates and their advisers.

Coinciding with the so-called“refinancing wall”, the effects of slottingin a highly regulated environment, whileundoubtedly painful for incumbentlenders in the short-term, may beattractive to buyers, new investors andsecondary lenders and might be just thestimulus that a moribund market needs.

Michael Lewis is a Partner in our Financial Services team and Alastair Lomax is a Legal Director in ourRestructuring team.

Michael LewisPartner

T: +44 (0) 207 490 6549M: +44 (0) 7585 996254 E: [email protected]

Alastair LomaxLegal Director


n

Risky Business – Health & Safety for InsolvencyPractitioners

There are Health & Safety risks associated with any insolvency appointment. In many caseschronic lack of investment in the period prior to appointment can dramatically exacerbate theH&S risks that the IP will inherit. IPs understand the potential exposure to personal injurycompensation claims and protect themselves accordingly. What is far less well understood bythe restructuring market is the risk that the IP might face criminal prosecution in a personalcapacity for breach of a H&S duty. Fortunately, there are steps that can be taken to reduce thelikelihood of prosecution.

Dr Simon Joyston-Bechal dispels the myths about health and safety issues for IPs and explains why therestructuring market needs a wake-up call.



Why do IPs need to beconcerned about criminalH&S liabilities?

Our specialist insolvency regulatory teamhas handled a variety of cases in whichappointed insolvency practitioners (IPs) andagents have faced criminal investigationand potential prosecution, whether actingas administrators or LPA receivers. In eachcase, they have been in control of abusiness or a portfolio of properties at atime when alleged H&S failings occurred.

Exploding the myths

Our experience is that awareness ofthese issues is low among firms and IPsat both a risk and compliance level. Thefollowing are some of the morecommon misconceptions that we haveencountered in the restructuring market:

Administrators have a statutory agencywhich protects them against personalliability for H&S claims. Any liability willfall on the company or the formerdirectors – Wrong. Administrators takeover from the directors and are subjectto the same responsibilities under H&Slegislation regardless of the statutoryagency. They can and will be held liablefor breaches committed while in office.In many ways IPs are a more attractivetarget for the authorities than the formermanagement or an insolvent company.

IPs have special dispensation under H&Slaws because they simply inherit theproblems caused by the directors and haveinadequate financial resource oropportunity to comply with H&S law –Wrong. There is no special exception forIPs. They have a duty to ensure safety andthe prosecutor's view is that if an activity(or the occupation of premises) can't bedone safely, then it shouldn't be done at all.

This is all covered by insurance anyway– Wrong. Insurance covers against civilcompensation claims by individuals fordeath or injury. It is not possible toinsure against the criminal penaltieswhich can result from a breach of H&Slaw; nor will insurance ameliorate thedamage to reputation or the potentialfor disqualification from acting as an IP.

The buyer, not the IPs, will be liablewhere second-hand work equipment issold “as seen” in the normal way –Wrong. The usual exclusions mightprevent contractual claims on the part ofthe buyer but selling second-hand workequipment "as seen" in the normal waydoes not prevent criminal claims againstthe IP if such equipment was unsafe. Inpractice most assets (other thanproperty and stock) sold by IPs could fallinto this category. It is possible to passresponsibility to the buyer but only ifvery specific steps are taken.

There can't be H&S exposure with Pre-packs – Wrong. Certainly a tradingadministration is more likely to presentnew risks which will not be present witha pre-pack. However, whether the saleis a pre-pack or undertaken after aperiod of trading, the IP can beresponsible alongside the insolventcompany for compliance with H&S lawin connection with the sale. In one ofour cases, the prosecutors wanted tohold the IP responsible for selling unsafeplant in a pre-pack.

There has to be an accident and injury fora H&S prosecution to be brought –Wrong. A key focus of H&S law isprevention, so it is an offence ifeverything reasonably practicable isn'tdone to prevent exposure to risk foremployees, visitors and members of thepublic affected by the activity. Manyprosecutions are brought as a result ofinstances of non-compliance foundfollowing an inspection by the relevantauthority. Fire safety in large real estateportfolios is a typical example of this andsomething to which IPs and agents actingas LPA receivers are particularly exposedeven when there hasn't been a fire.

Administrators are off the hook whenthey secure their discharge at the end ofa job – Wrong. The statutory dischargespecifically excludes misfeasance, so it isunlikely to guard against a criminalconviction.

We know the demands that IPs face,including the very fluid nature of eventsand information flows post-appointment.

IPs can be appointed to businesses withthe full range of H&S risks, includingexposure to liability to claims relating todeath and serious injury. Our specialistinsolvency regulatory team hasextensive experience of advising anddefending IPs in respect of both. Theconcerns for IPs, their firms and thosearound them in such situations can bevery great. Quite apart from thepersonal stresses and reputationalimpact borne by the IP, the penalties andother consequences of a successfulprosecution can include fines,imprisonment and the suspension ordisqualification of the IP from practice.

The solutions

Our experience is that merely seeking todeflect responsibility on to others (such asdirectors) is not likely to be a successfulstrategy given the officeholder's statutoryor contractual functions and, moregenerally, the way IPs have to operate inthe market. Instead, we have beenspeaking to IPs and providing training andrelated support to them and their teams.This gives IPs a greater understanding ofthe risks, how to mitigate them throughemploying best practice (documentation,policies and procedures) and understandinghow to respond to an incident (includingan approach from the regulatoryauthorities) if the worst happens. Ourteam is also familiar with the most recentrestructuring market developments,including broker risk and compliance auditsand pre-appointment H&S reviews.

Conclusion

The direction of travel is towards stricterregulation of IPs in this area, including agreater focus on enforcement. It mayonly be a matter of time before theauthorities claim a high profile scalp inour market. It is never going to bepossible for IPs to eliminate all risks whentaking on an appointment to run or sell afinancially stressed business. The goodnews is that IPs can take steps which willdramatically reduce their exposure andallow them and their staff to focus on thejob they were appointed to do.n

Dr Simon Joyston-Bechal is Head of Pinsent Masons'national Health & Safety Team and has acted on a

number of assignments for insolvency practitioners in defenceto health and safety claims. He presented on the topic at this

year's R3 Annual Conference in Barcelona in May.

Dr Simon Joyston-BechalPartner


Brief CaseWinter 2011 – Spring 2012

Here various members of the team look at the key legal developments in the restructuringmarket over the past few months, focussing on the implications for restructuring professionals.



The party's over for landlords Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) andothers [2012] EWHC 951 (Ch)Alastair Lomax explains how a controversial decision on the payment of rent in administration which waslauded by landlords has become something of a double-edged sword.

What has happened?

In a case involving the collapsed Luminarleisure group, the High Court ruled on 28March 2012 that rent payable in advanceand falling due for payment prior to theappointment of administrators is simply aprovable unsecured claim and does not rankfor priority payment ahead of other creditorclaims as an administration expense. This isthe case even if the tenant, at the directionof the administrators, continues to use oroccupy the leased premises during therelevant rent period in reliance on theadministration moratorium andnotwithstanding the landlord's desire toforfeit the lease.

Who does this affect?

The ruling is significant for tenantbusinesses which are facing formalinsolvency and their landlords. The impactis likely to be most noticeable in multi-sitebusinesses operating in the retail andleisure sectors as well as other property-based businesses in difficulty, such as carehome operators. It will also directly affectbanks and other creditors with aneconomic interest in the outcome of thetenant's insolvency. Insolvencypractitioners (IPs) will also need to focuson this issue at the planning andimplementation phases of relevantassignments.

How does the ruling affectthem?

The decision clarifies rather than changesthe law but it highlights the flip-sidecorollary of the “victory” achieved bylandlords in the notorious Goldacre case(see below). It confirms that, in applyingthe Goldacre approach, the timing ofappointment of administrators (whether byaccident or design) can have a strategicallysignificant impact on the outcomes forlandlords and other creditors. In practicalterms, it means that a struggling tenantbusiness (and a lender to it with qualifyingsecurity) can effectively secure the benefit

of a rent-free period if the appointment ofadministrators occurs after the due date foran advance rent payment – potentiallymaking administration more attractive.

Landlords caught unawares couldeffectively lose the benefit of unpaid pre-appointment rent except to the extent thatany distributions are available to ordinaryunsecured creditors. In such circumstanceslandlords can still apply to court to forfeitthe lease and recover possession of thepremises, provided that the court issatisfied that their interest in the propertyshould take precedence – the judge inLuminar confirmed that he would havegranted permission to forfeit and awardedthe landlords their costs had theadministrators not given permission theday before the hearing.

Next steps?

It is possible that the effect of this rulingmay be reversed on appeal but in themeantime, it highlights the importance tolandlords of proactive management of theirexposures to tenant default. All partiesshould pay particular attention to theterms on which any move is agreed fromquarterly to monthly advance rentpayments, anticipating the possibility of anadministrator being appointed shortly aftera payment date (for example by requiringpayment of a deposit).

While the outcome in this case may assisttenants, banks and IPs planning anappointment, in reality it highlights thedownside risks for all parties of theGoldacre decision. Insolvency practitionerswill need to continue to ensure thatpurchasers in occupation under licenceprovide adequate cash and contractualcommitments to coverthe cost of thetenant's rent andother obligationsfalling due under thelease during thelifetime of thelicence. It would alsobe prudent for IPs to

include provision for all periods of usenotwithstanding the outcome in Luminarto provide against the possibility that thedecision may be overturned. Of course,commercial considerations could meanthat administrators and landlords, seekingto avoid a contested court application,reach agreement resembling a pre-Goldacre "pay as you go" arrangement.

Relevant background

In December 2009, the High Court in thecase of Goldacre (Offices) Limited v NortelNetworks (UK) Ltd held that theadministrators in that case were liable topay to the landlord as an administrationexpense the full amount of rent which felldue under the insolvent tenant's lease aftertheir appointment for the period of theiruse of the premises for the purposes of theadministration. The decision appliedprinciples set down by the House of Lordsin an earlier liquidation case. Goldacre wascontroversial as it was contrary to acceptedpractice deemed necessary to the rescueculture under which administrators paidrent as an administration expense pro ratafor the period of use and to the extent theof premises occupied and used by them.Previous practice was based largely on theprinciples laid down in the landmarkdecision of the Court of Appeal in the ReAtlantic Computer Systems case. Whilewelcomed by landlords, the Goldacredecision has been the subject of excoriatingcriticism from certain quarters and it isquestionable whether it would survive anappeal. Although landlords havesubsequently sought to extent theprinciples laid down in Goldacre, theLuminar case is the first time in which thewider implications of Goldacre have beenconfirmed.n

Alastair LomaxLegal Director



What has happened?

In a series of High Court decisions (thelatest delivered on 23 March 2012),involving cases where directors havepurported to appoint administrators totheir company via the out-of-courtroute, the courts have wrestled with thequestion of:

• whether the directors must alwaysgive notice to the company of theirintention to appoint (i.e. even if thereis no qualifying floating chargeinvolved); and

• if they must give notice in all cases,how this must be given (i.e. becausethe existing official insolvency forms– let alone the legislation –apparently did not anticipate this).

While a robing-room bust-up appearsunlikely, all judges are not of a like mind,with decisions on the same points (twoof which were delivered on the sameday!) in direct conflict with one another,apparently (although not alwaysexplicitly) depending on whether thejudge favours a literal or purposiveapplication of the legislation.

The Bezier case (reviewed elsewhere inthis update) suggests a preferenceamong some judges for a pragmaticsolution to the various issues at stake.The latest decision in the MF Globalinsolvency adopts a similar approach:while acknowledging the uncertaintyover the obligation always to notify thecompany (and thereby dodging the mainissue! – albeit indicating that hepreferred the more purposive line ofauthority) the judge endorsed thedirectors' decision, acting out of anabundance of caution in that case, toserve a notice of intention on thecompany. Helpfully, the court thenwent on to confirm that, having issuednotice of intention on insolvency form2.8B, the correct form for the directorsto use to complete the appointmentvalidly was insolvency form 2.9B.

Who does this affect andhow?

The issues are of immediate importanceto directors seeking to make anappointment but, more acutely, toinsolvency practitioners who riskpersonal liability if the wrong procedureis followed such that they are appointedinvalidly and subsequently take stepswhich cause loss to the insolventcompany or those dealing with it.

While the strict interpretation applied inthe Minmar and Msaada decisions wascontrary to existing market practice andmay appear pedantic to manypractitioners, any judicial endorsementof appointments which do not complywith the statutory safeguards could beextremely prejudicial to directors andshareholders who are not 'in the loop'on the process.

Next steps?

The situation is a mess. Conflictingdecisions have thrown practitioners andadvisers into confusion on best practice.The MF Global Overseas case appears tosuggest that the courts may be comingcloser to determining this issue one wayor the other. However, ultimately it willrequire a clear ruling from an appealcourt or amending legislation to resolvethe uncertainty. Practitioners shouldwatch developments closely.

In the meantime it is difficult to identifywhat constitutes the new “best practice”in the knowledge that future events mayreverse the position. The following is asummary of the alternatives:

• The least risky approach is for thedirectors to make an application tocourt to effect an appointment. Thisavoids the issue altogether but, asagainst the out of court appointmentroute, it suffers from likely greatercost and delay as well as a degree of

uncertainty as to whether the courtwill grant the order sought.

• At the other end of the spectrum, thehigh risk approach is to proceed onthe basis of the former best practiceof appointing administrators usingform 2.10B (because there is no QFC)and providing no formal notice to thecompany. This is a speedier means toan appointment and may ultimatelyprove to be the legally correct courseto effecting one validly (at least if theHill v Stokes and Virtual Purple line ofauthority is followed) in the absenceof a QFC. Nonetheless, this course isunattractive at present because, in thecurrent climate, it carries with it anunacceptable level of uncertainty inthe minds not just of the purportedadministrators but anyone dealingwith them (for example a purchaser)requiring assurance that theappointees have the authority to acton behalf of the company.

• The middle course favoured by manyis that followed in the MF GlobalOverseas case; serving a notice ofintention in form 2.8B in all cases(following the Minmar and Msaadadecisions) and, in reliance on theruling in that case, using form 2.9B toeffect the appointment. The judge in MF Global suggested that it might bepossible for parties to hedge theirbets by serving both forms 2.9B and2.10B. We have seen this done buthave concerns that this might giverise to further legal difficulties andconfusion!

While the last of these options is themost attractive, it is difficult to feelcomfortable that it offers a panaceasolution in the face of conflictingjudicial opinion. In cases where thevalidity of an existing appointment isquestionable it may also be possible toapply for retrospective relief from thecourt.

Other issues remain unresolved. Forexample, if form 2.8B is required in all

Minmar – Still no solutionRe MF Global Overseas Ltd [2012] EWHC 1091 (Ch)

Andrew Robertson attempts to pick a path through the growing list of cases dealing with the "right" way fordirectors validly to appoint administrators out of court.


cases, how long following service of thatform on the company should thedirectors allow before effecting theappointment? The court in Minmarfavoured the application of a"reasonable" notice period (which wassomething in the region of 5-10 daysdepending on the facts of each case).The court in Msaada preferred a five dayperiod equivalent to that enjoyed by theholder of a QFC. Most practitionerswould view either option as whollyunrealistic and creating furtheruncertainty where previously there wasnone.

Comparisons with the position of theholder of a QFC appear particularlyinappropriate given that the companydoes not have the same rights to step inand make an appointment in the sameway during the notice period. Of course,form 2.8B permits a QFC to consent toshort notice in order to accelerate theappointment. Should this option also beavailable to the company? We simplydo not know.

Again the prudent course would appearto be to allow at least five days' noticeso as to minimise the risk that any otherparty could allege that somehow theirposition was prejudiced by a failure tofollow the correct procedure. Thoseappointing on the back of a shorterperiod of notice should have clearreasons on file for why this wasappropriate in the circumstances –although even that may not be enough.

Relevant background – thestory so far...

Hill and another v Stokes [2010] EWHC3726 (Ch) (23 November 2010) – TheHigh Court held that a directors' out ofcourt appointment was valid, despite thedirectors' failure to notify a distraininglandlord of their intention to appointadministrators to the company asrequired under the same insolvency ruledealing with notice to the company.This was in line with the approachendorsed by the Insolvency Service (seeDear IP, October 2010 p.1.36).

Minmar (929) Ltd v Khalastchi andanother [2011] EWHC 1159 (Ch) (8 April2011) – In a decision which also focussedon the need for directors to comply withthe company's articles of associationwhen seeking to effect an out of court

appointment of administrators, theChancellor of the High Court held thatthe directors of a company must givenotice of their intention to appointadministrators to the company in allcases, even if there is no qualifyingfloating chargeholder. The court inMinmar was not referred to Hill v Stokes.

Re Derfshaw Ltd and others [2011]EWHC 1565 (Ch) (2 June 2011) –Following a 2007 decision (in the G-Techcase), the High Court grantedretrospective relief to administratorswhose appointment had not compliedwith the Minmar approach, effectivelyby back-dating the administration orderto the original date of appointment.

Re Care Matters Partnership Ltd [2011]EWHC 2543 (Ch) (7 October 2011) – Inanother Minmar-related case, the HighCourt declined to make a retrospectiveorder appointing the administrators onthe basis that, as at the date of thehearing, the order was not "reasonablylikely to achieve the purpose ofadministration", as required bylegislation. The judge suggested that itmay be more appropriate to seek reliefon the basis of the general statutoryprovision that acts of an administratorare valid in spite of a defect in hisappointment – although it may be of nohelp if the defect rendered theappointment a nullity.

Adjei and others v Law For All [2011]EWHC (Ch) 2672 (19 October 2011) –The High Court followed the Minmarruling in holding that the appointmentof administrators in this case was invalidbecause the appointing directors hadfailed to notify a qualifying floatingchargeholder (QFCH) – even though theQFCH was no longer owed any money.Helpfully, however, the court alsoapplied the decision in Care Matters butreached the opposite outcome; it madea retrospective order effective from thedate of the original filing because thepurpose of administration was stillcapable of being achieved.

Re Bezier AcquisitionsLtd [2011] EWHC3299 (Ch) (12December 2011) – Inthis case, reviewedelsewhere in thisupdate, the HighCourt confirmed that

an appointment was not invalidatedalthough notice of intention had notbeen served directly on the company; itwas sufficient for it to be served on dulyauthorised solicitors acting on behalf ofthe company.

National Westminster Bank plc vMsaada Group (a firm) and others [2011]EWHC 3423 (Ch) (21 December 2011) –Here the High Court considered thevalidity of an out of courtadministration appointment, made bythe members of an insolventpartnership. It reached the sameconclusion as the court in Minmar as tothe obligation on the directors to servenotice on the company in all cases, forsimilar reasons. It expressly disapprovedof the reasoning in Hill v Stokes.

Re Virtualpurple Professional ServicesLtd [2011] EWHC 3487 (Ch)(21 December 2011) – On the same dayas the Msaada decision the High Courtjudge responsible for the Bezier decisionreached the opposite conclusion to thecourt in Msaada on substantially thesame issues, following Hill v Stokes anddisapproving of Minmar.

Re MF Global Overseas Ltd [2012] EWHC1091 (Ch) (23 March 2012) – Whiledodging the key issue, the High Court hasmost recently given welcome guidanceas to which forms may be used to effectan out of court directors' appointmentwithout falling foul of Minmar and theobvious shortcomings both in the formsand the underlying legislation.

Peter Lloyd Bootes and others v CeartRisk Services Ltd [2012] EWHC 1178(Ch) (3 May 2012) – The High Courtconfirmed that an out of courtappointment was valid despite thedirectors' failure to notify the FSA andthat, although the appointment onlytook effect from the date of filing of theFSA's consent and despite the defects intheir appointment, the administrators'acts in the meantime were valid underthe general statutory provision referredto in the Care Matters case.

Andrew RobertsonSolicitor


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What has happened?

On 22 March 2012, the High Courtconfirmed that it can make an orderrequiring administrators to treat thecosts of an abortive court application toappoint administrators as if they werean expense of the administration(ranking on a par with the costs of anout of court appointment) even though:

• such costs do not fall within the strictstatutory definition of administrationexpenses; and

• the application did not result in anappointment because it wassuperseded by an out of courtappointment of administrators by aqualifying floating chargeholder(QFCH).

The case concerned a company, BicklandLimited, which operated a restaurantbusiness. The QFCH was a creditor andjoint shareholder of the company. Thepreceding application was brought byanother creditor/joint shareholder. Thecourt was heavily influenced byevidence that an appointment (andproposed pre-pack sale) pursuant to theapplication would have been in the bestinterests of creditors and a lack ofevidence that they would be materiallybetter off pursuant to the QFCHappointment.


This ruling affords some comfort tothose (most obviously creditors) whoare considering making an application tocourt to appoint administrators when anout of court appointment could trumpthe application, resulting in the risk ofcosts being “thrown away” in the failedbid to appoint. The decision is based onprinciples of wider application inadministration and liquidation of whichcreditors and insolvency practitionersneed to be aware.


A court dealing with an administrationapplication has a statutory discretion tomake any order which it "thinksappropriate". The decision in this casefocuses specifically on how the courtwill exercise its discretion as regards aparty whose administration applicationis superseded by an out of courtappointment and whose costs willotherwise have to be met from theirown pocket.

While the specifics of this case may beunusual, it is common for parties to beexposed to the risk of irrecoverable costswhen seeking to appoint administrators.In that regard, the ruling provideswelcome confirmation, of widerapplication, that the court has thediscretion, in deserving cases, to lookbeyond the narrow framework of"administration expenses" listed ininsolvency legislation and to requireadministrators to treat certain liabilities"as if" they were administrationexpenses included in that list. Similarprinciples apply in liquidations. In caseswhere liabilities are to be treated asadministration expenses, the court mustalso specify the expenses category towhich the liability should be allocatedfor the purposes of priority ranking.

Next steps?

Careful thought needs to be given to thebenefits and risks of proceeding with anappointment. While the applicants weresuccessful in this case, the remedy isdiscretionary and the court will normally

look to base its decision on what is fairin all the circumstances of the debtor'sinsolvency.

The factors which influenced the courtin this case and which parties in asimilar position in future should bear inmind, included:

• that the application was capable ofbeing successful had an out of courtappointment not been made;

• the applicant's awareness that theapplication could be superseded by anout of court appointment did notnecessarily result in an assumption bythe applicant of responsibility for thecosts of a superseded application; and

• the applicant bears the burden ofpersuading the court that the costsought to be treated as if they wereadministration expenses – essentially,the applicant was able todemonstrate that the application andsupporting administrators' proposalswere made in good faith for thebenefit of creditors and in line withthe statutory purpose ofadministration, rather than simply ameans of securing the applicant'sinterests.

Relevant background

The leading cases in this area are the2002 House of Lords decision in ReToshoku and the 1991 Court of Appealdecision in Re Atlantic ComputerSystems. You may recall that these arealso the cases and similar issuesreviewed in the context of the (nownotorious) Goldacre case on payment ofrent as an administration expense.

Costs protectionRohl v Bickland Limited (in administration) [2012] EWHC 706 (Ch) (22 March 2012)

Emma Reece looks at a High Court decision which provides comfort, using the administration expensesregime, to parties seeking to appoint administrators but who risk having the rug pulled from under them.

Emma ReeceSolicitor

T: +44 (0) 161 250 0134M: +44 (0) 7795 801 210 E: [email protected]

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What has happened?

On 29 February 2012, the SupremeCourt upheld the decision of the Courtof Appeal in Lehman Brothers clientmoney case. In summary the courtdecided that:

• the statutory trust that applies toclient money under CASS 7 (the FSArules which attempt to safeguardclient monies) arises from the timeof receipt by the institution;

• the client money pool available fordistribution to clients on insolvencycomprises of funds which can beidentified as client money, whethersegregated or not; and

• clients whose monies should havebeen segregated have a claim againstthe client money pool to the extentof the amount which ought to havebeen segregated (rather than whatwas actually segregated) whenpooling occurred (in this case onLehman's administration).

While the court was unanimous on theissue of the timing of the creation of thestatutory trust, there was considerabledissent amongst their Lordships asregards the impact of segregation. Themajority view was essentially that: theguiding principle was one of affordingthe widest protection to all affectedclients; that there should be a rateable

sharing of loss across clients incircumstances of insolvency; and thatthe CASS wording supported this. Thedissenting views recognised theapparent injustice done to those clientswho may have adopted a more prudentapproach to segregation pre-insolvency.


This is a significant case for financialinstitutions and their clients involved inthe Lehmans and MF Global insolvenciesand who might be affected by similarfuture events. The ruling impacts onhow insolvency practitioners areobliged to handle client monies in suchcases.


In overview, by endorsing a "claimsbased" rather than "contributions based"approach, the court's decision has anumber of implications in any givencase:

• the number of clients with claimsagainst the client money pool is likelyto increase;

• the size and value of the pool is likelyto increase as and when client moniesare identified;

• clients with claims against the poolcould well face a shortfall;

• there are likely to be additional delaysand costs in the distribution process;

• given the above, this could become aneven more contentious issue in aninsolvency of a financial institution.

This decision will directly impact uponthe complex insolvency of MF Global UKLimited, the first company to enter thespecial administration regime.

The special administrators have recentlyindicated that there are approximately1,200 claims from clients claiming to besegregated clients but where MFG UK’ssystems recognise them as non-segregated clients (representing 25% oftotal claims). Given this backdrop, andthe prospects of a shortfall in the clientmoney pool, it would seem inevitablethat the court's assistance will berequired to determine the status ofsome of these claims.

Next steps?

In light of the decision, firms operatingunder CASS 7 and their clients will wantto understand whether the firm'ssystems and controls comply with theruling as regards application, monitoringand segregation of funds. Clients inparticular will be concerned about thelikely impact of future insolvency eventson the prospects of recovery. n

Bryan FaulknerAssociate

T: +44 (0) 207 490 6503E: [email protected]

Pools NewsIn the matter of Lehman Brothers International (Europe) (in administration) [2012] UKSC 6Bryan Faulkner considers the implications for all parties of the latest Supreme Court ruling in LehmanBrothers which adopted the broadest possible view of the client money pool.


What has happened?

On 9 February 2012, the High Courtrejected an attempt by a firm ofsolicitors to make an administrator, theirformer client, personally liable foramounts due under conditional feeagreements entered into with theadministrator. The agreements governedlitigation conducted by the solicitors onbehalf of the administrator in defence toclaims brought by a third party inrelation to funds under theadministrator's control. The court heldthat, where litigation is brought againstan administrator, which arises out ofcontractual obligations entered into byhim as administrator, the cause of actionwill, in general, be against the company(or other entity to which he has beenappointed administrator) rather than theadministrator personally.


The High Court’s decision will bewelcomed by insolvency practitionerswho commonly risk claims against themarising from contractual commitmentsentered into while in office asadministrators or liquidators. There canbe little doubt that the case was broughtbecause there were insufficient funds inthe insolvent estate out of which to paythe solicitors. It is therefore also a

valuable reminder of the payment risksto counterparties to contracts withadministrators and liquidators.


The ruling should reassure IPs that theadministrator's statutory agency willnormally prevent personal liability undercontracts commenced or continued bythem in performance of their duties –even if personal liability is notspecifically excluded and there areinsufficient assets in the insolvent estateout of which to pay such claims. It isworth noting that the court alsoreaffirmed the rule that officeholderscan be held personally liable for theother party's costs in proceedingsinitiated by the officeholder and,exceptionally, in other cases – albeitgenerally having the right to indemnifythemselves out of the assets in theinsolvent estate.

On the other hand, while such liabilitiesoften qualify for super-priority asadministration or liquidation expenses,without specific protections forcounterparties to such contracts, thereis a real risk that they will be out ofpocket if there are insufficient assets inthe insolvent estate, to pay out eventhose expenses.

Next steps?

The current case turned on whether thesolicitors knew that the administratorwas contracting without personalliability. In the circumstances (whichincluded no exclusion of personalliability in the CFAs but variousreferences in the CFAs and other keydocuments to the officeholders asadministrators of the company), thecourt found that the solicitors wereaware. The opposite conclusion mighteasily have been reached had theevidence indicated an intention to admitpersonal liability.

In order to avoid any nasty surprises, it isincumbent on officeholders and partiesto contracts with them to make clearwho bears the risk of any claims arisingout of the contract. Even with thebenefit of the statutory agency, this caseemphasises the importance toofficeholders of avoiding inadvertentexposure to personal liability byensuring that, while in office, allcontracts and correspondence explicitlyexclude it while making clear thecapacity in which they are dealing with third parties.

In Wright Hassall LLP v Morris [2012] EWHC 188 (Ch)

Carl Allen reflects on some good news for insolvency practitioners who are faced with personal claimsarising out of contracts entered into while in office.

Agents in the line of fire

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Carl AllenSenior Associate



What has happened?

On 26 January, Ed Davey, then theGovernment Minister responsible forinsolvency matters, announced that,following a period of consultation withinterested stakeholders, the Governmentwould not be seeking to introduce newlegislative controls on pre-packagedsales out of insolvency. The Governmentwould instead look into the possibility ofintroducing relevant regulatory reformsto the insolvency profession.

Who does it affect and how?

The Government's announcement wascriticised by insurers, landlords and othercreditor groups who are opposed to thecurrent system of pre-packs which theyconsider is far too opaque and putsexisting management and shareholdersat an unfair advantage in any proposedsale, to the detriment of creditorinterests.

However, the move has been warmlywelcomed by the restructuringcommunity who regard pre-packs as avital part of the insolvency practitioner'sarmoury. There is a widespread viewamong restructuring professionals thatpre-packs are unfairly maligned and thatadequate legal and regulatory controlsalready exist to prevent and punishabuse.

It would appear that the Government'sdecision was prompted by concernsvoiced by practitioners and othercreditor groups that the proposed

legislation, which had already been putforward in draft form, was misguidedand potentially damaging to the rescueculture, particularly as regards theproposed three day notice period – aperiod during which, it was alleged, withthe insolvent company's problems in thepublic domain, confidence in thebusiness would rapidly leak away,dramatically increasing the level oflosses to creditors as creditor pressurerises, customers re-source and the mostvaluable employees jump ship.

It is unclear what shape furtherregulatory reform – presumably toStatement of Insolvency Practice 16 –might take.

Relevant background

Pre-packaged sales in insolvency allow acompany to negotiate, structure, andagree terms for the sale of some or all ofits assets or business before enteringinto formal insolvency proceedings. Thisenables the sale to be executed as soonas an administrator is appointed.

Pre-pack sales can provide a swift,efficient means of business rescue whichminimises damage to the business,preserves employment and ensuresmaximum returns for creditors.Detractors claim that pre-pack sales lacktransparency and fairness, as thebusiness is often sold to a connectedparty. Critics also fear that businessesmay be hastily sold at undervaluewithout the need for consultation withany unsecured creditors,

who may ultimately be unable torecover their debts.

In a bid to address these concerns, EdDavey announced in March last yearthat the Government intended to takesteps to "improve the transparency andconfidence" of pre-pack sales. Aconsultation period on proposals forreform was led by the Insolvency Servicein June 2011. The most significant ofthe planned changes was theintroduction of a requirement forcreditors to be given three days' noticeof any intention to sell the business toconnected parties. Despite expectationsthat the new laws would be introducedin October 2011, the planned regulatorychanges were postponed until April2012.

Ed Davey's about-turn in January,scrapping legislative reform, was asurprising, but nonetheless welcomemove. The speedy sale of a businessensures continuity of supply and cansecure its survival. Whether a pre-packis appropriate depends on thecircumstances and sectors involved.Insolvency practitioners are alreadyrequired by their regulatory standards toprovide creditors promptly with detailsof any pre-packaged sale, including therationale for pursuing it as being in thebest interests of creditors against anyalternatives. Compliance with theseregulations (known as SIP16) ismonitored by the Insolvency Service andprofessional penalties (such assuspension or withdrawal of an IP'slicence to practice) can be incurred forany misdemeanour.n

Pamela MuirLegal Director


Pamela Muir reflects on the Government's decision to abandon proposals to reform the law relating topre-packs.

A reprieve for pre-packs


What has happened?

In this case decided in late December2011 the Court of Appeal has affirmedwhat it calls the “absolute” approachwhen considering the impact onemployees of the transfer of theundertaking or business of a company inadministration under the employmentprotection regulation known as TUPE(see below). It decided that:

• on the "relevant transfer" of abusiness or undertaking byadministrators TUPE will always applyto transfer to the purchaser thecontracts of employment and allrights and responsibilities under or inconnection with them;

• there is no "terminal proceedingsexception" to avoid the impact ofTUPE in the context of administrationsales (pre-packaged or otherwise),regardless of the factualcircumstances leading to theappointment;

• previous case law in the employmenttribunal was wrongly decided on thispoint.

A relevant transfer occurs upon thetransfer of a business, undertaking orpart of a business or undertaking wherethere is a transfer of an economic entitythat retains its identity.

The ruling has resolved the uncertaintyarising from previous case law (notablythe Employment Appeal Tribunaldecision in Oakland v Wellswood(Yorkshire) Limited), which hadsuggested that a “fact-based” enquiryinto the purpose of the administration ofthe transferor should determine whetherTUPE applied.


This decision affects all partiesinvolved in business sales byadministrators, including theemployees concerned.


The ruling is particularly helpful foremployees. It removes the threatcreated by previous case law that theremight be a legal loophole through whichadministrators and buyers could avoidTUPE, transferring undertakings to abuyer free of unwanted employeeliabilities – something that TUPE wasspecifically designed to prevent.

For most IPs this ruling simply confirmswhat they had assumed was always thecase. The market has been comfortablefor many years with the policy ofprotecting employees in thesecircumstances, albeit that the transfer ofsuch liabilities is often the single biggestfactor in negotiations over price – if notan outright deal-breaker.

For those looking to purchase a businessout of administration, the judgment inthis case demonstrates that there is noeasy means of snapping up a bargainsimply by avoiding the impact of TUPE.

Next steps?

This case simply confirms that it is in allparties' interests when negotiating a salefrom administration which is (or risksbeing) a relevant transfer to focus carefullyon the scope of the TUPE risk, the value ofclaims which may transfer to the buyerand how these might be mitigated.

Careful planning and advice could bevital even in the case of fast-movingpre-pack sales. Insolvency practitionersand directors considering redundanciespre-transfer need to understand whethersuch activity will simply crystalliseclaims which might be mitigatedthrough information and consultation oravoided altogether bypursuing alternativecourses of action.

Ultimately, subject toany compromisesvalidly reached withemployees,purchasers (and their

funders) who wish to proceed must be prepared to assumeall relevant transferring employeerelated liabilities of a target businesswhich has gone into administration andfactor this into their plans.

Relevant background

The Transfer of Undertakings (Protectionof Employment) Regulations 2006 (TUPE)provide that, where there is a "relevanttransfer" of an undertaking, theemployees employed in that undertaking,together with all rights and liabilities inconnection with their employment, willautomatically transfer from thetransferor employer to the transferee.

In 2009 the Employment Appeal Tribunalsurprised practitioners by ruling in thecase of Oakland v Wellswood (Yorkshire)Ltd that whether or not TUPE applies totransfers from companies inadministration is a question of fact, thedeterminative factor being the intentionof the administrator at the beginning ofinsolvency proceedings.

In an earlier hearing of the Key2Law casein 2011 (under the name of OTG Ltd vBarke as it was consolidated with otherappealed cases) the tribunal reached theopposite conclusion. The Court ofAppeal has now upheld that outcomeand endorsed the "absolute approach"that administration proceedings cannever be regarded as terminalproceedings for the purposes of avoidingthe transfer of liabilities under TUPE.

Whilst there are those who questionhow the application of TUPE inaccordance with this case correlateswith the "rescue culture", the decisionshould be welcomed for bringing backcertainty for purchasers, administratorsand employees alike.

Key2Law (Surrey) Ltd v De'Antiquis [2011] EWCA Civ 1567James Cameron considers whether a business sale out of administration can ever avoid the transfer ofemployee costs to the buyer.

Clarity on employee protection

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James CameronSenior Associate



Spaceright Europe Ltd v Baillavoine and another [2011] EWCA Civ 1565

Lucy Robinson reviews a case which demonstrates the breadth of employment liabilities which can pass toa buyer and which has important implications for how administrators deal with dismissals prior to a sale.

Making the connection

What has happened?

In mid-December the Court Appeal ruledthat the dismissal of an employee by acompany in administration can beconnected with the transfer of abusiness or undertaking and is thereforeautomatically unfair, with the resultingliability passing to the transferee underTUPE even though no transferee was"known, identified or contemplated atthe date of dismissal".


Clearly, the decision is good news foremployees who are dismissed byadministrators before their employer'sbusiness is sold. The decision is lesspositive for buyers of businesses fromadministrators and consequently it willhave important knock-on effects foradministrators who are consideringdismissals and a business sale.


This decision clarifies an issue on whichthere were conflicting tribunal decisions.It has come as some surprise to therestructuring market. The scope of TUPEprotection is broader than hadpreviously been thought in somequarters; including classes of employeeswho many had thought to have no claimagainst a purchaser and little more thana provable claim in their employer'sinsolvency.

The decision will throw into doubt thebenefits to administrators of effectingredundancies post-appointment wherethe purpose either is or could beconstrued to be to make the businessmore attractive to purchasers. This isnot an economic, technical ororganisational reason (the so-called ETOdefence) capable of preventing theapplication of TUPE. For an ETO reasonto exist there must be “an intention tochange the workforce and to continue to

conduct the business, as distinct fromthe purpose of selling it”. It is now clearthat TUPE applies even if there is noprospective purchaser on the scene,although the problem is likely to bemore acute the closer in time that thedismissals occur to a sale.

The outcome increases the TUPE risk toprospective purchasers. As aconsequence, administrators are likely toface greater pricing pressure anddemands for price retentions as a resultof this decision as well as greaterscrutiny from buyers as to any job cutseffected prior to their involvement andhow these were handled.

Next steps?

It is widely recognised that the partiesto a sale and purchase agreementcannot contract out of the TUPE regime.Consequently, in insolvency sales(because there are no vendor warrantiesor indemnities) the TUPE risk isinvariably passed by the buyer to theseller by means of a reduction in or aretention from the price. To be adequatefrom the buyer's perspective theseadjustments need to factor in the typeand level of claims as well as the cost ofdealing with them. Administratorsshould expect buyers to make greaterenquiry into and insist on more explicitwording relating to pre-completiondismissals.

In many cases, the simple timing ofevents makes it hard for administratorsto deflect the suspicion that dismissalswere effected to 'clean up' the businessfor sale. The best practical means ofadministrators mitigating the TUPE risk

is to ensure that they have a robustaudit trail demonstrating that they havefollowed appropriate processes inconnection with any dismissals, havetaken professional advice whennecessary and maintained detailedrecords of the fair reasons for dismissals.

Relevant background

When there is a relevant transfer underthe Transfer of Undertakings (Protectionof Employment) Regulations 2006("TUPE"), affected employees areprotected against dismissal through thetransfer of their contracts and relatedclaims to a buyer. This includes bothemployees who were engaged in theundertaking at the time of the transferas well as those who would have beenengaged in the undertaking but for adismissal connected with the transfer.

In this case, Mr Baillavoine had beenChief Executive of Ultralon HoldingsLimited, a company which went intoadministration on 23 May 2008. Mr Baillavoine was dismissed along with43 other employees on the same day.On 25 June the administrators sold thebusiness and assets of Ultralon toSpaceright Europe Limited.

The Court of Appeal rejectedSpaceright’s appeal, holding that nothingin TUPE required a particular transfer ortransferee to be in existence orcontemplation at the time of thedismissal for that dismissal to be"connected with the transfer". It madeclear that the ETO reason defence is notavailable to enable administrators tomake businesses more attractive toprospective buyers.

Lucy RobinsonSolicitor


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What has happened?

On 12 December, Mr Justice Norrishanded down a judgment which shouldmake life a little easier for directors andtheir advisers who are seeking toappoint administrators out of court butare daunted by the legal and logisticalwrangles over the service of the noticesrequired to effect the administrators'appointment.

While, regrettably, the judge dodged thehot topic of whether a notice ofintention has to be served on theinsolvent company in all cases (seeelsewhere in this update), he did providea pragmatic solution to the question ofhow service of notices can be validlyeffected. In reliance on existinginsolvency legislation, the judgeconfirmed that if solicitors acting for thecompany are duly authorised to acceptservice then service of the notice ofintention on the solicitors will besufficient for a valid appointment.

Interestingly, he also ruled that it wasnot appropriate to hold the appointmentto be invalid simply because thedirectors did not comply with the strictrequirements of insolvency legislationconcerning service in circumstances"where at a valid meeting of thedirectors of the company (a) it wasresolved that the company enteradministration and that Notice ofIntention to Appoint be given and (b) anagent was appointed to act on behalf ofthe company in respect of the

appointment of the administrators (thatengagement to include the takingreceipt of, and dealing on the company'sbehalf with, all relevant notices andformal documentation)."


The ruling is a pragmatic outcome andpositive news for all concerned ineffecting an out of court appointment ofadministrators by directors incircumstances where time to effectservice on the company may be verylimited and there may not have beenstrict compliance with the rules.


This is a rapidly developing area of caselaw with a series of first-instancedecisions which are fact-sensitive andconflict in many ways depending onwhether the court prefers a strictinterpretation of the legislation or (as inthis case) a "purposive approach" to thelaw of administration. For that reason itis difficult and perhaps unwise to drawtoo many universal truths from a case ofthis sort. This is particularly the case asregards the implications for the validityof an appointment made without strictcompliance with the letter of legislation.

Nonetheless, it demonstrates that aslong as the solicitors acting for theinsolvent company have a sufficientlyclear authority to accept service on

behalf of the company for the purposesof the appointment, service of papers onthe company's solicitors can form partof a valid appointment process.

Next steps?

Given the ongoing judicial debate andthe lack of appeal court authority onthese fundamental issues, the prudentview is to adopt the strict approach andensure that service on the company ismade in all cases in a manner whichcomplies with the legislation (seeelsewhere in this update).

Using the company's solicitors to acceptservice appears to be a neat solution tothe logistical difficulties often thrown upwhen executing, filing and serving formsurgently in circumstances of financialdistress.

Those seeking to follow this routeshould do so cautiously, however. Tominimise the risk of challenge, it wouldappear to be safer to have clear writteninstructions from the company to thesolicitors, authorising them to acceptservice of the appointment documentson behalf of the company.

Relevant background

See the earlier update on the VirtualPurple, Msaada and MF Global cases fora summary of the underlying (andconflicting!) case law in this area.

Richard BuckleySolicitor


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Re Bezier Acquisitions Ltd [2011] EWHC 3299 (Ch)

Richard Buckley offers up some good news (sort of!) for practitioners arising from a case concerning thevalidity of an out of court appointment of administrators.

Substituted service


What has happened?

In December 2011, the Court of Justiceof the European Union reaffirmed theprinciple that every company has itsown centre of main interests (COMI),the location of which depends uponfactors specific to that company. In thiscase, although the property of an Italiancompany and a French company wasintermixed and the two companiescarried on a single enterprise operatedand managed from France, the courtruled that was not enough, by itself, torebut the presumption that the COMI ofthe Italian company was at its registeredoffice in Italy.


The ruling is significant for banks andother creditors who will have aninterest in the location where a debtor'sinsolvency proceedings are opened.Insolvency practitioners will also needto consider this case when acceptingappointments and/or dealing withmulti-jurisdiction corporate groups.


At the heart of the InsolvencyRegulation is the principle thatinsolvency proceedings for a companyshould take place under the jurisdictionof the state in which the company hasits COMI.

The case endorses the decision in ReEurofood IFSC – that a COMI must beidentified by reference to criteria thatare “both objective and ascertainable bythird parties”.

The Insolvency Regulation creates apresumption that a company's COMI isat the place of its registered office.However, if there are objective factors,which are ascertainable to third parties,that indicate that the company's COMIis elsewhere, that presumption isrebutted.

This decision will make it harder, in futurecases, to rebut the presumption thatCOMI is in the jurisdiction of a company’sregistered office, and therefore will makeit more difficult to centralise the COMIsof a number of companies incorporatedin different jurisdictions in one EUjurisdiction. This comes in the wake ofcertain high profile insolvencies of non-UK entities which had re-registered in theUK pre-appointment, thereby taking thebenefit of the UK's more flexibleinsolvency regime.

Relevant background

Mediasucre International had its COMIin Marseilles, France. On 7 May 2007,the Tribunal de Commerce de Marseillesmade an order placing Mediasucre inliquidation. Mr Jean-Charles Hidoux wasappointed as the liquidator ofMediasucre.

Rastelli was a company incorporated inItaly and had its registered office inRobbio, Italy. There was apparently nosuggestion of Rastelli having anestablishment in France. However, MrHidoux applied to the Tribunal deCommerce de Marseilles to openinsolvency proceedings against Rastellion the basis that the property of Rastelliand Mediasucre was intermixed. Theyshared common bank accounts andassets were, on occasion, transferredfrom one company to the other for noconsideration.

The issue was referred to the Court ofJustice of the European Union whichdecided that the French courts did nothave jurisdiction to open insolvencyproceedings in respect of Rastelli. Thefact that the assets of Mediasucre andRastelli were mixed did not necessarilymean that Rastelli's COMI was in thejurisdiction in which those assets weremanaged.

While it was possible that, in the case ofa group of companies, the COMI of allthe companies might be located at thegroup's head office, that was only thecase if, objectively and on the facts ofthe particular case, third parties wouldregard the head office as eachcompany's COMI.

In this case, the court decided that therewas no evidence to rebut thepresumption that Rastelli's COMI was inItaly. Indeed, the court noted that it wasunlikely that the mixing of the propertyof Mediasucre and Rastelli would beapparent to third parties in any case.

Rastelli Davide e C. Snc v Jean-Charles Hidoux [2011] EUECJ C-191/10

Bhaljinder Mander considers the latest case in the ongoing saga to define what constitutes a company's centreof main interest for the purposes of the location of main proceedings under the European insolvency regulation.

Centre of attention

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Bhal ManderSenior Associate



What has happened?

In a case involving the WIND Hellastelecoms group, in November 2011 theHigh Court ordered that the company beplaced into compulsory liquidation inline with the wishes of unsecuredcreditors and, absent evidence of acontrary intention, a substantial fightingfund provided to the administratorsmust be made available to subsequentlyappointed liquidators (i.e. not the sameindividuals as the administrators).


The ruling is significant in the context ofthis high profile and contentiousrestructuring. It is of wider significanceboth for parties who provide funding ofthis kind to aid recoveries in aninsolvency process and for thoseinsolvency practitioners who are inreceipt of such funds.


The ruling indicates that, in the absenceof clear agreement on the point, thecourt may infer, objectively, from theavailable evidence the parties' naturalintentions as to the use of third partyfunding. In this case the courtconcluded that the parties intended thefunds to be utilised not just in thecontext of the insolvency process in

which they were provided but also anysubsequent process. Of course theparties' true intentions, had they beenfully articulated at the time, may havebeen very different from the inferencesdrawn by the court on the availableevidence.

Next steps?

Matters are always clearer with thebenefit of hindsight. Any third partyproviding funding, and the insolvencypractitioner in receipt of the same, willbe keen to ensure in light of this casethat funding has a clear, agreed anddocumented purpose and that there iscertainty around the intendedbeneficiaries of the funds (includingprovision for how the funding should beapplied during and at the end of thesubsisting insolvency process).

Relevant background

The administrators of HellasTelecommunications ("HT") applied tothe court for directions on how toproceed in circumstances where theadministration of the company wasdrawing to a conclusion, but there was aconsiderable “fighting fund” still inexistence. The fund was provided by athird party, to be held on trust, to meetthe costs of the administration.

The court was asked to considerwhether the fund could continue to beused if HT was to proceed into

liquidation and its affairs investigatedfurther, yet the administrators wereapplying for HT to be dissolved. Thecourt acknowledged that the fund wasset up for the purpose of satisfying thecosts of the administration (as per theterms of a share sale agreement enteredinto by HT), yet taking into account thesize of the fund (€10m initially) itdetermined that the funds could be usedbeyond the administration as it was anamount in excess of the costsanticipated to be incurred in theadministration alone. The court decidedthat HT should enter compulsoryliquidation and the administration cease.

The administrators' request to proceedto dissolution was based on theassurance that there were no furtherdistributable assets, which onexamination was found not to be thecase. The court deemed there was scopefor HT's affairs and potential claimsagainst third parties to be investigatedfurther, and that the fund could be usedfor this purpose.

The court concluded that the fundshould continue to be used as there"remain(ed) a similar level ofuncertainty and contingency" to futurecosts as at the date on which theadministrators initially projected theirfuture costs in October 2010, comparedto the time of this decision.n

Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2011] EWHC3176 (Ch)

Claire Sharf reviews a case in which the court denied an administrators' application to move fromadministration to dissolution on the grounds that there remained distributable assets, ordering instead thatthe company be placed into compulsory liquidation and the liquidators have access to the balance of a thirdparty fighting fund which was originally set up to cover the administrators' costs.

Winds of change

Claire SharfSenior Associate



What has happened?

The employment tribunal has madeprotective awards equivalent to 60 daysgross pay in favour of formerWoolworths employees who were maderedundant following the appointment ofadministrators. The tribunal made someconcession (down from 90 days' pay) inthe level of award to take account oflimited steps. In line with previouscases, the tribunal also found thatWoolworths’ financial circumstancesand the fact that it was inadministration did not, of themselves,constitute “special circumstances” whichcould have allowed Woolworths not tocomply with its duties.

Interestingly, the tribunal decided thateach store was an establishment. Theunions involved had tried to argue thatWoolworths' nationwide retailoperations constituted oneestablishment overall, in line with theEuropean legislation from which the UKlegislation derives. While recognising thediscrepancy between the regimes, thecourt declined to follow that course or torefer the matter to the European Court.This ensured that only employees inestablishments/stores with over 20employees could benefit from the award.


The ruling is significant for multi-siteemployers (distressed and solvent) whoare considering a redundancy

programme. It is also relevant toadministrators appointed to suchbusinesses, particularly if they arecontemplating a sale of its business.


The ruling clarifies the likely cost andscale of the process required foremployers to comply with collectiveconsultation obligations when dealingwith operations spread across multiplesites. It seems as if tribunals willinterpret the term “establishment” notpurely in terms of geographical locationas it was originally intended, but alsotaking into account the organisationalstructure of individual sites. In this casethe fact that the stores had differingmanagement structures and operatedfor distinct purposes contributedtowards the court's determination thateach was a separate establishment.

The case further demonstrates thecourt’s determination to set the bar highfor businesses engaged in redundancies,even if they are subject to formalinsolvency. To many restructuringprofessionals this approach setsunattainable standards when time andfinancial resources are critical and theoutcome is potentially damaging tocreditors' interests. Non-preferentialemployee claims will often simply rankas unsecured claims in the employer'sinsolvency. However, where a goingconcern sale is mooted, there is a very

real risk that the liabilities triggered by anon-compliant redundancy programmepre-disposal could pass through to thebuyer with a £1 for £1 reduction in theprice achieved on a sale. The Spacerightdecision, reported elsewhere in thisupdate, is a recent example of this issue.

Next steps?

As well as giving cause for employersand appointed insolvency practitionersto revisit their plans and costings inconnection with a proposed multi-siteredundancy programme, the case moregenerally underlines the importance oftaking appropriate advice and creatingan audit trail of meaningful engagementwith employees and theirrepresentatives as a means of reducingthe level of future claims.

Relevant background

Woolworths Plc went intoadministration in November 2008 andinto liquidation two years later.Although considerable work wasundertaken by the administrators toeffect a going concern sale, this came tonothing and all of the employees ofWoolworths were made redundantfollowing the administrators'appointment.

USDAW and others v WW Realisation 1 Limited (in Liquidation) and another ET 3201156/2010

Dawn Allen examines the treatment of claims relating to collective redundancies in administration.

Protection racket

Dawn AllenSenior Associate


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33 I Restructuring Business33 I Restructuring Business

Diary Room

Restructuring Business is delighted to start a series of in-depth interviews with members of theteam. First into the Diary Room are new joiners Bhal Mander and Pamela Muir.


Bhal (aka “Knuckles”!) Mander on... joyriding and MLK

What important words of wisdom do you intend to pass on to your children?The happiest of people don't necessarily have the best of everything; they just make the most of everything that comes alongtheir way.

If you were not a lawyer what would you be?Unemployed.

If you could change one thing about yourself, what would it be?Nothing – I am what I am...

What is your most prized possession?My (wife’s) iPad.

What is the book that has most changed your life?Sealy & Milman – Annotated guide to the insolvency legislation – eighthedition. A real life changer.

What is your worst habit?Knuckle cracking – eight years of karate are to blame.

Which person(s) has influenced you the most?My parents.

If you could have a drink with someone from history, who would it be?Martin Luther King.

What crime would you commit if you knew you could get away with it?Joyriding in Nick Pike’s Aston Martin.

If you could spend 24 hours doing only one activity, what would it be?See my answer to the last question.

Which film can you watch over and over?Scarface.

Which person would you happily swap lives with?My son. Sleep, eat, play – that’s the life.

What would be your specialist subject if you were on Mastermind?Tottenham Hotspur – the glory years...

What would be your entry music if you were a boxer?"Mama Said Knock You Out" is about as perfect as you can get for a boxing intro.



Pamela Muir on...whisky, mostly

In addition to having practised in the area of insolvency and restructuring for over 15 years, the three main passions in mylife are family, sailing and whisky.

Before you think that it is too much of a cliché for a Scots person to have an overwhelming interest in the water of life or uisgebeatha, I like to think my hobby goes a little further than that.

Whether or not it is a clean, sweet, heathery Highland Park from Orkney or a salty Talisker from the Isle of Skye or a real "peatfreak", from some of the 10 distinct distilleries on Islay, I am a huge whisky fan (with a soft spot for those of the peat addictedpersuasion!).

The whisky industry in modern Scotland, in addition to providing a rather fine product for any taste, really shows you the best ofour entrepreneurial spirit (pardon the pun!).

Take for instance the story behind my favourite distillery Bruichladdich on Islay.

Bruichladdich had been mothballed during the dark days of Scottish whisky production of the 70s and 80s and had lain dormantfor some time. The impact of a mothballed distillery on a village in Islay is something that is felt throughout the community.

One of the current directors visited Islay on holiday (having been a fan of the Bruichladdich anyway) and in an attempt to visitthe distillery was astounded to see it closed. He spent the next 10 years bidding or trying to persuade one conglomerate afteranother to sell him the small distillery and after 10 years of trying and with a lot of personal, family, friends and islandinvestment, successfully re-opened Bruichladdich. It has since gone from strength to strength producing not only all the fantasticspirits but an amazing enthusiasm for the local economy, driven by a true passion for their "day job".

If you're ever visiting Islay, be sure to stop by and ask them about the time the US Department of Homeland Security thoughtthey were helping out terrorists, an event commemorated by them releasing a bottling called, "weapon of mass destruction", ormaybe about the time they tried to give the MOD back their mini yellow submarine…

If you travel less than 6 miles up the road from Bruichladdich you will stumble across Kilchoman Distillery celebrating its 7thbirthday this year. An ambitious project to add another distillery to a small island already stuffed full with distilleries, but againproducing a distinctive product, carving out a niche in a crowded market.

I think if you look at the whiskey industry, even just on Islay, you can apply the same lessons to our crowded market place –tenaciousness, inspiration, innovation, striving for excellence and customer service.

It is probably no coincidence that I developed a love of the Island malts given my second largest passion is sailing. There isnothing quite like a small boat, moored off a beautiful setting with a fabulous malt as a reward for a day's hard work. Now if wecould only guarantee decent weather!

Of course, there is no truth in the rumour that insolvency law drove me to whisky in the first place!


Team UpdateSpring promises to be an exciting timefor our team with a number of highprofile hires and significant growth inour wider business in the UK andinternationally.

London hires

We are delighted to confirm thatpartners Nick Pike, Tom Withyman andSteven Cottee as well as seniorassociates Bhal Mander and SerenaMcAllister have now joined our Londonteam. All are experienced restructuringspecialists. Feedback from clients andthe legal press confirms that they areexcellent additions to our team and willprovide a tremendous boost to ourgrowing London business.

Merger – Pinsent Masons andMcGrigors

You may already have read about themerger between Pinsent Masons andMcGrigors, a deal which will create abusiness with over 2,500 staff, including1,500 lawyers based in offices across theUK, the Middle East and the Far East.The merger took effect from 1 May 2012and has dramatically increased ourcapacity to deliver great service to ourRestructuring clients whatever theirneeds and wherever they may be. As aconsequence we are pleased to welcomeLegal Director Pamela Muir (based inGlasgow) and Senior Associate LawrenceSpencer to the expanded team.

Office launches

Pinsent Masons has also announcedplans to open two new offices inmainland Europe in 2012. Furtherdetails for our Paris and Munich officeswill be announced in due course but thedemand from our clients to be presentin those locations is strong and you canexpect the Restructuring team to play aleading role in building these importantnew parts of our business.

London and Regional Round-Up

London – Teams led by Richard Williams,Nick Gavin-Brown and Carl Allen

continue to take a leading role inadvising creditors on some of the largestexposures in the Lehman Brothers andMF Global insolvencies. Lucy Robinsonis also advising PwC as administrators ofthe FSA-regulated Target accountancypractice.

Belfast – Laurence Spencer recently leda cross-practice group team in thesuccessful disposal (by pre-packadministration) of the Pizza Hutfranchise in Northern Ireland and theRepublic of Ireland. The MBOsafeguarded more than 200 jobs andensured that the public on both sides ofthe border continue to be able to enjoyPizza Hut products!

Birmingham – Our Birmingham team,led by Alastair Lomax has advised the£100m turnover Nightfreight logisticsgroup on its restructuring and disposalto the DX group.

Glasgow – Having acted for thepurchaser from administrators of apopular soft drinks business, PamelaMuir is currently leading our team actingfor one of our UK clearing bank clientson a significant UK-wide real estatesector restructuring.

Leeds – As well as acting for BDO onvarious disposals from the Dukedom pubchain, Claire Sharf and Ben Thornton inour Leeds team are advising PumpkinPatch Limited, a company listed on theNew Zealand Stock Exchange on thepurchase of various assets of its £24mturnover UK subsidiary of the samename from its administrators Deloitte.Hannah Pinsent is currently onsecondment to Lloyds BSU Legal.

Manchester – James Cameron took alead role in the team which advised theboard of Davenham Group Plc prior toits administration. Alex Darbyshire ledthe team advising the bank and itsappointed receivers, Grant Thornton, onthe disposal of the 5* RadissonEdwardian Hotel at the Free Trade Hall.Alex is now on secondment with theCorporate and Commercial teams atHSBC LMU.

Welcome back also to Jenna Bartlettwho rejoins the team following herreturn from sabbatical.


Key Contacts

Jamie WhitePartner (London)Head of Restructuring

T: +44 (0) 207 418 9550M:+44 (0) 7900 823400E: [email protected]

Richard WilliamsPartner (London)


Jonathan JeffriesPartner (Leeds)

T: +44 (0) 113 294 5281M:+44 (0) 7767 224101 E: [email protected]

Nick PikePartner (London)


Tom WithymanPartner (London)

T: +44 (0) 207 490 6941M:+44 (0) 7974 170983 E: [email protected]

Steven CotteePartner (London)


Restructuring helpline

For urgent queries call our 24 hour helpline in order to speak to one of our partners: +44 (0) 207 418 8280.

For more general or technical and legal queries email us at: [email protected]

While we take every care to confirm the accuracy of the content in this edition, it is not legal advice. Specific legal advice should be taken before acting on any of the topics covered.

Alastair LomaxLegal Director (Birmingham)


James CameronSenior Associate (Manchester)


Lawrence SpencerSenior Associate (Belfast)


Pamela MuirLegal Director (Glasgow)


Combining the experience, resources and international reach of McGrigors and Pinsent Masons

Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority, and by the appropriate regulatorybody in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with

equivalent standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP and affiliated entities that practise under the name ‘Pinsent Masons’ or a name that incorporates those words.

Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012

For a full list of our locations around the globe please visit our websites:

www.pinsentmasons.com www.Out-Law.com

Documents

2474 Pinsent Masons Magazine Alastair Lomax May12 (web version