Corporate Bankruptcy and Insolvency litigation

Financier Worldwide recently invited Simmons’ Litigation & Arbitration Partner Kirsten Kitt to join an experts roundtable discussion on the corporate bankruptcy and insolvency litigation landscape. Below we print Kirsten’s excerpts from this roundtable as reported by Financier Worldwide in September 2021.

The corporate bankruptcy & insolvency litigation landscape has experienced a turbulent period over the past year and a half, largely a consequence of the extreme circumstances created by the COVID-19 pandemic. Against this backdrop, many businesses have sought arrangements and restructuring plans in an attempt to avoid corporate bankruptcy. However, as government COVID-19-related stimulus is withdrawn and the true financial impact of the pandemic becomes clear, the focus turns to which businesses will remain in crisis or fold, and which are able to restructure and survive. As the battle lines are drawn, disputes are sure to rise.

Could you provide an overview of the most significant trends in the corporate bankruptcy & insolvency litigation arena over the past 12 months or so?

Kitt: The last 12 months for practitioners with an insolvency focus have been somewhat of a period of limbo. Practitioners have been awaiting UK government announcements to see what new measures aimed at promoting business rescue have been created, whether those already in place have been effective, will cease or will be continued and if so, until when. During this period, four things have stood out. First, the way that the insolvency courts have continued to operate remotely and, arguably more effectively than they did before. Second, how creditors have had to look more creatively at debt enforcement in the absence of the usual winding up petition procedure. Third, the continued evolution and expansion of litigation funding and insurance options. Finally, the use of England & Wales’ new restructuring plan and the court’s evolving approach to sanction of those plans.

In what ways does the corporate bankruptcy & insolvency process differ from other types of litigation? To what extent do issues of cost and speed impact on the process?

Kitt: The crucial difference between insolvency litigation and other types of litigation is that insolvency processes are essentially class actions – where an insolvency practitioner brings litigation, he or she is almost always litigating for the benefit of several creditor stakeholders who, in some cases, must be consulted or provide sanction to proceed. In actions brought by insolvency practitioners, the existence of these stakeholders calls for greater scrutiny on whether the litigation is in their best interests, what its risks are, what its potential costs are, how they can be funded and whether those costs are worth incurring considering the potential upside. Speed is a factor in that creditors demand quick results, but English courts cater for this with various summary forms of procedure for certain types of proceedings.

Have you seen any common issues arising in corporate bankruptcy & insolvency processes in today’s market? In what ways do these issues complicate bankruptcy litigation?

Kitt: Litigation funding has, over the last 10 years, given insolvency practitioners the ability to bring litigation that otherwise could never have proceeded. That has been a game changer and the global reach and availability of funding options is ever-expanding in today’s market. But, with litigation funding comes complexity. First and foremost is the impact on net return. The significant percentage of damages that funders require by way of return can be off-putting. We are therefore seeing increased competition from the range of insurance products on the market, the use of assignments and law firms’ appetite to take more risk. Second is speed. Funders require cases, their risks and their costs to be presented with some rigour. That is understandable and it is fair to say that funders are improving in streamlining their processes, but complex cases can still take some time to complete. Funders and insurers also increase the number of stakeholders standing behind the litigation and therefore add to the complexity of reporting obligations and the management of competing interests.

How have recent court rulings impacted on the corporate bankruptcy & insolvency litigation space? How are the issues involved in such cases likely to affect how parties conduct themselves going forward?

Kitt: The cases around the sanctioning of restructuring plans have undoubtedly been the ‘talk of the town’ so far in 2021. But we have taken a keen interest in three UK Supreme Court judgments in the cases of Manchester Building Society, Khan v. Meadows and AssetCo. In circumstances of corporate collapse, the auditors, with their insured pockets, are often high up the list as litigation targets. These three Supreme Court decisions restate English law on how losses are to be assessed in negligence cases, framing a new test around a six-point plan. The most important take-aways for those bringing audit negligence cases in an insolvency context is being clear about the counterfactual test that is applied, the recoverability of trading losses, and whether in cases of the most clear and obvious fraud, damages will be reduced more than we have seen previously on account of contributory negligence. The interplay between the developing law in this area and the various government consultations into the future of the audit industry is an interesting area to watch.

How would you characterise the evolving dynamic between various creditors in the corporate bankruptcy & insolvency process? To what extent do you see multiple parties collaborating to reach a viable solution?

Kitt: We do not regard the dynamic as between creditors, as opposed to between creditor and debtor, as a particularly evolving one. In our experience, creditors still generally act in their own interests to maximise their recoveries rather than trying to work as a collective to maximise returns. That is a generalisation, however, and it does depend on the make-up of the creditor group. For example, we have seen more collaboration among financial institutions as creditors than with creditors from other industries. The UK restructuring plan procedure, which involves placing creditors into classes, requires collaboration among that class, albeit potentially at the expense of other classes that become adverse and can, under this new procedure, be ‘crammed down’. It is very possible that we will see more collaboration among creditors given the dire debt situation that COVID-19 is likely to create.

With many parties emerging unsatisfied from a corporate bankruptcy & insolvency dispute, what are the most significant factors that need to be observed to reach as positive an outcome as possible for all those involved?

Kitt: I agree with the question to the extent that it is an obvious truth that in an insolvency scenario, many creditors will suffer losses that cannot be recovered either at all, or in part. They therefore start from a position of disappointment. To lift that disappointment, the process then becomes one of managing expectations, regular communication, collaboration with other stakeholders where that is possible, being clear on potential risk and reward, making the costs of recovery actions as low as possible, and creativity and agility in potential recovery techniques and claim possibilities. Litigating over schemes or restructuring plans has a different dynamic because there is a real hope that the underlying business can be saved – still the creditor may be looking at less than a full recovery, but it is a more positive scenario than litigating post liquidation because the whole point is that the creditor should be less worse off as a result of the process.

How do you expect the corporate bankruptcy & insolvency litigation arena to unfold in the months ahead? What overriding trends and developments will continue to dominate this space?

Kitt: The months ahead must see an end to the ban on winding up petitions and with that, however it is managed, is likely to come a deluge of actions. The courts will inevitably have difficulty coping with any sort of cliff-edge and no doubt forms of alternative dispute resolution (ADR) will be encouraged. A mandatory ADR process in the form of binding arbitration has been proposed to resolve landlord and tenant disputes over the now jaw-dropping levels of rent arrears. I think we will continue to see developments in the case law on the sanctioning of restructuring plans, particularly focusing on the ‘relevant alternative’ test, with the Hurricane Energy case potentially going to the Court of Appeal. Finally, the full extent of the impact of Brexit, and the loss of the EU Insolvency Regulation in the UK is yet to be seen. Will we see a shift in centre of main interests, additional legislation passed to fill the void, or will European courts in any event reveal a continued willingness to recognise English insolvency proceedings?

How do you expect the corporate bankruptcy & insolvency litigation arena to unfold in the months ahead? What overriding trends and developments will continue to dominate this space?

Kitt: The months ahead must see an end to the ban on winding up petitions and with that, however it is managed, is likely to come a deluge of actions. The courts will inevitably have difficulty coping with any sort of cliff-edge and no doubt forms of alternative dispute resolution (ADR) will be encouraged. A mandatory ADR process in the form of binding arbitration has been proposed to resolve landlord and tenant disputes over the now jaw-dropping levels of rent arrears. I think we will continue to see developments in the case law on the sanctioning of restructuring plans, particularly focusing on the ‘relevant alternative’ test, with the Hurricane Energy case potentially going to the Court of Appeal. Finally, the full extent of the impact of Brexit, and the loss of the EU Insolvency Regulation in the UK is yet to be seen. Will we see a shift in centre of main interests, additional legislation passed to fill the void, or will European courts in any event reveal a continued willingness to recognise English insolvency proceedings?

Kirsten Kitt is a partner in Simmons & Simmons’s London litigation and arbitration team and has a wealth of experience in dealing with substantial and high-profile commercial disputes, particularly those with an insolvency focus and those which involve parallel proceedings. She predominantly acts for insolvency practitioners, professional services firms and financial institutions. Her work has included managing the Simmons team that won three Litigation Team of the Year awards in 2019.