AIRA Newsletter

The world continues to transform into a global society. The impact of new technologies, like the internet, has increased the speed and ease of communications, while the introduction of a unified currency, the Euro, has made cross border trade more efficient. As more and more companies and industries become global, the need for restructuring professionals to handle global restructurings is increasing.

Many recent bankruptcy filings, including Worldcom, Enron, Federal Mogul and Parmalat, have required global expertise and insight, because each of these businesses had operations located in multiple countries, and required local expertise during the bankruptcy process. Wherever the case is administered, local strategies and knowledge are required to achieve success. In addition, globalization has given companies more strategic choices (i.e., globalization has increased the number of potential locations for insolvency proceedings administration).

Historically, the United States has been the global leader in bankruptcies and restructurings with the State of Delaware commanding the title as the most popular venue for filings. However, expansion has provided opportunities to countries across the globe to participate and compete for restructurings in multi-national locations. The change has largely been driven by the increase in global exposure, as well as changes in world insolvency laws.

Global Insolvency Law
Numerous laws have been developed to address the globalization of insolvency and allow cross border administration. The European Union (“EU”) recently enacted “Council Regulation (EC) No 1346/2000 of 29th May, 2000 on Insolvency Proceedings,” while the United Nations has had “UNCITRAL Model Law” as a tool for several years. Both are structured to address the issues confronted during bankruptcies involving cross border or global businesses.

Despite the progress made, significant issues still exist for global restructurings. The new EU regulation addressed many facets of insolvency, including a focus on EU cross border issues. A primary component of the regulation is the “Center of Main Interest” (“COMI”) test, which attempts to match the administration of the case with the primary business location. However, the regulation does not specifically identify the process for determining the COMI. There-fore, the COMI test under the EU regulation is still open to interpretation, which will drive “forum shopping” between EU member countries. Forum shopping has the potential to cause disagreements between courts on jurisdiction issues within EU member countries. For example, a company may open bank accounts in a jurisdiction prior to filing in an attempt to facilitate administration in a location that will be more conducive to their insolvency strategy. However, their actual primary business location may be in another court’s jurisdiction. It is likely that creditors, or other affected parties, may try to persuade the courts that one jurisdiction is the true COMI, and not the other, based upon local insolvency law. This endeavor to win jurisdiction has occurred in several cases, and will continue to be a point of contention until EU member courts become more familiar with the new regulation and its interpretation. In addition, the quest for EU courts to become the next “Delaware” of European bankruptcy proceedings will cause additional stress between courts. The goal for the local court will be to attract the most high profile and lucrative bankruptcy filings throughout Europe.

Despite these issues, many individual countries are revamping their legislation to incorporate elements of the EU and UN regulations, as well as U.S. style insolvency law. In Germany, insolvency usually meant a sale or liquidation of the business with the proceeds distributed to creditors. The court would simply appoint a trustee to manage the company during the process. Insolvency law in Germany has recently been changed and now allows for a debtor in possession (“DIP”). Although this change in law has not been widely utilized, it represents movement towards a more uniform global code.

Spain has been focused on structuring a single consolidated insolvency law. Unlike the U.S., Spain has fragmented and arguably outdated insolvency laws. They are working on creating a unified set of regulations that will be more in line with other countries’ insolvency laws and the EU regulation. For instance, the new Spanish insolvency laws will include rules on cross border insolvency proceedings based upon the EU regulation. Like many European countries, Spain currently operates under two types of corporate insolvency, provisional and definitive. Spain is looking at replacing these types with a single insolvency proceeding, similar to the U.S.

The differing types of insolvency law also dictate varied actions. The potential liability of directors and management are minimal in the U.S. However, in Germany, directors and management may be held personally liable, if they continue to operate an insolvent business. The introduction of the Sarbanes-Oxley act in the U.S. may increase the potential liability of management, transforming U.S. protocol closer to that of Europe. Could the end result be U.S. and European insolvency law migrating toward each other until they merge into a global set of acceptable insolvency laws?

In contrast, workouts in Asian countries are typically informal in nature and completed through working with the original lenders (i.e., banks). This is not the typical procedure for the U.S. or European countries. This practice is in part driven by the level of financial regulation and government intervention in Asian countries.

As more countries modify their insolvency laws towards a unified structure, forums will begin to take precedence. One of the most significant factors will be the willingness of courts to cede power to other courts. Historically, courts have looked negatively upon fighting over jurisdiction and prefer to either relinquish power or agree to joint administration of the proceedings. It is likely that with more global exposure, administration will shift toward dual insolvency. However, until a protocol is defined, the outcome will vary.

Impact to the Restructuring Professional
The restructuring industry is in the midst of a global expansion to facilitate the need for global insolvency services. Expansion is a difficult strategy to execute properly and profitably. Should offices be opened world-wide? Should joint ventures be utilized? Or should you simply use local talent as needed? In addition, the professional must have incremental local knowledge and deal with numerous inherent problems with cross border insolvencies.

The U.S. has a strong restructuring history and, therefore, is the most logical starting point for evaluating global expansion of the restructuring industry. As restructuring professionals begin to practice globally, they should concentrate on utilizing their knowledge and experience to educate foreign constituents and expand their comfort with worldwide insolvency options. As the constituents become more familiar with all options available, they will realize the value proposition that a U.S. restructuring professional offers.

Local bankruptcy laws and philosophies vary dramatically, forcing restructuring professionals to either learn all of the local nuances or hire local talent who already have the knowledge. The intricacies can be demonstrated by reviewing treatments of various issues, including protections for entities, financing, and treatment of liabilities. For instance, in the U.S. an automatic stay is enacted upon filing, DIP financing is commonplace, and secured creditors are first in line. The focus is on the business and maintaining its existence if feasible. In Germany, the focus is on creditors and how value can be maximized for them. In Mexico, the focus is on employees, who must be paid prior to any other actions. Each country has local incentives and focal points. The professional needs to have expertise on all facets of the engagement to be successful and maximize value for all involved.

Local accounting and financial standards need to be fully understood. The professional will need to have an understanding of local accounting requirements or hire local talent skilled in the area’s standards. It is likely that the hiring of local accountants will provide more value than attempting to learn the standards for each locality affected in the insolvency and then reconcile the difference into a global strategic plan.

Cultural issues will also play a role. The U.S. professional will not be versed in local culture, thereby placing the professional with additional execution and implementation risk. It will be more advantageous to hire locals, who have intimate knowledge of the culture to avoid any cultural pitfalls during the restructuring.

What is the best strategy for the professional who wants to provide their clients with a solution to a global problem?
Many firms have chosen to ignore the global market and focus on local business. This may work well for smaller boutique firms and those that focus on small to mid-market clients. In addition, many firms may not have the financial capital or global contacts to expand. However, if your clients are global, or have global exposure, you may need to develop worldwide capabilities to be successful. As global expansion continues, a strategy of focusing on a single market may make you more susceptible to failure.

Some firms have gone toward the opposite end of the spectrum and have begun to open offices worldwide, typically in large metropolitan areas within Germany, France, Hong Kong, or Great Britain. This provides a global presence and allows increased market exposure. However, this strategy can be quite expensive and still does not provide the professional with expertise within every market. They end up with offices scattered throughout Europe and Asia, with a variety of professionals from limited countries. In addition, the foreign offices may lack the experience of a more tenured restructuring professional, as offered by their U.S. counterparts.

The focus should be geared toward the best possible client service to meet the client’s needs. What does the client want and what is the most cost effective and efficient strategy? The solution may be developing relationships with local talent on a global basis. The professional can rely on their global contacts to provide local expertise in insolvency law, accounting standards, and cultural acumen. Meanwhile, the professional can rely on their insolvency experience, intimate knowledge of their clients need, and knowledge of various industries to develop a global strategy and implementation plan. The professional will act as a central contact point for all parties, but will rely on his network of professionals to execute the strategy and handle implementation on the ground in various global locations. In essence, he has a macro level strategy that includes vast experience and knowledge of his client’s specific needs, plus the micro level expertise, through his network, to comply with all local standards to ensure success on a global basis.

Who else can you turn to? Large accounting firms, already experienced in the problems with global expansion, can offer services based upon audit functions. However, the professional offers much more in the way of forward looking vision and strategy. Typically, accounting firms are focused on the past year, while the restructuring professional focuses on the future. Specifically, what value can be saved and nurtured from this business. The restructuring professional has a much broader experience level that outweighs other options.

Europe and other regions also offer their own professionals. However, the experience and knowledge level of the U.S. professional will bring additional insolvency expertise and an independent viewpoint from regional insolvency and restructuring strategy. The U.S. professional has dealt with more creative methods for maximizing value for all constituents. They encompass what the client hires a professional for: assessing the situation, developing a vision or forecast for the future, and analyzing the best method for maximizing value, whether it is through restructuring operations, restructuring debt, selling certain assets, or winding down operations altogether. These combined skills will provide the best path for the client to pursue, making decisions easy and outcomes positive.

The best strategy for developing a global restructuring practice will be to develop internal strengths such as effective project management skills, strategy development, and a single point of contact/delivery. The professional can hire local talent through their global network to implement and carry out the strategy or plan, handle financial accounting requirements, research legal constraints, and deal with cultural issues. What you want from a professional is the ability to interact with all constituents, provide advice based upon successful experience, and administer the process as a central point for all parties.

With global affiliates, the restructuring professional will have the ability to success-fully manage a global restructuring plan, which offers minimal overhead costs and maximum local expertise. In addition, the professional can achieve international marketing capabilities and exposure with minimal time invested in opening new offices, training new hires, and administering day-to-day activities. The professional can focus on the business of restructuring, instead of worrying about international office logistics and cost controls. The key is to leverage the restructuring professional’s expertise and global ability by leveraging additional assets available worldwide. The professional should heed his own advice to others: focus on your core competencies and outsource the rest.

Mr. Tague is a Senior Analyst in the Restructuring and Performance Improvement Group at Stout Risius Ross, Inc. He has significant experience providing financial expertise to middle market firms in distressed situations, and has performed work for debtors, creditors’ committees, and customer groups.

Mr. Tague has a Master’s of Science degree in Operations Management from Walsh College, and a Bachelor or Arts degree in Accounting from Michigan State University. He is a Certified Insolvency & Restructuring Advisor, and a member of the American Institute of Restructuring Advisors, the Institute of Management Accountants, and the American Bankruptcy Institute.