Hedge funds push for radical insolvency review

Corporate restructuring and recovery is changing and it is changing fast.

Hedge funds have suddenly become major stakeholders in business turnarounds
and when working through the wreckage of a failed business, insolvency
practitioners now have to deal with a plethora of debt holders rather than one
or two banks.

It is against this backdrop the
European High Yield
, an association of investors, banks, accountants and lawyers
involved in high-yield debt transactions, wrote a 12-page letter to Treasury
lobbying for reform to UK insolvency rules.

The EHYA put forward a radical set of reforms that will prevent customers and
suppliers from terminating contracts when a business goes insolvent, the
introduction of a judicial process to value distressed debts and the creation of
new rules making it more difficult for shareholders and creditors to block

The thrust behind the recommendations was that as the rules currently stand,
it is nigh impossible for a business to trade its way out of trouble and it is
too easy for creditors to push a company into liquidation.

The involvement of hedge funds will also make business recovery too complex
for the current rules to cope with.

‘The next round of corporate rescues is going to be vastly more complex given
the explosive growth in leveraged lending in Europe since 2001 and the sheer
number, variation and complexity of debt instruments,’ EHYA executive director
Gilbey Strub said.

The EHYA suggestions may seem to make some sense, but legal experts have
already warned that the EHYA suggestions could have catastrophic consequences
for the business recovery process.

Paul Flood of City law firm Reynolds Porter Chamberlain, said adopting the
EHYA proposals would see the UK insolvency descend into a state of bitter
litigation and delays.

‘By pushing so much of the UK’s insolvency and restructuring process into the
courts these proposals could lead us into the mire of expensive litigation that
US companies are now so keen to escape.

‘Insolvencies will change from being relatively quick and pragmatic into huge
set piece multi-party litigation of the kind that exists in the US,’ Flood said.

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