Jennifer Marshall and Susan Hazledine
Meltdown?
Recent developments in Insolvency Law
1930s revisited?
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Lehman’s demise
Fannie Mae/Freddie Mac
Icelandic banking collapse
$750bn capital injection in the States
Unprecedented government funding and rate cuts
Setting the scene
 Unprecedented events of the last few months
 Greatest impact on financial institutions but corporate sector to
follow
 When bank gets into difficulties, number of options:
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private sector deal (merger, guarantee, loan)
state support
emergency pre-insolvency legislation
insolvency proceedings
 When company gets into trouble, options more limited:
 consensual restructuring
 insolvency proceedings
Crisis checklist
 Impact of insolvency proceedings on contracts
 Impact of insolvency proceedings on set-off
 Impact of insolvency proceedings on enforcement
rights
 The cross-border framework
To perform or not to perform?
 Good or bad contract?
 Contractual provisions
 Insolvency process
 Jurisdiction
Good contract
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Effect of breach by counterparty
Affirm contract
Ability to insist on performance?
Avoid breach of own obligations
Obligations as expense
Bad contract
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Contractual termination provisions?
Nature of breach
Anticipatory breach
MAC clauses
Repudiatory breach?
Consequence of choices
Simple set-off
£100m
A
£150m
B
Options:
 Can I set off the 100 I
owe against the 150 I am
owed and prove for the
net 50 (thus recovering
5)? or
 Do I need to pay the 100
I owe in full and then
prove for the 150 (thus
paying out 100 and only
recovering 15)?
Simple set-off: issues arising
 Different types of set-off:
 contractual set-off (and exclusions of set-off)
 transaction or equitable set-off
 independent or statutory set-off
 current account set-off or combination
 insolvency set-off
 When do the insolvency set-off rules come into play?
 Requirements for insolvency set-off under English law:
 mutuality
 provable debts
 claims incurred or acquired after the cut-off date
Impact of insolvency proceedings on simple set-off
 Stays on exercising rights of set-off:
 self-help remedies
 defence and counterclaim in legal proceedings
 Insolvency set-off rules may replace other rights of
set-off
 Acceleration and valuation of incoming claim for setoff purposes
International impact on set-off
 Cross-border issues and Article 6 of the European
Insolvency Regulation:
 general rule
 exception where set-off permitted by law
governing insolvent debtor’s claim
 subject to claw-back challenges and does not
protect netting
Build-up of set-off
A
100
Assign
B
C
150
Options:
 Can my affiliate assign to me the
benefit of all or part of its 150 claim
so that I can set this off against the
100 I owe and pay nothing?
 If I pay less than 100 for the claim, I
have benefited from this transaction
 If my affiliate is paid more than 15, it
will have benefited from the
transaction
 The other creditors of the insolvent
company are prejudiced, however,
as they lose the benefit of an asset
worth 100
Impact of insolvency proceedings on build-up of set-off
 Cut-off date for acquired claims:
 date of liquidation (or earlier date of notice of winding up
petition / creditors’ meeting)
 date of administration (or earlier date of notice of
application / filing of documents with court for appointment
of administrator)
 However, in administration, insolvency set-off rule does not
come into play immediately
Impact of insolvency proceedings on build-up of set-off
(cont’d)
 Does this mean that creditors can build up and exercise rights
of set-off in the meantime?
 no clear legal reason why not
 may be general policy against such build-up
 need to take into account risks in pricing of claim
 NB acquired claim must actually be set off prior to
insolvency set-off rule coming into play (use or loose)
Enforcement options where your counterparty is in…
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bad shape but not bust
administration
liquidation
control of your assets
another country
a different country from where the assets are
located
The cross-border framework
 Cross-border questions:
 where should insolvency proceedings be commenced?
 what law applies in those proceedings?
 will those proceedings be recognised in other jurisdictions?
 Cross-border answers:
 is there an international treaty or European legislation that
applies?
 is the UNCITRAL Model Law relevant and has it been
implemented in the relevant jurisdiction?
 are there any mutual assistance provisions under the
domestic insolvency law?
 otherwise comes down to matters of comity and the
individual judge’s discretion
It all comes down to the nature of the beast …
 EEA credit institutions (Credit Institutions Winding Up
Directive):
 single set of EEA proceedings
 only applies to winding up proceedings and reorganisation
measures, not regulatory proceedings
 EEA insurers (Insurance Undertakings Winding Up Directive):
 single set of EEA proceedings
 NB priority for policyholder claims
 EU companies other than credit institutions, insurance
undertakings and investment undertakings (European
Insolvency Regulation):
 main and secondary proceedings
It all comes down to the nature of the beast …
 EU investment undertakings (e.g. LBIE) (black hole):
 recognition of such proceedings will be a matter for the
courts of each relevant jurisdiction
 Relevant country companies (s.426, IA 86):
 English court required to give assistance to court of
relevant country
 Non EEA / EU companies including credit institutions and
insurance undertakings (Part V, IA 86 and UNCITRAL Model
Law):
 requirement for sufficient connection with the jurisdiction
 recognition of insolvency proceedings commenced in the
place of the CoMI
Recent events
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Contracts
Set off
Restrictions on enforcement
International
Nature of entity
Speakers’ details
Susan Hazeldine
Partner, Litigation
Email: susan.hazledine@allenovery.com
Direct line: 020 3088 3729
Jennifer Marshall
Partner, Restructuring
Email: jennifer.marshall@allenovery.com
Direct line: 020 3088 4743
Questions?
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The
term partner is used to refer to a member of Allen & Overy LLP or an employee or
consultant with equivalent standing and qualifications or an individual with
equivalent status in one of Allen & Overy LLP's affiliated undertakings.
Jennifer Marshall and Susan Hazledine
Meltdown?
Recent developments in Insolvency Law
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