Mini Series: Business of Law Firms
Restructuring & Insolvency​

By Jake Rickman​

What do you need to know this week?

This is the sixteenth article in TCLA’s series on the Business of Law Firms.

This week will be the first of several intermittent articles giving an overview of certain less-considered practice areas. The purpose is to provide you with an insight into the kind of law trainees and associates in these practice areas.

Today we will consider Restructuring & Insolvency (R&I).

What is R&I?

Restructuring & Insolvency is arguably one of the most diverse seats you can sit in as a trainee. What R&I work has in common is the fact that there is a business (the debtor) that owes money to another party (its creditor) where the business is facing some sort of financial difficulty.

You can think of R&I matters as sitting on a large spectrum. On one far side is a straightforward refinancing, such as where a distressed company agrees with a group of bank lenders to take out a new loan and use the cash to pay off the old loan. On the opposite side is where a company and its creditors cannot work out a deal and the court intervenes to sell the company’s assets to pay back creditors.

Fraud plays a more common role in R&I matters than you might suspect, such as where a few naughty directors have squirrelled away company cash to the detriment of its lenders (and the company’s balance sheet). Where this is the case, it is not uncommon to have a whole separate set of civil and criminal proceedings against the directors brought on the company’s behalf.

Why Should I Consider R&I?

R&I is relatively unique in that the matters you are staffed on incorporate transactional and contentious elements simultaneously.

All but the most acrid of insolvencies will require negotiation because an effective outcome requires all involved parties to relinquish certain rights acquired under the terms of the debt documents, company law, and other private agreements in force. For instance, a negotiated outcome might involve shareholders agreeing to give up 40% of their equity in exchange for the lenders writing off half the outstanding debt.

Likewise, nearly all restructurings are inherently contentious because the fundamental interests of all involved parties are contradictory. Not only do creditor and debtor interests diverge, but one creditor may have an entirely different risk tolerance than the rest (secured bank lenders vs opportunistic credit investors).

It follows that R&I is one of the few transactional seats where lawyers play a fundamental role in commercial negotiations. Unlike straightforward loan transactions where most of the terms are pre-agreed before the lawyers get involved, the circumstances facing all the interested parties in a distressed situation are often highly peculiar. Adept senior lawyers can “unlock” unseen outcomes depending on the terms of the existing debt and security agreement, thereby creating an outcome that another lawyer might not have envisioned.

In this sense, R&I is immensely strategic. Complex restructurings have been likened to a single game of chess but where there are more than two players, all of whom strive to beat the rest.

Additionally, high-value R&I matters frequently have a cross-jurisdictional element: a single company might have a series of local secured bank loans governed under German law adjudicated in a German court, high yield bonds governed by English law, and a single UK-governed security package affecting half of the corporate group entities in seven other jurisdictions, with the group’s top holding company located in the British Virgin Islands.

Finally, it is worth observing that R&I is countercyclical. That is, when the market tanks, R&I matters increase. In theory, this means that while associates and lower-performing partners in other practice groups (*cough* M&A) are cut due to slackening deal volume, R&I staffing remains steady.

What Do Trainees in Restructuring do day-to-day?

The day-to-day depends on the firm, but common trainee tasks include:

Structure charts

Large businesses consist of many corporate entities. Structure charts are a visual representation of the group structure including the debt liabilities and security interests associated with each entity.

Trainees read through publicly available documents (e.g., debt documents and company accounts) to piece together the group structure so that partners can quickly grasp the picture — as this information may not be available otherwise.

Client calls

Arriving at a restructuring agreement requires continuous communication with all parties, including creditor committees. Trainees take notes and ensure their client’s interests are accounted for.

Slide Decks

A restructuring process can take months. At every step of the way, clients — be they creditors, debtors, or trustees — expect to understand what the next steps are.

As restructuring processes involve the negotiation of various legal debt documents, clients find it useful to see a roadmap of the plan as and when it changes.