UNCLC Seminar on Insolvency Law - Blog by Howard Wat, LLM student
Mr Tim Lees, a Partner at Clifford Chance and a graduate of the University of Nottingham, delivered a talk on insolvency law at a seminar chaired by Professor Irit Mevorach on 15 March 2023. Mr Lees began his presentation by highlighting the primary goal of every business, which is to make money. He emphasised that having a sound understanding of insolvency law is an essential component for achieving this objective. To illustrate this point, Mr Lees presented a case study on NMC Health PLC, a United Arab Emirates company with convertible bonds issued by a German company.
Convertible bonds are initially made as loans which can later be converted into equity investments, such as stocks. Since they are a form of debt, it means that they represent money owed by the debtor to the creditor. According to Mr Lees, convertible bonds are a preferred option for investors seeking a passive stream of income, especially in the face of potential economic downturns. In the particular case study, the creditors had invested heavily in the convertible bonds and had to cash out their investments when the company entered a restructuring procedure. Mr Lees emphasised that lawyers' role in such a scenario is to maximise the amount of money that the creditors can recoup from their investments. The creditors, in this case, operated as syndicate bank facilities and provided loans to the borrowers while receiving interest payments.
Mr Lees also pointed out that businesses often rely on revolving credit facilities to fund their activities, which enables them to borrow and repay money, and subsequently re-borrow within the lifetime of the facility. The company had a substantial sum of funds, over a billion dollars, which were used in the revolving credit facility. Since the sum is considerable, the syndicate bank facilities demanded security in the form of properties or monetary value in the business. This security protects the banks’ interests in case the business goes into insolvency or experiences an event of default. In such a situation, the banks would take control of the security assets using an enforcement order. Mr Lees highlighted that the banks were further protected by negative pledges, which prevent the owner of a charged asset from creating further security without the lender’s agreement.
When businesses engage in fraudulent commercial practices, they will eventually face the consequences. A due-diligence investment firm, Muddy Waters, raised concerns about NMC Health Plc's financial health, highlighting the risks of significant fraud in its financial statements. These concerns led to the suspension of NMC Health Plc's trading due to suspicions of under-reporting of debts. Further investigations revealed that the company had vastly inflated its asset values while understating its debts. Consequently, the largest lender of NMC Health Plc, Abu Dhabi Commercial Bank, petitioned the court to appoint administrators from the UK.
Enforcement of arbitration awards can extend beyond the borders of signatory countries. In the context of insolvency, Mr Lees suggested that the Abu Dhabi Commercial Bank considered both UAE and UK jurisdictions when handling arbitration proceedings. This was due to their confidence in the English courts producing more consistent results. However, the question arose as to whether foreign judgments could be enforced. Mr Lees explained that despite NMC Health Plc being based in the UAE, foreign arbitration judgments could be enforced. This is due to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international treaty ratified by both the UAE and UK. As a result of this ratification, signatory countries are obligated to recognise and enforce arbitration agreements made in other signatory countries, thus resolving the issue of enforceability of foreign judgments.
Mr Lees concluded that the English arbitration court imposed a moratorium on NMC Health Plc, which is a legal mechanism that allows businesses to regain their footing. It provided a period during which creditors could not take enforcement action. This meant that the company had additional time to remain in administration and address its debt problems.
In conclusion, the primary objective of every business is to generate revenue, and insolvency law serves as a critical tool to aid businesses in achieving this goal. Businesses utilise various financial instruments, including convertible bonds and revolving credit facilities, to raise funds, while banks seek to protect their interests by demanding securities when providing loans to businesses. In the event of insolvency, banks often seek court-appointed administrators to recover their investments, and courts may impose a moratorium to provide struggling businesses with additional time to resolve their debt issues. Going forward, businesses must carefully consider the potential consequences of engaging in fraudulent commercial practices, which could significantly impact their properties and monetary values of their businesses.