Gordon Stewart is president of Insol International (2011-2013), and a partner and head of the global restructuring group at Allen & Overy in London. He has also served as Insol vice-president, sat on its board, and acted as the first lawyer president of the Association of Business Recovery Professionals (R3).
Have you set any specific objectives for your term as Insol president?
Yes. I want to increase our membership in emerging markets, such as the Bric countries, and equally I'd like to increase it in the US.
Secondly, there are a number of cross-border recognition rules and laws and I'd like to see them adopted more widely. Insol had a lot of input into the Uncitral Model Law on Cross-border Insolvency. It has been adopted by the UK, US and a number of other countries, but it hasn't been adopted universally, as is the ideal.
Another of my aims is to continue the work of Insol in bringing the knowledge of the more mature markets to those who are trying to build their capacity. The World Bank goes round and marks countries by reference to a number of different standards, and one is the quality of their insolvency laws and the quality of the courts in implementing those laws. We can help those countries learn from how things are done in other territories.
It seems quite an ambitious remit for Insol to be an international society of insolvency practitioners, considering the differences in insolvency laws around the world. How does Insol approach that aspect of its work?
We have about 9,000 members, and those members are either individuals or come through one of the 40 member associations we have from all across the world. The 10 largest member associations have a seat on the Insol board. So we have contacts and access to people all over the world and we can tap that knowledge base quite readily.
Insol seeks to share knowledge: to offer to those who are trying to improve their insolvency laws and their capacity-building the opportunity to see what is best in class. We have no axe to grind – I happen to be an English common lawyer, but I hold no particular cards for the common law against the civil law, nor am I particularly pro-creditor or pro-debtor. We are neutral. What we do is show people the various alternatives that have been used and tried elsewhere in the world, and they can choose what they consider, in the context of their culture and existing resources, to be best in class.
Is there a growing eagerness to improve insolvency frameworks in the light of the economic crisis?
Absolutely. I would like to see more, but I think in general terms one is seeing a lot of countries seeking to improve their insolvency laws – and it's right that they should. Remember that a company's assets and people are part of a country's capital, so if a company is bust, essentially that capital is all tied up. An insolvency law should either give people a second chance or, if the people are incompetent, take the capital out of those hands and put it swiftly and efficiently into new hands who hopefully can run it better and then pay the creditors swiftly so that that liquidity again is put back into the economy. Insolvency plays a vital part in marketplaces. Countries that don't have an effective insolvency system are damaging themselves.
In South Africa there used to be an inclination for companies to be broken up and liquidated when they ran into trouble, whereas a lot of other countries have pursued a rescue culture where the emphasis is on saving the business because insolvency is likely to reduce value for all stakeholders and also damage employment. So South Africa has introduced a new business rescue law, and has separated the professions into rescue practitioners and insolvency practitioners.
Germany had seen some dissatisfaction with aspects of its laws during the last downturn, and a number of companies relocated to jurisdictions that were felt to be more amenable to achieving rescues. So the Germans have just amended a number of aspects of their laws. The PRC introduced a new law a couple of years ago that has started to see rescues and restructurings approved by the court; and the UAE has indicated it intends to introduce a new bankruptcy law.
Capacity building doesn't end with laws. You can have the best laws in the world, but if you don't have courts ready to deliver prompt, efficient and certain justice, then you haven't built the requisite capacity.
There's no one right answer; as Deng Xiaoping said: "It doesn't matter if a cat is black or white, so long as it catches mice." That is my approach to capacity building in countries: what is available, what can be done, and how can we best help people?
Where are we with global financial regulation now, following the lessons learnt from the recent crises?
In terms of the regulation, supervision and resolution of financial institutions, we emphasised this as a member of a private sector task force reporting to the G20 on regulatory convergence around the world. One of the things we said was that bank resolution should be pretty near the top of everybody's agenda. There is so much that needs to be done, and it is so challenging and illustrates some of the difficulties in being truly cooperative and convergent internationally.
First of all you have the concept of the living will – a document that describes what a bank's assets are, and how it's put together. If you have Bank X with branches and subsidiaries around the world, you have to have blueprints for the whole thing, and every country that has a bit of that entity has to have been spoken to before so that if the crisis hits everybody is ready. That way it's not like we sit down on Saturday morning and try to work out what to do.
You've got to have laws in each of these countries enabling cooperation or, even better, recognition of the main resolution procedure. And you've got to have the ability for the executive to take action: the ability to transfer the good bits over to a purchaser or into a bridge bank, and the ability to ignore covenants and contracts that say you can't do that. Then you have the shell that's left behind and the obligation of that shell to continue servicing the bridge bank or purchaser with the bits that couldn't effectively be detached. You need all that in all the major financial jurisdictions of the world.
I wouldn't underestimate how long it will take and how sensible people will have to be. It's the prisoner's dilemma – the realisation that we'd all be better off if we cooperate. That can be tricky when you've got a situation where banks are going down and countries are worried about their future. So don't hold your breath that it will be sorted by the end of the year.
What's your assessment of how regulations dealing with corporates and groups have developed?
I think the ingenuity of restructuring lawyers globally has been quite impressive in the last downturn. We've found ways to work around the difficulties and achieve results.
For example, we've seen the use of English law schemes of arrangement – I don't think they're perfect but they have delivered the result that's been needed. Companies from Spain, France or Germany have come to the UK either to take advantage of schemes directly or shifting their centre of main interest in order to get an administration and get what the UK law and courts can provide. Of we've gone to the US to use Chapter 11.
I don't regard that as forum shopping – that has pejorative connotations. I regard it as a perfectly sensible purchase of the services that are needed.
I would like to see more countries having their own efficient, sophisticated, modern restructuring laws and courts to deliver the results without having to shop around. Insol is very much in the business of encouraging people and demonstrating what's on offer in other parts of the world.
But how far do you think convergence of laws and regulations can go?
There is something to be said for asking 'Wouldn't it be great if we had one global law that applied everywhere, and a global court?' That's certainly not going to happen as far ahead as I can look, because of history and different priorities and resources. I think that all one can seek to do is recognise other foreign laws. Respect and recognition is the name of the game, and not having one global insolvency law, simply because there are too many structural differences to achieve that.
The English courts have always been quite good about this under the common law and emphasised their approach recently. For example, Lord Hoffmann's view in two important cases in 2006, HIH and Cambridge Gas Transport, was that under English law in a restructuring there should be, so far as possible, one procedure in the world, it should admit all claims from wherever they come, and it should divide the assets up fairly. He said the fact it's different doesn't make it bad.
The basis of the Uncitral Model Law is that you should recognise a practitioner coming in from another part of the world. If they come from the centre of main interests of the company, they get certain automatic recognition and the court can give more. If they come from a non-centre of main interest, they get fewer automatic rights but the court can still decide that all in all they're going to help the applicant.
As I mentioned, I'm disappointed that there are a number of mature markets and some very wealthy countries in Western Europe that haven't adopted the Model Law. One of the recommendations of the private sector task force to the G20 was that there should be greater adoption of the Model Law. We'd like to see far wider adoption because it makes for simpler, cheaper, more efficient cross-border insolvencies and there are going to be more of those, not fewer, as a result of globalisation.