After an economically uncertain and sluggish 2018, offshore law firms are anticipating a need for restructuring and insolvency services in the region, and bulking up their teams in that practice area.
Even as certain industries go bust, law firms that provide offshore legal services are experiencing a boom in the demand for restructuring and insolvency services.
The regulatory framework for cross-border matters might still be in the process of being sorted out in Asia, particularly in China and Hong Kong, but offshore law firms getting ahead of the curve by growing both their banking and finance teams and their dispute resolution teams in the British Virgin Islands (BVI) and the Cayman Islands to meet the rise in the volume of Asian cross-border insolvency and restructuring work.
Michael Makridakis, partner and head of Carey Olsen's dispute resolution and insolvency practice in Hong Kong, thinks that the growth in non-performing loans and bond defaults will lead to a greater need for litigation services.
"We have seen the much-discussed rise in non-performing loans and bond defaults by Hong Kong and People’s Republic of China (PRC) corporate borrowers translate into several new instructions from lenders to advise upon and investigate enforcement options in Bermuda, British Virgin Islands (BVI) and Cayman, as part of a wider global enforcement strategy which includes Hong Kong and the PRC,” says Makridakis. “We have not yet seen these recent enquiries translate into litigation or active enforcement action in BVI or Cayman, but we anticipate that a number of such cases will arise during the course of 2019.”
A seesaw effect is anticipated with significant slowdowns creating strong demand for insolvency and restructuring services.
"Demand for offshore services in the insolvency, restructuring and litigation space remains strong,” says Makridakis. “Any significant slowdown in the PRC or global economy, or other economic events which give rise to higher interest rates, tighter liquidity conditions, an increase in the rate of non-rollover of revolving credit lines or an increase in corporate loan/bond defaults, will in our view result in a significant pickup in demand for these services in 2019 and beyond.”
Eliot Simpson, partner and group head of Appleby’s dispute resolution department in Hong Kong, foresees more shareholder disputes heading to offshore jurisdictions.
“There is an ever-growing expectation amongst the users of offshore products in Asia that disputes can be resolved in the courts of the relevant offshore jurisdiction. This manifests itself particularly in the increasing numbers of shareholder disputes being litigated in BVI and the Cayman Islands,” says Simpson.
“As users of offshore products in Asia increasingly expect that disputes can be resolved in the courts of the relevant offshore jurisdiction, we see more and more instructions in shareholder disputes and other corporate disputes, particularly in BVI and the Cayman Islands,” Simpson adds.
Vicky Lord, partner in Harneys’ litigation, restructuring and insolvency team in Hong Kong office, observes that policy shifts in the PRC mean distressed companies may not be allowed to survive at any cost.
“We can expect to see consolidation in the market of private enterprises,” says Lord. “We are seeing increased shareholder activism over worthwhile investments. There is also more appetite for enforcement as investors claw back assets and reciprocity opens up the courts,” says Lord.
“As China goes global, that will inevitably mean more disputes when it comes to ownership issues over valuable assets held offshore as investors reassess their portfolios. Big investors are, in this economic and political climate, less tolerant of failure and so we expect to see more enforcement when deals go south.”
CHANGING STRUCTURES
Nigel Meeson QC, partner and head of the Asia disputes and restructuring group in the Hong Kong office of Conyers Dill & Pearman, points to a specific case as setting the trend for restructuring in the region.
“The recently completed complex restructuring of Noble Group was achieved through the conventional, but highly effective, traditional route of using parallel schemes of arrangement in the UK and Bermuda (the place of incorporation) with Chapter 15 recognition in the U.S.,” says Meeson.
Although Noble Group was listed in Singapore, the new Singapore restructuring regime was not used.
That may have been a blow to Singapore’s ego as the island nation has been revamping its insolvencyregulatory framework to set itself up as a hub for debt restructuring work in the region. The amendments aim to make Singapore's insolvency regime more in line with the U.S. Chapter 11 Bankruptcy provisions.(See ‘A Resolve for Insolvency’ in the September 2018 issue of Asian Legal Business for more).
“There is likely to be a continued reluctance to use the Singapore regime for more complex cross-border cases until some clearer principles have emerged from the Singapore courts. There is a further impediment following the recent decision of the English Court of Appeal in The OJSC International Bank of Azerbaijan case, holding that in English law debt is not discharged by foreign insolvency process,” explains Meeson.
“Unless the Supreme Court overturns this decision, then if there is English law governed debt parallel scheme in the UK, the place of incorporation is likely to remain the most popular restructuring route,” says Meeson. “The alternative approach could be a centre of main interests shift, but this may involve a higher level of execution risk possibly owing to lack of recognition in the place of incorporation offshore.”
Following a large number of merger appraisal actions being filed in the Cayman Islands, Meeson notes that this trend has slowed considerably, no doubt reflecting the slowdown in the privatisation activity of Chinese listed companies.
"On the other hand, there has been an emergence of more internal corporate battles within Chinese companies, especially in the new technology sectors, which have not all resulted in litigation being commenced. This trend is likely to continue in the light of the slowdown of the Chinese economy and increased scrutiny by Chinese regulatory authorities," says Meeson.
Given the large number of Chinese companies being structured using Cayman Islands holding companies and BVI subsidiaries, the increasing economic and regulatory pressure on those companies is likely to lead to an increase in contentious corporate advisory work and litigation.
“On the other hand, there may be a slowdown in other corporate work such as the IPO market and M&A activity, but increased activity in investment funds work relating to distressed investing, and potentially increased finance work focussed more on re-financing and debt restructuring,” says Meeson.
THE TRADE WAR TAKES ITS TOLL
Another variable that could have a significant impact on the sheer amount of offshore legal work is the ongoing trade war between the U.S. and China, which nowadays is never far from anyone’s mind. As the two economic superpowers engage in a global tit-for-tat, the global economy has experienced some volatile times. This is especially true for the economies of the two main countries involved.
“2019 looks like it will also be a challenging year for China, particularly for PRC high-yield issuers who need to refinance,” says Chai Ridgers, partner in Harneys' litigation, restructuring, and insolvency practice group in Hong Kong.
“Those challenges stem from the ongoing trade war with the United States as well as Beijing’s continued tight regulation of capital controls and strict implementation of a deleveraging campaign, which has resulted in a significant drop in leveraged based overseas acquisitions by Chinese conglomerates,” Ridgers says.
“We can expect more volatility in the markets,” says Harneys’ Lord. “The current situation has been building for a while. The U.S./China trade war will likely mean that China will isolate the U.S. and consolidate with BRICS (the association consisting of five major emerging national economies: Brazil, Russia, India, China and South Africa) - this, in turn, will feed into increased use of offshore vehicles.”
Fiona Chan, partner in the corporate department of Appleby's Hong Kong office, believes there is certainly a greater likelihood that economic growth in China could be further affected by the trade war.
“However, we see that this has led to an increase in collaboration between financial institutions and startups. In addition to initial coin offerings (ICO) starting to decrease, we expect to see an increased interest in securities token offerings (STO) in Asia. In general, across the region, there is an increasing focus on regulatory compliance and transparency as these become global standards," says Chan.
Conyers Dill's Meeson thinks there are two factors involved that differentiate the current situation from previous years.
“There are two significant macro-economic factors: the trade war and the rapid slowdown in the growth of the Chinese economy. Both are uncertain. The trade war may last a long time or be resolved swiftly,” says Meeson.
“The extent of the growth slowdown in China and how it will be managed by the Chinese government is unknown at this time. This makes it even more difficult than usual to predict the likely needs of Asian businesses for offshore legal services over the next 12 months,” Meeson adds.
But the one thing he feels is likely would be a need for more litigation services this year.
“There is likely to be an increasing demand for contentious corporate and restructuring advice, which is likely to translate into an increase in litigation and court proceedings later in the year,” says Meeson.
BELT AND ROAD AND OTHER TRENDS
Appleby’s Chan believes last year’s tech developments will feed into 2019’s trends in the Asian banking/finance sector.
"2018 was an exciting year for the banking and finance sector. In particular, the trend towards increased utilisation of technology continued to grow, principally in the fast-growing areas of blockchain, artificial intelligence (AI) and cloud technology in financial institutions,” says Chan.
Chan thinks China’s recent introduction of a series of cybersecurity and data protection regimes will play a key role in affecting the operation of the banking and finance sector in the country.
And that’s not all, China’s ambitious infrastructure initiative for the region is also expected to churn up opportunities for all. When combined with the GBA (which takes in nine cities in mainland China, Hong Kong and Macau), the Belt and Road Initiative could prove to be a powerful springboard for more offshore mandates.
“As in previous years we expect the Belt and Road countries to continue to benefit from investment from China, although the number and size of the projects would likely be affected by the performance of the Chinese economy in 2019,” says Chan.
“This combined with the continued growth of Chinese banks, active loan and capital markets activities (e.g., One Belt, One Road projects) have seen the Chinese technology and insurance sectors yielding higher and higher investments. This has contributed to a continuation of activities of downstream portfolio companies/funds,” she adds.
In addition, Chan expects to see more sophisticated deals in the market with the major Chinese companies increasingly using these vehicles. Although she also feels the uncertain outlook of the Chinese economy may impact this.
"Offshore jurisdictions are quick to adopt and/or refine legislation as they strive to be the major FinTech hubs. In particular, we see more utilisation of offshore structures in Fintech and related projects, especially in STO, and increasing advice work on regulatory compliance (e.g., reporting requirements and disclosure, data protection, tax filing and transparency, economic substance requirements and filing),” says Chan.
“We expect to continue to see the use of offshore structure in projects for One Belt, One Road investments alongside more structured products with usual offshore entities such as repackaging, securitisation structures.”
Chan also expects the year ahead to bring further decentralisation of data and with it an increasing deployment of FinTech in both existing and new sectors.
"With the increasing focus on regulatory compliance, global convergence of regulatory requirements relating to data protection, regulatory compliance and disclosure, and tax may come into force. The performance of the Chinese economy will influence the region as a whole, which will create new challenges and opportunities along with it," says Chan.
Furthermore, the days of easy and cheap credit are now a thing of the past, which will leave many companies exposed to refinancing risks both in China and offshore.
“These challenges will hit a number of corporates, particularly in (but not isolated to) the real estate sector, many of whom have issued short-term bonds maturing in 364 days or less, creating another refinancing challenge for those companies in the year ahead as sales slow and the government tightens its regulation of the real estate sector,” says Ridgers.
All of these issues provide a climate that will likely impact investor sentiment and appetite for high-yield bonds in 2019.
“This will hopefully spell good news for the need for offshore legal services (and not just restructuring practices such as ours) given the prevalence of Caribbean entities in Asian capital structures,” says Ridgers.
He adds that this is further aided by the Cayman Islands, the BVI and Bermuda being prescribed by the Listing Rules of the Hong Kong Stock Exchange as ‘recognised’ or ‘acceptable’ jurisdictions for the purpose of eligibility for listing to the Main Board or the Growth Enterprise Market.
"I am confident that there will be an upturn in restructuring work in 2019, which will, in turn, increase the overall size of our existing global practice and our recruiting needs accordingly," says Ridgers.
Regardless of what 2019 holds, offshore law firms are gearing up to be versatile enough to deal with any trends or various twists that the year’s developments may turn out to be.
“Offshore jurisdictions have continued to implement various global standards and regulations promulgated by the UK, U.S. and the EU, which puts these jurisdictions in a strong position in compliance with international standards,” says Appleby’s Chan.
“As a firm, we have been heavily involved in providing legal advice in relation to international standards adopted across the various offshore jurisdictions in which we operate in, particularly in the FinTech space. Further, we remained committed to advising clients on all aspects of offshore law in this challenging and exciting environment.”
China opens bankruptcy court in Shenzhen
By Asian Legal Business
Looking to the growth of cross-border disputes brought about by the expansion of the global business expansion out of mainland China and various initiatives such as the Greater Bay Area, a special bankruptcy court was recently set up in Shenzhen with a clear focus on cross-border cases.
The Shenzhen Bankruptcy Court, which aims to provide “powerful judicial services and guarantees for Greater Bay Area development”, will mainly handle bankruptcy filings in Shenzhen, but it is also expected to help Chinese authorities trace the assets of bankrupt mainland businesses that have been transferred to Hong Kong.
Though this new court is not expected to overrule the separate jurisdiction in Hong Kong or extend the mainland’s reach into the Special Administrative Region (which is part of the GBA), it brings both sides one step closer to dealing with a soaring number of insolvency and restructuring cases. At the moment, there is no framework for the courts to mutually recognise insolvency orders.
In the background is the changes in the pattern of economic growth in China. GDP growth of 6.6 percent through 2018 was the slowest pace since 1990. As a result, bankruptcy cases on the Chinese mainland have risen rapidly. According to data from the Supreme People’s Court, the 6,257 bankruptcy cases settled by Chinese courts in 2017 already marked a year on year increase of 73 percent. 2018 was an even busier year, with 6,647 bankruptcy cases in just the first ten months.
To contact the editorial team, please email ALBEditor@thomsonreuters.com.
