Testing Deeper Waters
The Ukrainian legal market, which had almost forgotten about the noisy arrival of international powerhouse law firms, was shaken by the arrival of Kinstellar at the beginning of March.
Being among the most challenging, but nevertheless, very prospective emerging markets, Ukraine seems to have been a target for Kinstellar since its establishment in 2008.
Kinstellar’s competitive advantages include its network of offices in nine countries across the Emerging Europe region and beyond, and its well-developed relationships with leading international law firms — both of which benefit clients in Ukraine.
In Kiev, Kinstellar has already made a number of strategic hires, including most recently Andriy Nikiforov, a long-time fixture at Baker & McKenzie, who joins as a counsel and head of the Banking, Finance & Capital Markets and Restructuring & Insolvency practices.
We met with Andriy recently to learn more about Kinstellar’s strengths and the outlook for its finance and restructuring practices. As Andriy has been engaged in restructuring Ukrainian corporate debt, we also asked him to shed some light on the situation on the ground and to share some pertinent legal solutions that may be helpful when it comes to testing deeper waters of financial restructuring.
UJBL: Andriy, your arrival at Kinstellar ushered in the launch of the Banking, Finance and Capital Markets practice at the Kiev office. What do you regard Kinstellar’s competitive strengths in Ukraine to be?
Andriy Nikiforov: I think this can be summarised in a very simple way. Unlike many international law firms, we have a multi-jurisdictional footprint without being UK-based or US-based. Kinstellar is, therefore, able to assist clients on many deals, working together with top US or UK law firms without any conflict of interest. Moreover, Kinstellar is an international law firm rightly sized for the Ukrainian market and brings along a number of significant client benefits in addition to quality work. To start with, a good piece of advice gets even better when the client is confident that the advice was not compromised in any way. Essentially, that it was sought from non-conflicted counsel and no other considerations impacted the counsel selection process.
UJBL: So how does Kinstellar handle a conflict of interests? Which procedures are in place to address this? What is the firm’s stance in terms of ethical issues?
A. N.: Unlike most local firms, Kinstellar has a dedicated risk and compliance team serving all offices and practices of the firm, which consists of a senior full-time lawyer and three full-time support staff. When a conflict is identified, the client will be notified accordingly, and the mandate will be rejected by the firm. It is always hard to turn down work, but it is rewarding in the long run.
As regards ethical concerns, Kinstellar has literally a “zero tolerance” policy in this regard. The firm believes that commitment to integrity is of crucial importance, as clients face growing pressure to demonstrate that they have taken all reasonable measures to prevent improper practices, not only among their own staff, but among their consultants and contractors.
UJBL: Would it be right to assume that Kinstellar’s clients may also rely on its insurance if things go off track?
A. N.: Kinstellar has professional, multi-million euro indemnity insurance from a leading global insurer. This covers practice at all the firm’s offices and extends to our sub-contractors, the work discharged by the firm’s lawyers on a charitable basis or in the capacity of, for example, trustees or bankruptcy administrators. Insurance is not something that can ever replace proper advice, but when it comes to a pioneering transaction or other similar matter, clients are much more willing to retain a law firm that has an appropriate level of insurance in place.
UJBL: Does the launch of Kinstellar’s office in Kiev mean that you expect a revival in the Banking, Finance and Capital markets practice in the near future?
A. N.: With a few exceptions, the flow of new money deals has dried up in Ukraine. These days it is restructuring work that keeps finance and capital markets lawyers busy. “Scheme of arrangement” will be a layman’s term very soon, and new Ukrainian financial restructuring legislation is also on the horizon.
UJBL: Turning to major debt restructurings in the Ukrainian market, is there some kind of connection between the restructuring trends and the recession that followed the all-time high Ukrainian GDP in 2013?
A. N.: It is no secret that Ukraine was already mired in an economic slowdown in 2013. The slowdown was followed by a slump of real GDP by 6.8% in 2014 and by an estimated further 12% in 2015. A similar downward trend was observable, in particular, in the context of Eurobond restructuring of Ukrainian corporates.
UJBL: Does this mean that restructurings have become a lot harsher since companies like DTEK and MHP were able to tap international capital markets and refinance their outstanding notes in 2013?
A. N.: The DTEK and MHP deals in 2013 were, in fact, purely new money issuances. They had a liability management component because the markets were so favourable that DTEK and MHP could also launch contemporaneous tender offers in respect of their existing Eurobonds and seek to push down their coupon expenses. These debt refinancings in 2013 were followed by the consensual liability management exercises of 2014 that, at a later point in time, gave ground to restructurings under court supervision.
UJBL: When exactly did Ukrainian corporates turn to this kind of restructurings?
A. N.: Following Moody’s downgrade of Ukraine’s government bond rating to Caa1 in 2013, there was no investor appetite for new money issuances from Ukraine but, for a short while, the holders of Ukrainian corporate notes remained generally eager to reschedule when properly incentivised. However, at some point in 2015, consensual restructurings were no longer an option, especially where the conditions to extend the maturity of the debt of the relevant bond provided for the consent of holders of as high as 90% of the aggregate principal amount of the notes then outstanding. This prompted Ukrainian issuers to consider in-court restructurings, in particular by way of a scheme of arrangement under Part 26 of the UK Companies Act 2006.
UJBL: What is a UK scheme of arrangement? Could you elaborate on its advantages for distressed companies?
A. N.: It is a statutory procedure whereby a company may make a compromise or arrangement with its creditors subject to the sanction of an English court. Under a scheme process, the restructuring may concern a class (and not all) of the company’s creditors, the management of the debtor remains with its directors, and the court’s involvement is limited to establishing whether the scheme’s proposals are fair, reasonable and represent a genuine attempt to reach agreement between a company and its creditors. The scheme’s approval requires relatively low creditor support — a majority in number representing 75% in value of the creditors (or class of creditors) present and voting at the meeting. Finally, since a scheme of arrangement is viewed as a Company Act process, no insolvency stigma is attached to the debtor.
UJBL: The English schemes of arrangement seem to have won the hearts of debtors, particularly in the Eurobond context. Is this perception correct? Does the scheme work solely for UK-registered companies, or does it have a broader application?
A. N.: Schemes indeed make the most sense in bond restructurings because of the large pool of creditors, the difficulty in identifying all of them (since Eurobonds are generally held through the clearing systems), and the risk that a rogue creditor will hold for ransom the prospect of a reasonable debt settlement. A multitude of corporates worldwide have turned to the English scheme of arrangement for this reason, so it is no surprise that the recent Eurobond restructurings of DTEK, PrivatBank and Metinvest have followed suit.
Under the UK Company Act, a scheme can be carried out by “any company liable to be wound up under the [UK] Insolvency Act 1986”. This may lead to a spontaneous assumption, which would be wrong, that a scheme of arrangement works only for companies incorporated in the UK. An English court would be competent to wind up a non-UK registered company if that company has a sufficient connection with the English jurisdiction and the scheme is likely to achieve its purpose.
UJBL: So what does the sufficient connection test look like these days?
A. N.: The English QCs acting on schemes of arrangement are aligned in that, in recent years, the circumstances in which an English court will find a “sufficient connection” for the purposes of the scheme jurisdiction have expanded enormously. From its origins as a procedure used essentially for English incorporated companies, schemes have been successfully promoted to suit foreign companies which either have substantial assets or the centre of main interests (COMI) in England, foreign companies where the relevant liabilities are governed by English law and/or subject to English jurisdiction, and foreign companies for which their COMI has been deliberately moved to England for the purposes of establishing scheme jurisdiction.
UJBL: Is it true that DTEK’s 2015 scheme gave another reason to talk about the English courts’ ever-increasing amenability to accept jurisdiction in respect of a scheme?
A. N.: The DTEK scheme was indeed without precedence and went one step further. In the DTEK case, the English court recognised jurisdiction primarily on the basis of DTEK’s Eurobonds governing law and jurisdiction clause, which had been purposively changed from New York law to English law in order to confer jurisdiction in relation to a scheme. This development received extensive press coverage in London and, without a doubt, was one of the few exciting pieces of news about Ukraine in the generally depressing restructuring context.
UJBL: Is there something similar to schemes of arrangement in Ukraine?
A. N.: Actually, a pretty much identical pre-insolvency instrument exists in Ukrainian legislation. With effect from 19 January 2013, the Act of Ukraine On Restoration of Debtor’s Solvency and Declaration it Bankrupt was, among other things, supplemented by Article 6, which established a procedure for a debtor’s financial rehabilitation, managed by a commercial court, prior to the commencement of bankruptcy proceedings. Article 6 has essentially all the key features of the UK scheme: the debtor may continue to be run by its managers, the arrangement may concern a class of creditors (and not necessarily all of them), and it is also the basis for the court to impose a moratorium on creditor claims.
UJBL: Did the Article 6 process live up to the expectations of the Ukrainian business community?
A. N.: Article 6 did not change the Ukrainian restructuring and bankruptcy landscape in any significant way, even by a long shot. At the end of the day, it is such a difficult process to launch that its principal benefits (such as cram-down of minority creditors and introduction of a moratorium) may be not worth the trouble. Prior to even submission of the financial rehabilitation plan to the court, the debtor needs to collect the consent of all secured creditors and the majority in value of non-secured creditors and hold a creditors meeting. It may then take up to a month for the court to hear the case and to decide on approval of the financial rehabilitation plan.
UJBL: On 31 March 2016, the Parliament of Ukraine adopted the Act of Ukraine On Financial Restructuring in the first reading. What will the Ukrainian toolbox look like once the new Act comes into effect?
A. N.: It is proposed that the court administered pre-insolvency procedure under Article 6 will co-exist with an out-of-court restructuring process regulated by the financial restructuring law until the latter is in effect (currently, for three years following its effective date). Various technicalities put aside, the rationale for having both of them comes down to mistrust in the Ukrainian judicial system and the need for extrajudicial consensual restructuring process to be given legislative shape. The financial restructuring law amends, inter alia, Article 6 of the bankruptcy law with a view to making it more comprehensive and pushing down the secured creditors voting threshold to 75%, where their claims are part of the financial rehabilitation plan.
UJBL: Can any of these laws be somewhat instrumental in bringing Ukrainian restructuring work back to Ukraine?
A. N.: It should be clear that, generally speaking, a jurisdiction may suit as a restructuring venue only if the debtor is registered in that country or, to a lesser extent, if the liabilities are governed by the laws of such jurisdiction. Under Ukrainian bankruptcy law, a court would only accept jurisdiction if the debtor is located in Ukraine at the court’s location. It remains to be seen whether, under the financial restructuring law, which is somewhat unclear on this, a foreign company may succeed in restructuring its liabilities in Ukraine, but without doubt this will be breaking news.
Furthermore, when it comes to restructuring, it is in the debtor’s interest to secure either a moratorium or the creditors’ forbearance consent in respect of the existing creditors’ claims that will be recognisable in the jurisdictions of location of the debtor’s assets. It is difficult to imagine that debtors with major assets located in Ukraine would put their multimillion fortunes at risk and make a choice in favour of a procedure that, among other things, has no history of application. It is unlikely that a Ukrainian debtor would suddenly have a change of heart in favour of a Ukrainian restructuring procedure when English or Dutch courts are known to accept jurisdiction. That said, the financial restructuring law expressly provides that it is applicable to restructuring of the liabilities owed to non-Ukrainian financial institutions and/or governed by a foreign law.
UJBL: Would the financial restructuring law do the trick in a situation where a Ukrainian corporate issuer seeks to restructure its bonds, whether issued locally or on international capital markets?
A. N.: Whatever the reasons, the authors of the law limited its application to liabilities owed to creditors, at least one of which is a financial institution that is engaged in factoring, leasing or primarily the lending business. Therefore, in circumstances where, for example, all of the creditors are investment funds and none of them meets the financial institution test, the financial restructuring law does not apply. The foregoing would also hold true, particularly in respect of all direct Eurobond issuances by Ukrainian corporates like those of Naftogaz. Notwithstanding this, the financial restructuring law should work for the majority of local Ukrainian restructurings, and we look forward to seeing it applied.
Kinstellar Key facts:
• Year of establishment
2008
• Number of lawyers/partners
200/26
• Core practice areas
Banking, Finance & Capital Markets
Competition & Antitrust
Compliance, Risk & Sensitive Investigations
Dispute Resolution
Employment & Labor Law
Energy
Infrastructure & projects
Intellectual Property
Life Sciences & Healthcare
M&A / Corporate
NPLs & Distressed Assets
Private Equity
Real Estate & Construction
Restructuring & Insolvency
Tax
Technology, Media & Telecommunications
