Cross-border leasing, insolvencies market consolidation are just
some of the areas keeping law firms busy with asset finance work.
But will it continue, we ask, in this survey of the UK asset
finance legal market
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While consolidation among law firms continues apace, several
City firms, though remaining major players in the wider financial
services sector, are not as active in asset finance as they were in
the heyday of taxbased leasing. Meanwhile, other firms have
expanded their asset finance capability and work volumes, and
generally, today, the market remains intensely competitive.
Crucially, however, there has been almost no drop-off in the
number of lawyers engaged in asset finance, despite a groundswell
of opinion that leasing is on a downward spiral thanks to lowering
margins and Government legislation.
Norton Rose remains top of the pile in the category of number of
asset finance specialists (see boxout) with 33 partners,more than
double Watson Farley & Williams (WFW), ranked second, which has
16 lease specialist partners.
The coffers of law firms are also being filled through a fresh
wave of lease-related litigation and transactions.WFW still regards
asset finance as an important driver for the firm’s future growth,
while offshore, in the Cayman Islands, local firm Walkers recently
set up an asset finance business in its Jersey office. Such a move
was spurred by the obsession among lawyers that, with the near
death of tax-based leasing, structuring deals away from the gaze of
the Treasury might just be the way forward.
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By GlobalDataOther mid-tier firms have made deeper inroads into leasing.
Stephenson Harwood, for example, wisely hired a team of rail
finance specialists in recent months, just as this market began to
kick-off.
Meanwhile, larger firms – as well as their smaller counterparts
– still highly regard asset finance. Recently, Clifford Chance
shunted its marine division into asset finance, partly to attract
tax-based finance deals, a move that resulted in the loss of its
heavy hitter, Paul Turner, to the London firm Clyde & Co.
Litigation
Litigation has kept certain firms busy, particularly arising
from the collapse of lessees and consequential claims by lessor
creditors. Firms particularly endowed with this work include
Addleshaw, Bermans and, more recently, Shoosmiths, ever since the
arrival of Joanne Davies from Cheltenhambased firm BPE. Davies was
previously a litigation manager at Royscot Trust, part of RBS
Group.
Such creditor claims this year have included the very large
administrations of Thornycroft and EPP Global, both involving
allegations of fraud and complex title claims.
In terms of landmark litigation, the past year has been a
particularly eventful one for Wragge & Co, which advised the
finance companies in the Court of Appeal actions Fairfax
Gerrard Holdings Ltd and Others v Capital Bank plc,where a
lessor was in conflict with a trade finance company over title to a
large asset, and Caterpillar Financial Services Ltd v Goldcrest
Plant and Groundworks Ltd and Others, concerning the
enforceability of personal guarantees of corporate asset finance
contracts.
Sources of work
Most firms reported that large ticket instructions in the UK,
which always seemed the most likely to be hit by the long funding
lease (LFL) rule changes, are not substantially down, although a
minority do perceive reductions (see table 1).
Norton Rose partner Alistair MacRae says: “Both large ticket and
other UK business was up from 2006, but still substantially down
from the pre-2006 level in 2007.”
He largely puts this down to “some banking sector lessors,who
did not previously take residual value risk,now writing operating
leases”.
“There is also still a market for finance leases on big ticket
assets where customers are happy with a full payout within a
five-year period,” he adds.
Future of cross border leases
On UK-to-foreign leases, where the tax rules were, to a large
extent, eased in 2006, threequarters of respondents reported an
increase in business. MacRae says there has been “a shift towards
lessors retaining risks of future tax changes rather than passing
them on to lessees through tax variation clauses”.
He also points to the emergence of ‘tax-fixed’ UK-to-foreign
leases, whereas, previously, such deals would have been
variable.
Evan Stergoulis, head of project and structured finance at WFW,
remarks that “relatively short UK-to-foreign leases that we are
seeing now are really a new product”.
The taxman clamps down
At a time when the taxman is clamping down on tax
avoidance, particularly on the sale of leasing companies, lawyers
interviewed for this piece also pointed to an increasing lack of
flexibility by tax authorities around interpretation of tax
law.
Commenting on this point, Norton Rose tax partner Chris Bates
says: “The merger of the Inland Revenue with HM Customs &
Excise seems to have brought a more rigid enforcement approach in
corporation tax, in line with more long-standing practices on
VAT.
“Where a leasing company has outstanding points of contention
with HMRC on several deals, inspectors are now more likely to try
to uphold all their interpretations through the threat of
litigation, rather than looking to reach a negotiated settlement.
It is by no means clear that higher tax revenues will always be
achieved as a result.”
Shortcomings in the insolvency regime for
lessors
Many lawyers regard the UK’s insolvency regime as being
problematic for lessors (see table 2). Lessors active in small and
middle ticket leasing were particularly vocal about shortcomings in
the UK’s insolvency regime.More than half thought that financiers
fared relatively better in the UK, but a substantial number saw
negative features. Most also expected insolvencies to increase
during 2008.
Wragge partner Paula Laird points to a possible jurisdictional
problem where an insolvent customer has operations in two or more
European countries. She remarks:“We are a creditor-friendly regime
in the UK. Yet, with a multinational lessee, it can be difficult to
be sure that the ‘centre of main interests’ would be determined as
being in the UK under the EU regulations.This can give rise to
structuring issues in cross-border transactions.”
An even more frustrating problem is when lessors’ assets are
sold during an administration. Morton Fraser partner Bruce Wood
says: “Administrators are tending to take a rather cavalier
attitude towards obtaining the consent of funders to the disposal
of their assets.” Generally, lessors are offered far less for their
goods than the amount they are actually worth. Usually though, they
are presented with a take-it-orleave- it deal from
administrators.
Wood adds: “If it refuses, the administrator then says it has 48
hours to remove the assets or else he will start charging for
storage, or withdraw site security. If the financier accepts the
deal, it will invariably recover less than if it had been able to
recover the asset and sell it. Sales as a going concern are less of
a problem since the finance company can often get the new user into
a deal of some sort, but, in my experience, asset sales are more
common.”
Another problem, according to BLTL partner Richard Humphreys, is
that “there are two conflicting precedents concerning the
obligation of administrators to pay for equipment when a lessee or
hirer is in administration”.
Service agreements
A problem in the future lies in how courts will deal with the
fact that lessors have become more service orientated.
“It will be interesting to see what the courts make of standard
‘hell or high water’ clauses on the finance side in some cases,
such as where the finance company might appoint a replacement
service supplier if the original one becomes insolvent,” says
Bermans partner Ian Munford.
In the year ahead, no doubt most asset finance lawyers boasting
litigation experience will be secretly hoping for an upturn in
administrations. Their wishes may well come true if the credit
crunch continues. But other work looms on the horizon.
Meanwhile, industry consolidation continues apace, while some
lawyers foresee an upturn as a result of the enactment of the
Consumer Credit Act (CCA) 2006.This legislation, lawyers said, will
create more room for business-to business (B2B) credit agreements,
over and above consumer credit deals. The fact the CCA will apply
to contracts worth less than £25,000 will mean work for lawyers
advising clients getting to grips with new public statements and
default protection statement requirements.
Lawyers are also keeping a watchful eye on developments in Europe.
Some point to the Unfair Commercial Practices Directive, which
includes strict liability provisions on advertising and on
misleading and unfair practices, as potentially having an effect on
B2B lending. Meanwhile, expect further consolidation among laws
firms’ leasing arms.
