The financial crisis has led numerous corporations (apart from individuals) to financial distress. At this point, the debtor (company), its shareholders and creditors become involved in a situation where their respective rights must be exercised in a way that will enable the most balanced solution to be reached and implemented. For example, even in cases where company assets’ value might seem to cover the debt, creditors should allow the company to be reorganised and continue its operation, instead of leading it to liquidation.
The choice of action, by respective parties, depends on the options provided by legislation and the debtor company characteristics (eg in case of a company with high value assets, situated in the same jurisdiction, bankruptcy might not increase creditors’ risk, whereas, in the case of a company with a large dispersion of assets, in various jurisdictions, creditors’ recovery rate might be considerably reduced, in case the company became bankrupt). A pre-bankruptcy solution, in principle, serves better. Essential for negotiating a solution in such cases are debtor’s and creditors’ points of power: The debtor usually controls the submission of a restructuring plan at the pre-bankruptcy stage, knows how to operate the business, debtor’s management produces the company business plan, controls the relationship with workers, customers and suppliers, understands better future capital needs. In addition, creditors usually want to avoid liquidation in order to preserve the company’s value and goodwill and they also (especially banks and bondholders) want to avoid becoming the owners of a debtor’s business. Creditors on the other hand, can threat company owners with liquidation – although liquidation is a “knife that cuts both ways”, as mentioned before. They can also threaten to attack company owners, based on personal guarantees, or possible criminal liability. Creditors may also deprive the company of new credit, which is essential for its operation and growth, aggravating its financial position, in order to press for the acceptance of a reorganisation plan favouring creditors.
Under the new Greek Bankruptcy Code (article 99 of law 3588/2007), at the pre-bankruptcy stage, the debtor (only) may request the court, based on an insolvency forecast (ie prior to arriving at this point), to initiate a negotiation (mediation) period, by appointing a mediator. The mediator has a two or three month period to come up with an agreement between creditors and the debtor, for the financial restructuring of the latter. The agreement must be adopted by holders of more than 50 percent of existing debt (irrespective of priorities) and then be ratified by the court. The ratification of the agreement leads to:
– An automatic stay of creditors’ enforcement actions, against the debtor and its guarantors, for a period equal to the agreement term, which may be up to two years (stay of creditors’ enforcement actions, against the debtor, may also be ordered by the court, as an interim measure, at the stage of mediation).
– Cannot bind creditors not participating in the agreement. This means that non-participating creditors retain their claims against the debtor (even if the agreement provides for a write-off) but wait until the lapse of the agreement term, in order to continue with enforcing their claim.
– However, six months after the agreement’s ratification, bankruptcy proceedings may be initiated, if the company has become insolvent.
The drawback of this new procedure is that it does not lead to a restructuring deal, which is binding upon all creditors, while it precludes the possibility of direct negotiation (without the procedure of appointing a mediator) between debtor and creditors. As a result, there is a great risk of losing valuable time, without any tangible outcome for the company. In addition, in Greece, creditors may not deprive debtor’s management from its powers, before the company is declared bankrupt, but then again, bankruptcy is detrimental to creditors’ interests, in most cases.
Creditors should examine different characteristics of each jurisdiction and approach each case with a productive spirit. In jurisdictions where they are not considered stakeholders of the debtor and where even pre-bankruptcy proceedings may put at risk the prospect for a good workout, the best strategy would be (i) to ask from the debtor a viable business plan (ii) to facilitate debtor’s cash flow, if required, for the business plan implementation (iii) to keep company owners within corporate governance limits, but use their value for the company management, especially in countries where corporate culture is built around the owners, (iv) to give company owners good incentive to support the restructuring, based on achieving business plan targets. Preserving company value is definitely more important than simply trying to avoid direct or indirect write-offs, or giving priority to the mere acquisition, by the creditors, of high equity participations, in the debtor. Instead of becoming a bigger stakeholder in the “problem” it is better to solve it and thus secure repayment of debt.
For further information +30-210-3670400; dsamoladas@sarantitis.com; www.sarantitis.com
