A Toolkit For
Out-of-Court Workouts
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Table of Contents
Foreword.................................................................................................................................................. vii
Acknowledgments....................................................................................................................................ix
Acronyms and Abbreviations.................................................................................................................xi
1 Introduction to the Toolkit.................................................................................................................1
1.1 Background............................................................................................................................................1
1.2 Purpose of the Toolkit......................................................................................................................... 2
1.3 Structure of the Toolkit...................................................................................................................... 3
1.4 The Different Restructuring Models............................................................................................... 3
1.5 The Economic Impact of Restructuring Frameworks................................................................. 5
1.6 Workouts in the World Bank Group Principles for Effective Insolvency
and Creditor/Debtor Regimes........................................................................................................... 6
1.6.1 Principle B3: Enabling Legislative Framework................................................................................ 7
1.6.2 Principle B4: Informal Workout Procedures.....................................................................................8
1.6.3 Principle B5: Regulation of Workout and Risk Management Practices...............................9
2 Cross-Cutting Practicalities of Conducting a Workout.............................................................. 11
2.1 Preparing for a Workout: A Checklist of Debtor Considerations............................................. 11
2.2 Relevant Stakeholders..................................................................................................................... 15
2.2.1 The Issue of Debt Trading......................................................................................................................16
2.3 Standstill Agreement....................................................................................................................... 16
2.4 Standstill Period.................................................................................................................................17
2.5 The Importance of Confidentiality.................................................................................................17
2.6 Valuation of the Debtor’s Assets....................................................................................................17
2.7 The Restructuring Plan.................................................................................................................... 18
2.8 The Different Steps of the Workout Process.............................................................................. 19
2.9 Establishing Intangible Elements of a Successful Framework............................................... 21
2.10 The Ranking of Creditors’ Claims in a Restructuring Plan...................................................... 21
2.10.1 Subordination............................................................................................................................................. 21
2.11 New Financing during a Workout..................................................................................................22
2.12 Potential Impediments in Other Laws..........................................................................................22
2.13 The Classification of Claims...........................................................................................................22
2.14 The Possible Role of a Mediator.....................................................................................................23
Table of Contents iii
3 Informal Out-of-Court Workouts.................................................................................................. 27
3.1 What Are Out-of-Court Workouts?.............................................................................................. 27
3.2 The Advantages of Out-of-Court Workouts............................................................................... 27
3.3 The Challenges of Out-of-Court Workouts................................................................................. 27
3.4 Implementing an Out-of-Court Framework................................................................................29
3.4.1 Understanding the Existing Framework......................................................................................... 29
3.4.2 Design and Issuance of Guidance.....................................................................................................30
3.4.3 Implementation of a Communications Strategy.......................................................................30
3.5 INSOL Principles for Out-of-Court Workouts............................................................................. 31
FIRST PRINCIPLE............................................................................................................................... 31
SECOND PRINCIPLE..........................................................................................................................32
THIRD PRINCIPLE..............................................................................................................................33
FOURTH PRINCIPLE..........................................................................................................................33
FIFTH PRINCIPLE...............................................................................................................................34
SIXTH PRINCIPLE..............................................................................................................................34
SEVENTH PRINCIPLE........................................................................................................................34
EIGHTH PRINCIPLE...........................................................................................................................35
3.6 Examples of Guidelines for Out-of-Court Workouts and Case Studies................................35
3.6.1 Examples of Guidelines for Out-of-Court Workouts................................................................. 36
3.6.2 Jordan, Lebanon, and Latvia................................................................................................................ 41
4 Hybrid Procedures........................................................................................................................... 45
4.1 What Are Hybrid Procedures?........................................................................................................45
4.2 The Advantages of Hybrid Procedures.........................................................................................46
4.3 The Disadvantages of Hybrid Procedures................................................................................... 47
4.4 Implementing a Hybrid Regime...................................................................................................... 47
4.4.1 Steps in Developing Hybrid Procedures.......................................................................................... 48
4.5 Early Intervention Models................................................................................................................49
4.5.1 Italy................................................................................................................................................................ 49
4.5.2 Croatia........................................................................................................................................................... 51
4.5.3 Spain.............................................................................................................................................................. 51
4.5.4 France............................................................................................................................................................ 51
4.5.5 Tunisia........................................................................................................................................................... 53
4.6 The Pre-Packaged Restructuring Plan.........................................................................................53
4.6.1 Legal Differences between Pre-Packs............................................................................................. 54
4.6.2 The Pre-Arranged Plan.......................................................................................................................... 57
4.7 Contractual Workout Schemes......................................................................................................58
iv A Toolkit For Out-of-Court Workouts
5 Practical Case Study....................................................................................................................... 61
5.1 Introduction to the Case.................................................................................................................. 61
5.1.1 The Problem................................................................................................................................................ 61
5.1.2 A Restructuring or Liquidation? That Is the Question . . ......................................................... 61
5.1.3 Current Debt Structure.......................................................................................................................... 61
5.1.4 Valuation of the Hotel Group’s Assets (Three Hotel Properties)........................................... 62
5.1.5 Case Study Analysis Guidance.......................................................................................................... 62
5.2 Phases in the Operational Restructuring Process.....................................................................63
5.2.1 Phase 1: Stabilizing.................................................................................................................................. 63
5.2.2 Phase 2: Analyzing.................................................................................................................................. 67
5.2.3 Phase 3: Repositioning..........................................................................................................................68
5.2.4 Phase 4: Reinforcing...............................................................................................................................69
5.3 Forms...................................................................................................................................................69
FORM 1: Stakeholder Identification................................................................................................................ 71
FORM 2: Letter of Intent to Adopt Workout Principles......................................................................... 73
FORM 3: Workout Planning and Communication Framework............................................................77
FORM 4: Confidentiality Agreement............................................................................................................. 79
FORM 5: Standstill Agreement.........................................................................................................................81
FORM 6: Financial Data......................................................................................................................................83
FORM 7: Stabilizing Plan....................................................................................................................................89
FORM 8: Restructuring Plan..............................................................................................................................91
FORM 9: Letter of Intent to Enter into New Financing Agreement.................................................. 93
FORM 10: Set-Off Agreement.......................................................................................................................... 95
6 Conclusion......................................................................................................................................... 97
Glossary...................................................................................................................................................99
Endnotes................................................................................................................................................103
References.............................................................................................................................................. 111
List of Boxes
Box 1: The Impact of Pre-Insolvency Restructuring in the European Union...........................................7
Box 2: Tax Considerations in Out-of-Court Workouts.............................................................................. 23
Box 3: A Generalized Description of Judicial Reorganization.................................................................. 45
Box 4: Summary of the European Commission’s Recommendation
Regarding Early Intervention.........................................................................................................................50
Box 5: Understanding the Term Pre-Pack................................................................................................... 54
Table of Contents v
List of Case Studies
Case Study 1: Middle East and North Africa (MENA): Introduction of Out-of-Court Debt
Restructuring in Jordan and Lebanon...........................................................................................................41
Case Study 2: Corporate Debt Restructuring in Latvia........................................................................... 42
Case Study 3: Saur........................................................................................................................................... 53
Case Study 4: Blue Bird Body Company (Blue Bird).................................................................................. 56
Case Study 5: India’s Corporate Debt Restructuring Mechanism......................................................... 59
List of Diagrams
Diagram 1: Level of Formality of Insolvency Proceedings...........................................................................3
Diagram 2: Spectrum of Processes from Informal OCWs to Formal Insolvency Proceedings...........4
Diagram 3: Judicial Reorganization Proceedings Present the Best Outcomes.................................... 6
List of Tables
Table 1: Hotel Group’s Debt Structure.......................................................................................................... 62
Table 2: Valuation of the Hotel Group’s Assets: Best-Case Scenario.................................................... 63
Table 3: Valuation of the Hotel Group’s Assets: Worst-Case Scenario................................................. 63
vi A Toolkit For Out-of-Court Workouts
Foreword
Since the global financial plement informal, corporate restructuring principles
crisis of 2008, countries in order to successfully rescue failing enterprises.
around the world have Accordingly, this guidance is primarily aimed at pol-
looked to develop policy icy makers, financial institutions, insolvency repre-
responses to the challenge sentatives, and businesses. It fo-cuses primarily on
of an increasing number of out-of-court restructurings and hybrid workouts that
nonperforming loans. What can sometimes involve the court, but that are funda-
has become evident in the mentally different than court-supervised restructur-
years since the crisis is that ings. We seek to explain the necessary practicalities
there is no single, “silver-bullet” policy response and standard approach to achieving a successful re-
to address this challenge. Instead, a wide array of structuring. We also highlight different restructuring
tools needs to be made available to businesses and models that countries have adopted in the under-
lenders to resolve situations of corporate distress standing that there is no ‘one size fits all’ approach.
in a manner that yields the maximum value avail-
able to stakeholders, while promoting certainty and This work also arises from the World Bank Group’s
transparency. In particular, countries have begun to mandate as a joint standard-setter with the United
recognize the need to have a diverse set of tools that Nations Commission on International Trade Law
promote corporate restructuring and rehabilitation. (UNCITRAL) for the Insolvency and Creditor/Debtor
Indeed, the stakes could not be higher. When the Rights Standard (ICR Standard) in insolvency law and
right tools are available, they can aid in the preser- practice. Specifically, the ICR Standard is recognized
vation of jobs, the retention of supply chains, and by the Financial Stability Board as one of the key stan-
the preservation of asset value. Conversely, the dards for sound financial systems. The ICR Standard
risks of not doing so have become all too clear in is based on the World Bank Principles for Effective
the many corporate failures of the last few years. Insolvency and Creditor/Debtor Regimes and the
UNCITRAL Legislative Guide on Insolvency Law.
Many elements need to be present to effectively re- These two complementary texts represent the interna-
structure businesses. Businesses will need to be viable tional consensus on best practices and set forth a unified
or capable of being reorganized, related laws will have standard for evaluating and strengthening ICR systems.
to facilitate both financial and operational restructur-
ing, and participation of the various stakeholders is As the world of finance continues to evolve at a re-
critical. Most importantly, a country needs a transpar- markable pace, businesses are able to avail them-
ent legal framework or regulatory principles that pro- selves of newer sources of capital that go beyond
vide an enabling environment for fair and good-faith traditional commercial banks. When a period of dis-
restructuring negotiations. Once the framework is in tress arises for the business, having a framework un-
place, it needs to be applied consistently to ensure that der which all of the various providers of capital can
the economic benefits of these restructuring tools are negotiate, increases the likelihood of maximizing
achieved. It is therefore vital that stakeholders learn value for all stakeholders in that business.
how to effectively use such tools.
We have created this Toolkit to help policy makers
develop a corporate restructuring framework and Gloria Grandolini
culture in their country and to help stakeholders im- Senior Director, Finance and Markets Global Practice
Foreword vii
Acknowledgments
A Toolkit for Out-of-Court Workouts is a The team especially thanks all of the individuals and
collaborative effort of the World Bank Group organizations whose case studies were included in
Finance & Markets MENA, and the Finance & the Toolkit for sharing their information. The team
Markets Insolvency and Debt Resolution teams. would like to acknowledge our donor partners, the
Swiss Secretariat for Economic Affairs (SECO),
The Toolkit was led by Antonia Menezes and and the Facility for Investment Advisory Services
prepared under the overall guidance of Mahesh (FIAS) for their contribution and support in the
Uttamchandani. Specific advice and leadership on development of the Toolkit.
issues relating to the MENA region were provided
by Rolf Behrndt and Carol Khouzami. Our appreciation is extended to Catherine Connor
Lips for editing and to Aichin Lim Jones and
The primary technical content of the Toolkit the internal services of the World Bank Group
was developed by Rodrigo Olivares-Caminal (GSDPM) for design and production services.
(Professor in Banking and Finance at the Centre
for Commercial Law Studies [CCLS], Queen This Toolkit complements the foundational World
Mary, University of London) and Arnoud Griffioen Bank Group 2012 study on Out-of-Court Debt
(Turnaround Specialist and Lecturer, AG Financial Restructuring, and should be read as a companion
Management & Turnaround Management). The to that work. The team would therefore like to
team was supported by Oleksandra Svyryba and acknowledge Dr. José Maria Garrido, primary
Nicholas Avis. author of the study, for the instructive framing of
many of these issues. In further amplifying the
The team is grateful for the insightful inputs of 2012 study, the Toolkit draws on the experience
peer reviewer Sandy Shandro. The team would also of the World Bank Group’s Insolvency and
like to acknowledge the contributions of Yiannis Debt Resolution Technical Assistance Program,
Bazinas, Gillette Conner, Fernando Dancausa, focusing on the practicalities of creating out-of-
Andres Federico Martinez, Nina Mocheva, court restructuring platforms that seek to achieve
Gordon I. Myers, Will Paterson, Rebecca R. Post, restructuring agreements with no or limited court
Rob Wright, Justin Yap and Fernanda Zavaleta. involvement.
Acknowledgments ix
Acronyms and Abbreviations
ABJ Association of Banks of Jordan
ABL Association of Banks of Lebanon
BdL Banque du Liban (Central Bank of Lebanon)
CAPEX Capital Expenditure
CBJ Central Bank of Jordan
CDR Corporate Debt Restructuring
CDRG Corporate Debt Restructuring Guidelines
COMI Center of Main Interests
EBITDA Earnings before Interest, Taxes, Depreciation, and Amortization
EC European Commission
GDP Gross Domestic Product
ICR Insolvency and Creditor Rights
ICR Standard Insolvency and Creditor Rights Standard
INSOL The International Association of Restructuring, Insolvency, and Bankruptcy
Professionals
INSOL Principles INSOL Statement of Principles for a Global Approach to Multicreditor Workouts
MENA Middle East and North Africa
NPL Nonperforming Loan
OCW Out-of-Court Workout
SME Small- and Medium-Sized Enterprises
UNCITRAL United Nations Commission on International Trade Law
Legislative Guide UNCITRAL Legislative Guide on Insolvency Law
WB-ICR Principles World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes
acronyms and Abbreviations xi
1 Introduction
to the Toolkit
1.1 Background books. Addressing the problem of NPLs requires
looking for sustainable solutions that tackle the
Financial distress may be described as both a real roots of corporate distress and the potential
symptom and a cause of economic weakness, for long-term business profitability, liquidity, and
and in a globalized world, corporate distress solvency. The recent financial crisis has prompted
often results in a domino effect across financial many countries to reevaluate the effectiveness of
markets. The collapse of Italian dairy enterprise their corporate restructuring mechanisms and focus
Parmalat illustrates this point—36,000 jobs across on preventing severe corporate distress in a timely
30 countries were imperiled when it filed for and effective manner.
Europe’s largest insolvency proceeding in 2003.1
Canadian telecommunications enterprise Nortel had Nonetheless, corporate distress is unavoidable
a similar global impact when it filed for Canada’s and, to a certain extent, a desired outcome of
largest insolvency in 2009, resulting in 30,200 strong market economies. It can be seen as a self-
lost jobs in global operations,2 followed by years cleansing, market-efficiency process that promotes
of litigation by creditors in Canada, the United the “survival of the fittest” enterprises. While the
States, Europe, and Asia.3 Today, the Spanish utility least capable and nonviable enterprises should
enterprise Abengoa faces a comparable fate, with leave the marketplace to make resources available
26,600 jobs and crucial water, electricity, and solar for other entities, their exit should be guided by a
energy projects on five continents at risk4 as the clear and pre-established mechanism that deals
enterprise grapples with over €14.6 billion of debt.5 with distress and firm closure. Other distressed but
viable enterprises should be provided with a method
Such insolvencies emphasize the need to resolve of becoming more efficient and better organized in
corporate distress quickly, and to the extent order to maintain profitability and improve business
possible, retain the value of the enterprise as a operations. This is the role of restructuring processes.
going concern and reassure creditors that the They should seek to provide an orderly procedure to
value of their claim will not be overly diminished. save businesses that are still viable and capable of
Moreover, as with the cases cited, corporate distress revival and growth, and allow nonviable entities to
on a wide scale can impact the broader financial liquidate in an orderly fashion. As discussed later in
stability of a country. Financial crises are usually this Toolkit, restructuring procedures may be formal
characterized by a large number of enterprises and involve the courts, or may be less formal and
unable to meet their obligations, leading to high conducted by parties with minor or no institutional
levels of nonperforming loans (NPLs) on banks’ involvement or supervision.
1 inTRoduCTion To The ToolkiT 1
Although the goal of an effective corporate framework and culture in their country; and (2) to
restructuring mechanism is an intervention aimed help stakeholders implement informal corporate
at avoiding the failure of an enterprise, insolvency restructuring principles to try to rescue failing
laws are primarily focused on maximizing creditor enterprises. It is accordingly aimed primarily at
returns. An effective restructuring plan recognizes the policy makers, financial institutions, and insolvency
available options for creditors to collect their debts representatives, as well as enterprises.
(or parts of them) while simultaneously facilitating
the rescue of the enterprise.6 A properly structured The Toolkit generally examines different models
corporate restructuring process will achieve these for restructuring, in the understanding that there
twin goals: (1) obtaining debt sustainability by is no such thing as a “one size fits all” approach,
reducing the debt burden of the enterprise in an and countries have the ability to develop flexible
orderly manner while (2) protecting the value of and varied solutions to meet their specific
the assets and the rights of the creditors in order to financial sector needs. Specifically, the focus of
avoid litigation. These goals need to be achieved the Toolkit is on workouts, which for the purposes
over a short period of time to preserve value in the of this publication is taken to mean two types of
enterprise, prevent possible disruptions in business restructuring models: (1) those that involve no
activities, and regain access to financing options. judicial involvement (i.e., that are purely out-of-
court mechanisms [OCWs]); and (2) those that
The restructuring process also has to ensure a balance involve some institutional or judicial involvement
between protecting the debtor and the creditors. A (hybrid procedures). Focusing on these models is
debtor may enter into negotiations with its creditors designed to provide stakeholders with a broader
to reach a restructuring agreement, which might understanding of restructuring and the varied
imply less beneficial economic and financial terms models that different countries are implementing.
for the creditors, although it could be preferable to
liquidation—with little or no prospect of recovery. Included in the Toolkit are sample documents
However, if it is too unreasonable, creditors always typically used in a workout. These are included
have the option of pursuing remedies against the only to illustrate certain practicalities and
debtor in a court of law, trying to collect the full considerations in conducting a workout, and should
face value of the debt. It is therefore in the interest not be used without legal advice in the jurisdiction
of both parties to maintain a balanced approach that of their intended use. Complex restructurings often
can successfully lead to an agreement. require much more elaborate documents of many
different types, which are beyond the scope and
1.2 Purpose of the Toolkit objectives of this Toolkit.
A Toolkit for Out-of-Court Workouts was created to The publication also touches on more formal,
achieve two objectives: (1) to provide policy makers court-supervised methods of reorganization for
with tools to develop a corporate restructuring completeness, as well as on formal liquidation
Note on Terminology
The terms reorganization, workout, and restructuring may sometimes be used interchangeably in common
parlance; however, this Toolkit assigns them unique technical definitions that are found in the Glossary.
In this publication, reorganization is used in the sense of judicial reorganization, meaning a court-supervised
restructuring. A workout is an out-of-court restructuring, which includes both fully out-of-court workouts
(OCWs) and workouts that are conducted mostly out of court (“hybrid procedures”). Restructuring refers
to business rescue procedures in general, and includes reorganization, OCWs, and hybrid procedures (see
Diagram 1).
2 A Toolkit For Out-of-Court Workouts
Diagram 1: Level of Formality of various workout frameworks. These illustrate
Insolvency Proceedings how different countries develop a framework that
suits their culture, local laws, and financial sector
Low
realities.
Chapter 5 examines a sample OCW case study and
Out-of-Court shows associated model agreements and forms
that relate to specific steps in the OCW. They are
Hybrid
provided as guiding tools to help stakeholders
understand how to conduct an informal OCW in a
Level of Formality
Workouts
practical manner.
Judicial
Reorganization Chapter 6 concludes the Toolkit with a discussion
of lessons learned and recommendations, and is
Restructuring followed by references used in the text.
Liquidation 1.4 The Different
Insolvency
Restructuring Models
High
Restructuring frameworks can take many different
forms. They are adaptable to the specific needs of
processes to explain what happens when an enterprise the country’s financial and real sectors.
is no longer viable. The relationship between these
different processes is shown in Diagram 1. Restructuring frameworks range from informal
to formal procedures. The typologies below are
1.3 Structure of the Toolkit classified based on the level of court involvement
and their degree of formality.7 Moreover, as
The remainder of Chapter 1 describes different illustrated in Diagram 2, at some point it will be
types of frameworks for effective restructuring, the realized that the enterprise cannot realistically
link between informal and formal mechanics, why be restored to profitability and is no longer
such frameworks are economically beneficial, and viable: there is no longer a prospect of successful
the relevant World Bank Principles for Effective enterprise rescue, and the enterprise should exit the
Insolvency and Creditor/Debtor Regimes (WB- restructuring framework and enter a formal, court
ICR Principles). liquidation process to try to preserve as much of the
respective creditors’ claims as possible. In practice,
Chapter 2 sets out some of the preconditions and this point is typically reached toward the start of
practical steps that help ensure productive workouts. the analytical process, as it will be apparent that no
It presents the different stakeholders involved, restructuring is feasible.
describes the tools needed to conduct an effective
workout, and explains some of the elements of an ■■ OCWs are nonjudicial, private contractual
enabling legal framework that facilitate successful arrangements between the debtor and its
workouts. creditors (all or just some of the creditors).
OCWs workouts are not typically provided for in
Chapters 3 and 4 delve deeper into the OCW and insolvency legislation, but are instead the result
hybrid restructuring models, including “real world” of consensual negotiations, which is why many
instructive examples and success stories about workouts are considered “informal.” In OCWs,
1 Introduction to the Toolkit 3
parties are free to negotiate the terms of their ■ Reorganizations are formal proceedings
restructuring agreement without involving the supervised by a court.10 The role of the court-
court. This typically means that workouts are supervised reorganization processes is to
flexible, fast, and less expensive than litigation. facilitate the survival of the enterprise and its
Generally, the only formal requirement of OCWs business as a going concern to preserve the
is that the negotiations must ultimately result in source of the debtor’s income, the value of its
a valid, binding contract. The major drawback assets, and its employees’ jobs while maximizing
of OCWs is that they are only binding among the potential recovery value for creditors. Often, a
the parties to the agreement, lacking the cram- country’s insolvency laws require that a majority
down8 feature of a court-supervised sanctioned of creditors and/or the creditors holding a certain
reorganization. threshold of the debt agree to a reorganization
■ Hybrid procedures as the name suggests, plan. Typically, the court then approves the
combine informal out-of-court restructuring plan and, in certain jurisdictions, makes the
arrangements (that is, privately negotiated reorganization binding on all creditors that were
restructuring contracts) with elements of formal subject to such process regardless of whether
court or institutional procedures and supervision.9 they have accepted the terms of the plan or not
The importance of the hybrid procedure is that (a cram-down).11 These types of procedures are
it benefits from the most salient features of usually characterized by two features: (1) the
both OCWs and reorganization processes: it is proceedings are lengthier due to the court’s
a fast and flexible procedure that can enhance involvement, since all parties involved are
the efficiency of an otherwise lengthy formal required to follow a pre-established procedure
process and can also be binding on other and adhere to set time intervals; and (2) the
creditors. Moreover, it might be used before the proceedings are public and often require that
enterprise is actually in insolvency to stave off certain financial and commercial information be
further corporate distress. disclosed, which might deter certain enterprises
Diagram 2: Spectrum of Processes from Informal OCWs to Formal
Insolvency Proceedings
Low
Out-of-court workouts: contractual voluntary agreements between debtors
and creditors
Hybrid procedures: private workouts with the involvement of the judiciary or
Level of Formality
administration authorities to make them binding to dissenting minorities
Judicial reorganizations: formal reorganizations of viable enterprises under
court supervision
Liquidations: liquidations through the courts with no restructuring
High
4 a ToolkiT foR ouT-of-CouRT woRkouTs
from undergoing such proceedings. This Tool- its continuous operation, and ensures higher
kit is focused less on the establishment and repayment rates to creditors.
implementation of these procedures, although
they are included for comprehensiveness. As many workouts are confidential, it is difficult to
■■ Liquidation proceedings do not incorporate get empirical data on the success of these restructuring
elements of restructuring, and are not addressed regimes, particularly those that take place with no
by the Toolkit. Liquidation is a court-supervised, court involvement. Nonetheless, more general studies
orderly process in order to close the nonviable show that effective insolvency regimes, which include
enterprise and pay outstanding claims. both judicial reorganization and more informal
restructuring tools, preserve jobs by facilitating the
Diagram 2 illustrates the spectrum of processes from survival of distressed but viable enterprises, reduce
informal OCWs to formal insolvency proceedings. credit risk, and help strengthen access to credit at a
lower price.13 Some of these studies follow.
In many cases, countries choose to have several of
these procedures in their insolvency law to provide Following the revised corporate reorganization code
stakeholders with a variety of options from which that Colombia enacted in 1999, which dramatically
to choose. Which option is selected depends on the improved the efficiency of reorganization proceed-
level of financial distress of each enterprise and the ings, the duration of reorganization proceedings fell
stage at which recourse is sought. from an average of 34 months to 12 months. This in
turn reduced the burden on the judiciary and other
1.5 The Economic Impact of parties to the reorganization, and strengthened over-
Restructuring Frameworks all creditor rights.14 A 2007 study analyzed Mexi-
co’s newly enacted corporate insolvency law, which
A well-functioning insolvency law seeks to sort changed the structure, venue, and length of proceed-
viable, but financially distressed, enterprises from ings, and also strengthened the role of professional
nonviable enterprises. It seeks to offer mechanisms administrators. These changes increased the average
whereby the first category of enterprise may be recovery rate for secured creditors from 19 cents on
rehabilitated in the marketplace—whether through the dollar to 32 cents on the dollar, and shortened the
a restructuring of its capital structure or a sale of the duration of proceedings from an average of 7.8 years
business as a going concern—and at the same time to 2.3 years.15 In the United Kingdom, comparative
to ensure that the second category of firm is closed studies have been conducted between formal receiv-
and liquidated as quickly as possible. However, ership and administration procedures in the insol-
under a poorly functioning insolvency regime, vency law vis-à-vis more informal hybrid restructur-
viable but financially distressed enterprises may ing tools known as restructuring plans (discussed in
have no option but to enter liquidation and close.12 Chapter 4). These studies showed that of all the sales
of businesses as going concerns during receivership
Restructuring frameworks therefore help encourage or administration proceedings, 65 percent of cases
domestic and foreign lending by giving lenders and resulted in the new owner’s preserving the entire
investors assurance that, if a borrowing enterprise workforce. In more informal pre-pack solutions, the
runs into financial difficulty, a framework is in owners preserved the entire workforce in 92 percent
place that will both protect creditor rights and allow of cases.16
a viable enterprise to resolve its indebtedness as
quickly and inexpensively as possible. Restructuring The impact of reorganization proceedings on the
also preserves the value of the enterprise, enables economy is demonstrated in Diagram 3, which
1 Introduction to the Toolkit 5
Diagram 3: Judicial Reorganization Proceedings Present the Best Outcomes
Judicial Reorganization Proceedings Present the Best Outcomes
100.0
DB 16 Recovery Rate (cents per dollar)
90.0
80.0 80.9
70.0
60.0
53.9
50.0
40.0
35.4
30.0 30.4
20.0
10.0
0.0
0.0 50.0 100.0 150.0 200.0
Domestic Credit Provided by Banking Sector (% of GDP)
Receivership Reorganization Liquidation Foreclosure
Notes: Size of the bubble shows number of economies. Number inside the bubble shows average recovery rate.
highlights cross-country data from the World Bank’s the late 1990s. At that time, the WB-ICR Principles
Doing Business 2016 report.17 Diagram 3 indicates constituted the first internationally recognized
a causal link between the design and operation of benchmarks that could be used to evaluate the
insolvency procedures on one hand and recoveries effectiveness of domestic creditor/debtor rights
in insolvency on the other. The data illustrates that and insolvency systems. The WB-ICR Principles,
reorganization proceedings yield higher recovery together with the UNCITRAL Legislative Guide
rates than foreclosure, receivership, or liquidation. on Insolvency Law (Legislative Guide), form the
Moreover, reorganization proceedings are positively Insolvency and Creditor Rights Standard (ICR
correlated with greater amounts of domestic credit Standard) in insolvency law and practice. The ICR
provided by the financial sector; in other words, Standard is recognized by the Financial Stability
there is a correlation between restructuring and Board as one of the key standards for sound financial
accessing higher levels of credit in an economy. systems, and represents the international consensus
on best practices for evaluating and strengthening
1.6 Workouts in the World insolvency regimes.21
Bank Group Principles for
The WB-ICR Principles, as they relate to developing
Effective Insolvency and
workout and corporate debt restructuring
Creditor/Debtor Regimes frameworks, are discussed in detail in the 2012
The WB-ICR Principles18 were developed in 2001 World Bank Study.22 Sections B3, B4, and B5 of
in response to a request from the international the Principles form the best-practice guidance for
community in the wake of the financial crisis of corporate workouts and restructurings. These are
6 A Toolkit For Out-of-Court Workouts
BOX 1: The Impact of Pre-Insolvency Restructuring in the European Union
The European Commission (EC) published a 201519 report based on data from its member states that
demonstrates that efficient pre-insolvency frameworks can (1) spur entrepreneurship, (2) mitigate the impact
that deleveraging has on GDP growth, and (3) improve financial stability by quickening the normalization of
nonperforming loans in an economy. Pre-insolvency frameworks are commonly based on a hybrid model
of restructuring, meaning they incorporate limited court involvement typically at the beginning and/or end
of the proceedings, in addition to informal creditor negotiations (see Chapter 4 for more discussion on the
EC’s discussion of pre-insolvency frameworks). The EC’s study approached pre-insolvency frameworks from a
general perspective without focusing specifically on hybrid frameworks.
Entrepreneurship
Efficient pre-insolvency frameworks are shown to be particularly beneficial to entrepreneurs because they lessen
the level of risk that entrepreneurs would assume should their venture fail. Further, the frameworks facilitate
an entrepreneur’s rapid reentry into the economy following an enterprise failure. Using self-employment as a
proxy for entrepreneurship, this EC study measured the efficiency of member states’ pre-insolvency structure
by applying a grading scheme to 12 indicators that it considered characteristic of an efficient, preventative
restructuring framework. When the efficiency of a member state’s pre-insolvency framework increased by one
percentage point, self-employment increased by an average of 0.75 percent.20 This positive relationship suggests
that the more efficient a country’s pre-insolvency framework is, the better it is at fostering entrepreneurship
and its economic benefits.
Nonperforming Loans
Rising NPLs mean debtors are less capable of servicing their debts. As a result, the supply of credit is lessened. By
giving debtors the opportunity to restructure their debts at an early stage through pre-insolvency frameworks,
they can react more quickly to changing economic conditions. Accordingly, there appears to be a relationship
between efficient pre-insolvency frameworks and the speed at which NPLs return to normal levels following
negative economic conditions.
Corporate Deleveraging
Corporate deleveraging lowers corporate expenditure and slows economic growth, which results in enterprises
implementing cost-cutting measures. However, in jurisdictions with efficient pre-insolvency frameworks, the
negative consequences of deleveraging are softened. For each one percentage point reduction in debt-to-
financial assets, the GDP growth is lowered by only 0.23 percentage points, compared to 0.36 percentage
points in jurisdictions with less efficient insolvency frameworks. Thus, efficient early insolvency frameworks
make an economy less sensitive to changes in corporate indebtedness.
set out here, accompanied by summaries of each ■■ The availability of accurate and reliable
relevant principle. information;
■■ Incentives to invest in or recapitalize viable,
1.6.1 Principle B3: Enabling financially distressed enterprises;
Legislative Framework ■■ A range of restructuring tools that the stakeholders
can use to achieve their goals;
Summary
■■ Appropriate tax treatment in associated laws that
Principle B3 contains the core criteria for enable debt restructurings;
establishing an enabling legislative framework in ■■ Effective debt enforcement and insolvency
a country—one that is conducive to conducting procedures;
negotiations and undertaking analysis to preserve ■■ In addition, regulatory impediments in associated
viable businesses in the economy. Such a framework laws should be removed.
should include:
1 Introduction to the Toolkit 7
B3 Enabling Legislative Framework
Corporate workouts and restructurings should be supported by an enabling environment, one that encourages
participants to engage in consensual arrangements designed to restore an enterprise to financial viability. An
environment that enables debt and enterprise restructuring includes laws and procedures that:
B3.1 Require disclosure of or ensure access to timely, reliable, and accurate financial information on the
distressed enterprise;
B3.2 Encourage lending to, investment in, or recapitalization of viable financially distressed enterprises;
B3.3 Flexibly accommodate a broad range of restructuring activities, involving asset sales, discounted debt
sales, debt write-offs, debt reschedulings, debt and enterprise restructurings, and exchange offerings
(debt-to-debt and debt-to-equity exchanges);
B3.4 Provide favorable or neutral tax treatment with respect to losses or write-offs that are necessary to
achieve a debt restructuring based on the real market value of the assets subject to the transaction;
B3.5 Address regulatory impediments that may affect enterprise restructurings; and
B3.6 Give creditors reliable recourse to enforcement, as outlined in Section A, and to liquidation and/or
reorganization proceedings, as outlined in Section C.
1.6.2 Principle B4: Informal occur outside of the courts (Chapter 2 covers these
Workout Procedures restructurings in detail). However, the WB-ICR
Principle B4 encourages the use of voluntary dispute
Summary resolution tools to help facilitate such negotiations.
As discussed throughout this Toolkit, informal As discussed in Chapter 3, several countries have
restructurings or workout procedures take place in the adopted pre-insolvency procedures that make use of
“shadow of the law”—that is, they do not typically such tools, as well as “hybrid” measures that allow
follow a legislative or regulatory framework because the conversion of informal instruments to formal,
they are private, contractual arrangements that court-sanctioned ones.
B4 Informal Workout Procedures
B4.1 An informal workout process may work better if it enables creditors and debtors to use informal
techniques, such as voluntary negotiation or mediation, or informal dispute resolution. While a
reliable method for timely resolution of inter-creditor differences is important, the financial supervisor
should play a facilitating role consistent with its regulatory duties as opposed to actively participating
in the resolution of inter-creditor differences.
B4.2 Where the informal procedure relies on a formal reorganization, the formal proceeding should be
able to quickly process the informal, pre-negotiated agreement.
B4.3 In the context of a systemic crisis, or where levels of corporate insolvency have reached systemic
levels, informal rules and procedures may need to be supplemented by interim framework
enhancement measures in order to address the special needs and circumstances encountered with
a view to encouraging restructuring. Such interim measures are typically designed to cover the crisis
and resolution period without undermining the conventional proceedings and systems.
8 A Toolkit For Out-of-Court Workouts
1.6.3 Principle B5: Regulation of implementation of workouts on the ground, and
Workout and Risk Management will start developing a fair and effective negotiation
Practices culture in the country. Some countries have initiated
Memoranda of Understanding between the central
Summary bank and the bankers’ association to ensure that
WB-ICR Principle B5 emphasizes the importance there is strong promotion of principles among the
of having financial sector authorities and regulators key financial sector players. Other countries have
promote any guidelines or code of conduct on adopted more mandatory, hybrid models, discussed
how to conduct informal workouts. Having strong further in Chapter 4.
leadership from the banking community helps ensure
B5 Regulation of Workout and Risk Management Practices
B5.1 A country’s financial sector (possibly with the informal endorsement and assistance of the central
bank, finance ministry, or bankers’ association) should promote the development of a code of
conduct on a voluntary, consensual procedure for dealing with cases of corporate financial difficulty
in which banks and other financial institutions have a significant exposure, especially in markets
where corporate insolvency has reached systemic levels.
B5.2 In addition, good risk-management practices should be encouraged by regulators of financial
institutions and supported by norms that facilitate effective internal procedures and practices
supporting the prompt and efficient recovery and resolution of nonperforming loans and distressed
assets.
1 Introduction to the Toolkit 9
2 Cross-Cutting Practicalities
of Conducting a Workout
Chapter 2 highlights practical considerations for two 7. The debt restructuring tools that might be relied
types of workouts: those with no court involvement upon in a restructuring plan;
(OCWs), and those with some court or institutional 8. The procedural elements of conducting workout
involvement (hybrid procedures). OCWs and negotiations;
hybrid procedures have many overlapping elements 9. Establishing intangible elements of a successful
because the latter often includes an informal, out- framework;
of-court negotiation phase as part of the process. 10. The ranking of creditors’ claims;
This chapter focuses solely on elements that are 11. New financing during a workout;
mutually relevant to both types of workouts. In- 12. Potential impediments in other laws;
depth discussions of OCWs and hybrid procedures 13. The classification of claims; and
appear in Chapters 3 and 4, respectively. 14. The possible role of the mediator.
This chapter is designed to highlight issues as they 2.1 Preparing for a Workout:
would arise in a workout process, namely: A Checklist of Debtor
Considerations
1. The considerations that the debtor must address
prior to engaging in a workout; Prior to entering workout negotiations with creditors,
2. The relevant stakeholders of a workout and the debtor in financial difficulties must prepare for
how these stakeholders may change due to debt these negotiations. Preparation is the crucial first
trading; step to a successful workout. When preparing for
3. The types of agreements they might consider creditor negotiations, the debtor should have a view
putting in place from the outset, such as a to achieving a business restructuring and gaining
standstill agreement; financing so that the enterprise can continue
4. The standstill period; operations. The following Box is a general checklist
5. The importance of protecting confidential of considerations that the debtor should address
information; prior to engaging in negotiations. By following this
6. The valuation of the debtor’s assets; checklist, debtors will be well prepared to negotiate
a restructuring plan.
2 CRoss-CuTTing PRaCTiCaliTies of ConduCTing a woRkouT 11
Checklist for Debtor before Workout Negotiations
The checklist was designed to apply to a corporate debtor that is part of a group of companies. Nevertheless,
although not all of the questions raised will be relevant in all circumstances, it is hoped that financially troubled
debtors of all types, including single corporates, partnerships, and sole proprietorships or merchants, will benefit
from using it on a selective basis. The aim is to help debtors be well prepared for discussions, and to assist them
in developing a credible plan which will win the support of creditors and, if need be, the court.
1. Group Structure
Prepare the current group structure chart.
1.1
List the place of incorporation of each company.
1.2
Verify all shareholdings within the group.
1.3
Establish whether or not any companies in the group are publicly listed (and if so, where).
1.4
Establish the identity of any controlling shareholders, or of identifiable groups of shareholders (e.g., family
1.5
members).
Establish if there are any associated or related companies or individuals under local law and consider the
1.6
consequences of this for any future restructuring process.
Obtain up-to-date search information from all public registers.
1.7
Obtain copies of the constitutions of all the companies.
1.8
2. Business and Assets
Identify business activities of the group and draft a description of these.
2.1
Establish which companies in the group carry on which business.
2.2
Establish the level of interdependence of members of the group, such as: common services or facilities,
2.3
intragroup trading, cross-ownership of assets.
2.4
Establish which companies own the operating and other assets of the group.
Establish the recent trading history of the group, including major changes in the business, acquisitions, or
2.5
disposals.
List assets that are owned outright, and list separately all assets that are charged, leased, hired, licensed,
2.6
held on trust or subject to retention of title or otherwise not subject to the claims of creditors.
Obtain copies of any property, plant, or other asset registers of title.
2.7
2.8
Consider obtaining independent valuations of key assets likely to be essential to enable the business to
continue or likely to need to be sold to raise finances.
3. Management
Identify current directors and secretaries of all group companies.
3.1
Identify key managers and employees who are not directors.
3.2
Identify connections, if any, between management and shareholders, including family connections.
3.3
If remuneration of management is linked to performance, set out the details of the arrangement.
3.4
4. Financial Information and Confidentiality
Obtain copies of the latest management accounts.
4.1
Obtain copies of recently audited accounts.
4.2
Identify auditors of each company.
4.3
Obtain, if necessary, individual accounts as well as consolidated accounts.
4.4
Obtain/produce up-to-date cashflow statements and forecasts.
4.5
Obtain/produce budgets, forecasts, and other future financial planning information.
4.6
Consider the need for confidentiality agreement for recipients of commercially sensitive information and
4.7
form of any such agreement.
12 A Toolkit For Out-of-Court Workouts
5. Cash Flows
Identify all bank accounts of every company in the group, including bank, location, currency, purpose, and
5.1
current balances.
Describe cash flow patterns: which company receives and pays, how much it receives and pays, in which
5.2
currency, and when.
Identify all intragroup payments/payment patterns.
5.3
Identify any intragroup loans and their terms.
5.4
Identify key cash flow dates, such as: paying wages, rent, and other periodic mandatory payments.
5.5
6. Key Contracts Review
Locate all key contracts. If they are not in writing, then draft a description of their terms.
6.1
Establish whether valuable contracts may be terminated by a counterparty or might automatically be
6.2
terminated on an “insolvency.” Determine whether “insolvency” includes “restructuring” and if so, whether
it might make a difference if the “restructuring” is completely informal or involves the court.
Establish the consequences of termination by the debtor of key contracts: damages or contingent liabilities.
6.3
Examine contracts with customers and suppliers, service providers, IT and IP licenses, property and other
6.4
operating leases, and assess the consequences of a restructuring on these.
7. Financing
Identify all sources of financing used by the group, including intragroup loans (see above).
7.1
Obtain copies of all bank loan documentation and identify, where applicable:
7.2
• Agent and Security Trustee;
• All current participants in the loan;
• Amount and type of facility;
• Current level of drawdown;
• Repayment profile;
• Currencies involved;
• Interest rates and margins, both normal and default;
• Fees and expenses;
• Events of default and potential events of default;
• Termination rights, including acceleration;
• Financial and other covenants;
• Negative pledges;
• Assignment provisions;
• Majority bank voting percentages;
• Pro-rata sharing provisions;
• Confidentiality provisions; and
• Governing law.
Establish if there are any existing defaults. Have any default notices been served or rights reserved? Are
7.3
there any letters extending or varying facilities?
Obtain copies of documents relating to all other bank facilities, such as:
7.4
• Overdrafts;
• Letters of credit;
• Bonding;
• Acceptance credits;
(continued )
2 Cross-Cutting Practicalities of Conducting a Workout 13
Checklist for Debtor before Workout Negotiations—Continued
• Bills of Exchange; and
• Currency facilities.
Identify any foreign exchange contracts, swaps, options, or other derivative contracts, and obtain copies
7.5
of relevant ISDA Master Agreements and Schedules. Establish termination provisions, close-out exposures
and current mark-to-market values.
Identify all bonds, notes, and other debt instruments issued by the company, and obtain copies. Review
7.6
these documents as loans.
Identify all finance leases and obtain copies. Review as loans.
7.7
8. Security and Guarantees
Identify all guarantees given by or to members of the group and note the following in each case:
8.1
• Identity of guarantor;
• Beneficiary of guarantee;
• Persons/entities guaranteed;
• Liabilities guaranteed;
• Date of guarantee;
• Purpose/benefit to guarantor in providing the guarantee;
• Consider the enforceability of the guarantee under its governing law; and
• Assess the risk that payment under the guarantee will be required.
Identify all security given, by which company to which lender, including the following:
8.2
• Mortgages on land;
• Debentures;
• Charges or pledges over shares;
• Charges by deposit of title deeds;
• Charges on bank accounts;
• Charges over movable/personal property, e.g., ships, aircraft;
• Cash held as collateral, and where;
• Other collateral, type and location.
Identify all creditors who may be able to assert liens, retention of title claims, trusts, or other proprietary (in
8.3
rem) or security rights.
Check that all security requiring to be registered has been registered and assess the consequences of failing
8.4
to do so.
9. Litigation and Litigation Risk
Obtain details of all material litigation against the company, including:
9.1
• Parties;
• Nature and amount of claim;
• Lawyers acting;
• Stage reached in the proceedings;
• Advice received on likely outcome;
• Insurance coverage; and
• Settlement prospects.
14 A Toolkit For Out-of-Court Workouts
Obtain details of any claims or threats of litigation.
9.2
Establish if any significant arrears are owed to suppliers, tax or government creditors. Has any enforcement
9.3
action been threatened or commenced?
10. Regulation
Are the activities of the group subject to regulation in any way? If so, by whom?
10.1
Does the group hold licenses that permit its activities? Could these licenses be affected by a restructuring
10.2
or insolvency?
Are there obligations to disclose restructuring or insolvency events to regulators? Consider how this
10.3
obligation is to be discharged, and when this must/should be done;
Are any public announcements required, e.g., through a stock exchange?
10.4
11. Advisers
Identify and list contact details for:
11.1
• Legal advisers in local jurisdiction;
• Legal advisers in other jurisdictions;
• Auditors;
• Financial advisers;
• Valuations experts; and
• Any relevant technical advisers.
Identify and list contact details for the legal, financial, and other advisers to the financial creditors.
11.2
2.2 Relevant Stakeholders ■■ Bankers’ associations, as coordinators of creditor
banks.
The main and obvious participants in any
restructuring scenario are the debtor enterprise and Creditors (parties to the negotiations):
its creditors. As noted by the Legislative Guide, an
important aspect of a workout is to have a balance ■■ Leading domestic and international banks, as
between the different interests of these stakeholders, creditors and new finance providers;
as well as between the broader social, political, ■■ Microfinance institutions (including peer-to-peer
and policy considerations that impact insolvency lenders), as creditors;
proceedings in general.23 However, when the debtor ■■ Tax authority, as creditor, but often one that
is facing a liquidity crisis or a situation of financial benefits from a priority to be paid ahead of
distress, there are a number of other stakeholders certain creditors;
(not necessarily participants in the negotiations) that ■■ Labor authority or trade unions, as representatives
may be interested in the development and success of the employees of the enterprise in distress,
of the workout process. Stakeholders might include: who are creditors regarding unpaid wages;
■■ Insurance enterprises, as potentially affected
Promoters of the overall restructuring framework in parties in the event that any policy is linked to a
a country (not typically parties to the negotiations): default or nonperformance of obligations;
■■ Trade creditors, as sellers who deliver goods to
■■ The central bank, as the guardian of the financial a buyer and do not require payment for a certain
stability in the country; period of time.
2 Cross-Cutting Practicalities of Conducting a Workout 15
Economic stakeholders (not typically parties to the permitted to hold certain levels of distressed claims.
negotiations): On the other hand, some parties are interested
in acquiring such claims, either because they
■■ Chambers of Commerce, as parties interested specialize in debt collection (for instance, the so-
in the sound functioning of the business called “vulture funds”) or for other reasons relating
environment in the country and in preserving to debt restructuring, such as the desire to acquire a
enterprises as a growing concern; stake in the debtor enterprise. Debt trading is best
■■ Stock exchange, as listing authority of the facilitated through active secondary markets for
enterprise in distress; distressed debt and when there are few regulatory
■■ Credit default swap providers, as protection or tax impediments.
providers in an event of default, which can put
them at risk. Generally, debt trading can have both positive as
well as negative implications for the success of a
Potential facilitators of the negotiations: workout. For instance, a liquid market in secondary
debt may complicate the negotiation process
■■ Insolvency representative associations (if any), and cause difficulty in identifying the relevant
as safeguards to the integrity of the restructuring parties. Furthermore, creditors who specialize in
processes; distressed debt may have very different incentives
■■ Alternative dispute resolution professionals (that from original creditors, and may therefore be more
is, mediators, conciliators), as facilitators of willing to block a comprehensive restructuring
party negotiations. and seek concessions from the debtor without
regard to the interests of other creditors or the
The composition of the stakeholders in any given survival of the debtor’s business. Alternatively,
case may vary depending on the type and size of it is possible for debt trading to increase the
the borrower (for example, a large incorporated possibility of a successful workout and improve
enterprise; a small- or medium-sized enterprise corporate governance in debtor firms. Debt trading
[SME]; or an entrepreneur who has taken on a can encourage the concentration of debt in fewer
personal loan for an enterprise). creditors, which in turn reduces the transaction
costs of restructuring. The presence of creditors
2.2.1 The Issue of Debt Trading that specialize in distressed debt may also lower the
fixed cost of enforcement and help discipline the
Debt trading is one of the many issues that need to
debtor’s management in times of distress.24
be considered in identifying the central stakeholders
in the context of debt workouts and in determining
the possibility of success because it changes who is
2.3 Standstill Agreement
a relevant stakeholder at the time of the workout. Creating a standstill agreement is one of the first
Debt trading is the transfer of a creditor’s claim to steps involved in a workout once the creditors have
another party, resulting in the party that assumes the convened. It is an agreement between the debtor
claim becoming the new creditor. Original creditors and relevant creditors that the creditors will grant
may engage in debt trading for a number of reasons, a specific standstill period during which they will
resulting in them no longer being creditors during not enforce their rights against the debtor for any
workout negotiations. They may, for example, default. Depending on the standstill agreement, it
have their own liquidity problems and be willing may also provide that creditors must keep open any
to sell their claim in an attempt to get cash. Other existing lines of credit to the debtor, or postpone
creditors, such as banks and pension funds, may any capital or interest payments due. Furthermore,
be subject to regulatory constraints and only be since insolvent debtors do not default on all loans
16 A Toolkit For Out-of-Court Workouts
at the same time—but rather on the facility whose ■■ Draft a restructuring plan;
payment comes due just as the debtor’s financial ■■ Provide creditors with relevant information
situation becomes so acute that it cannot make on the enterprise and its financial position,
the next payment—the burden of default falls so that creditors can assess the viability of
disproportionately on one creditor. As a result, the restructuring plan. The creditors may hire
creditors often agree to share the losses from any professional accountants to prepare a report
debtor default. detailing the enterprise’s financial situation and
prospects for rescue.
It should be emphasized that with certain hybrid
procedures, the court might impose a formal stay The length of the standstill period varies, but
or moratorium to prevent enforcement actions by typically will not exceed two months, at least
creditors. However, with more informal negoti- initially. The standstill agreement can be extended
ations, a standstill agreement will have to be ne- if the parties concur.
gotiated contractually by the respective parties.
In either case, a successful workout generally re- 2.5 The Importance
quires the involvement of the debtor’s major bank of Confidentiality
lenders and their agreement not to enforce their
debts, since it is their cooperation that is needed to Confidentiality is an essential element of workouts.
restructure the enterprise’s obligations. Typically, However, with certain hybrid procedures, this might
trade creditors continue to be paid and often may not be possible in light of the court’s involvement.
not even be aware that the borrowing enterprise is For instance, a formal stay imposed on creditors
attempting to restructure its debt. If the number of to prevent enforcement action would necessarily
bank lenders is great enough to make coordination mean that all creditors receive notice and the court
difficult, the standstill agreement may designate a proceedings will be public knowledge. On a general
bank to oversee the loan restructuring and represent level, the management of a struggling enterprise
all lenders in negotiations with the debtor and any may not wish to make it known that the enterprise
professional advisors (lead bank). In particularly is insolvent, or negotiating with its creditors to
complex cases, lenders may find it appropriate to avoid insolvency, for fear that customers would
form a committee of creditors that oversees the shun the enterprise or that suppliers might break off
restructuring on behalf of all creditors (steering their relationships with it. In the specific context
committee). of the workout negotiations, the debtor would
be concerned about how creditors will treat the
In some cases, the lead bank may have a conflict of information it provides so that the latter can assess
interest between its position as an individual lender the debtor’s financial situation and assess the
and its role representing other creditors. While the chances of a successful restructuring. Much of this
lead bank would generally be required to disclose any information is often commercially sensitive and, in
conflict of interest, the other bank lenders could decide the wrong hands, could be used against the debtor.
that it is appropriate for the lead bank to continue As a result, debtors and creditors often incorporate
representing them, notwithstanding the conflict. confidentiality agreements into the workout.
2.4 Standstill Period 2.6 Valuation of the
Debtor’s Assets
The standstill period grants the debtor a reprieve
from enforcement actions. In return, the debtor Properly valuing a distressed debtor’s assets is
agrees to use this time to: crucial to a successful operational and financial
2 Cross-Cutting Practicalities of Conducting a Workout 17
restructuring. A workout must be based on the When undertaking a workout, both the procedural
assumption that the debtor’s financial situation and substantial aspects need to be considered.
has been accurately described and that there are The procedural aspect focuses on the way in
no hidden losses or overvalued assets. Creditors which the restructuring should be performed (for
will need to compare the enterprise’s current value example, OCW, hybrid procedure, extent of court
against the value that a proposed restructuring intervention, etc.), whereas the substantial aspect
will generate and make an informed decision on involves the actual restructuring of debt. The
whether to agree to the measures proposed by the substantial aspect can occur pre-emptively in an
debtor and accept a restructuring plan. However, attempt to prevent actual default (debt rescheduling)
the debtor and the creditors often have conflicting or after the default has taken place. The substantive
views of the value of the debtor’s assets; on the one aspect can take the form of an array of options that
hand, creditors will tend to overstate the debtor’s may, for instance, consist of:
financial woes, while the debtor will emphasize the
economic prospects of the enterprise as foreseen by ■■ Debt write-down: a face-value reduction on the
the reorganization plan. claim;
■■ Extension of maturities: by extending maturities,
Where debtor and creditors cannot reach an the debtor benefits from a net present value
agreement on the valuation of certain assets or reduction on the claim, and obtains relief from
losses, the parties to the restructuring may benefit the consequences of what might be a temporary
from engaging independent third-party advisors and cash-flow problem;
experts who can undertake due diligence. Advisors ■■ Interest holiday: a temporary suspension of
and experts should address the general suspicions interest payments;
that creditors have regarding the debtor’s previous ■■ Delivery of assets to the creditors: the creditor is
business conduct and its ability to produce a paid in kind;
successful business plan, as well as helping to gather ■■ Debt-for-equity swaps: structuring the enterprise
the necessary information to get a clear picture of so that the general creditors exchange their debt
the debtor’s situation and its viability according to a for shares in the enterprise (or partners in a
new business plan. They may also study the causes partnership);
of the enterprise’s problems and prepare or review a ■■ Restructuring of the debtor enterprise: a corporate
business plan that would put the enterprise back in restructuring that can result in the isolation of the
a healthy economic situation. Advisors and experts deficit units to protect the revenue-generating
may be drawn from a variety of disciplines, such as parts of the enterprise to guarantee payment;
accounting, finance, law, business reorganization, ■■ Management of all or part of the enterprise
and marketing. for the creditors’ benefit: to appoint a third,
independent party with the required skill sets to
2.7 The Restructuring Plan run the enterprise for the benefit of all parties,
bearing in mind streamlining costs;
The debtor’s main responsibility is to prepare and ■■ Issuance of securities or convertible debt
present to its creditors a plan for restructuring its instruments: issue new shares of the enterprise
debt and/or operations. The restructuring plan also or debt instruments that the creditor can convert
specifies how and when creditors are to be repaid. into shares in the event the enterprise recovers
There is no format for how a restructuring plan and performs well;
should look. The details of the plan depend mainly ■■ Creation of guarantees on thirty-party assets: a
on the needs of the business and the willingness of different party guarantees the claims of creditors
creditors to make concessions to avoid a liquidation (that is, the pool of available assets gets bigger);
of the debtor and the risk of even lower recoveries.
18 A Toolkit For Out-of-Court Workouts
■■ Assignment of stock in other enterprises: this is Operational Restructuring
another type of payment in kind, where the debtor
assigns the shares it owns in another enterprise to Operational restructuring is the adjustment of a
the creditors; debtor’s liabilities to make the debtor more capable
■■ Capitalization of claims into shares or in stock of meeting its obligations. It can be financial,
ownership programs: this is mainly an option for operational, or a combination of both. For ease of
employees of the enterprise, whereby the monies analysis, workout process can be divided into the
owed are paid in shares or future shares of the following phases27:
enterprise.
1. Stabilizing;
Note that these options can be combined or arranged 2. Analyzing;
in such a way that alternative options can be offered 3. Repositioning; and
to several types of creditors allocated or categorized 4. Reinforcing.
in separate classes (for instance, secured creditors
in one class versus unsecured creditors in another In practice, the different phases (and actions to
class). Nonetheless, the proposal should contain be taken) frequently overlap, as restructuring
equal or equivalent provisions for all creditors in management is an iterative process.
the same class. If this is not done, there may be
court challenges to the enforceability of the plan in Phase I. Stabilizing
OCW cases as well as challenges to the approval of In the stabilizing phase, the focal point is to identify
the plan in hybrid procedures. and react to the distress, which requires immediate
action to stabilize the enterprise. The primary
2.8 The Different Steps of the concern in this phase is increasing the incoming cash
Workout Process25 flow, and reducing the outgoing cash flow. In this
way, the required “breathing space” can be created
This section discusses the key steps of a typical to meet critical short-term financial obligations.
workout. Whether for an OCW or a hybrid Some possible actions that can be taken include:
procedure, these steps are likely to be undertaken
in the restructuring assessment and ensuing ■■ Reducing the current expenses both in the field
negotiation. Based on research and experience, of costs and with regard to investments;
the prime focus of a restructuring should be on ■■ Selling off excessive inventory, as well as
improving the competitive position of the debtor. reducing the stock;
Consequently, “fixing the business” is the prime ■■ Quicker collection of receivables and/or reducing
focal point. This consists of addressing two matters: the payment periods; and
■■ Selling excessive assets (asset stripping).
■■ Operational or business restructuring; and
■■ Financial restructuring. When stabilizing an enterprise, it is important that
management implement new (temporary) internal
The underlying idea is that it is impossible controls. See Chapter 5 for more detail.
and undesirable to carry through financial
restructuring without operational restructuring of
Phase II. Analyzing
the enterprise operations (which is what usually
leads to the deteriorated financial situation within In the second phase, it is necessary for the enterprise
the enterprise). The process is also aimed at a to look at its long-term prospects. Drawing up a well-
restoration of confidence in the enterprise and its founded restructuring plan is of vital importance,
management among interested parties.26 particularly to restore confidence of the relevant
2 Cross-Cutting Practicalities of Conducting a Workout 19
interested parties. When developing the plan, it is Phase IV. Reinforcing
important to adequately set forth the core activities
of the enterprise—including the (potential) value In addition to initiating the restructuring (during
that they can create. In addition, consideration must which period the organization tries to regenerate
be given to which specific products, services, and positive cash flows from operations), the enterprise
customers should be retained and which should be also needs to be “reinforced.” This means replacing
given up. Measures to restore profitability in the or enhancing current management and improving
long term can be diverse and will depend upon the the enterprise’s balance sheet by lowering the debt-
specific situation. equity ratio. This can be achieved by transferring the
enterprise to be restructured to another enterprise,
The restructuring plan must indicate the short- thus guaranteeing future payments.
and long-term objectives to halt the insolvency
process and to restructure the enterprise, as well As stated before, it can help to involve third-party
as the actions to take to achieve the objectives. It experts in the restructuring process, as it still
is important that the plan is realistic; interested remains to be seen whether current management
parties make decisions on this basis. Financiers will be able to independently complete the operation
decide on the basis of the plan whether to maintain successfully. During the reinforcing phase, the
the credit facilities granted or make new funding question is whether current management is able to
available to finance the workout. Suppliers of successfully run the enterprise in the future, and
products/services decide whether to continue whether the existing organization and management
to supply the enterprise (on credit). In addition, structure fits within the new enterprise. Changing the
shareholders/investors consider whether to make management structure—including position changes
any required capital available. This involves, for or dismissal of key figures in management—may
instance, the depositing of (informal) capital and/ be required.
or (subordinated) loans. It is often also necessary to
recruit or consult persons such as restructuring and Reinforcing the balance sheet, as described in this
insolvency representatives. phase, is interconnected with financial restructuring.
Phase III. Repositioning Financial Restructuring
In the repositioning phase, management and any Although the restructuring plan forms a basis for
consultants initialize the restructuring as outlined a successful rationalization of the enterprise, some
in the plan. This is called the “value recovery degree of financial restructuring can also often be
process,” so named because the enterprise has lost necessary. The losses from the past have—in most
value due to its financial distress, but now in the cases—disturbed the balance sheet ratios to such
process of reversing that value loss. It is important an extent that the obligations toward the assets
that means of recovering value are feasible and are excessive; as a result, interest and repayment
that management reports to the interested parties obligations cannot be or no longer have been met.
in an open and timely manner. This will enable the In addition, high restructuring costs are usually
restructuring plan to restore the confidence of the involved, for example, costs for redundancies.
interested parties in management, and ideally help
to rebuild relationships. In many ways, the process The enterprise is not always able to clear away its
of the enterprise’s recovery is also the process of debt with its own current cash flows. Therefore,
restoring confidence among the interested parties. new financing assistance from outside the enterprise
Third-party professionals who specialize in (that is, from shareholders and/or creditors) must
restructuring and insolvency processes may also often be requested, as well as revision of the terms
assist in this regard. of funding already provided by creditors.
20 A Toolkit For Out-of-Court Workouts
The core of financial restructuring is typically 2.10 The Ranking of
debt rescheduling, namely the deferment or
Creditors’ Claims in
remission of current financial obligations, as well
as generating additional liquidity. The partial or
a Restructuring Plan
complete takeover of an enterprise fits within the An “order of priorities” means that some creditors
financial restructuring framework because the have precedence over the others in the distribution
buying enterprise usually acts as guarantor (in part of the proceeds of the sale of the debtor’s assets,
or in whole) of current obligations and/or provides if liquidation were to take place. There is no
additional financial resources. standardized order of priorities across countries,
although there is guidance as to best practices,
2.9 Establishing Intangible and modern thinking suggests that to the extent
Elements of a Successful possible, the order of priorities should be based
Framework upon commercial bargains and not reflect social
and political concerns that have the potential to
Despite the best intentions, stakeholders may fail to distort the outcome of insolvency.
reap the benefits of a workout framework if certain
intangible elements are not present. Motivating A creditor’s ranking is often arranged at the time
private parties to be fully engaged in negotiation that the creditor lends money to the debtor or it is
and open discussion requires that certain intangible set by law. The order of priorities is important in the
elements be in place. These include: context of an OCW because creditors might agree
to change their status or priority in the workout in
■■ Good faith on the part of the borrower and order to facilitate a restructuring plan. Similarly,
lenders; creditors might agree to provide new financing to
■■ An understanding by lenders of the methods and the enterprise to help save it, which might result in
principles for conducting workouts; a higher ranking in priority.
■■ A highly developed creditor culture, where
creditors possess the initiative and incentive to 2.10.1 Subordination
work with debtors to obtain the best possible
outcome; Another method of altering priority is subordina-
■■ An awareness on the part of lenders that workouts tion. Subordination is “the act or an instance of
work in their best interest, compared to either moving something (such as the right or claim) to
refusing to negotiate or going through a formal a lower rank, class or position.”28 Creditors vol-
proceeding; untarily agree to situations of subordination, and
■■ A willingness on the part of lenders to proactively understand that by holding subordinate debt, they
encourage borrowers to seek help if they are have moved lower in the order of priorities (that
facing financial difficulty; is, subordinated debt is only recoverable after other
■■ A setting in which both parties feel they can debt is satisfied).29 Creditors mitigate the risk asso-
engage in open dialogue; and ciated with subordinated debt by pricing the debt
■■ A business culture where borrowers feel accordingly and charging higher interest rates or
comfortable approaching lenders with financial some other kind of benefit.30
problems in a timely way, that is, while borrowers’
businesses are still viable. Subordination is usually agreed upon and governed
by means of an inter-creditor agreement, a common
These elements cannot typically be created by any feature in transactions where most of the outstanding
public sector authority. debt obligations are of a financial nature rather than
commercial or trade debts.
2 Cross-Cutting Practicalities of Conducting a Workout 21
2.11 New Financing during of the existence of a negative pledge provision
in ongoing financing agreements, or because of
a Workout
the lack of available unencumbered assets. In
Since most enterprises undertaking a workout are those cases, creditors will again need to reach an
typically in serious financial straits, they may not agreement in order to ensure that the new money
be able to continue operating through the OCW or will be accorded priority status. In any case, it is
the hybrid procedure without additional financing. important to review existing legal provisions related
Without new financing arrangements, the debtor to creditor priority in a liquidation to make sure
enterprise may experience liquidity problems that the grant of super priority is not prohibited by
and be forced to resort to formal insolvency local laws and, importantly, that such a priority will
proceedings. Additional financing may also be apply even in the event of a subsequent liquidation
necessary to satisfy the claims of smaller creditors should the workout attempt fails.
so that negotiations may be kept to a manageable
number of parties. Therefore, additional funding 2.12 Potential Impediments
(sometimes referred to as “new money”) is often in Other Laws
an important prerequisite of a successful debt
restructuring. The existence of priorities in other laws, and the
priorities that they or prior contracts might confer
An effective way to encourage lending to on creditors, could impact the dynamics of the
distressed enterprises is to accord priority status negotiations. It is therefore important to understand
to new funding. Given the importance of such the existence of such legal priorities in the relevant
additional financing to the enterprise’s survival jurisdiction, whether the priorities could survive
(and consequently the potential benefit for all liquidation, and whether they will ultimately affect
creditors), as well as the additional exposure and bargaining positions.
risk that the lender (often the lead bank) is taking
on, many jurisdictions understand the importance Tax laws in numerous jurisdictions often give rise
of allowing providers of additional financing to difficulties in implementing workouts, because
a super-priority over other, existing creditors. tax laws may not allow write-offs of the value of
However, obtaining funds during the informal the loan. This creates certain inefficiencies because
process can be a significant problem because, the tax authority is sometimes protected by a super
even though there is some provision under formal priority and can end up obstructing the success of
proceedings for a type of “super priority” for a a restructuring. Other concerns are considered in
debtor’s post-commencement financing, that law Box 2.
normally does not extend to such an arrangement
under the informal process. Therefore, priority of 2.13 The Classification
new money will normally require the prior approval of Claims
of creditors (or of a committee of creditors).
A debtor seeking to achieve a workout may
Another way of attracting post-commencement have a number of different creditors to whom it
financing is by providing creditors with additional owes various sums pursuant to different types
security over the debtor’s assets. The negotiation of transactions (financial, commercial, etc.) and
of new security and the provision of new money different legal structures (unsecured, secured,
for the debtor are also considerably easier under a other priorities, etc.). In such a context, achieving
workout, as important rigidities and requirements of debt restructuring without the involvement of the
formal processes are avoided. In a number of cases court requires coordinating and motivating these
such security may not be granted, either because different groups of creditors as well as providing
22 A Toolkit For Out-of-Court Workouts
BOX 2: Tax Considerations in Out-of-Court Workouts
In debt restructuring, tax policy plays a key role in creating adequate incentives for parties to engage in informal
agreements. While debt-restructuring transactions that occur within in-court proceedings are usually exempt
from taxation, this is not usually the case for identical transactions negotiated out of court. In fact, many
restructuring transactions—such as outright write-offs, debt forgiveness, debt-to-equity swaps, and simple
sales of assets in exchange for debt—result in a tax obligation for the debtor or the creditor.
Two typical impediments that arise are (1) the tax treatment of debt forgiveness and (2) the deductibility of
losses. Both obstacles occur, for instance, when a creditor accepts a partial write-off or a reduction on the
principal of the loan in a workout settlement. Under the first impediment, the amount written off is sometimes
considered an extraordinary income or “gift” received by the debtor, and is therefore treated as taxable income.
This classification creates a significant tax burden on an already cash-strapped debtor, and allows the tax
authorities to make a “profit” out of the amounts sacrificed by creditors. The second impediment consists of the
impossibility of a creditor to deduct the losses incurred in a restructuring transaction, including the amounts of
the claim written off to allow the survival of the debtor. Although these amounts are typically regarded as losses
under applicable accounting and regulatory legislation, tax laws may impose additional stringent requirements
to allow their deductibility for tax purposes, such as, having exhausted collection efforts. This restrictive
interpretation of losses significantly discourages creditors from engaging in restructuring transactions.
Tax rules are designed to protect government revenue, and as such, to accelerate income recognition and
minimize deductions. However, these overarching goals may undermine successful restructuring and de facto
minimize the tax base during financial crisis: the more businesses liquidated, the lower the tax base will be. For
this reason, several countries have introduced exemptions in their tax codes that promote corporate rescue
and allow a neutral treatment of out-of-court restructuring.
a mechanism that simplifies voting and ensures an the particular restructuring. In general, creditor
efficient and equal treatment of claims. In order to classification in the context of OCWs may prove
achieve the above objectives, creditors are usually a valuable technique for reducing the costs and
divided into separate classes for the purpose of complexities of restructuring and also ensuring that
treatment of their claims based by the reorganization similarly situated creditors are treated equally.
plan.
2.14 The Possible Role
The classification of claims in OCWs has a different of a Mediator
function than in the context of formal proceedings.
More specifically, classification may help the Workouts succeed when there is open dialogue and
debtor treat similarly situated creditors consistently good-faith negotiations between the debtor and
as well as identify those creditors that are the its creditors. At times, these intangible elements
most significantly affected in the restructuring. may be missing. Mediators or conciliators are a
On the other hand, classification cannot provide means of support. They can be used in a variety of
a mechanism to bind holdout creditors through a restructuring models, but are particularly beneficial
cram-down mechanism as in the case of formal in workouts.
proceedings (except to the extent that financing
agreements provide a majority mechanism for Mediators assist the parties by operating like
altering the terms of transactions). The only intermediaries or referees in that they facilitate
leverage participating creditors have to persuade a the creation of an agreement between disputing
holdout to cooperate is market leverage and peer parties; however, mediators are not enabled to
pressure, especially if the participating creditors make binding decisions for the parties. Instead, the
do other business with the holdout except from goal is to guide the disputing parties to reach their
2 Cross-Cutting Practicalities of Conducting a Workout 23
own resolution. Mediators are independent and in France and Greece or a “mediator” in Belgium,
objective third parties, and they frequently have where the insolvency laws expressly include
vast experience in mediation as well as knowledge the use of these alternative dispute-resolution
about the topic being mediated. mechanisms to overcome differences between the
parties. In addition, the UNCITRAL Practice Guide
Mediation is a growing trend, although it is most on Cross Border Insolvency Cooperation expressly
often used in common law jurisdictions. The use of acknowledges the important role that mediation
a “conciliator” in civil law jurisdictions can be seen plays in the field of insolvency law.31
24 A Toolkit For Out-of-Court Workouts
3 Informal
Out-of-Court Workouts
3.1 What Are Out-of-Court ■ Fast, as there are no procedures with pre-
established timeframes to follow. If agreements
Workouts?
with creditors are properly conducted, and with
As defined in the Glossary, a workout for the the right incentives in place, the process can be
purposes of this Toolkit is defined as a nonstatutory relatively quick.
agreement between a debtor and creditors with the ■ Flexible, because parties are free to agree to the
aim of easing the debtor’s debt-servicing burden terms of the restructuring in their most convenient
so that it can maintain its business activities and way (for example, an agreement does not have to
value. Out-of-court workouts have no judicial observe the priority rule, and parties can decide
involvement. This informal restructuring process what to do with their security interests).
is akin to a private reorganization,32 and involves ■ Informal, because the agreement is conducted
changing the composition of assets and liabilities privately between parties, and is therefore subject
of debtors in financial difficulty.33 As discussed only to the formalities of a valid contract under
in Chapter 2, OCWs often contemplate a debt the governing law of the agreement.
rescheduling between the debtor and its creditors, ■ Confidential, since the private agreement is
and encompasses a wide array of other possibilities. not publicly disseminated. OCWs are less
prone to unwanted publicity and speculation,
An OCW regime is not structured by formal rules and are therefore a good option for preventing
and modes of participation. The whole procedure reputational damage to the debtor.35
is driven by the players and their needs, outside
of the formal court system.34 All stakeholders who 3.3 The Challenges of
are to be bound by the terms of the restructuring Out-of-Court Workouts
plan need to be persuaded that the plan is in their
best commercial interests. If the going concern As discussed in Chapter 2, there are several
value of a firm exceeds its liquidation value, most challenges to workouts (such as tax disincentives).
stakeholders will have an incentive to prefer a Some additional impediments specific to OCWs
workout. include:
3.2 The Advantages of ■ Creditor “hold-out”: The drawback of OCWs
is that due to their contractual nature, they are
Out-of-Court Workouts
only binding upon signatories. Unless there is
Advantages of an OCW include that they are: unanimity among the participating creditors,
there is a risk of the so-called “holdout creditor”
3 infoRmal ouT-of-CouRT woRkouTs 27
problem occurring.36 Holdout creditors benefit at based on types of creditors, or focus only on a
the expense of the agreeing creditors because the select group of creditors.
holdout creditors are not bound to the agreement, ■■ Requirement for good faith: An OCW agreement
and they must therefore be paid in full, to prevent can only be successful where there is real
them from commencing a legal claim against commitment to negotiate on the part of the
the debtor. In some circumstances, holdout financial creditors—either due to their desire or
creditors are not a concern (for example, it may initiative, or simply by necessity. OCWs should
be understandable to permit a small or special be binding on all creditors, but the contractual
creditor to be excluded from the proposal and nature of such procedures means that every
collect its debts in full). In other circumstances, a creditor must give its individual consent to the
holdout creditor may be viewed as a free rider and agreement for this to happen. OCWs are different
prompt other creditors to not agree to postpone from court-supervised procedures in that there is
or reduce their debts unless all creditors of that no statutory stay, and therefore the status quo can
class unanimously agree to the agreement. The be altered at any time by a dissenting creditor
holdout creditor problem may be avoided with rushing to the courthouse. A contractual stay can
a hybrid model, which gives the court the power mitigate this, but again it requires unanimous
to impose the terms of the plan on dissenting agreement to be effective. The lack of a formal
creditors. stay or moratorium on creditor demands while
■■ Collective responses: An OCW is only possible resolving the enterprise’s problems represents
if the enterprise’s main creditors are willing to a weakness of OCW mechanisms. Creditors
explore it as a viable option. That means it offers may simply not consent to delay enforcing
the prospect of a higher return than the statutory their debt while waiting for a private agreement
alternatives. The main creditors will act as a to be reached. Changes to the composition
critical mass that can induce other creditors to of the syndicate as a result of debt trade can
join (or not). For example, if a major creditor does disrupt negotiations as new creditors take time
not agree with the terms of the OCW or holds out to comprehend the detail, often wishing to
to get paid in full (or to force the debtor to make reopen negotiating ground that has already been
a better offer), the workout will be at risk because covered.39
others might follow suit (herd behavior37). ■■ Requirement for cooperation: A workout entails
■■ Creditor identification/organization: The sale of a substantial degree of cooperation. Each
debt in secondary markets and risk hedging tools creditor must agree not to press for repayment
can make it more difficult to identify and orga- until the viability of the enterprise has been
nize creditors aiming at coordinating a negotia- assessed and a consensus reached on a way
tion strategy.38 forward. In particular, secured creditors must
■■ Coordinating participants: Negotiations are en- stay from enforcing their rights, although non-
hanced when the creditors appoint a leader (and, secured creditors should also refrain from
if need be, a creditors’ committee) to facilitate making demands for repayment. The use of
discussion among fragmented participants, and OCWs involves challenges due to the growing
better disseminate competing viewpoints. complexities of capital structures in a way that
■■ Aggregation problem: There are frequently dif- each creditor approaches the restructuring. As
ferent types of creditors with distinct interests the European High Yield Association noted in
(for example, secured and unsecured), so it may 2008, “Stakeholders approach each restructuring
be hard to engage in meaningful negotiation if with their own agenda and strategy, often looking
various classes of creditors are all present. It may for positions of control and influence to gain
make negotiations easier to separate them into leverage, not always seeking common ground
homogeneous groups and have multiple OCWs and consensus.”40
28 A Toolkit For Out-of-Court Workouts
■■ Informality might be too challenging in some In the 1980s, the Bank of England consolidated the
jurisdictions: The absence of a predictable debt restructuring practices of financial institutions
restructuring process (to say nothing of the into a set of nonbinding guidelines that the Bank
absence of a predictable liquidation process) may of England then promoted. The London Approach
create a level of uncertainty that would mean has inspired other debt-resolution models, such
that OCWs are not attractive to stakeholders, as INSOL Statement of Principles for a Global
particularly in cases of larger-scale enterprises. Approach to Multi-Creditor Workouts (the INSOL
In such jurisdictions, it is necessary for the design Principles) (discussed in detail later), as well as a
of OCW guidelines to be as simple as possible, number of country-specific models, including the
and for expectations of the pace of development Bangkok Rules,42 the Istanbul Approach,43 and the
of the workout culture to be realistic. Jakarta Initiative.44
■■ Information asymmetry: Imbalances in the
information publicly available and the inter- The specific actions required to institute OCW
relationship between the debtor and its creditors guidelines as the basis for an out-of-court workout
can create conflicts of interest between credi- system include:
tors and coordination problems.41 To prevent
this, the debtor should provide its creditors with ■■ Understanding the existing insolvency framework
full disclosures of all financial and market in- (or lack thereof);
formation relevant to the decisions being asked ■■ Designing and issuing guidelines; and
of them. ■■ Communicating the insolvency framework to
■■ Insolvency law: Typically voidance actions nul- various stakeholders.
lify agreements that involve the creation of
additional securities or preferences, while the 3.4.1 Understanding the Existing
enterprise is on the verge of insolvency. These Framework
common provisions, if not mitigated, may cre-
The first stage of any implementation program is to
ate disincentives to achieve workouts because
review how lenders currently work with borrowers
creditors may be reluctant to enter in agree-
and other lenders to resolve debt situations. This
ments that can be easily nullified in a liquida-
review is key to designing OCW guidelines that
tion scenario.
conform to local laws, circumstances, and practice.
For example, differences in practice or exposure
3.4 Implementing an Out-of- between foreign and domestic lenders may call
Court Framework
OCWs, by definition, are voluntary informal Tenets of the London Approach
proceedings. Conducting an OCW does not need
The lenders agree not to pursue enforcement
1.
to involve establishing specific institutions or
actions against the debtor;
mechanisms. Instead, many countries have chosen a
The debtor provides relevant information on its
2.
consensual approach to OCWs through the issuance financial situation to all lenders, who agree to
and dissemination of nonbinding OCW guidelines keep this information confidential;
for parties to follow when conducting an informal The lenders use this information to evaluate the
3.
restructuring. The consensual approach is inspired business’s viability and determine whether to
largely by the so-called London Approach, the continue to support it;
product of extensive experiences with multiparty The burden of supporting the debtor (e.g., the
4.
provision of additional financing) should be
OCWs in the United Kingdom. shared by all lenders equally.
3 Informal Out‑of‑Court Workouts 29
for a different approach to how losses are shared The form of the guidelines need not adhere to
among creditors; the approach would need to be any particular template. The issuing institution
taken into account in the design and application of may see fit to send a letter with the guidelines to
OCW guidelines. Similarly, while certain countries the stakeholders, or simply to publish them on its
may already have a highly developed creditor website.
culture—perhaps aided by the presence of foreign
financial institutions that are familiar with multi- 3.4.3 Implementation of a
party OCW practices in other countries in which Communications Strategy
they do business—other countries may not have
The OCW guidelines need to be publicized in a
a strong tradition of an independent and proactive
manner that educates lenders and borrowers on the
creditor culture. There may also be impediments
utility of OCWs. If lenders and borrowers are not
that discourage parties from pursuing OCWs (for
persuaded that alternatives to judicial reorganization
example, tax laws or labor laws, as discussed in
will produce the best outcome, the OCW Principles
Chapter 2). It is important to gauge the country’s
will not achieve their goal of rescuing troubled
familiarity with workout practices, because this can
enterprises and reducing the amount and volume
impact whether a more concerted communications
of nonperforming loans in the private sector. A
strategy is more appropriate than would otherwise
communications strategy needs to be adapted to the
be the case.
local environment. Less intense communications
efforts may be needed in countries with more
To evaluate the existing situation, it is necessary
developed insolvency and financial systems, a more
to engage in a fact-finding mission and meet
developed creditor culture, and greater awareness
with representatives of the various stakeholder
and cultural acceptance of insolvency as a useful
groups, determined based on the case’s unique
tool for debt resolution and enterprise restructuring.
circumstances (common stakeholders can be found
In countries where such conditions do not exist, a
in Chapter 2). The fact-gathering process takes
targeted, customized communications strategy is
about one week. Afterward, the information should
needed.
be compiled into a research report that clearly
outlines the current situation and identifies areas on
To disseminate the OCW guidelines most efficiently,
which to focus the new insolvency framework. The
financial institutions that act as senior lenders in
World Bank Group can provide assistance in such
multi-lender situations often guide other lenders
evaluations.45
and the borrowers through the OCW process. (Since
banks typically account for the largest portion
3.4.2 Design and Issuance
of private sector lending, the central bank, as the
of Guidance
regulator of banking institutions, is also a natural
Based on the report, the second step is issuing authority to provide guidance on bank practice. See
voluntary OCW guidelines for borrowers and Chapter 4 for an example of the role the Reserve
relevant creditors46 to follow in negotiating OCWs. Bank of India plays in a workout regime.)
The OCW guidelines should set out basic tenets
for OCWs and provide commentary on how they Once convinced that OCWs represent their best
can be put into practice. Before being issued, chance for optimum returns, these lenders could
these guidelines should be reviewed by different play an important role in advising borrowers
stakeholders (for example, the central bank, of restructuring options. The scope of the
regional lawyers, etc.). These guidelines should be communications strategy should not be limited
as brief as possible, since they are statements of to banks and financial institutions; other bodies,
guidelines rather than binding regulation. such as chambers of commerce, could be used
30 A Toolkit For Out-of-Court Workouts
to disseminate the guidelines. Third-party The eight INSOL Principles are listed here and
insolvency representatives can also be integral to followed by a short commentary on their most
communicating restructuring options because they salient aspects. Policy makers should consult the
are often client-facing and considered authorities principles when establishing guidelines.
on the subject.
FIRST PRINCIPLE: Where a debtor is found to be
In addition, and at a minimum, it would be
in financial difficulties, all relevant creditors should
appropriate to conduct dissemination workshops for be prepared to cooperate with each other to
all stakeholders soon after the issuance of the OCW give sufficient (though limited) time (a “Standstill
guidelines. Other types of communications efforts that Period”) to the debtor for information about
the debtor to be obtained and evaluated and
may be appropriate on a case-by-case basis include: for proposals for resolving the debtor’s financial
difficulties to be formulated and assessed, unless
■■ A series of speeches by government and bank such a course is inappropriate in a particular case.48
officials promoting OCWs;
■■ A series of articles to familiarize the lending and
business communities with OCW guidelines; Commentary
■■ Roundtable discussions to examine issues that 1. No enterprise has a “right” to conduct an OCW:
arise during workouts; the granting of a standstill period is a concession
■■ Follow-up seminars on specific topics, such as: by creditors and not a right of the debtor. The
■■ Loss-sharing among creditors; debtor (and, if applicable, the debtor’s advisors)
■■ Problems faced by lead banks; therefore needs to assess whether there is a
■■ How to coordinate steering committees; realistic possibility that financial difficulties
■■ Debt-to-equity swaps; can be resolved and the enterprise’s long-term
■■ Engaging insolvency representatives; viability restored. If a possibility does not exist,
■■ Negotiation techniques; alternative remedies should be considered,
■■ Using unresolved workout negotiations as including liquidation of the enterprise through
bases for an expedited proceeding/pre-packaged formal bankruptcy proceedings.49
restructuring; 2. As explained in Chapter 2, the standstill period
■■ SME debt-resolution issues; allows the debtor time to prepare a restructuring
■■ Conflict-of-interest issues; and plan. The plan must show that the business is
■■ Other topics as appropriate. capable of operating profitably and the extent to
which the debtor will be able to repay its debts.
3.5 INSOL Principles for There is no prescribed minimum requirement
Out-of-Court Workouts to the contents of a restructuring plan, but it is
imperative for the debtor to show in the plan
The INSOL Principles of the International Association that there is a reasonable prospect that the
of Restructuring, Insolvency and Bankruptcy enterprise will be viable within the foreseeable
Professionals (the INSOL Principles), published in future.
2000, are a modern version of the London Approach. 3. The reference to “all relevant creditors” means
They are regarded as a set of best practices for private all creditors whose rights will be affected by
rescue arrangements47 in all multi-creditor workouts. the proposed restructuring.
The INSOL Principles encourage financial creditors 4. The unanimous support of all relevant creditors
to take a collective, coordinated, and cooperative is essential to the restructuring’s success. As a
approach to debtors in difficulty and, most important, result, the number of creditors being included in
facilitate the rescue of debtors.
3 Informal Out‑of‑Court Workouts 31
the restructuring should be strategically planned
to minimize the complexity of the negotiations. If SECOND PRINCIPLE: During the Standstill Period,
all relevant creditors should agree to refrain from
there is not enough creditor support for granting taking any steps to enforce their claims against or
the debtor a reprieve to find a solution for its (otherwise than by disposal of their debt to a third
financial difficulties, the restructuring cannot party) to reduce their exposure to the debtor but
are entitled to expect that during the Standstill
proceed because the lack of court intervention
Period their position relative to other creditors
means that there is no way to force opposing and each other will not be prejudiced.52 Conflicts of
creditors to come to terms against their will.50 interest in the creditor group should be identified
That said, the way in which the first INSOL early and dealt with appropriately.
Principle is expressed makes it plain that what
is hoped to develop, over time, is a willingness
of creditors to participate in the process with
Commentary
the understanding that it is not uncommon that 1. The objective of this principle is to achieve
enterprises could get into trouble, and that if stability and to maintain the pre-standstill status
creditors are informed of the current situation quo among existing relevant creditors.53
and future prospects, they could be better off by 2. The attractiveness of the workout process can
accepting the restructuring. be enhanced by the involvement of qualified
5. The standstill period should be limited to the professional advisors or government agencies
time required to produce a restructuring plan, or that have the required know how and/or can
to establish that such a plan cannot be produced earn the respect of the creditors.
within an acceptable time. It would be unusual 3. All creditors must be confident that, in deciding
for the initial standstill period to be longer than not to pursue their individual remedies, they will
a few weeks, although this will vary from case not be prejudiced vis-à-vis other creditors if a
to case.51 This is discussed in Chapter 2. consensual way forward for the restructuring of
6. During the standstill period, it is essential the debtor could not be found. Each creditor’s
that creditors receive sufficient current and relative ranking must neither be worsened nor
reliable information to enable them to assess improved during the workout process unless
the debtor’s financial position, to understand voluntarily agreed.
the causes of the financial problems, and 4. In those cases where there is a written standstill
to evaluate any solutions proposed. This is agreement, it will be necessary for the creditors
discussed in Chapter 2. signing up to it to agree, during the standstill
7. An ever-present challenge for the debtor is period:
the natural tendency of many creditors to a. Not to try to improve their positions relative
adopt an “each creditor for itself” approach to other creditors;
and to pressure the debtor for payment on an b. Not to insist on payment of amounts owed
individual basis. The effectiveness of such a to them;
strategy will depend in part on the provisions of c. Not to initiate collection, security
local insolvency law dealing with transactions enforcement, or winding-up proceedings;
undertaken on the eve of a debtor’s insolvency. and
For example, in some jurisdictions, the d. To allow existing credit lines and facilities
application of such pressure can be a defense to be used.
to a claim brought by a subsequent liquidator 5. A written agreement is not always necessary, as
to challenge the validity of the transaction as there can be an informal understanding among
a preference. The prospects of success of the the most important creditors that they will work
out-of-court workout are diminished as the together toward a solution.
commercial significance of such transactions
increases.
32 A Toolkit For Out-of-Court Workouts
an atmosphere of honesty and frankness, and
THIRD PRINCIPLE: During the Standstill Period, with the objective of finding a constructive
the debtor should not take any action which might
adversely affect the prospective return to relevant solution. If any parties lose confidence that
creditors (either collectively or individually) as their counterparts are negotiating in good faith,
compared with the position at the Standstill the negotiations are likely to fail. Consequently,
Commencement Date.54
creditors will fall back on their legal remedies
and enforcement proceedings and/or insolvency
proceedings are likely to begin.
Commentary
2. Unless the negotiations can be conducted on
1. If the creditors are to expressly or tacitly agree a bilateral basis, the number of constituencies
that they shall not take any steps intended to that could be involved in a corporate workout
enable one (or one group of them) to gain an and their different priority positions in the
advantage over other creditors, it must follow event of liquidation means that it is often
that the debtor must also agree not to undertake advisable for committees to be formed and
any activities or transactions which would for professional advisers to play their part in
be detrimental to the interests of any creditor achieving a consensus. These committees will
or class of creditors, or alter their respective include different types of creditors or the most
priority positions. representative creditors and are normally used
2. One important exception to this principle must to facilitate the representation of creditors and
be the ability of the debtor to continue to make the communication with and among them.
payments in what is commonly referred to as 3. Relevant creditors or any coordination
“the ordinary course of business,” as otherwise committee may wish to consider appointing
the debtor would not be able to continue to one person (for example, the creditor with
trade while attempts are made to agree to the the greatest exposure or experience managing
terms of a workout. What must be avoided, workout negotiations, or an independent
therefore, are transactions that are not for full third party) or a small representative group
value, the making of preferential payments, the of creditors (usually not more than three, and
granting of security for past debts, or incurring the creditors with the greatest exposure or
new borrowings without creditor consent. a representation of creditors from different
classes) to lead negotiations on their behalf
with the debtor.
FOURTH PRINCIPLE: The interests of relevant
creditors are best served by coordinating their
4. If the creditors experience difficulties in
response to a debtor in financial difficulty. Such co- reaching an agreement, it is appropriate to
ordination will be facilitated by the selection of one consider whether mediation can be used as a
or more representative coordination committees workout tool. Any agreement reached between
and by the appointment of professional advisers
to advise and assist such committees and, where or among certain creditor groups on this basis
appropriate, the relevant creditors participating in can be conditioned on an overall workout plan
the process as a whole.55 being agreed upon that also includes them.
5. It may be appropriate for the costs of outside
advisers (perhaps within specified limits, or
Commentary “caps”) to be paid by the debtor.
1. All negotiations between the debtor and relevant
creditors must be conducted in good faith, in
3 Informal Out‑of‑Court Workouts 33
position of creditors. For example, unless local
FIFTH PRINCIPLE: During the Standstill Period, bankruptcy law specifically so provides, it will
the debtor should provide, and allow relevant
creditors and/or their professional advisers’ generally be unacceptable if deferred creditors
reasonable and timely access to, all relevant or shareholders are to benefit to any extent
information relating to its assets, liabilities, while unsecured or secured creditors are not
business and prospects, in order to enable proper
being paid in full.
evaluation to be made of its financial position and
any proposals to be made to relevant creditors.56 3. Creditors will analyze their position under
different scenarios (for example, in a liquidation
or in a reorganization) in order to decide what
Commentary their view of any proposed restructuring plan
should be. That said, creditors may appreciate
1. The integrity of the process depends on
that it may be necessary for minor trade
creditors being provided quality information
creditors to be paid in full to achieve greater
regarding their debts. Although time is in
consensus and also to permit the debtor’s
most cases of the essence—and indeed the
enterprise to continue.
tension of deadlines serves a valuable purpose
in reaching agreement—the standstill period
must be sufficiently long to enable information SEVENTH PRINCIPLE: Information obtained
gathering, dissemination, and analysis. for the purposes of the process concerning the
assets, liabilities and business of the debtor and
2. It is in the debtor’s interest to disclose all
any proposals for resolving its difficulties should be
required information. At the very least, this made available to all relevant creditors and should,
information will include full particulars of the unless already publicly available, be treated as
debtor’s assets and liabilities, and of the debtor’s confidential.58
future business prospects. Full disclosure may
require that the debtor produce forecasts and
projections that are more detailed than those it
Commentary
would normally prepare. 1. All relevant creditors should be provided
3. The creditors must also have sufficient time with the same information, and it should be
to consider the details of the workout solution as detailed as the circumstances of the case
being proposed. require. It must in any event be sufficiently
detailed to permit creditors to form their own
view of the merits of the proposal being put
SIXTH PRINCIPLE: Proposals for resolving
the financial difficulties to the debtor and, forward by the debtor.
so far as practicable, arrangements between 2. If information is price sensitive or in some
relevant creditors relating to any standstill way the subject of legitimate confidentiality
should reflect applicable law and the relative
concerns, then confidentiality agreements may
positions of relevant creditors at the Standstill
Commencement Date.57 be appropriate before the information is made
available.
3. Where the relevant creditors are only the
Commentary debtor’s banks, in most instances they can be
relied on to treat any information concerning
1. Absent special circumstances, creditors will
the debtor in confidence.
wish to be assured that the debtor will treat like
4. In very complex cases, the issue of debt
creditors alike both throughout the workout
trading may arise. This raises complex issues,
process and in any proposed plan.
and special conditions may be needed where
2. The provisions of local bankruptcy law should
creditors intend to trade their debt.
serve as the guide to the relative priority
34 A Toolkit For Out-of-Court Workouts
creditors, even if the workout fails and a
EIGHTH PRINCIPLE: If additional funding is formal insolvency follows. Because of this
provided during the Standstill Period or under
any rescue or restructuring proposals, the super priority, it is often the case that existing
repayment of such additional funding should, creditors (or new finance providers) are willing
so far as practicable, be accorded priority status to provide this form of finance. They see it
as compared to other indebtedness or claims of
as a relatively low-risk way of increasing the
relevant creditors.59
chances that their existing obligations will be
satisfied, if only in part, in the longer term.61
Commentary 4. There are many ways of achieving the desired
priority, including the provision of fresh
1. The ability of the debtor to continue in security of some kind (for example, a first
business during any period of negotiations is ranking mortgage security over physical assets
central to the notion of an OCW. While some or receivables) and various forms of statutory
debtors do not depend on third-party finance to priority. Care must be taken to ensure that any
operate, many do. In that event, or if additional security will be considered valid in the event of
funding is required for other justifiable reasons the debtor’s insolvency.
during the workout discussions, the sources 5. Questions of priority often raise acute local
are typically the proceeds of sale of noncore sensitivities. It is therefore important to examine
assets, new investment from shareholders, existing priority provisions under local law to
or additional lending from existing creditors ascertain what priority can appropriately be
(including banks).60 given to this form of finance.
2. Unless a certain degree of priority is accorded
to any additional lending, it is highly unlikely 3.6 Examples of Guidelines
that money will be made available, and the
workout may fail to survive long enough to
for Out-of-Court Workouts
permit a workout plan to be fully developed and Case Studies
and considered by creditors.
This section presents examples of OCW guidelines
3. The priority treatment that is generally sought
adopted in four jurisdictions (Lebanon, Jordan,
and made available for additional finance
Latvia, and Mauritius). Needless to say, these
provided during a workout is often described as
OCW guidelines are not identical, because they are
a “super priority,” mentioned earlier, because
tailored to the country’s financial sector and needs
the provider of such finance is entitled to be
on the ground. In addition, some are more detailed
paid in priority to the claims of pre-existing
and/or their length number of principles differ.
3 Informal Out‑of‑Court Workouts 35
3.6.1 Examples of Guidelines for Out-of-Court Workouts
Examples of Some Recently Adopted OCW Guidelines
Lebanon1 Jordan2 Latvia3 Mauritius4
The debt restructuring Workouts are a Debt restructuring is a Where a debtor finds
is contingent upon the concession and not compromise, not a right. itself in financial distress,
approval of at least two- a right. An out-of- Out-of-court debt all relevant creditors
thirds of the creditor court workout should restructuring must should be prepared to
banks and financial only be commenced be initiated only if cooperate with each
institutions that hold at if the circumstance of the debtor‘s financial other, and the debtor,
least 60% of the debtor’s a financially troubled problems can be solved to provide sufficient
total bank debts. debtor appears to offer and their business can (though limited)
Principle 1
the possibility to resolve continue in the long time—the “Standstill
the financial difficulties term. A debtor should Period”—for information
and achieve long-term turn to the creditors about the debtor to be
viability. In any case, in order to discuss obtained and evaluated,
and despite the non- available options. and for proposals for
mandatory nature of resolving the debtor’s
these principles, debtors financial difficulties
should be encouraged to to be formulated and
approach their creditors assessed, unless in a
to discuss options for the particular case such a
settlement of their debts. course is inappropriate.
The creditor that holds Good faith. All Good faith. During the standstill
the largest portion of negotiations between Negotiations between period, all relevant
the debt shall manage the debtor and the the debtor and the creditors should
and supervise the relevant creditors on relevant creditors must agree not to take any
debt restructuring one hand, and between take place in good faith steps to enforce their
process, and shall be the creditors themselves in order to create a claims against, or to
called hereinafter the on the other hand, take constructive solution. reduce their exposure
Principle 2
“Manager,” unless place in good faith with to, the debtor (this
otherwise agreed the objective of finding a would exclude the
between it and the constructive solution. disposal of their debt
other creditors. to a third party).
However, creditors are
simultaneously entitled
to expect that their
position relative to other
creditors will not be
prejudiced during the
standstill period.
The “Manager” shall set Confidentiality of Unified approach. During the standstill
a detailed preliminary Information. Information The interests of all period, the debtor
plan to deal with the relating to the assets, parties should be should not take any
client’s situation, with liabilities, business and observed if a unified action that would
a new repayment capacities of the debtor approach is taken to adversely affect the
Principle 3
schedule based on the and any proposals for solving the issues. prospective returns to
client’s cash flows, after resolving his difficulties Creditors may facilitate the relevant creditors on
having: should be made coordination of the a collective or individual
■■ Examined the client’s available to all relevant issues by forming a basis, as compared to
financial statements creditors or their coordination work their position at the
(balance sheet, representatives and group. In more complex commencement of the
income statement, should, unless already situations, the parties standstill period.
cash flows) publicly available, be should consider the
treated as confidential. option of inviting
36 A Toolkit For Out-of-Court Workouts
Examples of Some Recently Adopted OCW Guidelines
Lebanon1 Jordan2 Latvia3 Mauritius4
■■ Taken cognizance professionals who can
of all the facilities consult with and advise
granted to the client the parties and the
Principle 3—continued
by the creditor relevant creditors.
banks and financial
institutions and by
other creditors.
■■ Identified the
weaknesses that led
to the deterioration
of the client’s
financial situation
and the way to
address these
weaknesses.
The “Manager” shall Debtor’s undertaking Negotiation with the In an out-of-court
notify all the creditor to the creditors during debtor. The creditors restructuring, the
banks and financial standstill. During must appoint one interests of the relevant
institutions as well as the standstill period, person (usually it is the creditors are best served
the Banking Control the debtor and his creditor which has the by coordinating their
Commission that guarantors undertake largest claim against the response to a debtor
negotiations on the in writing not to take debtor, with experience experiencing financial
restructuring process any action that might in negotiating debt difficulties. In complex
have started with the adversely affect the restructuring, or it cases coordination
debtor, and that banks prospective return may be a neutral third of this nature may
Principle 4
and financial institutions to relevant creditors party), who will conduct be facilitated by the
approving this (either collectively negotiations with the formation of one or
negotiation undertake or individually) as debtor, and will ensure more representative
to refrain from compared to their that the relevant coordination
taking any new legal positions at the creditors receive the committees, by the
proceedings against Standstill Date. information provided by appointment of
the debtor during the the debtor. It must be professional advisors to
negotiation period. taken into account that advise and assist such
if necessary, in the event committees and, where
that there is a dispute appropriate, the relevant
between the interested creditors themselves
parties, they may turn to participating in the
an arbitration procedure. process as a whole.
All the agreeing banks Full disclosure by the Moratorium period. During the standstill
and financial institutions debtor during the All relevant creditors period, the debtor
shall participate in the standstill. During must be prepared to should provide all
negotiations in order to the standstill period, cooperate with the relevant information
set a final restructuring the debtor should debtor as well as with regarding its assets,
Principle 5
or rescheduling program provide relevant each other in order to liabilities, business, and
within a three-month creditors and their provide the debtor with future prospects. All
period renewable for professional advisors enough time (identifying relevant creditors and/or
another three months, and representatives full a deadline) in which their professional
with the consent of access to all relevant to prepare options advisors should be
all banks and financial information relating for solving financial given reasonable and
institutions involved in to his assets, liabilities, problems (hereinafter— timely access to this
the negotiation process. business, and prospects. moratorium period). information in order
(continued )
3 Informal Out‑of‑Court Workouts 37
Examples of Recently
of Some
Examples Adopted
Some Recently OCW Guidelines—Continued
Adopted OCW Guidelines
Lebanon1 Jordan2 Latvia3 Mauritius4
Granting this to enable a proper
moratorium period evaluation to be made
is not the right of of its financial position,
the debtor, but is a and for the formulation
concession granted of any proposals that
Principle 5—continued
by the creditors. The are to be made to the
beginning date is called relevant creditors.
the first date of the
moratorium period. It
is necessary to identify
the length of the
moratorium period,
providing enough time
to prepare the plan as
mentioned in Principle 11,
or to constitute how
much time would be
necessary to prepare
such a plan.
Without prejudice to Restructuring plan. Priority of new Proposals contained
the right of the creditor The debtor and his resources. in a restructuring
banks and financial advisors must prepare a If, during the plan for resolving the
institutions that agree restructuring proposal moratorium period, financial difficulties of
on the restructuring based on a business or in accordance with the debtor, and, in so
process on the basis of plan that addresses the suggestions put far as this is practicable,
the guarantees given to operational and financial forth as a part of the arrangements between
them, these creditors issues. The business plan restructuring process, the relevant creditors
Principle 6
shall refrain from should be supported additional assets are relating to any standstill
taking any individual by reasonable and given to the creditor, period, must comply
action to reinforce such achievable forecasts then the grantor of with both the applicable
guarantees during the which evidence the this loan shall have law as well as reflect
restructuring process or ability of the debtor to the option to request the relative positions of
to start any judicial or generate the cash flow security for the loan. the relevant creditors at
enforcement proceedings required, according the commencement of
that might hinder the to the restructuring the standstill period.
restructuring process plan. The aim should
agreed upon with the not be simply delaying
complying debtor. insolvency.
The restructuring Proposals must be in Creditors do not take Any information
process shall not bind line with the legal rights. action during the obtained for the
any non-consenting Proposals for resolving moratorium period. All purposes of the
creditors. the debtor’s financial relevant creditors do restructuring process
difficulties should take not take any actions dealing with the assets,
into account the legal to submit court claims liabilities and business
Principle 7
rights of each creditor, against the debtor or of the debtor, as well
separately, and the to reduce their claims as any proposals for
creditors’ legal positions against the debtor resolving its financial
at the Standstill Date. during the moratorium difficulties, should be
period. made available to all the
relevant creditors and
should, unless already
in the public domain, be
treated as confidential.
38 A Toolkit For Out-of-Court Workouts
Examples of Some Recently Adopted OCW Guidelines
Lebanon1 Jordan2 Latvia3 Mauritius4
Standstill period. All Debtor’s pledge to If additional funding is
relevant creditors the creditors during provided to the debtor
should be prepared the moratorium during the standstill
to cooperate with period. During the period, or as part of any
the debtor and each moratorium period, restructuring proposal,
other to give sufficient the debtor promises the repayment of such
(though limited) time not to take any actions additional funding
for the debtor to which may negatively should, in so far as
prepare proposals for affect the proposed this is practical, be
resolving its financial debt repayment to accorded priority status
difficulties (a “Standstill the relevant creditors as compared to other
Principle 8
Period”). Such a (to all, or either of indebtedness or claims
Standstill is a concession them individually) in of the relevant creditors
and not a right. The relation to the state at that existed at the time
commencement is the beginning of the of the commencement
referred to as the moratorium period. of the standstill period.
Standstill Date. The
Standstill should be
limited to the time
required to produce
the plan referred to
in Principle 6 or to
establish that such
a plan cannot be
produced within an
acceptable time.
Creditors refrain from The debtor’s complete
action during standstill. transparency during the
During the standstill moratorium period.
period, all the relevant During the moratorium
Principle 9
creditors refrain period, the debtor shall
from taking any legal provide the relevant
measures to enforce creditors and advisors
their claims against the with access to all
debtor or to reduce their information regarding
exposure to the debtor. assets, liabilities, and
business transactions
and forecasts.
Coordinated approach. Information
The interests of confidentiality.
all parties are best Information regarding
served by adopting a the debtor’s assets,
coordinated approach. liabilities, and business
Principle 10
The creditors may transactions and
facilitate coordination forecasts, as well as
by selecting a proposals for solving
coordination committee. the problems must be
The appointment of available to the relevant
professional advisors to creditors and must be
advise and assist
(continued )
3 Informal Out‑of‑Court Workouts 39
Examples of Recently
of Some
Examples Adopted
Some Recently OCW Guidelines—Continued
Adopted OCW Guidelines
Lebanon1 Jordan2 Latvia3 Mauritius4
Principle 10—continued
the committee and the confidential, unless
relevant creditors should it is publicly available
be considered for more information.
complex cases.
Leading negotiations Debt restructuring plan.
with the debtor. It is the obligation of the
Creditors should appoint debtor and his advisors
one person (usually to prepare proposals for
the creditor with the debt restructuring which
greatest exposure; or are based on a business
one with experience plan that contains
in managing workout information regarding
negotiations or an the necessary steps
Principle 11
independent person) that need to be taken
to lead negotiations to solve the debtor’s
with the debtor and financial problems.62
ensure that the relevant The business plan must
creditors receive the be based on sound and
debtor’s information. feasible forecasts, which
Regard should be given indicate the debtor’s
to the timely use of ability to increase cash
mediation to resolve flow to the point that is
disputes. necessary to execute the
debt restructuring plan
(and not delaying the
insolvency process).
Priority of fresh fund. Settlement proposals
If additional funding correspond with the
is provided during the party’s rights.
standstill period or When creating
under any rescue or proposals for solving
Principle 12
restructuring proposals, the debtor’s financial
the settlement of such difficulties, the parties
additional funding must take into account
should be accorded the rights of the creditor
priority in accordance and the amount of
with a written outstanding obligations
agreement among the at the beginning date of
creditors. the moratorium period.
1
The Governor of Banque du Liban, Basic Circular No 135 addressed to Banks and Financial Institutions, 26 October 2015.
2
Amman Principles for Out-of-Court Debt Workout.
3
Guidelines and Debt Restructuring Principles on Out of Court Debt Restructuring in Latvia, issued by the Ministry of Justice in associ-
ation with the state agency “Insolvency Administration,” the Latvian Commercial Bank Association, Latvian Certified Insolvency Process
Administrator Association, the Latvian Labor Confederation, the Foreign Investor’s Council in Latvia, the Latvian Chamber of Commerce
and Industry, and the Latvian Borrower’s Association approved on 6 August 2009.
4
Out-of-Court Restructuring Guidelines for Mauritius, issued by the Insolvency Service and endorsed by the Bank of Mauritius dated
21 January 2013.
40 A Toolkit For Out-of-Court Workouts
3.6.2 Jordan, Lebanon, and Latvia
CASE STUDY 1: Middle East and North Africa (MENA): Introduction
of Out-of-Court Debt Restructuring in Jordan and Lebanon
Banks in Jordan and Lebanon have traditionally negotiated with their clients informally when they saw distress
warning signs. At times they would even cooperate with other banks to better understand the state of affairs
of common clients. However, Jordan and Lebanon only recently implemented a structured and transparent
framework for private out-of-court debt restructuring workouts.
The formal insolvency regime in both Jordan and Lebanon is outdated and inefficient, and relies on slow and
costly court proceedings that are rarely used in practice. In this context and while also assisting authorities
to revise the insolvency sections of the Commercial Code, the World Bank Group helped the respective
Governments launch an OCW framework in an effort to strengthen creditor recovery by facilitating out-
of-court debt negotiation. The initiative started in October 2013 in both Jordan and Lebanon through a first
awareness and consultation workshop held in collaboration with the association of banks in each country. The
event was attended mainly by middle and senior management of commercial banks operating in the country,
as well as representatives of the central banks and association of banks. The workshop aimed at explaining
the OCW rationale, benefits, and functioning, as well as identifying the potential idiosyncratic challenges of
introducing OCW, in each country.
Following this first event, an OCW framework consisting of 12 straightforward principles inspired by the INSOL
Principles was suggested to the banking authorities in these two countries. After careful consideration, each
country opted for the approach that was better aligned with its domestic banking culture. In Jordan, it was decided
to further tailor the 12 principles proposed and then launch them as guidelines through a public endorsement
by the Central Bank of Jordan (CBJ) and the Association of Banks of Jordan (ABJ), in an event chaired by the
Governor of the Central Bank, which was held on October 21, 2015. The Banque du Liban (BdL), Lebanon’s central
bank, adopted its provisions as Circular No. 135 of October 26, 2015. The BdL included prudential incentives to
encourage the use of certain new principle-based rules and procedures (see the table prior to this section of
Chapter 3, “Examples of Principles for Out-of-Court Workouts”) under the supervision of the Banking Control
Commission. Despite differences in how these two countries approached OCW structures, the mechanisms
adopted by both countries are fully voluntary and out-of-court—no judiciary supervision or validation is required.
In Jordan, the CBJ made clear from the outset the need for extended consultations to gather bank feedback
on the OCW principles, an explanatory note for each principle, until consensus on the final text was ultimately
reached. Consequently, in addition to the many awareness-raising events that the World Bank Group team
held, there were three rounds of written consultations with all banks, requesting feedback. After each round,
the team discussed the comments received from the CBJ and ABJ and agreed on amendments to the text,
whenever relevant and acceptable, according to the feedback received. The financial community in Jordan
requested the introduction of prudential incentives, similar to those introduced in Lebanon. The CBJ has stated
its intention to consider granting them on an ad hoc basis.
In Lebanon, reaching consensus among the Lebanese banks was relatively simple, as the Association of Banks
of Lebanon (ABL) was actively involved. This was because of the strong position of the ABL in the banking
community and its experience in spearheading new initiatives in close cooperation with the BdL. Thus, the
main culture-based resistance that the project team had to face was to make sure the debtor’s voice was
heard in a region where, traditionally, debtors facing financial difficulties were presumed to be acting in bad
faith. Technical assistance was provided to ensure that the draft circular on the OCW prepared by the Lebanese
banking authorities embodied the fundamentals of OCW principles. This required seemingly endless written
comments on the countless versions of the draft circular, in addition to many meetings with the reform
champions and key actors at the BdL to discuss and promote the draft circular.
Shortly after the enactment of the Jordan Guidelines in October 2015, the first restructuring case was initiated,
involving a local debtor in financial distress and five leading creditor banks. While there was uncertainty
throughout the negotiation phase as to the restructuring process and the legal documentation required, the
parties have so far acted in good faith and cooperated with each other in their attempt to create mutually
beneficial settlements. These experiences can be beneficial to those countries that are introducing a restructuring
culture in the banking sector.
3 Informal Out‑of‑Court Workouts 41
CASE STUDY 2: Corporate Debt Restructuring in Latvia
In Latvia, a World Bank Group team assisted the government in improving the insolvency framework through
the implementation of the Latvian Corporate Debt Restructuring Guidelines (CDRGs). This was followed by a
public–private sector workshop, which was cohosted by the World Bank Group and the Latvian Government,
on how to use this tool in out-of-court debt negotiations. The guidelines are a series of principles promulgated
by the Ministry of Justice for improving the effectiveness of informal workouts. The CDGRs were promulgated
in the aftermath of a financial crisis that affected Latvia in early 2009. As result of the crisis, Latvia saw a two-
digit gross domestic product decline, plummeting real estate property values, and a three-fold increase in
nonperforming loans. The communication of the CDRGs in August 2009, shortly after the crisis, was timely. It
coincided with the early stages of development of restructuring and corporate recovery divisions in the major
commercial financial institutions in the country, as a result of the number of enterprises affected by the crisis.
With limited prior debt restructuring experience in Latvia, the workout team of four banks representing
63 percent of the loan market share (9.5 billion Latvian latu, or $18.8 billion) confirmed that the guidelines
played a pivotal role in providing a framework to address widespread debt distress in the corporate sector (the
national NPL rate was 18 percent as a percentage of total loans). Coupled with proactive risk management
tools and the principles set forth in the guidelines, the largest commercial banks have developed a restructuring
culture by applying principles contained in the guidelines to foster the use of informal workouts. This provided
viability to enterprises with an opportunity to weather the crisis and continue operating.
Success stories such as the restructuring cases of Valmiermuizas Alus and Sportland International show that
early detection, good faith negotiations, and multiparty concessions are key to restoring distressed firms and
getting them back on track.
The Case of Sportland International Group
Sportland International Group (“SIG”) is a multinational manufacturer and retailer of sporting goods from Estonia
and operates in the Baltic region. SIG underwent a multi-creditor workout in Latvia. In 2005 the enterprise was
reaping the rewards brought by strong economic growth in the region, but by 2007 it anticipated a burst of the
economic bubble and started to take conservative steps to lessen pre-orders for the following season and stop
opening new stores. When financial difficulty arrived, discussions with the major secured creditors in Estonia,
Latvia, and Lithuania (including DnB in Latvia, a subsidiary of Norway’s largest financial services group) started
early on and led to a multi-creditor restructuring agreement in early 2010.
Viktors Šeršņovs, former head of the Restructuring Department at DnB in Latvia, confirmed that reaching a
restructuring plan with SIG was not easy. Key to reaching a restructuring agreement was SIG’s early detection
of financial distress, its understanding of the steps it needed to take, its early initiation of discussions with
creditors, and its laying out of the benefits of restructuring to creditors. The restructuring plan with SIG took
several months to complete and required that SIG refrain from further expansion and expenditures, along with
changing its management and consolidating subsidiaries. Although some jobs were cut, the restructuring plan
allowed the rescue of the business, which ultimately preserved 986 jobs in 106 stores across four countries.
Stakeholders from Latvia who specialize in restructuring and insolvency confirm that timely action, a realistic
restructuring plan, new solutions that do not concentrate solely on cost-cutting, multi-creditor cooperation,
concessions, guidance from experienced restructuring specialists, and good faith relations and negotiations are
the main ingredients for a successful restructuring.
42 A Toolkit For Out-of-Court Workouts
4 Hybrid
Procedures
4.1 What Are Hybrid To fully understand the hybrid procedure, it is nec-
essary to understand both OCWs and judicial re-
Procedures?
organization. Chapter 3 discusses OCWs, and the
The circumstances of some restructurings may following section briefly outlines judicial reorgani-
make it necessary for the debtors to have access zation. Judicial reorganization is a formal restruc-
to the courts in order to develop and/or implement turing process that is usually included in a coun-
a restructuring plan. Most commonly, this is the try’s insolvency legislation and takes place under
case when the debtor cannot continue to operate the supervision of a court with the assistance of in-
without the benefit of a court-imposed stay against solvency experts. The court-supervised procedure
creditor action, or where it is necessary (in order aims at reducing the financial burden of the debtor
to make the business viable in future) for the plan enterprise by means of a reorganization achieved
to be legally binding on creditors who may not be through an agreement reached with the legally re-
willing to vote in favor of its terms. In such cases, quired majority of creditors and a consequential
the procedure can be called a “hybrid procedure” order by the court imposing the terms of the agree-
because it combines elements of both the OCW ment on all affected creditors. Judicial reorganiza-
approach and judicial reorganization. tion only constitutes a valid option if there is a real
possibility of reaching an agreement to restructure
the enterprise in distress.
BOX 3: A Generalized Description of Judicial Reorganization
Clearly, every reorganization process will differ, depending on the relevant domestic insolvency legislation in a
country. This Box sets out a general description of a judicial reorganization process. The initial step in a court-
supervised rescue is the submission of a formal request to a court for the commencement of the process,
followed by the creditors establishing that the debt is owed.63 In the process, the court will require information
about the business of the enterprise, including its state of affairs and its financial condition. Based on the
information presented to the court, the court may impose a time-bound stay (or standstill) on the enforcement
of creditors’ claims to assist the debtor in trying to rescue the enterprise. Throughout this process and until the
plan or arrangement is fulfilled, the debtor is under the supervision of the court or an insolvency representative.
In some jurisdictions (for example, the U.S.), the stay is imposed automatically, without any intervention or
decision by the court or any administrative agency. Instead, the debtor obtains a stay simply by opening an
insolvency proceeding, and the stay arises by statute. Stays can be varied or eliminated if the creditors can
(continued )
4 HYBriD ProCEDurEs 45
BOX 3: Continued
successfully challenge them or their scope. This approach is not considered suitable for transition economies or
jurisdictions where the level of trust and confidence in insolvency debtors or in the capacity of the local courts
is weak.
The reorganization plan must lead to the rescue of the enterprise while allowing the enterprise to continue
its business activity.64 Some jurisdictions include what is known as a “best interest test” to ensure that
any arrangement is better than alternatives to creditors, and a “feasibility test,” whereby the debtor must
demonstrate that it can meet its obligations under the proposed plan. The reorganization plan needs to be
accepted by a specified majority of creditors, after which the court is often empowered to bind (cram-down)
the plan on the dissenting creditors.
The debtor and creditors may be unable to create an agreement on which a sufficient majority of creditors
agree. In such circumstances, a judicial reorganization allows for orderly liquidation. This is possible because the
enterprise continues running until the last instance and under the supervision of a court to preserve its going
concern value.
The success of court-supervised procedures depends on the workability of the process itself (for instance,
whether the necessary restructuring agreement can be effectively reached by creditors and enforced), and
whether the agreement is recognized in foreign jurisdictions (if necessary). Factors influencing the choice of the
judicial reorganization proceedings include:
Whether the directors are penalized or are held personally liable if they continue to trade or whether they
1.
are obliged to commence formal insolvency proceedings;
The ability to bind dissenting creditors; and
2.
The violability of security, especially security for preexisting debt.65
3.
The court-supervised approach is complex because it forces the debtor to face three interest-balancing
dilemmas:
The risk-shifting incentives of shareholders/managers in the proximity of insolvency;66
1.
The desirability of workouts to prevent a time-consuming process in which delays are risky for the survival of
2.
the enterprise, and the possibility of not being able to contain the damage resulting from bad publicity; and
The benefits of a court imposed stay and the possibility of binding dissenting creditors through a formal
3.
process.
4.2 The Advantages of Hybrid sanction. Having the agreement sanctioned in a
court makes it binding on and enforceable by the
Procedures
respective parties, which gives the agreement a
The hybrid procedure is advantageous because strong advantage over informal agreements.
it brings together the benefits of the OCW and ■■ Cramming-down the agreement on dissenting
judicial reorganization procedures. The following creditors. Due to the agreement’s binding nature,
advantages that certain hybrid procedures have are if the agreement is sanctioned by a court admin-
particularly notable: istrative authority, it can often be forced on mi-
nority creditors that abstained from or dissented
■■ Binding nature. A private agreement reached to the agreement, making a court sanction a pow-
with creditors is usually presented to the court erful tool of persuasion.
or administrative authority to approve and
46 A Toolkit For Out-of-Court Workouts
■■ Fairness. The restructuring agreement, when 4.4 Implementing
brought before the court or administrative
a Hybrid Regime
authority, will be assessed to help ensure that
it meets the formal requirements and minimum This section discusses considerations that policy
thresholds required by law to be binding and makers should bear in mind when considering de-
enforceable, particularly on dissenting creditors. veloping hybrid procedures in their own jurisdic-
■■ Certainty. The involvement of the court or tion. Secondly, it highlights different types of hybrid
administrative authority affords the sanctioned procedures to illustrate that countries have devel-
agreement the “blessing” of an independent, oped numerous ways of handling financial distress
objective, and fair third party. The resulting to suit their unique domestic legal, administrative,
process provides certainty of the validity and and cultural contexts.
inviolable nature of the agreement.
Policy makers should foremost bear in mind the
4.3 The Disadvantages main difference between OCWs and other types of
of Hybrid Procedures restructurings: OCWs can be started by the debtor
at any time and for any reason. On the other hand,
Although there are no real disadvantages per se, the need for the court or an administrative agency
there are several issues that might be of concern to be involved in hybrid procedures and more
to the parties, depending on the circumstances formal reorganizations almost always requires some
surrounding the restructuring. These are: statutory trigger or approval to enable the debtor
to have access to the process. In other words, to
■■ Publicity. The process can lose its confidential develop new, effective hybrid procedures, some
nature (in light of the court’s role) and can dissuade measure of legal reform to the domestic insolvency
parties from entering workout discussions for legislation will normally be necessary, whereas
fear of the financial repercussions. for OCWs, informal guidelines can be published
■■ Possible challenges. Since the agreement is without any legislative act. Accordingly, when
presented to the court or administrative authority policy makers are considering putting a hybrid
for sanction, it may be possible for opposing regime in place, the first task of the informed
creditors, or those that were not included in policy maker is to be absolutely clear on what is
the agreement, to challenge the outcome. currently legally permitted and what legal revisions
The outcome of judicial challenges is often are needed.
unpredictable. Nevertheless, the reasons upon
which the agreement can be challenged are Following on from this, there are many cases where
usually quite limited. local laws already allow for hybrid procedures, but
■■ Temporary uncertainty. The judicial or local practice has not developed. In such jurisdic-
administrative review built in the sanctioning of tions, law reform may not be necessary, but rather
the agreement takes time, regardless of whether policy makers should focus on dissemination, train-
there are challenges (challenges, when present, ing, and promotion.
increase the level of uncertainty and frequently
the length of time). While under review, there is a Hybrid procedures are one of the “last pieces in
window of time when the status of the agreement the puzzle” of evolved bankruptcy regimes. For
is uncertain. In some jurisdictions, the window this reason, hybrid regimes present a unique and
is very narrow, yet in others it is longer, and the delicate challenge to law reformers and policy
window can be extended as a result of the number makers in transition economies. Hybrid regimes
of challenges presented by “unhappy” creditors. have for the most part arisen:
4 Hybrid Procedures 47
■■ In a piecemeal fashion, often (but not always) by ■■ The debtor will take care to ensure that the voting
practice rather than by decree or law; protections for creditors already provided for in
■■ Over a period of many years; and the formal process will be respected when the
■■ In ways which suit unique contexts and needs pre-pack is put to the court for approval;
relevant to the cases at hand and the time period ■■ Cram-down is possible;
(for example, whether the context is a financial ■■ Such pre-packs are in use in many jurisdictions,
crisis or otherwise). both common and civil law based, and this will
reassure policy makers locally;
What this means is that no two hybrid regimes are ■■ Importantly, there is no need, in order for this
exactly alike. approach to be taken, for there to be a cadre of
insolvency representatives in place to assist;
4.4.1 Steps in Developing Hybrid ■■ Legislative change may be needed to permit an
Procedures application to court for approval of the deal.
There may be sensitivities about requiring the
4.4.1.1 Step 1
opening of a formal “bankruptcy proceeding” for
The first step is for policy makers to consider the this purpose, but cram-down is a huge advantage.
state of development of its relevant insolvency re-
gime and its most important characteristics. Once 4.4.1.3 Step 3
there is clarity on that, then it is possible to assess
If the jurisdiction in question has both a
which of the main shared characteristics of hybrid
functioning judicial reorganization regime and
regimes would stand a good chance of working in
a cadre of competent insolvency representatives
that respective jurisdiction.
in whom the public have confidence (whether
licensed and regulated or not), then this opens
If the jurisdiction in question does not already
other possibilities.
have a functioning in-court, formal reorganization
process, then it might be more difficult for any
■■ A U.S. pre-pack approach will of course still be
hybrid proceeding to work. In such cases, policy
possible;
makers should consider whether it might be better
■■ Appointment by the court of an independent
to adopt some form of OCW guideline (discussed in
insolvency representative to assist the debtor
Chapter 3). There should be pressure on the central
develop a plan, followed by a pre-pack, but with
bank to assist in this by endorsing the guidelines,
no stay;
and for banks doing business there to improve their
■■ Appointment by the court of an independent
practices by participating.
insolvency representative to assist the debtor,
followed by a pre-pack, with a stay.
4.4.1.2 Step 2
If the jurisdiction in question does have a functioning In latter two cases, other policy decisions and
reorganization regime, but does not (yet) have a implementing legislation may be needed. These
cadre of competent insolvency representatives in might include determining the following issues:
whom the public have confidence, then experience
suggests that one of the more effective hybrid ■■ What financial condition must the debtor be in to
model to be introduced first should be a U.S.-style have access to the court to ask for the appointment
pre-pack. The advantages of this are as follows: of the insolvency representative, and should the
requirement vary depending on whether a stay
■■ It permits the development of a confidential out is sought as envisioned in the two latter points
of court solution which the court can endorse; above?
48 A Toolkit For Out-of-Court Workouts
■■ What should the insolvency representative The revised regulation that takes effect in 2017
be called once appointed, e.g., facilitator or provides for more hybrid, pre-insolvency restruc-
representative? turing proceedings in an attempt to avoid costly
■■ What are the tasks of the appointed person, and insolvency procedures that do not necessarily res-
should this be set out as a statutory list or in court cue businesses effectively. Moreover, a 2014 rec-
orders? ommendation by the EU Commission68 encouraged
■■ What are the necessary time limits? member states to put in place a framework that en-
■■ How is new financing dealt with, including the ables the efficient restructuring of viable enterprises
priorities allocated (as discussed in Chapter 2)? in financial difficulty and give honest entrepreneurs
■■ Should it be necessary for the debtor to have a second chance. This promotes entrepreneurship,
opened an insolvency proceeding to benefit investment, and employment and helps reduce the
from the assistance of the insolvency represen obstacles to the smooth functioning of the internal
tative? Or should it only be necessary if the market.
debtor wants the benefit of a stay?
■■ What should the scope of the stay be? The following is a discussion of various country
examples where pre-insolvency procedures have
4.5 Early Intervention been introduced or have added more options for
Models early rescue in their legislation. The objective
of providing such examples is to emphasize how
Over the past several years, there has been a varied hybrid procedures are and that they can be
focus on pre-insolvency and early intervention developed for the local context.
systems that seek to save businesses that might
be experiencing financial distress, but are not yet 4.5.1 Italy
in a technical state of insolvency. Such measures
In Italy, a debtor in financial difficulty may file with
have been particularly important in Europe, where
the competent court for a pre-insolvency procedure,
European Commission analysis showed that about
even when it is only in a crisis situation (stato di
50 percent of enterprises do not survive the first
crisi) and not technically insolvent. The Italian
five years of their life.67
Bankruptcy Law does not define the concept of
“crisis,” but this situation will generally occur
The EU adopted Council Regulation (EC)
when there are financial difficulties (not necessarily
1346/2000 on Insolvency Proceedings, which
reaching insolvency).69
became effective on May 31, 2002 (it was revised
in 2012, with the revisions to become effective
The debtor must file a petition with the competent
in 2017). The main features of the regulation are:
court, accompanied by a proposed plan certified by
(1) it provides a uniform set of conflict of law rules
an expert opinion confirming its feasibility and the
to determine jurisdiction between member states
truthfulness of the accounting data. The bankruptcy
in relation to insolvency proceedings; (2) it allows
court does not have the power to examine the
domestic courts of any member state to assert
expert’s opinion on the feasibility of the plan,
jurisdiction over an entity if its center of main
limiting its activity to check if the procedure has
interests (“COMI”) is located in that jurisdiction;
been fulfilled and if the classes of creditors have
and (3) it regulates significant consequences of that
been formed according to the law. The debtor may
assertion of jurisdiction, notably, applicable law,
ask for authorization to obtain interim financing by
recognition, and procedural coordination.
granting first priority to the lender offering it.
4 Hybrid Procedures 49
BOX 4: Summary of the European Commission’s
Recommendation Regarding Early Intervention
The European Commission published a 2015 report70 that offered recommendations to its member states
about implementing efficient pre-insolvency frameworks. This is discussed in the Introduction above. The EC
emphasized the need for its member states to have methods of early intervention to increase the potential for
firms to survive financial distress. It outlined 12 “indicators of efficiency of preventive restructuring frameworks.”71
Within each indicator, the EC created a grading scheme with higher values assigned to what it considered best
practices. The following is the list of indicators with the associated feature that the EC assigned the most value:
Existence of early restructuring possibilities: Early restructuring (as soon as the debtor is in financial difficulties)
1.
is preferred. The recommendation is that the procedure should be available before insolvency, when insolvency
is imminent or foreseeable, but has not yet happened, or even simply when the debtor is in financial difficulty.
Conditions for initiating the early restructuring process: Preferably the debtor is still making payments (not
2.
in cash flow insolvency). The rationale for this recommendation is that the easier the test for initiating the
procedure, the more accessible it will be for debtors or creditors if they are allowed to initiate reorganization.
It is best not to require expert opinions or audits before allowing access to the procedure. In some countries,
such as Croatia, the debtor must only have an unsettled obligation in the registry, or be delinquent by
30 days on employee salaries or payroll taxes.
Existence of alternative preventive procedures: A variety of options are preferred.
3.
Debtor’s control of the business operations/administration: Preferably the debtor retains control of the
4.
operations and administration of the business (that is, it is not automatically transferred to an insolvency
representative). A pre-insolvency procedure is not likely to succeed if the debtor does not continue to
operate the enterprise. The rationale behind this recommendation is that the debtor’s current management
knows the enterprise best, and removing it would interrupt operations and make rehabilitation unlikely.
Possibility of a moratorium (that is, a stay of individual enforcement actions by the creditors against
5.
the debtor): Preferably debtors have the ability to request a moratorium for protection from individual
enforcement (discussed in Chapter 2). The recommendation is that the length of the moratorium should
balance debtors’ and creditors’ interest, and should be long enough to allow a chance at negotiations but
not long enough to directly cause additional creditors’ losses.
6. Length of the moratorium: Ideally not less than two months.
Majority decision on plan approval as opposed to the requirement of full consensus among creditors (cram-
7.
down): Majority rather than unanimous consent is preferred.
Possibility to obtain new financing in preventive procedures: Preferably new financing that is exempt from
8.
avoidance actions.
Limited court involvement: Court involvement is ideally limited to appointing the insolvency representative
9.
and confirming the plan. The rationale is that the court needs to be available to ensure that creditors’
rights are protected, but should not be the driver of the process. The negotiation should be largely driven
by the debtor and creditors, with the insolvency administrator overseeing the process. The court should
be available to resolve disputes if necessary and ensure that the approved plan is within legal limits and
adequately protects all parties’ rights.
Confidentiality of the proceeding: Confidentiality throughout is recommended. It can encourage debtors
10.
to use a pre-insolvency procedure so that the debtor may negotiate with creditors before news of its
insolvency is published.
Existence of early warning procedures of insolvency: Debtors should be provided five or more tools to help
11.
them recognize when they are in financial distress.
Debt discharge possibilities following an entrepreneur’s bankruptcy: All debt should be discharged within
12.
three years and without requiring a repayment threshold.
The grading scheme appears to indicate that the EC favors hybrid forms of pre-insolvency restructuring.
(Certain traits of hybrid forms are assigned higher values, for example, some court involvement is preferred
to full court involvement, majority approval and cramming-down are preferred to unanimous consent, and
the ability to impose a moratorium is preferred to no moratorium). Nevertheless, the EC does not explicitly
recommend one form of pre-insolvency restructuring over another, but rather indicates that enterprises should
have a variety of options from which to choose.
50 A Toolkit For Out-of-Court Workouts
After the most recent amendments of the bankruptcy published on the financial agency’s website. The
law, creditors holding 10 percent of the debt may procedure is intended to last approximately four
propose competing plans. After filing for a pre- months; this period may be extended by the court. A
insolvency procedure, the creditors are subject to moratorium on enforcement action goes into effect
a moratorium on enforcement action. Creditors when the proceeding is opened. A commissioner,
representing a majority of the debt must vote for who functions much like a bankruptcy trustee, is
approval of a pre-bankruptcy settlement agreement. appointed to help oversee the process. All creditors
A court will approve the plan if the creditors vote whose claims are reduced must approve the plan.
in favor of it. The court may also approve it against The first time this procedure was introduced, in
the will of a dissenting creditor if it can determine 2012, it was a separate act and overseen completely
that the creditor receives as much under the plan by the financial agency. In 2015 the procedure was
as it would in liquidation. The proceedings must incorporated into the bankruptcy law, and is now
be concluded within six months from the date of under the jurisdiction of the commercial court
filing the petition, which can be extended by the and the financial agency. When the procedure was
competent court for an additional two months. first enacted under its own law, many enterprises
(several thousand) filed under it.
The Debt Restructuring Agreement (accordo di ris-
trutturazione), pursuant to Article 182 of the Italian 4.5.3 Spain
Bankruptcy Law, is an out-of-court procedure that
In Spain, if a debtor informs the court that it is
allows the debtor to negotiate with its creditors,
negotiating with its creditors, a limited moratorium
mostly bank creditors. Despite the out-of-court na-
on court enforcement actions against assets
ture, a debtor may file with the competent court for
needed for reorganization enters into force for
a moratorium during the negotiation period for a
four months.74 In practice, it appears that debtors
Debt Restructuring Agreement. If bank creditors
obtain a standstill agreement from their creditors
holding 60 percent of the debt approve the plan,
to negotiate effectively. This notification to the
it is binding on dissenting creditors. Unlike the
court delays an insolvent debtor’s obligation to file
pre-bankruptcy settlement agreement in concor-
for bankruptcy, and prevents creditors from filing
dato preventivo, a Debt Restructuring Agreement
bankruptcy against the debtor. This notification
only applies to the parties to the agreement. The
can be done either while the debtor is in imminent
competent court can grant judicial approval of the
insolvency or actual insolvency. The pre-insolvency
agreement once it has ruled on any opposing ac-
stage, if successful, allows the debtor to avoid
tions. The court’s decree of approval is then pub-
mandatory insolvency.
lished in the Companies’ Registry.72
4.5.4 France
4.5.2 Croatia
The French pre-insolvency model has three
In Croatia, a filing for pre-insolvency may be
procedures:
done based on the threat of bankruptcy, which is
evidenced by an unsatisfied debt registered with
■■ Special mediation (mandat ad hoc), which is
the financial agency, representing 20 percent of
requested by a debtor and where a mandataire can
the debtor’s liabilities, or the debtor being 30 days
only be appointed once financial difficulties have
in arrears on employment salaries or employment
materialized, but before cash flow insolvency
taxes.73 The decision to open the proceedings is
(cessation de paiements).
4 Hybrid Procedures 51
■■ Conciliation proceeding (conciliation), which standstill to be able to work on the understanding
can be commenced before the debtor is in cash that no creditor will enforce their claims and
flow insolvency or is actually in cash flow undermine any negotiations. If an agreement is
insolvency for less than 45 days. It has a limited reached, it can be presented to the court for approval
timeframe of just four months plus a one month (homologué) through a conciliation proceeding.
extension. Otherwise, upon failure to reach an agreement,
■■ The law for Companies’ Safeguard (loi No. 2005- there is a serious chance that the enterprise can be
845 de sauvegarde des entreprises, dated July 26, put into an insolvency procedure and consequently
2005) provides a court-supervised restructuring be liquidated.
procedure similar to the U.S. Chapter 11
restructuring process to enterprises that are in 4.5.4.2 Conciliation Proceedings
distress but not yet in cash flow insolvency.
The conciliation proceedings were also introduced
in 2005. Similar to special mediation, the purpose
The first two procedures might be considered hybrid
of conciliation proceedings is to facilitate an
models because they are opened and closed in
agreement between the enterprise and its main
court, but with a long, private negotiation phase for
creditors.
the stakeholders to come to an amicable agreement
on the restructuring plan. Overall, the success rate
The conciliation proceedings are available to any
of cases that have preserved enterprises as a going
enterprise that faces actual or foreseeable legal,
concern, as a result of either the special mediation
economic, or financial difficulties and has not been
or the conciliation proceeding, is 60 percent.75
in default for more than 45 days.
Moreover, a study by Deloitte and Altares shows
that, based on a sample size of 17 courts, the
Upon the commencement of conciliation, the
number of mandat ad hoc and conciliation cases
enterprise is required to provide details of its
continues to rise on an annual basis. In their sample
financial, economic, and social situation, including
analysis between 2011 and 2014, the total number
its future financial needs. As in the special mediation,
of amicable proceedings opened in 2014 in these
the rights and judicial remedies of creditors remain
courts was 948; five percent higher than in 2013.76
unimpaired, and a creditor can make a formal claim
on its debt during the conciliation proceedings. If
4.5.4.1 Mandat Ad Hoc
that is the case, the debtor can apply to the court for
The special mediation procedure—which has a grace period.
existed in practice for many years—was formally
introduced into the restructuring and insolvency An agreement reached by the debtor and its creditors
legislation in July 2005. The management of an can be endorsed by the court if the following
enterprise can request that the president of the three conditions are met: (1) the debtor is not in
commercial court appoint a preselected special default of the agreement, or the agreement reached
mediator (the mandataire ad hoc), provided that resolves the situation; (2) the agreement allows the
the enterprise is not in cash flow insolvency. The continuation of the business; and (3) the agreement
appointment will usually last three months, and does not affect the interests of the creditors that did
can be renewed, as the law does not provide any not participate in the agreement.
specific time limit.
New debt financing obtained within the framework
The rights and judicial remedies of creditors of the agreement will have priority, although
remain unimpaired, and it is common practice that subordinated to court fees and labor claims. This is
the mandataire ad hoc will request a contractual similar for new services and assets suppliers.
52 A Toolkit For Out-of-Court Workouts
Parties are not subject to any constraint or rules to
CASE STUDY 3: Saur 77
reach an agreement that could include, but is not
Saur is a leading French water utility provider. limited to, a rescheduling of the debt, a write-down,
In early 2012 the enterprise breached a financial and suspension of interests.
obligation and, as a result, petitioned for
conciliation proceedings. It applied to the court
and was granted a conciliator, so Saur engaged
The settlement agreement is validated by the
in private pre-insolvency negotiations with its court if it is agreed on by the creditors holding
creditors. Using the conciliation method, the debt equivalent to two-thirds of the total loans,
involved parties agreed to give the creditors and the court shall also order the rescheduling of
control of the enterprise’s shares. The creditors
cut the €1.7 billion of debt to a more manageable the remaining loans held by other creditors (with
€900 million and provided an additional €200 the exception of certain small debts) for a period
million of financing. The proceedings avoided a not exceeding the duration of the agreement or
lengthy court dispute (the court was only involved
alternatively no longer than three years. Creditors
for the purpose of appointing the conciliator and
approving the final arrangement). bound by the agreement will have to suspend (for
the period of the agreement) any debt recovery
proceeding.
4.5.5 Tunisia
Fresh money provided in the context of the
Tunisia’s newly enacted insolvency law (April settlement agreement will be given a super priority
2016) provides for a debtor that is facing financial ahead of other creditors.
difficulties, but is not yet insolvent, to request the
opening of an amicable settlement proceeding. It In case the debtor breaches its obligations under
is a voluntary process that can be initiated only by the settlement agreement, the agreement can
the debtor through the court that also validates the be terminated by the court at the request of any
agreement. Negotiations between the debtor and relevant party, and the pre-settlement situation
its creditors are facilitated by a court-appointed restored unless debt has been reimbursed.
conciliator. The agreement should be reached
within a period of three months, renewable for one 4.6 The Pre-Packaged
month (as set out in the law). Restructuring Plan
Information on the financially troubled enterprise Pre-packs are generally negotiated as out-of-
can be requested by the conciliator and the court court workouts. They are characterized by a
from the debtor itself, any public administration, contractual resolution arrangement agreed prior
any financial institutions, and the Follow-up to the enterprise’s formal reorganizing under an
Committee on Economic Entities. The court can insolvency law.78 In this regard, much of the process
also request from the committee a diagnosis of the is hidden from public scrutiny because a significant
debtor’s situation within one month. portion of the pre-pack takes place in an informal
and private process that does not usually involve
A stay of execution cannot be ordered by the court all creditors. Under the structure of a pre-pack,
on a debt recovery proceeding initiated prior to the the enterprise in financial distress can negotiate
opening of the amicable settlement proceeding or a solution with a limited amount of its creditors,
related to the payment of wages, unless it appears prepare an action plan on how to reorganize the
that it could worsen the situation of the business enterprise, and solicit the acceptance of the plan all
and jeopardize its rescue. in private and prior to filing an insolvency-related
petition.79
4 Hybrid Procedures 53
The pre-pack is mostly a market-oriented insolvency at the time the agreement is filed with a competent
procedure that offers the benefits of quickly rescuing judge, since for a pre-pack plan to be able to be im-
an enterprise in distress without the recourse of a plemented, only a significant majority of creditors
judicial order.80 In practice, when a deal is reached have to agree to the plan.83
and endorsed by a sufficient majority, it is presented
to the court to verify the formality and transparency Indeed, the interests of unsecured creditors may be
of the process and subsequently make it binding on inadequately protected during the process if their
all creditors. input into the pre-pack is weak and they are unable
to submit early objections to unrealistic options
The pre-pack procedure originated in the United proposed by the secured creditors.84 The input of
States under Chapter 11 of the United States unsecured creditors is sometimes sought after a pre-
Bankruptcy Code,81 where it is currently regulated pack agreement had been concluded, that is, once
under Section 1125(g) of the U.S. Bankruptcy the troubled enterprise has entered reorganization
Code.82 Following the United States example, pre- under an arrangement that would be unsuitable for
packs then became popular in the United Kingdom some of the unsecured creditors.
after the introduction of the Enterprise Act 2002, as
well as in Canada under the Companies’ Creditors To protect minority creditors from potential abuses,
Arrangements Act. courts have to assess the sufficiency of the disclosure
made in the pre-pack process to ensure that all
The main advantage offered by a pre-pack is the creditors have equal knowledge about the situation
speedy and efficient resolution of an enterprise’s of the enterprise and the relevant circumstances. If
distress, as well as the secrecy and flexibility sur- the agreement is approved by the court, it becomes
rounding the negotiation process. This combina- binding on all creditors affected, even if they have
tion of factors maximizes the chances that the en- rejected the agreement.
terprise’s business will be preserved. However, in
some cases pre-packs may succeed at the expense 4.6.1 Legal Differences
of certain minority creditors that are not involved between Pre-Packs
in the negotiations and that may have different
■■ The United Kingdom
views on the objectives and values that are to be
pursued. These differences may only come to light
As stated earlier, in the United Kingdom, pre-
packaged administrations, or pre-packs, can be
BOX 5: Understanding used to quickly facilitate the sale of the business
the Term Pre-Pack and/or to realize the assets of the enterprise. A pre-
pack is “an arrangement under which the sale of
There is a significant difference in terminology
in various jurisdictions when it comes to the all or part of an enterprise’s business or assets is
term pre-pack. In the United Kingdom, this term negotiated with a purchaser prior to the appointment
makes reference to a procedure whereby the of an Administrator, and the Administrator effects
business of the debtor is sold expeditiously after
the appointment of an administrator. This would
the sale immediately on, or shortly after, his
be the equivalent to the sales “free and clear” of appointment.”85 The enterprise’s business and/or
charges under Section 363 of the U.S. Bankruptcy assets are typically sold immediately after the
Code. In the United States, however, the term administrators are appointed. Administrators can be
pre-pack refers to pre-agreed plans filed for
confirmation before the Bankruptcy Court where appointed out of court by certain secured creditors
a certain amount of creditors have already agreed (specifically, those with qualifying floating security
on the content of the proposed plan. As a result, interests), the enterprise or its directors, or an order
the borrower continues operating and there is no
of the court. Out-of-court routes in particular
sale involved.
represent a quick entry route into administration to
54 A Toolkit For Out-of-Court Workouts
facilitate the delivery of a pre-pack (for example, the the sale price is a matter for the commercial judg-
requisite forms pursuant to which the appointment ment of the administrator, once appointed.
of administrators is made can be filed with the court
by email or fax outside of court hours). The main criticisms that have been made with
respect to pre-packs concern the comparative lack of
Major advantages of pre-packs in the United monitoring and judicial oversight; agreement on the
Kingdom include the fact that they minimize future of the business is reached in principle before
the risk of losing material contracts and reduce the statutory administration process commences
the costs arising from an administration. In an and unsecured creditors will normally find out
ordinary case, an announcement that a company about the pre-pack after the event. However, there
is in administration can generate uncertainty for are now extensive (albeit ex post facto) reporting
counterparties, employees, and other stakeholders. requirements with which administrators must
With a pre-pack, this is more likely to be averted comply, which has helped in demonstrating to
because by the time the administration is made creditors the steps taken to implement a pre-pack
public, a solution will have been agreed to and and improve the transparency of the process more
implemented. Pre-packs can preserve the goodwill, generally.
reputation, and confidence the market has in the
business, as well as the value of the enterprise and ■■ The United States
therefore the potential returns available to creditors.
Another factor in favor of pre-packs is that they can In the United States the term “pre-packaged” re-
usually help ensure continuity of employment for organization (pre-packs) is often confused or
the employees of the business. used in conjunction with “pre-arranged” or “pre-
negotiated” reorganization. While these two proce-
The length of time it takes from a pre-pack proposal dures are in fact closely related, it is important to
to the sale’s effective date can depend on a number distinguish between them on the basis of the differ-
of factors, including the size of the business and ent treatment afforded to them by the U.S. Bank-
the industry sector in which it operates, as well as ruptcy Code as well as non-bankruptcy law.
the amount of market testing and/or the number of
valuations carried out by or at the instance of the In a pre-packaged case, unlike regular bankruptcy
prospective administrators. Since the timeframe proceedings under Chapter 11, a debtor files for
can vary so widely, it is difficult to provide bankruptcy after having already solicited the
estimates of how long the process is likely to take, acceptance of a reorganization plan by a majority
but, depending on the business in question, it could of its creditors. In a typical pre-packaged case, the
be anywhere from a matter of days to several weeks debtor will negotiate with its creditors (at least its
to complete the process from start to finish. main creditors) and prepare a reorganization plan,
which will then be circulated to creditors together
with a disclosure statement and a ballot.
In the United Kingdom, there is no requirement for
creditors to be consulted or to formally approve After the creditors review the plan and submit their
the pre-pack proposals (although the prospective votes, provided that the plan receives sufficient
administrators may seek the consent of the enter- support, the debtor will file for bankruptcy and the
prise’s financiers in advance in the interest of min- court will confirm the plan, usually within three
imizing the risks of subsequent challenge) or for months (sometimes as fast as 30–45 days). This
any form of court involvement (unless, perhaps, the enables a debtor to restructure quickly, it is less
court is involved in appointing the administrators). costly, there are no significant disruptions to its
Effecting the sale of the business and the amount of business operations, and it has the ability to bind
4 Hybrid Procedures 55
dissenting creditors or holdouts. The success of a A pre-arranged bankruptcy proceeding has many
pre-packaged plan, however, hinges on a number of similarities with a pre-packaged case. Unlike the
factors. For example, the court will have to review latter, however, the enterprise and key creditors
the sufficiency of disclosure provided by the debtor (or their representatives) in a pre-arranged case
during the out-of-court negotiations, and determine agree upon the terms of a restructuring and
whether it satisfies the bar of “adequate disclosure” contractually bind themselves to such terms
specified in Section 1126 (b) of the Bankruptcy without yet having engaged in the voting process
Code. In the event the disclosure is deemed mandated by Section 1126 of the Bankruptcy Code.
inadequate, the court will require the debtor to repeat Consequently, no disclosure statement is circulated,
the solicitation process. Furthermore, the debtor no solicitation takes place, and creditors are only
runs the risk of creditor enforcement actions during contractually bound to vote in the manner agreed
the time of negotiations, unless it has managed to upon. Following the conclusion of this agreement,
successfully conclude a standstill agreement with the debtor initiates a Chapter 11 case, a disclosure
its creditors. Finally, the law also places some statement is filed and approved by the Court, and
limits on the expediency of the case through rules the actual solicitation commences. This, however,
requiring that creditors are provided with adequate usually proves to be less time-consuming than a
time to review the plan before voting.86 In any regular bankruptcy case, considering most creditors
case, the United States pre-packaged bankruptcy is have already consented to the restructuring. A pre-
mostly used as a means to reorganize and rescue negotiated plan may be useful in cases where the
the enterprise in a quick and cost-efficient manner, debtor does not wish to deal or comply with non-
and not as a mechanism to sell the enterprise, as is bankruptcy rules that may govern pre-packaged
commonly the case in the United Kingdom. plans, such as securities regulations. A pre-arranged
CASE STUDY 4: Blue Bird Body Company (Blue Bird)87
Blue Bird is a manufacturer of school buses in the United States that, from start to finish, successfully
implemented a pre-pack process in seven days (one of the shortest bankruptcies in U.S. history).
In 2006 Blue Bird found itself in dire financial straits. It considered filing a traditional bankruptcy petition,
but changes to the U.S. Bankruptcy Code and the enterprise’s unique business model meant that Blue Bird
could not survive such a process. Moreover, Blue Bird was under severe time pressures because it needed an
immediate cash infusion if the enterprise was to survive.
Blue Bird quickly began an out-of-court restructuring process with its shareholders and creditors. It arranged
for $211 million of secured debt to be reduced to $100 million, along with an infusion of $52 million in credit.
In exchange, Blue Bird’s creditors would be given shares in the restructured enterprise. All the necessary
stakeholders less one hedge fund agreed to this arrangement. Accordingly, the out-of-court arrangement
failed because the enterprise failed to attain unanimous approval.
Blue Bird then decided to undertake a pre-packaged reorganization plan. By using a pre-pack, the enterprise
could take advantage of the U.S. Bankruptcy Code’s lower voting threshold so that each class of creditors
could be deemed to approve the arrangement if at least one-half of the creditors holding at least two-thirds
of the debt voted to support the plan. Blue Bird took four days to renegotiate a similar proposal to its out-of-
court agreement, following which it took a vote. Ninety percent of its creditors supported the arrangement,
representing 92.6 percent of the relevant debt. That day, Blue Bird filed its petitions in court. Shortly thereafter,
the court considered the petition and heard from the dissenting hedge fund. It ruled in favor of Blue Bird, and
within 32 hours and 26 minutes of the petition being filed, Blue Bird was formally restructured.
The Blue Bird case demonstrates the speed at which pre-packs can occur. By minimizing the time it takes to
reorganize, enterprises incur lower restructuring costs, less publicity, and less operational downtime.88
56 A Toolkit For Out-of-Court Workouts
plan may also be a fitting solution when the creditors judicial questions with the European Court of Justice
are “knocking at the door,” and the debtor does not in relation to a pre-pack. Pending this decision, the
have time to negotiate each point of a pre-packaged position of the pre-pack in the Netherlands—even
plan but can only agree on the principal terms of a if the proposed Dutch legislation is enacted92—is
deal with its major creditors and work out the rest not yet clear.93
in bankruptcy. As a result, pre-negotiated plans
may prove particularly useful in a debtor’s effort 4.6.2 The Pre-Arranged Plan
to achieve a speedy restructuring of its business
A pre-arranged or pre-negotiated plan is a
and involve less stringent requirements than a pre-
restructuring plan negotiated between the debtor
packaged plan.
and its creditors that requires a formal solicitation
of votes. This is done under the auspices of
■■ The Netherlands
the court or an administrative authority.94 The
approval of any restructuring plan is settled
Although there is not yet specific legislation in place
by a procedure established by the court or an
regarding pre-packs in the Netherlands, in practice,
administrative authority; it is usually a creditors’
some Dutch courts have adopted pre-packs under
meeting summoned by the court or administrative
the scheme of “silent trustees.”89 A silent trustee
authority that resolves the outcome. This procedure
scheme is a restructuring transaction negotiated
shows strong similarities with the pre-pack, since
prior to formal insolvency proceedings, but put in
it combines elements of judicial and non-judicial
place during the formal insolvency. The transaction
restructuring schemes. The difference between the
helps ensure maximum preservation of the value of
pre-pack and the pre-arranged or pre-negotiated
the enterprise in distress by selling the business on a
plan lies in whether the agreement is pre-voted or
going concern basis to a new legal entity. The silent
post-voted.95
trustee is appointed by the court, and in the event of a
formal application for a bankruptcy proceeding, will
The pre-arranged insolvency procedure allows the
be appointed as trustee.90 The silent trustee scheme
debtor, before commencing the formal proceedings,
was used in the case of Schoenenreus (a chain of
to negotiate a restructuring plan and solicit votes on
shoe stores). A pre-pack restructuring was the only
the plan from the number and classes of creditors
tool that could be used to retain the majority of the
and of shareholders required for reorganization
employees. The transaction was prepared with the
(or by the representatives of the most significant
close involvement of a bank that held a pledge over
creditors and shareholders).96 It is important to
almost all of the enterprise’s assets.91
highlight that the alleged solicitation of votes will
not be formally carried out beforehand since it has
The Dutch pre-pack with a silent trustee represents
to be done under the auspices of the court. However,
a useful option in situations where the amendment
no debtor will submit a pre-negotiated or pre-
of leases appears to be the only solution for
arranged plan without having previously secured
maintaining the enterprise’s viability. Currently, a
the necessary votes and having locked them up
draft proposal to implement a pre-pack proceedings
in some kind of binding arrangement. Otherwise,
in the legislation is pending in the Dutch Parliament.
the outcome would be too uncertain. It is common
Some practitioners report that the trade unions in
practice that the debtor and its agreeing creditors
the Netherlands take the view that a pre-pack is
(the majority required by law) will enter into a
contrary to European law. This is because the pre-
lock-up or plan-support agreement that sets out the
pack proceeding is not intended to liquidate the
main aspects of the restructuring plan that will be
business, but is rather aimed at a restructuring,
put forward when the court summons a creditors’
and therefore all the employees should follow the
meeting. Creditors would—on the assumption that
enterprise. Recently, a Dutch Court raised pre-
4 Hybrid Procedures 57
there are no changes to the originally proposed (“National Institute of Competition and Protection
plan—tender their vote as previously committed. of Intellectual Property,” the administrative author-
ity that oversees insolvency procedures) can start
■■ Bolivia and Peru an ordinary restructuring procedure if more than
50 percent of the creditors recognized or present at
Pre-arranged insolvency plans are contemplated the creditors’ meeting agree so.
in Bolivia’s Law 2,495 (titled Corporate Voluntary
Restructuring Law), which regulates these plans INDECOPI is limited to an administration role
as “transactional agreements” (Article 1). The except in certain exceptional circumstances. It is the
rule provides that once the debtor negotiates a sole administrative body that oversees insolvency;
transactional agreement, it requests the approval Peruvian courts do not participate directly in the
of the agreement by the enterprise’s supervisory insolvency process, though they may at later stages
authority (Superintendencia de Empresas). The review administrative resolutions that exhaust all
supervisory authority appoints a trustee to oversee available administrative remedies.
the proceedings. The trustee summons a general
meeting to decide on the transactional agreement, 4.7 Contractual Workout
which needs majority approval to bind the creditors Schemes
to a newly arranged contract.
Although a different form of the hybrid procedure,
In Peru, the insolvency framework is regulated by because it might not necessarily involve the courts,
Law No. 27,809 (Ley General del Sistema Con- some workout schemes have been reinforced by
cursal). Enterprises undergoing restructuring can institutional and administrative contractual frame-
choose from two procedures (concursos): preven- works. These models still involve a large degree of
tive or ordinary. In either case, only creditors at a extra judicial negotiations among stakeholders, but
creditors’ meeting can approve the restructuring the more formal framework and institutional role of
plan under both the preventative and ordinary pro- the central bank helps promote restructuring within
cedures. Accordingly, debtors and creditors often financial institutions.
meet before entering the formal proceeding to cre-
ate a pre-negotiated restructuring plan so that when The 1999 East Asia Crisis gave rise to a number
they enter formal proceedings the process is eas- of workout models in different forms. For
ier and more predictable (however, pre-negotiated instance, Korea adopted a contractual workout
plans are not required nor endorsed by the legis- approach in July 1998 with encouragement from
lation). The resolution approving the restructuring the Financial Supervisory Commission (FSC).
plans (and their amendments) requires more than Local financial institutions, 210 in all, signed
66.6 percent of the recognized credits (in the first Corporate Restructuring Accords that provided for
call); or more than 66.6 percent of the recognized one to three months’ standstill (depending on due
credits represented in the creditors’ meeting (in diligence requirements), which could be extended
the second call). Each creditor gets a vote propor- for one month; a creditors committee led by a
tionate to its share of the debt—see Art. 53.1, Law lead creditor; a 75 percent threshold for creditor
27,809. In cases of preventive restructuring where approval of any workout plan; and a coordination
an automatic stay of protection is requested and if committee that would provide workout guidelines
the restructuring agreement lacks the required ap- and arbitrate certain disputes where workout plans
proval from the enterprise’s creditors, INDECOPI were not approved.97
58 A Toolkit For Out-of-Court Workouts
CASE STUDY 5: India’s Corporate Debt Restructuring Mechanism98
India’s Corporate Debt Restructuring (CDR) mechanism was initiated in 2001 and is run by the Reserve Bank of
India to provide an alternative, voluntary method of restructuring corporate debts without involving the court.
Banks and financial institutions that take part in CDR99 sign an inter-creditor agreement in which they agree
that if 75 percent of creditors by value approve of the restructuring package, the other 25 percent are bound.
When debtors engage the CDR mechanism, they sign a debtor–creditor agreement that provides a 90–180
day moratorium. The CDR mechanism is comprised of three panels, each composed of representatives from
participating banks and financial institutions:
The CRD Forum creates policies and guidelines that are used for debt restructuring.
1.
The CRD Empowered Group decides which cases are eligible for the CDR mechanism.
2.
Debtors are only eligible to restructure their debts if they can demonstrate the viability of their business
a.
to their lead banker and the CDR Cell.
The CDR Cell works out the detailed restructuring package in coordination with the referring institution and
3.
other experts as need be.
Statistics100
■■ Since inception, 655 cases were referred to the CDR process; 530 were accepted (81 percent acceptance
rate).
■■ Out of the accepted cases, 80 (15 percent) successfully exited the process (none since 2011), 165 (31 percent)
were withdrawn on account of package failure, and 285 (54 percent) were ongoing.
■■ The total debt of the 530 cases accepted was over 4 trillion Indian rupees ($60 billion). About 600 billion
Indian rupees ($9 billion) of debt has been successfully resolved.
Impact of CDR
A 2013 study101 compared enterprises that underwent the CDR process (“treated firms”) with a control sample
over a five-year period. The treated firms were found to have a lower return on assets vis-à-vis the control
sample in each of the five years after restructuring, meaning that treated firms did worse than enterprises that
did not engage in CDR. Granted, this study was hindered by the difficulty in choosing accurate control firms,
but it nevertheless demonstrates the questionable impact of CDR.
A 2015 report102 raised similar concerns. The report studied 24 enterprises that were restructured under CDR
and found that two years after restructuring the financial performance of these enterprises, there was little
improvement (as measured by their interest coverage ratios and debt-to-equity). Moreover, the report claimed
the CDR mechanism was distorting the financial stability of India’s banks. The Reserve Bank of India requires
that banks holding nonperforming loans have loan loss provisions of 15 percent to 100 percent, but for loans
undergoing restructuring, the provision threshold is 5 percent. Accordingly, banks are motivated to push
enterprises to restructure, even if they are not ideal candidates for restructuring, in an effort to avoid classifying
them as NPLs on their balance sheets.
CDR’s Success
Essar Steel is one of the CDR mechanism’s 80 successful cases. The enterprise agreed with its creditors in 2002
to repay its debt of 28 billion Indian rupees ($417 million) over a 12-year tenure, but the enterprise was instead
able to pay it within four. The repayment was funded in part through internal means and loan refinancing, and
it was helped by an upturn in economic conditions. The flexible nature of CDR allowed Essar to implement
rigorous changes to improve its operations, and it was able to acquire another enterprise to help boost profits
(it was paid for with equity, not debt).103
Another successful case is Future Financial Services Ltd. (FFSL), a microfinance enterprise that opted for CDR in
2011 when a controversial law barred it and all other microlenders from collecting certain debts in a key market.
FFSL had 1.1 billion Indian rupees ($16.5 million) in debt and used CDR as a means of acquiring a moratorium to
negotiate lower interest rates and expand to new markets. The breathing room offered by CDR let it pay off its
debts within two and a half years.104
4 Hybrid Procedures 59
5 Practical
Case Study
5.1 Introduction profitability in day-to-day hotel operations and
a positive impact from the Hotel Group’s invest-
to the Case105
ment in property renovations.
A hotel group (the “Hotel Group”) is facing a
challenging financial situation. Because of changing The enterprise is owned equally by a family of three
market dynamics, the Hotel Group’s assets—its (father, son, and daughter), who represent the Hotel
three hotels—are losing market share and have Group’s management.
started to experience substantial losses. Limited
financial resources have prevented the Hotel Group 5.1.2 A Restructuring or Liquidation?
from making the large-scale renovations necessary That Is the Question . . .
to compete for customers with new hotels emerging Despite the projected improvements, the Hotel
throughout the region. As a result, the Hotel Group Group is not able to meet its current interest and
is in financial distress and does not have sufficient debt repayment obligations to lenders. Moreover,
funds to cover current and future obligations. some of the loans are due to be repaid in full in 2016.
These issues mean a prompt workout is necessary
5.1.1 The Problem so that the Hotel Group has sufficient cash to pay its
The Hotel Group currently generates positive suppliers and employees and prevent being forced
earnings before interest, tax, depreciation, and into insolvency proceedings. If the Hotel Group
amortization (EBITDA), which represents oper- does not take action, some of the secured creditors
ational earnings. However, net profits are down, may start judicial enforcement proceedings to seize
and the Hotel Group remains burdened with a secured assets (the hotels) and have them sold
high debt load. Projections show that the Hotel piecemeal (whether or not in a going concern sales
Group will not generate sufficient cash to meet transaction). In case the company is unable to repay
both interest and debt repayment expenses, and its debts, the directors have the statutory obligation
its planned capital expenditure (CAPEX). How- to initiate a formal insolvency proceeding.
ever, an underlying assumption in the projections
analysis is that the management team will be able 5.1.3 Current Debt Structure
to make headway in reviving the Hotel Group’s The table below shows the current debt structure of
operational and financial health. As such, the pro- the Hotel Group.
jections show gradual operational improvements
in the Hotel Group’s performance. Specifically, Lender A and Lender B have secured senior debt
these estimates assume greater efficiency and over the same assets. There is an inter-creditor
5 PRaCTiCal Case sTudy 61
agreement between them to split the proceeds of the 5.1.5 Case Study Analysis Guidance
collateral pro rata.
1. What are the parties’ interests? All the
5.1.4 Valuation of the Hotel stakeholders involved have different interests.
Group’s Assets (Three Hotel Some of them are relatively safe (Lender A
Properties) and Lender B) because they have senior and/or
secured debt. In the worst-case scenario, they
The valuations are based on the assumption that the lose their investment, but there is not as much
Hotel Group’s properties could be sold relatively at stake compared to Lender C and Lender D.
quickly to, for example, a strategic or financial The Trade Creditors have a large outstanding
investor. The Hotel Group’s assets can be sold. The amount of debt, and no collateral, but they do
value of the three hotel properties is shown in Tables 1 have a strong (informal) position.
and 2, which present a high and low valuation of the 2. Is there consensus on a possible solution? Do
properties. That would depend on the negotiation all the parties in this case understand that an
skills and business connections of the seller. informal workout is probably the best for all
stakeholders in order to maximize recovery?
Each property has its own license to operate. In the 3. How should the workout be restructured?
valuation, it is assumed that the licenses will remain; How should the informal workout process
however, this is not 100 percent guaranteed (the be managed and structured to satisfy all
license is subject to the discretion of the authorities). stakeholders?
Table 1: Hotel Group’s Debt Structure
Arrears in
Currently Arrears in Debt
Stakeholder Term Loan Expiration Date Interest
Outstanding Repayment
Payments
Secured senior debt 6.937 Expires in several Yes Yes
Lender A months
Secured senior debt 5.946 Expires in several Yes Yes
Lender B months
Unsecured 991 Expired
subordinated debt
(working capital)
Lender C
Unsecured debt 793 Expires in several No No
Lender D years
Secured debt provided 2.000 No expiration date N/A N/A
by shareholders
Trade Creditors N/A 4.851 The Hotel Group Payment is net 30 days from date of
(unsecured) currently pays on invoice according to contract terms.
average after
90 days.
The two Trade Creditors that are at the negotiation table are crucial for the Hotel Group’s
operations, as they supply food and beverages (F&B) and daily cleaning and housekeeping services.
It is not possible to switch to other suppliers within 30 to 60 days, as the current suppliers (which
represent about 50 percent of the current trade debt) are monopolists in the high-end hotel
industry. Also, new suppliers probably would demand substantial guarantees or cash-on-delivery.
62 A Toolkit For Out-of-Court Workouts
Table 2: Valuation of the Hotel Group’s Assets: Best-Case Scenario
Out-of-Court Reorganization Liquidation Liquidation
BEST-CASE
Workout (going Proceeding (going (going concern (piecemeal sale
SCENARIO
concern scenario) concern scenario) scenario) of assets)
Total Hotel Group 27.000 21.600 17.550 13.500
Hotel Master 16.546 13.236 10.755 8.273
Hotel Oak 7.560 6.048 4.914 3.780
Hotel Gold 1.123 899 730 562
Table 3: Valuation of the Hotel Group’s Assets: Worst-Case Scenario
Out-of-Court Reorganization Liquidation Liquidation
WORST-CASE
Workout (going Proceeding (going (going concern (piecemeal sale
SCENARIO
concern scenario) concern scenario) scenario) of assets)
Total Hotel Group 20.250 16.200 13.163 10.125
Hotel Master 12.409 9.927 8.066 6.205
Hotel Oak 5.670 4.536 3.686 2.835
Hotel Gold 842 674 548 421
5.2 Phases in the Operational Hotel Group enterprises or business units), as well
as selling inventory is key.
Restructuring Process
Chapter 2 discussed the four phases of restructuring To effectively minimize expenses, the Hotel
in depth. They are Group’s management needs to have a clear
overview of payments that need to be made in the
1. Stabilizing forthcoming weeks. Management naturally has
2. Analyzing concerns about its ability to pay employees, tax
3. Repositioning authorities, and Trade Creditors, and a failure to
4. Reinforcing make these payments could cripple the enterprise.
Creditors, in turn, are concerned about the stability
The Case Study will now put the phases into of the company since they have limited faith in the
practice for the Hotel Group. All Forms are set out reliability of the reporting by the Chief Financial
at the end of Chapter 5. Officer. At this stage, creditors may also focus
on what management considers drastic means of
5.2.1 Phase 1: Stabilizing generating cash (for example, some creditors may
push for the sale of certain assets like artwork
This phase focuses on how to stop the cash outflow or vehicles in order to alleviate some liquidity
or reduce it to an acceptable level, and additionally concerns).
on how to increase the cash flow. Minimizing
operational expenses and capital expenditures is The importance of the stabilizing phase is often un-
necessary. The sale of assets (fixed assets but also derestimated. In practice, parties initiate meetings
5 Practical Case Study 63
to try to resolve the financial distress and to pro- ■■ Financial data (past data and also forecasts of the
tect their own interests as much as possible. How- income statement, balance sheet, and cash flow
ever, just like any other project, the OCW will most statements) (Form 6); and
likely fail if the objectives of the workout are not ■■ Stabilizing plan (Form 7).
clearly defined and are not shared among the rele-
vant stakeholders. 5.2.1.1 Identifying Stakeholders
The owners of the Hotel Group should first identify
In the stabilizing phase, the relevant stakeholders
the relevant stakeholders in the OCW, including the
of the Hotel Group are identified and meetings
lenders and the Trade Creditors (Form 1).
are set up (Form 1). The Hotel Group’s owners
and the lenders and Trade Creditors agree on the
In the case of the Hotel Group, the primary
OCW process and the communication framework
stakeholders are:
(Forms 2 and 3). Next, since there is already a
lack of trust toward the Hotel Group’s owners, it is
■■ Hotel Group management
important that if there information is disclosed, it is
■■ Lender A
reliable information and that the parties will keep it
■■ Lender B
confidential (Form 4). The principles that will be
■■ Lender C
adopted for the workout should be explicitly stated
■■ Lender D
at this point so that they can set the tone for the
■■ A representation of the Trade Creditors
upcoming negotiations, for example, in the terms of
a Standstill Agreement (Form 5). Throughout these
Other possible stakeholders include:
early stages, deadlines are set and deliverables are
determined.
■■ Tax authorities
■■ Employees/trade unions
During this phase, information sharing and sharing
of financial data is key (Form 6), as well as a
If stakeholders that are not yet involved in the OCW
clear action plan addressing how to stabilize the
are identified, the owners should contact them and
enterprise to prevent further deterioration and
invite them to participate in the process. In order
exacerbated financial distress (Form 7). In order
to make the OCW process as efficient as possible,
to ensure that all stakeholders are fully informed,
the representatives of the relevant stakeholders (for
it is important that the Hotel Group’s owners will
instance, any creditor committees representing the
fully disclose their financial data to all relevant
creditors) should have a mandate in the negotiations.
stakeholders.
In the case of the Hotel Group, the Trade Creditors
Potential deliverables and agreements in this phase
do not seem to be very important given their legal
are:
status. However, the continuity of the operations
will be at risk if the Trade Creditors decide to stop
■■ Identification of all the relevant stakeholders
their supply of services to the Hotel Group. The
(Form 1);
legal position of Trade Creditors is not strong,
■■ Adoption of guiding principles of the OCW in
but their informal power is enormous. Therefore,
letter of intent (Form 2);
management, Lender A, Lender B, Lender C, and
■■ Workout planning and communication frame
Lender D asked the Trade Creditors to join the
work (Form 3);
OCW.
■■ Confidentiality agreement (Form 4);
■■ Standstill agreement (Form 5);
64 A Toolkit For Out-of-Court Workouts
5.2.1.2 Adoption Agreement to ensure that management can remain in charge,
of Workout Principles and therefore the Hotel Group should be compliant
in the planning agreed to by both the Hotel Group
The relevant stakeholders of the Hotel Group
and its creditors, since otherwise this will erode
should agree (on a voluntary basis) that the workout
their trust even more.
will be done according to a framework of OCW
principles. A letter of intent is drafted to ensure 5.2.1.3 Short-term Stabilizing Plan
a mutual understanding of the OCW “do’s and
don’ts” or standards of conduct by all stakeholders The Hotel Group should prepare a short-term
(Form 2). stabilizing plan that includes:
Workout Planning and Communication Framework ■■ An analysis of why the enterprise went into
a phase of financial distress. This analysis is
In order to have a clear overview of the standstill preliminary, but indicates the causes of decline
period and the roles, responsibilities, and that need to be addressed in order to effectively
deliverables, as well as the overall timeframe of the stabilize the enterprise.
process, a detailed workout plan should be drawn ■■ An overview of the immediate cash requirements
up. An example is set out in Form 3. The plan of the Hotel Group.
should include a plan to structure communications
and meetings with all relevant stakeholders of the Subtopics in the short-term stabilizing plan (which
Hotel Group. The planning and communication is different from the restructuring plan insofar as it
framework should answer the following questions: focuses on short-term survival) may include:
■■ When are important deadlines for the owners, for ■■ An overview of the first analysis of the causes
the lenders and the Trade Creditors? of decline;
■■ What information will be disclosed and at what ■■ An overview of the immediate cash requirement
time, and to which stakeholder? needs (based on a short-term cash flow overview
■■ What are the tasks and responsibilities of the of six–12 weeks);
owner and the other stakeholders? ■■ An overview of initiatives that will generate
cash flow, for example, the sale of business
For the owners of the Hotel Group, it is most units, increased collection of accounts payable,
important to ensure compliance with the deadlines postponement of payment of Trade Creditors,
agreed in the planning. If the Hotel Group fails to reduction of inventory, sale of assets;
comply, trust in the enterprise will be even further ■■ An overview of newly installed controls to
deteriorated while, in fact, restoring faith in the gain more control over the cash outflow of the
enterprise by the lenders and Trade Creditors is enterprise (for example, payment controls,
necessary for a successful OCW. controls regarding forecasting and reporting,
human resources controls);
Current management of the Hotel Group has not ■■ Implementation of cash rationing (restrictions on
been able to guide the company towards a positive capital expenditures); and
cash-generating company, despite promises towards ■■ An overview of the newly formed restructuring
the creditors in the past. The creditors also have management team, including roles and
serious doubts about the positive forecasts of the responsibilities and a description of changes in
Chief Financial Officer. Restoring the creditors’ existing management.
trust in management of the Hotel Group is important
5 Practical Case Study 65
5.2.1.4 Confidentiality Agreement ■■ The deliverables that the Hotel Group agrees to
disclose to the stakeholders; and
A confidentiality agreement (Form 4) should be ■■ The intention of the lenders and the Trade
required of any stakeholder receiving information Creditors not to enforce their claims against the
that is not already publicly available. Information, Hotel Group during the standstill period.
ideas, concepts, and other thoughts or facts that are
shared between the relevant stakeholders within the 5.2.1.6 Financial Data
context of the OCW should be strictly confidential.
This will help generate an open, trustworthy Once the standstill period starts, it is necessary
relationship between the participants, and this will for the owners of the Hotel Group to provide
ultimately lead to a better workout solution. financial information to relevant stakeholders. This
information may consist of:
The owners of the Hotel Group, Lenders A, B,
C, and D and the Trade Creditors will provide ■■ The latest audited financial statement, including
information to each other, and in order to facilitate a balance sheet, income statement, and cash flow
a safe environment, the confidentiality agreement statement with disclosures;
should be put in place. In this way, the Trade ■■ Management reports per business unit/product/
Creditors are more likely to provide information service line/country per month over the past
about their cash flow position that might clarify their 24 months (including reconciliation to last year’s
formal and informal position in this OCW process audited financial statements); and
(for example, are the Trade Creditors able to pay ■■ Forecast cash flow statements and income
salaries to their employees and what happens if this statements (short-term and long-term).
is not possible anymore? Will the going concern of
the operations of the Hotel Group be at stake?). An example of financial data relevant to the Hotel
Group is set out in Form 6.
5.2.1.5 Standstill Agreement
5.2.1.7 Short-term Stabilizing Plan
The stakeholders should agree on the standstill
period, which is discussed in Chapter 2. A sample Preferably before the start of the standstill period,
of a standstill agreement is set out in Form 5. The the Hotel Group should commence to prepare a
timeframe should be enough for the enterprise to short-term stabilizing plan. An example of this is
create a short-term stabilizing plan, but at the same set out in Form 7.
time the period should not be too long in order to
protect the creditors whose money is at stake. A Such a plan is essential in order to enable the Hotel
standstill period of several weeks is common, but Group to negotiate a standstill, which will help it
this may depend on the complexity of the enterprise achieve its primary function of permitting the Hotel
and the willingness of the individual lenders and Group to trade while developing a restructuring
Trade Creditors. plan. The short-term plan need not be a single
formal document (if it is not voted on by creditors).
The following items should be included in the However it is presented though, it must make clear
Hotel Group’s standstill agreement (with additional what cash requirements of the Hotel Group need to
issues set out in Form 5): be met, in order to permit the Hotel Group to carry
on with the restructuring. It should be a convincing
■■ The timeframe of the standstill period, including document, supported by financial and market
the end date; projections that are credible. The plan should be
■■ Defining the circumstances in which the company capable of being presented to groups of creditors
can continue to have access to credit; at a meeting. In large cases, the involvement of
66 A Toolkit For Out-of-Court Workouts
expert financial advisers is an essential part of this 5.2.2.1 Restructuring Plan
exercise, and often such advisers present, explain
and/or support the plans at meetings with creditors. The best outcome of an OCW is the agreement
among owners, lenders, Trade Creditors, and other
Topics in the short-term stabilization plan may stakeholders to continue to support the enterprise
include the following: so it can survive and succeed in the long term.
An important basis for this agreement is restoring
■■ An overview of the first analysis of the causes the trust of the stakeholders in the enterprise
of decline; and in the possibilities to overcome this difficult
■■ An overview of the immediate cash requirement period. A restructuring plan is the foundation of
needs (based on a short-term cash flow overview restoring trust. Form 8 sets out an example of
of six–12 weeks); issues that might be considered when developing
■■ An overview of initiatives that will generate a restructuring plan.
cash flow, for example, the sale of business
units, increased collection of accounts payable, Reasons to write a restructuring plan are:
postponement of payment of Trade Creditors,
reduction of inventory, sale of assets; ■■ It provides a holistic overview of what needs to
■■ An overview of newly installed controls to be done;
gain more control over the cash outflow of the ■■ It provides guidance and ensures complete focus
enterprise (e.g., payment controls, controls on the objectives set in the restructuring plan;
regarding forecasting and reporting, human ■■ It provides quantitative and qualitative objectives;
resources controls); and
■■ Implementation of cash rationing (restrictions on ■■ It provides trust to the stakeholders and is a way
capital expenditures); and to communicate with them.
■■ An overview of the newly formed restructuring
management team including roles and responsi In case of the Hotel Group, important aspects for
bilities and a description of changes in existing the restructuring plan are:
management.
■■ A clear definition of the position of the Hotel
5.2.2 Phase 2: Analyzing Group (high end versus budget), including a
definition of target groups (leisure, business);
When entering Phase 2 of the OCW process, the ■■ An analysis of the threat of online competition
focus of the Hotel Group’s management and the for hotels (for example, providers like Airbnb)
relevant stakeholders shifts from a short-term to and how to deal with this;
a longer-term perspective. As noted in Chapter 2, ■■ An analysis of the dependency of online travel
there is overlap among the phases. Phase 1 is still agents and a solution for how to attract more
in progress when Phase 2 begins, so management bookings through the website of the Hotel Group
is often changing focus—solving short-term issues (to reduce commission fees for such online
and trying to stabilize the enterprise while at the agencies);
same time forecasting what the enterprise should ■■ Targets for key performance indicators for the
look like in five to ten years. Management should Hotel Group:
keep in mind that short-term survival is necessary ■■ Decrease of occupancy in combination of an
for long-term success. increase of the average room rate;
■■ Increase of the Revenue per Available Room;
The deliverable in this phase is the restructuring plan. ■■ Change in booking channels (less online
agencies, more direct bookings).
5 Practical Case Study 67
5.2.2.1.1 The Restructuring Plan Should of the hotel buildings (with a real estate investor).
Contain the Following Topics: This will generate cash, reducing the cash outflow
for investing, but it results in a long-term rental
■■ Detailed enterprise profile, including an analysis
agreement.
of the causes of decline;
■■ Analysis of the external environment (compe
An important deliverable in this phase is a post-
tition, trends, new forces, and so on);
commencement financing agreement to try and
■■ Vision on the restructuring (new customers, new
keep the business afloat (see Form 9 for a sample
branding, new partnerships, new structure, new
letter of intent to provide new financing).
management, new technology);
■■ A detailed restructuring strategy (detailed
Possible other agreements that might be put in
description of the new products/services, including
place will vary depending upon the particular
the needs and wants of the customers, positioning
circumstances of the debt, but might include:
of the products/services, focused on sales);
■■ Operational analysis (detailed overview of the
■■ Contractual post-commencement financing priority;
enterprise’s strengths and weaknesses, and
■■ Share issuance agreements;
opportunities and threats to the enterprise);
■■ Waiver of pre-emption rights;
■■ Operational action plan (proposed measures in
■■ Hybrid securities agreements;
small, clear, and quantifiable steps, segmented
■■ Sale and purchase agreements;
to the various parts of the organization in which
■■ Forms for modifying or cancelling tax debt; and
specific actions should be taken);
■■ Transfer of licenses.
■■ Financial projections (long-term and short-term
versions of the balance sheet, income statement, 5.2.3.1 New Financing and Letter
and cash flow statement including worst-case of Intent to Provide New Financing
and best-case scenarios);
■■ Time scheme; As discussed in Chapter 2, the enterprise will most
■■ Risk analysis; and likely need additional funding during the OCW
■■ Analysis of effects for current lenders/Trade period. For instance, in the case of the Hotel Group,
Creditors/owners. the Trade Creditors need to be at least partially
paid to ensure that the Hotel Group can continue
5.2.3 Phase 3: Repositioning to receive key services, such as laundry services,
food supplies, staff for housekeeping, transport
In the third phase, the restructuring plan is services, etc.
implemented. At the start of this phase, it is
important that the relevant stakeholders, including An example of a letter of intent on the part of
the owners/management of the Hotel Group, agree the creditors to provide new financing to the
on certain aspects. For example, if one of the lenders Hotel Group is set out in Form 9. However, if
of the Hotel Group is willing to invest funds to keep no agreement can be reached regarding such new
the current Trade Creditors satisfied (to ensure that financing, for instance, regarding the priority that
the supply of goods and services continues), all the creditors providing the new financing will have
stakeholders need to agree on how to deal with the (see Chapter 2), it is unlikely that any lenders
additional funding. will be willing to furnish such funding. To create
this opportunity, current relevant stakeholders
An important option for the Hotel Group, for should be willing to prioritize the additional post-
instance, is a sale-and-leaseback of one or more commencement financing in case of insolvency.
68 A Toolkit For Out-of-Court Workouts
The Hotel Group should answer the following While in the stabilizing phase, the attention of the
questions in their post-commencement financing Hotel Group was focused on short-term survival;
agreement: here the owners of Hotel Group and the lenders
are focused on how to fund the company for long-
■■ Who is going to provide additional funding term growth. An example is looking for strategic
to ensure continuation of supply by the Trade partnerships with other hotel groups, participation
Creditors? of a private equity firm or looking for a franchise
■■ What are the possibilities of providing this lender partnership with one of the international hotel
a secured loan? chains. Also, the sale-and-leaseback of the hotel
■■ Do all stakeholders agree that this additional buildings can be considered to improve the financial
funding should be the most senior debt, even though position and ratios.
this means less security for the existing lenders?
Another part of this phase is strengthening the
5.2.3.2 Set-off Agreement leadership team of the enterprise. During the
stabilizing phase a restructuring team was formed,
A set-off agreement is a settlement of mutual debt
more or less equivalent to a project team. The main
between a creditor and a debtor through offsetting
task of this team was to stabilize the company,
claims. This allows creditors to collect a greater
and to ensure its short-term survival to facilitate a
amount than they usually could under bankruptcy
restructuring plan. Part of the long-term survival
proceedings. Form 10 provides an example of a
involves changing the board of directors. In case of
set-off agreement.
the Hotel Group the creditors might consider adding
a Chief Marketing Officer to the board or replacing
5.2.4 Phase 4: Reinforcing
the Chief Financial Officer for a more qualified and
During the last phase of the restructuring process, the independent (not family related) person.
relevant stakeholders should focus on improving the
financial situation of the balance sheet (improving An important deliverable of this phase is a
the debt-to-equity ratio, for instance). Part of the summary by the relevant stakeholders on the
improvement of the financial situation will be restructuring process, including an assessment of
reaching an agreement among the stakeholders the incorporation of restructuring management
regarding the funding of the Hotel Group. skills in the enterprise itself.
5.3 Forms
5 Practical Case Study 69
Disclaimer
The sample forms and documents included
in this publication are intended to serve as
simplified examples solely in the context of the
case study in Chapter 5. While they represent
a basic example of the type of documentation
that might be used in such a case, they are in
no way intended to serve as models for actual
transactions. Rather, they are intended to give
users of this publication an idea of the types of
issues that may arise in the context of an OCW
and the types of documents that participants
in such a workout may need to produce. All
documents including contracts, agreements
and undertakings in relation to a restructuring
should be subject to local legal and financial
advice, and nothing in this publication is intended
to serve as a substitute for, or supplement to,
such advice.
1 Stakeholder
FORM
Identification
NAME OF STAKEHOLDER Family Y
CONTACT PERSON Enterprise Executive
POSITION Enterprise Executive
EMAIL ceo@hotelgroup.com
TYPE OF STAKEHOLDER Owner
SHORT DESCRIPTION OF THE POSITION 100% owner of the enterprise and management
_____________________________________________________________________________________
NAME OF STAKEHOLDER Lender A
CONTACT PERSON Mr. X
POSITION Senior Account Manager, Large Clients
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EMAIL x@lendera.com
TYPE OF STAKEHOLDER
SHORT DESCRIPTION OF THE POSITION
Bank
Senior debt, collateral
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_____________________________________________________________________________________
NAME OF STAKEHOLDER Lender B
CONTACT PERSON Ms. Z.
POSITION Vice President, Corporate Clients
EMAIL z@lenderb.com
TYPE OF STAKEHOLDER Bank
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SHORT DESCRIPTION OF THE POSITION Senior debt, collateral
_____________________________________________________________________________________
NAME OF STAKEHOLDER Lender C
CONTACT PERSON Mr. A
POSITION Account Manager, Hospitality
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EMAIL a@lenderc.com
TYPE OF STAKEHOLDER Bank
SHORT DESCRIPTION OF THE POSITION Junior debt, no collateral
_____________________________________________________________________________________
NAME OF STAKEHOLDER Lender D
CONTACT PERSON Mr. F
POSITION Account Manager, Hospitality
EMAIL f@lenderd.com
TYPE OF STAKEHOLDER Bank
SHORT DESCRIPTION OF THE POSITION Junior debt, no collateral
_____________________________________________________________________________________
FORM 1: Stakeholder Identification 71
NAME OF STAKEHOLDER Trade Creditors
CONTACT PERSON Mr. R and Ms. T
POSITION Representatives of Trade Creditors
EMAIL r@tradecreditor1.com and t@tradecreditor2.com
TYPE OF STAKEHOLDER Trade Creditors
SHORT DESCRIPTION OF THE POSITION Important Trade Creditors for going concern, not easy to
replace, no formal position, but strong informal position
_____________________________________________________________________________________
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72 A Toolkit For Out-of-Court Workouts
2 Letter of Intent to Adopt
FORM
Workout Principles
LETTER OF INTENT TO APPLY OUT-OF-COURT WORKOUT PRINCIPLES
Parties to this Agreement:
■■ Creditors: Lender A, Lender B, Lender C, Lender D, and Trade Creditors
■■ Debtor: Hotel Group
It is a generally accepted in global principles that restructurings achieved outside of formal insolvency
proceedings yield higher stakeholder returns for those involved, as these are more flexible and efficient than
court proceedings.
It is generally accepted that OCWs:
■■
■■
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Allow viable businesses to continue to operate and to emerge successfully from
financial distress;
Allow creditors generally, but specifically lenders, to reduce losses;
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■■ To a large extent avoid the social and economic impact of major business failures;
■■ Reduce pressure on the courts;
■■ Better serve other key stakeholders, such as customers, employees, suppliers, and
investors, since businesses
subject to out-of-court restructuring proceedings
continue to trade;
■■ Are more efficient and effective than court procedures due to the shorter time frames and higher recovery
rates;
■■ Assist the commercial community in developing confidence in the fairness,
transparency, and accountability
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of insolvency and restructuring proceedings;
■■ Can apply to any form of business enterprise. The approach taken in these guidelines is that of INSOL
International’s “Statement of Principles for a Global Approach to Multi-Creditor Workouts.” The INSOL
principles are highly regarded around the world, and have formed the basis for out-of-court restructuring
guidelines in various jurisdictions.
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The eight Principles of workout procedures adopted under this agreement are:
FIRST PRINCIPLE
Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to cooperate
with each other to give sufficient (though limited) time (a “Standstill Period”) to the debtor for information
about the debtor to be obtained and evaluated and for proposals for resolving the debtor’s financial difficulties
to be formulated and assessed, unless such a course is inappropriate in a particular case.
Creditors will agree with Debtor a Standstill Period of 1 month. Within this Standstill Period the Debtor should
produce (in cooperation with Creditors) a turnaround plan.
FORM 2: Letter of Intent to Adopt Workout Principles 73
SECOND PRINCIPLE
During the Standstill Period, all relevant creditors should agree to refrain from taking any steps to enforce their
claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the
debtor but are entitled to expect that during the Standstill Period their position relative to other creditors and
each other will not be prejudiced. Conflicts of interest in the creditor group should be identified early and dealt
with appropriately.
Creditors acknowledge that their positions are best served by a going concern of Debtor. An interruption of
the operations of the hotels would seriously damage the reputation of Debtor and the insolvency issues will
become a self-fulfilling prophecy.
THIRD PRINCIPLE
During the Standstill Period, the debtor should not take any action which might adversely affect the prospective
return to relevant creditors (either collectively or individually) as compared with the position at the Standstill
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Commencement Date.
Payments to all Creditors (including Lender A, Lender B, Lender C, Lender D, and the Trade Creditors) is subject
to approval of all parties involved in this deal. Repayment of outstanding loans will not take place during the
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Standstill Period. Payments to Trade Creditors can take place, however payments of amounts that are currently
overdue are not allowed. Payments to a creditor that exceed USD 100,000 in total in the Standstill Period
needs explicit approval of Creditors.
Debtor will not take action to file for insolvency procedures without the approval of Creditors.
FOURTH PRINCIPLE
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The interests of relevant creditors are best served by coordinating their response to a debtor in financial
difficulty. Such coordination will be facilitated by the selection of one or more representative coordination
committees and by the appointment of professional advisers to advise and assist such committees and, where
appropriate, the relevant creditors participating in the process as a whole.
The Parties involved have appointed a Coordination Creditors’ Committee (Committee) comprising Professor A
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(mediator), Mr. X (Lender A), and Ms. T (Trade Creditor). The Committee is responsible for managing the process
of the OCW and will provide information to all stakeholders. The Committee also schedules meetings (both
general meetings between Creditors and Debtor as well as bilateral meetings).
FIFTH PRINCIPLE
During the Standstill Period, the debtor should provide, and allow relevant creditors and/or their professional
advisers’ reasonable and timely access to, all relevant information relating to its assets, liabilities, business and
prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be
made to relevant creditors.
Debtor will create a detailed package of information (to be specified) and will create a data room with access
for Parties involved. New information provided by Debtor will only be distributed via the data room so all
Creditors will receive that information.
74 A Toolkit For Out-of-Court Workouts
SIXTH PRINCIPLE
Proposals for resolving the financial difficulties to the debtor and, so far as practicable, arrangements between
relevant creditors relating to any standstill, should reflect applicable law and the relative positions of relevant
creditors at the Standstill Commencement Date.
Since the Debtor is located in jurisdiction ABC, the laws of ABC should be respected. The positions of the
Creditors at the Standstill Commencement Date are:
Arrears in
Currently Arrears in Debt
Term Loan Expiration Date Interest
Outstanding Repayment
Payments
Secured senior debt 6.937 Expires in several Yes Yes
Lender A months
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Secured senior debt 5.946 Expires in several Yes Yes
Lender B months
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Unsecured
subordinated debt
(working capital)
Lender C
991 Expired
Unsecured debt 793 Expires in several No No
Lender D years
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Secured debt 2.000 No expiration date N/A N/A
provided by
shareholders
Trade Creditors N/A 4.851 The Hotel Group Payment is net 30 days from date of
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(unsecured) currently pays on invoice according to contract terms.
average after 90
days.
SEVENTH PRINCIPLE
Information obtained for the purposes of the process concerning the assets, liabilities and business of the
debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and
should, unless already publicly available, be treated as confidential.
All information provided from Debtor to Creditors should be made available through the data room. Proposals
from one of the Creditors will be discussed during the meetings between Debtor and Creditors.
EIGHTH PRINCIPLE
If additional funding is provided during the Standstill Period or under any rescue of restructuring proposals, the
repayment of such additional funding should, so far as practicable, be accorded priority status as compared to
other indebtedness or claims of relevant creditors.
Both Lender C and Lender D have indicated that they are willing to provide additional funding to the Hotel
Group. Debtor needs to provide an overview of the necessary funding for the next 6 months. Lender A, Lender B,
FORM 2: Letter of Intent to Adopt Workout Principles 75
and Trade Creditors have indicated that they are willing to discuss a higher priority for repayment of the new
financing.
The parties acknowledge that they have read and understand this Letter of Intent and the Out-of-Court
Workout Principles and voluntarily accept the duties and obligations set forth herein.
Signed on 24 May 2016 by:
Owners Lender A Lender B
Lender C Lender D Trade Creditors
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76 A Toolkit For Out-of-Court Workouts
3 Workout Planning and
FORM
Communication Framework
Workout Planning and 24- 25- 26- 27- 28- 29- 30- 31- 1- 2- 3-
Communication Framework May May May May May May May May Jun Jun Jun
Standstill period Start
Meetings
—OCW stakeholder meeting X X X X
—bilateral meetings X X X
(Enterprise—Lenders)
—bilateral meetings X X X
(Enterprise—Trade Creditors)
—
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bilateral meetings (Lenders—
Trade Creditors)
Information
X X X
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—financial statements X
—management information X
—cash flow forecast—2 weeks X
Deliverables
signed letter of adoption
— X
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of OCW principles
—confidentiality agreement X
—standstill agreement—draft X
—standstill agreement—final X X
—stabilizing plan
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—turnaround plan
Other X
—new Turnaround Team
FORM 3: Workout Planning and Communication Framework 77
4 Confidentiality
FORM
Agreement
CONFIDENTIALITY AGREEMENT OUT-OF-COURT WORKOUT
Parties to this agreement:
■■ Creditors: Lender A, Lender B, Lender C, Lender D, and Trade Creditors
■■ Debtor: Hotel Group
It is understood and agreed to that the parties to this Agreement would each like to provide the other with
certain information that may be considered confidential. To ensure the protection of such information and in
consideration of the Agreement to exchange said information, the parties agree as follows:
1. The confidential information to be disclosed under this Agreement (“Confidential Information”) can be
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described as and includes:
Financial information about the Debtor, financial projections, budgets, forecast, restructuring plan, future
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business plans, information about customers and suppliers, information about bank loans, and all other
information regardless of whether such information is designated as Confidential Information at the time of
its disclosure.
In addition to the above, Confidential Information shall also include, and the parties shall have a duty to
protect, other confidential and/or sensitive information which is (a) disclosed as such in writing and marked as
confidential (or with other similar designation) at the time of disclosure; and/or (b) disclosed by in any other
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manner and identified as confidential at the time of disclosure and is also summarized and designated as
confidential in a written memorandum delivered within thirty (30) days of the disclosure.
2. The parties shall use the Confidential Information only for the purpose of trying to reach an Out-of-Court
Workout Agreement.
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3. The parties shall limit disclosure of Confidential Information within its own organization to its directors,
officers, partners, members, and/or employees having a need to know and shall not disclose Confidential
Information to any third party (whether an individual, corporation, or other entity) without prior written
consent. The parties shall satisfy its obligations under this paragraph if it takes affirmative measures to ensure
compliance with these confidentiality obligations by its employees, agents, consultants, and others who are
permitted access to or use of the Confidential Information.
4. This Agreement imposes no obligation upon the parties with respect to any Confidential Information (a) that
was possessed before receipt; (b) that is or becomes a matter of public knowledge through no fault of receiving
party; (c) that is rightfully received from a third party not owing a duty of confidentiality; (d) that is disclosed
without a duty of confidentiality to a third party by, or with the authorization of the disclosing party; or (e) that
is independently developed.
Form 4: Confidentiality Agreement 79
5. The parties warrant that they have the right to make the disclosures under this Agreement.
6. This Agreement shall not be construed as creating, conveying, transferring, granting, or conferring upon
either party any rights, license, or authority in or to the information exchanged, except the limited right to use
Confidential Information specified in paragraph 2. Furthermore and specifically, no license or conveyance of any
intellectual property rights is granted or implied by this Agreement.
7. All parties acknowledge and agree that the exchange of information under this Agreement shall not commit
or bind either party to any present or future contractual relationship (except as specifically stated herein), nor
shall the exchange of information be construed as an inducement to act or not to act in any given manner.
8. Neither party shall be liable to the other in any manner whatsoever for any decisions, obligations, costs or
expenses incurred, changes in business practices, plans, organization, products, services, or otherwise, based on
either party’s decision to use or rely on any information exchanged under this Agreement.
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9. If there is a breach or threatened breach of any provision of this Agreement, it is agreed and understood that
the non-breaching party shall have no adequate remedy in money or other damages and accordingly shall be
entitled to injunctive relief, provided however, no specification in this Agreement of any particular remedy shall
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be construed as a waiver or prohibition of any other remedies in the event of a breach or threatened breach
of this Agreement.
10. This Agreement states the entire agreement between the parties concerning the disclosure of Confidential
Information and supersedes any prior agreements, understandings, or representations with respect thereto. Any
addition or modification to this Agreement must be made in writing and signed by authorized representatives
of both parties. This Agreement is made under and shall be construed according to the laws of country ABC.
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In the event that this agreement is breached, any and all disputes must be settled in a court of competent
jurisdiction in ABC.
11. If any of the provisions of this Agreement are found to be unenforceable, the remainder shall be enforced as
fully as possible and the unenforceable provision(s) shall be deemed modified to the limited extent required to
permit enforcement of the Agreement as a whole.
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Wherefore, the parties acknowledge that they have read and understand this Agreement and voluntarily accept
the duties and obligations set forth herein.
Signed on 24 May 2016 by:
Owners Lender A Lender B
Lender C Lender D Trade Creditors
80 A Toolkit For Out-of-Court Workouts
5 Standstill
FORM
Agreement
STANDSTILL AGREEMENT OUT-OF-COURT WORKOUT
Parties to this Agreement:
■■ Creditors: Lender A, Lender B, Lender C, Lender D, and Trade Creditors
■■ Debtor: Hotel Group
All parties involved acknowledge that the parties should be provided sufficient time for information about the
Debtor to be obtained and evaluated and for proposals for resolving the debtor’s financial difficulties to be
formulated and assessed.
1. The standstill period is effective as of 24 May 2016 and ends 24 June 2016 12:00 CET.
E
2. During the standstill period, the Debtor:
Has the obligation to prepare a restructuring plan that will resolve the Debtor’s financial difficulties. The
a.
restructuring plan must demonstrate that the distressed business is capable of operating profitably, as
PL
well as the extent to which it will be able to repay its debts.
Has the obligation to provide all relevant Creditors with adequate reliable information to enable them to
b.
assess the debtor’s financial position, to understand what has caused the underlying financial problems,
and to evaluate any proposed solutions that are put forward.
Should not take any action that would adversely affect the prospective returns on the relevant Creditors
c.
on a collective or individual basis, as compared to their position at the commencement of the standstill
M
period.
During the standstill period, the Creditors:
3.
Are entitled to expect that their position relative to other creditors will not be prejudiced during the
a.
standstill period;
SA
Will not try to improve their positions relative to other creditors;
b.
Will not insist on payment of amounts owing to them;
c.
Will not initiate collection, security enforcement, or liquidation proceedings;
d.
Will allow existing credit lines and facilities to be used; and
e.
Will allow the Debtor to continue to make payments in what is commonly referred to as “the ordinary
f.
course of business.”
4. The standstill period ends on 24 June 2016 at 12:00 CET. Extension of the standstill period is only possible if
all Creditors and the Debtor agree.
Wherefore, the parties acknowledge that they have read and understand this Agreement and voluntarily accept
the duties and obligations set forth herein.
Form 5: Standstill Agreement 81
Signed on 24 May 2016 by:
Owners Lender A Lender B
Lender C Lender D Trade Creditors
E
PL
M
SA
82 A Toolkit For Out-of-Court Workouts
6 Financial
FORM
Data
Balance Sheet*
Consolidated Balance Sheet as at
2017E 2016E 2015A 2014A 2013A
31 December
Fixed assets
Intangible fixed assets 1,386 1,708 1,525 1,540 1,400
Tangible fixed assets 17,198 19,768 15,865 15,950 14,500
Financial fixed assets 1,202 1,365 980 731 683
19,786 22,841 18,370 18,221 16,583
E
Current assets
Inventories
Trade receivables
1,100
1,750
1,350
2,208
967
1,960
950
1,980
800
1,800
PL
Taxes and premiums 1,436 1,650 1,200 1,345 1,255
Other current assets 3,295 4,132 2,614 2,640 2,000
Cash and cash equivalents 147- 211- 113 342 540
7,434 9,129 6,854 7,257 6,395
27,220 31,970 25,223 25,478 22,978
M
Shareholders' equity
Share capital 18 18 18 18 18
Share premium — — — — —
Legal reserve — — — — —
SA
Other reserves 2,155- 660- 743 2,006 3,000
Result current year 1,331- 1,495- 1,403- 1,263- 994-
Total equity 3,468- 2,137- 642- 761 2,024
Provisions
Deferred taxes 642 975 409 584 900
Long-term liabilities
Long-term loan 14,000 15,000 12,500 11,016 10,000
Short-term liabilities
Trade payables 4,300 5,300 4,851 4,250 3,500
Form 6: Financial Data 83
Consolidated Balance Sheet as at
2017E 2016E 2015A 2014A 2013A
31 December
Taxes, pensions and premiums 2,000 2,000 1,200 1,800 500
Short-term part of long-term debt 6,745 7,500 4,167 3,667 3,370
Other liabilities and deferred income 3,000 3,332 2,739 3,400 2,684
Total liabilities 16,045 18,132 12,957 13,117 10,054
Total equity and liabilities 27,220 31,970 25,224 25,478 22,978
Income Statement
Consolidated Income Statement for
E
the Year 2017E 2016E 2015A 2014A 2013A
Net turnover 10.000 8.000 9.000 11.000 13.000
PL
Cost of sales
Gross margin
264
9.736
108
7.892
196
8.804
234
10.766
325
12.675
Wages and salaries 3.400 3.040 3.420 3.960 4.550
Social security charges and pensions 170 152 171 198 228
Other operating expenses 5.330 4.408 4.709 5.942 6.923
M
Amortization and depreciation 1.600 1.300 1.400 1.500 1.500
Total operating expenses 10.500 8.900 9.700 11.600 13.201
Result from operations 764- 1.008- 896- 834- 525-
Financial expenses 1.010- 985- 975- 850- 800-
SA
Result before taxations 1.774- 1.993- 1.871- 1.684- 1.325-
Income taxes 444 498 468 421 331
Result from nonconsolidated companies — — — — —
Net result after taxes 1.331- 1.495- 1.403- 1.263- 994-
84 A Toolkit For Out-of-Court Workouts
Long-Term Cash Flow Statement (18 months)
(Adjusted net income method)
Consolidated Income
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Statement for the Year
Cash flow from operating activities
Result after taxes 125- 125- 125- 125- 125- 125- 125- 125- 125- 125- 125- 125-
Amortization and depreciation 108 108 108 108 108 108 108 108 108 108 108 108
Decrease/(increase) of trade 21- 21- 21- 21- 21- 21- 21- 21- 21- 21- 21- 21-
receivables
Decrease/(increase) of other 196- 196- 196- 196- 196- 196- 196- 196- 196- 196- 196- 196-
E
current assets
(Decrease)/increase of 47 47 47 47 47 47 47 47 47 47 47 47
provisions
PL
(Decrease)/increase of short-
term part of loans
(Decrease)/increase of short-
term liabilities
37
116
37
116
37
116
37
116
37
116
37
116
37
116
37
116
37
116
37
116
37
116
37
116
Cash flow from operating 32- 32- 32- 32- 32- 32- 32- 32- 32- 32- 32- 32-
activities
M
Cash flow from investing activities
Investment in intangible fixed 42- 42- 42- 42- 42- 42- 42- 42- 42- 42- 42- 42-
assets
Investment in tangible fixed 407- 407- 407- 407- 407- 407- 407- 407- 407- 407- 407- 407-
assets
SA
Disposal of tangible fixed assets
Investment in financial fixed 32- 32- 32- 32- 32- 32- 32- 32- 32- 32- 32- 32-
assets
Disposal of financial fixed — — — — — — — — — — — —
assets
Cash flow from investing 481- 481- 481- 481- 481- 481- 481- 481- 481- 481- 481- 481-
activities
Cash flow from financing activities
Issue of ordinary shares — — — — — — — — — — — —
Proceeds from borrowings — — — — — — — — — — — —
Repayment of long-term — — — — — — — — — — — —
liabilities
Increase of long-term liabilities 486 486 486 486 486 486 486 486 486 486 486 486
486 486 486 486 486 486 486 486 486 486 486 486
FORM 6: Financial Data 85
Consolidated Income
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Statement for the Year
Change in cash and cash 27- 27- 27- 27- 27- 27- 27- 27- 27- 27- 27- 27-
equivalents
Net foreign exchange — — — — — — — — — — — —
difference
Total change 27- 27- 27- 27- 27- 27- 27- 27- 27- 27- 27- 27-
Cash & bank—beginning of the 113 86 59 32 5 22- 49- 76- 103- 130- 157- 184-
month
Total change 27- 27- 27- 27- 27- 27- 27- 27- 27- 27- 27- 27-
Cash & bank—ending of the 86 59 32 5 22- 49- 76- 103- 130- 157- 184- 211-
month
E
PL
M
SA
86 A Toolkit For Out-of-Court Workouts
Short-Term Cash Flow Statement (6 weeks)
(Cash and disbursement method)
Consolidated Income
24/05/16 25/05/16 26/05/16 27/05/16 28/05/16 29/05/16 30/05/16 31/05/16 01/06/16 02/06/16
statement for the Year
Cash Inflow
Revenues 24 25 21 19 23 24 18 19
FORM 6: Financial Data
Additional loans 125
...
...
...
...
SA
...
Total Cash Inflow 24 25 21 19 23 24 143 19
Cash Outflow
Disbursement for cost of — —
M 3 — — 3 — —
sales
Disbursement for payroll — — 101 — — — — —
Disbursement for other 36 36
expenses
Disbursement for — — — — — — — 22
financial expenses
PL
Disbursement for 124
investments
Total Cash Outflow — 124 140 — — 39 — 22
Total change 24 99-
E 119- 19 23 15- 143 3-
Cash & bank—beginning 5 29 70- 189- 170- 147- 162- 19-
of the day
Total change 24 99- 119- 19 23 15- 143 3-
Cash & bank—ending of 29 70- 189- 170- 147- 162- 19- 22-
the day
87
7 Stabilizing
FORM
Plan
The stabilizing plan contains the following items:
1. Preliminary analysis of causes of decline:
■■ Description of the strategy that led to the financial distress and the restructuring situation (cause of
decline) (first analysis).
2. Immediate cash requirements:
■■ Information on the detailed short-term cash forecast (see also 3)
■■ Daily basis for a period of six to 12 weeks
■■ Based on reliable starting position.
E
3. Short-term cash flow forecast:
■■ Spreadsheet with cash flow planning (six to 12 weeks).
4. Overview of cash generating activities:
PL
■■ Description of each initiative to generate cash including benefits and costs of the initiative
■■ Prioritize the cash generating initiatives
■■ Examples:
– Collection of accounts receivable
– Postpone payment of accounts payable
– Reduction of inventory
M
– Cancelling planned capital and operational expenditures.
5. Emergency cash management controls:
■■ Description of implementation of strong cash controls
■■ Cash management team
SA
■■ Strong forecasting and reporting controls
■■ Examples of new controls are:
– No new employment contracts
– No payroll increases and promotions
– Reduce all capital expenditures
– Additional purchase controls.
6. Cash rationing:
■■ Restrictions on the amount of new investments or projects undertaken by an enterprise.
FORM 7: Stabilizing Plan 89
7. Restructuring Management Team:
■■ Description of the Restructuring Management Team
■■ Roles and responsibilities (new skills).
E
PL
M
SA
90 A Toolkit For Out-of-Court Workouts
8 Restructuring
FORM
Plan
1. Enterprise profile and cause of decline:
■■ Detailed enterprise profile (history, major developments)
■■ Description of products and services and a description of the successes from the past (operational
activities)
■■ Detailed description of the management structure (including key managers)
■■ Detailed description of the strategy that led to the financial distress and the restructuring situation
(cause of decline).
2. Analysis of external environment:
■■ Detailed description of the industry
E
■■ Description of product/market segments
■■ Competitive forces (now and in the future)
■■ Threats of new entrants in the industry or substitute products/services
PL
■■ Description of the most important customers and suppliers.
3. Restructuring vision:
■■ In what way does the enterprise want to be renowned for in the market?
■■ How should the customers talk about the enterprise?
■■ What is the new internal culture?
M
■■ How is technology going to help the enterprise?
■■ New partnerships?
■■ How will the human resources management look?
■■ How should the enterprise be structured?
SA
■■ Changes in management?
■■ Changes in ownership?
4. Restructuring strategy:
■■ Detailed description of the sales growth that is strived for
■■ Description of the most important services and products (now and in the future) including the reason
why
■■ A detailed reasoning on the unique features of the new enterprise compared to its competitors (unique
selling points)
■■ What are the specific needs the products or services fulfill for the customer?
■■ In what way should the products or services be positioned in the market?
FORM 8: Restructuring Plan 91
■■ What are the target groups (customers) including the reasoning why these are the target groups?
■■ Overview of the forecasted savings and improvements of efficiency.
5. Operational analysis:
■■ Detailed overview of the strengths and weaknesses of the enterprise based on the preceding
SWOT-assessment
■■ Identification for possible operational points of improvement.
6. Operational action plan:
■■ A detailed plan of attack containing the proposed measures in small, clear, and quantifiable steps,
segmented to the various parts of the organization in which specific actions should be taken.
7. Financial projections:
■■ An overview of the financial calculation of the expected effects of the strategic and operational actions
E
■■ Balance sheet projections
■■ Result forecasts (profit and loss accounts)
■■ Forecasts of cash flow overviews, cash planning, long-term (18 months) and short-term (six to eight weeks)
PL
■■ Scenario analysis (worst case, best case).
8. Time scheme:
■■ A detailed timetable mentioning the milestones which are pursued
■■ A timetable and a preference of the sequence of the steps to take within different units and layers of the
enterprise (if relevant)
M
■■ A (proposal for a) timetable for reporting about the progress of the restructuring to the external parties
involved.
9. Risk analysis:
■■ An indication what the possible downside of the restructuring strategy is
■■ A description of a more negative (worst case) and a more positive (best case) scenario with regard to
SA
the expected restructuring scenario
■■ Risk-reward ratio, this concerns a (general) calculation of the maximum loss for a financier when
participating in the restructuring (should bankruptcy still follow) versus the immediate withdrawal of
the financier (with an instant bankruptcy following in which the chance of incomplete payment is fairly
present) against the potential upside which is expected when the restructuring succeeds (resulting in
higher repayments than in the case of bankruptcy)
■■ Compliance with local laws and regulations.
10. Effects on current creditors:
■■ Effect of the restructuring plan on the current creditors
■■ Proposed modifications of creditors’ rights.
Sources for additional capital (debt or equity).
92 A Toolkit For Out-of-Court Workouts
9 Letter of Intent to Enter
FORM
into New Financing Agreement
Parties to this letter of intent:
■■ Creditors: Lender A, Lender B, Lender C, Lender D, and Trade Creditors
■■ Debtor: Hotel Group
The parties acknowledge the fact that Debtor needs additional financing to be able to restructure the company
and avoid insolvency in general. More specific, the Debtor needs additional financing to:
■■ Reduce the outstanding amount to Trade Creditors to ensure continuation of the supplying services
(housekeeping services) and supplying food & beverages to the Debtor. Without this continuation, the going
concern position of Debtor is not guaranteed.
E
Lender D has expressed to be interested to provide additional financing to Debtor in the form of a secured
senior debt. In exchange for the additional financing by Lender D, the following is required:
PL
1.
An agreement should be made between the current creditors to provide Lender D with the highest priority
with respect to repayment of the additional financing. Lender D will be repaid first in case of insolvency.
An agreement to change the collateral/security rights from Lender A and Lender B and involve Lender D.
2.
Lender A and Lender B will give up a proportional part of the rights to the collateral in favor of Lender D.
A share pledge agreement that deals with the pledge over the shares of Debtor. Lender D will get a share
3.
pledge on the shares of Debtor.
M
A guarantee of the personal holdings of the shareholders of Debtor in case collateral is insufficient to repay
4.
the new loan.
Parties will finalize the agreements above in the next weeks.
Signed on 24 May 2016 by:
SA
Owners Lender A Lender B
Lender C Lender D Trade Creditors
FORM 9: Letter of Intent to Enter into New Financing Agreement 93
10 Set-Off
FORM
Agreement
SET-OFF AGREEMENT
This agreement between (“Party 1”) and Lender C (“Party 2”),
WHEREAS
A. Pursuant to a loan agreement Party 1 became indebted to Party 2 in the original amount of $900,000 (the
“Party 1 Indebtedness”);
B. As of the date hereof, the aggregate amount of the Party 1 Indebtedness is $991,000;
c. Pursuant to a sales agreement (employee gathering of Party 2 at Party 1) Party 2 became indebted to Party 1
in the original amount of $25,000;
E
D. As of the date hereof, the aggregate amount of the Party 2 Indebtedness is $25,000;
E. The parties hereto wish to set-off the full amount of the Party 1 Indebtedness against the Party 2
Indebtedness, to the fullest extent possible.
PL
NOW THEREFORE in consideration of the premises and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. The parties acknowledge and agree that the recitals above are true and correct in all material respects.
The parties hereby set-off the full amount of the Party 1 Indebtedness against the Party 2 Indebtedness, to
2.
M
the fullest extent possible.
3. The difference of $875,000 shall be the outstanding amount by Party 1 to Party 2 during the workout situation.
IN WITNESS WHEREOF the parties have executed this Agreement as of the date first written above.
Signed on 31 May 2016 by:
SA
Owners Lender C
FORM 10: Set-Off Agreement 95
6 Conclusion
The effective resolution of nonperforming loans a taxonomy of different workout frameworks
serves a critical function for a country’s financial and an understanding of how to implement such
system—to ensure both stability and liquidity frameworks. Such a document can never hope to
in the banking sector. Sound insolvency and be exhaustive, as there are infinite variations at
debt resolution frameworks also promote access the country level in how these frameworks have
to credit by ensuring that viable businesses are been put in place. At the same time, however, the
liquidated efficiently and those that can be rescued taxonomy provides a broad understanding of the
are successfully restructured. While ensuring different models that can be deployed under the
efficient and orderly liquidation has always been a larger banner of “out-of-court workouts.” Some of
challenge for policy makers, for most countries the these models will involve courts or administrative
larger challenge has been on the restructuring front. bodies—to varying degrees—and others will be
International experience tells us that there is no one purely driven by the parties. Some models are
size fits all solution to the challenge of developing heavily reliant on external advisers, both financial
effective restructuring frameworks. Even within the and legal, while others are highly dependent on a
same country, a diversity of restructuring procedures strong cadre of insolvency representatives and/or
may be necessary because one tool is often not fully mediators. In all cases, however, borrowers and
effective. Best practices dictate that a country’s lenders need to be willing to negotiate and drive the
restructuring system should provide borrowers and process forward. While the formal legal framework
lenders with as many tools as possible to restructure for business liquidation and reorganization will
troubled companies. Formal, judicial reorganization always provide a “backstop” when negotiations
forms the backbone of such a set of tools, but it fail, decades of experience in insolvency cases tell
needs to be supported with other options. This is us that consensus-driven solutions usually provide
what makes a framework for workouts so important. better outcomes to all stakeholders. The aspiration
of this Toolkit is to ensure that such solutions,
What this Toolkit has attempted to do is to pro- which today are far too rare, become commonplace.
vide policy makers and other stakeholders with
6 ConClusion 97
Glossary
T
o ensure consistency with terms used in the World Creditor is a natural or legal person who has a
Bank Principles for Effective Insolvency and Creditor/ claim against the debtor that arose on or before the
Debtor Regimes and the UNCITRAL Legislative Guide commencement of the insolvency proceedings (used in
on Insolvency Law, definitions have been taken from this Toolkit synonymously with lender).107
the Legislative Guide where feasible.
Debtor is a natural or legal person who owes a debt
Administration is a procedure (aimed at restructuring) to a creditor (used in this Toolkit synonymously with
under which an administrator is appointed to run an borrower).
enterprise for a finite period of time in the interests of
all of the creditors. Debt-to-equity ratio is a financial ratio based on an
enterprise’s balance sheet that indicates the proportion
Arbitration is an out-of-court dispute resolution of an enterprise’s debt to its shareholder equity.
mechanism in which an independent third party (the
arbitrator, often an expert on the disputed topic) EBITDA, or earnings before interest, tax,
hears the opposing claims and delivers a binding ruling. depreciation and amortization, is an accounting
Arbitration is less formal and quicker than a court principle that represents a company’s operating
process. profitability prior to subtracting interest, tax,
depreciation, and amortization.
CAPEX, or capital expenditure, is spending directed
towards physical assets (either new assets or repairs/ Foreclosure is a remedy available to creditors wherein
improvements to existing assets). the creditor can gain ownership of a defaulted debtor’s
secured property.108
Cash flow is the amount of cash moving into and out of
a business. Positive cash flow is necessary for long-term Going concern i s a concept that stands for the general
operations. Negative cash flow may lead to liquidity assumption that a business will continue to operate for
problems. the foreseeable future.109 A sale as a going concern is
the sale or transfer of a business in whole or substantial
Claim is a right to payment from the estate of the debtor, part.110
whether arising from a debt, a contract, or other type
of legal obligation, whether liquidated or unliquidated, Hybrid procedure, f or the purposes of this publication,
matured or unmatured, disputed or undisputed, secured is a workout that combines features of an out-of-court
or unsecured, or fixed or contingent.106 workout and a formal reorganization process.
Collateral is an asset that is offered by a borrower or ICR Standard is an assessment tool that represents the
a third party to secure a loan. The lender can seize the international consensus on best practices for evaluating
asset if the borrower breaches its obligations. and strengthening insolvency regimes.
Conciliation
is used synonymously with mediation for INSOL Principles refers to the INSOL Statement of
the purposes of this Toolkit, and is assigned the same Principles for a Global Approach to Multi-Creditor
definition. Workouts.111 It encompasses a set of best practices for
multi-creditor workouts and can be considered as a
Cram-down is a mechanism in some insolvency modern version of the London approach.
laws whereby a decision adopted by the legally pre-
stipulated majority of creditors can be imposed on the Insolvency is when a debtor is generally unable to pay
opposing minority group of creditors (the “dissentient its debts as they mature or when its liabilities exceed
creditors”). the value of its assets.112
GLOSSARY 99
Insolvency proceeding is a collective proceeding Receivership is when a creditor appoints a receiver
subject to court supervision that, for the purposes of this over one or more of the insolvent enterprise’s assets
Toolkit, includes either a restructuring or a liquidation specified in a legal charge within a secured loan
process. agreement.
Lead bank is a position given to a bank creditor to Reorganization for the purposes of this Toolkit is
oversee the loan restructuring and represent all creditors used in the sense of a judicial reorganization. It is the
in negotiations with the debtor and any professional process by which the financial well-being and viability
advisors if the number of bank creditors is great enough of a debtor’s business can be restored and the business
to make coordination difficult. continue to operate, using various means possibly
including debt forgiveness, debt rescheduling, debt-
Liquidation is a proceeding in which the debtor’s assets equity conversions, and sale of the business (or parts of
are sold and disposed of, with proceeds distributed to it) as a going concern.118
creditors in accordance with the insolvency law.113
Rescheduling is the changing of an outstanding loan’s
London Approach is a set of OCW principles to terms due to the debtor’s difficulty to make interest or
negotiate nonperforming loans and other obligations principal repayments. Usually the terms are changed to
favoring active out-of-court workout arrangements by defer payments or extend the repayment period (which
bringing together both the debtor and its creditor banks reduces the amount of each payment).119
to an agreement.
Rescue is the act of restoring an enterprise to
Mediation is a means in which disputes can be resolved financial viability with as few changes as possible to its
in a flexible process, conducted in confidentiality, in structure.120
which a neutral person (the mediator) actively assists
parties in working toward a negotiated agreement of a Restructuring is the adjustment of a debtor’s
dispute or difference.114 For the purposes of this Toolkit, liabilities to make the debtor more capable of meeting
mediation and conciliation are used synonymously. its obligations. It can be financial, operational, or a
combination of both. For the purposes of this Toolkit,
Moratorium is a period of limited time during which the restructuring is taken to include both workouts and
debtor can develop and implement its reorganization reorganization processes.
plan and the creditor(s) cannot seek legal remedies.115
Restructuring plan for the purposes of this Toolkit is
OCW principles or guidelines a re nonbinding a plan by which the financial well-being and viability
principles that parties follow when conducting an OCW, of the debtor’s business can be restored,121 and is used
such as those issued by the Bank of England titled the synonymously with workout plan and reorganization
“London Approach.” plan.
Out-of-court-workout (OCW) is a workout that Secured creditor i s any creditor or lender that takes
involves no judicial intervention. The negotiations are collateral for the extension of credit, loan, or bond
aimed at securing contractual arrangements both issuance and is recognized as such by the insolvency
between the lenders themselves as well as the lenders law.
and the debtor for the restructuring of the debtor, with
or without rearrangement of the financing.116 Senior debt is borrowed money that takes precedence
over other debts.
Pre-arranged plan or pre-negotiated plan is a
restructuring plan in which the debtor negotiates with Silent trustee is, in the context of the Dutch pre-
its major stakeholders and receives their support for a packaged restructuring framework, a trustee that the
plan. The debtor then enters the reorganization process, court states it will appoint in the event of an enterprise’s
and when a formal solicitation of votes is held under the insolvency proceeding (but who is not yet appointed).
auspices of the court or an administrative authority, the This trustee works with the enterprise to create a
major stakeholders support the pre-arranged plan. pre-packaged plan. When the enterprise files for an
application for an insolvency proceeding, the silent
Pre-packaged restructuring plan (pre-pack) for the trustee is appointed as the acting trustee by the court,
purposes of this Toolkit combines voluntary restructuring and implements the restructuring plan.
negotiations, where a plan is negotiated and agreed by
the majority of affected creditors, with reorganization Standstill agreement for the purposes of this Toolkit
proceedings commenced under the insolvency law to is a contractual agreement between the debtor and
obtain court confirmation of the plan in order to bind some or all of its creditors to give the debtor time to
dissenting creditors.117 It should be noted that pre-packs restructure. The parties agree not to seek legal remedies
have different legal definitions in different jurisdictions, during this period.122
which is explored further in Chapter 3.
100 A Toolkit For Out-of-Court Workouts
Standstill period is the time specified in the standstill Unsecured creditor is any creditor or lender without
agreement in which the relevant parties will not enforce collateral for the extension of credit, loan, or bond
their rights against the debtor. issuance.
Stay or stay of proceedings is a measure that The WB-ICR Principles refers to the World Bank’s
prevents the commencement of, or suspends the Principles for Effective Insolvency and Debtor/Creditor
continuation of judicial, administrative, or other Rights, internationally recognized benchmarks that are
individual actions concerning the debtor’s assets, typically used to evaluate the effectiveness of domestic
rights, obligations, or liabilities. The measure includes creditor/debtor rights and insolvency systems.
actions to make security interests effective against third
parties or to enforce a security interest. It also prevents Workout is a non-statutory agreement between
execution against the assets of the insolvency estate, a debtor and creditors with the aim of easing the
the termination of a contract with the debtor, and debtor’s debt servicing burden so that it can maintain
the transfer, encumbrance, or other disposition of any its business activities. Workouts, for the purposes of this
assets or rights of the insolvency estate.123 Toolkit, include restructuring procedures with no judicial
involvement (out-of-court workouts) or restructuring
Steering committee is a committee that is formed procedures with minimal judicial or other institutional
by creditors to oversee the restructuring of a debtor on involvement (hybrid procedures).
behalf of all creditors.
Glossary 101
Endnotes
1. Gail Edmondson and Laura Cohn, “How Parmalat 8. A feature found in insolvency laws whereby a
Went Sour,” Bloomberg News, January 12, 2004, decision adopted by the pre-stipulated majority
http://www.bloomberg.com/news/articles/ can be imposed on dissentients.
2004-01-11/how-parmalat-went-sour; Malcolm
Moore, “Four Banks to Stand Trial over Parmalat,” 9. The support provided as result of the intervention
The Telegraph, June 14, 2007, http://www.telegraph. of the courts or an administrative authority is a
co.uk/finance/markets/2810527/Four-banks-to- cramming-down or binding effect. The courts or
stand-trial-over-Parmalat.html. the administrative authority will ensure that the
formal requirements and minimum thresholds
2. Nortel Networks Limited (2009). Form 10-K for the have been met to assure that no fraud or deceit
Fiscal Year Ended December 31, 2008. Retrieved has taken place and all creditors have been treated
from SEC EDGAR website https://www.sec.gov/ fairly and have had their right to express their will.
Archives/edgar/data/1119664/000119312509042559/
d10k.htm. 10. These proceedings are usually characterized by an
initial order declaring the commencement of the
3. Drew Hasselback and Theresa Tedesco, “The Fate process; followed with several procedural steps;
of Once-Mighty Nortel’s Last Billions Lies in the and, a final court order implementing an agreed
Hands of Two Men,” Financial Post, September 27, plan or declaring the impossibility of reaching an
2014, http://business.financialpost.com/legal-post/ agreement and subsequent commencement of an
the-fate-of-once-mighty-nortels-last-billions- insolvency proceeding that terminates with the
lies-in-the-hands-of-two-men. winding up of the company and its registration
cancellation.
4. Melodie Michel, “Abengoa Collapse Could Change
Renewables Financing,” Global Trade Review, 11. The law in each jurisdiction will establish the scope
December 12, 2015, http://www.gtreview.com/news/ and reach of the norm and which creditors are
europe/abengoa-collapse-could-change-banks- subject to the agreement. Sometimes, secured
approach-to-renewables/. creditors, preferential creditors and bondholders
are excluded. The same may be the case with
5. Patrick Fitzgerald, “Spain’s Abengoa Wins U.S. employees and other specific types of creditors.
Bankruptcy Court Protection,” The Wall Street
Journal, April 27, 2016, http://www.wsj.com/ 12. John Armour, Menezes, Uttamchandani and van
articles/spains-abengoa-wins-u-s-bankruptcy- Zwieten, “How Do Creditor Rights Matter for Debt
court-protection-1461783532. Finance,” Research Handbook on Secured Financing
of Commercial Transactions, ed, Frederique Dahan,
6. Vanessa Finch, “Corporate Rescue Processes: the (provisional title) (forthcoming, Edward Elgar:
Search for Quality and the Capacity to Resolve,” London, 2015).
Journal of Business Law 6 (2010).
13. Garrido, Out-of-Court Debt Restructuring.
7. As set out in José M. Garrido, 2012, Out-of-
Court Debt Restructuring. A World Bank Study, 14. Sandra Frisby, “A Preliminary Analysis of Pre-
Washington, DC: World Bank, the “continuum is packaged Administrations,” Report to the
based on the degree of judicial intervention and the Association of Business Recovery Professionals, R3-
degree of ‘formality’ in general.” The Association of Business Recovery Professionals
(2007).
Endnotes 103
15. Mario Gamboa-Cavazos and Frank Schneider, by two major institutional characteristics: the
“Bankruptcy as a Legal Process,” Working Paper, distribution of information among different
Harvard University, Cambridge, MA, 2007, 3–12. market players (stakeholders) and the presence of
mechanisms/norms granting or punishing fair or
16. Frisby, “A Preliminary Analysis of Pre-packaged unfair behavior.
Administrations,” Report to the Association
of Business Recovery Professionals, R3-The 27. Adriaanse and A.M. Griffioen, “Toolkit for
Association of Business Recovery Professionals Turnarounds, Workouts and Insolvency Procedures
(2007). in Rwanda.”
17. The data for the graph is based on: World Bank 28. Joseph R Nolan and Jacqueline M. Nolan-Haley.
Group, Doing Business 2016: Measuring Regulatory “Subordination,” Black’s Law Dictionary: Centennial
Quality and Efficiency, 13th ed (Washington, DC: Edition (1891–1991). 6th ed. St. Paul, MN: West
The World Bank Group, 2016). Although the report Publishing, 1990.
studies 189 economies, only 160 are represented
in the graph. Of the 29 excluded economies, 19 29. As noted in In re Enron Corp., the “[s]ubordination
were omitted because they have no insolvency of a claim alters the otherwise applicable priority of
framework in place (the corresponding recovery that claim within a creditor class; a subordinated
rate is $0.00 per dollar), and 10 economies were claim receives a distribution only after the claims of
omitted because there is no data on the domestic other creditors have been satisfied.”
credit provided by the banking sector in those 30. As noted by David Billington, “Interactions with
countries. Other Creditors” in Shutter (ed.), A Practitioner’s
18. World Bank Group, “Insolvency and Debt Guide to Syndicated Lending (2010), para. 4.5: “To
Resolution,” Brief, Washington, DC: World Bank, some extent, these arrangements may look unfair
2015, www.worldbank.org/insolvency. to the junior [subordinated] creditors. But the extra
return they receive during the life of the junior
19. Mihaela Carpus Carcea, Daria Ciriaci, Dimitri [subordinated] debt should compensate them.
Lorenzani, Peter Pontuch, and Carlos Cuerpo, If they have priced the risk incorrectly, that is the
“The Economic Impact of Rescue and Recovery consequence of a free market.”
Frameworks in the EU,” Discussion Paper 4,
European Commission: Brussels, 2015, http:// 31. United Nations Commission on International Trade
ec.europa.eu/economy_finance/publications/eedp/ Law, UNCITRAL Practice Guide on Cross-Border
dp004_en.htm. Insolvency Cooperation, New York: United Nations
Publication, 2009, http://www.uncitral.org/uncitral/
20. A “percentage point” and a “percent” are different en/uncitral_texts/insolvency/2009PracticeGuide
units of measurement. A percentage point is .html.
the arithmetic increase between two numbers,
whereas a percent is a ratio (e.g., an increase from 32. John Armour, Brian Cheffins and David A. Skeel Jr.,
15% to 20% is a 5 percentage point increase, but a “Corporate Ownership Structure and the Evolution
33% increase). of Bankruptcy Law: Lessons from the United
Kingdom,” Vanderbilt Law Review 55, no. 6 (2002):
21. Financial Stability Board, “Insolvency and Creditor 1756.
Rights Standard,” January 20, 2011, http://www.fsb
.org/2011/01/cos_051201/. 33. Garrido Out-of-Court Debt Restructuring, 1.
22. Garrido, Out-of-Court Debt Restructuring. 34. Chatterjee Sris, Upinder S. Dhillon and Gabriel G.
Ramirez, “Resolutions of Financial Distress:
23. UNCITRAL, Legislative Guide on Insolvency Law. Debt Restructurings via Chapter 11, Pre-
packaged Bankruptcies, and Workouts,” Financial
24. Garrido, Out-of-Court Debt Restructuring. Management Journal 25, no. 1 (1996): 12, 13, 18.
25. Adriaanse and A.M. Griffioen, “Toolkit for 35. There is usually no stigma attached to an OCW and
Turnarounds, Workouts and Insolvency Procedures a successful agreement is generally followed by a
in Rwanda,” 2015. positive market reaction.
26. Sociology mostly considers confidence as the 36. One inherent weakness of OCWs is the requirement
“lubricant” for interactions; it ensures that of unanimity for major changes in loan terms
interactions run more smoothly. See for instance built into the terms of the original loan contracts.
Stewart Macaulay, “Non-Contractual Relations There is much less scope for minority lenders to be
in Business: A Preliminary Study.” American “crammed-down” as is the practice under court-
Sociological Review 28, no. 1 (1963): 55–67. In a more supervised procedures. A favorable development in
economic sense: business contexts are influenced
104 A Toolkit For Out-of-Court Workouts
this field is to include collective action clauses (CACs) aimed at resolving the limitations of the applicable
in multi-lender agreements. CACs are clauses legal framework.
whereby, if they are included in the contract, the
interaction of the creditors is required. There are 43. As result of the 2000 financial crisis that hit Turkey,
four different types of CACs. These are: (1) collective a large number of Turkish enterprises became
representation clauses; (2) majority action clauses; insolvent. Financial institutions realized that the
(3) sharing clauses; and (4) acceleration clauses. enforcement of claims by means of initiating an
Within CACs, majority action clauses are the type insolvency procedure or by foreclosing on a security
of clauses that have been strongly pursued by the was not always the best possible solution from a
official sector and many academics, and they were commercial point of view and that participating in a
effectively incorporated in bond issuances. Majority restructuring exercise might prove more beneficial.
action clauses enable the amendment of any of As result of this change of attitude, a large
the terms and conditions of the bonds, including number of Turkish financial institutions entered
the payment terms, if the required majority therein into a consensual framework agreement for the
established is obtained. restructuring of the debts of large enterprises (the
Anadolu Approach focused on the restructuring of
37. Herd behavior is a concept of behavioral finance debts of small and medium sized enterprises).
that describes how individuals in a group can act
collectively without centrally organized direction 44. As a result of the 1998 financial crisis that hit
just by following the (rational or irrational) actions Indonesia and to facilitate voluntary corporate
of others (usually a larger group). The larger group restructurings, the Jakarta Initiative was established
has to start by the action of an individual that then as a set of principles based on the London Approach
is followed by others, even if it does not transcend to serve as a guide to out-of-court voluntary
to a degree that it becomes a “herd” it can be corporate debt restructurings.
sufficient to become a holdout problem. 45. The Insolvency and Debt Resolution team of
38. David Clementi, “Debt Workouts for Corporates, the World Bank Group assists governments in
Banks and Countries: Some Common Themes,” developing OCW frameworks, including developing
Speech to the INSOL International Sixth World principles that are most suited to the country
Congress held at the Hilton Metropole Hotel in context.
London on 19 July 2001, 2. 46. The term “relevant creditor” means any creditor
39. Pen Kent, “Corporate Workouts—A U.K. Perspective,” whose rights are to be affected by any proposed
International Insolvency Review 6 (1997): 165–182, restructuring plan. (See comments under
available online at http://wss30.reformkurumsal Principle 1).
.com/Document%20Library/london_approach.pdf. 47. INSOL International, Statement of Principles for
40. European High Yield Association, “Submission on a Global Approach to Multi-Creditor Workouts,
Insolvency Law Reform” (2008), 3. In particular, it London, October 2000, https://www.insol.org/pdf/
has been noted that it is essential “to create the Lenders.pdf.
conditions that will best allow both informal and 48. Ibid., 2.
formal and insolvency representative-centered
rescue systems to operate at lowest cost and 49. For example, a formal insolvency procedure such
highest effectiveness.” as an in-court restructuring (if available under local
law) or liquidation.
41. Clementi, “Debt Workouts for Corporates, Banks
and Countries: Some Common Themes,” 2. 50. Expedited restructuring mechanisms can provide a
way to come to an agreement among a requisite
42. As result of the 1997 financial crisis that hit Thailand, number of creditors and then apply to a court
the central bank (Bank of Thailand) set up out-of- to enforce that agreement against dissentient
court processes for the restructuring of distressed creditors.
enterprises. In 1998, it was decided to establish the
Corporate Debt Restructuring Advisory Committee 51. Note that the reference is to an “initial” standstill
(CDRAC), which was followed by the establishment period. It is very common for the standstill period
of the Thai Asset Management Corporation (TAMC) to be extended. Indeed, one of the advantages of
entrusted with the facilitation of the restructurings the out-of-court approach to workouts is that they
and the monitoring of the restructuring processes. enable the debtor to avoid the time limits (which
In this context, the CDRAC developed a framework are often unrealistic) imposed by laws governing
of voluntary principles and timelines for voluntary the conduct of restructurings conducted within the
workouts (known as the Bangkok rules) which context of a formal court proceeding.
Endnotes 105
52. INSOL International, Statement of Principles for a way that safeguards the interests of creditors. The
Global Approach to Multi-Creditor Workouts, 2. main issue is the lack of a clear definition on the
“vicinity of insolvency” (and its variants) although a
53. In some jurisdictions, there is legislative provision wide pool of case law has shed some light on the
for a statutory form of moratorium on creditor matter (see e.g., Colin Gwyer and Associates Ltd v
claims. London Wharf (Limehouse) Ltd [2002] EWHC 2748
54. INSOL International, Statement of Principles for a (Ch) at 74; Nicholson v Permakraft (NZ) Ltd (1985)
Global Approach to Multi-Creditor Workouts, 2. 3 A.C.L.C. 453 at 459; Re New World Alliance [1994]
FCA 1117 at 66; Brady v Brady (1988) 3 B.C.C. 535 at
55. Ibid., 2. 552; Re Horsley and Weight Ltd [1982] 1 Ch. 442 at
455; Geyer v Ingersoll Publications Co, 621 A 2d 784
56. Ibid., 3. (Del Ch, 1992); Credit Lyonnaise Bank Nederlander,
57. Ibid., 3. NV v Pathe Communications Corp (1991) Del Ch
WL 277613). However, it is of worthy note that this
58. Ibid., 3. is a matter on which there is no uniformity. The
Supreme Court of Canada rejected this theory,
59. Ibid., 3. deciding that directors do not change allegiances
60. The debtor must appreciate that in the event when the corporation comes under financial
that there are no assets capable of being offered pressure. In People’s Department Stores Ltd. (1992)
as security for additional funding, the creditors Inc., Re, 2004 SCC 68; [2004] 3 SCR 461 at para 43
are unlikely to be willing to provide it. In these the Supreme Court of Canada stated that there
circumstances, it may be necessary for the debtor’s is only one beneficiary of the directors’ fiduciary
shareholders to introduce additional equity, provide duties, the corporation itself, stating “[a]t all times,
personal guarantees or similar security. directors and officers owe their fiduciary obligation
to the corporation.”
61. The behavior of creditors in an out-of-court
workout scenario is very often based on an 67. European Commission, “Consultation on the Future
assumption (itself based on experience) that an of European Insolvency Law,” Work Programme for
out-of-court approach is to be preferred (as it is 2012. Accessed date May 20, 2016. http://ec.europa
less value-destructive) to any in court procedure. .eu/justice/newsroom/files/insolvency_en.pdf.
62. The plan may, for example, call for selling assets, a 68. European Commission, “Commission Recommendation
repayment schedule for creditors, debt forgiveness, of 12.3.2014 on a New Approach to Business
gaining additional financing, and guarantee and Failure and Insolvency” (C(2004)1500). Accessed
loan capitalization. June 3, 2016. http://ec.europa.eu/justice/civil/
files/c_2014_1500_en.pdf.
63. Elizabeth Warren and Jay Lawrence Westbrook,
The Law of Debtors and Creditors (Little, Brown 69. Bankruptcy law (r.d. 16-3-1942, n. 267) “Legge
and Company, 1996), 57. Fallimentare.”
64. Philip R Wood, Principles of International Insolvency, 70. Carpus Carcea et al, “The Economic Impact of
2nd ed. Vol. 1 (Sweet & Maxwell, 2007) 36. The Rescue and Recovery Frameworks in the EU.”
author observes that one of the main advantages 71. The EC’s report was based on a study by INSOL
of judicial reorganizations is “the fact that the Europe and commissioned by the EC. The INSOL
business does not have to be broken up, so that Europe study examined restructuring mechanisms
potentially the cataclysmic fall in values commonly in European Union Member States. The study
experienced on a fire-side bankruptcy sale is not delves into the details of recommended elements
so serious.” of pre-insolvency frameworks and provides more
65. Ibid., 41. information about each specific element than the
EC’s report. See the full study: Stefania Bariatti
66. For example, the United Kingdom and other and Robert van Galen. “Study on a new approach
common law jurisdictions have concluded that to business failure and insolvency—Comparative
directors have primary duties to shareholders but legal analysis of the Member States’ relevant
once a corporation enters the “vicinity of insolvency,” provisions and practices: TENDER NO. JUST/2012/
the directors fiduciary responsibilities shift so that JCIV/CT/0194/A4.” INSOL Europe for the European
their duties are owed to the enterprise’s creditors. Commission. Published Dec. 05, 2014. https://www
The basis of this theory is the proposition that once .insol-europe.org/eu-study-group-publications.
a enterprise is near insolvency, its primary economic
stakeholders are its creditors and therefore, 72. Giorgio Cherubini, “Restructuring and Insolvency
directors should exercise business judgment in a in Italy: Overview,” Restructuring and Insolvency
106 A Toolkit For Out-of-Court Workouts
Global Guide 2015/16. Thompson Reuters, 82. Postpetition Disclosure and Solicitation, United
http://uk.practicallaw.com/8-501-9255.http:// States. Title 11 U.S. Code, Sec. 1125(g) et seq. 2012
uk.practicallaw.com/8-501-9255#a988693. ed. “Notwithstanding subsection (b) [pre-approval
by the Bankruptcy Court of disclosure statements
73. Lawyer in Croatia, “Changes in Bankruptcy Law,” when solicitation is done after the commencement
September 22, 2015, http://www.vaic.eu/news- of the Chapter 11 case], an acceptance or rejection
and-publications/changes-in-bankruptcy-law/. of the plan may be solicited from a holder of a
74. Royal Decree-law 1/2015, dated February 27th, on claim or interest if such solicitation complies with
second chance mechanisms and the reduction of applicable non-bankruptcy law and if such holder
the financial burden and other measures of a social was solicited before the commencement of the
interest. Official State Gazette No. 51, February 28th case in a manner complying with applicable non-
2015 Sec. I. Page 19058. bankruptcy law” (emphasis added).
75. Office of the Commercial Courts in Paris, 83. Frisby, “The Second-Chance Culture and Beyond:
http://www.greffe-tc-paris.fr/en/insolvency-- Some Observations on the Pre-pack ‘Contribution,’”
proceedings/ad-hoc-mandate-or-conciliation Law and Financial Markets Review 3, no. 3 (2009):
.html. 246.
76. Rod Cork and Marc Santoni, “France: Restructuring 84. Claire Mowbray, “Pre-packs—the Debate ‘Continues,’”
and Insolvency Procedures,” International Financial Corporate Rescue and Insolvency 6 (2013): 179.
Law Review (March 1, 2009), http://www.iflr.com/ 85. BCR: Rescue, Recovery & Turnaround. “What
Article/2166556/France-Restructuring-and- is a pre-pack administration?” UK’s Association
insolvency-procedures.html. of Business Recovery Professionals from http://
77. Hélène Bourbouloux, and Arnaud Pérès, “France.” www.bcr-insolvency.co.uk/what-is-a-pre-pack-
The International Insolvency Review, ed. by Donald S. administration/. Accessed 6 June 2016.
Bernstein (London: Law Business Research, 2013); 86. Federal Rules of Bankruptcy Procedure, United
See also “La Reprise de la SAUR par Trois Banques States. Part II—Officers and Administration; Notices;
approuvée.” Le Monde, July 27, 2013, sec. Économie. Meetings; Examinations; Elections; Attorneys and
http://www.lemonde.fr/economie/article/2013/07/ Accountants. § Rule 2018(b): Intervention; Right to
26/la-reprise-de-la-saur-par-trois-banques- Be Heard.
approuvee_3454251_3234.html.
87. Jay M. Goffman, Mark A. McDermott, and Kurt
78. Eva Hupkes, “Special Bank Resolution and Share- Ramlo, “United States—Practice: American
holders’ Rights: Balancing Competing Interests,” Bankruptcy Reform and Creativity Prompt the
Journal of Financial Regulation and Compliance 17, In re Blue Bird Body Company One-Day Pre-
no. 3 (2009): 292. The author underlines that “such packaged Plan of Reorganization” in Expedited
arrangements could set out contingency plans for Debt Restructuring: An International Comparative
circumstances in which the institution becomes Analysis, ed. Rodrigo Olivares-Caminal (The
financially distressed and include a series of pre- Netherlands: Kluwer Law International, 2007), 457.
commitments to reorganization measures.”
88. For more on Blue Bird, see Ibid.
79. Finch, “Pre-Packaged Administrations: Bargains in
the Shadow of Insolvency or Shadowy Bargains,” 89. On this matter, see Barbara F.H. Rumora-
Journal of Business Law (2006): 568. “[T]he pre- Scheltema, “Dutch Pre-pack Alternatives on the
pack is a process in which a troubled company and Rise” (2016) International Corporate Rescue, 11 (1),
its creditors conclude an agreement in advance of pp. 28–30.
statutory administration procedures” and, “the pre-
pack has the effect of establishing a deal in advance 90. Ibid., 28. If the court is willing to provide this
of the appointment of an administrator and it information it will usually reserve the right to
allows statutory procedures to be implemented at refrain from appointing that individual in the event
maximum speed.” the enterprise does not cooperate with the silent
trustee prior to the insolvency.
80. John J. McConnell, and Henri Servaes, “The
Economics of Pre-packaged Bankruptcy,” Journal 91. Negotiations took place between the trustee and
of Applied Corporate Finance 4, no. 2 (1991): 93. the envisaged purchaser (a newly incorporated
entity), as well as between the trustee and the
81. Richard F Broude, “How the Rescue Culture Came bank. There were also discussions where all three
to the United States and the Myths That Surround of these parties were present.
Chapter 11,” Corporate Rescue and Insolvency
Journal 16, no. 5 (2000): 194.
Endnotes 107
92. “Case C-126/16, Federatie Nederlandse 104. Biswarup Gooptu, “In a First, Future Financial
Vakvereniging—Worker Rights, Failing Firms and Pre- Services Set to Part-pay Debt,” The Economic
pack Administration,” EU Law Radar, March 3, 2016, Times, August 7, 2013. http://articles.economictimes
http://eulawradar.com/case-c-12616-federatie- .indiatimes.com/2013-08-07/news/41168049_1_
nederlandse-vakvereniging-worker-rights-failing- sks-microfinance-corporate-debt-micro-loans.
firms-and-pre-pack-administration/.
105. Adriaanse, and A.M. Griffioen, “The Malaysia
93. Taylor Wessing, “Dutch Court Asks for Preliminary Turnaround Workout Game 2016,” April 2016.
Rulings with Regard to Transfer of Bankrupt Daycare
Company,” Lexology, March 8, 2016, http://www 106. The United Nations Commission on International
.lexology.com/library/detail.aspx?g=b2ad73aa- Trade Law (UNCITRAL). Legislative Guide on
5be4-4459-88d5-272e32ea8a64. Insolvency Law, (New York: United Nations
Publication, 2005), 5, http://www.uncitral.org/pdf/
94. In a “pre-arranged rescue plan,” the debtor files english/texts/insolven/05-80722_Ebook.pdf.
for an insolvency-related reorganization plan
after negotiating the terms of a restructuring with 107. Ibid., 4.
its major stakeholders. The debtor and certain 108. Law, ed. “Foreclosure.” A Dictionary of Law Oxford
stakeholders will have entered into a lock-up or University Press, 2015.
plan-support agreement setting forth the salient
terms of the restructuring. Once the debtor has 109. Peter Moles, and Nicholas Terry, eds. “Going Concern.”
obtained the support of its major stakeholders, The Handbook of International Financial Terms.
it then will enter the reorganization process and (Oxford: Oxford University Press, 1997), http://www
move fairly quickly to have the court approve the .oxfordreference.com/view/10.1093/acref/9780198
restructuring, as contained in the debtor’s plan of 294818.001.0001/acref-9780198294818-e-3538.
reorganization.
110. UNCITRAL, Legislative Guide on Insolvency Law, 7.
95. Melissa Jacoby, “Prepacks and the Deal-Litigation
Tension,” American Bankruptcy Institute Journal 23, 111. INSOL International, Statement of Principles for a
no. 2 (2003): 34. Global Approach to Multi-Creditor Workouts, 5.
96. Garrido, Out-of-Court Debt Restructuring, 49. 112. Ibid.
97. William Peter Mako, The Legal and Policy Framework 113. Ibid.
for Corporate Restructuring (Washington, DC: 114. World Bank Group. “Alternative Dispute Resolution
World Bank, 2004). Guidelines.” Investment Climate Advisory Services
98. Corporate Debt Restructuring Mechanisms, of the World Bank Group. Washington: The World
available at http://www.cdrindia.org/. Bank Group, 2011, page 63, http://siteresources.
worldbank.org/INTECA/Resources/15322_ADRG_
99. Nearly all state banks take part in CDR. Private Web.pdf.
banks have the option of participating.
115. Law, ed. “Moratorium.” A Dictionary of Law.
100. “CDR Performance up to Mar 2016,” Corporate
Debt Restructuring Mechanism, March 31, 2016, 116. UNCITRAL, Legislative Guide on Insolvency Law, 21.
http://www.cdrindia.org/statistical.htm. 117. Ibid., 29.
101. Sargam Jain, Kanwalpreet Singh, and Susan 118. Ibid., 7.
Thomas, “Evaluating the Impact of the Corporate
Debt Restructuring Scheme,” Presented at the 119. Law, ed., “Debt Rescheduling,” A Dictionary of
6th Emerging Markets Finance Conference, Finance and Banking (Oxford University Press,
Finance Research Group, Indira Gandhi Institute 2014).
of Development Research, Bombay (December 17,
120. Frisby, “Corporate Rescue,” The New Oxford
2015).
Companion to Law, ed. by Peter Cane and Joanne
102. Pankaj Agarwal, Ravi Singh, and Aadesh Mehta. Conaghan (Oxford: Oxford University Press, 2008).
“BFSI Analyst Report.” Ambit Capital Pvt. Ltd.,
121. UNCITRAL, Legislative Guide on Insolvency Law, 7.
July 13, 2015.
122. Wood, Principles of International Insolvency
103. “Essar Steel Comes Out of CDR Debt.” The Economic
(London: Sweet & Maxwell, 2007), 629.
Times, June 2, 2006. http://articles.economictimes
.indiatimes.com/2006-06-02/news/27434202_1_ 123. UNCITRAL, Legislative Guide on Insolvency Law, 7.
essar-steel-corporate-debt-restruc turing-cdr-
debt.
108 A Toolkit For Out-of-Court Workouts
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