What Should I Know About Restructuring & Insolvency

Restructuring and insolvency are crucial concepts in corporate finance, especially when your business faces financial challenges.

When you're restructuring, you remodel your company's financial setup to continue operations. Professionals typically handle this process, aiming for a business turnaround. Key aspects include:

• Renegotiating debts to regain liquidity
• Modifying your asset structure (acquisitions, divestments, joint ventures)
• Adjusting your capital structure (reducing debt, raising debt, repurchasing shares)

Insolvency, on the other hand, is when your company can't meet its debt obligations on time. This might lead to:

• Informal arrangements with creditors
• Bankruptcy protection (court-ordered liquidation)
• Cash flow insolvency (lack of liquid assets)
• Balance-sheet insolvency (negative net assets)

The main difference is this: Restructuring is proactive, focusing on debt renegotiation and financial remodeling to keep your business operational. Insolvency is a condition that may require legal action if unresolved.

Bottom line: Restructuring offers a chance for recovery, while insolvency often precedes bankruptcy. Understanding these distinctions is vital when you're navigating financial difficulties.

Key legal frameworks governing restructuring and insolvency - bankruptcy include:

The Bankruptcy Code (U.S.) provides for reorganization (Chapter 11) or liquidation (Chapter 7) of businesses. Chapter 11 allows you to restructure debts and continue operations under court supervision.

The EU Restructuring Directive aims to harmonize insolvency laws across member states. It focuses on preventive restructuring, second chances for entrepreneurs, and increasing the efficiency of procedures.

The Insolvency Code (Italy) introduces tools like the Negotiated Composition to allow distressed but viable businesses to restructure under expert supervision.

Out-of-court restructurings involve informal agreements between debtors and creditors to modify debt terms without court involvement. These agreements are not binding on non-participating creditors.

Key features include:
- Debtor-in-possession financing for continued operations
- An automatic stay on creditor actions
- The ability to reject unfavorable contracts
- Creditor priority rules for distributing assets
- Court oversight of restructuring plans

Jurisdictions aim to create predictable frameworks that encourage investment while protecting creditor rights. In a nutshell, these frameworks balance stakeholder interests, rescue viable businesses, and promote economic stability.

A company is considered insolvent under UK law when it cannot pay its debts. You can determine this by two primary tests:

1. Cash Flow Test: The company cannot pay its debts as they fall due.
2. Balance Sheet Test: The company's liabilities exceed its assets.

Under the Insolvency Act 1986, meeting either test means the company is insolvent. This can lead to actions like administration, company voluntary arrangements, or liquidation, where the company's assets are sold to pay creditors. If you are a director, you could be personally liable if you continue trading while the company is insolvent.

All in all, understanding these tests can help you take timely action to avoid serious consequences.

If your business is facing financial distress, several options can help you manage the situation:

You can restructure debt by renegotiating the terms of your existing debts. This might involve moving to interest-only payments temporarily or extending payment terms. This option helps you avoid bankruptcy and allows you to negotiate favorable terms with creditors.

A managed wind-down or liquidation involves selling off assets and winding down operations in an orderly manner. This helps you maximize value for creditors and mitigate losses.

A General Assignment for the Benefit of Creditors (ABC) is an alternative to bankruptcy. You transfer assets to an assignee who liquidates them and distributes the proceeds to creditors. This option can be less formal and less costly than bankruptcy.

Bankruptcy provides legal protection from creditors while you restructure your business or liquidate assets. It gives you time to develop a proposal to repay creditors and prevents them from taking immediate legal action against your assets.

Assess your goals and financial position to choose the best option. Consult specialists who can provide unbiased recommendations. They can help identify core issues and devise a plan tailored to your business needs.

At the end of the day, you need to weigh your options carefully and seek expert advice to navigate your financial distress effectively.

Restructuring can help you avoid insolvency proceedings and bankruptcy by taking several strategic steps.

First, you should negotiate with creditors to lower interest rates and extend payment deadlines, making your debt more manageable. Consider a debt-for-equity swap where creditors cancel some debt in exchange for partial ownership of your business, which reduces your liabilities.

Next, implement operational changes to improve profitability through cost-cutting and efficiency measures. Address financial issues quickly to give yourself more options and flexibility.

You should seek help from financial advisors and restructuring specialists to guide you through complex negotiations and planning. Be open with creditors about your situation to build trust and increase their willingness to work with you.

Develop a clear turnaround plan to restore your financial health, showing creditors you are serious about recovery. Transparent communication is key, as it fosters cooperation.

Lastly, by taking these steps, you can preserve jobs, maintain business relationships, and improve your chances of regaining financial stability without formal insolvency proceedings.

Insolvency practitioners help you navigate financial distress. They are licensed professionals who assess your financial situation, mediate between you and your creditors, and implement appropriate procedures.

For businesses, they may act as administrators, liquidators, or receivers. They evaluate your company's finances, sell assets, distribute funds to creditors, and ensure legal compliance. For personal insolvency, they help you manage debt through bankruptcy or voluntary arrangements.

The goal of administration is to rescue viable businesses or achieve better outcomes than liquidation. Practitioners take control of operations, explore restructuring options, and may facilitate asset sales to repay your debts.

Key duties include:

• Analyzing your assets and liabilities
• Developing repayment plans
• Negotiating with your creditors
• Overseeing agreed arrangements
• Balancing the interests of all parties involved

Insolvency practitioners follow strict regulations and ethical guidelines. Their expertise in insolvency laws and commitment to fair resolutions make them invaluable when you face financial difficulties.

Finally, these professionals guide you through financial challenges, ensuring you achieve the best possible outcome.

You have several key rights during restructuring and insolvency:

- Review and object to reorganization plans.
- Maintain collateral rights if you are a secured creditor.
- Form committees to negotiate collectively if you are an unsecured creditor.
- Attend meetings and file claims.
- Challenge debt discharge.
- Advocate for liquidation if restructuring seems unfeasible.
- Participate in rights offerings to purchase equity in the reorganized company.

As a secured creditor, you generally have stronger recovery rights, while as an unsecured creditor, you may receive partial repayment from remaining assets. You can review filings, attend hearings, and pursue fraudulent transfer claims.

Active participation lets you influence decision-making and balance the actions of debtors and insolvency administrators. This is crucial, especially in developing economies with less efficient systems.

You can also:

• Select the insolvency representative.
• Challenge liquidator fees if they seem excessive.
• Appeal decisions on claim payments.
• Claim VAT Bad Debt Relief for written-off debts.

We advise you to consult legal counsel to navigate these complex processes and strategically protect your interests as a creditor.

Big picture, understanding your rights and actively participating during restructuring and insolvency empowers you to secure a fair outcome and protect your interests.

Liquidation and bankruptcy are distinct insolvency procedures with key differences:

• Liquidation applies to companies, while bankruptcy is for individuals.

• Liquidation involves winding up a company's affairs, selling assets, and distributing proceeds to creditors before dissolving the business. It's the final stage for insolvent companies, resulting in closure.

• Bankruptcy is a legal process where an individual is declared unable to pay debts. It typically lasts 3 years and 1 day, during which a trustee may sell assets to repay creditors.

• In liquidation, an external liquidator takes control from directors. All company assets are sold off, and the business ceases to exist after completion.

• Bankruptcy can be voluntary (filed by you) or involuntary (initiated by creditors). It aims to give you a fresh start after discharging debts.

• Alternative procedures like voluntary administration and restructuring focus on debt reorganization and business survival, contrasting with liquidation's goal of orderly company closure.

Understanding these distinctions helps you evaluate appropriate actions when facing financial distress. Liquidation is the only way to completely wind up a company, while bankruptcy provides debt relief for individuals. Overall, knowing the differences between these procedures can guide you toward the best solution for your financial situation.

Recent legislation has significantly impacted restructuring and insolvency practices, often shifting to more debtor-friendly approaches that prioritize reorganization over liquidation.

In the UAE, the new Financial Restructuring and Bankruptcy Law (effective May 2024) introduces a "Preventive Settlement" mechanism. You can negotiate with creditors under court supervision while continuing operations. Expanded definitions, clarified procedures, and increased court authority streamline restructuring plans.

Greece's Insolvency Code (2021) integrates EU Directive 2019/1023, reshaping how you tackle financial inability and creditors' collective payment. This reform aims to boost efficiency in restructuring and insolvency procedures.

Belgium's new insolvency law (September 2023) aligns with the EU Restructuring Directive. It introduces the "herstructureringsdeskundige" (restructuring expert) and modifies amicable agreements, clearly separating restructuring from liquidation processes.

As a final point, these legislative changes create more predictable insolvency regimes, impacting lending practices, business risk assessment, and economic stability in regions undergoing reform.

Cross-border insolvency cases involve complex implications for businesses with international operations facing financial distress. You may encounter jurisdictional conflicts between courts in different countries, making it challenging to coordinate multiple insolvency proceedings. Recognizing foreign court orders can be tricky, complicating asset recovery and equitable distribution among creditors across nations.

Key concerns include determining which country's laws take precedence and handling concurrent proceedings in multiple jurisdictions. You need to navigate mechanisms for cooperation between courts and insolvency professionals internationally. Treatment of foreign creditors and strategies for maximizing value across borders are crucial.

Chapter 15 of the U.S. Bankruptcy Code, modeled after the UNCITRAL Model Law on Cross-Border Insolvency, aims to address these challenges. It promotes cooperation between U.S. and foreign courts, establishes legal certainty for trade and investment, and facilitates efficient administration of cross-border insolvencies.

Two major issues have emerged in U.S. courts since Chapter 15's adoption: the "Center of Main Interests" analysis and the "Public Policy Exception." These aspects significantly impact how cross-border cases are handled and resolved.

For foreign companies seeking relief in the U.S., initiating a Chapter 15 proceeding involves filing a petition through a foreign representative. U.S. courts must recognize the foreign bankruptcy proceeding if the debtor has assets in the U.S., even if they're not substantial. The court then classifies the proceeding as either "foreign main" or "foreign nonmain," affecting the automatic relief granted.

Comity plays a vital role in cross-border bankruptcy cases, influencing how U.S. courts recognize and enforce foreign judicial determinations. The extent of inconsistency between U.S. and foreign bankruptcy laws impacts whether a foreign court's decrees are enforced in the U.S.

To put it simply, you should understand the implications of cross-border insolvency cases to effectively navigate international bankruptcy claims by recognizing jurisdictional conflicts and leveraging Chapter 15 provisions.

Personal and corporate insolvency procedures differ significantly in bankruptcy:

For individuals:
• Bankruptcy applies only to your personal debts.
• You must pass a means test to prove you can't pay.
• Chapter 7 liquidates your assets to pay creditors.
• Certain debts like child support can't be discharged.
• Your credit score is severely impacted long-term.
• The process usually lasts about one year.

For companies:
• Insolvency refers to financial state, not a legal process.
• No means test is required.
• Options include liquidation, administration, and voluntary arrangements.
• Focus is on restructuring debt or liquidating assets.
• Directors may face restrictions if found liable.
• It impacts the company's credit, not your individual credit score.
• The timeline varies based on the chosen procedure.

Key distinctions:
• Personal bankruptcy is a legal status, while corporate insolvency is financial.
• You have fewer options than businesses.
• Corporate procedures aim to save the business if possible.
• Personal bankruptcy affects future borrowing more severely.

In short, personal bankruptcy and corporate insolvency have different procedures and impacts. We advise you to consult a licensed insolvency practitioner to explore your specific options.