Newly established principles provide guidance for the cooperation between all involved banks in extra-judicial restructurings.
1. The context
In times of financial turbulences such as those witnessed over the past few years, taking a sound and comprehensive approach to addressing a company's crisis appears vital to preserving the company's existence, safeguarding jobs, and circumventing negative consequences for the affected business location. In this context, extra-judicial restructurings, which take place before and aim to avoid the opening of insolvency proceedings, have gained enormous momentum.
As the major creditors, banks play a crucial role in all restructuring proceedings. The extra-judicial restructurings of the past few years have shown that reliable cooperation amongst creditors when they are working with financially troubled companies is crucial in minimizing damages for all participants. A successful reorganization not only protects banks and other creditors, but also avoids considerable negative consequences for the broader economy and society.
However, the practice of manifold restructuring proceedings in recent years has demonstrated that individual interests are often placed above joint interests.
This regrettable tendency called for rectification: Together with three leading Austrian banking groups (Raiffeisen Bank International, Erste Group Bank, and UniCredit Bank Austria), Schoenherr developed an innovative restructuring guide for Austria which was published in September 2013.1 This guide contains eight non-binding principles that aim to coordinate the steps taken by banking institutions in restructuring proceedings and thereby render the proceedings predictable and profitable for all stakeholders involved.
Furthermore, the guide's two annexes contain valuable advice for the particularities related with the trade credit insurance and leasing sectors.
2. The principles
The principles apply to the first "Standstill Period", which is the short period of time in which a company's capacity to be restructured is assessed by its creditors. The main focus of the guide's principles lies on those restructurings that have a total volume exceeding EUR 30 mln and involve at least three banks. The principles explicitly do not presume to anticipate the self-dependent decisions of all stakeholders involved. Rather, they express a common understanding that constructive and reliable cooperation in extra-judicial restructurings might be able to preserve values on both the debtor's and the creditors' side.
2.2 One example
"Principle No. 1: In the Standstill Period, all creditors should cooperate and provide the debtor enough time to obtain and evaluate information about its economic status, and to formulate and assess proposals for restructuring measures."2
Implementing this principle involves banks being released from bank secrecy regulations in order to enable a direct exchange of information. In a next step, a banking meeting is arranged at which the debtor reveals its real economic situation. The same information is provided to all stakeholders at a subsequent All Lenders' Meeting. There, the Standstill Period is agreed upon, and the start of the period, its duration and milestones within the period are fixed. The milestones refer to the dates on which the debtor is obliged to mandate external advisors and present a written restructuring concept. The restructuring concept's economic and legal requirements are to be established during the Standstill Period in mutual cooperation among the debtor, the creditors, and the advisors. The concept's substance must be sufficient for the creditors to reach a careful decision on whether to support the restructuring plan. In this context, the stakeholders must additionally decide if a prognosis for the company's continued existence will be prepared in order to facilitate the creditors' decision.
The principles reflect the ambition to secure the creditors' financial position without disadvantaging any single creditor. On the other hand, the creditors shall, in a mutually coordinated effort, demonstrate a willingness to help the company overcome its crisis. This support might be generated by extending due liabilities or by granting additional bridge loans.
However, the cornerstone to a successful restructuring is cooperation: An initiative by a single bank that leaves the others behind will not trigger the expected improvement. A coordinated approach towards restructuring proceedings will not only enhance the debtor's chance for a successful recovering, but also strengthen the position of all banks involved.
Unquestionably, legal advice, for both the company and the banks, is strongly recommended to calculate and minimize all potential risks associated with restructuring procedures. The insolvency & restructuring team at Schoenherr has a very strong record in this area.
Quote: Extra-judicial restructurings, which take place before and aim to avoid the opening of insolvency proceedings, have gained enormous momentum.
1. The English version of the guide is available at http://www.schoenherr.eu/news-publications/publications/guidelines-for-restructuring-in-austria; the German version is available at http://www.schoenherr.eu/news-publications/press_releases_pdfs/schoenherr_restructuring-guide
2. See also the "Statement of Principles" of INSOL International.
This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.