Restructuring

Insolvency Context

The alternatives to a workout may be liquidation, receivership or examinership.  If a lender has a debenture over all assets, it may be in a position to secure control over the entire undertaking.

Examinership gives a period in which to formulate a proposal for the survival of a business.  The rights of creditors are frozen for a period, usually up to 100 days.  Provided an arrangement is supported by one class of creditors, it may be forced on others.

Standstill

A standstill agreement may be for a relatively short period in order to allow assessments of the position.  It will generally provide for equality of treatment for creditors and for maintenance of the existing position.

Generally, no repayments or prepayments are permitted other than pro-rata.  It may be provided that no new security is to be granted nor are to be asset disposals, enforcement of guarantees nor set-off. There may be provisions regulating the disclosure of information.

The standstill agreement has many of the same effects as insolvency provided that all the major creditors are a party.  It usually preserves the principle of equality.  It avoids the cost and reputational damage of insolvency.

The standstill agreement will be typically short.  It may be terminated by agreement early.  There may be provision for a majority of lenders to make this and other relevant decisions.

The principal borrowers may agree not to petition for examinership.  There may be issues as to whether and to what extent this agreement is enforceable under companies legislation.

The standstill period will be used to review the borrower’s position.  This will consider the entirety of its structure, assets and liabilities, trading position, particular risks and principally the debt and loan position.

The lenders may appoint an accountant or other to investigate the borrower’s prospects and future viability.  It may prepare cash flows and a business plan for a feasible workout program.  This may involve the disposal of assets.

Agreement of Creditors

The agreement may provide for a disposal program to reduce debt and get rid of loss-making assets and activities.  Standstill agreement may deal with the sharing of the proceeds of disposal.  Existing loans may be restructured. There may be an introduction of new funds by the borrower or by the syndicate members.

This may involve an extension of maturities; roll-up of interest, write-off of principal or interest or conversion of debt to equity.  There may be an increase in margins and commitment fees to compensate for increased risks.

There may be a steering committee or coordinator appointed by the lenders.  Decisions may require unanimity in the case of the most significant undertakings, a majority in the case of more regular ongoing matters.  Certain administrative matters may be delegated to the agent bank, steering committee or coordinator.  There will usually be warranties and representations, breach of which constitutes an event of default.

There may be provision for change of management either partial or total.  The group will be generally required security over all assets if this does not already exist.  There may be fixed and floating charges.  New guarantees may be required.

The new security risks in terms of fraudulent preference, fraudulent disposition of property and provisions invalidating floating charges within certain periods before insolvency.  These are rules which seek to maintain just equality between creditors.  Most of the provisions are triggered by the company being insolvent.  A fraudulent disposition of assets may take place notwithstanding the company is not insolvent.

Transactions can be set aside in a summary manner in a subsequent liquidation. The restructuring arrangements will need to be structured so as not to offend these provisions.

Role of Nominee Directors

The bank or steering committee may wish to appoint director’s to the lender, monitor the position.  There is a risk that the appointee may be deemed a shadow director.  This is a person who was neither formally appointed nor necessarily held out as a director.  However, they may be treated as a director for the purpose of certain personal sanction.  Shadow directors may be subject to liability for fraudulent or reckless trading.  He may be restricted or disqualified as a director.

The initial phases of the restructure are unlikely to involve the bank or a syndicate as a shadow director.  However, ongoing monitoring conditions lead to the risk that the bank or some of its officers or employees may be shadow directors.

If for example, the bank has control over operational matters and imposes requirements that affect operational matters, a signatory to bank accounts and can veto key decisions, it might be deemed to be a shadow director.

It is desirable that the company is independently advised and the directors continue to act in the best interest of the company albeit in straightened circumstances. It is desirable to keep the detailed minutes showing the propriety of decisions.