How Courts and Governments can facilitate Out of Court Workouts

Transcription

1 How Courts and Governments can facilitate Out of Court Workouts March 3, 2011 World Bank Group Investment Climate Restructuring & Insolvency Team Andres F. Martinez

2 Formal and Informal remedies to distress Origin of bankruptcy. Stigma Banca rotta, Greeks slavery for debtors, US and UK had debtors prisons and some Middle East economies still have. Civil punishments, including restrictions on movement, for owners/heads of bankrupt businesses continue in many bankruptcy laws Bankruptcy has been linked to civil death and carries great shame in many cultures. E.g. Honduras. Bankruptcy laws are often more focused on punishment of debtors than economic rehabilitation. Modern laws tend to modify this approach. 2 4 Jostarndt, Philipp and Zacharias Sautner. Out-ou-Court Restructuring verus Formal Bankrutpcy in a Non- Interventionist Bankruptcy Setting. Review of Finance (2009), 1-46.

3 Out-of- Court mechanisms vs. formal insolvency A firm that needs to restructure its debt during financial distress faces two choices. It can privately renegotiate the affected debt claims in an out-of-court workout or file for formal bankruptcy to resolve its distress through an in-court proceeding 1. Unlike formal bankruptcy proceedings, OCW: Does not carry a stigma for debtor; Does not change legal entitlements; Are consensual and focus on operational aspects, not only financial; Are appropriate only for viable company debtors; Are normally faster and cheaper; Are more flexible 3 4 Jostarndt, Philipp and Zacharias Sautner. Out-ou-Court Restructuring verus Formal Bankrutpcy in a Non- Interventionist Bankruptcy Setting. Review of Finance (2009), 1-46.

4 Why using the CDRGs? Why is it necessary/convenient a formal system (i.e. the Guidelines), instead of leaving it to each individual parties to negotiate? It provides a systemic approach, and saves creditors and debtors for having to renegotiate the basic framework within which the negotiations will take place banks agree that they will use this method when feasible. Attacking debtor s assets separately creates a jungle Lenders will approach financially troubled firms this way and it requires debtor education in order to achieve expected results. Collective agreement among the creditors has already been done, so negotiations can focus on this particular debtor. It makes the system more predictable for all the parties. 4

5 Why using the CDRGs cont? Formal insolvency proceedings can be slow- might prevent effective rescue of a troubled businesses and assets devaluate. Bankruptcy filings prevented; court congestion reduced If there is a bankruptcy filing after out of court negotiations, agreement reached faster within bankruptcy Facilitation of equity restructuring, especially debt/equity conversions; Encouragement of follow-on operational restructuring; Access to financing for working capital and essential investment needs; Faster and cheaper than formal insolvency proceedings 5

6 How can the Goverment help out of court restructurings succeed? By enabling the legal framework in the following aspects: The institutionalization of laws that do not penalize debt restructuring or debt forgiveness, especially eliminating adverse tax consequences; Having a legal system that provides the credible threat of debt collection by creditors or referral to liquidation, if no collective agreement is achieved (i.e. eliminating delays). Better results have been achieved in countries that build upon government support and establish public entities that facilitate the corporate restructuring process. By allowing flexible solutions (i.e. debt equity swaps). 6

7 How can the Courts help out of court restructurings succeed? By making sure that judicial procedures are conducted in good faith by both parties and discouraging recalcitrant debtors from useless delays. By streamlining procedures in a way that debt collection by creditors becomes easier encouraging debtors to address their operational issues. By encouraging the parties to find consensual solutions and referring cases to alternative systems of dispute (i.e. mediation). By allowing flexible solutions (i.e. debt equity swaps) when laws are silent and facilitating pre-packaged agreements. 7

8 Latvia: rolling out Corporate Debt Restructuring Guidelines (CDRGs) Assistance with the creation of CDRGs Co-hosted workshop to train stakeholders on out-of-court workouts Inclusion of private and public sector in roll-out Guidelines promulgated in August 2009; Provide a non-binding set of principles for multi-creditor workouts; A year later, the top 4 banks, holding 62.9% of loan market shares in Latvia suggest that the CDRGs is a useful tool that provides a framework to address widespread debt distress in the corporate sector. 8

9 9 Lessons from other Crises: East Asian Financial Crisis and Out-of-court corporate debt restructurings

10 East Asian experience Used London Approach as a foundation for out-of-court workouts during the East Asia Crisis Other types of OCW frameworks were adopted by the Korea, Malaysia, Thailand and Indonesia 4 : In Korea Out-of-court promoted by Financial Supervisory Commission, where 210 local financial institutions signed a Corporate Restructuring Agreement. This agreement contemplated a standstill (1-3 months, depending on due diligence), A seven-person Corporate Restructuring Coordination Committee to arbitrate inter-creditor differences, establish the price of the debt to be bought out by other creditors and imposing non-compliance fines up to 30% of the credit. 4 Mako. William P. Uses and Limitations of Out-of-Court Workouts. Global Forum on Insolvency Risk Management

11 Malaysian approach In Malaysia, Central Bank set up the Corporate Debt Restructuring Committee and the Danaharta Asset Management Company. The creditors committee can appoint independent consultants to help in the development and/or review of workout options; Creditors must observe a standstill period of 60 days (extendable); Existing credit lines must be kept open and priorities preserved; CDRC acted as an advisor and mediator between the debtors and the creditors. As of mid-2001, CDRC had resolved 37 of the 75 cases referred to it, representing MYR28.5 billion out of total referrals of MYR47.5 billion in debt. Mako. William P. Uses and Limitations of Out-of-Court Workouts. Global Forum on Insolvency Risk Management

12 Thailand Corporate Debt Restructuring Advisory Committee ( CDRAC ) was set up in 1998 as a Consensual out-of-court workouts approach but it proceeded slowly and had minimal impact; In 1999, BOT promoted a more contractual approach and established the CDRAC office for high profile OCW cases Promulgated civil contract on Debtor-Creditor Agreements (DCA) and Inter-Creditor Agreement ( ICA ) OCW focused heavily on financial vis-a-vis operational restructurings DCA Signatories agreed on: A six- to eight-month schedule for developing and approving a restructuring plan; Information sharing and disclosure; 75% Creditors approval. Mako. William P. Uses and Limitations of Out-of-Court Workouts. Global Forum on Insolvency Risk Management

13 Indonesia Jakarta Initiative Task Force (JITF), was established as a state agency to facilitate OCWs ; In April 2000, the JITF was given some ability to orchestrate regulatory relief or regulatory sanctions; Established time-bound mediation process Outcome of JITF cases concluded: Mako. William P. Uses and Limitations of Out-of-Court Workouts. Global Forum on Insolvency Risk Management

14 Indonesia (Time-bound mediation) Key features The debtor and creditors were given an opportunity to agree on a mediation schedule; Failing such agreement, a mediation schedule would be set by the JITF; The JITF would monitor a case s progress relative to the schedule and mediate disputes as appropriate; JITF could terminate the mediation and file a report with the government s Financial Sector Policy Committee; The Financial Sector Policy Committee could refer an uncooperative debtor to the Attorney General for initiation of bankruptcy proceedings. Mako. William P. Uses and Limitations of Out-of-Court Workouts. Global Forum on Insolvency Risk Management

15 Lessons: Areas where court and government are key for OCW success. Lessons An out-of-court workout framework can be useful for the financial stabilization of distressed companies; A controlled standstill is preferable; Operational restructuring has received much less emphasis in the four crisis countries than has financial restructuring; Courts can make sure that a credible threat of total loss from foreclosure, liquidation, and/or receivership is needed to encourage debtor cooperation with court-supervised rehabilitations or out-of-court workouts. An effective out-of-court workout scheme needs a reliable legal mechanism for resolving inter-creditor differences and forcing equity restructuring that works well in practice; Significant tax, legal, and regulatory impediments to corporate restructuring must be addressed; Mako. William P. Uses and Limitations of Out-of-Court Workouts. Global Forum on Insolvency Risk Management

16 THANK YOU Questions? Andres F. Martinez: 16