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Corporate restructuring or reorganization may be sought in situations where a company is unable to satisfy its debts

Written by: Dr. Mohamed Ibrahim

Article Overview: Corporate restructuring or reorganization may be sought in situations where a company is unable to satisfy its debts

Corporate restructuring or reorganization may be sought in situations where a company is unable to satisfy its debts

Corporate restructuring or reorganization may be sought in situations where a company is unable to satisfy its debts when they become due without affecting the ability of the company to continue business. However, the essential circumstance is the availability of cogent grounds that the company is likely to go into bankruptcy. Restructuring plans may include merger and acquisitions, capital reduction, debt rescheduling, claims enforcement stays, write-offs, rights of secured creditors, rights of unsecured creditors, debts for equity swaps, shareholders' rights and administrative costs. Corporate restructuring under the supervision of the court, unlike informal corporate restructuring limits autonomy in the management of the company as court supervision is required in respect of major business decisions. Again, it limits creditors' to compromise and agree to a flexible debt restructuring as the court shall be bound to exactingly adhere to the prescribed rules to ensure fair and equitable solutions for all parties involved in the restructuring process. Needless to say that a restructuring under court's supervision requires insolvency legislation having transparent procedure, tighter deadlines, clear distinction between restructuring and liquidation procedures, in addition to a judiciary having the required expertise.
It may be said that successful entrepreneurs have superior opinions of their capabilities to manage dealings. They normally assign constructive results to their abilities of decision making. However, self-assurance may be the underlying raison d'être that directors slacken in placing a troubled company in bankruptcy even in situations where it is evident that a company's current liabilities exceeded the fair market value of its current assets. On the other hand, if the rescue attempt is made for a public corporation the result would definitely affect wide latitude of interests. This is because a public corporation is not only a fortune of privately owned rights, but represents interests of a group of people. This may be verified by considering the interests of employees, creditors, suppliers, shareholders, and the local community in which the firm operates.
The public entails that a debtor when becomes bankrupt that signifies the loss of society's confidence. This may be attributed to the grave consequences of the liquidity crisis involving debts unpaid, job losses, and capital destruction. Accordingly, viable ventures should be offered a chance to reorganize excluding situations where dishonesty or fraud could be established. That is to say a fresh start may be declined in cases where the bankrupt conduct embraces entering on any debt commitment without anticipating ability to pay it, neglecting to keep proper books of accounts, undertaking business transactions subsequent to knowledge of his insolvency, and any misconduct which would be deemed as contributing to his bankruptcy. In such an instance the misconduct must provide glaring evidence of neglect to his business affairs. On the other hand, bankruptcy may result from misfortune without any misconduct from the part of the bankrupt on the basis of fair assessment of pre-bankruptcy behavior. Misfortune may arise in situations where the bankruptcy was a result of some accident over which the bankrupt had entirely no power.
The reorganization goal is to preserve commercial morality. It is an option which restricts employing insolvency as an easy solution for those who can bear with composure the disgrace of their own failure. Again, insolvency laws must not be considered as a means of discharge from a debt, but an instrument in the process of debt recovery. It should be considered as the final option for the enforcement of obligations. In contemporary society it may be positive to support rehabilitation of debtors to the effect that the period of restructuring shall be consummated on the shortest possible period.
It is submitted that the shareholders' interest remain the primary goal of directors. Directors' are only bound to take reasonable care to ensure the interests of shareholders. They are not legally obliged to serve the interests of non-shareholders. However, it would be a helpful attempt if directors initiated a scheme of arrangement before actual insolvency. Directors, accountants and legal advisors may be involved at an early stage instead of concealing or misrepresenting the company's true statement of insolvency. The act of concealing a company's low financial standing may extend the life of an insolvent company but would not ultimately avoid its death.
Restructuring must focus on attempts to achieve substantial operational changes in the debtor business rather than simple financial restructuring of balance sheets. The purpose of a scheme of arrangement is to provide a company sufficient time to restructure so as to avoid liquidation in situations where evidence of an intimidating liquidity crisis is expected. A financially troubled company is insolvent if it is reasonably expected to run out of liquidity within a reasonable nearness of time which is sufficient to implement a restructuring process. That is to say the restructuring process arises in a situation where it is likely that a liquidity crisis shall take place to the effect that the company will not be able to pay its debts when they become due in the future. In such a situation a scheme of arrangement or a filing for a stay of proceedings may the appropriate action.
The procedure in connection with restructuring and rehabilitation is governed by statutory provisions in each jurisdiction. A composition and scheme of arrangement is considered a major route of emergence from bankruptcy. The arrangement requires an agreement between a company about to be or in the course of being wound up voluntarily and its creditors. Such an arrangement is binding on both the company and its creditors. In most jurisdictions, the arrangement must be sanctioned by an extraordinary resolution of the company and the creditors must accede to the arrangement by three-fourths in number and value. Again, in the instance a company is being wound up by the court, the liquidator may with the sanction of an extraordinary resolution of the company, approval of three-fourths in number and value of the creditors and the sanction of the court make any compromise or arrangement with the creditors. In effect the statutory provisions dealing with composition and a scheme of arrangement may be employed as a process for restructuring a company either before or after it has been placed in liquidation. However, when a company's debts are approximately equal to its liquidation value, secured creditors will insist on a swift liquidation since they would ensure full payment or something near to be entirely paid. On the other hand, shareholders will favor a lengthy restructuring in anticipation of receiving something instead of absolute nothing.
The crucial matter is how a restructuring process succeeds in providing creditors with full payment. This may be resolved by addressing the likely results between a piecemeal sale and a going concern. A foreclosure procedure would unavoidably mean selling the company in distress on a piecemeal basis; however this option may be chosen if it is far away to rescue the company. A restructuring procedure conducted on an efficient manner is expected to ensure that creditors will be fully paid. The foreclosure procedure would seal the likelihood of providing the company in distress with a chance of rehabilitation. Some creditors may in expectation of recovering their whole debts inject some money for rescuing the company in distress. Needless to say, the restructuring procedure would not lock out foreclosure procedure. If efforts to rescue the company in distress failed, the company would finally finish up in liquidation. In situations where the value of the company in distress is equal to the debt owed to the creditors, unsecured creditors would not resist the restructuring process on the ground that if the company in distress is to be sold piecemeal, the unsecured creditors would probably get nothing. Once more, there would be no cogent grounds for tax authorities, shareholders, management and employees to raise claims during the rehabilitation process.

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Article Tags: administrative costs, autonomy, business decisions, circumstance, constructive results, corporate restructuring, court supervision, creditors rights, current assets, current liabilities, debt restructuring, insolvency legislation, merger and acquisitions, reorganization, rescue attempt, secured creditors, self assurance, shareholders rights, successful entrepreneurs, unsecured creditors



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