This is the most important precondition for a successful informal workout. If the debtor’s business is no longer viable, the most effective strategy is usually to initiate liquidation as soon as possible. In these situations, conducting a workout will only delay a company’s inevitable end and may do more harm than good in the process. Steps to ascertain business viability include a comprehensive analysis of the debtor’s financial position and the development of a rigorous, up-to-date business plan. In cases where the viability of the business is uncertain, it can be helpful to use a reorganization procedure, a strategy which offers more tools for a thorough business analysis and which can be transformed into a liquidation, if necessary.
Homogeneity of creditors
As mentioned, a plurality of creditors is a standard requirement both for formal insolvency and out-of-court restructuring. However, a key distinction is that a successful informal workout usually requires a certain degree of homogeneity of creditors. Situations in which a debtor company has many diverse creditors – such as financial creditors, trade creditors, tax authorities, or workers – can all too easily lead to problems of aggregation and coordination. In other words, the greater the number and diversity of creditors, the more difficult it can be to successfully negotiate a restructuring agreement due to factors such as conflicts of interest among creditors and the greater challenge and higher cost that can come with aggregating disparate legal positions. For this reason, the feasibility of an informal restructuring process is greatly increased in situations where the bulk of the debt is held by a number of banks or financial institutions, whose commonly held traits provide a more easily accessible basis for agreement both among creditors and between debtor and creditor.
Successful informal restructuring will only be possible if both the debtor and creditors bring a positive, open attitude to the negotiating table. The parties must believe and agree that the negotiation process will be more beneficial to debtors and creditors alike than will any recourse to individual enforcement or formal insolvency proceedings, which typically involve higher costs, a loss of control over the negotiation process, and a significant disruption of the debtor’s business. In order for such belief and agreement to be created, a certain display of good faith on all sides is important. Specifically, both debtor and creditors must disclose to and among each other the specifics of their financial situation in order for negotiations to be grounded on a shared basic understanding.
When considering informal restructuring as a potential solution to a debtor’s financial difficulties, it is important to take into account whether or not the debtor is in need of any of the benefits that formal insolvency proceedings can offer. For example, the debtor’s financial situation may be such that an automatic stay – an injunction which protects debtors who file for bankruptcy by automatically stopping all collection actions against them – may be necessary. The debtor may also need relief from trade-related debt or the ability to reject executory contracts that may be burdensome. Informal workouts are not able to provide any of these benefits or protective measures. If the debtor requires them, formal proceedings are likely the best course of action.
An enabling legal framework
A legal and regulatory environment that encourages restoring the debtor to financial viability through consensual participant negotiations is an important backdrop for a successful workout. This does not necessarily mean that specific provisions must exist which deal directly with informal workouts – such scenarios are rare – but rather that the formal insolvency and creditor rights systems against which any informal restructuring will be measured are both efficient in and of themselves, and include laws and procedures which are enabling and relevant, if not necessarily explicit.