John Mavridis and Newhouse Strategic Counsel

Anytime a company enters a creditor protection phase, the organization is about to enter into a storm so that it can come out stronger.

During any creditor protection plan, there will be many demands and a lot of noise from inside and outside an organization.  You need to be able to ignore the noise and focus on the job at hand.

Having participated inside management during a restructuring, I know how difficult this can be, but it is only by ignoring the noise, focusing on objectives and taking the next step in the process that you will be able to get through this successfully.

In the case of a public company or a Venture Capital-backed venture, shareholders are the key stakeholders.

By the time you finish the creditor protection process, your creditors may be a big part of your shareholder base.  As when building the company, issuing shares could be a part of the solution when you make an offer to your creditors.

This of course can be a managed process, and that is a subject of another paper.  Be that as it may, this will be a process that you should address with any major shareholders.  The attitude, both of the Courts and the insolvency lawyers, will be that the shareholders are of no consequence in this process. While this may be the approach that insolvency professionals have, you have to look at the big picture - not only today, but for the future. 

Ensure that you can win the vote of the creditors on the proposal you will make to them.

This can happen because the debtor company benefits from the impact that court-sanctioned creditor protection strategy has on most creditors.  If your company fails in its restructuring, they will probably get nothing.  In fact, the practical reality is that they may very well have essentially written off your debt from their books.  If your debt is over 90-120 days old, they most probably cannot have it financed by their banks. They know that if the restructuring fails, they will lose everything.  Not only the amounts owed, but also a client (even one they service C.O.D., or with a bank-guarantee).

Another tool in your arsenal is that you can divide the creditors into classes.  While some classes, such as secured creditors, are already defined, others can be sub-categorized.  In this way, since the rules call for over half the creditors in number and two-thirds in value to approve the proposal, you can line up your ducks.

You can structure the proposal to gain the vote of the majority of the creditors in number by ensuring that the “small” creditors, owed between $1 and $10,000 (for example) will be paid in full, or as close to in full as necessary, to get their vote supporting the company’s proposal. For the value issue, there has to be a plan on how you will work with your biggest creditors to get through the process.  Always remember that they also have a problem: their alternative in a potential bankruptcy is not positive.  This is their problem which will be used as a wedge to help you negotiate the acceptance of the proposal.

In any creditor reorganization, there is always a cast of characters to take the stage.   While some are on your side, you must have a strategy for each one of them.  They all have their respective likely courses of action, since the law allows them to do only so much.  You have to anticipate and determine a strategy to handle each of them. The players in this drama include:

·         The Court which allows you some protection from creditors, by applying the law.

·         The Trustee in Bankruptcy who is a professional who is also an officer of the Court whom you will hire to assist you in managing the process with the creditors.  He will send out the notices to the creditors and work with you and your lawyers in the process of obtaining their approval for the proposal.

·         The Secured Creditors.  These are your banks, and mortgage holders, but may also include government and taxation agencies.  Each of them will have their own lawyer.

·         The Trade Creditors.  You owe money to each of these suppliers whose goods your company has used and for whom your company has historically been a very good client.  Some are key to your continued operations and some are not.  The larger ones will probably engage their own lawyers in order to monitor the process and attempt to maximize their position.

·         The Landlord. He will also probably have his own lawyer.

·         Your Lawyer will be working on your behalf in this matter. He will be making the necessary representations on behalf of your company before the Court and deal with the others in the context of negotiation.

·         Your Restructuring Officer.  This is the key management representative that is watching and managing this drama at work and ensuring that the company meets its objective.

You will be paying (at least) for your own lawyer, probably the lawyer of your banker and the Banruptcy Trustee working on the Proposal. You will also have to cover the time and effort of your key managers involved in this process, on top of their usual responsibilities.

When you are in real financial trouble, you still have tools available to you and need to understand how to use them.

When you have exhausted your ability to continue negotiating with your creditors, the law provides for alternatives. In the US, it is the Chapter 11 provisions of the US Bankruptcy Code.  In Canada there is a proposal under the Bankruptcy and Insolvency Act or a proposal under the Companies Creditors Arrangements Act.

There are technical aspects to each of these tools, but the essence remains the same:

First, the law gives you some peace and quiet: there is an immediate stay of proceedings.  That means that if suppliers are suing you, or even petitioning your company into bankruptcy, everything is suspended.  You can get the necessary time to organize your affairs and make an orderly proposal to creditors.

The debtor company will get an initial stay for 30 days and you will most probably be able to extend it for an additional 45- 60 days in all.  Additional delay may be possible, but you will have to make a proposal to creditors by then.

The key is to know what you owe and to whom.  Determine which debts are secured, since you will eventually need the approval of these creditors. It is also important to clearly understand which debts may become the personal liability of the members of the Board of Directors.  Review your agreements and the law on various liabilities, including:

·          leases, (there is a right to repudiate them under certain circumstances).

·          employees, (including severance  obligations).

·          taxes, (where certain taxes are also personal liabilities of directors).

·          trade creditors (who are necessary for on-going supplies and operations).

Most importantly, determine where the cash will be generated to finance the proposal for creditors.

From a cash-flow point of view, trigerring the creditor protection process should be done when you have the greatest war-chest with which to fight the battle.  You will need funds to continue operating your business and to pay for the professionals involved.

The funds in your possession, be they  accounts receivable you will collect, proceeds of asset sales, proceeds of any last minute financing for such an operation, all have to be planned for to provide you the widest room to manoeuver.

Timing is everything.  If you wait too long you may not have the ammunition to accomplish your goal. Once you begin, time is of the essence. 

When you get into a creditor protection process, you need to imagine what you want your company to look like when you get through it.  This is not meant to be a new-age visualization technique, but rather a tool to develop the end-goal of where you will be when the restructuring effort will be completed.

Don’t focus only on the balance sheet issues, but also on what your company will be able to do when you get through this restructuring.  This process will have two phases: the formal front-end and the rebuilding plan afterwards.  It is important that you have a clear objective that will allow you to sell the idea of your restructured business to your creditors and all the stakeholders.

Ducks can do it! Why is the weakness in any project the failure to line up all the ducks that you need to get to the objective?

Law is a tool that has to be lined-up in order to meet the business objectives that our clients have. But it is only one aspect of any business objective. Usually, it is only an after-thought.  The key is to make sure that your team understands what the objective is and understands the barriers : be they competitive, economic, logistic or yes! even legal.  Sometimes you need a lawyer who understands the legal and business barriers to the project and can figure out how to line up the ducks so that the regulator or the courts can give the relief that is necessary to meet the objetives.

The law provides for this discretion and you just need to line up your ducks to ensure that discretion is exercised in your favour.

On March 25, 1821 the yearning for freedom which manifested itself from the principles of democracy born in the cradle of civilization of Ancient Greece, allowed the beginnings of a war of independence which was supported the world over. This history lesson is relevant to all those embarking in any business venture. The Greeks were true to themselves and sacrificed for themselves and their fellow freedom fighters. With the upcoming Greek Independence Day, it is a timely lesson.

In a culture grown from the history of Ancient Greece, they understood the concept of ”know thyself” and they knew that although it was the harder road, it was the right path to follow. In business, you need to know thyself to do the right thing and build the right kind of business. Build one that fits your own character and aptitude. This is the foundation of any business that one can be proud of.

On the occasion of Greek Independence Day, Newhouse acknowledges that it serves its clients, not only by the knowledge of the law and business around it but, just as importantly, by the knowledge of itself and continues its ongoing search for greater knowledge. All great businesses are true to themselves, and we help our clients keep on that road to ensure success.