Insolvency

Workouts

Preconditions to a workout

Significant amount of debt owed to variety of large creditors (banks)

Present or imminent inability to service the debt

Acceptance of principle that workout may be preferable

Relatively sophisticated refinancing, security and other commercial techniques

Swift and effective resort to bankruptcy if workout fails

Greater benefit to all parties from negotiation process

Workouts

Workout procedures

Commencement of negotiations

Coordination of creditors – lead creditor and steering committee

Standstill agreement

Engaging advisors

Assuring adequate cash flow and liquidity

New financing may be required

Full disclosure of information by the debtor

Treatment of other creditors

Payment in full

“Take it or leave it” offer

Threat of cram-down

Pre-Bankruptcy Procedures

Mandat ad Hoc - France

Annual reporting to the Commercial Court

Court knows in advance which businesses are in financial difficulty

Executives may be called in for consultation with president of the court – 611-2

“Experiencing difficulties of such a nature as to compromise the continued operation of the business”

Mandat ad Hoc - France

If executives do not appear, court may obtain information from other sources

E.g., auditors, employees, etc.

Mediator may be appointed to work out agreement with management and creditors

Automatic stay while performing agreed workout

Terminates upon commencement of more formal insolvency procedure

Statutes

United States

Effective 10/1/79

Replaced bankruptcy “act” of 1898

Three 19th century statutes

Each lasted very short time

Political reasons

All but Code enacted in time of economic crisis

United States

Parts

Chapters 1, 3, 5 – general

Chapter 7 – liquidation

Chapter 9 – municipal reorganization

Chapter 11 – business reorganization

Chapter 12 – family farmers (currently not in force)

Chapter 13 – consumer reorganizations

Chapter 15 – Model Law on Cross-Border Insolvency

Choose type of case at time of filing

Germany

Law adopted in 1994 – effective in 1999

“Unitary” system

Decision to reorganize likely would come at “report meeting” of creditor assembly

Debtor may propose plan at any time, but not after final creditors’ meeting

Typically filed with application to open insolvency proceedings

Default is liquidation – G 159

Germany

3-month delay between filing and opening

Fund pays salaries for 3 months after filing, but before opening

Plan may be filed with application to open case – debtor plan

Can invoke self-administration

Right to separation of assets, or claim to separate satisfaction – secured claim

Committee may be appointed in all cases