An Out of Court Workout as an Alternative to Bankruptcy

Business Bankruptcy
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Mohammad Hamdan
Russian Federation

An Out of Court Workout as an Alternative to Bankruptcy

The declaration of bankruptcy is not considered an attractive choice for dealing with a company in financial distress. Neither by the debtor (to resolve her/his financial problems), nor by the creditor (to recover her/his debt).
Therefore, most businessmen prefer to declare the debtor bankrupt only as a final remedy, and they try to find other ways away from judicial solutions to solve the problems of the unpaid debts instead of declaring bankruptcy. One of the most common alternative solutions to bankruptcy is an "Out of Court Workout". What does this approach entail?

Out of Court Workout. Definition.

The term "workout" is an attempt by the debtor to solve a financial problem through a consensual agreement with creditors outside of the court procedures. This alternative solution is based on two foundations: the company's creativity work on one hand, and the extent of creditors' willingness to cooperate with it to overcome its crisis on the other hand. The approval of all creditors is essential to make it work; a refusal by one or two of them may hinder it. So the company ought to work actively as a team to ensure its success.

Steps in an Out of Court Workout. Process

  1. PREPARING A SUSTAINABLE PLAN
    The company has to set up a financial rescue plan through which it can convince the creditors that it will be able to repay them in the near future. This plan must be sustainable and able to influence the perspective of the creditors by reviewing the historical financials of the business and preparing projections of cash flow, profit and loss, and balance sheet through the term of the repayment plan. This plan should give the creditors the idea that the continued activity of the company will allow an increase in the additional positive cash flow, which will ensure the payment of the debts. The plan can also include a sub-plan that guarantees that the company will receive new funding in the near future, which helps convince the creditors to agree on continuing the work in this way without resorting to the court.
  2. HIRING LEGAL AND FINANCIAL EXPERTS
    The quality of financial and legal advisors, through their expertise and specialization in managing corporate financial crises, is playing a great role and has a positive impact on the success of the work out of court. Either in terms of convincing creditors, or through developing an effective plan to overcome the crisis. Therefore, the debtor company has to select the experts very carefully, and it is preferable not to rely on its employees. In such a case, an integrated team of internal and external consultants must be formed in order to protect the debtor company.
  3. NEGOTIATING WITH SECURED CREDITORS
    One of the basics of doing business is obtaining loans and credit facilities from financial companies. Such debts are secured; when the debtor company fails to pay off its debts, the financial company begins procedures to close the credit and collect the debt through its guarantees. But before that, these companies usually send a representative to review the financial affairs of the debtor company to determine its financial position. Here, the debtor company has to welcome such an opportunity, in order to gain time on one hand, and in order to enter into negotiation and convince the financial company of the repayment plan on the other hand. Usually, financial companies do not prefer to go towards compulsory measures. Rather, it is common for them to enter into one of the forbearance agreements in which they agree to postpone the exercise of their legal rights in exchange for some privileges.
  4. NEGOTIATING WITH UNSECURED CREDITORS
    Once an agreement is reached with secured creditors, the company will need to obtain approval from its unsecured creditors. Due to their multiplicity, it is preferable to divide them into groups, either according to the nature of the debt, or according to the financial condition of the creditor, or according to the psychological state of each of them, in order to limit and define the persuasion tactics that will be followed with each of them. In general, the company has to explain to them the extent of the damage that will be caused to them as a result of declaring its bankruptcy, in comparison with the gains that they will get from agreeing to the plan.
⇨ This approach is one of the most common alternatives to bankruptcy used outside of court. If you have experiences with this way of avoiding bankruptcy, please share them here.

References:
Dov R. Kleiner, Kleinberg, Kaplan, Wolff & Cohen, P.C., (2017), "Non-Bankruptcy Alternatives to Chapter 11 Restructurings and Asset Sales", p. 7.
Entrepreneur (2008), "Alternatives to Declaring Business Bankruptcy".

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