SECTION H - WORK OUTS

The concept of the informal ‘work out’ might be said to be based on a combination of the following elements:

  • the fact that there is a significant size of debt owed to a number of different creditors (mostly these would be bank or other financial institution creditors) and the present inability of the corporate debtor to service that debt;
  • the attitude that it may be preferable to negotiate an arrangement for the financial difficulties of the debtor both between the debtor itself and the financiers (and perhaps other lesser creditors) and also between the financiers themselves;
  • the availability of relatively sophisticated refinancing, security and other commercial techniques that might be employed to alter, re-arrange or re-structure the debts of the corporate debtor or the corporate debtor itself;
  • the sanction that if the negotiation process cannot be started or breaks down there can be relatively swift and effective resort to the application of an insolvency law; and
  • the prospect that there may be a greater benefit for all through the negotiation process than by direct and immediate resort to the insolvency law.

In relation to these elements:

(a) identify which of these elements are appropriate and relevant to this economy;

All of these factors play a role to various degrees, although it is difficult to prioritize with any degree of certainty given the overlapping and interaction of the factors. However, in declining order of importance, a possible ordering would be as follows: the first and second, then the fifth, then the third, and then the fourth factor. Given the lack of an effective formal procedure for rehabilitating companies or restructuring corporate debt, except under the most dire scenarios, a cooperative attitude by both the corporate borrower and its lenders is most likely to yield the best results, especially in those circumstances when there is no doubting the fact that the corporate borrower is unable to serve its multi-bank debt. These two factors become even more important when viewed against the backdrop of the prospect that negotiating an informal workout will, except in the rare case, yield better results than resorting to winding up a company. Of slightly lower priority would be the availability of sophisticated refinancing, security, and other devices. This, in turn, would be followed by the sanction that if the banks failed to cooperate the invocation of liquidation procedures would almost certainly lead to a smaller recovery for any bank that is undersecured.

 

(b) which of these elements might be considered absent, ineffectual or of little consequence in this economy?

None; all of the factors play some role.

 

(c) which of these elements would be viewed as the least persuasive if a work out was contemplated?

See Section H(b) immediately above.

 

(d) are there any other elements that are relevant to this issue in this economy?

It is very important to have the services of an independent CPA workout specialist who can help formulate options and advise as to how best to proceed.