out of court workouts (ocws) mahesh uttamchandani law justice and development week 2011 november 16,...
TRANSCRIPT
Out of Court Workouts (OCWs)
Mahesh UttamchandaniLaw Justice and Development Week 2011
November 16, 2011
NPLs in many countries are high and rising
2
Tu
rke
y
Ru
ssia
Po
lan
d
Ge
org
ia
Hu
ng
ary
Mo
ldo
va
Cro
atia
Ro
ma
nia
Bu
lga
ria
Alb
an
ia
Ukr
ain
e
La
tvia
Se
rbia
Lith
u..
.
Ka
zak.
..
0
5
10
15
20
25
30
3.1
8 8.410.3 10.4 10.7 11.5
13.4 13.5 14.4 15.4
18.4 18.6 19.1
26.3
2008 2009 2010 Latest
Non-Performing Loans/Total Loans in percent
Source: IMF Global Financial Stability Report
Benefits of an Effective Insolvency and Restructuring Regime
Key Findings from a recent World Bank/IFC study:
Reforms that improve insolvency regimes have a real effect on credit
• More timely repayment
• Reduce the cost of debt and interest rates
• Increase aggregate level of credit
• In Brazil, 2005 bankruptcy reform followed by 22% reduction in cost of debt and 39% increase in aggregate level of credit
New mechanisms for debt restructuring or reorganization 1) reduce the failure rate of insolvent firms and 2) decrease the duration and cost of bankruptcy proceedings
• Belgium’s 1997 bankruptcy reform allowing reorganization reduced liquidation of SMES by 8.4%
• In Thailand a legal framework for rehabilitation lowered NPLs and insolvency costs
Leora Klapper, joint World Bank/IFC study, funded by USAID, 2011
3
What is an OCW?
Out of court workout allows collective negotiation among creditors and the debtor, during a standstill period that allows all the parties to reach the best restructuring solution for a distressed company
Unlike formal bankruptcy/reorganization proceedings, OCWs:
Do not change legal entitlements;
Are consensual
Do not impair debtors and creditors legal rights;
Are appropriate only for viable company debtors;
Are flexible
In many countries, they offer distressed firms financing which would be unavailable during formal bankruptcy proceedings
4
1 Jostarndt, Philipp and Zacharias Sautner. “Out-ou-Court Restructuring verus Formal Bankrutpcy in a Non- Interventionist Bankruptcy Setting.” Review of Finance (2009), 1-46.
Why develop a system for OCWs?
Formal insolvency proceedings in client countries are often slow and offer very low recovery
Cheaper than formal insolvency proceedings
More distressed-but-viable companies are rehabilitated
Bankruptcy filings prevented – avoid court case overload
Creditors benefit by shared information and negotiating together
Collective action benefits creditors, maximizes recovery when enforcing individual claims will lead the debtor to formal insolvency and low recovery for all
If bankruptcy filed, improved outcomes due to intensive prior negotiations
Viable debtors have access financing for working capital
5
Goals of debt resolution: for viable companies, OCWs help all parties reach these goals more effectively
6
Preserve business value of debtor enterprises
Minimize creditors’ risk, improving access to finance
Reduce time and cost for restructuring
Increase stakeholder returns
Examples of Out of Court Workout Systems
London Approach—well-known, model for many other systems, informal, established practice
East Asia—systems developed in response to financial crisis, JITF in Indonesia, CDRAC in Thailand, CPRA in Korea, others.
Mandataire Ad Hoc in France, expert appointed on a case by case basis to assist debtor in negotiations with creditors
Corporate Debt Restructuring system in India—non-statutory but institutional, RBI encourages participation, the CDR system involves several bodies that work with creditors and debtors during negotiations
7
Spectrum of Out of Court Workouts--Examples
French Mandataire Ad Hoc:
Assisted negotiations, with a trained mediator, creditors gathered on a case-by-case
basis—pre-insolvency
London Approach:
Major creditors, (banks and financial institution) agree to
negotiate collectively with common
debtors according to certain rules;
voluntary; central bank available for
assistance but does not control process.
Corporate Debt Restructuring in India (CDR):
Banks agree in advance to negotiate restructurings for common debtors; voluntary
and non-statutory but written agreement to use elaborate
institutional mechanisms banks have agreed to use
when a distressed debtor is common to several of them
Korean Approach:
Law mandated a lead bank convene
creditors for restructuring when
corporate clients fail and that debtors
submit; but private parties implement.
Government provides arbitration at parties’ request if
no agreement
8
Formality: Least formal More Formal Most FormalProcedure: Flexible Defined Institutional
French Mandataire Ad Hoc—simple negotiation assistance pre-insolvency
Court appoints a mandataire ad hoc, usually a receiver, for three months (renewable) to assist the company in negotiating with its creditors
No standstill statutorily, though in practice creditors refrain from recovery action
Confidential
Mandataire has no power over any of the parties—purely advisory
Agreement to restructuring/reschduling plan must be unanimous
Conciliation, next level pre-insolvency
Court appoints a conciliateur who has more power, he can demand financial information and hire experts, recommend a plan, and can negotiate with tax authorities.
Conciliation can lead to a Sauvegard Express, a prepackaged plan that is implemented through the Sauvegard (reorganization) procedure in the French law
Both Mandataire Ad Hoc and Conciliation are used
9
London Approach
Developed in the 1970s with Bank of England’s support; Rules of procedure are known and accepted but not codified; central bank will assist but leaves development of plans to private parties
Voluntary
Instrumental in recession of 1990s
No statutory guidelines, but recognized procedures
Standstill among creditors
New financing available to debtors
Has earned the trust of the market over decades of use
Model for many systems which developed later—INSOL principles for out of court workouts based on London Approach
10
Korean Approach
Response to Asian Financial Crisis
Corporate Restructuring Promotion Act (CPRA) of 2001 mandated that banks work together when corporate clients are financially distressed
Standstill for one to three months, extendable for one month
Creditor council develops plan
75 percent threshold for creditor approval of workout agreements
A seven-person Corporate Restructuring Coordination Committee (“CRCC”) to provide workout guidelines and arbitrate inter-creditor differences after three rounds of voting fail to bring agreement
Creditors can ask to be bought out--CRCC can establish the price of the debt to be bought out by other creditors
Law was to expire but was resurrected; system still in use; has earned the trust of the market
11
CDR in India
Reserve Bank of India (RBI), the central bank, promoted CDR
Voluntary, non-statutory
Banks/financial institutions are standing signatories (CDR members) to the Inter Creditor Agreement, which sets forth procedures and obligations; non-members can join on a case-by-case basis
Debtor’s lead bank (or a consortium) holding 20%+ of debtor’s debt can initiate proceedings
Institutional: one CDR body does case intake, another viability assessment, another formulates plan with creditors, another monitors implementation, etc.
75% creditor approval required for plan approval
Successful, has earned the trust of the market
12
Lessons
Lessons
An out-of-court workout framework can be useful for the financial stabilization of distressed companies
Tax debts can be a huge obstacle to restructuring
A credible threat of total loss – from foreclosure, liquidation, and/or receivership – encourages debtor cooperation with court-supervised rehabilitations or out-of-court workouts
An effective out-of-court workout scheme benefits from a reliable mechanism for resolving inter-creditor differences
Mako. William P. “Uses and Limitations of Out-of-Court Workouts.” Global Forum on Insolvency Risk Management. 2003.
13