Out-of-court Restructurings and Workouts; Dispute Resolution

Out-of-court restructurings usually involve changing the composition and structure of assets and liabilities of a debtor in financial distress, generally without judicial intervention. The typical, main objectives are promoting efficiency, restoring growth, and minimizing the costs associated with the debtor’s financial difficulties.

Restructuring activities can include:

  • operational restructuring, which restructures the debtor’s business and operations
  • financial restructuring, which restructures the debtor’s finances

Out-of-court restructuring is an important role in all insolvency systems. If an informal solution is implemented, in many cases, the debtor and the creditors can protect their respective interests more efficiently and effectively.

Sometimes the preference for insolvent businesses or their creditors is to avoid court proceedings to liquidate or reorganize as these types of proceedings, among other things, can be expensive and time-consuming, with no guarantees of what will ultimately happen. To this end, the parties will often informally and consensually attempt to restructure their financial issues or otherwise work out their differences.

An Alternative to Formal Insolvency Procedures

In most cases, informal restructuring constitutes an alternative to formal insolvency proceedings. The distinction between formal insolvency proceedings and informal restructuring processes is blurred with the introduction of workouts, which are strengthened by contractual/statutory provisions or by various mechanisms that aim to combine the advantages of formal and informal approaches to address financial problems. By finding points of contact between formal and informal procedures, formality becomes a question of degree. According to the World Bank, treating financial problems can be represented by a continuum of procedures, illustrated as follows:

financial-problems-treatment-illustration

General preconditions for debt restructuring include a situation of financial difficulty (for example, liquidity issues or insolvency) and creditor issues such as financial institutions that are owed meaningful debt and the debtor’s inability to service it. For a successful out-of-court workout, it is often helpful for several things to be present, including:

  • viability of the debtor’s business
  • positive attitude towards negotiation
  • formal insolvency proceedings are unnecessary
  • a framework, including sometimes through enabling legislative and regulations

Advantages and Disadvantages of Informal Procedures

Before deciding whether an out-of-court restructuring is the most adequate response to financial difficulty, we take into consideration the advantages and disadvantages of informal workouts compared to formal insolvency proceedings. Informal workouts are usually unrelated to any judicial intervention. The advantages relate to superior flexibility and expediency in dealing with financial difficulty, and include:

  • confidentiality
  • often continuation of the debtor's business
  • relative ease of negotiation
  • flexibility and ease of adaptation to the specific needs of the debtor's business
  • lack of regulatory impact
  • less reputational damages and stigma
  • relatively cheap
  • typically no, or minimal, changes in management
  • rights and duties of parties can typically be easily modified
  • procedural rules are extremely light or non-existent
  • shorter process compared to formal insolvency procedures

The main disadvantages of informal workouts as opposed to formal insolvency include:

  • possible difficulty in analyzing the debtor’s real financial and economic situation
  • difficulty in being recognized by foreign courts
  • difficulty in dealing with a large number of creditors, including obtaining their unanimity
  • creditors can be rigid in their approval procedures
  • fewer chances of lender liability actions, taking away potential leverage from debtors
  • inability to deal with fraud and criminal conducts connected to insolvency
  • inability to investigate antecedent transactions and potentially avoid them
  • inability to use some extraordinary remedies (e.g., subordinating creditor claims)

In order to maximize collateral value and minimize loss and risk, usually debtors need to act quickly and decisively. We understand that financial distress situations can often be resolved most favorably through negotiated solutions. We advise clients on all aspects of workouts and out-of-court restructurings, including:

  • corporate restructurings
  • forbearance agreements
  • out-of-court restructuring agreements
  • purchasing of assets from troubled businesses
  • refinancing issues

Why Choose The Law Offices of Kevin S. Neiman, pc

For financial restructurings, Denver-based Law Offices of Kevin S. Neiman, pc employs negotiation strategies designed to achieve solutions among debtors, lenders, investors, and other creditors in connection with distressed businesses and individuals. It has successfully represented parties in this process, helping them efficiently and effectively avoid the uncertainty that necessarily arises from court proceedings.

Similarly, we strongly advocate for attempting to resolve other types of commercial disputes without the time and cost engendered by litigation. To that end, we represent clients when they attempt to resolve commercial disagreements through simple negotiations with opposing counsel and mediation.


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