Preventive restructuring and new trends for companies

Chief Yilmaz

TMA Turkey/HEARTH

vice-president

In Directive 2019/1023 of the European Parliament and of the Council (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019L1023&from=), which lays down the preventive restructuring framework for companies EN 2nd article) preventive restructuring. with; It has been stated that the aim is to rescue debtors from insolvency and prevent unnecessary liquidation of surviving businesses by restructuring debtors at an early and effective stage. Thanks to preventive restructuring, employees will not lose their jobs and therefore their knowledge and skills. Structuring should help increase overall value for creditors, business owners and the economy as a whole.

In this context, preventive restructuring, the debtor in financial difficulty,

– It may modify the composition, conditions or structure of its assets and liabilities,

– It can modify the capital structure,

– It may involve actions, including the sale of some or all of its assets,

– It may also necessitate operational changes.

The main objective here is to allow the debtor to continue his activity in whole or in part.

The sooner a borrower can identify and diagnose their financial difficulties and take the necessary financial and operational measures, the more likely they are to avoid impending bankruptcy and insolvency. In this regard, it is also important to establish and develop early warning systems.

It is observed that within the framework of the basic principles contained in Directive No. 1023, EU countries are gradually adapting the fundamental questions included in this Directive to their own national laws. In this regard, it is seen that preventive restructuring has become extremely important, especially in 2020 with the effect of COVID-19. It should be noted that EU countries have made significant changes in 2020 to strengthen their existing preventive structuring mechanisms in order to comply with the directive, to control possible increases in non-performing loans (NPLs) for the period post -COVID-19, and develop new mechanisms for companies that may encounter difficulties.

It seems that Germany has created an independent law on preventive structuring. On the other hand, we see that the Netherlands has positioned it as a new tool in bankruptcy law and other countries such as the United Kingdom have generally reinforced existing structures in their commercial laws or have been involved in the process with new additions.

It turns out that these new regulations have some features in common, which are actually the tools included in Directive 1023. To briefly mention them;

  1. A debtor-centric perspective: The first thing that emerges from the new regulations is that the restructuring process is debtor-initiated and offers a debtor-centric perspective.
  2. A flexible structure (possibility of structuring with all or part of the creditors): The debtor company only manages the process with its creditors who will be affected by the restructuring plan. Since the rights and interests of others are not affected in the structuring plan, they do not need to be involved in the planning process.
  • Orientation towards hybrid models: Efficiency decreases in out-of-court restructuring processes, because the most feared situation when the company knows or sees the possibility of having financial difficulties is a possible execution and lawsuits. For this reason, first suspension of payments In cases such as the reconsideration of certain measures, such as the moratorium, new mechanisms should be considered, such as the cessation of direct proceedings upon request to the court or the administrative authority. It can be seen that the period for suspending payments (termination of the enforcement procedure) is generally set at three months, and that an additional period of one or two months is granted. In the European directive, this period is limited to 12 months. This time is considered sufficient to prepare a plan, negotiate with creditors and reach a conclusion. In this process, the duty to monitor and prevent possible violations of rights by the court or administrative authority is highlighted.
  1. Cessation of all claims during the grace period: Except for a limited number of claims, the grace period seems to be binding on all creditors.
  2. Minority classes of creditors subject to the majority: Creditors are divided into different classes. When a majority of 75% (by amount) is reached in each class, the proposed Restructuring Plan is valid for the class concerned. Still with the new approach defined as “Cross-Class Cram-Down”, if the creditor classes representing 75% of the amount to be received approve the plan, the plan also applies to the opposing classes if certain minimum conditions are met.
  3. Commercial management remaining in current management: As this is a pre-bankruptcy process and the process was initiated by the debtor, the existing management of the company remains in management, while the “Structuring Professional”, who is appointed by the court or appointed by the debtor (non-court), has a power of control and supervision. If the “structuring professional” is appointed by the court/authority, he has a duty to report to the court/authority and to the creditors.
  • Additional credit facility: It is extremely important for companies that have or are about to have liquidity problems to have additional credit facilities as a lifeline for the continuation of their economic activities. At this stage, certain conditions must be met in order to make it possible to grant additional loans to the company in difficulty, at the beginning of which the collateral linked to the additional loan is separated from the other collateral, and these claims take the first place in the process. of bankruptcy.
  • Preparation and discussion of the plan with creditors and execution of the plan by a professional working in the field of restructuring: It should be noted that in all these regulations, the existing structure has been further strengthened and its powers and responsibilities have been regulated in detail in the relevant laws.

In our next article, we will talk about restructuring practices in Turkey.

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