This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
Is the formal restructuring of distressed businesses a real option, or is it simply the last stop before the terminus? The SkyEurope story offers some important insights.
Chapter 11
The expression is known to us from US insolvency law. Chapter 11 of the United States Bankruptcy Code provides for the reorganisation of a corporation or a partnership, whereby a debtor usually proposes a plan for reorganisation to keep its business alive and pay creditors over time. About one-fifth of all insolvency proceedings in the US are conducted under this chapter, offering economically more efficient solutions also for the creditors.
Slovakia, as a rare example in Europe, has in recent years introduced a similar scheme for its entrepreneurs in trouble. Under the Bankruptcy and Restructuring Act (Act No. 7/2005 Coll.) insolvent or excessively indebted companies may conclude an agreement with their creditors regarding debt settlement (a restructuring plan). This is instead of entering into bankruptcy, which would result in the sale of their assets and termination of their activities (and also, presumably, in a much lower level of creditor satisfaction). The alternative offered by restructuring is to continue the debtor's business activities and stabilise its economic and financial situation through curative measures. This occurs under the supervision of the trustee, the court and the creditors. Thanks to regained productivity, the debtor can eventually settle a higher proportion of its debts.
Slovak restructuring proceedings
During restructuring, the debtor remains in possession of its business. However, certain of its legal acts, as determined by the court, are subject to prior approval by the trustee (the creditors' committee may extend this scope).
Generally speaking, the debtor must restrict its activities to ordinary legal acts only.
Restructuring requires the cooperation of the debtor. It is usually the debtor who appoints a trustee, who in turn is in charge of preparing the restructuring opinion. The restructuring trustee, selected from the list of court-registered, independent trustees, assesses the economic situation of the debtor and supports or rejects the debtor's intent to enter restructuring. In a supportive opinion, the trustee confirms that the debtor is able to carry on with its main business (despite implementing the necessary healing procedures) and declares that adopting the plan will result in a higher level of satisfaction for the creditors than what they would get under bankruptcy proceedings.
The opinion is attached to the debtor's (or a creditor's) petition to the court to approve the restructuring. Through its resolution initiating restructuring proceedings the court grants protection to the debtor from its creditors by discontinuing all enforcement and bankruptcy proceedings pending against the debtor and by not allowing the opening of new ones. Unilateral terminations of existing contracts and set offs against the debtor by its creditors due to the debtor's non-performance, as well as former contractual arrangements granting the creditor the right to terminate or rescind the contract upon the debtor entering restructuring, are legally unenforceable.
In the next phase, upon determining that the trustee's opinion has met all legal requirements, the court approves the restructuring. This in effect ends enforcement proceedings and suspends all court and arbitration proceedings regarding submitted creditor claims. Creditors must submit their claims within 30 days from the publication of the approval of the restructuring. Within 90 days the debtor presents its final version of the restructuring plan. Then the creditors' committee, and subsequently the creditors themselves, vote on the plan in their separate groups (including shareholders, if applicable). Dissenting creditors may be forced to accept the plan. Finally, the plan must be approved by the court, after which any claim not submitted ceases to be enforceable. The happy ending arrives when the debtor fulfils the plan. Then it can start a new life with a clean slate.
Far from perfect
Although the legal institution of formal restructuring should create quite a number of success stories, the reality is different. The proceedings are overly formalistic, punishing creditors for every small mistake. Time limits are short and strict. There is also room for misbehaviour by both for the debtor and the creditors. The debtor may for instance impede communication or convince the trustee to reject a claim for some formal insufficiencies, and of which the creditor need not be personally informed. On the other hand, creditors may boycott the procedure for approving the plan, perhaps because they deem the settlement too low or simply in an effort to eliminate the debtor because it is a competitor.
SkyEurope: No happy ending
Sometimes the economic conditions are just too tough to succeed. SkyEurope Airlines was in many ways a visionary (although never a profit-making) company. Then came the economic crisis and an increase in fuel prices. The airline entered restructuring in July 2009. Then, after less than two months of gallant resistance, the restructuring trustee filed for bankruptcy. The reason: The financial situation of the debtor had changed to such a degree that successful restructuring could no longer be reasonably expected. Allegedly, promised interim restructuring finance never arrived. The company failed to ensure that sufficient cash was available for airline operations, which led to an inability to pay new debts.
Conclusion
Unfortunately, the current business environment is giving rise to ample opportunities to test Slovakia's restructuring law. On the bright side, the law will help some struggling businesses survive the crisis, and the experience gained may be used to produce a better law.
During restructuring, the debtor remains in possession of its business. However, certain of its legal acts are subject to prior approval by the trustee.
This article was originally published in the schoenherr roadmap`10 - if you would like to receive a complimentary copy of this publication, please visit: http://www.schoenherr.eu/roadmap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
