Answer ... (a) Debtor
The debtor must be open and transparent, engaging with advisers and stakeholders and providing adequate and accurate information (including forecasted financials) so that they can make an informed decision on whether to support the proposed restructuring. It must continue to engage during the restructuring itself, as otherwise the commercial reality of the proposed restructuring may not be realised; and if variations are needed, the sooner the debtor tells its stakeholders, the better. Otherwise, they may become disillusioned with the debtor and company management, potentially leading to a hostile environment that is not conducive to potential negotiations that may need to take place.
(b) Directors of the debtor
The directors’ responsibilities are, for the most part, congruent with the debtor’s. However, the directors should also be cognisant of their fiduciary duties to creditors if the business is in the ‘zone of insolvency’. They should take independent legal advice and immediately disclose any facts that may give rise to a conflict of interest or perception thereof to the professional advisers.
(c) Shareholders of the debtor
Depending on the process envisaged, the shareholders either may not be impacted at all or could be asked, for example, to make changes to their equity or forgo dividends. Shareholders that hold issued and unpaid capital will also be debtors of the company, with their liability limited to that unpaid share capital – unless the entity is not a limited liability structure, in which case the shareholder should consider its exposure if the business is in distress.
(d) Secured creditors
It is rare that a secured creditor’s rights are affected by a restructuring; but if a secured lender is brought into the process, it should ensure that its security is valued accurately to assess exposure. Independent legal and financial advice is critical, to ensure that no steps are taken that could devalue its investment. If it is asked to waive or exchange debt or to postpone repayments, the lender should consider additional security, collateral or guarantees, while maintaining an appropriate balance of pressure on the debtor to maximise the chances of a successful restructuring. Covenants that are too onerous may have short-term positive results for the secured creditor, but may affect the long-term viability of the business.
(e) Unsecured creditors
As there is no stay on proceedings in the negotiation and agreement phases of a restructuring, unsecured creditors are advised to think carefully before taking precipitative enforcement action. This will incur costs for the individual creditor, which will not necessarily be recovered if the entity becomes insolvent – for example, if the restructuring is not approved or is approved but subsequently fails. Furthermore, being the first to issue a statutory demand or winding-up order does not equate to payment. If the directors are facing insolvency, they will be advised not to make ad hoc payments to creditors, despite pressure from collection agents and legal demands. The directors will be careful not to make any payments that may later be regarded as a preference; even if a payment is a bona fide due and payable debt, with issued letters before action, this will not guarantee remittance. Furthermore, once in insolvency, unsecured creditors are treated equally under the parri passu principle; so in case of liquidation, an unsecured creditor that has issued a statutory demand will not receive more money or faster payment than anyone else. It is therefore important to balance the relative costs and expected advantage of taking action when a restructuring is proposed.
(f) Employees
Due to the nature of companies incorporated in the British Virgin Islands, which are often asset holding companies or shell entities, employees and preferential claims are rarely involved in this context. However, the position for preferential creditors in restructurings is that their claims are rarely compromised, so the plan/arrangement itself will rarely affect employees. However, there is a risk that a business experiencing some sort of distress that requires reorganisation may have to make staff cuts, implement efficiency measures or close down loss-making divisions – which will often have direct consequences for employees.
(g) Pension creditors
Part of a pension claim could be preferential (currently up to $5,000 for each employee), while the remainder is unsecured; this is in respect of current employees whose contributions were not paid over to the pension fund.
(h) Insolvency officeholder
The role and duties of any insolvency office holder will vary depending on the specific procedure being proposed. Generally, however, the insolvency office holder should ensure independence and fairness, undertaking the role with due care and diligence in accordance with the respective code of ethics. The proposal should be fair and balanced, as well as being sensible and practical, ensuring that the proposal has a good chance of being both approved and successfully implemented in accordance with the proposed terms.
(i) Court
The court’s role will also vary depending on the procedure. However, in most cases the court will take a supervisory role; while the insolvency office holder is an officer of the court who will supervise the arrangement, the court will take a high-level supervisory role and can direct and opine as it sees fit.