INSOL International has issued a second and updated edition of its Statement of Principles for a Global Approach to Multi-Creditor Workouts, launched at the recent Quadrennial Congress in March 2017. These confirm and support the current Australian reforms for safe harbor protection to assist companies in financial distress.
As INSOL says, the world of finance has changed significantly since the INSOL Lenders’ Group first published the Principles in 2000 and the reviewed and updated Statement reflects today’s cross-border world of more complex financial restructurings.
Commentary introducing the eight Principles supports Australia’s current reforms in providing safe harbour protection to companies in financial distress. It refers to the continuing international trend in the development of local insolvency laws to
“facilitate the rescue and rehabilitation of companies and businesses in financial difficulty, as opposed merely to closing them down through liquidation”,
the advantages being in the
“expeditious implementation of informal or contract-based rescues or workouts compared with the unpredictable costs and uncertainties of a formal insolvency”.
Well-designed insolvency laws
The Principles have been found to be most successful in facilitating rescues and workouts in the context of well-designed insolvency laws that provide incentives for debtors and creditors, and laws that allow for the protection of security and priority interests between creditors. This can be an important means of encouraging the availability of new financing during any workout process. At a minimum, Australia’s laws provide these incentives and protections, as to the latter through our well developed personal property security (PPS) regime, and secure real property title regimes.
The principles follow.
FIRST PRINCIPLE: Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (a “Standstill Period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor’s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case.
SECOND PRINCIPLE: During the Standstill Period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor but are entitled to expect that during the Standstill Period their position relative to other creditors and each other will not be prejudiced. Conflicts of interest in the creditor group should be identified early and dealt with appropriately.
THIRD PRINCIPLE: During the Standstill Period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the Standstill Commencement Date.
FOURTH PRINCIPLE: The interests of relevant creditors are best served by co-ordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisers to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole.
FIFTH PRINCIPLE: During the Standstill Period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors.
SIXTH PRINCIPLE: Proposals for resolving the financial difficulties of the debtor and, so far as practicable, arrangements between relevant creditors relating to any standstill should reflect applicable law and the relative positions of relevant creditors at the Standstill Commencement Date.
SEVENTH PRINCIPLE: Information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential.
EIGHTH PRINCIPLE: If additional funding is provided during the Standstill Period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practicable, be accorded priority status as compared to other indebtedness or claims of relevant creditors.