In many restructuring proceedings, failure is not caused by court delays, procedural flaws or institutional inefficiency. More often, the problem lies in adopting the wrong perspective on the purpose of restructuring and on the measures required to complete it successfully.

One of the most common obstacles is a prolonged dispute between the debtor and its creditors over the amounts included in the list of claims.

Time is one of the most valuable resources

I have seen restructuring proceedings that had a genuine chance of succeeding, both commercially and financially, but ultimately failed.

While the debtor was still able to finance its ongoing operations, valuable time and resources were consumed by disputes concerning the amounts of claims submitted by creditors. Before those disputes could be resolved, the available restructuring window had closed.

The company lost its ability to continue operating, even though the restructuring itself could have succeeded from an economic perspective.

The list of claims is not the purpose of restructuring

A common mistake is to equate successful restructuring by limiting the amounts included in the list of claims to figures that the debtor considers objectively justified.

However, the purpose of restructuring is not simply to establish the lowest possible total number of claims.

Its real objective is to determine, under the arrangement, an overall amount of debt repayment that reflects the debtor’s actual financial capacity.

It is equally important to complete the proceedings in time. Restructuring should be concluded before the debtor’s sources of operating finance are exhausted. It cannot continue beyond the point at which the debtor loses the ability to operate as a going concern.

Accepting a higher claim does not necessarily mean paying more

A debtor’s consent to include higher-than-expected amounts in the list of claims does not automatically produce final and adverse financial consequences.

In simplified terms, the amount of a claim included in the list primarily determines the creditor’s voting power in the vote on the arrangement. It does not necessarily determine the amount that the debtor will ultimately pay.

The decisive factors are the terms of the restructuring proposals and the total amount that the debtor is realistically able to distribute among creditors.

Example: a higher total of claims, but the same repayment amount

Assume that the debtor estimated its total debt at 100 units and proposed to repay creditors a total of 50 units. This would represent a 50 per cent reduction.

The creditors, however, submitted claims totaling 150 units.

In such a situation, the debtor may still propose an aggregate repayment of 50 units, while increasing the reduction from 50 per cent to approximately 66.7 per cent.

From the debtor’s economic perspective, the outcome remains unchanged. The debtor still pays 50 units in total. What changes is the basis on which creditors vote on the arrangement and participate in the distribution of payments.

The main advantage is that the parties avoid losing time on a dispute that could otherwise irreversibly consume the remaining opportunity to complete the restructuring.

Is the dispute necessary?

Avoiding a dispute over the list of claims may also produce further benefits.

A question may arise as to whether the percentage of repayment provided for in the arrangement should be calculated based on the amount included in the list of claims or on the basis of the amount that is actually due.

In the example above, if the debtor applied a two-third reduction and later established that the actual debt amounted to 100 units, one third of the actual liability would equal approximately 33 units rather than 50.

This may, of course, lead to a subsequent dispute regarding the remaining scope of the debtor’s liability. At the same time, awareness of such a risk may have a disciplining effect on creditors, encouraging them to submit only those amounts for which they have a clear factual and legal basis.

Each case nevertheless requires a separate legal analysis, considering the wording of the list of claims, the restructuring proposals and the approved arrangement.

A concluded arrangement is better than a perfect arrangement that is never reached

The overriding purpose of restructuring should always remain in focus: preserving the business and enabling it to perform its obligations to the extent permitted by its actual financial capacity.

From this perspective:

• a concluded arrangement is better than an arrangement that is never reached because of a prolonged dispute;
• it may be sensible to leave room for further negotiations over disputed claims after the arrangement has been concluded;
• financial forecasts and expectations concerning the future performance of the business are inherently uncertain;
• it is often better to allow the company to continue operating and test those assumptions in practice than to let it fail while the parties are still arguing over a largely hypothetical dispute.

Compromise as a means of achieving the restructuring objective

The views presented above are based on practical experience with restructuring proceedings.

In some cases, it is worth considering a compromise that may initially appear unfavourable to one of the parties. If that compromise makes it possible to avoid a lengthy dispute, conclude an arrangement and preserve the business, it may ultimately be the more rational economic solution.

In restructuring, success does not always belong to the party that challenges individual claims most effectively. More often, it belongs to the party that manages to conclude and implement the arrangement in time.

Loewen, it’s thinkable.

Author: attorney-at-law Artur Zawadowski, partner