Fri | Dec 3, 2021

Wilfred Baghaloo and Marlon Murdock |The Insolvency Act: An opportunity for the turnaround of failing companies

Published:Sunday | May 9, 2021 | 12:09 AM
Wilfred Baghaloo
Wilfred Baghaloo
Marlon Murdock
Marlon Murdock
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We recently compared the previous and current legislation governing insolvencies. We also looked at how the Insolvency Act (2014) has made significant improvements benefiting both companies and individuals in the event of financial distress. In this article, we focus on companies and how the Insolvency Act can help executives charged with governance navigate rehabilitation during periods of a financial crisis.

The objective of the act is to provide companies the opportunity to be rehabilitated during a financial crisis rather than being placed in receivership or liquidation as was the case during the financial crisis of the 1990s, which forced many companies – approximately 30,000 – to close their operations. Commencing the process of saving a company for the benefit of creditors and other stakeholders lies with its board of directors and a licensed trustee. It is the latter who makes the final recommendation to the creditors on the way forward.

Does creditors’ protection require court action?

The Insolvency Act is administered by the Office of the Supervisor of Insolvency through the supervisor. A trustee is licensed by the supervisor to act as an insolvency practitioner under the act. A petition can be made to the supervisor to appoint a trustee and the filing of a rehabilitation plan, known as the Proposal, within an initial 30-day period. The Proposal is a plan that details how the company will pay its creditors and the ‘new plans’ it has to ensure the future viability of the company. In summary, the plan must give the creditors some comfort that the company can be saved to ensure that they will receive the settlement of their debts in accordance with the Proposal crafted by the board of directors and recommended by the trustee.

The trustee must guide the company through the process, assist in developing the Proposal, and making recommendations to all classes of creditors. If the company’s Proposal is rejected by creditors or any class of creditors, then the company will become bankrupt and the Trustee’s role will change to managing the assets for the benefit of all creditors either through another restructuring plan or liquidation.

The company is protected against action from creditors – The Stay

Commencing on the day that a Notice of Intention (NOI) to make a Proposal is filed, no creditor, secured or otherwise, can take or continue any action to recover amounts owed or prevent the reasonable trading of the company. This is called the Stay of Proceedings, and it is a critical feature of the Insolvency Act used to allow the company an uninterrupted opportunity to develop the Proposal within the required timeframe. The Stay applies to all creditors, including those holding collateral against the company such as financial institutions and suppliers of critical services. The Stay can be challenged by a creditor through the court; however, they must satisfy the court that the Stay will cause an unfair and significant decline in the amount they can recover from the company or that it could create irreparable damage to their collateral if any.

How long does the company have to complete rehabilitation?

The NOI allows the company an initial 30 days from its filing to develop and file a Proposal. The company may, however, request several extensions of time up to 180 days, but any request must be approved by the supervisor.

The Proposal will detail the terms of the rehabilitation, including how long the company would be seeking to be allowed to pay the amounts owed to creditors.

Negotiating with creditors and potential investors

During the process of developing the Proposal, the company, with assistance from the trustee, may approach key creditors to discuss and negotiate the considerations being made for settlement. The discussions allow the borrower and the trustee to determine the feasibility of the contemplated Proposal and its probability of successfully receiving a vote of approval from creditors.

The process also allows the company an opportunity to seek and engage potential investors, if necessary, to finance the terms of the Proposal. An investor may provide a loan or equity financing. Where a loan is being sought, and to have that loan become a secured debt, which would be a likely condition imposed by the lender, the company must apply to the court seeking an order that grants permission to borrow and will declare that an appropriate part of the assets of the borrower will be subject to a charge in favour of the lender.

The company can be saved even after rejection of the Proposal

If at the end of the process, the required votes on the Proposal are not received, causing its failure, the company is declared bankrupt. A company in bankruptcy has the effect of having its assets being taken over by the trustee for the benefit of all creditors. The role of the trustee then becomes managing and disposing of the assets to settle the debts due. This is similar to the receivership or liquidation process that existed before the Insolvency Act. It is however dissimilar because unlike a liquidation for example, if the Trustee can subsequently develop a Proposal that is acceptable to the creditors, the company may, subject to the terms, be restored from bankruptcy and the asset returned to the control of the company.

The provisions of the Insolvency Act allow a company to rehabilitate its business in a formal process for up to 180 days, and potentially beyond, to avoid a sale of assets which usually results in a winding up of the business. Insolvency regimes that focus on the rehabilitation of the borrower have been shown to result in relatively higher recovery rates for creditors generally, relatively lower costs of borrowing, and resolve insolvencies in a shorter time compared to regimes that primarily utilise traditional tools such as receiverships and liquidations.

In our third and final article in the series, we will examine the impact of the Insolvency Act on creditors.

- Wilfred Baghaloo is deals leader, partner, and licensed trustee, PwC Jamaica. Marlon Murdock is senior manager, advisory services, PwC Jamaica. Send feedback to wilfred.b.baghaloo@pwc.com or marlon.a.murdock@pwc.com.