Indebted Companies – There May Be Better Options Than Insolvent Liquidation

Companies go through good times and bad and, when their debts mount, specialist lawyers are adept at ensuring that matters are dealt with in an orderly fashion and that creditors get the best possible deal. Exactly that happened in one case in which High Court proceedings promised a rosier future for an international commodities trading company that had built up deficits of over $1 billion.

The company had been in financial difficulties for some time and was continuing to lose vast sums of money. In the event of it entering insolvent liquidation, it was estimated that creditors would receive between 19 and 30 cents in the dollar. That outcome was, however, averted after lawyers consulted by the board of directors proposed a scheme of arrangement under Part 26 of the Companies Act 2006.

The scheme was part of a planned broader restructuring of the group of which the company was the ultimate holding company. It was proposed that substantially all of the company’s assets would be transferred into subsidiaries of a newly incorporated holding company and that fresh debt instruments would be issued to creditors by companies in the new group.

In return for releasing their existing debt claims, creditors would also receive 70 per cent of the equity in the new group. The remaining shares would be split between the company’s existing shareholders and management, with the former receiving 20 per cent and the latter 10 per cent.

In recommending the scheme to the Court, the company’s lawyers argued that it would provide the new group with access to substantial new hedging and trade finance facilities. The company would be returned to a position in which it could compete for major commodities contracts and in which it would be able to meet any liabilities on an ongoing basis.

In sanctioning the scheme, the Court found that the statutory requirements of Part 26 had been fully satisfied and that it promised a substantially better outcome for the company’s creditors and other stakeholders than an insolvent liquidation.