Preserving your business through debt restructuring

In this article, Christophe Vandendorpe and John Tan, who are restructuring and liquidation practitioners at EY Luxembourg´s Reshaping Results team, answer a question often asked by businesses: how to preserve value in a distressed situation?

My business is failing due to the current situation – what can I do?

Applying for bankruptcy is a last resort as that doesn’t necessarily maximise value for your shareholders and creditors. If your business remains viable long-term, and if you have the support from a majority of existing creditors, you could consider a debt restructuring exercise in Luxembourg.

What is the purpose?

Debt restructuring is meant to introduce a moratorium period during which all claims and bankruptcy petitions against your company are suspended, giving you valuable space to formulate a new recovery plan.

It also ensures that your business plan is agreed formally with your creditors. This can take various forms, for example, extending repayment deadlines, negotiating debt reduction (also known as a “haircut”) or a debt to equity conversion, enlisting the help of a new investor, or a combination of any of these elements.

What are my options in Luxembourg if I were to carry out a debt restructuring?

Distressed businesses may implement restructuring via a variety of different procedures. These include a stay of payments, controlled management and composition with creditors.

Can you tell me a bit more about these options?

Stay of payments

A company files an application with the court seeking a stay of payments for a determined period. The company´s application must receive at least 75% of votes (in value) from creditors in order to be binding.

Controlled management

The company files an application with the court for the approval of its proposed plan. The plan must be approved by at least 50% of creditors (both in number and value). The plan is binding on all creditors including secured creditors (with the exception of security holders under the Law of 5 August 2005 on financial collateral arrangements, as amended) and dissenting creditors.

Composition with creditors

The company files its proposed plan of compromise with the court, and a creditors’ meeting is held to vote on the plan. To be valid, the proposal must be approved by creditors forming more than 50% in number and 75% in value.

Which option should I use?

There are pros and cons with each procedure.

Businesses facing temporary liquidity issues, but which are able to repay their debts in full eventually, might consider the stay of payments procedure.

The controlled management procedure provides a stay against all winding-up and enforcement action, even against secured creditors (with the exception of security holders under the Law of 5 August 2005 on financial collateral arrangements, as amended).

The composition with creditors procedure only binds creditors who participated in the vote, therefore non-participating creditors continue to be free to pursue their claims against the company.

Anything else I should know?

Not all of the procedures affect the rights of secured creditors or non-participating creditors. Therefore, getting the necessary buy-in and support from key creditors for your restructuring plan is crucial.

If the above procedures sound too complicated, consider agreeing with key creditors a standstill arrangement. This will give you a temporary period for your business to recover and formulate a new business plan, rather than filing for bankruptcy which may not produce the best outcome.

A solid restructuring plan must be considered from business, financial, and regulatory perspectives. An experienced advisor who can leverage such a multi-disciplinary skill set is a must to lead the company through this critical phase.

To learn more and connect with the EY Reshaping Results team, visit https://www.ey.com/en_lu/strategy-transactions/reshaping-results.

Disclaimer - this article is for information only and is not meant to provide legal advice.

Christophe Vandendorpe, Strategy & Transactions leader, EY Luxembourg

John Tan, Manager, Strategy & Transactions, EY Luxembourg