Financial Services Focus
Chelsea PollardAssociate, Corporate Commercial
Under the new Bankruptcy Law (Royal Decree No. 53 of 2019), the concept of reorganising was introduced whereby a debtor may make an application to the competent department of the Ministry of Commerce, Industry and Investment Promotion (“Competent Department of the MOCIIP”) to restructure their debts.
A debtor may submit an application to the Competent Department of the MOCIIP within six months from the date of hardship. The debtor must not have committed fraud nor commenced composition proceedings, and a final judgement must not have been rendered declaring the debtor bankrupt. Under the Bankruptcy Law, there is no requirement for the debtor to have failed to pay a debt by a designated due date, but rather the debtor must show that it has experienced financial and administrative hardship.
The Competent Department of the MOCIIP has sixty (60) days to review the application, ensure its completeness and prepare a memorandum of the claims of the parties and their respective grounds. Following its review, the Competent Department of the MOCIIP shall hold a mediation. During the mediation phase, either the Competent Department of the MOCIIP or the court may form a reorganisation committee.
The application for reorganising shall be set aside by the Competent Department of the MOCIIP where the parties fail to reach an agreement on the reorganisation plan, the debtor fails to provide the requisite documents and information, the debtor fails to meet the costs and expenses needed for the reorganisation procedures or it becomes evident the debtor’s assets are not sufficient to meet the costs and expenses, if the hardship ceases to exist or the reorganising procedures are not suitable for the debtor based on the information and documents submitted or based on the report of the reorganisation committee.
Following its review, the Competent Department of the MOCIIP shall hold a mediation with the parties and their representatives. If any of the parties or its representatives fail to attend two consecutive sessions, then the application shall be set aside.
In the event of a settlement between the parties, a settlement agreement shall be drawn up and executed by all parties setting out the details of the agreement and measures to be taken. The Competent Department of the MOCIIP shall record the agreement and refer the file to the Primary Court for approval.
If no settlement is reached, then the application shall be deemed rejected and any of the interested parties may appeal against the decision within fifteen days with the Primary Court of the Commercial Court. Any decision by the Primary Court in this regard shall be final.
Either the Competent Department of the MOCIIP or the court may form a reorganisation committee from a panel of experts which shall have the authority and power to develop a plan for reorganisation, management and appraisal of the assets of the debtor, as well as any other duties assigned to the committee.
The reorganisation committee shall submit a report to the Competent Department of the MOCIIP or the court, whichever appointed it, within three months of appointment. The report shall specify its opinion on the cause of the hardship, the feasibility of reorganisation and the proposed plan.
Upon finalising the report, the Competent Department of the MOCIIP shall obtain the consent of the parties and submit the plan to the court for approval. Once approved, the reorganisation plan becomes binding on the parties and must be implemented within five (5) years.
At the discretion of the court, an associate may be appointed to implement the reorganisation plan from among the panel of experts (or others selected by the parties). The fees of the expert (acting as an associate) are to be agreed upon between the parties or determined by the court in the event the parties are not able to agree.
The associate shall be responsible for assisting the debtor in assessing its financial and administrative position, providing advice and technical support to the debtor, developing a mechanism for implementing the reorganisation plan providing assistance to the debtor in implementing the reorganisation plan and cooperating with the creditors and drawing up a quarterly report on the implementation of the reorganisation plan. The quarterly report shall be submitted to the Competent Department of the MOCIIP and the parties to the plan (creditors) to keep them informed of the progress and compliance by the debtor.
The debtor shall continue to manage its own property during the implementation of the reorganisation plan and shall remain liable for any obligations or contracts entered into either prior to or subsequent to the approval date without conflicting with the reorganisation plan.
The debtor may not carry out any acts which would affect the interest of the creditors, including sales that are not associated with its normal business activity (e.g. dissipation of assets), donations, gifts, borrowing or lending or any act in violation of the reorganisation plan.
Any of the interested parties may apply to the court to take any actions relating to the reorganisation plan during the implementation period. Upon the approval of the reorganisation plan, no legal proceedings may be initiated against the debtor and the signatories of the plan in relation to the plan, its progress, their claims or their debts until the reorganisation plan is competently implemented. This includes any lawsuits or judicial orders which may impede the plan’s implementation.
As a creditor (lender), the key factor in deciding whether to approve the settlement and proceed with reorganising is whether you are a secured or unsecured creditor. As a secured creditor, the risks associated with reorganising are lower than if you are an unsecured creditor. Unsecured creditors should ensure that they are comfortable with the likelihood of success with reorganising since agreeing to such will eliminate the option of having a first-mover advantage if it initiates legal proceedings against the debtor to attach and liquidate the assets.
Upon the completion of the reorganisation plan, such shall come to an end. However, it may be terminated earlier if the debtor pays off the debts or where, upon an application of a signatory to the plan, the court finds that the plan cannot be implemented or has been violated. The court shall determine if the plan is terminated either by reason of the debt being paid, the plan not being able to be implemented or a violation occurring.
As a creditor (lender), the key factor in deciding whether to approve the settlement and proceed with reorganising is whether you are a secured or unsecured creditor. As a secured creditor, the risks associated with reorganising are lower than if you are an unsecured creditor. Unsecured creditors should ensure that they are comfortable with the likelihood of success with reorganising since agreeing to such will eliminate the option of having a first-mover advantage if it initiates legal proceedings against the debtor to attach and liquidate the assets. The risk of entering into reorganising is that the process becomes public and if the reorganising fails, all assets will be liquidated and paid pro rata to all the creditors. Additionally, it is worth considering the types of assets that the debtor (borrower) has and whether there is a likelihood that the principal and any interest may be recouped from the sale of such assets. It is worth noting that where assets are sold through liquidation proceedings, they are normally sold below market value.
As a debtor (borrower), reorganising is a viable option in the event there is a small pool of creditors, meaning an agreement to the settlement is more likely. Whether reorganising will be successful will also depend on the industry and operations of the company. Before filing an application, it is important for a debtor to consider the business case for reorganising to assess the feasibility of such.
For further information,please contact Chelsea Pollard
Published in February 2023
