G. Ray Warner, Course Leader St. John's University School of Law Of Counsel, Greenberg Traurig llp, usa



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Partial pre-pack –



Procedural consolidation

  • Procedural consolidation

    • All cases before same judge
      • Global Oceans – even foreign entities
    • Single plan involving multiple entities
  • Substantive Consolidation

    • Combines assets and debts
      • Rarely forced by court decision
    • But consensual “deemed” substantive consolidation is common in large cases






  • Professor of turnaround management at Leiden Law School

    • Department of Business Studies
    • TRI Leiden – “Turnaround, Rescue, Insolvency” research team
    • www.tri-leiden.eu
  • Founder of global think tank Turnaround PowerHouse®

    • Training programs and advisory including turnaround games for turnaround professionals, bankers and management teams
    • www.turnaroundpowerhouse.com


Harvard Business School approach

  • Harvard Business School approach

  • Preaching versus teaching

  • Participant centered learning

  • Learning by sharing knowledge and experiences in discussion

  • Learning by doing things together (e.g. cases, serious gaming)

  • Based on conceptual framework “Crisis. What crisis?”





13.45 Introduction

  • 13.45 Introduction

  • 13.55 Workout Discussion

  • Preparation in groups [20 minutes]

  • Plenary presentations and discussion

  • 14.45 The Trump Casino Workout Game

  • What is serious gaming?

  • Introducing the Workout Game

  • Playing the Workout Game…

  • 17.15 Group analysis on Workout Game process and results

  • 17.50 End of session



Preparation in groups

  • Preparation in groups

  • Input based on your own practical workout experience

  • Report group conclusions on a flipchart paper + short presentation/explanation

  • What is a successful (out-of-court) “workout” according to your definition?

  • What are advantages and disadvantages of workouts compared to judicial bankruptcy/reorganization procedures? How do you deal with that in practice?

  • What are cross-cultural differences and (potential) conflicts in international workout situations?

    • Your experiences? Characteristic examples/anecdotes?
    • How to deal with it?


Advantages [not limited]

  • Advantages [not limited]

  • Confidentiality

  • Control

  • Flexibility

  • Wide range of solutions possible

  • Less reliance on legislation or judiciary

  • Encourage commitment

  • ‘Selffulfilling prophecy’ can be avoided due to relative silence and ‘controlled’ process

  • Disadvantages [not limited]

  • Holdout problem / free-rider risk

  • No instruments to force stakeholders to participate in solution



Examples

  • Examples

  • Settling of priorities

  • Local habits and behavior

  • Times of the day people work and hours in workweek

  • Acceptable pay wage/fees

  • Motivation of people

  • Ehtical standards practiced in business

  • “Rescue culture” in business community / stigma on failure (yes/no)

  • (direct) Involvement of governments

  • Influence of local labor laws and role of unions

  • Bankruptcy and tax laws (debtor - creditor friendliness)

  • Level of experience with workouts and bankruptcy (”Kosovo” example)

  • Sophistication of banking sector (“London Approach”)

  • Etc…

  • Source [amended]

  • DiNapoli (ed.) Workouts & Turnarounds II, Wiley/PriceWaterHouseCoopers, 1999





Simulation of real life situation – in a safe environment

  • Simulation of real life situation – in a safe environment

  • Role change to better understand other actors in workout situations

  • In the end: what can we learn from the game to use in daily practice?

  • Challenging your own assumptions…

  • Recent games: Zambia, Uganda, Tunisia, UK, South Africa, Suriname, Italy, Rwanda



Five teams (“roles”) at the “Workout Game Table”

  • Five teams (“roles”) at the “Workout Game Table”

  • The Trump Casino Management Team

  • The Informal Equity Committee

  • The Informal Lenders Committee

  • The Workout Firm

  • Team Trump

  • Instructions

  • Every team receives a sheet with specific instructions

  • Fair play

  • No team is being manipulated – no boobytraps

  • Just remember: the more serious you play, the higher the gain…



Round 1: 30 minutes to prepare with your subgroup

  • Round 1: 30 minutes to prepare with your subgroup

    • State/define your position
    • Initiative for 1st meeting taken by Workout Firm
  • Round 2: maximum of 30 minutes to come to a standstill agreement

  • Round 3: 90 minutes to come to a written workout agreement















Active attitude by management and shareholders

  • Active attitude by management and shareholders

  • Seeking help from professional advisors

  • Adequate operational turnaround measures [fixing the business]

  • Transparency with regard to financial situation

  • Injection of risk-bearing capital

  • Involvement of financiers (major financial and trade creditors)

  • Confirmed by (among others): R3 research (UK), Slatter & Lovett (London Business School) and Franks/Sussman (UK)





    • Principal banks putting pressure on management [tension]
    • Unsecured creditors cannot be convinced and yet refuse to take “haircut” [holdout problem]
    • Investors only interested under unfavorable conditions
    • Shareholders and potential investors not agreeing on sales price
    • Principal bank canceling financing
    • Uncontrolled “race to collect” started by creditors [frustrations among creditors]
    • Problems becoming publicly known leading to “self-fulfilling prophecy”
    • Conflicts with service providers and suppliers on payment terms
    • Emergency loans necessary yet shareholders and banks refusing
    • “Signaling” of shareholders by not injecting additional finance [no trust anymore]
    • “Skeletons in the cupboard” leading to pressure of potential investors towards liquidation


Passive attitude management and shareholders

  • Passive attitude management and shareholders

    • Started too late; “too little, too late”
    • Need for strategic redirection not seen
  • No speedy and adequate operational restructuring

    • Lack of turnaround planning based on vision, strategy, operational and financial planning
    • Too much focus on costs instead of sales
    • No indications of methodical approaches towards turnaround
  • Important stakeholders not involved

    • Banks badly informed
    • Important suppliers/vendors ignored
  • Insufficient transparency regarding financial situation and proposed reorganization

    • MIS is disaster
    • Lack of attention with regard to steering on financial key performing indicators
  • Not enough efforts towards bringing in risk-bearing capital (equity)

    • Too much focus on additional debt and/or workout agreements with (unsecured) creditors
    • Need for additional equity not seen by management


  • Frustrations and loss of trust

  • Not enough attention on negotiation and communication

  • No improvement in operational (financial) results



Why is communication needed? With whom?

  • Why is communication needed? With whom?

  • What is good communication?



Harvard negotiation framework

    • Harvard negotiation framework
    • [People] Adopting a problem-solving approach and not allowing personality differences to side-track this [dealing with frustrations]
    • [Interests] Avoiding taking and defending positions but rather concentrating on parties’ respective interests [enlightened self-interest]
    • [Options] Before making decisions, generating as many options as possible, particularly those creating mutual benefit [tailor made solutions]
    • [Criteria] Establishing objective and fair criteria for a resolution, rather than the judgment of either party [sophisticated turnaround plan – commercially viable future - root causes addressed]


Consciousness must be present with regard to “feelings, emotions, frustrations” of stakeholders involved

  • Consciousness must be present with regard to “feelings, emotions, frustrations” of stakeholders involved

  • Resolving financial distress has a great way to do with:

    • Communication
    • Frustrations
    • Dealing with fear of losses at various parties involved
  • Harvard principle 1: deal with human factor first, then move on



  • Negotiations often take place one-on-one

  • Important to focus on common interest of company, individual creditor and other creditors

    • Interests are related
  • Harvard principle 2: “pull” parties out of positions and show them

  • what is to be gained for all



Fact: companies in distress lack money

  • Fact: companies in distress lack money

  • Yet, various options always available between direct payment and debt write-offs [“workout”]

  • “Opportunism” to be avoided; specifically with regard to tendency to have unsecured creditors footing the bill

  • Harvard principle 3: always look for various options to choose from by creditors



“Company viability” is a subjective fact

  • “Company viability” is a subjective fact

  • Holistic turnaround plan needed as basis for negotiations

  • Harvard principle 4: establish “objectified subjectivity”

  • Consensus in literature: turnaround plan (10 elements)

  • Company profile – business model + causes

  • Analysis of external environment – market analysis

  • Turnaround strategy – sales growth + retrenchments

  • Strategic intent – description of desired end-state

  • Operational analysis – formulated SWOT-issues outlined

  • Operational action plan – detailed operational plan of attack

  • Financial prognostications – profit & loss-, and cash forecasts

  • Time scheme – timetable + milestones

  • Risk analysis – best & worst case scenario, and risk reward ratio

  • Summary – `to the point` outline (e.g. for bankers steering committee)



First of all, try to create a standstill and with that stabilize the situation (“informal moratorium”)

  • First of all, try to create a standstill and with that stabilize the situation (“informal moratorium”)

  • Agree about “fresh money” and how to deal with it in case the company collapses anyway (“loss-sharing agreement”)

  • Try to generate as many options as possible before deciding on solutions

  • Make information transparent for all

  • Be aware of fact that some stakeholders in practice have more power than strictly based on their legal positions

  • Create a negotiation atmosphere based on mutual trust and respect

  • Keep a close eye on legal positions: do not try to put stakeholders in a worse off position as compared to their legal status

  • Use Harvard Negotiation principles and INSOL Statement to help guide negotiations and to create some kind of “informal rules” (framework)

  • Make sure the company works on a turnaround plan (“fixing the business”)

  • Use a little bit of humor… (indeed, research shows it helps in difficult situations)



  • Rotterdam Science Tower

  • Marconistraat 16, 12th floor

  • 3029 AK Rotterdam

  • The Netherlands

  • tel +31 (0) 10 204 56 70

  • fax +31 (0) 10 204 55 55

  • jan.adriaanse@turnaroundpowerhouse.com

  • www.turnaroundpowerhouse.com





Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (“stand still period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor´s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case

  • Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (“stand still period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor´s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case



During the standstill period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor but are entitled to expect that during the standstill period their position relative to other creditors and each other will not be prejudiced

  • During the standstill period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor but are entitled to expect that during the standstill period their position relative to other creditors and each other will not be prejudiced



During the standstill period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the standstill commencement date

  • During the standstill period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the standstill commencement date



The interests of relevant creditors are best served by co-ordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisors to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole

  • The interests of relevant creditors are best served by co-ordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisors to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole



During the standstill period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors

  • During the standstill period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors



Proposals for resolving the financial difficulties of the debtor and, so far as practical, arrangements between relevant creditors relating to any standstill should reflect applicable law and the relative positions of relevant creditors at the standstill commencement date

  • Proposals for resolving the financial difficulties of the debtor and, so far as practical, arrangements between relevant creditors relating to any standstill should reflect applicable law and the relative positions of relevant creditors at the standstill commencement date



Information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential

  • Information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential



If additional funding is provided during the standstill period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practical, be accorded priority status as compared to other indebtedness or claims of relevant creditors

  • If additional funding is provided during the standstill period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practical, be accorded priority status as compared to other indebtedness or claims of relevant creditors



  • Day One Close



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