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Spark's debt Workout Approach

Spark! Debt Workouts - History, Culture and Attitudes Matter

Debtor and Creditors beware! Despite modelling the chapter 6 - Company Act 2008 on the US Chapter 11 framework, South Africa has yet to develop a "Rescue Culture", like that which we find in the US, the City (London) and across Asia. Instead we in SA have drifted towards the worst aspects of the continental "Insolvency Culture", without the benefits of some of their key enablers, for example

  • the non-adversarial Napoleonic legal representation, where a single legal team can represent the two parties
  • the encouragement of early action as in the French Sauvegarde, where merely a debtor's failure to solve key business problems, instead of waiting for financial distress, is a trigger to the processes available
  • the very mature, respectful co-determination of labour - Germany's Mitbestimmungsgesetz, which requires companies over a certain size to have half the supervisory board of directors as representatives of workers.)

The EU is growing continually towards an aligned approach to business rescue (as it has with other laws and dictates under the Copenhagen criteria, which define eligibility criteria for membership of the EU), and its 2002 EU Insolvency Regulation, which very stand out in so far as

Many developing nations having recognised the need to liberalize bankruptcy and insolvency laws, went about choosing the US Chapter 11 law as a skeleton, and added to it parts of others approaches which were politically expedient or were aligned to an economic agenda, assuming then a natural domestic acceptance would evolve to complement the new legal framework. Many hold the opinion, that cultures will express a set of social values and hierarchies which in turn have laws created to preserve and protect these culturally defined constructs. Laws are the product of culture, not the other way, and where regulatory and legal insolvency frameworks have been copied, imported or duplicated, without due consideration of history, culture and attitudes, the expected benefits and the impact on the economy have been impeded. South Africa fits this view.

  • showed a complete lack of interest in rehabilitation of distressed businesses
  • dictated that any secondary proceeding be followed up by winding up proceedings
  • bestowed the designation of "liquidator" to the responsible insolvency office holder in main or secondary proceedings -

American's looked aghast at this and make comparison to penal law codes and debtor's gaols. Mercifully, since then most of the insolvency laws have been modernized and the insolvency regimes dragged kicking and screaming into the 21st century. historians will question this social anomaly, and we should to as Insolvency laws although measured by economic impact, are at their heart Social Welfare tools! In fact, in the US, the only real Social Welfare protection for citizens is to be found in their bankruptcy laws.

Evolving EU attitudes and US laws

South African's looking to the US, London or the EU, because of theur cultural anchoring, will do well to observe the changes in attitudes and laws on either side of the Atlantic. The Chapter 11 laws were introduced in 1978, and South African's involved in insolvency, and bemoaning our own legal framework, whilst trumpeting the virtues of the US law would do well to think a little before speaking voicing their confident criticism again, as:

  • The key enabler of US insolvency is actually their culture, and their attitudes to risk, entrepreneurship and debt-forgiveness
  • The 1978 law were designed for a largely domestic market, where secured credit instruments had not been created, where the economy was dominated by capital intense, asset based manufacturing rather than the service orientated firms of today where great value resides in intellectual property, and contracts, with a heavy international presence and much more cross-border complexity.
  • These structural changes to the economy are shifting the intention of insolvency from rehabilitation and the protection of jobs and securing the tax base to the ominous and generic "maximization of value"

Meanwhile in the EU, politics has taken an interest in insolvency laws and things are changing quickly

The European Commission published its proposal for the Regulation to amend the EU Insolvency Frameworks in December 2012, which had the noble intent of addressing 5 areas of concern and improvement: ,Scope, Jurisdiction, Secondary proceedings, Publicity of proceedings and lodging of claims and is rapidly reforming and converging the laws across the EU

In November 2011 the European Parliament (EP) approved a ‘Motion for a European Parliament resolution with recommendations to the Commission on insolvency proceedings in the context of EU company law’.

Follow, EU Insolvency Proceedings and Evolving Policies to track their rapid evolution.

Careful observation indicates new and recent tendencies towards:

  1. Adopting a "debtor in possession" approach
  2. Re-enforcing prompt actions, and much earlier recourse to processes and easier entry (not using financial distress).
  3. Bolstered collective solutions with the ability to bind creditors not granting approval
  4. With automatic stays and moratoria and the appetite and ability to grant these on request
  5. The expanded use of Financial Restructuring with encouragement of debt to equity swaps for example
  6. The protection of "fresh" money - what we would call post-commencement funding, which shielded from the operation of avoidance provisions, paulian actions etc. in national insolvency law (R6(e) and 27), as well as from ‘civil and criminal liability relating to the restructuring process’ (R28) except in the case of fraud
  7. Reduced Court involvement by granting debtor businesses access to the restructuring framework without court proceedings

How Debtors and Creditors should use these insights

Use this information when you are confronted by intransigence and blinkered behavior of obstructive stakeholders regarding their accommodation of the various (and to them, new!) ways of collaborating within the informal workout process

It is not unreasonable to expect the workout stakeholders to be rational, logical, and consistent in their thinking. If they acknowledge their cultural leanings and the origins of their attitudes, then they should make sure that they evolve wit the times. The rational and logical will respond to the quantitative benefits of new ways of collaborating.

In those instances where obstinacy persists, (I know at least one bank's credit and rescue department), we can only conclude that they are vindictive and abusing their power, or unfit to perform the role they occupy. Regulators will act on this, and the press will do their bit.