Article by Don Navarro, KPN Health’s Executive Chairman.
From time-to-time, businesses in all industries face operational and financial challenges, some more severe than others. The severity of these challenges often correlates to the amount of time taken by boards/management/owners to recognize the existence of these issues and take actions to remedy these conditions.
When faced with the more severe challenges, companies generally have two options: First, “out of court restructuring” (sometimes referred to as “non-judicial restructuring”), or second, a “judicial restructuring” — a court supervised restructuring such as bankruptcy chapter 11, 9 or 7 bankruptcy proceedings and state court receiverships.
Reasons “Out of Court Restructuring” may be needed: (i) company’s tangible or non-tangible assets are not performing to projected levels; (ii) cost and internal controls are lacking; and (iii) loss of focus, market share, market place or competitive advantage due to several factors.
An additional level of complexity surrounding a business faced with severe financial is due to creditor/claimant categories not being timely paid: (i) secured (generally banks); (ii) unsecured creditors (suppliers/vendors); and (iii) interest holders (other shareholders and strategic partners) are dissatisfied with company’s financial performance). Any or all of these conditions could place an entity into the “Zone of Insolvency” – at which time, a company’s board/management/owners should seek professional assistance to determine the next strategy and action steps based on this determination.
WHY: Operating in the “zone of insolvency” can meaningfully impact actions, decisions, fiduciary duties of all creditor constituencies and interest holders of a company, plus influence short-term efforts for near-term solvency restoration that segue to longer-term permanent strategic plans of reorganization.
Out-of-court restructurings are uncharted waters for most board/management/owners, hence the reason to involve outside professionals sooner rather than later for guidance and input assistance when facing business/financial challenges.
The landscape varies among industries and is complex and fragile. When facing these challenges, always be mindful that “inaction is a decision itself”. Decisiveness with targeted objectives executed by confident leadership is key for exiting the zone of insolvency and restoration to business norms and future commercial success.
To hear a dynamic discussion on out of court restructuring, click here to view Expert Webcast’s Out-of-Court Restructuring Options webcast recording where top industry experts, including Don Navarro, KPN Health’s Executive Chairman, weigh in on topics including out-of-court restructuring alternatives, capital availability for distressed companies (equity and debt) and duties of boards of directors and management.
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