Distressed Companies: How to help financially distressed businesses

If the UK is any indication of how distressed businesses will cope with the post-pandemic world, then companies across the globe could be in for a rough ride in the next few years.

In the first quarter of 2022, the UK recorded its highest insolvency levels for more than 60 years. The surge in business closures as a result of the Covid-19 pandemic witnessed some 5,000 business insolvencies, more than double the number during the first quarter of 2021, according to the Insolvency Service. The number of insolvencies was driven by a rise in voluntary liquidations, which increased by an annual rate of 117% to about 4,300.

Meanwhile, in Q1 some 137,000 UK businesses closed, which was a 23% increase on the same period for 2021 (these companies had ceased trading rather than become insolvent), according to the Office for National Statistics.

The reasons for what’s being termed the “perfect storm” in business closures and insolvencies in the UK is the ending of government support measures, soaring energy costs because of the war in Ukraine, supply chain disruption and a sharp decline in consumer confidence.

Rise in distressed businesses globally

To a more or lesser degree, distressed businesses globally are set to rise significantly this year as governments in every jurisdiction withdraw support measures that have helped businesses stay afloat during the pandemic. According to research by trade credit insurer Euler Hermes, worldwide business insolvencies are expected to jump 15% year-on-year.

In the US, the number of bankruptcies filed in March this year increased 33.5% compared to the previous month, according to legal research firm Epiq. But the overall number of cases was still lower compared to previous years. The first quarter of 2022 brought a 17% decline in new filings compared with the same period in 2021. In the US, companies are largely being kept afloat by a federal cash injection.

The news for distressed companies is generally less favourable for Europe. In Spain and Italy, for example, insolvencies are predicted to increase above 2019-levels in 2022, while Switzerland, Sweden and Portugal will probably experience a rebound in business insolvencies in 2022.

Meanwhile, in France and Germany large government support packages and extensions have kept insolvencies low. In France, for instance, business is now back to normal in the commercial courts. In the first quarter of this year, according to figures from Altares Dun & Brandstreet, almost 10,000 businesses were facing insolvency. This number was up by 35% compared to the same period in 2021, but still below the levels in 2018-19, when the first three months saw around 14,000 companies defaulting.

Chapter 11 in the US and beyond

With such diversity in the numbers of distressed business and insolvencies in the different jurisdictions, it’s understandable that there should also be a wide range of solutions to help distressed businesses.

Professional advisors in different jurisdictions cite the local version of the US’ Chapter 11 (if a version indeed exists locally) as a means of helping distressed businesses stave off closure or insolvency. Briefly, Chapter 11 refers to the chapter of the US Bankruptcy that sets out the procedure for a company’s reorganisation proceedings under US bankruptcy law. Broadly, when the petition is filed an automatic stay comes into effect that prevents any enforcement action or the start or continuation of other legal proceedings against the debtor. This technically extends worldwide. Once the debtor has entered Chapter 11 proceedings, it is given an exclusive period of 120 days to file a plan of reorganisation with the court.

In Italy, the local version of Chapter 11 is called the “arrangement with creditors” and in France similar procedures have been established with the “Redressement Judiciaire”.

In all cases, the goal is always to keep the business active and allow the entrepreneur to give value to their assets and satisfy creditors without falling into liquidation.

In Italy, the greatest opportunity for companies in distress is to use the resolutions contained in the code of the business crisis. This provides for contacting the OCC (organizations for the settlement of the business crisis), which recognizes the use of the agreement through which entrepreneurial activity does not cease despite the sale of assets, along with a debt restructuring plan in which the intervention of the OCC and the court is required.

In Belgium, meanwhile, distressed businesses rely on the procedure of judicial reorganisation and as a result there is a period of protection offered to companies, which can apply for a judicial reorganisation. The business will then be aided further under the assistance of the court, which is when assets will be sold on the public market under the responsibility of the Commercial Court. Distressed companies are given the possibility of making silent plans with their assets transferred to other market players, for example competitors to pay the companies’ creditors. This is under the surveillance of a commercial court appointed trustee.

In Mexico, distressed businesses rely on the local US equivalent of Chapter 11 where for the debtor it’s “business as usual”, interest is suspended (except for secured creditors), and broad liberty is given to the debtor to negotiate the reorganisation plan with its creditors. Mexico has adopted the UNCITRAL Model Law on Cross-Border Insolvency, which facilitates the use of Chapter 11 as a tool that crosses jurisdictions.

Last but not least, Australia’s equivalent of the Chapter 11 bankruptcy process is known as Voluntary Administration (VA). This is a process where a company that is insolvent or likely to become insolvent is placed under the control of an independent insolvency practitioner (administrator) who takes over management of the company. The appointment of an administrator starts a moratorium period where unsecured creditors are prevented from taking further legal action against the company. Unlike liquidation, a VA does not necessitate a distressed sale and provides additional options for the company and creditors.

The above information gives you a flavour of what to expect in the following publication on distressed companies. Here IR Global members talk about the issues involving distressed businesses in their jurisdiction. They give an overview of the post-pandemic business climate and then expand on their version of Chapter 11 and how distressed businesses are helped in their jurisdiction. Finally, they give invaluable tips to business people on how to avoid bankruptcy and what to do if their business is in crisis.

Download the publication using the button on the top right of the page.