When a company faces severe financial difficulties, the path to recovery can seem daunting. Deciding between an out-of-court restructuring and court protection is a crucial step. Understanding the differences and benefits of each approach can help businesses navigate through financial distress more effectively.

Can I Restructure my Company Out of Court or Do I Need Court Protection?

When dealing with significant financial challenges, businesses have two main pathways to consider: in-court restructuring (also known as Chapter 11 bankruptcy) or out-of-court restructuring. Out-of-court restructuring is a strategic approach companies take when facing financial distress to renegotiate their debt obligations with creditors outside of formal judicial proceedings. This method offers a potential path to recovery that can benefit both the debtor and the creditors if managed effectively and collaboratively.

Unlike formal Chapter 11 bankruptcy proceedings, which have judicial oversight, out-of-court restructuring is a collaborative process between the company and its creditors. The shared objective is to restore the company’s financial health to a sustainable state, avoiding insolvency.

Factors Influencing the Decision

Making the decision to opt for out-of-court restructuring or in-court proceedings like Chapter 11 is influenced by several factors, including:

• The Company’s Current Liquidity: Companies with sufficient liquidity may have more time to negotiate out-of-court.
• The Complexity of the Company’s Capital Structure: Companies with simpler capital structures and fewer creditors may find it easier to negotiate and implement an out-of-court restructuring.
• The Urgency of Its Financial Situation: Companies facing imminent liquidity shortfalls may have to resort to the formalities of a court-supervised process.

Success Factors for Out-of-Court Restructuring

The success of out-of-court restructuring largely depends on the willingness of creditors to negotiate and the company’s ability to present a viable turnaround plan. It requires a high degree of cooperation and agreement among all parties involved, and unanimous or near-unanimous consent from the affected creditors is typically necessary. If successful, it can preserve the company’s value and operations without the stigma and operational restrictions that come with a bankruptcy filing. However, if the company cannot secure agreement from its creditors, it may have no choice but to seek protection under bankruptcy laws, where a court-supervised reorganization can impose terms on dissenting creditors.

Snapshot Process Comparison

Out-of-Court Restructuring

• Informal – No court involvement; negotiations occur directly between the company and creditors.
• Cost-Effective – Simpler and less expensive than Chapter 11.
• Swift – This can be appealing to cash-constrained companies.

In-Court Restructuring (Chapter 11)

• Formal – Standardized process overseen by the court.
• Complex – Involves legal procedures, filings, and court approvals.
• Time-Consuming – This may take longer due to court proceedings.

Advantages and Disadvantages

Advantages of Out-of-Court Restructuring:

• Lower legal fees and administrative costs.
• Faster resolution.
• Tailored solutions.
• The continuation of goodwill between the business and its creditors.

Disadvantages of Out-of-Court Restructuring:

• Non-consenting parties cannot be forced to comply (limited binding power).
• Agreement from multiple creditors is required and can be difficult to coordinate.
• If negotiations break down, court proceedings may become necessary after all.

In short, out-of-court restructuring offers an efficient and collaborative path to financial recovery. Companies must weigh the pros and cons based on their unique circumstances. The goal is to achieve a sustainable, going-concern basis while avoiding insolvency.

DWH has helped hundreds of businesses through both types of restructuring processes. If your business needs advisory services, contact us to schedule a consultation today. You are not alone. We can help. At DWH, we’re here for you. Feel free to reach out for a conversation on how we can assist you as you focus on thriving rather than just surviving.

This post was written by Heather Gardner
hgardner@dwhcorp.com | LinkedIn
Edits made by Jordan Gunn

All companies experience change.
Plan for it with us.