Legal Issues for Turnaround Managers – Part 2
In part 1 we looked at the common legal issues turnaround managers may encounter in the pre-appointment phase; including terms of retainer and indemnity, and solvency assessment.
In part 2 we consider the common legal issues for turnaround managers once appointed.
Financial instruments – The future of a distressed company is often dictated by the interests of its secured creditor(s) or large creditor groups (e.g. bond/note holder groups). The turnaround manager must consider and understand the nature and extent of the company’s financial and security rights and obligations, so that he or she can manage the repayment timetable and any existing or looming defaults including the risk of cross-default across the company’s corporate instruments.
To facilitate a turnaround, the turnaround manager will typically negotiate and document a formal forbearance or standstill arrangement with the main creditors, whereby those creditors will forbear from exercising their enforcement rights for a defined period of time on certain conditions such as an upfront goodwill payment or an early repayment plan. The terms of such arrangements need to be carefully drafted to ensure that the company is not trading whilst insolvent, the company’s rights, interests and entitlements are protected and that the position of those creditors is not unreasonably advanced to the company’s detriment.
Trade creditors and suppliers – To ensure that the company’s business continues during the turnaround, continued terms of supply and trade are critical. A review should be undertaken of the company’s key supply and trading contracts to understand the company’s rights and obligations with suppliers and creditors. This will allow the turnaround manager to determine what arrangements to continue, revise, compromise or terminate.
A review should also involve an assessment of the company’s compliance with the Personal Property Securities Act 2009 (Cth), to assess whether the company’s rights and interests in its property and goods are adequately protected.
Employment issues – A review should be undertaken of the company’s employment contracts, so that the turnaround manager understands staffing requirements, ongoing liabilities and termination rights and consequences. The turnaround manager should also consider the adequacy of the existing contracts with key employees, possibly with a view to re-negotiating new terms to ensure continued service during the turnaround.
Financial restructuring – A successful turnaround will typically involve a complete financial restructuring, the objective being to better structure and manage the company’s cash flow and debt levels going forward. A financial restructuring will typically involve a careful consideration of legal, regulatory and tax issues and may include recapitalisation, asset sales, debt for equity swaps and even pre-packaged transactions through a formal insolvency administration.
With any distressed situation, early intervention is critical.
The key to planning, devising and implementing a successful turnaround is having the right team in place to properly assess all relevant information, circumstances and risks, so that the turnaround manager can make informed decisions at the earliest possible time and with the least amount of personal and project risk.
Cameron Belyea is a Partner and Alistair Fleming Special Counsel for Clayton Utz, one of Australia’s leading independent law firms.