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What are the #alternatives to a company going into #receivership or #windingup its affairs on the ground of its inability to pay its debt?
👉🏾 What do you do as an In-house #Counsel or #companylawyer if the corporate entity you work for is approaching #insolvency ?
A few years ago, I had the opportunity to review an #assetfordebtswap arrangement, which reduced a company's #debtportfolio further helping this company remain afloat, long enough for it to take care of its outstanding debt.
🟥 Strategies to manage a company's finances will largely depend on the size of its debt. While #smallbusinesses may explore avenues such as asking suppliers for a #tradecredit - a company with an bigger volume of operations and a huge debt profile may have to look for a more effective #debtmanagement #strategy
One of such strategies is an #assetfordebtswap - key aspects of negotiation in this transaction include the value of the asset, the amount of debt to be settled, and any additional terms or conditions.
The company transfers the agreed assets to the creditor(s), who, in turn, cancel or reduce the corresponding debt.
Similarly, a company may adopt the #equityfordebt swap strategy. The company can either trade existing #equity or issue new shares to the creditors in exchange for the cancellation or reduction of the debt. The number of shares issued is based on the agreed valuation.
In Nigeria, Section 434 of the #companiesandalliedmattersact 2020 allows the directors of a company to make a proposal to its creditors for a composition in satisfaction of company #debts also known as "voluntary arrangement".
A voluntary arrangement is a legally binding agreement between a company and its creditors to restructure its debt and manage its financial difficulties without resorting to insolvency proceedings - it can take different shapes or forms, under the guidance of an insolvency lawyer or practitioner.
There are many reasons why a company may get into financial difficulties - one of the biggest offenders being the volatility of the market.
In 2016, Oando, a reputable energy company in Nigeria, was reported to have had a burgeoning debt portfolio after it acquired some assets from Conoco Phillips, sadly, the oil market was performing abysmally and it negatively impacted the company's finances - a restructuring occurred with the disposal of specific company assets and a loan facility from 10 banks which was used to offset the asset acquisition costs and part of the company's outstanding debts.
❌️ The reality remains this: Fluctuating market conditions can adversely impact a company's ability to manage its debt portfolio. However, a ballooning debt profile isn't a death sentence yet. 🔑 It is essential for the company's management to carefully assess the options available and formulate a comprehensive plan to remain afloat (if the opportunity presents itself). Effective management can mean the difference between survival and insolvency.
Divesting non-core assets or business units to raise funds and streamline operations can be crucial to survival and recovery - and importantly, engaging experts who can help to navigate the complexities of existing crisis.