"The main conditions for successful restructuring are the mutual interest of the parties, the right team and a readiness to compromise" OLEKSANDER PLOTNIKOV, A PARTNER AT ARZINGER LAW FIRM, UNDERLINES
— What place does the practice of debt restructuring occupy in the structure of Ukrainian law firms? Can we say that lawyers specializing in the banking law and related practices were redirected primarily towards it?
— Certainly, those companies with strong banking and financial law practices occupy leading positions in the debt restructuring practice. The restructuring practice was one of the most highly sought after and profitable as part of such companies in recent years.
However, talking of Arzinger, most clients and colleagues would not have named our Banking & Finance practice among the leaders five years ago, and someone would have been surprised to learn that this was the case (smiling).
But the situation has changed significantly in the last few years, and now we are on terra ferma both in classical Banking & Finance and in debt restructuring.
— Tell us about the role of outside lawyers in restructuring issues.
— I would single out two types of projects to answer this question. The first is when the need for, and possibility of, restructuring is obvious to all parties and the main question is only in the definition of such restructuring conditions.
In this case, the lawyer’s main task is to offer the optimum restructuring scheme (from the legal point of view) and to competently prepare the arrangements of the parties by providing the legal base for their relationship after restructuring.
But there are also other projects in which, prior to discussion about possible restructuring, there is the need to provide the client with a good position for negotiations and to help the contractor to move towards reasonable dialog. I am talking about cases when there is a conflict with the borrower that is, as a rule, the result of illegal actions and attempts to avoid repayment of a debt by the latter.
The lawyer's role increases many times in such projects. This does not mean execution of arrangements, but creating the conditions in which restructuring is more attractive for the borrower than continuing the conflict.
It turns out that our portfolio contains a majority of conflict projects, and we work only for the benefit of creditors in them.
We should speak separately about cases when everyone agrees to restructuring in principle, but each participant has an understanding of the conditions accepted for him, which differ from the position of the others in a big way. I am not talking so much about a conflict between a debtor and creditor, but about the inconsistency of positions of several creditors of one borrower (in a case with a syndicated loan or club of creditors). The complexity of such projects is that all creditors are equal clients for the outside legal advisor and he/she must ensure the balance of their interests. I can say from my own experience that it’s sometimes very difficult and takes a lot of time. For me personally, it became the next step in my professional growth.
— On what basis should a team of advisors (legal and financial) be formed for project support?
— It depends on the tasks set for advisors. If we are talking about difficult projects, it is very important that the legal advisor is able to provide high-quality support in all areas: negotiations, courts, international arbitration, search for assets, criminal prosecution, and, of course, direct restructuring support.
There is a shortage of companies that can resolve all these issues at a good level.
The synergy in the work of lawyers and financial advisors is also very important. To be honest, I underestimated their role at some stage. But during the debt restructuring of Mriya, Creative and some other companies (unfortunately, I cannot disclose information about them) I got to cooperate with some very strong financiers, who have just changed my understanding about their work and role in the project. Sometimes, the doors that are closed for lawyers are open for financial advisors, and it is important to use this correctly.
— Do you think is there a need for further statutory regulation of financial restructuring? Why is the Law On Financial Restructuring virtually not used?
— I think that everyone who has ever faced restructuring abroad and the legal and financial instruments that the parties can use in such processes has a wish list for improving our legislation. And I am no exception, but this issue deserves a separate article.
I believe that the disadvantage of the Law On Financial Restructuring is that it did not give anything radically new from the perspective of instruments. At the same time, the restructuring process under this law is strongly formalized and imposes obligations on the parties that are not available during restructuring outside the framework of this law.
It is worth singling out for special attention the requirement of the law on obtaining consent for restructuring from financial institutions, which own at least 50% of the total amount of claims of financial institutions to the debtor. In many cases, such requirement leads to the fact that several banks should participate simultaneously in restructuring. In practice, however, both banks and debtors try to avoid such situations, since debt restructuring with each bank separately is much easier and faster than to try to do this with a group of banks in one process. Whoever tried this, will understand (smiling).
Thus, against the background of difficulties of restructuring under this law, the said tax benefits lose their attractiveness.
— Is there any alternative to settling a bad debt? How realistic are the options for selling bad assets or attracting investors?
— The option with the sale of rights to a claim is quite popular and, in many cases, a logical conclusion of the restructuring process. I am talking about situations, when partial repayment of a debt is made in this way with the transfer of rights to claim to a person who is connected to the debtor.
At the same time, the Ukrainian NPL market has been very dynamic in recent years, and we have faced situations when creditors, not seeing good prospects for themselves, sold the rights to a claim to a third party during restructuring. Sale is not the main option at the start of process, but you should not forget about this. The main thing is to make the right decision in a timely manner.
Certainly, everything is more complicated with attracting investors. We have several projects in which attracting a third-party investor was considered quite seriously. Only one such project was successfully completed. In other cases, the investor either turned down the transaction for whatever reason, or did not fulfill the undertaken obligations in full.
— In conclusion, what do you think are the factors present in successful restructuring?
— If we omit objective factors, such as the debtor's financial condition and the viability of his/her business, I would highlight the following three factors: the first is the mutual interest of the parties, the second is the right team and the third is a readiness to compromise.
In addition, it is very important that the project has a leader, who coordinates the implementation of the entire project. It is not so important who it will be — the agent, financial or legal advisor. The main thing is that he has authority, skillfully performs this function and "moves" the process forward.