One of the primary responsibilities of a Trustee is to maximize value from the sale of the insolvent company’s assets for the benefit of its creditors. Maximizing recoveries for the creditors is one way to define success in a failed business situation. However, to find a restructuring solution may be more important from a public policy point of view, and in the longer term will also provide greater benefits to most creditors.
More often than not, Trustees gravitate towards liquidating, as opposed to recommending a restructuring of a business. Maybe it is because: 1) there is more certainty of outcome in a liquidation since a restructuring has many unknowns, 2) there is no qualified management to operate the business, 3) the lack of funding to carry out a restructuring, 4) the Trustee is unable to visualize what a restructuring in this particular case may look like, or a combination of the above. Despite these reasons, a restructuring should always be the first priority of any Trustee. This is where a Trustee has to become creative!
The debtor may be able to borrow to fund a restructuring attempt. This would grind down the value of the assets in a liquidation. However, if the priority is to attempt a restructuring, and if the creditors are on side with the attempt to restructure, than it may be worth the grind.
If there are secured lenders involved they would be concerned about a grind down in the value of their security, and may object to a restructuring and prefer liquidation. However, more often these days, lenders, and tier 1 banks in particular, are also concerned about public perception and are interested in hearing about a viable restructuring solution. They may even provide new funds to finance the restructuring plan if they believe it has a high likelihood of success, will protect their security position and may even preserve a customer.
If there are a large number of jobs at stake (the employees are in most cases also creditors), a priority should also be to find a solution that would result in jobs for the former employees of the corporation, especially if it involves employees living in remote communities where employment options are more limited. Other creditors who benefit from a restructuring are the suppliers, since they are able to continue to supply to the restructured business, and often are paid COD during the restructuring. The ability to continue supplying may be more valuable to them than getting cents on the dollar in a liquidation and so they may prefer the grind to their recovery in order to see through an attempt to restructure and possibly preserve the debtor company as a customer.
A great example of a worthwhile grind is the True North Hardwood Plywood Inc. insolvency. It started off as a restructuring, then turned into a liquidation, but then was sold by the Receiver, Dodick Landau Inc., to Rockshield Engineered Wood Products ULC, who started operations in April 2015, hired back 100+ former employees and will be spending millions in new supply. If the tenacious attempt on behalf of the Trustee and former management to find a new operator would have been abandoned, than True North would have been liquidated in pieces and there would not be an ongoing operation today. In this case, the restructuring attempt was worth the grind!