Financial Debt Restructuring: A Case Study

As a result of the downturn arising from the COVID-19 pandemic, the client faced an unexpected challenge in its business and was unable to meet the scheduled repayments for its previously restructured debts. The client recognized a significant mismatch between its cash flows and debt obligations, as well as the need to right-size its debt proportionately to its expected cash flows and repayment capability.

The client was facing mounting pressure from creditors, including potential winding up petitions. There was a perceived divide between the company and its creditors, making it difficult to devise a mutually acceptable solution. The client needed to formulate a workout proposal in relation to its obligations to financial institutions and other creditors, bridge the gap with major creditors, and communicate with potential white knights. Additionally, the client needed to address its Practice Note 17 (PN17) status and regularize its financial position.

BDO was appointed as the financial advisers to formulate a comprehensive debt restructuring plan for the client and its key subsidiary, as well as to work with the client's Principal Adviser regarding its PN17 status.

BDO's approach included:
- Working in step with the client, key stakeholders, and the White Knight to formulate a workout proposal
- Maintaining open and continued communication with key stakeholders to keep them appraised of developments within the client's business and options being explored for debt restructuring
- Providing independent perspectives to bridge gaps between the company and creditors
- Assisting in applications to the Court for restraining orders under Section 368 of the Companies Act 2016 to secure legal protection while the workout proposal was crafted
- Seeking feedback for improvement in repayment terms throughout the process
- Incorporating stakeholder feedback into the final workout proposal

The final workout proposal was a "self-rescue" plan based on the business plan agreed between the client and the White Knight, involving:
- A capital injection from shareholders (including undertakings from the major shareholder and the White Knight) with proceeds used to partially repay creditors
- Use of existing cash as partial repayment to creditors
- Issuance of equity as part settlement
- Waiver of remaining portions of debts which were not settled
- A regularisation plan to restructure the client's financial position (improving gearing, cash position, net asset position, and reducing accumulated losses) to regularise its PN17 condition
- Streamlining the client's operations by liquidating, striking off, and/or disposing of non-core entities

The workout proposal was implemented via proposed schemes of arrangement (SOA) pursuant to Section 366 of the Companies Act 2016, with BDO assisting in the client's solicitors' application to the Court for an order to convene meetings of creditors and for Court sanction of the SOA after approval by the requisite majority of creditors.

The schemes of arrangement were successfully completed after all conditions precedents and repayment terms were met. The holding company is now on track to exit from its PN17 status in the near future. The comprehensive workout proposal successfully addressed the client's financial distress by restructuring its debt obligations to sustainable levels, securing stakeholder agreement on repayment terms, and implementing a plan to regularize the company's financial position and operational efficiency.