Is Chapter 11 the solution for a troubled Cyprus business?

03 February, 2014 | Posted By: Rakis Christoforou

Is Chapter 11 the solution for a troubled Cyprus business?

By Rakis Christoforou BBA, CPA/ABV/CFF, MCSI, CGMA, ACFE

Bankruptcy is one of the most complex areas of law, incorporating elements of forensic accounting, contract law, corporate law, tax law and real estate law. When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a bankruptcy court for protection under Chapter 11. But what is really Chapter 11? Can it be used in the case of troubled businesses in Cyprus?
Chapter 11 is a chapter of the Bankruptcy Code, which permits reorganisation under the bankruptcy law of the U.S. Chapter 11 bankruptcy is available to every business, whether organised as a corporation or sole proprietorship. Laws and attitudes regarding bankruptcy are different outside the US, but the basic elements are usually the same -- debtors can have their debts (or most of the debt) legally discharged or they can formulate a repayment plan. European bankruptcies are usually referred to as insolvencies but work in a similar way.

Features of Chapter 11 reorganisation
Under Chapter 11, in most cases the debtor remains in control of its business operations as a debtor in possession, but is subject to the oversight and jurisdiction of the court.,_Title_11,_United_States_Code  
Chapter 11 affords the debtor in possession a number of mechanisms to restructure its business. A debtor in possession can acquire in some cases financing and loans on favourable terms by giving new lenders first priority on the business's earnings. The court may also permit the debtor in possession to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay.
While the automatic stay is in place, most litigation against the debtor is stayed, or better, put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue. The court is ultimately responsible for determining whether the proposed plan of reorganisation complies with the bankruptcy law.

The Chapter 11 plan
Chapter 11 usually results in reorganisation of the debtor's business and debts, but can also be used as a mechanism for liquidation. Debtors may "emerge" from a chapter 11 and have first opportunity to propose a plan. With some exceptions, the plan may be proposed by any party in interest. If the judge approves the reorganisation plan and if also the creditors approve it, the plan can be confirmed. Upon its confirmation, the plan becomes binding and identifies the treatment of debts and operations of the business for the duration of the plan.
Debtors in Chapter 11 have the exclusive right to propose a plan of reorganisation for a period of time (in most cases 120 days). After that time has elapsed, creditors may also propose plans. Plans must satisfy a number of criteria in order to be "confirmed" by the bankruptcy court. Among other things, creditors must vote to approve the plan of reorganisation.
A company that declares Chapter 11 must disclose all of its assets and make a list of all the debts that it is seeking protection from. This is the creditors' right to question the debtor, a fundamental element of bankruptcy law.

The Logic behind Chapter 11
In enacting Chapter 11 of the Bankruptcy Code, it is sometimes the case that the value of a business is greater if sold or reorganised as a going concern than the value of the sum of its parts if the business's assets were to be sold off individually. It follows that it may be more economically efficient to allow a troubled company to continue operating, writing off some of its debts, and giving, in some cases, ownership of the newly reorganised company to the creditors whose debts (or part of) were written off. Alternatively, the business can be sold as a going concern with the net proceeds of the sale distributed to creditors rateably in accordance with statutory priorities.

Considerations for Cyprus
Bankruptcy and Insolvency Laws relating to Chapter 11 have been implemented successfully for many years now in other countries rescuing many large corporations and jobs. They could also be implemented in Cyprus. However, there are certain issues that need to be resolved first:
• Our court process may take an inordinate amount of time to decide on reorganisation plans which may be fatal for the survival of a business;
• Our Bankruptcy law must to be adapted accordingly;
• Judges must be trained in this area because they are the ones to approve or disprove reorganisation plans. A Bankruptcy court may need to be created in order to have oversight and jurisdiction over Debtors in Possession and the reorganisation process;
• The chances of a successful outcome may be limited because debtors in possession financing may be unavailable at this time due to the problems in our Banking sector.
It is obvious that a lot of things need to be done before proper implementation of Chapter 11 business reorganisation in Cyprus. Those in authority, however, need to take action the soonest if some otherwise good corporations are to continue operating in the near future.

Rakis Christoforou is a qualified accountant with the Certified in Financial Forensics (CFF) and Accredited in Business Valuation (ABV) certifications. He is a member of many professional associations including the UK Chartered Institute for Securities and Investment (CISI), the Institute of Certified Public Accountants of Cyprus (ICPAC) and the American Institute of Certified Public Accountants (AICPA). Rakis is the founder and director of RC Business Valuation & Forensic Accounting Ltd., the first company in the region specialising in the areas of Financial Forensics and Business Valuation.