As if the haircut on deposits required for the bail in of banks in March 2013, and the credit constraints that followed bringing Cyprus’ businesses on their knees, weren’t enough, just 7 years after another black March dawned and further financial constraints arose as a result of the Covid-19 related contingency measures. Having reduced their operations to the very minimum or even being forced to close-down for two months, these businesses are now called to continue ‘business as usual’ amidst the current market instability and an imminent global financial crisis.
Further, one should consider, that the vast majority of businesses in Cyprus are family businesses, and the entrepreneurs that support these, in fear of the stigma of failure, tend to recapitalize the business from personal lending. This may be the case for non-viable businesses as well, thus leading in time to personal failure and individual bankruptcy. With these in mind, it should not be a surprise that the younger generation is reluctant to startup a business being afraid of the stigma of bankruptcy.
This is not, however, the wise approach that a financially sophisticated business would adopt. There are several debt and operational restructuring options available for these businesses to explore and identify the most suitable one to their case.
Simple restructuring solutions for the recovery of businesses
Just like doctors that advise prevention is the best cure, a business shall likewise check on its liquidity and take preventive restructuring measures to ensure its business continuity.
There are various restructuring measures that Cypriot businesses may benefit from: immediate relief solutions; partial debt restructuring offered by financial institutions; overall debt restructuring plans; debtor friendly schemes; creditor friendly schemes; corporate reorganization; and schemes for the restructuring of personal and corporate debts combined.
The main categorization in restructuring tools though is between court enforced schemes and out of court solutions. The reason is that, in order to determine which restructuring solution best suits your business, there are two critical questions that should be answered up front: (1) Who is considering the restructuring? (2) Which stakeholder interests are likely to be impacted? The answer to this will determine whether a simple out-of-court restructuring shall suffice, or whether it is likely that the scheme would have to be imposed on certain stakeholders, in which case a court order in respect of the restructuring will be required.
The first to identify the need for restructuring of any kind, would be the board of directors of the business, who ’s engaged with its day to day management and financials. If the issue at hand is a temporary cash flow constraint, which may have occurred due to some unexpected expense or loss of a contract, then the answer is definitely out-of-court restructuring.
These solutions are simple and swift. It can be a short-term financing by the business’ main financial institution partner or partial debt restructuring, involving just one major creditor. Such solutions may be initiated conversely by the financial institution against the business, had it identified that the business’ overdraft has long been to the maximum amount available or a loan is in arrears.
Following the enforcement of the Arrears Management Directive by the Central Bank of Cyprus in 2015, the major financial institutions have utilized immensely these partial debt restructurings. Judging though by the re-default rate following such debt restructurings (which by the end of 2019 was about 73%), it has become apparent that this solution was not best suited in most cases. The reason is simple; it relates only to the debt owed to that financial institution, while all other debts of the business -taxes, contractors, service providers and so on- are not being restructured.
Therefore, it was not suited to businesses with long term financial constraints, such that could be deriving from market instability; credit constraints or currency fluctuations. This is not a solution either for businesses that may be facing additionally certain operational issues, such as shareholder disagreements; management deficiencies; succession constraints; employees that are resilient to any change; or creditors with conflicting interests, such as franchisors whose goodwill is at stake or contractors with competitive advantages.
Which brings us to the second question to be addressed: which stakeholder interests are likely to be impacted? If these vary, as described above, then a more integrated solution should be sought after.
Court restructurings – a more sophisticated, integrated restructuring solution
There are two schemes by which Cypriot companies may be put under restructuring by Court order: Reorganization, provided in section 198 of the Companies Law, and Examinership, provided in Part IVA of the same legislation. Both of them may be initiated by the company, or any of its creditors or shareholders and, once approved by the majority at the creditors’ meeting or shareholders meeting or meetings of the different classes of creditors, the restructuring plan shall then be affirmed by Court order and be binding against all stakeholders.
The main difference between the two is that with Examinership the company will also benefit from a 4-month-long moratorium on all claims against the company by its creditors, which may be extended for a further 2 months. This is so provided to facilitate a period of negotiations between the company and its stakeholders, without undue pressure from creditors. For the duration of this protection period, an insolvency practitioner will be appointed as Examiner of the company and will work, in collaboration with its board of directors, to examine the company’s affairs for the purpose of forming a restructuring plan and getting it approved by its shareholders and creditors.
Examinership may also be applied simultaneously to a Personal Repayment Plan, which enables the restructuring of an entrepreneur’s personal debts. This Coordinated Scheme is a unique tool facilitated by the Cyprus insolvency framework available only to micro companies, that is companies that employ up to 10 persons only. In a coordinated scheme the insolvency practitioner that will undertake the role of the Examiner in the company, will also develop a debt restructuring plan that will involve all of the personal financial obligations of the entrepreneur, including any taxes, charges and rental payments, while considering and reserving any amounts required for the entrepreneurs’ household reasonable living expenses.
Considering that this regulated restructuring procedure was non-existent in Cyprus’ insolvency law framework until 2015, it’s not a surprise that both entrepreneurs and consultants had initially viewed this with skepticism or even general disapproval. It is indeed easier for someone to use and advise on the procedures that is already familiar with. However, such procedures are not enough anymore in facilitating resilience to the unprecedented financial hardships and constraints that businesses are faced with in times of global recessions.
Examinership and the Coordinated Scheme are more integrated, preventive restructuring tools that businesses and consultants shall learn to use to their advantage. These schemes are here to stay and shall be further enhanced within the following year to meet Cyprus’ obligation for harmonization with EC Directive 1023/2019 on preventive restructuring frameworks and second chance, which shall be completed by 21st July 2021. The target is to increase the use of preventive restructuring tools to reduce business failures which in turn will have a positive impact in reducing unemployment and improving financial stability and social cohesion.