For companies that are already on the verge of bankruptcy, with debts of billions and even trillions of rupiahs, and financial conditions that are predicted to not make them be healthy, who says there is no hope of operating again? There are always possibilities, depending on how smart your lawyer is in managing the company restructuring, using the slightest loophole to turn things around and being able to convince creditors to accept the Composition Plan.
That possibility has been proven to be not just utopia. Reflecting on the case of Merpati airlines which had been in debt of around Rp. 10.9 trillion from thousands of creditors, that red plate company could finally survive the death trap because the Composition Plan was accepted by creditors, and the company would even be operated again. Not only that, there are still many track records of other companies with large amounts of debts that could survive bankruptcy. Yet, there were many other companies that failed to convince creditors and eventually went bankrupt. What’s the secret?
A lawyer experienced in debt restructuring cases, Rizky Dwinanto from the law firm Adisuryo Dwinanto & Co (ADCO), shared tips on handling cases with complex issues related to corporate restructuring in a workshop held by hukumonline titled ‘understanding the characteristics and legal aspects of corporate debt restructuring agreement and its drafting techniques, ‘Thursday (18/7).
“The first important thing to do”, Rizky continued, “is to ensure the feasibility of company restructuring”. The first parameter used is to look at the company’s financial capital, both debt (debt financing) and equity (equity financing).
Remember, companies are not established only from bank capital. There is no way for companies to be established with 100% bank capital. So, banks will usually reject the debt funding plan in the first place because what the bank will do to help is only to increase equity capital so that the company can run faster. That is why to estimate the financial health of a company, it is important to ensure the balance between equity and debt.
“Capital from debt and from equity must always be balanced and measured using a debt equity ratio,” he explained.
Second, does assessing the fairness of the financial statement model, whether the model of profit or loss, cash flow, balance sheet and debt/receivables make sense? This is where it lies the importance of good collaboration with people who are experts in the field of finance. Every financial statement that is suspicious must immediately be confirmed to a finance expert because it is possible that the company suffers losses due to fraud. So, mistakes in determining the corrective actions to be taken can be minimized.
“Ask the finance department to check. Ask when it seems like the financial statements are suspicious, and wait for the confirmation later,” he said.
Third, the fairness of the financial statement assumptions (year to year/yoy financial statement) is also an important parameter whether or not a company can be restructured. It is very bad if, at the time of restructuring, the company’s yoy financial statement fluctuates but its fairness is not checked.
Fourth, Check the latest financial position such as debt, equity, interest payment ability and others. That is very important to see the financial health of the company.
Finally, forecasting new business models. From the perspective of creditors, it is clear that what is seen first is whether the Composition Plan submitted by the debtor is truly visible, logical and achievable. Forecasting a new business model can be the answer. “If after the plan is achieved and the business model offered remains the same, with the same management and the same strategy, the results will automatically be the same, nothing changes,” he explained.
In a failing chicken-breeding business affected by financial distress, for example, if the management of chicken manure was previously handled by other parties, then in the Composition Plan, the debtor can propose to manage the manure itself to be used as fertilizer. The fertilizer can then be sold or used for the process of fertilizing rice plants or certain plants. As a result, from rice and fertilizer, income will be obtained to pay off debts to creditors.
It is this new business model that gives creditors the confidence to approve a Composition Plan. “That is one of the important parameters related to whether or not the restructuring of a company is visible,” he said.
It is also important to note that the dimensions of debt restructuring are inseparable from the dimensions of tax, finance and legal issues that are closely related to one another. For example, in terms of finance, when a particular method is possible to do, legal experts will take the role in determining whether the said method is acceptable by applicable law. The existence of tax experts will also be crucial to estimate the steps to be taken to predict the tax implications that will arise.
Apart from that, in addition to the Composition Plan material that must be really well-prepared, there is also a very important supporting factor that should not be ignored in the process of convincing creditors namely to build a good communication style. That is why, in large cases, there is always a special communication team formed to serve and appease creditors.
Why is that so? the mindset of creditors in PKPU can no longer be based on ‘debt repayments have to be made as quickly as possible’. That mindset must be corrected since the company’s operational ability is what will be at stake. That is the importance of good communication.
“Not to be taken lightly, how many companies had very good Composition Plan but in the voting the plan was rejected by the majority of creditors? Conversely, how many companies whose Composition Plan was not even visible, but the plan was finally accepted by creditors? The key is communication,” he said.
-This article has been published on Hukumonline and translated by ZAM