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18 January 2018

Confidentiality in restructuring

Successful restructurings typically depend on a smooth and swift process. All information relevant for the restructuring must be available to the creditors, and must be kept confidential. In addition, legal duties of secrecy must be considered. Finally, the effective restructuring of a debtor's business needs to receive as little attention as possible from third parties (eg customers, the market, suppliers).

Information is key
Receiving timely and transparent information about all circumstances relevant for the restructuring process is crucial for the decision-making of the creditors involved. Creditors usually require comprehensive information on the assets, liabilities, granted securities as well as the business of the debtor and on any proposed restructuring measures. In addition, the banks have to be released from their duties under banking secrecy towards other creditors. Without full transparency and sufficient information, no creditor will ever trust the debtor and the other creditors enough to agree to an often painful restructuring.

So is confidentiality
A debtor will only consent to disclose sensitive information about its business to its creditors if it is certain that the information will be kept strictly confidential. Apart from the economic impact, management and the shareholders often want to avoid the stigma of a failing business.

Also, creditors have a vital interest in making sure that the process does not become public. Customers may avoid buying from a distressed seller, suppliers may deliver only against advance payment, and a prospective buyer in an m&a process may reduce its price offer if it learns that the debtor is compelled to sell a certain business. All of this may significantly impair the creditors' prospects of recovery.

In short, leaking information may be so detrimental to the debtor's business that the restructuring itself becomes impossible.

Keeping information confidential is difficult in a multiparty process. As it is in their best interest, creditors and debtors still have to try.

Recently, the European Commission published its proposal for a European Directive on preventive restructuring frameworks and a second chance for entrepreneurs. More and more states are aiming to implement a legal framework which allows preventive restructuring proceedings.

One of their main benefits is to avoid the stigma of insolvency as well as publicity. The European legal framework currently only allows the recognition of public, collective (insolvency) proceedings initiated in other Member States. National laws on preventive restructuring proceedings will have to address the need for publicity.

At the European level, it should be ensured that preventive restructuring proceedings limiting publicity to a minimum will be recognised in all other Member States.

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Further reading
Banking secrecy in CEE - one region, different rules

authors: Miriam Simsa, Philipp Wetter, Wolfgang Höller



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