12.3.2 Why restructure rather than liquidate?

Chapter 3 further examines why creditors would choose to restructure rather than liquidate a business.

The right of creditors to enforce their claims is a right to liquidation: the right to procure payment in cash by converting non-liquid assets of the debtor into cash through a forced sale. The enforcement process of converting non-liquid assets into cash is restricted to a limited statutory timeframe and has an inherent downward pressure on price.

A forced sale, almost by definition, takes place in distressed circumstances. As a result, a forced sale generally delivers proceeds that are lower than the perceived market value-the maximum price that could be expected in a hypothetical sale outside distress.

If creditors wish to avoid the price-depressing effects of a forced liquidation, they can abstain from liquidation and have the available value distributed to them in kind (debt and equity instruments). Whereas liquidation allows creditors to realise the (forced) liquidation value, a restructuring allows them, at least in theory, to realise the market value outside distress.

The “surplus” that might be realised with a restructuring could therefore best be described as the difference in value between a distressed sale of the business and a hypothetical sale of the business outside distress, or as the “delta” between the liquidation value and the fair market value. This “delta” is often incorrectly described as the “going-concern surplus”. That is inaccurate because a going-concern solution can also be achieved through a liquidation.