12.5 Chapter 5: conceptual valuation questions in respect of a pre-insolvency scheme

Chapter 5 starts with a conceptual analysis of how to assess the financial impact of a reorganization by means of a pre-insolvency scheme. In order to do so, two valuations are required. The valuation in the situation without the restructuring should be compared with the valuation in the situation once the restructuring has been implemented: the reorganization value, as elaborated on in chapter 3. In the situation of financial distress, doing nothing will ultimately result in bankruptcy, at least this can be safely assumed. Therefore, there are two scenarios for assessing the value in situation 1: either breaking up the company (or the group) and selling the various parts or business unites as a going concern, or selling the assets on a piecemeal basis, after closing down the business activities of the company.

The aforementioned analysis only provides insights at a collective, or macro-economic, level. It does not analyse the impact on the position of an individual equity or debt provider. For this purpose, the situation and expected proceeds before the implementation of the scheme have to be compared with the proceeds available to the respective claimant (after the implementation of the scheme).

Looking at the position of the individual debt or equity provider who does not agree with the proposed scheme, one has to assess what their proceeds are in situation without a financial restructuring. If an individual debt or equity provider would because of the restructuring be receiving more compared to bankruptcy proceedings, then – provided that the company would otherwise end up in bankruptcy proceedings (which the court should confirm) – it should be possible to cram down such an individual.

When considering a class of debt or equity providers that – in majority – votes against the proposed plan, the liquidation value is no longer the relevant test. In order to cram down a class that – in majority – opposes to the scheme, the relevant test should be whether or not the respective class receives (under the reorganization plan) its fair share in the reorganization value: the distributable value or the enterprise value (including non-operating assets like excess cash) of the reorganized debtor.