With results in from Sunday’s referendum, and with a surprisingly large percentage of the population voting no to the European Union’s demand for more austerity measures, the Greek government heads back to the negotiating table with its creditors (International Monetary Fund and European Central Bank).
There are many similarities between Greece’s financial crisis and the problems that a company faces when it is having financial difficulty. In simple terms, Greece’s problems stem from the fact that their expenditures exceeded their revenues. They borrowed money to cover the deficit. Eventually, as expenditures continued to outpace revenues, debt levels rose to the point where Greece could not afford to make their loan payments and on June 29, 2015 they defaulted on a 1.5 billion Euro payment.
One can imagine how a company could get into similar difficulties. Decisions of a profitable business, such as introducing a new product line, opening a new location or purchasing a competitor, could increase expenditures. If the increased expenditures that flow from these new ventures exceed the expected revenue, then the company may need to take on more debt. Throw in higher than expected uncollectible receivables, and the gap between expenditures and revenues grows. As debts continue to grow, the company could get into a situation where the payment to creditors becomes unmanageable.
This is where the similarities end.
Greece’s creditors may provide a bailout, but that money is going to be used to make payments on existing debts. Without a reduction in the total debt, there is no way for Greece to get out of the vicious cycle.
In Canada, companies with unmanageable debt can restructure their debt through the Companies’ Creditors Arrangement Act (CCAA) or through a Proposal under the Bankruptcy and Insolvency Act (BIA). Under the BIA, there is an automatic Stay of Proceedings that prevents creditors from taking legal action or from collecting their debt. Under the CCAA, the court typically grants a similar Stay. This Stay gives the debtor company breathing room to put together a plan to restructure its debts. Creditors are given the right to vote on the plan. In most cases, the company pays only a portion of their debt. From the creditor’s perspective, the restructuring provides better realizations than the alternative, a bankruptcy.
Not all creditors are required to accept the restructuring plan. As long as the required majority of creditors accept the plan, then it is binding on all creditors.
Without the option to restructure its debt, a struggling company would eventually file for bankruptcy. Being able to restructure provides a company in financial crisis the ability to come up with a plan that will allow for a debt repayment arrangement that is manageable, allow it to stay in business, maintain jobs and eventually become profitable.
Unfortunately for Greece and other countries that get into financial difficulties, there is no formal way to restructure their debt and get out from the crisis.
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