USA Law and Practice Contributed by: Davis Lee Wright, Natalie D. Ramsey, Katherine M. Fix and Rachel Jaffe Mauceri, Robinson & Cole LLP
under applicable state law, including enforcement of contract or applicable sales terms. Unsecured credi - tors may engage in collection efforts, either directly or by utilising a debt collection agency, and, failing self-help, may bring a state court action to recover payment. Some states allow an unsecured creditor to seek pre-judgment attachment of a debtor’s property if the creditor can satisfy certain statutory requirements and demonstrate that a debtor is unlikely to be able to sat- isfy any judgment. Pre-judgment attachment provides an unsecured creditor with the opportunity to secure a potential recovery while proceeding with a civil action to recover payment from the debtor, thus elevating the unsecured creditor to the status of a secured creditor. Applicable state law or contractual agreements may also permit an unsecured creditor to cancel mutual debts owed between the debtor and the unsecured creditor (set-off). The debtor and unsecured creditor may engage in a set-off transaction without initiating formal litigation. 3. Out-of-Court Restructuring 3.1 Out-of-Court Restructuring Process In the United States, no formal statutory requirements exist for out-of-court restructurings (OCRs). There are also no standardised agreements, terms, processes or timelines. A business may commence an insolvency proceeding under state law or a liquidation or reor - ganisation under Chapters 7 or 11 of the Bankruptcy Code without undergoing consensual OCR negotia - tions, although co-ordination with key creditors gen - erally is recommended prior to the filing of a Chapter 11 case. OCRs are contractual in nature, and the relationships between the debtor and its various creditors are deter - mined by direct negotiations. Timelines depend on several factors, including the number of negotiating creditor parties, the continued availability of trade credit, the veracity of the debtor’s business projec - tions, and the willingness of new parties to bring money to the debtor.
During any OCR, creditors will conduct due diligence into the debtor’s operations, financial projections, strategic plans and other relevant areas to best pro - tect their own financial interests. Creditors then deter - mine their own willingness to participate in an OCR and do not owe any duty either to the debtor or to other creditor groups to participate. While a creditor cannot be held liable for refusing to participate in an OCR by the debtor or another creditor, lenders that act beyond the scope of their contractual rights can be subject to liability. Unlike bankruptcy proceedings, an OCR does not provide for a stay of existing or future litigation. A debtor may, however, negotiate a “standstill agree - ment” with its creditors to avoid the consequences of any default or to prevent creditors from exercising contractual or statutory remedies during the pendency of negotiations. The standstill agreement binds only signing creditors, meaning non-consenting creditors could initiate civil litigation or file an involuntary bank - ruptcy case. Dissenting creditors or equity holders may impede the success of an OCR. The consensual nature of OCRs means that businesses may not forcibly bind dissent - ers. If an obstreperous group of dissenting creditors or dissenting equity holders must be forcibly bound, then this can be done only through the filing of a bankruptcy. See 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation . Bankruptcy may bind non-consenting creditors if the reorganisation plan receives the statutorily required creditor votes and meets the Bankruptcy Code’s other confirmation requirements. Notwithstanding the inability to bind dissenting credi - tors, consensual OCRs are a viable alternative, and may: • avoid the potentially greater costs associated with a Chapter 11 bankruptcy and the increased public financial and operational oversight required by the Bankruptcy Code; • avoid potential bankruptcy-related litigation, including discovery into the company’s finances, business operations and board-level or officer decisions;
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