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What is a standstill? What is the suspension of payment?

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Creditors are typically willing to afford a viable debtor in financial distress standstill relief in order to work out a restructuring plan with its creditors.  A standstill is a temporary generally voluntary stay on legal action by creditors against the debtor following a breach of the financial terms of a debt contract between a debtor and its creditors, before a restructuring agreement is reached.  A standstill gives stakeholders time to gather information and evaluate their respective position.  During the standstill period, creditors agree to refrain from taking steps to enforce their credits or foreclose their collateral against the troubled borrower, while the debtor agrees not take any action (or inaction) that might adversely affect the prospective ranking, position, status, or recovery expectations of relevant creditors.

When debt work-outs fail, distressed debtors seek legal protection against their creditors by filing an application for suspension of payments with the bankruptcy court.  A suspension of payment is a court-ordered temporary stay on a debtor’s payment of its debt for the purpose of avoiding bankruptcy in favor of debt restructuring.  An administrator will be appointed and a date will be set for a creditors’ meeting at which the granting of a definitive suspension of payments will be discussed.  The usual criteria for suspension of payments are that the debtor foresees:

  1. It will be unable to pay its debts as they fall due; and
  2. It has the prospect of repaying its creditors fully in the future or offering a composition.

The INSOL Principles, which were agreed in 2000, are a protocol of best practices applicable to multicreditor Commercial workouts on a multinational basis.  The eight INSOL Principles were designed based on the basic premise that voluntary support for a distressed firm better preserves value for all stakeholders than bankruptcy.  The Principles favor a temporary standstill, well-organized consultations between all creditors and the debtor leading to a long-term going-concern solution and fair to all interested parties, preferably negotiated and executed outside judicial procedures.

The 8 INSOL Principles - Summary
   1.   Where a debtor is found in financial distress, all creditors should cooperate and grant the debtor a standstill period, to allow sufficient time to gather appropriate information from the debtor and for the preparation and provision of restructuring proposals.
   2.   Creditors should refrain from enforcing their claims against the debtor so as not to prejudice the others’ claims.
   3.   The debtor should not take any action that might adversely affect its creditors’ interests.
   4.   Creditors should coordinate their responses by forming committees and appointing professional advisers.
   5.   The debtor should provide all relevant information to its creditors.
   6.   All proposals and arrangements of creditors should conform to applicable law and reflect the relative positions of creditors.
   7.   Information concerning the details of the debtor’s business should remain confidential.
   8.   If the debtor obtains additional funding during the standstill period or under any restructuring plan, repayment of that debt should be accorded priority status.

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