The INSOL principles

Eight principles were developed by INSOL International, a worldwide federation for accountants and lawyers specialised in turnaround and
insolvency (INSOL - Home Page). These principles should provide guidance and best practice for out-of-court workout negotiations between a
debtor business and multiple creditors. Although principles should be universally (globally) applicable, bear in mind the local specifics that might
need to be considered.
Principle
Principle 1: Creditors should be prepared to cooperate
under a standstill
This principle states that when a business is in financial difficulties, its
creditors should cooperate for sufficient time (a ‘standstill period’) for
information about the business to be obtained and evaluated, and for
proposals for resolving the business’s financial difficulties to be
formulated and assessed.
Principle 2: No participant should try to enforce or reduce
its exposure during the standstill
During a standstill, all creditors bound by the standstill should refrain
from taking any steps to make demand, enforce their claims or reduce
their exposures. This includes not taking any action that would
improve a particular creditor’s position over another’s, for example, by
taking additional security.
Description
This is a voluntary agreement between certain of the business’s
creditors, in which all who participate agree to continue to support the
business to achieve a restructuring rather than pursue their own
interests. Although there is no mechanism by which a particular
creditor can be forced to join a standstill, once a creditor is committed
it can no longer take unilateral action.
Speed is extremely important because one of the biggest enemies of a
business in distress is continuing uncertainty. One of the main barriers
to the prompt agreement of a standstill is lack of common ground.
When different creditors’ interests vary widely, the chances of success
are much reduced. For this reason, it is normal to restrict the
participants in a standstill to bank lenders.
Although the INSOL principles envisage a formal (binding) standstill,
an informal standstill is quite common. When the creditors concerned
trust each other, an informal arrangement may be sufficient.
The main advantages of a standstill (whether formal or informal) are
that it provides some stability to the business and provides (limited)
time for a way forward to be agreed to. The disadvantages are that
sometimes key stakeholders (for example trade insurers) cannot or will
not join a standstill and the announcement of a formal standstill will
often have a destabilising impact on trade creditors, customers and
the investing public.
The facilities available to a business in a standstill can either be fixed
at the amount actually drawn or at the amount of the facilities originally
provided. The former can be significantly less than the latter. In certain
circumstances, fixing at the amount actually drawn could lead to a
liquidity issue. Some facilities may be fully drawn, while others may
not. When this is the case, the likelihood of achieving a standstill
based on current exposures may be reduced.
While all participants in the standstill are bound to continue their
support, and not to take any steps to make demand, enforce their
claims or reduce their exposures, there is nothing to stop other
creditors from reducing their exposures, to the collective detriment of
the standstill creditors.
Principle 3: The debtor should not do anything to
negatively affect standstill creditors’ prospective returns
During a standstill, the business should not take any action to
adversely affect the prospective returns to creditors, when compared
to the position of creditors at the commencement of the standstill.
Principle 4: Creditors should appoint a coordinator
representative
This principle states that the interests of creditors are best served by
coordinating their response to the business. This is facilitated by the
selection of one or more (usually for each creditor class) coordination
committees and by their appointment of professional advisors.
Principle 5: The debtor business should give creditors
access to all relevant information during a standstill
During a standstill, the participants of a standstill (and/or their
advisers) should be given timely access to all relevant information by
the business, so they can properly evaluate the business’s financial
position and any proposals they receive.
Principle 6: Proposals for resolving financial difficulties
should reflect creditors’ relative positions
Any proposal presented to the participants of a standstill should reflect
both applicable law and their relative positions at the start of the
standstill.
Principle 7: Confidentiality should be respected
Information, and any proposals, provided to creditors should, unless
What this means in practice is that the business should only pay
creditors in the usual course of business and must not grant additional
security, if this demonstrates preference of one participant in a
standstill over another. This clause will be included in the standstill
agreement.
Coordination committees usually select one of their member creditors
to act as their main coordinator. That member takes on much of the
administrative burden and usually chairs the relevant coordination
committee meetings.
The coordination committee is often given the authority to appoint and
instruct legal and financial, and sometimes other, advisers. They are
best described as facilitators of the negotiation process, as well as
coordinators of the provision of information to the relevant creditors
(with appropriate professional advice).
The coordination committee has no authority to commit the
participants to a particular course of action, but can facilitate
discussions among relevant creditors to resolve disagreements and
move the process forward.
Frequently, there will be a considerable degree of ignorance about the
issues surrounding a business’s problems, and indeed, different levels
of knowledge between creditors. Reporting accountants will often be
called in to carry out an Independent Business Review, which will
provide a common information platform to the creditors. The business
should expect to be requested to provide such information, as well as
any access to management required for such a review.
Proposals will need to take into account the validity of creditor claims
and any security granted. There may be some doubt as to the date the
standstill commenced. The normal approach is to regard the key date
as the date when the participants first came together, not the date on
which they signed the standstill agreement.
This is not usually an issue for banks, but when the standstill includes
creditors, such as bondholders or debt traders (those who buy and sell
already publicly available, be treated as confidential.
Principle 8: Additional funding should have priority as far
as possible
Additional funding (often referred to as ‘new money,’ which, in addition
to new loan facilities, includes any other increase in exposure levels,
for example, the redrawing of facilities blocked at the date of the
standstill, the non-payment of scheduled principal or interest, or the
utilisation within the business of proceeds from the sale of secured
assets), is granted priority over all pre-existing debt.
financial debt), they may not be able to accept such information
without prejudicing their ability to trade the debt. In such
circumstances, it is not uncommon for such information to be
assessed by a sub-group of such creditors, who are prepared to be
temporarily restricted from trading, until the proposals have been fully
formulated and can be published, and hence ‘cleansed’, which
enables members of that sub-group to then trade the debt
If your business requires new money, the creditors providing such
funding will be keen to ensure that such new money is given priority of
repayment, compared with other debts in the event of the
failure/insolvency of your business.
Some lenders may prefer to concede priority to let other lenders
provide you the new money; others are prepared to put up the new
money themselves.