Misplaced Restructuring Stigma Before considering the data on insolvencies and openings and closings, we open this issue of Insolvency Now by considering the key aspects of misplaced stigma related to restructuring that could be feeding into a debtor’s hesitation to initiate reorganization proceedings.
KEY ASPECTS OF STIGMA OR HESITATION TO FILE
We have seen stigma explained and manifested both in academic studies and in our experience advising corporate debtors as follows: — Perception of Filing as a Last Resort. Reorganization is often viewed as a last resort. — Moral and Emotional Dimensions. This stigma is not just about financial failure but also about a perceived loss of integrity and responsibility. — Misinformation and Lack of Information. Some debtors avoid filing owing to a lack of understanding or misinformation about its benefits and processes. This includes the misconception that initiating a filing, in particular filing under the Companies' Creditors Arrangement Act , is solely for liquidation, not reorganization. — Impact on Relationships. There is often a fear that initiating proceedings can lead to the loss of relationships with creditors, suppliers and even customers, which further discourages businesses from considering this as an option. — Cultural Perceptions. There is a broader cultural perception that reorganization can be seen as synonymous with failure. This perception needs to be addressed for reorganization to be a more viable option for struggling businesses.
DETRIMENTAL IMPACTS OF STIGMA
The perceptions of stigma associated with reorganization can significantly neuter the ability of reorganization tools to preserve value as intended. The following are some examples: — Delayed Filing > Timing Issues. Corporate debtors may delay filing until they are in dire financial straits. This delay can result in the depletion of valuable assets and resources that could have been preserved if reorganization options had been considered earlier. Even in the context of a liquidation, delayed filings often result in chaotic asset liquidation, reducing overall value. > Reduced Options. By the time businesses consider filing, their financial situation may have deteriorated to a point at which reorganization is no longer viable, leaving liquidation as the only option.
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