A memorandum prepared on the basis of our recent practical experiences
Before bankruptcy :
We expect that the present volatility in commodity markets will unfortunately result in financial problems of some companies. In our experience the highest level of risk is in general in a bear market since the movements often are very violent and it is as a consequence difficult to unwind long positions. Also human nature is in general more geared to being optimistic which translates in unnecessary long positions.
In these high-risk circumstances a check-up on the organization of a trading company could be very useful. In case a bank senses trouble or difficulties with a company, the bank should use its leverage with the client and get a team of individuals with relevant commodity markets experience into examine the books and control mechanisms of its client. Well managing this process can even be perceived as a very welcome support by the client.
Entering into bankruptcy
One of the advantages of the above recommendations is that if indeed the company moves into bankruptcy, the bank and possibly also the liquidator might have a very good idea - right from the start - what has to be done to limit further, since the report of this recommendation should make clear where and what the important issues are, that will have to be managed immediately.
Factor of time; provided first signs of a bankruptcy or fraud appear on the radar screen, immediate actions are required. Such actions should be practical, decisive, on the field and without hesitation. Time will be a very critical factor. Appointing a legal department by hoping that a difficult case can be saved by applying the law-book is far away from collecting the assets pledged to the bank / lowering the banks’ exposure.
In our experience, most of the irreparable damage for creditors and banks is caused in the 1st month of a bankruptcy. Personnel at the defaulting company are normally in disarray and not longer motivated. Any positions in process of execution or any open contract positions will need immediate attention to avoid irreparable losses.
Persons without the necessary commodity knowledge simply do not know what to do with documents presented, tenders, default clauses in contracts etc.
Immediately appoint at the moment of bankruptcy declaration one or more experienced commodity professionals to manage the aspects of inventory, afloat positions and open contracts. These individuals or this team must have legal support (be it from the bank involved or the liquidator) and obviously a mandate to lead the process.
Immediate actions after bankruptcy
Within a bank, in most cases a bankruptcy process moves immediately from the commercial department to the legal department, thereby often interrupting the possibility of commercial settlements. Also at legal level, there is a lack of specific commodity knowledge which results in missing opportunities for settlement or worse ignoring contractual obligations under commodity contracts which might result in default and loss of recovery.
The legal team should always work hand-in-hand with a commodity expert. Support of a trade finance banker could be useful but the banker will most likely not have the necessary information to provide the essential knowledge concerning specific commodity contracts. Again commodity expertise is very much needed.
Following bankruptcy announcement
It is imperative immediately at the start to discuss the collections process with the bankruptcy trustee/liquidator and present team of experts to prevent an inexperienced trade company liquidator to trying to manage the process himself.
When the very critical period following the announcement of a bankruptcy has passed and the necessary protective measurements are taken, in today’s volatile commodity markets, there are huge price differences in the open commodity book. It is imperative that a team of people immediately starts working on settlement of these price differences. Depending on the commodity contract, there are several ways to settle these price differences. In most cases officially recognized market values are needed. All in all, this is an activity that must be handled by seasoned commodity professionals.
Engage individuals with extensive experience in the commodity world to work out the open commodity book of a bankrupted trading company.
Debt collecting policy
Cashing in on debts of a bankrupted company is a huge task. The overall position of all payments and receivables needs to result in a debt before one can successfully pursue it. So the total of outstanding debit notes, credit notes, invoices of open book etc. need to show a counterpart as having a debt. We have noted that lawyers or other companies specializing in debt recovery are very often trying to make settlements without realizing the real value of some (or even all) of the invoices. E.g. invoices out of the open commodity book, invoiced on the basis of contract specifications, are in nearly all cases due for 100% under the terms of contracts and hence no discount is needed. However from a practical perspective it is important to finalize outstanding debt as quick as possible after the date of bankruptcy; discussions become more difficult when time goes by, resulting in counterparties referring to arbitrage and/or other delaying tactics.
Last but not least we have also observed that having discussions with counterparts are much more effective, if the counterpart realizes that his discussion partner knows the commodity world inside out. After the entire commodity world is very small. Having an experienced commodity person leading the process of negotiations will substantially increase the credibility and hence the efficiency of the process; this creditability will in general be lacking with the legal department or outside lawyers.
Engage persons with extensive experience in the commodity world to work out the debt receivable situation of a bankrupted trading company, possibly in combination of legal and collection experience. View the need to sometimes negotiate, the lead should come from those who are working on the execution of the open book.
Any trading company will have outstanding arbitrations at the moment of bankruptcy. In the bigger trading companies that process is executed by the (in-house) lawyer, but controlled and guided by the trader or his management. Arbitrations have very often a very long tail. In most cases banks/liquidators are not used to weather that long process, or forced by accounting rules to limit the work-out time, whereas often there is a lot of monetary value in particular part of the book.
A combination of commodity experience and practical legal knowledge is needed to find an effective end to outstanding arbitration processes.