Virtual Data Rooms Open Doors for Insolvent & Bankrupt Businesses
The COVID-19 outbreak has impacted the global economy to an extent not seen since the Great Depression. Businesses face unprecedented challenges and although massive remedial actions by governments and central banks will help, the economic outlook is incredibly bleak.
Even the most optimistic observer would have to accept that the number of businesses at risk of going bankrupt or insolvent will rise dramatically.
The owners and managers of such businesses should not despair, however. Even the best entrepreneurs can fall to misfortune and it may be that there is still value in their enterprises that could be highly attractive to investors. And using the right online tools to manage insolvencies and subsequent sales can make the process significantly easier and more efficient for them.
The options for businesses on the brink
When a company’s liquidity reaches crisis levels but is unrelated to COVID-19 and there is no prospect of resolution, then its directors must file for insolvency, usually within 21 days. Any delay risks legal consequences for business owners. It is rare for a sales process to be started before insolvency proceedings because the debt burden usually reduces the purchase price.
Even struggling businesses can be sold, however. There are two ways in which this can be achieved during insolvency proceedings. These include:
- Insolvency plan procedure – This is enacted either by insolvency administrators or debtors. Under such plans, secured and ordinary creditors can determine the realisation of an insolvency and manage the distribution of proceeds among creditors.
- Transferred restructuring – This involves the transfer of a company’s assets, wholly or in part, to another legal entity via an asset deal negotiated by the insolvency administrator.
A crucial element
A crucial, and often under-appreciated, element in restructuring and insolvency procedures is due diligence, which can be conducted in a highly efficient manner by using virtual data rooms (VDRs).
VDRs are also commonly used to streamline mergers and acquisitions, IPOs, non-performing loan transactions and commercial real estate sales. The popularity of VDRs can be attributed to the significant improvements they deliver to the speed and effectiveness of negotiations and the collection and analysis of data.
Even the best entrepreneurs can fall to misfortune and it may be that there is still value in their enterprises that could be highly attractive to investors.
Some of VDRs’ key attributes mean they are indispensable in insolvency cases. For example, their highly functional and secure platforms facilitate organised access to documentation at any given time, which is particularly useful at the start of a corporate restructuring process when critical information must be collected to formulate a suitable plan. Once the correct plan has been drawn up, VDRs are also effective tools for selling parts of a business in line with the overall strategy. Trustees or liquidators, who must sell assets for the best prices possible, can speed up the sales process and minimise the risks of wider events undermining deals.
Key VDR features
Generally, there are several features that prospective users should look for in a VDR. These include:
Proper data indexing – As soon as information is collected, it can be structured according to requirements. Records can, therefore, be overseen and researched immediately, with any gaps easily identified.
Auto allocation of documents – The process of analysing and sorting large volumes of documents automatically can become more accurate and sophisticated over time if the VDR applies machine learning and artificial intelligence (AI).
Fast setup and support – Many providers offer free initial preparation phases followed by ongoing access to documents once they end and 24/7 project management in several languages.
Flexible access to documentation – Users can control which relevant parties are allowed online remote access to certain documents and data, wherever they might be. VDRs generally provide this without compromising security.
Ease of search – Advanced search and filter functionalities enable documents to be selected and analysed to reveal potential risks and opportunities. Drooms’ FINDINGS MANAGER, for example, is context-sensitive and recognises words, synonyms and semantic patterns.
Improved reporting – Analytics and reporting features can provide a better understanding of a project plus which users are accessing what information and when.
Centralised Q&A – A built-in, fully automated Q&A functionality can keep multiple relevant stakeholders up to date simultaneously. This can be a key contributor to the success of projects.
While the COVID-19 crisis will have many consequences for years to come, the sharp increase in people working from home has highlighted to many companies the importance of seeking digital solutions that facilitate online remote access. Holding on to past paper-based practices is not even a medium-term option now. VDRs, especially those that incorporate AI, blockchain technology and application programming interfaces, will play a key part in this digital evolution for many companies – including those facing the challenges of bankruptcy and insolvency.