Mediation to the rescue: how to develop a negotiation culture in business
restructurings
By
Antonia Menezes Consultant, Insolvency & Restructuring Group, Investment Climate Advisory Services
Department, World Bank Group, Washington DC, USA
Introduction
When Lehman Brothers filed the largest ever bankruptcy in 2008, it requested Alternative Dispute
Resolution (ADR) as a means of time and cost-saving in its complex Chapter 11 case. Last September,
Judge Peck agreed that mediation could be used for certain derivative contracts in the Lehman
bankruptcy, stating “[t]he goal is to get to an ADR process that encourages parties to write checks”. 1 The
mingling of ADR, particularly mediation, with bankruptcy procedures in the U.S. is being increasingly
used, not only in large Chapter 11 cases, but also in smaller personal bankruptcy proceedings. The
benefits of having such a forum for negotiation and compromise using a third party neutral are widely
documented, and include the fact that mediation is an informal process helping to reduce both time and
cost for the disputing parties. However, what happens when a country does not have a strong basis for
using mediation in bankruptcy proceedings? More importantly, what happens if the problem is magnified,
and the overarching culture of negotiating corporate rescues is lacking? How are other restructuring tools,
such as out-of-court workouts and pre-packs able to develop if the core requirement of debtor-creditor
negotiations is absent? This brief article examines the importance of a negotiation climate for informal
methods of restructuring. It relies on a current case study of Montenegro to illustrate why a weak
negotiation culture in insolvency regimes is proving problematic, and suggests how the corporate rescue
culture in Montenegro can be improved by piggybacking off its successful mediation framework.
The underpinning standards of restructuring
The global financial crisis has seen a huge drop in cash flows with tightening credit and falling demand for
goods and services. Restructuring businesses and corporate debt has therefore taken center stage as a
means of retaining value of viable assets, with insolvency law providing an array of tools to facilitate
restructuring.2 As with liquidation, the goal of restructuring is to maximize the value of the estate for the
benefit of one or more stakeholders.3
Techniques for restructuring include out-of-court workouts and pre-packs, but whichever technique is
used, what is clear is that the base-line standards of good faith negotiations, settlement and debtor-credit
dialogue are required in order to achieve the goal of value maximization. For instance, in out-of-court
workouts, which are often touted as an effective alternative to court-supervised insolvency proceedings, a
number of implementation issues will require the debtor and creditors to sit down and negotiate a
mutually satisfying solution, including apportioning losses among creditors as a result of the restructuring;
facilitating equity restructuring; encouraging follow-on operational restructuring; and conversion of
unsuccessful workouts into court-supervised reorganizations or liquidations. 4 In pre-packs, where the
insolvency process is used to convey the business to a pre-selected buyer, the debtor in practice will

Special thanks goes to Mahesh Uttamchandani (Global Product Leader, Restructuring & Insolvency, CICRA, World Bank
Group); Lada Busevac (Global Product Leader, ADR, CICRA, World Bank Group) and Nina Mocheva (Consultant, ADR,
CICRA, World Bank Group) for their input into this article. The views expressed are those of the author and do not reflect the
views of the World Bank Group, its management, executive directors or its shareholder nations.
1<http://www.haslaw.com/publications/Lehman%20Bankruptcy%20ADR%20Procedures%20Update.pdf>, October 2009; <
http://www.law360.com/articles/118654>, (August 2009).
2 Thomas Laryea, IMF Staff Position Note “Approaches to Corporate Debt Restructuring in the Wake of the Financial Crisis”
(2010).
3 Dr. Sandra Frisby, “A preliminary analysis of pre-packaged administrations”, University of Nottingham (August 2007).
4<http://www.meti.go.jp/policy/jigyou_saisei/ADR%20HP_E-virsion_100126.pdf> (January 2010).
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have to enter into frank negotiations with his major creditors, locate a buyer and ensure that everybody
reaches a satisfactory consensus prior to going to court to file for insolvency.
Implementing these techniques might not be too challenging in countries where a strong negotiation
cultures exist. However, in certain countries consensus building is often lacking in insolvency regimes,
making corporate rescue difficult to achieve.
Montenegro: the problem of a weak negotiation culture in insolvencies
Montenegro is an example of a country that is struggling to promote a business rescue culture in the
midst of economic turbulence. Research shows that around 11,000 business accounts with a debt of over
135 million Euros are currently locked due to liquidity problems.5 This is a substantial problem given that
there are only 42,000 registered businesses in Montenegro. 6
Although Montenegro’s Law on Insolvency of Business Organizations 7 provides for reorganizations and
out-of-court workouts, very few bankruptcy cases result in a restructuring, with the majority going to
liquidation. Of the 174 cases that are currently pending in the Commercial Court of Montenegro, only
about 4% are in the process of being restructured. 8 Court systems do not promote a rescue culture, which
only increases the stigma of bankruptcy procedures for financially troubled businesses. The issue is not
so much that negotiations are absent in Montenegro’s overall business climate, but rather that negotiation
is not intuitively used as a means of reaching a restructuring agreement for failing businesses. The
Government of Montenegro is therefore interested in methods of promoting a rescue culture, focusing on
value retention.
Mediation might prove to be one method of doing so. Despite the challenges faced with restructuring in
Montenegro, Montenegro’s mediation practice, supported by the IFC since 2007, does have a solid and
successful track record. There are currently four fully operational mediation centers with a total roster of
80 trained and licensed mediators. By the end of 2009, over 970 cases were mediated, 630 cases
successfully resolved (a 65% success rate) and over 24 million US dollars released back to businesses in
Montenegro.9 In practice, most mediation sessions that are held lead to a successful outcome within an
average of two hours.10
Leveraging the success of the existing commercial mediation practice, the Government of Montenegro
sees potential scope for linking the mediation and insolvency frameworks by facilitating the use of
mediation in out-of-court mechanism for reorganization of businesses in distress.
How mediation can help build a culture of negotiations in bankruptcy proceedings
The use of mediation in bankruptcy proceedings is not particularly new in countries with strong business
negotiation cultures that underpin insolvency regimes. It has been used as an alternative to bankruptcy
court litigation, whenever disputes arise, both in personal bankruptcy cases and complex corporate
restructurings. With the former, mediation has been used in disputes such as actions to recover assets
from third parties for the benefit of the estate,; 11 disputes relating to claims against a debtor; inter-creditor
disputes about distribution of the estates’ assets; 12 and early case issues. In complex multi-party
restructurings, various ADR tools are inherently incorporated in the restructuring process, for instance, in
creditors’ meetings, where creditors vote on a proposed plan of arrangement thus requiring negotiation
and compromise, or the activities of claims officers who, in effect, act as arbitrators in determining
SME Business Climate In Montenegro – Survey 2009, prepared by CEED Consulting, (October 2009).
Investment Climate Department, World Bank Group.
7 The version consulted appeared in the Official Gazette of the Republic of Montenegro in numbers 06/02 and 01/06.
8 Montenegro Commercial Court data, Investment Climate Department, World Bank Group.
9 Ibid.
10 Investment Climate Department, World Bank Group.
11 Erwin Katz, Lisa Fenning and Jacob Esher, ABI Guide to Bankruptcy Mediation (2005).
12 Ibid.
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whether to admit claims of creditors. 13 Some countries have even launched new initiatives to promote the
use of mediation in insolvency proceedings, such as in Japan where “Turnaround ADR” provides for
mediation to be used in insolvency proceedings using a professional body that is certified by the Minister
of Justice.14
There are several ways in which mediation can be used to constructively improve negotiations in formal
and informal bankruptcy procedures. First, mediation involves a professional neutral mediator who is
trained in resolving disputes and encouraging party negotiations. Given that mediation is not a formal
process and it is not binding, parties are generally more open with mediators about their bargaining
position and share information that they might not otherwise submit in formal litigious proceedings. This
means that there is greater scope for a settlement to be reached.
Secondly, mediation is more resource-conscious than procedurally intensive court proceedings given that
parties can often control the time spent on proceedings, and discovery is limited. This means that it
usually provides a more cost-effective process which parties might be keen to explore. This is especially
important for small and medium sized enterprises (SMEs), which include sole proprietorships. These
small-scale businesses form the backbone of economic activity and have higher rates of non-performing
loans than larger organizations, and yet they might not have the financial resources to undertake more
formal dispute resolution methods that are part of the bankruptcy process .15 Perhaps in recognition of this,
mechanisms such as pre-packs are being used predominantly in small cases for greater expediency, 16
and countries such as Greece have adopted conciliation procedures in their Bankruptcy Code. 17
Thirdly, mediation provides greater flexibility to debtors and creditors who want to stay out of court. This is
particularly important in jurisdictions where there is little faith in the judiciary, or where back-logged courts
are inundated with cases and delays are rampant. Moreover, the control that is placed in the parties’
hands means that they can play a proactive role in the decision-making, rather than having a court
judgment imposed on them. The fact that the agreed upon settlement is consensual means that parties
are more likely to adhere to it.
Finally, the mediation procedure itself provides certain procedural conditions to facilitate debtor-creditor
negotiations. For instance, confidentiality is guaranteed in mediation proceedings which means that the
parties can feel more at ease about having frank, open discussions, and the enforceability of any
negotiated agreement can be built into the system.
Implementation of a mediation platform in Montenegro to encourage restructuring
Montenegro has existing provisions for mediation in bankruptcy cases. In 1997, at least twenty-eight
bankruptcy courts in Montenegro (approximately 30% of all bankruptcy courts at that time) had local
rules, general orders or guidelines that governed judicial referral of bankruptcy matters to mediation. The
problem is not so much that enabling mediation should be used, it is implementing these provisions in
practice that can be problematic. Moreover, the lack of restructuring agreements suggest that improving
overall negotiation strategies in the entire insolvency system might be the bigger challenge. New hybrid
approaches between bankruptcy and mediation are therefore being developed to help encourage the
negotiation culture in Montenegro, as set out in more detail below.
Ensuring that the law provides an optimal framework for the implementation of reorganization plans
developed out-of-court but prior to formal proceedings
John Lorn McDougall QC and Matthew Flemming, “ADR in Cross-Border Canadian Corporate Restructuring” (2006).
Delivered at the International Bar Association's “Restructuring Among the Ruins” in Athens, Greece (May 7-9, 2006).
14 Op. Cit. 4.
15 OECD, “The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses” (2009).
16 Op. Cit. 3.
17<http://www.potamitisvekris.com/_control/admin/_files/binaries/publications/fil_publications940494182.pdf> (2009).
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Pre-packs involve soliciting creditor votes in advance of the bankruptcy filing. This provides certainty and
assurance of the outcome in advance of going to court to file for bankruptcy proceedings. 18 Accordingly,
one of the biggest advantages of pre-packs is the expediency of the process. It is therefore important to
ensure that the legal framework provides the space for such negotiations to take place prior to filing a
bankruptcy, and that the court recognizes negotiated or mediated pre-packs that have been agreed to
prior to the commencement of formal proceedings.
Montenegro’s current law provides for a reorganization plan to be submitted at the same time as a formal
bankruptcy petition.19 It also provides for a broad concept of “cramdown”.20 This means that if after
negotiations a debtor has still not managed to reach an out-of-court reorganization with the consensus of
all the relevant creditors, it might nevertheless be possible through the intervention of the court to achieve
this on an expedited basis via a pre-packaged approach. Any developments in the law should ensure
that the debtor has access to formal proceedings to effect a pre-packaged reorganization without having
to meet overly stringent requirements, and that there is explicit provision for the possibility of a plan of
reorganization being submitted at the same time as a petition. Provision for cramdowns should also be
retained, and an important policy consideration is the extent to which a plan submitted by a debtor is to be
subject to a vote before any other plan (by another participant) may be considered. In the U.S., for
instance, there is a period during which the debtor alone has the right to submit a plan, which is voted on
first by the creditors. In this way, a debtor attempting a pre-packaged plan will have some assurance that
a rival plan will not be an immediate obstacle.
Improving the structure of out-of-court workouts to incorporate space for mediation
International experience suggests that out-of-court reorganizations may be an effective way to preserve
maximum value for all participants in a business distress scenario, 21 allowing the debtor to commit to a
restructuring strategy over an extended period of time, whilst still having the option to go to court if the
deal is not finalized. Montenegro’s insolvency law has provisions for out-of-court workouts, although these
workouts have not been extensively relied upon to date. 22 One way of facilitating the process is by
incorporating guidelines, which in practice operate as a structured code of conduct for workout
participants, such as those contained in the London Approach. 23 Similar guidelines have recently been
adopted in Latvia,24 and provide a more structured approach to workout negotiations. These guidelines
might also incorporate a mediation mechanism to be used during any inter-creditor conflicts that might
arise during the restructuring negotiation, to allow for enhanced workouts. For instance, where a
dissenting minority of creditors refuses to accept the restructuring plan, mediation can assist workouts by
providing a neutral professional to facilitate negotiations between the parties. This will allow countries,
such as Montenegro, to broaden their successful mediation framework to insolvency matters, and will
assist in establishing a culture of compromise and negotiation within a timely and cost-effective manner.
Improving training and capacity building of insolvency and mediation actors
In order to effectively implement the incorporation of mediation in insolvency procedures, the training of
selected insolvency practitioners in mediation or professional mediators in insolvency will be essential.
Such training will help bridge the gap between technical issues arising under bankruptcy or mediation
18
Op. Cit. 3.
See Article 64, Law on Business Organization Insolvency.
20 Montenegro’s current law provides for the court to confirm a plan over the objections of two classes of creditors. See Article
75, Law on Business Organization Insolvency.
21See, for example, World Bank Principles for Effective Insolvency and Creditor Rights Systems <www.worldbank.org/gild>,
Principle B4.
22 Investment Climate Advisory Department, World Bank Group.
23The London Approach was originally designed by the Bank of England in the 1970s, and was a non statutory and informal
framework for dealing with temporary support operations mounted by banks and other lenders to a company in financial
difficulty.
24 The Latvian Chamber of Commerce and Industry and the Latvian Borrower’s Association participated in a Consultative
Committee for Insolvency Issues, which approved the Principles and guidelines for out of court debt restructuring in Latvia on 6
August 2009 (source: Investment Climate Department, World Bank Group).
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laws, and will encourage the implantation of hybrid solutions to reach a negotiated restructuring plan.
Capacity-building can also be focused within the established mediation centers to enable the centers to
act as fora for out-of-court workouts. Possibilities are also being explored regarding enhancing the
provisions of the mediation law, by defining and allowing the use of out-of-court insolvency procedures.
Conclusion
The importance of restructuring viable businesses is borne out in today’s economic climate where
alternatives to liquidation are greatly in demand in order to retain value where possible and maximize
creditor returns. However, such restructuring plans are built on the fundamental premise that countries
have a culture of negotiation and compromise in their business climates, particularly in their insolvency
regimes. This is not always the case, however, and promoting restructuring where such an environment is
lacking will most likely be unsuccessful. If the country has a successful mediation framework, such as
Montenegro, this may provide a method of engaging negotiation techniques in corporate rescue cases. In
particular, three steps are currently being implemented: (1) enabling the law to recognize reorganization
plans developed out-of-court but prior to formal proceedings taking place, with minimal stringent threshold
requirements for the debtor to meet; (2) incorporating elements of mediation in the out-of-court workout
guidelines to add more structure to the negotiations and provide a forum for dispute resolution should any
disputes arise; and (3) training insolvency practitioners about mediation and mediators about insolvency
to encourage a cross-dialogue of technical issues and improve hybrid solutions offered for any dispute. It
is hoped that such techniques will help encourage the creditors and debtors to discuss, negotiate and
achieve workable restructuring programs that will benefit both the actors and the overall economy.
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