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Slater & Gordon says it owes a total of $761 million, as of 30 June 2017, which it cannot pay down and the debt level is greater than the value of the company which means shareholders will get nothing if it moves to insolvency.
"If the recapitalisation is not implemented, the directors consider that Slater & Gordon will not be in a position to repay any amounts due under the syndicated facility agreement when they become payable," says chairman John Skippen.
"Accordingly, the directors consider that, without implementation of the recapitalisation, Slater & Gordon will become insolvent."
Skippen says that an independent expert has confirmed its secured debt "materially exceeds total enterprise value" and there was no other alternative but to proceed with the recapitalisation plan.
"Therefore, in the event that the recapitalisation was not implemented and Slater & Gordon became insolvent, shareholders would most likely receive nothing because the assets of Slater & Gordon are not sufficient to fully satisfy its secured debt obligations, let alone the claims of other secured creditors, unsecured creditors or any interests of shareholders," Skippen says.
"In addition, the value of Slater and Gordon's business may be further eroded due to the loss of current employees and clients that would likely occur as a result of entering an insolvency process."
Slater & Gordon posted a loss of $546.8 million for the 2016-17 financial year, coming on the back of the previous year's impairment-heavy loss of $1.01bn.
The main cause of the company's billion dollar fall from grace was its disastrous $1.3 billion acquisition of British professional services firm Quindell in 2015 which led to two class actions by aggrieved shareholders. One of those class actions was settled in July for $36.5 million.
Slater & Gordon meanwhile filed its own lawsuit against UK-based Watchstone Group over the sale of Quindell, alleging the company and its senior managers made "fraudulent misrepresentations" over the deal.
Since the purchase of Quindell, and the subsequent legal troubles and heavy losses, shares in the company, which traded at just over $8.00 two years ago, are now at just $0.07.
Under the scheme of arrangement with its senior lenders, a consortium of hedge funds led by Anchorage Capital Partners, Slater & Gordon says its debt will effectively be reduced from $761 million to no more than $125 million.
Slater & Gordon (Australia) will be released from its obligation to pay the debt from its UK division which mostly stems from a $375 million loan as part of the Quindell acquisition. It senior lenders will take control of the UK subsidiary.
A vote on the recapitalisation of its debt structure will be held at the AGM.
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