COMPANIES which have defaulted on loans and are in need of professional help often find themselves stuck between a rock and a hard place.

Imagine Company A having defaulted on bank borrowings of $130 million, for which it has pledged its assets as security. With no other means to repay the loans, it turns to turnaround professionals, only to be told that it has to pay fees of $1,000-$2,000 per hour.

Amid hard times, more companies find themselves in this predicament. It appears that corporate rescue is fast becoming a boon for professionals and a bane for distressed companies. The issue of fees gets thornier when advisers take a slice of the funds raised.

But hard-pressed for solutions, some companies still enter into unfavourable contracts with their financial advisers.

Costly restructurings, however, can leave companies in a severely weakened position. As companies are increasingly challenged in this economic climate, it may be time to scrutinise the fees charged by turnaround artists.

Restructuring - whether informally, through a scheme of arrangement under a provision of the Companies Act or by judicial management - seeks to preserve value for all stakeholders.

While restructuring specialists have the unenviable task of dealing with angry creditors and coming up with a proposal that is widely acceptable to creditors with vastly different interests, it remains highly debatable if that service justifies exorbitant fees.

There is also the scepticism that paying professionals by the hour may work against a swift completion of the restructuring work.

'In any restructuring, one of the key success factors is time. So, logically speaking, time-based charges are counter-intuitive,' said Rajagopalan Seshadri, a partner for transaction advisory services at Ernst & Young Solutions LLP.

But some argue that a better way to align the interests of a restructuring adviser with those of a company's stakeholders is to pay the adviser a value-added fee.

Restructuring fees do not get contested by 'white knights' as the former management has agreed on the fees with its advisers before the new investors come in. They are also hardly challenged by creditors in an informal restructuring, although they could affect how much debt creditors can recover.

'When the company signs the contract with the adviser, it is signing its wealth away,' a market watcher commented wryly. Another calls it 'charging an arm and a leg'.

But would paying a fixed rate to restructuring experts be a better option? Thio Shen Yi, senior counsel at TSMP Law Corporation, notes that it is not easy to estimate the amount of work needed given the highly unpredictable nature of corporate restructuring.

'One possible middle ground is not to do away with time-based charges but to have an independent third party, such as the court, scrutinise the fees,' he said. This would be similar to how the court rectifies fees charged by judicial managers and liquidators.

Adds Mr Seshadri: 'The court has recognised that the fees of advisers should be based on the value they bring to the restructuring and that is a commercial decision between the company and the adviser. Where there are disputes regarding fees, parties can always seek direction from the court.'

Fees aside, market watchers also observe that advisers are becoming more creative in their proposals, sometimes stepping into grey areas. While an informal restructuring is supposed to give financial advisers the flexibility to come up with any solution, not everyone is comfortable with the practice of reverse auctioning.

In a reverse auction, creditors are told that whoever takes the biggest haircut will be repaid first. This creates a bidding war between creditors and those who hang out with the least discount will be last in the pecking order.

Some argue that this practice breaches the duty of fairness towards creditors. Others find it acceptable so long as creditors aren't forced into participating in a reverse auction.

But clearly, when left largely unsupervised, provocative industry practices and fees can leave companies and creditors hard done by. It shouldn't be left to pure market forces, with a few players driving up the costs of corporate restructuring and coming up with artful schemes.

To save the industry from earning a bad name, a system of checks and balance needs to be in place.

This article was first published in The Business Times.