Restructuring a business can be a daunting issue to discuss or face. But, for many businesses, it is a vital tool that can make all the difference between a company surviving and dying in times of financial difficulty. Especially when the option is still available and has not been left too late to sufficiently explore.
What is Restructuring?
Restructuring is typically the first step to manage and agree the repayment of debt with creditors (creditors are people or businesses who are owed money by another person or business, and the people who owe money are called debtors).
A company is usually deemed insolvent when they cannot pay its debts. The courts look at both a company’s cash flow and its balance sheet to assess insolvency.
Cash flow is a company’s available disposable money to spend at any one stage, and a company’s balance sheet will show the value of its assets and its liabilities – if the value of a company’s liabilities is greater than its assets, a court may decide that the company is insolvent (also depending on the cash flow situation and other legal points).
For this reason, it is imperative that business owners are continually aware of their business’s financial health, including its cash flow and balance sheet. When a company is on a path to becoming insolvent and needs to repay debt, a restructuring of that debt and/or the business are options that should be considered by the debtor to avoid insolvency or bankruptcy.
How Would a Business Go About Restructuring?
The two most common restructuring options are a Company Voluntary Arrangement and administration.
1) Company Voluntary Arrangement (CVA)
A CVA is an agreement between a debtor company and its creditors. The debtor company and creditors must firstly agree an updated repayment plan (typically a portion of the existing debt value) over an agreed period. Once agreed, the debtor company and its creditors must then prepare, agree and execute (sign) a CVA agreement.
Typically, a simple majority of the debtor company’s shareholders must agree to the CVA and at least 75% of the creditors (measured in value) must agree to the CVA to legally bind all parties to the new debt repayment plan 28 days after CVA execution (assuming no challenges by any party within those 28 days challenge period).
A CVA can benefit both debtors and creditors because the creditor is more likely to receive the updated debt repayment from the debtor (as opposed to the debtor going bankrupt and the creditor perhaps being a low priority creditor in a liquidation scenario), and the debtor now has a more favourable debt repayment plan which reduces debt and costs on their balance sheet. The debtor business is then more efficient and, on paper, a more valuable outfit.
2) Administration
This is a process where an insolvency practitioner (the ‘administrator’) is temporarily appointed to manage a flailing company for the company’s survival and to review a good outcome for creditors before liquidation is explored. The debtor company is protected from legal action by creditors during the period of administration.
Administrators will on a day-to-day basis typically need to thoroughly review the company’s:
- Financial position.
- Assets.
- Commercial agreements and contracts.
- Legal and compliance matters.
- Business operations.
- Suppliers
- Potential buyers
One example of how an administrator may look to reduce a company’s performance immediately after carrying out the reviews mentioned above would be to restructure employee numbers and streamlining departments. This often involves downsizing headcount and outsourcing some labour functions to reduce costs and improve productivity.
Any proposed employee redundancy programme would, of course, require the support of a trusted employment lawyer to avoid legal challenges from disgruntled employees. Businesses should be aware that employee-related restructures risk reducing morale in surviving staff which subsequently may impact productivity benefits.
Key Practical Tips
- Businesses and creditors should both maintain good relationships with each other and with other stakeholders (employees, for example). Those good relationships often matter in times of insolvency and restructuring when creditors are being prioritised and CVAs are being agreed.
- As above, business owners and senior staff should continually keep abreast of their company’s financial health and balance sheet.
- Get in touch with a trusted insolvency practitioner in advance of any debt and repayment issues!
The team at NavigateBR advises both debtors and creditors in restructuring and insolvency cases. Please do not hesitate to contact us if you have any questions or would like any advice.
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