Any company that is facing a challenging financial outlook must be prepared to explore a range of options to ensure that it is able to avoid (or come out of) insolvency and continue to operate – such as embarking upon the corporate restructuring process.
This article will guide you through the facts regarding restructuring & insolvency to enable you to make the right decisions for your company.
It is important to be aware that restructuring and insolvency law is highly complex and so it is advisable to seek expert guidance.
What is the main objective of corporate restructuring?
The usual aim of corporate restructuring is to improve the financial performance of a business by one or more of the following measures:
- increasing revenue
- reducing costs
- increasing efficiency
There are many ways that restructuring can be carried out – the option that a company chooses will be influenced by both the intrinsic nature of the organisation and the market in which it is operating.
Areas that might undergo change as part of a corporate restructuring process include:
- staffing levels
A corporate restructure is often carried out in response to the business experiencing financial challenges, with the changes seen as a way of getting the company back on an even keel and safeguarding its future.
It is important to be aware, however, that corporate restructuring may also occur for positive reasons – for example, to enable a company to expand its operations or take advantage of market opportunities.
Alternatively, a corporate restructure may be necessary in order for the business to comply with new legislation that has been introduced.
What are the most common forms of corporate restructuring?
A corporate restructure can take a number of forms, including:
Should a company be at risk of becoming insolvent it may opt to look at ways of reducing its administrative and operational costs. The scale of changes it makes will depend on both the size and structure of the business and the amount of money that it needs to save.
For example, a company may opt to close down unprofitable departments or overhaul its management structure to remove unnecessary roles. As well as bringing about a reduction in costs, such action is also likely to make the organisation more efficient.
Divestment and spin-offs
Following on from the above point, a company looking to cut costs may consider divestment as an option. A large retailer, for example, whose stores are mainly based in out-of-town shopping centres may decide to sell off its traditional high street stores if they are no longer making sufficient profits or fulfilling a strategic purpose.
Alternatively, the stores could become spin-offs, operating as a standalone enterprise with the company retaining part ownership.
A common way for a company to be facing insolvency is if it has debts that it is unable to pay on time – these could include rent, payments to suppliers or the interest on a business loan.
The company may seek to remain solvent by asking creditors to agree to a Company Voluntary Arrangement (CVA) whereby they forgo immediate repayment in return for a guarantee that the debt will be honoured at a future date.
In other instances, the company may avoid insolvency by converting some of the debt into equity meaning that the creditors effectively become part owners.
As mentioned above, corporate restructuring sometimes takes place for positive reasons – for example, through mergers and acquisitions.
A vehicle manufacturer, for example, may decide that the best way to increase its profitability is to buy one of its suppliers.
Such a case would be termed a vertical merger while should the company acquire a rival car maker, it would be termed a horizontal merger.
Should new individuals take over a company or become investors in it, this may require a restructuring to reflect the changed ownership of the company.
What are the pros and cons of corporate restructuring?
It is likely that there will be both advantages and disadvantages to carrying out a corporate restructure which must be considered when deciding whether to go ahead.
Pros of corporate restructuring
The restructuring process may entail staff positions being abolished altogether (for example, a double-glazing company may decide to cut back on the number of installers it employs) or outsourced (the same company may opt to outsource the cleaning of its head office rather than continue to employ cleaning staff directly).
In both cases, the company may experience a significant reduction in its expenditure.
A common reason for carrying out a corporate restructure is to remove unnecessary management positions.
This can not only free up funds to be better directed elsewhere but also make the organisation more streamlined, flexible and efficient.
A restructure can also have major practical benefits for the way a company carries out its day-to-day activities.
The introduction of new technology on a factory assembly line, for example, could lead both to greater productivity and finished goods that are of better quality – both factors which could enhance the firm’s profitability.
Cons of corporate restructuring
Loss of Human Capital
Dispensing with a highly trained, skilled and motivated member of staff is not something a company should do lightly – even if the payroll savings initially appear attractive.
Training up another member of staff in the role (so they can combine it with their existing responsibilities) will take time, with no guarantee they will be able to produce work of the same quality.
Drop in motivation
Any company embarking on a restructuring should consider the likely impact on their workforce in terms of motivation and performance.
Many workers find going through a restructuring process a stressful and uncertain time with concerns over either being made redundant or having to take on a new role to which they feel unsuited.
This could result in greater staff absences due to illnesses, lower productivity by staff who are in work and even employees finding new jobs to pre-empt any potential changes at the company.
What is insolvency?
As we have seen above, insolvency and restructuring are closely linked as restructuring is often carried out to avoid (or as a response to) a business becoming insolvent.
A company is insolvent if either of the following apply:
- It cannot settle debts that are due for payment
- The value of the liabilities on its balance sheet exceeds that of the assets
What happens if a company goes into insolvency?
This is an extremely serious situation for any business to be in with potentially severe consequences for its owners, employees and creditors.
It is vital that those making the decisions act in accordance with insolvency law and so they should seek legal advice as soon as possible.
There are a number of options available to a company that has gone into insolvency.
Informal agreement with Creditors
The overriding concern of creditors is likely to be having their money paid in full as soon as possible.
They may be prepared to defer repayment for a period if they are satisfied that the company will be able to use the time to improve its financial position and so be able to meet its obligations.
With such an agreement in place, the company may be able to implement business restructuring as a way out of insolvency.
Company Voluntary Arrangement (CVA)
Should creditors not be open to an informal agreement they may be willing to accept a legally-binding CVA, accepting a delay in payment in return for a guarantee that they will be repaid in the future.
Once again, a creditor may be more willing to reach an agreement if they are confident that the business has a plan, such as through corporate restructuring, to come out of insolvency.
While going into administration is a major step (and one which can lead to liquidation), it can buy the company some time in terms of having to repay creditors.
This could enable it to come out of insolvency via restructuring or for all or part of the company to be sold.
Should it not be possible to either restructure or sell the company, it will be necessary for it to go into liquidation.
Also known as winding up, this process sees the firm’s assets sold and distributed to creditors.
Can a company come back from insolvency?
As we have seen above there is a close connection between business restructuring and insolvency. While some companies are able to come back from insolvency through gaining new orders, it is also possible for a business to get back into profit via a corporate restructure.
Having a convincing plan in place can help to persuade creditors to enter into either an informal agreement or CVA with the company, allowing the measures implemented as part of the restructure to take effect and get the company back on track.
What are the two types of insolvency?
The two types of insolvency are:
Cash flow insolvency
This occurs when a company does not have the money to pay its immediate debts but does have illiquid assets (such as property, plant and vehicles) that could be sold and used to settle the debt in the longer term.
Cash flow insolvency could occur, for example, if a major customer fails to pay its bill on time, leaving the company in turn unable to meet its obligations. The firm does, however, own its business premises which, if sold or mortgaged as part of a corporate restructuring, would enable it to repay the debt.
In such instances the company may be able to persuade its creditors to enter into a voluntary agreement or a CVC, as it can provide reassurance that the debt will be settled in time.
Balance sheet insolvency
This could be seen as a more serious form of insolvency than the above case as the company does not have the assets to meet its obligations in either the short or long term.
A company in this position may find it more difficult to reach an agreement with its creditors – one option may be to draw up a convincing restructuring plan (involving, for example, redundancies and outsourcing) that will provide the required reassurance.
Is a restructuring plan an insolvency process?
A restructuring plan can offer a way of avoiding insolvency if the measures result in increased profitability in advance of potential problems.
Should a company be forced to go into insolvency, however, a restructuring plan could be an effective response in both the short and long term.
In the short term it can offer reassurance to creditors that the company is viable and so help persuade them to allow more time for the repayment of their debts.
Longer term, should the plan include measures to reduce costs, increase efficiency and seek alternative forms of funding it could pave the way for the company to have a sustainable future.
Where can I find out more about corporate restructuring and insolvency law?
Wilson Browne’s expert team of solicitors has a wealth of experience in the areas of restructuring and insolvency law and a successful track record of supporting people in making the right decisions for their company.
We believe in taking the time to get to know you and your business so that we can offer a bespoke, professional and confidential service.
Working with the highest standards of integrity we will guide you through the areas of insolvency and business restructuring to ensure that you are aware of all your options.
With offices in Corby, Higham Ferrers and Rushden, Kettering, Leicester, Northampton and Wellingborough, we can offer a friendly face-to-face meeting at a convenient location.