Company Restructuring: Everything you Need to Know (Updated 2023)
Company Restructuring is when a company works with some or all of its creditors to come to a negotiated solution and implements operational improvements to return the company to financial health.
What is Company Restructuring?
Company Restructuring is a process where a company that is under financial distress develops and implements a restructuring plan to improve its financial position to allow the business to continue. It will usually involve improvements in the business operations and commonly works with some or all of a company’s creditors to vary terms of payments.
Depending on the seriousness of the company’s situation, a company restructure can be implemented informally, which is behind the scenes, or formally, using one of several legal restructuring processes such as Safe Harbour, Small Business Restructuring and Voluntary Administration.
- What is Company Restructuring?
- Overview: Why consider company restructuring?
- What you need to think about before embarking on a Company Restructuring
- What are the different categories of companies needing a Restructuring?
- The two broad categories of Restructuring are Informal and Formal – what is the difference?
- Pros and Cons of Informal v Formal Restructuring
- What actions can be taken within a restructuring?
- When should an Informal Company Restructuring be used?
- How can an Informal Restructuring help a company in financial difficulty?
- What is the process and timeline of an Informal Restructuring?
- There are a lot of different restructuring names – what do they all mean?
- What is a Workout?
- What is Financial Restructuring?
- What is Debt Refinancing?
- What is Operational Restructuring?
- What is Business Stabilisation?
- What is Turnaround Management?
- How can an Informal Restructuring help a company in financial difficulty?
- When should a Formal Company Restructuring be used?
- Company restructuring vs. liquidation
- Personalised advice
Engaging in a company restructuring can be difficult and complex. This guide comprehensively covers the subject, letting you know the options, tricks-and-traps and timeframes. For a company in financial distress, the circumstances will vary, but for each situation there is an appropriate solution. The overriding philosophy is to find the “Least Drastic Solution”.
Overview: Why consider company restructuring?
A Company Restructure should be considered if a company:
- Is failing to produce a return that meets the expectations of its shareholders;
- Is recording a consistently poor trading performance;
- Has encountered a one-off serious event, such as the collapse of a large customer, leaving the Company in financial distress;
- May not be able to continue to pay its debts in the short term or in the long term;
- Has parts of its business that are performing well and other parts that are not.
What you need to think about before embarking on a Company Restructuring
There is one key question that must be answered before embarking on a restructuring: If we can fix the specific problems, can you envisage a situation whereby the business, or part of the business, can trade profitably within the reasonably immediate future? If the answer is “yes” then a company restructuring should be considered. If the answer is “no” then the business may be unviable, and liquidation may be a better option.
What are the different categories of companies needing a Restructuring?
Companies in financial distress can be classified into several broad categories. We have coined the phrase “Restructuring Spectrum” to describe the broad range of situations a company may be facing. We use four broad categories being:
- Financial Distress;
- Insolvent – Restructurable;
- Insolvent – Liquidation
The two broad categories of Restructuring are Informal and Formal – what is the difference?
Restructuring can fall into two broad categories, Formal or Informal. An informal restructuring is usually the “least drastic” solution available to a company in financial distress because it is flexible and can be achieved behind-the-scenes. A formal restructuring is an official process governed by the Corporations Act 2001, such as Safe Harbour, Voluntary Administration or Simplified Business Restructuring.
Pros and Cons of Informal v Formal Restructuring
This table outlines the pros and cons of informal vs. formal company restructuring.
|Pros||Behind the scenes
Company retains control
|Well understood process
Legally binding on all creditors
External oversight adds credibility
|Cons||Harder to enforce on all creditors
Does not have legal backing
Less flexible timeframe
Failure could lead to Liquidation.
What actions can be taken within a restructuring?
A Company Restructure may include the following actions:
- Staffing reorganisation or cutbacks
- Refinancing bank facilities
- Introduction of new equity capital
- Rationalisation of products or services
- Closure of non-performing branches or locations
- Investment in new plant or technology
- Entering into informal or formal payment arrangements with banks, other financiers, suppliers or the Australian Tax Office.
When should an Informal Company Restructuring be used?
An Informal Company Restructuring can be used when:
- The need to make changes to the business is identified at an early stage.
- The business is likely not insolvent.
- A restructuring plan has been carefully modelled, including detailed projections to show the predicted positive outcomes.
- All of the interested stakeholders, such as shareholders, banks, suppliers, ATO are likely to engage in the process.
How can an Informal Restructuring help a company in financial difficulty?
An informal restructuring is usually the “least drastic” solution available to a company in financial distress. They are flexible and are achieved behind-the-scenes. They can be achieved in a short space of time or can take years to complete. At times it is not necessary to involve external parties, such as the company’s bankers or trade creditors, at all. Commonly though, a company will need to approach its key creditors and agree some sort of forbearance by those creditors whilst the company deals with its problems.
What is the process and timeline of an Informal Restructuring?
An informal restructuring process need not follow any set timeframe. The timing will be dictated by each situation. Some restructurings can be dealt with by a company entirely internally by focusing on performance improvement. That is, it is not necessary to involve external parties such as the company’s bankers or trade creditors. In more serious situations a company will need to approach its creditors and agree to some sort of forbearance by the creditors whilst the company deals with its problems. Where a restructuring involves creditors, the deal finally agreed between the company and its creditors need not follow a set prescription. In practice, the agreements are often quite imaginative and are designed to suit the specific needs of the situation.
There are a lot of different restructuring names – what do they all mean?
Unlike in formal restructuring, where the terminology is dictated by the Corporations Law, in the informal restructuring world there are a raft of names and terminologies used. We cover the more common ones below.
What is a Workout?
The term Workout or Informal Workout is often used to describe the process of restructuring very large companies involving negotiations with a large number of Banks.
What is Financial Restructuring?
Financial Restructuring is a corporate restructuring process that addresses problems or inefficiencies caused by an inappropriate capital structure of a company or business It can involve matters such as:
- Converting existing debts to equity;
- Converting preference shares to ordinary shares;
- Debt subordination;
- Debt compromise; and
- The sale or transfer of existing debts or equity to more supportive new owners.
What is Debt Refinancing?
Debt Refinancing is the review of a company’s debt finance to arrange a more appropriate type of finance or a rescheduling of the current terms. Debt Refinancing usually focuses on the largest lenders to a company and so will focus on Bank and other lenders. Usually whilst a debt refinancing is being undertaken, trade creditors are paid in the normal course of business.
What is Operational Restructuring?
Operational Restructuring is the identification of the causes of operational underperformance and the development of a strategy to achieve improvement. That is, Operational Restructuring focuses on the profitability of operations. It does not address the capital structure or financing structure of a company. The plan will usually cover the following areas:
- Review of products and markets to assess their contribution to profit;
- Alignment of costs with revenues and making appropriate cost reductions;
- Rationalisation of operations and facilities to improve efficiency and release cash;
- Disposal of underperforming and non-core businesses;
- Identification of skills and resource gaps in the management team.
What is Business Stabilisation?
Business stabilisation is a corporate restructuring process designed to help a business through short term and unexpected financial distress such as the loss of a major contract or a natural disaster that has affected operations. The need for Business Stabilisation will arise as a result of some form of crisis. Business stabilisation will involve the implementation of short-term measures usually designed to enhance cash-flow and generate liquidity. It will usually be combined with steps to help rebuild the confidence of key stakeholders. Business stabilisation will create sufficient breathing space to implement a longer-term turnaround process.
What is Turnaround Management?
The term Turnaround Management refers to the process of an Expert working with the directors of a company in Financial Distress to identify the causes of the Financial Distress and the development of a strategy to return the company to financial health.
When should a Formal Company Restructuring be used?
A Formal Company Restructure should be used when:
- The Company is already under significant financial pressure and may be insolvent or might become insolvent;
- Directors require expert external assistance to design and implement a Restructure plan;
- The plan relies, in part, on releases from existing contracts or on creditors agreeing to a “haircut” or rescheduling of their debts;
- There is uncertainty about the level of support the Company will receive from its creditors;
- It is not certain that all creditors will agree to a restructuring and so formal restructuring is used to bind all creditors;
- Directors do not want to be exposed to the risk of personal liability arising from breaches of Corporations laws dealing with things like Insolvent Trading or Directors’ duties of care.
What are the types of Formal Restructuring?
There are 3 Formal Company Restructure processes:
- Safe Harbour
- Simplified Business Restructuring
- Voluntary Administration
Each process works differently and is suitable for different circumstances.
What is Safe Harbour?
Safe Harbour legislation was introduced in 2017 as part of the Insolvency Reform Law Act. Under the Safe Harbour reforms, directors will not be personally liable for debts incurred after the date of insolvency if they can show they were incurred in connection with a course of action reasonably likely to lead to a better outcome for the company and its creditors, rather than proceeding to immediate administration or liquidation. So, the Safe Harbour operates to carve directors out from the civil insolvent trading provisions of the corporations law.
What is Small Business Restructuring (SBR)?
Small Business Restructuring become effective in January 2021. The process draws on key features of the US Chapter 11 bankruptcy process allowing small businesses to restructure their debts while remaining in control of their business. A small business is defined as one with debts less than $1 million. An insolvent small business would have 20 days to come up with a restructuring plan, and creditors would have to vote on whether to accept it within 15 days after that. If creditors don’t accept the deal the company can choose to proceed into a new streamlined liquidation process, or Voluntary Administration. SBR is designed to be cheaper, simpler and quicker than voluntary Administration.
What is Voluntary Administration?
Voluntary Administration is a process where an insolvent company is placed in the hands of an independent person, who is a Registered Liquidator, who can assess all the options available and generate the best outcome for a business owner and for creditors. It is a highly regulated process and has strict timeframes. As a guide, the VA process aims to put a restructuring plan, called a Deed of Company Arrangement (DOCA), to creditors around two months after the process commences.
Company restructuring vs. liquidation
Company Restructure will only work if there is a viable underlying business to be restructured. If not, other insolvency solutions, such as Voluntary Liquidation, should be considered.
Every company’s circumstances are different. We strongly encourage anyone considering a company restructuring to give us a call to discuss your specific circumstances. We may even recommend a cheaper (or free!) solution.