Restructuring

Challenges and solutions

RSM member firms offer the full range of restructuring services to clients across a wide range of industries and sectors.

For Businesses

• Financial advisory services
• Independent business reviews
• Management consultation and assessment
• Viability reports
• Corporate simplification

Individuals and Partnerships

• Debt advisory
• Creditor negotiation
• Financing solutions
• Formal and informal creditor arrangements
• Dissolutions
• Formal insolvency and bankruptcy

Troubled Businesses

• Cash management solutions
• Out of court restructuring and turnaround
• Exit planning
• Investor an creditor relations and negotiations
• Refinancing and debt for equity swaps
• Expedited acquisitions and disposals
• Forensic investigations fraud and asset tracing
• Valuation and shareholder disputes
• Expert witness services
• Pre-packaged insolvencies
• Formal insolvencies

Experience

We understand the industries our clients operate in and have specific experience in the following sectors:

• Agribusiness 
• Automotive 
• Charities and Education 
• Chemicals 
• Construction 
• Engineering 
• Financial Services 
• Health Care 
• Hospitality and Leisure 
• Manufacturing 
• Pharmaceuticals 
• Public sector
• Property
• Printing
• Retail
• Recruitment
• Travel
• Technology, Media and Telecoms
• Transportation and Logistics
• Waste Management and Recycling

Restructuring is the term used to describe the act of reorganising the legal, financial, operational, or other structures of an organisation. The purpose of restructuring can be varied, but generally the need for restructuring comes with a desire to become more profitable, address financial or operational issues or to be better organised in changing market conditions.

Other reasons that businesses may seek to restructure include:

• Change of ownership/ownership structure
• Demergers
• Corporate or group simplification
• Tax or regulatory requirements or changes
• Response to crises or significant change in the business
• Potential or actual insolvency

Corporate debt restructuring refers to an organisation reorganising its existing outstanding commitments and liabilities. This mechanism is generally used by companies whose equity and borrowing structure does not suit its current situation or which are facing problems with debt repayment. The restructuring process allows for equity and debt structures to be changed and potentially for credit obligations to be spread out over a longer duration with smaller repayment terms. The process is designed to assist in giving the business a breathing space to allow operations to return to normal, as well as trying to resolve the longer term issues faced by the corporate, whilst enabling them to become viable once more.

Financial and legal consultants are frequently engaged to derive restructuring plans, as well as assist with implementation. As well as changing the financial and operation structure this can also include offering parts of the business for sale, demerger and the introduction of interim managers or specialist consultants in particular industries/specialisms to address skill gaps and drive change.

A scheme of arrangement refers to a court approved restructuring agreement between an organisation and its trade creditors, lenders, or shareholders. It can also form part of a wide merger or acquisition plan.

Schemes of arrangement are implemented to perform significant changes to the overall structure of a business for the benefit of the general body of stakeholders. As a result of this, they are often utilised when a restructure cannot be easily implemented through other methods. Whilst a scheme of arrangement is not a formal insolvency procedure, it is not unusual to see it utilised alongside a formal insolvency procedure, such as administration.

Administration is a UK restructuring process that aims to rescue insolvent organisations and enables the business to possibly continue running business operations in the process. The Administrator who is appointed by the court at the request of management, shareholders, lenders or creditors, has wide powers to continue trading operations (or close them down). The Administrators primary function is to :

• Enable the survival of the business in whole or part
• Get a better level of realisations for stakeholders/creditors than would be achieved in an insolvent liquidation
• Enable a distribution to be made to a charge holder (secured lender)

An Administrator will often look to sell parts or all of a business to enable it to continue under new ownership, realising funds for lenders and creditors at the same time as hopefully saving the business and jobs involved. It is similar but not quite the same as Chapter 11 in the USA.

A pre-pack is generally referring to a pre-packaged sale of a business. This is a process designed to rescue a business when time is often very short.

The business is generally widely marketed for sale over a period of time. As a result of the nature of a business’s liabilities (to large or difficult to establish) or because it is unable to continue to trade for long (maybe due to a shortage of cash) meaning it is difficult for a potential purchaser to undertake extended and lengthy due diligence, a sale of the business assets to achieve best value for creditors and stakeholders may become necessary in a short period of time.

The terms of sale are agreed with the purchaser and contracts negotiated. The business is then put into administration and the administrator immediately completes the sale of the business assets. This has a number of key advantages:

• Achieving a better sale value for the assets & business for creditors
• The survival of the business and rescue of jobs as the purchaser will generally go on to continue trading the business
• A sale is achieved in a short time frame where otherwise the business would have been forced into liquidations

Whilst pre-packs can occasionally get some bad press, as stakeholders and creditors generally only find out about the sale afterwards. The process has been very successful at rescuing business, jobs and preserving value for stakeholders and creditors. There are also strict professional conduct rules around how a pre-pack sale can be undertaken.

Liquidation is the process by which a business is brought to a close and its assets sold for the benefit of stakeholder, lenders and creditors (similar to Chapter 7 in the USA). Liquidation generally takes one of three forms:

• Solvent Liquidation (members voluntary liquidations) – Normally triggered by shareholders for the purposes of bringing the business to a close and paying out the value of the assets to shareholders (often used for tax or corporate simplification purposes).
• Voluntary Liquidation (creditors voluntary liquidations) – This trye of liquidation is triggered voluntarily by the shareholders and approved by creditors for an insolvent company that is very likely to have no prospect of rescue or trading on. The aim of the liquidation being to return what value can be achieved for the company’s assets to creditors.
• Compulsory Liquidation – This is where a creditor via the courts forces a company in to liquidation for non-payment of a debt. The purpose again being to distribute what can be realised for the assets to all the creditors.

Whilst there are different types of voluntary arrangement (formal and informal) the basis for both is the same. The business with the assistance of a restructuring professional formulates a plan to enable the business to restructure and continue to trade. The aim is for the business to generate profits and cash in order to pay money to its creditors that will give them a better result than if the business was liquidated (closed and sold).

In order to enable the business a breathing space to start to generate profits and cash again creditors agree not to chase payment of their current outstanding debts and indeed may accept a smaller sum in full settlement of a debt.

Under an informal arrangement a repayment plan is agreed with one or more of the company’s creditors (frequently for a relatively short period) to give the company to undertake some restructuring or to source new funds from somewhere. This sort of arrangement is not normally legally binding.

A formal company voluntary arrangement (CVA) is a similar process In that the business formulates a plan (proposals) to put to its creditors as outlined above. However, in this case an insolvency practitioner must be involved and if the proposals are approved by a majority of creditors as they do become legally binding. The insolvency practitioner generally has an ongoing role as supervisor to make sure the business complies with the terms of the proposals.

Bankruptcy is where an individual has a trustee appointed over their assets by a court, normally by application from a creditor for non-payment of a debt. The trustee appointed has the role of selling the persons assets (subject to some complex rules) and distributing the proceeds to the bankrupt’s creditors.

The term ‘Bankruptcy’ is very often miss used as applying to a corporate business rather than correctly referring to administration, receivership or liquidation.

Insolvency refers to an organisation that fails either of the following two test:

• An inability to meet its debts as and when they fall due (cashflow insolvent) 
   
  • When an organisation may have valuable assets but not enough liquid cash to pay its debts. This form of insolvency can often be addressed by some sort of formal or informal restructuring including a voluntary arrangement (repayment scheme).
• Balance-sheet insolvency (liabilities exceed the value of assets) 
   
  • This form of insolvency refers to an organisation that does not have enough assets, liquid or otherwise, to cover its debts.

There are specific proceedings that pertain to the country within which an organisation operates. However, typically all countries require insolvency officials to be involved. Generally, these are highly qualified professional people qualified accountants/solicitors who have also trained and qualified to become a member of a professional restructuring body. These are represented by the following:

• Insolvency practitioner
• Tribunal
• Regulatory agency
• Liquidator
• Referee in bankruptcy
• Trustee in bankruptcy

Directors should keep in mind that in nearly all jurisdictions there are penalties for not conducting themselves appropriately when dealing with a business that is facing insolvent. Sanctions can include disqualification from managing businesses in the future, fines, personal liability for business costs/losses and even imprisonment.

In very general terms directors/managers if they have any concerns should take advice and ensure they are looking after the interest of all stakeholders and creditors alike. Generally, they should:

• Avoid formulating and undertaking business plans with little or no chance of success
• Pay for goods and services as that are precured
• Prepare trading and cashflow forecasts to show that ongoing trading is viable and sensible
• Put customer deposits in a trust account until the related goods or services are provided
• Possible cease in trading (subject to professional advice) if by doing so the position is going to be made worse for creditors
• Avoid selling goods, services, assets or parts of the business at below their true value to generate cash for trading
• Look to move assets including intellectual property, customer contracts etc to other or new entities to avoid creditor actions against them
• Seek professional advice from an appropriate professional advisor