Informal Restructuring
This is the nineth topic of our series of articles aimed at informing directors of their duties and options for small to medium enterprises if faced with insolvency. This particular article will deal with the less publicised ‘informal restructuring’.
What is informal restructuring?
There is no strict definition of what informal restructuring is, however, quite simply it is the process of turning around the financial results of a business.
Unlike one of the formal restructuring processes set out in the Corporations Act 2001 (Cth) (the Act) (like scheme of arrangement, voluntary administration and deed of company arrangement, safe harbour or new small business restructuring process), the directors remain in control of the business whilst steps are taken to explore and implement a variety of strategies to return the business to a viable and sustainable operation. There are also arguably less barriers to implementation and considerably less outlays involved with an informal work out strategy compared to a formal appointment restructure.
How to start the process?
The Company will often engage an external consultant to discuss the situation and seek guidance on the options available and how to implement same. It is during those initial discussions that there will be some hard truths explored about the need for change. It is also prudent at the planning phase to consider the safe harbour provisions set out in the Act. Section 588GA of the Act provides directors with an exception from any insolvent trading liability, where they are developing courses of action, which are reasonably likely to lead to a better outcome for the company than an immediate administration or liquidation.
Safe Harbour protection may be available when:
- directors suspect that the company may become insolvent
- directors develop one or more courses of action that are reasonably likely to lead to a better outcome
- a debt is incurred in connection with that course of action
- the company is paying employee entitlements when due
- the company is meeting all tax filing obligations when due
If it is decided that safe harbour is to be adopted, it is critical that any plan is clearly documented and compliance with requisite criteria is monitored closely.
Other restructuring techniques might include:
- Divestment (e.g. sale of certain assets or parts of the business).
- Rationalisation of operations (e.g. costs, revenue, business processes, termination of non-performing contracts and employees etc.).
- Financing – refinancing of existing facilities, new debt or equity funding.
- Changing the legal structure.
What happens if an informal restructure is not working?
An informal restructure is a process to explore options to provide a pathway back to a positive financial position. However, the reality is that there is no guarantee it will be a success. If it becomes apparent the informal process is not yielding desired results, it is critical to seek advice for an alternate pathway.
If the business is viable however simply cannot sustain operations with the current debt level or structure, a director may want to consider a sale of business (or certain assets) or formal restructure such as the appointment of a Voluntary Administrator or a pre-pack followed by a liquidation). By having a well-documented plan, a business will often be better placed to pursue one of these alternatives. On the other hand, not all businesses can be saved and therefore it may be more appropriate to undertake a controlled winding down of operations prior to the appointment of a liquidator.
Financial distress by default does not mean financial defeat. The WCT team strongly believes in this and that there is no one size fits all. We are dedicated to helping you and your clients to diagnose the core issues, understand all options available and assist with implementing the right solution.
Should you wish to discuss whether an informal restructure is the right solution, please do not hesitate to contact our experienced team for a free, confidential consultation.