COVID-19 Business, but not as we knew it Restructurings and Reorganisations
Business Restructurings Part Two
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COVID-19 | Business, but not as we knew it Restructurings and Reorganisations
Business Restructurings Part Two
A financial restructuring involves a company which is in financial difficulty agreeing with its stakeholders to reorganise its liabilities so that its business can survive (though not necessarily the company itself). It will typically involve cost-cutting measures, the divestment of unprofitable businesses and refinancing. It may also involve an insolvency process (e.g. administration) or formal restructuring (e.g. CVA) but this is not inevitable.
Johnathan Rees Partner | Head of Corporate & Commercial johnathan.rees@laytons.com +44 (0)20 7842 8009
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Business Restructurings | Part Two
Introduction • Businesses confront the most significant challenge in a generation as their markets shrink, change or disappear. Having navigated the initial phase of the
Preliminary Steps Preliminary Steps • Typically the lender ’s choice is restructuring or an
crisis implementing a series of cost saving and liquidity
insolvency process. Where the solvency of the business
measures, companies are now progressing to the next
is in issue lenders will generally recognise that they will
phase. For most, including many who were strong
achieve better returns through a restructuring than by
heading into the crisis, this next phase will be the most
instituting formal insolvency proceedings.
challenging as businesses look to replace lost revenues and “future proof” their organisations.
• Any proposed restructuring will be based on the premise that:
• The likelihood therefore is that we will increasingly see companies undertaking not just a financial restructuring
• There is inherent value in the company's business.
- where a business looks to reschedule or refinance its
• The company's short and long term plans are
financial arrangements - but simultaneously a business restructuring root and branch reviews of all aspects
sound. • The restructuring has the support of the company
of their operations to “future proof” their businesses
and its principal creditors (or, in the case of a CVA
against the post-pandemic world.
or scheme of arrangement, at least the statutory majorities required).
• The first part of this Article examined the wide range of matters which fall for consideration in the context of
• In terms of the business’s management, it is safe to say
those broader business restructurings. In this second
that in the current trading environment there will be a
part we explore the options, implications and processes
premium on experience. Consequently businesses and
involved in a financial restructuring.
their stakeholders will use the opportunity to review and strengthen management teams.
Company’s objectives • The directors must first identify the objectives of any restructuring i.e. what they hope to achieve from it (i.e. the “end game”). As mentioned in the current climate this will likely include not merely sourcing new financing but as adapting the business to the new world order. • In broad terms the goals of a financial restructuring will typically involve relieving financial stress, generating cash, reducing costs and increasing profitability and reduce long term liabilities (e.g. pensions). 4 | laytons.com
Business Restructurings | Part Two
• These objectives will often involve short-term (e.g. preventing security enforcement) and long-term goals (e.g. compromising debts).
Key Stakeholders • The company needs to identify its key stakeholders as early as possible i.e. those creditors with a genuine
• This preliminary exercise will represent the board’s
economic interest in the company and restructuring.
conclusions about the business’s mid- and longer-term
To do that the directors must identify the “value break”
prospects and their vision for the future of the business.
in the business’s capital structure - the point above
Experience will be invaluable and directors will be well
which a stakeholder ’s claim is "in the money" (and so
advised to draw on relevant skills within and outside
the stakeholder has a genuine economic interest in the
the organization to ensure that their conclusions and
restructuring) and below which a stakeholder is "out of
recommendations are as well informed as possible.
the money" (and has no economic stake).
Information
• Similarly, understanding the order in which the company must return assets to its various stakeholders is fundamental to a restructuring strategy.
• Up to date reliable information is essential to any restructuring. The company’s board should ensure that they have a sound understanding of the business’s fundamentals e.g. its company’s financial position and capital, funding and operational structures and identify its key stakeholders.
Options The business in conjunction with its advisers should evaluate the full range of restructuring options. These will typically
• If the company has operations in other jurisdictions
include:
then local counsel and other advisors will need to be engaged as early as possible. The efficiency of that
• debt for equity swaps
aspect will be fundamental to the success or otherwise
• amended or extended facilities
of the wider process.
• new money • disposals possibly via an accelerated M&A process
• The quality of that data will be vital. No restructuring
• a formal restructuring process e.g. a CVA
will be possible unless the stakeholders have clarity and confidence about the company's financial position and faith in the reasonableness of the directors’ projections (see Process).
Contingency Planning • The progress of any restructuring may not run as the parties intend. Depending upon the context (urgency of the situation and solvency of the business) it would be prudent for the business to develop a Plan B (e.g. a pre-pack administration or accelerated M&A process) alongside its restructuring negotiations which can be
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Business Restructurings | Part Two
swiftly implemented if the restructuring fails for any reason.
• A standstill agreement provides a moratorium (standstill period) freezing the position of creditors while the business negotiates with key counterparts
• A contingency plan should be capable of being
and stakeholders. The agreement prevents the
implemented without the consent of the uncooperative
creditors from taking any enforcement action against
stakeholders and may involve the implementation of a
the company during that period. During the standstill
formal insolvency process in at least one jurisdiction.
period stakeholders will typically:
Process • The restructuring process will be influenced by a number of factors:
• review the company's projections and other financial information (this due diligence will serve as a platform for the restructuring negotiations). • assess the company's management • consider the viability of the company • prepare an insolvency model (identifying projected
• urgency – are there any time critical issues which
returns for creditors in the event of an insolvency).
must be addressed • size and sophistication of the business (real estate
• The form of Restructuring Agreement will of course
portfolio, workforce, key suppliers and customers,
depend on the circumstances. Typically it will amongst
cross border aspects)
other things deal with the following:
• solvency of the business • complexity of existing funding, security and capital structures and proposed funding arrangements • whether stakeholders are supportive
• the repayment of creditors and the extension or amendment of existing facilities • new money • liquidity measures - cash conservation (controls on
• Directors would be well advised to delegate management of the process (e.g. to a committee of
what the company can do with its cash and cash generation (e.g. an agreed disposal programme).
directors and senior management) to ensure that the day-to-day running of the business continues to be supervised. The ability to keep one eye on the ball (the present) and another on the “end game” (objectives) will be key.
Directors’ Duties and Liabilities • Directors of companies in financial difficulty face a
• The main steps to the process of implementing a
number of issues including:
restructuring will usually involve negotiating (i) a standstill agreement and (ii) a restructuring agreement,
• what can they do to keep the company in business
and, depending on the number of lenders, establishing
without committing an offence or incurring
a steering committee of key stakeholders.
personal liability (see below) • when they must cease trading
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Business Restructurings | Part Two
• Directors are under a duty to act in the best interests of
• Engaging local counsel early will be key to help identify
the company. However, once they form the view that
issues - e.g. local security and priority rules and the
the company is insolvent their duty is to act primarily in
impact of the restructuring on any key contracts - and
the interests of the company's creditors. Amongst other
to co-ordinate the implementation of the restructuring
things the directors should:
in those territories.
• consider the potential impact on creditors of all the
• We have extensive experience of working with our
decisions they take with regard to the management
associate offices throughout the EU. Good working
of the company
relationships between advisors across jurisdictions are
• monitor and review the financial state of the
key to an efficient process.
company continually • seek external advice • There are a limited number of circumstances in which directors may incur personal liability. An analysis of these is beyond the scope of this article but in brief
Corporate Insolvency and Governance Act 2020
these include wrongful trading fraudulent trading and misfeasance or breach of fiduciary duty. There is
The Corporate Insolvency and Governance Act 2020 entered
also the question of director disqualification in certain
into force on 26 June 2020. It sets out the detail of the UK
circumstances. The government has announced
Government’s reforms to the existing restructuring and
the suspension of the wrongful trading provisions
insolvency regime as part of its response to the economic
retrospectively from March 1st to 30th June and these
crisis caused by the COVID-19 pandemic. The Act includes
measures are addressed in the new draft UK insolvency
temporary measures intended to support businesses as
bill (see New Legislation).
they deal with the crisis as well as permanent changes which reform of the UK’s insolvency and restructuring regime.
Cross Border Restructurings
This legislation will transform the interaction of creditors with businesses in financial difficulties and will be relevant to any discussions concerning a financial restructuring.
• Where the assets of the business are located in more than one jurisdiction a range of different issues arise.
Our briefing considers in more detail the Act and its likely
The first is to understand which laws apply in the
impact.
relevant jurisdictions and their effect (a number of countries have enacted laws attempting to harmonise the process of cross-border insolvencies). The EU Insolvency Regulations apply to insolvency proceedings of businesses whose centre of main interest is situated in an EU member state. The regulations continue to apply to the UK during the transition period.
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Expertise
Corporate & Commercial We provide a complete range of corporate and commercial advice and support for clients who extend from start-ups, individual entrepreneurs and family offices to multinational corporations. We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market. Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.
Johnathan Rees Partner | Head of Corporate & Commercial johnathan.rees@laytons.com +44 (0)20 7842 8009
John Gavan
Esther Gunaratnam
Dimitri Iesini
Partner john.gavan@laytons.com +44 (0)20 7842 8000
Partner esther.gunaratnam@laytons.com +44 (0)20 7842 8000
Partner dimitri.iesini@laytons.com +44 (0)20 7842 8081
Robert MacGinn
Brian Miller
Daniel Oldfield
Partner robert.macginn@laytons.com +44 (0)20 7842 8000
Partner brian.miller@laytons.com +44 (0)20 7842 8000
Partner daniel.oldfield@laytons.com +44 (0)20 7842 8037
Daniele Penna
Christopher Sherliker
Cameron Sunter
Partner daniele.penna@laytons.com +44 (0)20 7842 8053
Partner christopher.sherliker@laytons.com +44 (0)20 7842 8015
Partner cameron.sunter@laytons.com +44 (0)20 7842 8036
Liza Zucconi Partner liza.zucconi@laytons.com +44 (0)20 7842 8092
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