Business Restructuring

What Is Business Restructuring?

Restructuring is an action taken by a company, usually in a formal manner and under the supervision and control of an external administrator through the use of statutory mechanisms, to reconstitute the company’s balance sheet by reducing debt and future liabilities under a compromise arrangement agreed by creditors.

Usually but not always, there is a contribution of money into the company by the directors or shareholders to increase the pool of funds available to pay creditors. It is common for related party creditors to not participate in the arrangement. That is to say, their claims are subordinated in priority behind those of external or unrelated creditors. This reduces the pool of claims against the company and increases the dividend that can be paid to participating creditors.

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Formal Restructuring

The Corporations Act provides for three different types of corporate restructuring:

  1. Small Business Restructuring
  2. Deed of Company Arrangement
  3. Scheme of Arrangement

Schemes of arrangement require court approval, engagement of lawyers and are comparatively expensive. They are normally only suitable for very large restructuring arrangements involving complex issues. Consequently, they are rarely used.

As an SME focussed practice, we specialise in the arrangements most suited to SME businesses in financial distress, namely, Small Business Restructuring and Deeds of Company Arrangement.

Informal Restructuring

Restructuring can in principle be performed outside the formal mechanisms provided in the Corporations Act. The costs of such an arrangement may be significantly lower than formal schemes, with corresponding greatly improved outcomes to the creditors of the insolvent company.

Generally speaking, we do not recommend informal arrangements, for these reasons:

  1. 100% Creditor Support Required
    An informal debt compromise arrangement requires the support of 100% of creditors. This may be possible if the number of creditors is small, but in practice, gaining 100% agreement across a large body of creditors is likely to be difficult. There need only be one disgruntled creditor who is dissatisfied with the arrangement and issues proceedings against your company, to render the entire compromise proposal unworkable. By contrast, a formal proposal made under the Corporations Act and approved by the majority of creditors is backed by the force of law and binds all unsecured creditors, even those who did not support it.
  2. No independent scrutiny
    An informal proposal put forward by the company’s directors or advisor does not and cannot undergo the scrutiny of an independent, registered liquidator appointed under the Corporations Act. Creditors cannot have confidence that they are not being misled into a disadvantageous arrangement, as the offer is not being put forward by an independent person who owes fiduciary duties to the general body of creditors. In contrast, a registered liquidator has a statutory duty to independently investigate whether a proposal made under the Corporations Act is in the best interests of creditors and to make recommendations accordingly, in which creditors can have confidence.
  3. No statutory protections available
    There are no statutory protections available to the company under an informal arrangement that may act to preserve value in its assets. In contrast, a voluntary administrator has the benefit of a statutory moratorium on certain creditor actions during the course of the administration, to enable a thorough investigation to be undertaken and recommendations made to creditors without the constant threat and distraction of litigation. For example, a landlord is not entitled to retake possession of leased premises during the currency of a voluntary administration, provided the administrator reaches agreement with the landlord in relation to a fee for occupancy.