- Energy and utilities
- Financial services
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- Government and public sector
- Health and aged care
- Hospitality, tourism and leisure
- Not for profit
- Professional services
- Real estate and construction
- Resources and mining services
- Telecommunications, media and IT
- Transport and logistics
- Practice Areas:
- Restructuring and turnaround services
We are often approached at the eleventh or twelfth hour when a company is teetering precariously on or over the edge of insolvency. It’s always a difficult and stressful time for the directors and decisions need to be made to pursue all reasonable options to achieve a restructure/turnaround. With the introduction of the new ‘safe harbour’ legislation, directors are being actively encouraged to engage with legal and restructuring advisors as early as possible.
Under the new safe harbour regime, directors should not be liable for insolvent trading if, after suspecting insolvency, they begin to develop “one or more courses of action” that are “reasonably likely to lead to a better outcome for the company”.
While the new laws are yet to be tested, our experience in helping companies navigate through distress provides a solid formula to help directors develop and implement a plan for restructuring the company to improve its financial position.
While every restructure will be unique, the following is a hypothetical of the critical components likely to be common for most companies under the new regime.
Assess the current situation as early as possible
Directors will have a window of opportunity to develop a plan designed to achieve a better outcome than immediate insolvency. This will include receiving appropriate advice to make sure the plan addresses the company’s needs and that directors fully understand the company’s predicament including:
- How acute the current financial position is
- the problems causing current or prospective insolvency, and
- whether the problems are terminal, or if they can be corrected.
Address liquidity issues immediately
An immediate or upcoming liquidity issue is the most common reason for a company’s directors to be considering its solvency. Formulating a plan for addressing these liquidity issues will likely be the most important factor in providing directors with time to address the company’s underlying problems during the safe harbour period.
Options to consider include:
- Negotiating a stand-still or refinance with financiers
- Pursuing additional equity funding from existing or new shareholders
- Divestment of assets (either to free up cash or reduce the company’s debt)
- Improving the working capital cycle through changes in terms with key suppliers and customers.
Implement rapid cost reduction
The quickest way to reduce cash outflow and improve liquidity (outside of negotiating with financiers) is to implement rapid cost saving measures.
Focus on high-value targets first, and then undertake a detailed analysis of where fat can be removed from the business. Consider reducing overheads, eliminating waste, increasing productivity, or rationalising redundant or loss making business units.
Manage your key stakeholders
For a restructure to be effective, key stakeholders will need to be engaged and brought along on the journey. Stakeholders will vary by company but will likely include employees, landlords, contract counterparties, suppliers, or the government. A restructuring plan should identify key stakeholder groups, and document how they are to be engaged.
Comparison to alternatives
A crucial element under safe harbour is that the proposed course of action needs to be reasonably likely to lead to a better outcome than the immediate appointment of a voluntary administrator or liquidator.
It follows then that directors should include in their restructuring plan a comparison of the proposed course of action with these alternatives. An assessment of the outcome in an insolvency scenario will need to consider the consequences of an insolvency appointment on ongoing trading, asset values, employee liabilities (including redundancies and payment in lieu of notice) and contracts with key counter-parties.
Restructuring Office to monitor “better” outcomes
Directors need to be aware that the safe harbour period will apply only as long as the course(s) of action pursued continue to provide a better outcome for the company. Any restructuring plan should therefore establish milestones to be achieved, and implement mechanisms for monitoring progress (and re-evaluating the decision to continue trading).
Establishing a ‘Restructuring Office’ is an effective way to ensure the plan is being monitored and implemented. Reporting to the directors, the Restructuring Office should be tasked with managing and monitoring strategic, tactical and operational activities relating to the restructuring, and whether the outcomes continue to be “better” than the appointment of an external administrator.
There will be numerous other considerations for directors who are preparing a restructuring plan, specific to the circumstances of the individual company and its predicament. And while the above points are a sound foundation, in our experience plans need to be fluid to adapt to changing circumstances.