COVID-19: Business Restructurings - Part Two

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).

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• 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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• 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

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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

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