How Do I Restructure My Company in England and Wales?

If you own a company and believe it may not be able to meet all of its debt obligations in the future, a corporate restructuring may be an option to rescue your company. Some business owners and investors opt to restructure their company, as this is often preferable to the alternative of initiating insolvency proceedings.

This is because a successfully negotiated restructuring often means the business will continue to trade while its creditors will get repaid.

This article will first explain restructuring before exploring the circumstances when you should consider initiating these proceedings. Finally, we will examine the various options to restructure your company and how you can initiate them. 

What is Restructuring?

A corporate debt restructuring (or a financial restructuring) is where a company and its creditors agree to renegotiate the terms of any existing debt. The aim is so that the company can continue to meet its obligations while also continuing trading. In most cases, creditors are lenders such as banks. 

You can restructure your company through various means, such as:

• refinancing an existing loan;
• giving concessions to your lenders; or 
• taking on additional debt. 

In some cases, all you need to do is have both parties come to an agreement and sign a new contract. However, in other cases, you will need to follow certain legal procedures. These are called statutory proceedings. Likewise, it may require the court’s approval before the parties can implement the restructuring plan. 

When Should I Consider a Restructuring?

Restructuring is an option for companies experiencing financial difficulties. Companies experiencing financial hardship are often called “distressed companies.”

If you believe any of the following apply to your company, you should consider exploring restructuring options:

• you will not have enough cash to make payments to your company’s creditors, including lenders like a bank; 
• you believe your company is not or will not be able to abide by the terms of a loan, such as maintaining a sufficient amount of cash on hand; or
• your company has or will soon trigger an “event of default.” These events permit your lender to bring the loan to an end and demand payment. Your loan agreement will define what these events include. 

It may be that none of the above scenarios applies to your company. However, if you think you will have financial difficulties in the future, you should at least start considering restructuring options in case things get progressively worse. 

When Will a Restructuring Not Work?

More often than not, the decision to restructure your company is consensual. This means that both the company and a sufficient number of creditors must agree to begin the process. 

Therefore, your creditors may decide that:

• there is no inherent value in your company’s business; 
• the company does not have an adequate medium- to long-term business plan; or
• the creditors’ cannot come to an agreement between themselves.

In this case, they may not consent to a restructuring. You would then have to consider other rescue options. 

How Does the Process Work?

Ultimately, debt restructurings are agreements between the company and its creditors. Therefore, the general process is to alert the creditors of your intention to enter into a restructuring. 

There are various processes available to restructure your company. Notable, the decision will depend on factors like:

• how big they are;
• how many creditors they have; 
• what the terms of any issued debt specify; and 
• the negotiating position of all parties, including between the various creditors.

Generally, your company may only have a single financial creditor, such as a loan with a bank. In that case, it will be easier to negotiate a restructuring. In fact, you may just need to refinance your loan. This effectively means entering into a new loan agreement. 

Things get more difficult if you have multiple different kinds of debt with different creditors. This is because where there is more than one creditor, the risk that each creditor will not get paid back in full increases. Additionally, each creditor’s security agreement concerning your assets may differ depending on the kind of loan. Unfortunately, this can complicate the process. 

Importantly, if your company has significant debt, the restructuring process usually moves through three stages:

1. Establishing the creditors’ committee.
2. Negotiating a standstill agreement.
3. Negotiating the restructuring agreement. 

Creditors’ Committee

If enough of your company’s creditors agree to begin a restructuring proceeding, they will convene a committee. This committee will enable the creditors to:

• liaise between themselves and your company; 
• nominate their own advisers, like lawyers and accountants; and
• negotiate the standstill and restructuring agreement. 

The Standstill Agreement

This agreement is a way for the creditors “to agree to agree” that they will work together throughout the process. Since it is an agreement between the creditors themselves, it does not concern your company as much.

The Restructuring Agreement

There are two main elements to the restructuring agreement:

• what will happen to the existing debt; and
• implementing agreements for the future. 

The Existing Debt

There are several ways that your company can restructure the existing debt. Some examples include:

• extending the date that the debt is due; 
• deferring or rescheduling when debt payments will be made; 
• adding any outstanding interest back into the debt principal (“capitalisation of interest”); and
• swapping any existing debt for equity.

Agreements for the Future 

Your creditors will want to have confidence that your business will continue and that they will get repaid. Additionally, they will want some compensation for spending their resources on implementing the restructuring agreement. 

Therefore, it is common to include as part of the restructuring agreement:

• how much your company will pay in additional fees; 
• if your company’s shareholders need to inject more money into your company (“equity injections” or “equity cures”); 
• what sort of measures your company’s management will take to preserve cash and increase your company’s cash flow; 
• if you need to implement additional terms in the agreement (known as “covenants” or “undertakings”); and 
• if your company should grant additional security over your company’s assets. This security gives your lender the right to sell the assets to pay off your debts.

Key Takeaways

A restructuring can be a lengthy, difficult, and expensive process. But it is often better than the alternative, which is to initiate insolvency proceedings and liquidate your company. The exact nature of the process will depend on:

• the size of your company; 
• how much debt it has; 
• how the debt is structured; 
• the number of creditors you have and their intentions. 

You should bear in mind that many of the terms put forward by your company’s creditors may not seem favourable to your company. However, this is the nature of the restructuring process. Again, the alternative is usually much worse.

If you need help with initiating a restructuring process, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Visit our membership page.

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