Many people want to know what corporate restructuring is. Also, they might be curious about the reasons a business needs to restructure.
This post is all about the process of restructuring. Also, it explains what a company can expect while going through the process. Further, it gets into the potential outcomes of the restructuring.
Restructuring requires creativity and a willingness to come up with answers to some tough questions. Answers to questions such as why the restructuring process needs to happen? Also, how will it happen? Lastly, what requires the help of a professional?
Corporate restructuring is complicated. You can contact us today by filling out the form on this page. Also, you can call us toll-free below. You will ultimately speak to Kyle Stroshein, our debt restructuring expert. You will then be connected to a bankruptcy lawyer or a trustee.
The Process Of Restructuring
Most business owners are struggling and are in a very distressed state. They may find it difficult to see what solutions are available, and how to access them.
In Canada, the Canadian Association of Insolvency and Restructuring Profession Association are the go-to experts when you need a debt professional. They are highly educated and provide objective and independent solutions while getting results.
Let’s now discuss the process in more detail and what you may expect to see as a business owner.
Detailed Business Review
A detailed business review begins with a thorough analysis of financial statements. This is done to determine liabilities. During the review, all secured, unsecured, and preferred creditors will be identified. The important question will be “Does your business have the assets to cover liabilities?” If the answer is no, your business may be insolvent and require financial restructuring.
The next step in the business review is to classify the liabilities. This begins by identifying which liabilities are secured. Further, what debts are unsecured and which are preferred. Secured creditors are those creditors that have collateral over an asset. Unsecured creditors just have a promise to pay.
Therefore, they need to enforce non-payment through a lawsuit. A preferred creditor will be determined by the law. They may include government debt, employees, or landlords. A debt professional will be able to look at the liabilities like a nurse in an emergency room. They will triage the necessary versus non-necessary debt.
Debt Restructuring Options With Corporate Restructuring
After assessing liabilities an asset review will be conducted. It is best to hire an independent third party to value the assets of the company. Once established, you can now make a decision. You will have options on how to restructure.
The next stage would be a thorough review of the operations, management structure, cash flow, and working capital management. This analysis will give the debt consultant a good feel for whether the business is going to make it or not.
Is there a chance the business can be restructured? If not, the best option would be to liquidate the company.
Based on the review above there are three options:
2) Orderly Liquidation
3) Forced Liquidation
A company can choose to restructure informally or formally under statutes such as the Bankruptcy and Insolvency Act (“BIA”). In either scenario, restructuring will be accomplished through a combination of selling assets. Also, there will be a divesting of shares. Also, the re-negotiating of its debt directly with the creditors might take place.
The process of an informal restructuring may happen through a lawyer or a Chartered Insolvency Professional. The issue here is that there are no hard and fast rules. If one creditor is prejudiced there could be legal action. Whereas in a formal restructuring the process is laid out in the Bankruptcy and Insolvency Act. Therefore, there is a clear path to follow. Let’s look at an example to best illustrate the process.
Corporate Restructuring And Financial Problems
Let’s say you sell commercial office furniture. Your main customer is the government. You have successfully won the contract year after year. You have a great lending relationship with the bank, and you have always met revenue targets as well as have a loyal staff. Then a new lower-cost competitor comes into the market and wins the government contract.
Then your operations manager gets hurt, and your top sales rep leaves for the competition. You are now working on the floor and having to make sales. You fall behind on paying bills, and getting new sales becomes difficult. It takes one year before you can rehire the staff, and sales are not rolling in.
Your accountant comes to you at year-end. Further, you are now $50,000 behind in government source deductions. There are $10,000 in sales taxes. Also, $100,000 in accounts payable. There is a line of credit and all credit cards are maxed out at $100,000. The companies key supplier has decided to accept cash only.
Your employees are behind one-month of wages. Your inventory valuation comes in at $20,000 and receivables are only $100,000. The inventory on hand is not enough to cover the debts. Therefore, you realize you are insolvent.
As outlined above the two options are to restructure or liquidate. Restructuring under the BIA generally involves filing a Division 1 Proposal. The proposal is a very powerful tool that will give the company an immediate stay of proceedings where all creditors are frozen, (cannot take legal action).
A trustee in bankruptcy will assist the company to put a proposal together and may include a longer repayment of debt over time, or from the sale of assets, share or a combination of all three.
The proposal will be sent out to the creditors and they will have a chance to vote during a meeting. The proposal will pass if it gets 66 and 2/3 in dollar value and 51% in the majority of the number voting in favour of the proposal. After the creditors approve the proposal, the trustee will present it to the court and the plan will be sanctioned.
Further, after sanctioning, the plan will be implemented. Lastly, the funds will be distributed, and cash flow can hopefully return to normal.
Liquidation During Corporate Restructuring
Liquidation can occur in a forced situation under the Bankruptcy and Insolvency Act. Further, this can happen through bankruptcy, receivership, or a combination of both. Also, this process is very straightforward. A trustee will be appointed to take over the business. Further, they will liquidate the assets of the company.
Finally, they will distribute the proceeds in accordance with the priority of distribution as laid out in the BIA.
Need help with corporate restructuring? Call us below.
When Do I Need Help?
It would be incorrect to think of the field of restructuring in terms of defined limits. Either it applies only to persons who are insolvent or for whom insolvency is looming. Or, it is a set of finite solutions that necessarily arise from an application of the provisions of the BIA or CCAA.
We hope that we have shed some light on the complex and difficult situation of restructuring. Also, there is a lot to learn. The debt professionals are here to help you. This is true no matter what you may be facing.
Author: Alistair Vigier is the CEO of ClearWay Law