Yudu - Finance Monthly October 2012

FM Analysis Restructuring Contact: Mark Watson-Gandy

Thirteen Old Square Chambers Tel: 020 7831 4445

Professor Mark Watson-Gandy is a barrister at Thirteen Old Square Chambers, a specialist commercial chancery chambers in Lincoln’s Inn. Mark’s work is primarily in the areas of insolvency and company law. He is a Visiting Professor at the University of Westminster. He is the author of “Corporate Insolvency Practice: Litigation Practice and Procedure” and “Personal Insolvency Practice: Litigation Practice and Procedure” and is one of the Editors of the Company Law volume of the “Butterworth’s Corporate Law Service”. He was recently voted in Acquisition International M & A Awards “UK Insolvency Barrister of the Year”.

What is the first thing to be done in a restructuring?

You need to ensure the company has enough liquidity to operate during implementation of the restructuring as without which the business will be going nowhere. Accurate working capital forecasts are going to be needed … and a plan! Having early and frank conversations with the creditors are therefore the real key to a successful restructuring because you will need them not merely to hold off enforcing their debts but also to reinstate the company’s lines of credit.

Are we looking just at court based solutions?

Section 895-900 Companies Act 2006 allows for a court approved process for reorganising the com- pany’s shares and compromising with its creditors without the stigma of insolvency.

CVA and administrations are other court based tools for restructuring.

A CVA is a formal binding composition under the supervision of an insolvency practitioner where all the creditors agree to accept part of their debt in settlement but which allows the company’s survival.

An administration can be used to provide a moratorium for a corporate rescue. Most commonly, they most used to allow the salvageable trading parts of the business to be bought out by a new company. The process is quick to implement and can be used to knock out a winding up petition.

But restructuring is not always court based. Do you have an example?

Corporate debt restructuring involves the reorganization of companies’ outstanding liabilities.

This may be something as basic as new finance arrangements whereby the credit obligations are

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spread out over a longer period with smaller payments – with a view to improving the company’s ability to meet debt obligations.

Another solution might be swapping debt for equity. This can be a “win-win” deal. For the creditor, they have something tangible – even if at this stage it is of merely token value – in exchange for a debt that they might otherwise have to write off for pennies in the pound. For the company you not only have a debt written off but a supplier who now has a financial incentive in helping the company succeed. These type of agreements however do need the input of a lawyer and may be part of a court process.

Q Are there other things that can be done?

Cash management is vital. Contracts need to be renegotiated. Underutilized assets can be sold. Useful assets can be subject to sale and leaseback arrangements to free up capital. Operations such as payroll and technical support could well be outsourced to a more efficient third party.

Cram down schemes and distribution schemes are popular strategies for larger scale debt restructuring.

Q So an informal solution can be better?

It can be cheaper and more flexible but it is not necessarily always better or risk free.

The Court based solutions have the advantage of being supervised by an independent insolvency practitioner and/or the court and being binding on all creditors.

With the overall financial picture tightening, informal restructurings are being subjected to ever closer scrutiny. If the company does go “pop” later, a liquidator and his legal team will look very closely at any informal arrangement.

Q Is the risk a real one? Yes, of course.

The sort of questions that are going to be asked by a liquidator about any informal arrangement is whether assets have been hived off to defeat creditors or whether one creditor has been given preferential terms. Of late, I have been brought in on a lot of facility agreements to advise on whether the agreement and the security given will be unwound by the courts if the borrowing company goes bust.

Another issue is whether the directors have been in breach of their duties to the company. Directors often forget that once insolvency becomes a real danger, the duty a director owes to his company changes and is interpreted as a duty to protect the company’s creditors. The Courts have made clear that in such circumstances, decisions taken for the long view may no longer be appropriate.

You mentioned winding up petitions earlier, is there any special problem with

them?

Under section 127 Insolvency Act 1986, in a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.

Q What would that mean?

Unless the court makes a winding up order on an administration application or a prior resolution has been made for a voluntary winding up, the winding up of a company by the court is deemed to commence at the time of the presentation of the petition for winding up. It means that if the company is wound up any payment by the company or sale of the company’s shares or property from the date the winding up petition was lodged at court could be set aside by a liquidator. The effect of this is in practice to sterilize the company’s ability to trade or make payments from the date the petition is issued.