Corporate restructuring during the proposed moratorium
Mercer & Hole has, for many years, championed the benefits of creating a breathing space during which a financially stressed business can seek to invoke a real restructuring and avoid formal insolvency. While an insolvency process may become a necessity both to protect the creditors’ interests in any residual assets and to protect the directors from potential personal liability, it does not always need to be the only avenue for solving financial distress. The value creation that can be achieved in relation to a trading business during a period in which it is getting specialist restructuring advice, whether within a formal moratorium period (as proposed) or through informal stakeholder and cashflow management, can be significant. The potential benefit will be magnified where the alternative to a restructuring is an insolvency process.
The reasons for corporate distress are numerous, from the loss of a major customer, the impact of wider market forces, rapid expansion leading to cash constraints or even straightforward mismanagement or fraud. However, not all distress is the result of an incurable ailment, and neither is it always best remedied through an insolvency process.
As touched on above, the Government’s proposals for a three month moratorium in A Review of the Corporate Insolvency Framework are a reflection of the value that can be added with the benefit of time. It is proposed that during the moratorium, the business will be granted the breathing space necessary to formulate and propose a restructuring plan to its major stakeholders, without the threat of duress creditors holding the management to ransom.
The restructuring plan will be formulated under the guidance of a suitably qualified supervisor, currently expected to be an insolvency practitioner, accountant, or solicitor. They will have the responsibility to ensure the company remains likely to have sufficient funds to carry on its business during the moratorium and is reasonably likely to be able to agree a plan with its creditors.
The final form of the proposed legislation remains to be seen but the enormous value which can be derived from such a moratorium appears to make a great deal of sense in avoiding the inevitable value impairment resulting from a formal insolvency.
Similarly, a formal three month window will allow the board of directors sufficient time to seek professional advice in relation to any restructuring proposal, rather than rush through a disposal or compromise which exposes the directors to a moral hazard threat should the disposal or restructuring subsequently fail with greater loss to the stakeholders.
The proposals appear to be a proactive step in legislating for a non-insolvency restructuring period during which directors, stakeholders and advisers can work to preserve value, jobs and services from a distressed scenario. It was for exactly these reasons that Mercer & Hole launched Corporate Advisory Services, combining the expertise of its Corporate Finance and Restructuring professionals, aided by the firm’s vast Corporate Tax knowledge, to provide clients with support throughout the transactional life cycle and in particular to overcome periods of change.
An insolvency practitioner with experience of corporate restructuring through s110 arrangements and solvent liquidations, as well as company voluntary arrangements and administrations, supported by an experienced Corporate Finance team well versed in raising finance, seeking equity investment, and managing sales mandates, appears to be well placed to assume the role of Supervisor set out in the Governments proposals.
To discuss this further please get in touch.
Date: 13th July, 2016
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