“If directors might become personally liable for the debts of a company,
urgency and action are critical. Failure to act is not an option”

Sometimes, the imperatives for action are so great that the situation requires more than just a strategy to improve business performance.

When a business is not performing as well as it should, it can sometimes be difficult to figure out how severe the problems really are. Problems can be masked by many factors, including:

• temporary improvements in cashflow
• creditors not reacting adversely to delays in payment
• one-off benefits which create a false horizon of hope
• a lack of or inaccurate measurement tools (financial and non-financial)
• future projections which show a rosy picture and which are inconsistent with recent historical performance
• non core issues diverting management’s attention from the looming problems
• a lack of focus or a focus on doing more, without regard to the outcomes (results) being achieved

When the performance of a company’s business is deteriorating, the type of restructuring required for the company will be determined by the severity of the rate of decline, the current financial position of the company and the prospects for the future of the business – as well as the interests and objectives of the various stakeholders.

There are two broad categories of restructuring:

• Informal – restructure for future trading
• Formal – restructure for future trading or for exit (sale or wind down)

An informal restructuring is conducted by the directors of the company and there is no legal change in control of the company.

With a formal restructuring, the control of the company and/or business is taken away from the directors and is vested in the hands of an independent or external administrator.

Click here to see the most common types of administration and the typical outcomes.

Sometimes, a business will move from an informal restructuring to a formal restructuring as more information comes to hand and as the various options are explored. Examples:

• What may start out as an informal restructuring plan may quickly change to a formal restructuring plan when there is a realisation that the business may be unable to pay its debts as and when the fall due.
• A future trading restructuring strategy may change to an exit restructuring strategy when it becomes clear there will be no sustainable business.

With a formal restructuring, there are a number of different types of stakeholders who can commence the process of restructuring (eg shareholders, directors, creditors, financiers). They each have different rights and the type of restructuring they can implement is governed by either the Corporations Act plus, in the case of a creditor who holds security (a charge), the terms of their charge document.

When a company is solvent (i.e. it can pay all its debts as and when they fall due), shareholders may also wish to restructure the business. The reasons may vary but in general, the shareholders will have made a decision that the existing business structure and assets no longer have a purpose in being retained.