Option #2 Restructure the debts of the business
Sometimes debt restructuring can be done informally – that is, without the appointment of insolvency administrator. Where this is possible, you may wish to consider discussions with key creditors to either extend the term of the repayment of their debt and/or reduce the amount they are to be paid. Formal documentation of any arrangements is very important.
Where the alternative to such an arrangement is an insolvency appointment which might generate little in the way of a return for unsecured creditors such as trade suppliers, this can be a strong basis to have these discussions, particularly where your business is important to the future viability of your supplier.
In the absence of being able to organise an informal debt restructuring with the major creditors, there is always the option to appoint a voluntary administrator and then ask creditors to consider a Deed of Company Arrangement (DOCA). A DOCA binds all creditors, whether a creditor votes in favour of the DOCA or not. So where you are likely to hold sufficient support for a DOCA from creditors, this can be a viable alternative to consider.
The required outcome:
To reduce the level and timing of repayment of debts so the cashflow of the business (and perhaps an injection of cash) is sufficient to meet the payments under any debt agreement plus meet the payments of the ongoing operations of the business.
What a debt restructuring agreement requires:
- The agreement of the majority of creditors to either have a delay in the repayment of their debts and/or a reduction in the amount they are paid. (A majority must be in number but also potentially in value – but this can include employee creditors for unpaid entitlements as well as related parties if they are owed moneys by the company).
- The 3 Cs – cash, capacity and capability.
- Cash is needed to meet the agreed payments as well as meet the payments of the ongoing operations of the business. Cash can come from:
- Sale of surplus assets or sale of assets at full or close to full value.
- Unused debt facilities (eg undrawn overdraft).
- Cash injections from related parties or third parties – either debt or equity.
- The capacity of the management team and other resources to implement a turnaround. If you are flat-out running the business then chances are you will need some additional resources to assist you manage the turnaround process.
- The capability of the management team including a cool head under pressure and a high ethical and transparent stance when dealing with stakeholders.
- Energy and resourcefulness – this is not for the faint hearted, particularly if times are tough.
- A sustainably viable business model. This means that even if not now, at some future point in time the business will be able to generate profits and positive cashflow, sufficient to pay all freshly incurred debt as well as all overdue amounts owing to existing creditors.
- Agreed consensus on adopting the turnaround by the directors and shareholders.
What you do not want:
- Rarely are surprises good in a debt restructuring, particularly one which requires a turnaround. More often than not, the ‘really bad news’ has not been dealt with and when it rises to the surface….. yuk!
- Insurmountable pressure from stakeholders.
- Pressure might arise from trade suppliers not supplying despite being bound by the debt agreement.
If this pressure is too high, then it can undo a turnaround very quickly.
- Putting others at risk.
- To rob Peter to pay Paul is not a good idea. For starters, Peter will get really annoyed and he may even pursue you to the corners of the earth if he has to if he feels you have not treated him fairly.
- Personal liability issues for the directors.
- We often say, you cannot change the past, but you can control your future. One thing you don’t want to do is increase the personal liability for directors and guarantors. However, their risk is clearly secondary to the risk of third parties.
If the risks are too high and/or the resources required to turn around the performance of the business are too scarce, then one of the other options may need to be considered.