What is Restructuring?
Business restructuring is the process of making changes to how a business is organised or operated to improve its performance or financial health. This might involve adjusting staff levels, reorganising teams or departments, selling parts of the company, or merging with another organisation. These changes help businesses adapt to challenges, respond to market conditions, or improve their efficiency and profitability over time.
Small Business Restructuring (SBR) is becoming more common, as ASIC notes that SBR cases accounted for 13% of all insolvency cases. Since January 2021, 89.4% of businesses that completed restructuring stayed active, while 5.4% went into liquidation and 5.2% were deregistered.
If your business is facing financial challenges or operational inefficiencies, the team at Macmillan Lawyers and Advisors is here to help. Our team is highly experienced in guiding businesses through liquidation, restructuring, and insolvency, helping you deal with these processes and achieve the best possible outcome.
When Should You Consider Restructuring Your Business?
Restructuring is often necessary when a business faces financial difficulties, consistent underperformance, or inefficiencies in its operations. In some cases, leadership changes, market shifts, regulatory updates, or mergers can also create a need to reorganise.
Financial Difficulties
If your business is struggling to meet financial obligations, experiencing declining profits, or may not be able to continue paying its debts in the short or long term, a company restructuring can help realign operations and finances.
Operational Inefficiencies
When processes become outdated or inefficient, restructuring can streamline operations, reduce costs, and improve productivity. Restructuring may also be necessary if some parts of the business consistently underperform.
Market Changes
Shifts in the market, such as new competitors or changing consumer preferences, may require restructuring to stay competitive and relevant.
Mergers and Acquisitions
Restructuring may be necessary during mergers or acquisitions to integrate operations, streamline processes, or align organisational structures. Leadership changes, which often accompany mergers, may also require restructuring to adjust roles and responsibilities or adapt to new strategic priorities.
Regulatory Compliance
Changes in laws or regulations may necessitate restructuring to maintain compliance and avoid potential penalties.
Shareholder Concerns
If the business is failing to produce returns that meet shareholder expectations or recording consistently poor trading performance, restructuring may provide the opportunity to address these issues and improve results.
Leadership Changes
A change in leadership can signal the need for restructuring to support new strategic directions, adjust organisational priorities, or reshape the management team. New leaders will assess business operations and introduce changes to improve efficiency or align the company with their vision.
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What are the Types of Restructuring?
Restructuring can be financial (reorganising debt and equity), operational (streamlining processes and reducing costs), or organisational (realigning goals, structures, or teams). Each type of restructuring targets specific issues to improve business stability and performance.
| Type of Restructuring | Description |
|---|---|
| Financial Restructuring | Improving a company's financial health through debt or equity adjustments |
| Operational Restructuring | Streamlining operations to boost efficiency and reduce costs |
| Organisational Restructuring | Reorganising a company’s structure to improve performance and adaptability |
Financial Restructuring
Financial restructuring focuses on fixing a company’s finances to help it recover from problems like too much debt or poor cash flow. This type of restructuring process helps businesses pay off debts, manage costs, and build a stable foundation for the future.
This may involve taking the following steps:
1. Debt Restructuring
Restructuring involves negotiating with the company’s creditors to revise the terms of existing loans. Adjustments may include extending payment periods, lowering interest rates, or restructuring repayment schedules to align with the company’s current financial capabilities. Debt rescheduling helps businesses avoid default while maintaining creditor relationships.
2. Equity Recapitalisation
Companies may raise new equity capital by issuing shares to existing shareholders or new investors. This approach provides funds to reduce debt, fund operations, or invest in growth opportunities while potentially diluting ownership.
3. Asset Sales
Selling non-core or underperforming assets is another common strategy. The proceeds from asset sales can be used to pay off debts, invest in profitable areas, or stabilise cash flow. Examples of assets sold might include real estate, subsidiaries, or surplus inventory.
Organisational Restructuring
Organisational restructuring focuses on changing how a business is set up to make it more efficient and better prepared for the future. It may involve adjusting departments, job roles, or locations to meet strategic goals.
The following approaches to organisational restructuring include:
- Department Mergers or Splits: Combining or dividing teams to optimise performance
- Flattening Management Structures: Reducing management layers for faster decision-making
- Role Redefinition: Adjusting responsibilities to align with business goals or eliminate redundancies
- Geographic Realignment: Consolidating or closing operations in underperforming locations
Operational Restructuring
Streamlining operations involves refining a company’s day-to-day activities to enhance efficiency and reduce costs. This includes scrutinising and optimising internal processes, systems, and workflows. By streamlining these areas, businesses can boost productivity and overall performance.
Common areas of focus for operational restructuring are:
- Process Optimisation: Redesigning workflows to eliminate inefficiencies and bottlenecks
- Cost Reduction Initiatives: Consolidating resources, renegotiating contracts, or outsourcing non-core functions
- Technology Upgrades: Modernising systems with tools like CRM software or automation
- Supply Chain Restructuring: Streamlining supply chain networks to reduce costs or improve reliability
- Lean Manufacturing: Implementing lean principles to reduce waste and improve productivity
What are the Different Restructuring Classifications?
Business restructuring can be classified into formal, informal, and post-insolvency processes, each focusing on approaches tailored to the needs of businesses facing financial challenges or operational difficulties.
| Classification | Process | Description |
|---|---|---|
| Formal Restructuring | Voluntary Administration | A formal process where a qualified administrator is appointed to investigate a company’s financial affairs and propose a restructuring plan |
| Safe Harbour | Section 588GA of the Corporations Act 2001 protects directors from personal liability for insolvent trading if they are working on a viable restructuring plan | |
| Simplified Business Restructuring | Designed to help small businesses restructure debts while retaining control of operations | |
| Informal Restructuring | Debt Rescheduling | Negotiating new terms with creditors to extend payment periods |
| Operational Changes | Implementing cost-cutting measures or reorganising management structures | |
| Post-Insolvency Processes | Scheme of Arrangement | A court-approved process where a company proposes a restructuring plan to its creditors |
| Receivership | A process where a receiver is appointed to take control of a company’s assets and sell them to repay creditors | |
| Liquidation | A formal process where a company’s assets are sold to repay creditors, and the company is dissolved |
Should You Choose Formal or Informal Restructuring?
Informal restructuring is most suitable for manageable financial challenges, offering flexibility, lower costs, and confidentiality. In contrast, formal restructuring is appropriate for severe financial distress, as it provides legal protection and enforceable agreements but involves higher costs and public disclosure. The choice between formal and informal restructuring will depend on your financial situation and creditor cooperation.
When to Choose Informal Restructuring
This process would be right when the business can realistically recover, creditors are open to negotiation, and management wants to retain control of operations while avoiding the costs and public scrutiny of formal processes.
Other indicators that informal restructuring is the right choice include:
- The Business is Early in Financial Distress: Financial challenges are manageable and the business can take early action to prevent further problems.
- The Business Wants to Avoid Formal Insolvency: If maintaining control over daily operations is important, informal restructuring is an alternative to formal processes like voluntary administration.
- Creditor Cooperation is Likely: Informal restructuring works best when creditors are willing to negotiate and adjust terms to help the business recover.
- The Business Needs to Save Costs: For businesses looking to avoid the expenses of court processes, informal restructuring offers a more affordable option.
- Protecting Business Reputation: The privacy of informal negotiations helps safeguard the business’s public image and relationships with customers and suppliers.
What does the Informal Restructuring Process Involve?
The informal restructuring process is a flexible, non-legal approach that’s often quicker and less costly than formal restructuring. Below are the steps of the informal restructuring process:
1. Financial Health Assessment
Restructuring begins by assessing the company’s financial health, which involves identifying issues through a review of financial statements, cash flow analysis, and evaluation of debts and inefficiencies.
2. Stakeholder Engagement
The next step is open communication with stakeholders, where repayment terms, deadlines, or debt reductions are negotiated to secure their support.
3. Restructuring Plan Development
Businesses bring in a restructuring practitioner to develop a restructuring plan, outlining the proposed changes to cut costs, create repayment schedules, or sell assets.
At Macmillan Lawyers and Advisors, our corporate lawyers in Brisbane can help guide you through the process, offering tailored strategies, skilled negotiation support, and practical advice for a smooth and successful restructuring.
4. Implementation of Changes
The plan is implemented with ongoing monitoring and adjustments as needed to stay on track.
When to Consider Formal Restructuring
This process is suitable when a business is facing significant financial distress, creditor pressure is escalating, and legal protection is necessary to manage debts and liabilities. Formal restructuring provides a structured environment, typically involving external administrators, to reorganise the business under legal supervision.
- Severe Financial Distress Exists: When the business cannot meet its financial obligations consistently, indicating deeper insolvency issues.
- Indicators of Insolvency Are Present: Signs like ongoing losses, cash flow shortages, or an inability to secure financing suggest the business may be insolvent.
- Creditor Pressure Is Escalating: If creditors are issuing statutory demands, threatening legal action, or initiating winding-up proceedings, formal restructuring offers legal protection and a framework to negotiate collectively with all creditors.
- Legal Protection Is Needed for Directors: To shield directors from personal liability for insolvent trading, formal restructuring processes provide a legal safeguard while developing a recovery plan.
- Comprehensive Operational Changes Are Required: When minor adjustments aren’t enough and significant changes to the business are necessary, formal restructuring facilitates these.
- Access to Statutory Restructuring Tools: Allows the use of legal processes like Deeds of Company Arrangement (DOCA) or Creditors’ Schemes of Arrangement, which can bind all creditors to a unified restructuring plan.
- Informal Negotiations Have Failed: If attempts to negotiate informally with creditors, suppliers, or financiers have not resolved financial issues, formal restructuring may be essential to implement enforceable agreements.
- Protection from Legal Actions: The process provides a moratorium on certain legal actions against the company, offering breathing space to restructure without the immediate threat of asset seizure or court proceedings.
- Stakeholder Confidence Needs Restoration: Engaging in formal restructuring can demonstrate to stakeholders that decisive action is being taken to address financial problems, potentially restoring confidence and support.
How does the Formal Restructuring Process Work?
The formal restructuring process is a series of structured steps under legal supervision to reorganise a financially distressed business. These steps include:
1. Filing for Formal Restructuring
The company initiates the process by filing under a legal framework, such as voluntary administration, receivership, or bankruptcy. A licensed insolvency practitioner is appointed to oversee the process.
Navigating the legal complexities of formal restructuring can be daunting. The team of insolvency lawyers in Brisbane at Macmillan Lawyers and Advisors can guide you through the filing process, ensuring compliance with all legal requirements and setting you on the right path for recovery. Contact us today for assistance.
2. Financial Situation Assessment
The insolvency practitioner reviews the company’s financial health, identifying issues and potential recovery options. Stakeholders, including creditors, are provided with detailed financial disclosures.
3. Restructuring Plan Development
A formal restructuring plan is created, proposing changes like debt reductions, extended repayment terms, or operational restructuring. The plan aims to balance the interests of creditors, employees, and the business.
4. Negotiation and Approval
Creditors and stakeholders review and negotiate the proposed plan. A vote is held, and the plan must gain majority approval to proceed.
5. Plan Implementation
Once approved, the plan is executed under the supervision of the insolvency practitioner or court. Changes may include asset sales, cost reductions, or debt restructuring.
6. Legal Compliance and Monitoring
The company must comply with legal obligations, including reporting and adhering to timelines. Regular updates are provided to stakeholders to ensure transparency.
7. Outcome
The process concludes with either the business stabilising and continuing operations or an orderly liquidation if recovery is not viable.
Who Prepares the Restructuring Plan?
The preparation of a corporate restructuring plan involves collaboration between a company's directors and a licensed restructuring practitioner.
Directors assess the company’s financial situation with the restructuring practitioner’s guidance and develop a plan to address challenges. The restructuring practitioner provides advice, maintains compliance with legal requirements, and assists in formulating a viable plan.
How is a Restructuring Practitioner Appointed?
Appointing a restructuring practitioner is a straightforward process designed to help businesses in financial trouble get professional support while meeting legal requirements. The table below breaks down the key steps:
| Steps | Description |
|---|---|
| 1. Directors’ Resolution | The company’s directors must pass a resolution stating that the company is insolvent or likely to become insolvent and that a restructuring practitioner should be appointed |
| 2. Eligibility Criteria | The company must meet specific eligibility criteria, including total liabilities not exceeding $1 million, excluding employee entitlements |
| 3. Selection of Practitioner | The directors select a registered liquidator to act as the restructuring practitioner |
| 4. Formal Appointment | The appointment is formalised by lodging the necessary documents with the Australian Securities and Investments Commission (ASIC) |
How Long does it Take to Restructure a Business?
For Small Business Restructuring (SBR), the process typically takes about 35 business days (around 7 weeks), including 20 days for plan preparation and 15 days for creditor approval. More complex processes, like voluntary administration, can take several months to over a year, depending on negotiations and financial challenges. It’s worth noting that the time to restructure a business always depends on the method and complexity.
Informal restructuring is most suitable for manageable financial challenges, offering flexibility, lower costs, and confidentiality. In contrast, formal restructuring is appropriate for severe financial distress, as it provides legal protection and enforceable agreements but involves higher costs and public disclosure. The choice between formal and informal restructuring will depend on your financial situation and creditor cooperation.
When to Choose Informal Restructuring
This process would be right when the business can realistically recover, creditors are open to negotiation, and management wants to retain control of operations while avoiding the costs and public scrutiny of formal processes.
Other indicators that informal restructuring is the right choice include:
- The Business is Early in Financial Distress: Financial challenges are manageable and the business can take early action to prevent further problems.
- The Business Wants to Avoid Formal Insolvency: If maintaining control over daily operations is important, informal restructuring is an alternative to formal processes like voluntary administration.
- Creditor Cooperation is Likely: Informal restructuring works best when creditors are willing to negotiate and adjust terms to help the business recover.
- The Business Needs to Save Costs: For businesses looking to avoid the expenses of court processes, informal restructuring offers a more affordable option.
- Protecting Business Reputation: The privacy of informal negotiations helps safeguard the business’s public image and relationships with customers and suppliers.
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FAQs on What is Restructuring?
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- Email: [email protected]
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