Company restructuring
Company restructuring is one of the new alternatives introduced by the Law, which allows an insolvent company to settle its debts and have a second chance to access the market. The Law defines the restructuring in its first article as “the procedures serving the trader or the company to exit financial and administrative difficulty”. This includes reassessing assets, debt restructuring, capital increases and managerial restructuring. Any company or individual with commercial activities may resort to restructuring, provided they meet certain requirements.
The purpose of the restructuring is to set a plan for reorganizing the company’s financial and administrative system with the aim of paying off its debts. So, instead of declaring bankruptcy or opting for liquidation, merchants and viable companies could apply for restructuring to save their business.
The concept of Corporate Restructuring
Restructuring is a type of action that companies resort to when a major modification occurs in the debts, operations or structure of a company as a means of minimizing or mitigating financial damage and improving the business. When a company is having difficulty making payments on its debts, it often resorts to readjusting debt terms in debt restructuring, creating a way to repay bondholders. Or by restructuring its operations or financial structure by reducing costs, such as salaries, or reducing its size through the sale of assets.
Article (18) of Law No. 11 of 2018 regulating restructuring, preventive reconciliation, and bankruptcy clarified that the goal of restructuring is to develop a plan to reorganize the financial and administrative business of the trader, including how to get out of the stage of financial and administrative turmoil and pay off his debts, with a statement of the proposed funding sources.
Article (15) of Law No. 11 of 2018 regarding the issuance of a law regulating restructuring and preventive reconciliation for bankruptcy stipulates that “every trader whose capital is not less than one million pounds and who practiced trade continuously during the two years preceding the submission of the application and did not commit fraud may request restructuring.”
What is the Restructuring Committee and its specializations?
The restructuring process will be run by a committee formed out of the experts listed in the Bankruptcy Expert Schedule at the Economic Courts.
The restructuring committee will have the authority to reevaluate the company’s assets, restructure its debts (including these owed to the government); increase its capital; increase its internal cash flow, decrease expenditure; and apply an administrative restructure.
The restructuring committee will prepare a report to the competent judge within 3 months with its opinion as to the reasons behind the company’s financial and administrative turmoil, the efficiency of entering into a restructure and the suggested plan. In all cases, the execution of the plan should take no longer than 5 years.
In order to be binding, the restructuring plan needs to be signed by the stakeholders and ratified by the competent judge. The judge has the authority to appoint an assistant from the listed Bankruptcy Expert to help the company in implementing the plan and negotiating with the creditor, as well as to provide technical and consultancy support.
The debtor may not submit an application for restructuring if the court has already deemed the debtor bankrupt or has begun preventive composition procedures. Submitting an application for restructuring automatically holds other applications until the restructuring application has been ruled on. Additionally, in case of rejection, the debtor must wait at least 3 months from the date of the ruling to submit another application.
Reasons for Corporate Restructuring
Corporate restructuring is implemented in the following situations:
1- Change in the Strategy
The management of the distressed entity attempts to improve its performance by eliminating certain divisions and subsidiaries which do not align with the core strategy of the company. The division or subsidiaries may not appear to fit strategically with the company’s long-term vision.
Thus, the corporate entity decides to focus on its core strategy and dispose of such assets to the potential buyers.
2- Lack of Profits
The undertaking may not be enough profit-making to cover the cost of capital of the company and may cause economic losses. The poor performance of the undertaking may be the result of a wrong decision taken by the management to start the division or the decline in the profitability of the undertaking due to the change in customer needs or increasing costs.
3- Cash Flow
Disposing of an unproductive undertaking can provide a considerable cash inflow to the company. If the concerned corporate entity is facing some complexity in obtaining finance, disposing of an asset is an approach in order to raise money and to reduce debt.
Characteristics of Company Restructuring
- To improve the Balance Sheet of the company, by disposing of the unprofitable division from its core business.
- Staff reduction by closing down or selling off the unprofitable portion.
- Changes in corporate management.
- Disposing of the underutilized assets, such as brands or patent rights.
- Shifting of operations, such as moving of manufacturing operations to lower-cost locations.
- Reorganizing functions such as marketing, sales, and distribution.
- Renegotiating labor contracts to reduce overhead.
- Rescheduling or refinancing of debt to minimize the interest payments.
- Conducting a public relations campaign at large to reposition the company with its consumers.
Types of Company restructuring strategies
Mergers and acquisitions (M&A):
In a merger, a company is acquired and absorbed into another business entity, or combines with another existing company to form a new corporate entity. While this strategy is a common one used by companies in financial distress.
It should be noted that M&A transactions are often the result not of financial distress, but of the potential for business synergies that can be achieved by combining the two businesses.
Demerger:
Under this corporate rebuilding methodology, two or more organizations are joined into a solitary organization to get the advantage of cooperative energy emerging out of such a consolidation.
Reverse Merger:
In this methodology, the unlisted public organizations have the opportunity to change over into a recorded public organization, without settling on IPO (Initial Public deal). In this procedure, the privately-owned business procures a majority shareholding in the public organization with its own name
Divestment:
Divestment is a type of restructuring where companies close branch locations, departments or other business units due to revised needs or profitability expectations. For example, a company removes their community engagement department and moves employees to work as members of the marketing department
Joint venture:
Under this procedure, a substance is formed by two or more organizations to embrace monetary demonstration together. The element made is known as the Joint Venture.
Both the gatherings consent to contribute in proportion as consented to form another element and furthermore share the costs, incomes, and control of the organization
Strategic Alliance:
Under this technique, two or more substances go into a consent to collaborate with one another, to accomplish certain destinations while as yet going about as autonomous organizations
Spin-off restructuring:
Spin-off restructuring refers to the process by which a company makes one or more branch locations or company sectors into their own business entities. This enhances the value of the company and allows it to take on the role of a parent organization.