What legal steps should UK companies consider when restructuring to avoid insolvency?

In the complex world of business, there are times when companies face financial difficulties. The situation can become so dire that the only viable solution is to undertake a restructuring process. Restructuring is a critical step that can potentially save a company from insolvency and possibly liquidation. But it is not an easy path to tread. There are legal implications, procedural requirements and often, the need to negotiate with creditors. In the UK, the law provides an array of options for companies in such a predicament. This article provides an in-depth look into the legal steps that companies should consider when restructuring to avoid insolvency.

Understanding the UK Insolvency Law

The UK insolvency law is complex but comprehensive. It provides various mechanisms for companies to restructure their businesses when faced with serious financial difficulties. These mechanisms are designed to give companies breathing space to turn their fortunes around, while also providing certain protections to the creditors.

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The first step in the legal process is to get a comprehensive understanding of the UK insolvency law. This law is primarily guided by two main legislations: the Insolvency Act 1986 and the Enterprise Act 2002. Both acts detail the procedures and requirements for different types of restructuring processes, which we will delve into later.

Undoubtedly, company directors will need legal advice to assist in navigating the complex legal framework. Professional insolvency practitioners can provide necessary advice and guide you through the entire process. Remember, your responsibility is to act in the best interest of the company and its creditors.

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Commencement of a Moratorium

When faced with financial distress, a company may need a period of respite to plan and execute its restructuring strategy. This is where a moratorium comes in handy. It's a legal tool provided under the Corporate Insolvency and Governance Act 2020. It provides a company with a 20-business day period, which can be extended, where creditors cannot take legal action to recover their debts.

To obtain a moratorium, the directors must file necessary documents at court, including a statement that the company is or is likely to become insolvent, and a statement from a licensed insolvency practitioner stating that a moratorium would likely result in the rescue of the company as a going concern. This period offers a breathing space for the company to explore and implement its restructuring plan without the threat of legal proceedings.

The Company Voluntary Arrangement (CVA)

One of the primary tools in the restructuring toolkit is the Company Voluntary Arrangement (CVA). It's a formal agreement between a company and its creditors, providing a legally binding plan to repay debts over a specific period. A CVA is overseen by an insolvency practitioner who works out the payment plan and ensures that all parties stick to their obligations.

A CVA has several advantages. If a majority of the creditors (75% in value) agree to the proposal, it becomes binding on all creditors, including those who did not vote or voted against the plan. This process allows the company to continue trading while repaying its debts.

Administration: A Route to Rescue or Restructure

If a moratorium or a CVA seems unlikely to solve the company's financial problems, then the directors may consider placing the company into administration. This is a formal procedure where an insolvency practitioner is appointed as the administrator to manage the company's affairs.

The primary goal of administration is to rescue the company as a going concern. If this is not possible, the aim shifts to achieving a better result for the company's creditors than would be possible if the company were wound up. In some cases, the administrator may sell the company's business and assets to repay the creditors.

Scheme of Arrangement: A Flexible Restructuring Tool

Unlike the aforementioned procedures, a Scheme of Arrangement is not an insolvency process per se, but it's often used in restructuring scenarios. This procedure involves a compromise or arrangement between a company and its creditors or members.

A Scheme of Arrangement is incredibly flexible and can be adapted to fit almost any set of circumstances. It can be used to restructure debt, carry out mergers or demergers, or even effect takeovers. Approval requires a majority in number representing 75% in value of the creditors or members present and voting at the meeting to agree to the scheme. Once approved, the scheme must be sanctioned by the court to become effective.

In conclusion, the decision to restructure a company is not to be taken lightly. It's a process that requires careful planning, astute decision-making, and a thorough understanding of the legal options available. The UK insolvency law provides various procedures, each with its own merits and drawbacks. It's crucial to seek professional advice to choose the best option for your company. Remember, the goal is to ensure the survival of the company while also protecting the interests of the creditors.

Wrongful Trading: Directors' Liability and Understanding English Law

As a company traverses the challenging path of restructuring, its directors have a paramount duty to act in the best interest of the company and its creditors. A critical aspect of UK insolvency law that directors must understand and heed is the concept of wrongful trading.

Under Section 214 of the Insolvency Act 1986, directors can be held personally liable for the company’s debts if they continue trading when they should have known that there was no reasonable prospect of the company avoiding insolvency. This provision is set to prevent directors from taking unnecessary risks with creditors’ money when insolvency seems inevitable. The court can order a director found guilty of wrongful trading to contribute to the company's assets.

To avoid liability, directors need to demonstrate they took every step to minimise the potential loss to the company's creditors. This is where a restructuring plan comes in handy. A well-thought-out and effective restructuring plan can provide evidence of the directors' efforts to prevent insolvency.

However, during the Covid-19 pandemic, the UK government temporarily suspended the wrongful trading rules to allow companies to keep trading even when they were insolvent. This measure was to prevent mass insolvencies during the global crisis. Yet, as of 19/04/2024, these measures are no longer in effect, and the wrongful trading provision applies as per the Insolvency Act 1986.

Dutch Law and English Scheme Restructuring: A Comparative Approach

While UK companies have a variety of tools under English law to help avoid insolvency, it can be beneficial to look at the practices in other jurisdictions. For instance, Dutch law offers an interesting contrast and complement to English insolvency law.

One of the most notable innovations in Dutch insolvency law is the 'Dutch Scheme' or WHOA (Wet Homologatie Onderhands Akkoord), introduced in January 2021. This is a legal framework that allows a company to restructure its debts by agreeing to a plan with its creditors and shareholders, similar to the English Scheme of Arrangement and CVA.

Unlike English law, the Dutch Scheme allows for a 'cross-class cram-down'. This means that if one class of creditors or shareholders agrees to the plan, it can be imposed on all classes, even those who voted against it. This could be particularly useful in complex restructuring cases with different classes of creditors.

Moreover, both Dutch and English laws provide for a 'stay' of legal proceedings, similar to a moratorium. Under Dutch law, this is known as a 'cooling-off' period. While a 'stay' under English law requires court approval, the Dutch cooling-off period can be ordered by the debtor itself, subject to court confirmation.

However, it’s worth noting that while Dutch law offers some innovative mechanisms, it lacks the extensive case law that provides guidance and predictability in English insolvency proceedings. Therefore, for UK companies, the familiar terrain of English law might still be the preferred path.

Conclusion

Navigating through financial difficulties and the threat of insolvency is a daunting task for any company. However, the UK insolvency law offers a robust and versatile legal framework to help companies restructure and avoid insolvency. Whether it's through a moratorium, a CVA, administration, or a Scheme of Arrangement, companies have various legal tools at their disposal.

However, the restructuring journey is laden with legal complexities. Directors must be cautious of their responsibilities and the risk of wrongful trading. It can be beneficial to consider comparative insolvency practices like the Dutch Scheme. Throughout this process, seeking professional advice is crucial.

Ultimately, the goal of restructuring is not just about evading insolvency. It's about ensuring the company's survival and safeguarding the interests of creditors. With a well-thought-out restructuring plan and the right legal guidance, a company can weather the storm of financial difficulties and emerge stronger and more resilient.