When a business is in financial difficulty (i.e. they are unable to pay their debts when they become due), they may look at restructuring themselves to save costs or making arrangements with their creditors to work out alternative repayment schedules outside of the original finance agreements.
If the restructuring and/or alternative repayment arrangements don't work, the situation may lead to insolvency proceedings. Insolvency proceedings involve legal action being taken against the business and its assets being liquidated to pay off the outstanding debts to its creditors.
The role of a lawyer in this area of law can be both contentious (when dealing with insolvency) and non-contentious (when dealing with restructuring).
What is corporate restructuring?
Corporate restructuring is the process of reorganising the way a business (or its group) is structured with the purpose of making it more profitable.
You'll often hear 'restructuring' alongside 'insolvency' (for the reasons set out above) but a business can undergo a corporate restructure without being in financial difficulty.
There are two forms of corporate restructuring:
(1) FINANCIAL RESTRUCTURING - where a business has debts and tax considerations, it will restructure the financial arrangements of its business to reduce liabilities and increase profits.
(2) ORGANISATIONAL RESTRUCTURING - over time a business or group's organisational structure can become inefficient either because of surplus services or complex employee hierarchies.
Why would a business undergo a restructure?
The obvious reason is financial distress as detailed above. When a business is on the verge of insolvency, it'll want to look at ways it can cost save and that's usually done via an intra-group restructure.
Other reasons can include:
Expansion - the company is buying another company (or business of another company) and needs to fit that new company/business into its existing structure;
Management - as a result of a company growing/expanding, there are lots of managers and directors all over the place so the management structure needs to be simplified; or
Legal compliance - new law is introduced which means a company needs to review its processes or introduce new processes.
Different types of corporate restructuring
There are a number of ways in which a company or its group can be restructured:
MERGERS & ACQUISITIONS - the company buys another company or merges with another company;
DIVESTMENT AND SPIN OFFS - a group of companies sells one of the companies (or more) in its group (reasons could be that the business unit is no longer profitable or fulfilling a strategic purpose) (a "divestment") or the group decides to reduce its involvement in one of its business units so the unit is restructured and it becomes a standalone company which is only partly owned by the group (a "spin off");
COSTS REDUCTION - if a company is facing growing debt, it's likely its running costs are increasing and perhaps there's an overspend on administration or operations within the business. Therefore, redundant companies in the group may be liquidated to release assets, reduce employees or enable a restructure of departments; and
LEGAL RESTRUCTURING - there may not be a financial reason at all and a company simply wants to shift its responsibilities at the top. A new company (or companies) may be incorporated to add new investors or change how the group ownership is structured.