When a small business slides deeper into debt, corporate debt restructuring can offer an out.
Corporate debt restructuring is often thought to only be available to large companies. But your small business can also benefit from it. This article explains how it works.
Corporate debt restructuring allows businesses of all structures and sizes to reorganize financial liabilities either through the formal process utilizing the Bankruptcy and Insolvency Act, or informally by dealing directly with the company creditors.
The desired end result is to reduce the overwhelming burden of debt the company faces by agreeing to a new payment amount with new payment terms that are in line with the company’s current cash flow or in extreme cases, strategically winding down the company with a focus on limiting personal liabilities.
What is corporate debt restructuring and when can you use it?
The need for a corporate debt restructuring arises when a business is going through financial hardship and is having difficulty meeting its financial obligations.
If the troubles are enough to pose a high risk of the company closing or going bankrupt then one option is to negotiate new terms with its creditors.
Corporate restructuring can allow for a company to get protection from creditors with the hopes of renegotiating the terms on the debt and surviving as a going concern.
The number of business failures is increasing in part due to the current economic climate. While every situation is different, the warning signs are similar.
The path towards crisis follows a number of important stages that should not be ignored.
- Default on lending terms and conditions
- Reliant on personal funds or personal credit to survive
- Owners not able to take salary
- Reduction in net profit
- Increased or unmanageable operating expenses
- Cash flow/liquidity issues
What debt options are available?
Every situation is different, therefore the process varies and requires a review of all options available. Creative thinking and a combination of different options is common. It all depends on the individual business circumstances.
Informal Corporate Debt Restructuring
This involves negotiating directly with each creditor. This may include a one-time settlement or a new payment arrangement. The repayment can be structured based on the company’s ability to pay and can deal with secured and unsecured creditors, including CRA and suppliers.
This will usually require showing the creditor’s details around the company’s current financial situation and an explanation of the current financial hardship.
The creditors are not obligated to settle but will if they feel the offer is a better return than the company either ceasing to operate or filing for bankruptcy.
Informal restructuring may also include a strategy to wind down the company and reduce the director’s liabilities and personal obligations of the business owners.
Formal Corporate Debt Restructuring
Division One Proposal:
The Bankruptcy and Insolvency Act (BIA) allows financially troubled corporations owing less than $5M the opportunity to restructure by filing a Division One Proposal.
This presents an opportunity for the company to avoid bankruptcy and means the creditors receive a greater return than if the company did go Bankrupt – but usually a lot less than was originally owed.
This provides the company the opportunity to pay back the new agreed amount on terms that are achievable based on current cash flow of the business.
Companies’ Creditors Arrangement Act (CCAA) is available to larger corporations with amounts owing to creditors in excess of $5 million. The CCAA also allows a company to address its shareholders in addition to its creditors.
Both processes begin with the company being given protection from the creditors under the BIA or CCAA.
The Court will issue protection from its creditors to allow for the preparation of the actual proposal. During this period, the company will often continue operating whilst working on the restructuring plan to present to the creditors.
Businesses, like consumers, need to be informed about their debt-relief options. Educate yourself and ask questions.
