What is restructuring?
Restructuring is a process designed to help a business regain financial stability and continue operating. It involves reorganising the company’s operations, assets, debts, or ownership structure to address underlying financial issues. The primary goal is to achieve sustainability and profitability while maintaining value for creditors and stakeholders.
Key features of Restructuring:
- Debt Management: Negotiations with creditors to adjust repayment terms, lower interest rates, or forgive part of the debt.
- Operational Changes: Streamlining operations, reducing overhead costs, and improving efficiency.
- Business Continuity: Allows the company to continue trading while addressing financial challenges.
- Legal Frameworks: In Australia, restructuring often takes place under voluntary administration or a formal Small Business Restructuring (SBR) process, which was introduced in 2021.
Advantages of Restructuring:
- • Preserves Business Value: By continuing operations, businesses retain their goodwill, customer base, and market presence.
- • Employee Retention: Jobs are often saved, maintaining morale and continuity.
- • Flexibility: Provides time to implement changes and improve cash flow.
- • Creditor Support: Creditors may prefer restructuring to liquidation, as it can result in higher recoveries.
Challenges of Restructuring:
- • Complexity: Requires expert guidance and thorough planning.
- • Time-Intensive: Turnarounds may take months or even years.
- • Uncertain Outcome: Success is not guaranteed, especially in severe financial distress.
What is liquidation?
Liquidation involves winding up a company’s operations and selling its assets to repay creditors. It signifies the end of the business and is generally considered a last resort when recovery is no longer viable.
Key Features of Liquidation:
- Asset Realisation: Assets are sold to repay outstanding debts.
- Legal Process: In Australia, liquidation is governed by the Corporations Act 2001. It can be voluntary (initiated by directors or members) or involuntary (initiated by creditors).
- Finality: Once liquidation is complete, the company ceases to exist.
Advantages of Liquidation:
- • Debt Resolution: Provides a clear path to settle outstanding obligations.
- • Closure: Allows directors to move on without the ongoing burden of an insolvent company.
- • Creditor Repayment: Ensures that creditors receive a share of the company’s remaining assets.
Challenges of Liquidation:
- • End of Business: The company ceases operations permanently.
- • Employee Impact: Staff may lose their jobs.
- • Asset Devaluation: Forced asset sales may yield lower returns.
- • Legal and Compliance Issues: Directors may face scrutiny if the business was trading while insolvent.
Comparing Restructuring and Liquidation
Choosing the right path
The decision between restructuring and liquidation depends on various factors, including the company’s financial health, industry outlook, and management’s ability to execute a turnaround. Here are some considerations:
- Severity of Financial Distress: If the company’s liabilities far exceed its assets and there’s no viable recovery plan, liquidation may be the only option.
- Stakeholder Interests: Restructuring may be favoured if it offers better outcomes for employees, creditors, and shareholders.
- Legal Obligations: Directors must consider their duties under Australian law, including avoiding trading while insolvent.
- Professional Advice: Engaging insolvency professionals, such as administrators or liquidators, can provide clarity on the best course of action.
The role of professional guidance
Navigating financial distress is challenging, and business owners should not face it alone. Engaging experts like restructuring advisors, insolvency practitioners, and legal counsel can help:
- • Assess the company’s financial position.
- • Explore all available options.
- • Implement the chosen strategy effectively.
- • Ensure compliance with legal and regulatory requirements.
A strategic decision
Restructuring and liquidation are both valid pathways for businesses in financial distress, but their implications are vastly different. Restructuring offers hope for recovery and continuity, while liquidation provides a clean slate for closure.
By understanding the nuances of each option and seeking professional advice, business owners can make informed decisions that protect their interests and those of their stakeholders. Whether it’s fighting for survival or winding up operations, choosing the right path is a critical step in managing financial challenges.
AVA Advisory provides expert guidance and support to help small business owners and directors set their businesses up for success in FY24-25 and beyond.
