The Ultimate Guide to Business Restructuring: How to Rescue a Struggling Company

Many companies that ultimately go into liquidation could have been rescued. They came up against a ticking clock, rather than hitting the wall with no other. Inevitably, the distinction between rescuable and dead is how early the board confronts the reality and how fast it acts.

This guide outlines the process a director needs to follow: determine which insolvency test you are unlikely to meet, appreciate how your duties alter the moment you become officially insolvent, and then choose a rescue path with your eyes open.

Work out which insolvency test applies to you

Insolvency is not a one-size-fits-all term. There are actually two different tests, and determining which one you're failing makes a big difference to what you should do next.

Are you failing the cash flow insolvency test? That's when you can't pay your debts when they're due, but your balance sheet still looks okay. Most cases of insolvency are caused by cash flow problems and this is usually the cheaper one to fix. For example, a company with strong margins but a large debtor book will struggle to pay its bills on time, but it's fundamentally solid.

You've probably guessed by now that the second test is balance sheet insolvency which arises when your liabilities exceed your assets. If that's where you are, you could still continue trading for a while... right up until a creditor notices and calls in a debt hoping that you have become ineligible to receive credit.

So, get your latest numbers and check against both tests. If it's just the cash flow test you're failing, you might be able to kick the can down the road by renegotiating terms, taking more from your overdraft or simply by delaying payment. If it's the balance sheet test, you need expert advice and quickly because directors can become personally liable if they continue trading when their business is insolvent.

The moment your legal duties change

Directors owe their duty to shareholders while a company is solvent. That shifts the moment insolvency becomes likely, not when it actually happens. Starting from this moment, the interest of creditors becomes more important than that of shareholders, and board members cannot ignore this fact.

The real issue here is wrongful trading. If a director continues to run a company after being aware, or supposed to be aware, that insolvency was inevitable, they can be held personally responsible for the debts accumulated from that point on. Neither ignorance nor a positive attitude are an excuse. Directors who continued to operate in the hope of a miracle, rather than a realistic plan, are the ones who end up being held accountable.

This is why the first warning regarding cash flow matters so much. Once the duties of the board have been altered, it is no longer only a business issue. It becomes a legal one, and the countdown begins, whether the board notices it or not.

Before you restructure anything, check it's actually worth saving

Not every struggling company is worth rescuing - and pretending they are just delays the inevitable, and makes a heap of wasted cash that could have gone to creditors instead. Before beginning any formal process, a company has to pass three basic tests.

Is there a product or service that can be made and sold for a profit, at a level that would make the business sustainable? And is there a post-process cash flow forecast that works back from that, and some real-world numbers to underpin it, rather than a bunch of fingers-crossed assumptions? Finally, is there a sensible route back to profit that will happen before all of the company's funders and suppliers lose patience?

Don't bother with this bit, and you're asking creditors to swallow whatever percentage they're going to get less, for no good reason. Do it right, and you know before you spend a penny on advisers whether you're rescuing a company, or just delaying its funeral.

The formal rescue options, compared honestly

Once you've established the business has a future worth fighting for, there are three core structured routes available - speed, control, and cost each different.

• Administration gives you an immediate moratorium, stopping creditors from enforcing debts, starting legal processes, or winding the company up the moment a licensed insolvency practitioner is appointed as administrator. It's a breathing space, but the administrator's obligation swiftly moves to becoming a custodian acting in the best interests of creditors, so ongoing costs and the risk of all assets and staff being lost remain high.
  
• Company Voluntary Arrangement (CVA) is a contract between the company and its unsecured creditors to partially pay debts over an agreed period. While it's typically floated to keep the business going with management in place while unshackling it from historic debts, CVAs only work with the permission of over 75% of creditors (by debt value) and the business often needs to make peace with that.
  
• Pre pack administration is different: most of the sales terms, including price and buyer, are agreed and signed before the administrator is appointed. That means the going concern value of both the business and workforce isn't lost while marketing and sale documentation is prepared, circulated, and assessed. The sale itself is concluded within days of the administrator being appointed, almost always before the creditors meeting required to rubber-stamp the choice of administrator, in the vast majority of cases five days or more sooner. That's because there's nothing to be gained by delay: it's a cash event the money is used to pay salaries and suppliers of the newly independent business.
  
  

Why pre-packs get bad press, and what actually stops abuse

The fundamental criticism of pre-packs is that they can see unsecured creditors exit the process with a deal already signed and little or no ability to influence the outcome - the so-called cram-down result. In the past this has seen a failing business sold at a knockdown price back to the same directors, leaving little or nothing in the pot for unsecured creditors as the business continues free of debt under a new corporate entity.

That criticism had substance, and real reform followed. Any sale to former management or existing directors requires mandatory disclosure of how the deal was marketed, what basis was used to value the business, and why that buyer was selected over the alternatives. Independent valuation of connected-party sales is now the norm in a properly run pre-pack, with the creditors provided a trail of paperwork on which to base their challenge if the deal appears to have been engineered rather than commercially driven.

The honest answer is that pre-packs, properly executed by a licensed insolvency practitioner who has conducted a genuine market test and provided full disclosure to creditors, remain one of the most effective methods of saving jobs and business value. The bad press tends to be generated by the exceptions, not the general rule.

When liquidation is the right call, not the failure

Sometimes the best advice a professional can give to the board is to give up trying to save the company. Liquidation is the right answer when there's no going-concern value left to protect.

This is typically the case when there's no viable business underneath the debt, no buyer for the business or trading name, and no route to profitability even when the business is restructured to remove the debt. In this scenario, a statement of affairs will be generated and used as the basis of an orderly wind-down of the company.

Trying to force a rescue solution that can't possibly work is just burning cash. That strategy is only going to maximise the return to creditors if a salvageable business exists and there is enough value left in the business once the debt has been stripped away to fund the process of selling it as a going concern.

The negotiation sequence that actually works

You don't just go and talk to stakeholders at random. There's an order to it, and if you get it wrong you can destroy the trust you need in the end.

You go to the secured lender first because they both have the most power and the most to lose if enforcement action begins. Have a plan to take to them before they feel the need to demand one. Next, go to key suppliers, especially those that will shut your operation down without their input and ask straight out for revised terms, don't just let the invoices slide.

The tax authority is normally a preferential creditor but, in our experience, just opening a dialogue is often all that is required - assuming that a time-to-pay arrangement stands a realistic chance of improving the outcome for them. Employees are last in the sequence but need clarity early, especially if redundancies are part of the answer. Do not fudge the mechanics of a redundancy and ensure that you have the funds and proper notices in place at the right time. Get this wrong and you create a second, potentially greater, legal issue on top of the first.

The operational levers that make a turnaround stick

A rescue process simply extends the amount of time you have to right-size the business. A turnaround plan is what you do with that time. The levers are consistent across most distressed businesses: exit unprofitable contracts even where there's an exit cost, because bleeding cash on a bad contract is worse long-term. Strip overhead that doesn't touch revenue generation directly. Renegotiate lease terms and supplier credit windows, since landlords and suppliers would often rather extend terms than lose a tenant or customer entirely. Accelerate invoice collection aggressively, because working capital tied up in slow-paying debtors is often the single biggest lever a distressed business can pull without spending a penny.

None of this works without the legal breathing room a moratorium or CVA provides first. The operational fix and the legal process aren't separate projects. They run together.

Act at the first warning, not the last one

A business that acts promptly at the first hint of cash flow pressure can consider all the solutions - refinancing, a CVA, a pre-pack, an informal arrangement with creditors... A business that leaves it until the winding-up petition's on the desk has one potential outcome. The shift in directorial obligation happens in both instances but the options become extremely limited once the creditors apply pressure.

The boards that emerge from the process in one piece are not typically those that ran the healthiest businesses beforehand. They're the ones that looked the numbers in the eye, and made a clear-headed choice about the best path before the alternatives were whittled down to one.

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