Experts in restructuring part 3 – Director Duties and Stakeholder Interests

Expert input is critical to a successful restructuring.  Obtaining proper independent expert input is vital, and this next article in our series focusses on managing director duties and stakeholder interests in a restructuring.  The impact of Covid19 on businesses has been significant and severe.  The Government have put in place numerous initiatives to assist businesses to trade through the current financial distress – for example, the job furlough scheme, the CBILS and bounce back loan schemes and now Recovery Loan Scheme, VAT reductions and deferments, rates holidays, moratoriums on creditor action to allow businesses breathing space and to refinance or restructure free from creditor actions or enforcement etc..

Consequently, during the earlier part of lockdown, a lot of our activity was reassuring clients and assisting them to understand and access these support initiatives and funds.

More recently, however, and as lockdown continues to ease enquiries have been more forward looking and seeking advice in relation to restructuring strategies and plans to deal with the business going forward.  Much of this has been driven by a sharpening of focus and realisation that many Government initiatives are coming or have come to an end and there are looming pinch points where debts and liabilities will need to be serviced and paid but in circumstances where business outlook, revenue and cash flow is still uncertain.

 Taking expert advice

In considering available restructuring options it is imperative that expert financial and legal advice is sought.  Early action on a restructuring (whether it is a financial, organisational or operational restructuring or some combination of all three) is most likely to preserve value for the company and its wide range of stakeholders.  Typically where a company has financial challenges, it and its stakeholders will have a greater number of options available to them if they begin formulating a strategy at an early stage.  Whatever the “end game” of the restructuring, early working on it leads to better outcomes.

And it is an advantage to directors personally, since in any restructuring it is imperative that directors understand and adhere to their directors’ duties.  Directors taking specialist financial and legal advice early helps demonstrate and support their position that they are exercising reasonable care, skill and diligence and independent judgement. In a financial challenging situation, the overarching consideration for the Board is to determine whether they ought to conclude that there is a reasonable prospect of achieving a solvent outcome.  Assessing and establishing this is likely to be complex and needs professional input, in particular in managing the risks of a later challenge to a director’s personal conduct.

Engaging restructuring experts and taking their advice demonstrates the Board’s awareness and commitment to their duties and recognition of the shift in duty to prioritising the interests of creditors over shareholders.

Stakeholders and corralling

There is a wide community of stakeholders in any business whose interests are affected by any restructuring and who can have a significant influence.

This usually includes; banks, creditors, directors, employees, owners (shareholders), landlords, new investors, suppliers, unions, and arguably customers. In some instances, the government, public and even the press might also be regarded as stakeholders.

For a restructuring to be successful the response and support of stakeholders is critical to both approval of proposals and the business’ future success.  Corralling all these parties can be challenging.

To the greatest extent possible, directors need to be transparent with the stakeholders.  Demonstrating to stakeholders as to why the status quo is not viable and that there is a potential positive outcome for all through the proposed restructuring is critical.  The key is to convince all stakeholders is that it is in their interests to support the business through the process of restructuring, however uncomfortable it might be in the short term.  The justification is likely to be survival, recovery, and eventual growth of the business for the benefit of everyone in the medium and long term.

It is stating the obvious but this needs to be backed up by the business plans and financial modelling and projections to support the restructuring and demonstrate to the stakeholders both the commercial sense behind the restructuring and the consideration that is being given to each stakeholder’s position.  Experts advising on and supporting the restructuring provide confidence and comfort to the stakeholder group (as well as probably presenting a more objective, third party perspective) which reassures and persuades.  This allows for a smoother, consensual restructuring process, minimizing disruption and the risk of any one stakeholder objecting.

Getting good advice at an early stage remains crucial to enable all appropriate and necessary independent input to be sought, and ultimately to identify and then implement a successful restructuring strategy.

If you would like further information on the topic discussed in this article, please contact a member of the Insolvency Team. 

Should you have any questions on any of the articles in this series please contact:

Steven Jansch by email: sjansch@gilsongray.co.uk or by phone: 0131 516 5361 / 07841 920 100. 

Eilidh MacEwan by email: emacewan@gilsongray.co.uk or by phone: 0131 285 1809 / 07376 192 463. 

Craig Darling by email: cdarling@gilsongray.co.uk or by phone: 0141 530 2044/07841 920 467

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.