Directors need to be aware of their common law duties, and their duties under the Companies Act 2006
As we mentioned in our initial article in this series, during November 2022 there was a total of 2,029 company insolvencies in England Wales. In December 2022 there were 1,964 registered company insolvencies. The December figure is 32% higher compared to December 2021 and a massive 76% higher than the pre-pandemic number in December 2018. Going back to basics, excessive or uncontrolled debt will drive a company towards insolvency. Bringing debt under control, or restructuring debt, may therefore, be the saving factor to avoid insolvency. As our initial article highlighted, Restructuring is just as much a course of action intended to avoid insolvency, as it is a consequence of it. Debt restructuring is one of a number of tools available to a company, or a group, looking to address its financial position, and hopefully look to strengthen its balance sheet.
A corporate restructure often involves a refinancing of debt. The relationship between the company and its creditors is of primary importance, there is a fundamental need to communicate with those to whom the company is indebted, and this is never more important that when implementing a Restructuring.
Finance document awareness
Where a company may be entering financial distress the company, and particularly its directors, should not only be engaging with secured creditors but should also be reviewing finance documents. A breach of the representations and warranties, a breach of loan covenants, or the occurrence of an event of default may entitle the lender to demand immediate repayment of all sums due to it. Where a lender is able to seek repayment this will give the lender leverage in any negotiation regarding the future structure of the company, and indeed often the ability to determine the continuation or failure of the entity.
Debt restructuring Process
For any restructuring process to have credibility the entity needs:
- to have an inherent value;
- a sound medium- to long-term business plan.
- the support of its principal creditors.
If creditors see these critical factors, then most financial institutions are likely to recognise that they can generally achieve better returns through restructuring than they will receive by instituting insolvency proceedings.
Stand still agreements
From the entity’s point of view there may be an advantage in a standstill agreement. Such an agreement often sets a level at which liability is frozen, seeks a contractual moratorium, looks to prevent one lender from taking an advantage at the expense of others and looks to set out the willingness of the parties to negotiate a restructure.
What will a debt restructure involve?
The entity seeking a debt restructure will often look to principal creditors to agree to:
- reschedule or defer debt repayment;
- push out repayment dates;
- capitalise unpaid accrued interest;
- take a debt for equity swap.
Directors be careful
By way of warning, directors need to carefully consider their own position, and particularly the demands of creditors. There needs to be considered whether any concession given to a lender could amount to a preference or whether any transaction could be considered to be at an undervalue, and hence may constitute misfeasance. Misfeasance may result in the directors being personally liable.
The directors need to think about what is in the best interests of the company and look to ensure that they are seen to observe their directors' duties. Directors need to be aware of their common law duties, and their duties under the Companies Act 2006. Where a question arises as to the financial viability of a company the Court has held that a duty to creditors falls within the directors’ fiduciary duty to the company to act in good faith in the interests of the company. Additionally certain provisions of the Insolvency Act 1986 (not least section 214 – wrongful trading) which apply when a company has gone into liquidation relate to the conduct of the directors of that company, prior to liquidation and hence raise further concerns which need to be carefully considered and addressed.
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