An overview on group reorganisations and restructures

In this and the following series of articles regarding group structures, reorganisations, and corporate simplifications (which for the purpose of these articles we term “restructuring”) we look at some different tools available to those looking to restructure a corporate entity or group structure. We are all acutely aware of the downturn in economic conditions both domestically and internationally. In November 2022 there were a total of 2,029 company insolvencies in England and Wales, 21% higher compared to November 2021 and 35% higher than the pre-pandemic number in November 2019. As this and subsequent articles will explore, restructuring is as much a set of tools available to seek to save cost, to seek savings both economically and structurally, and avoid insolvency as it can be a procedure that may work alongside the insolvency industry. These statistics do, however, draw to our attention the fact that simplifications and general corporate cost saving tools are increasingly in demand.

It is worthy of comment to say that there remain good practical reasons and potential tax benefits in forming a corporate group structure. There are times, however, when a reorganisation of an existing group or of a stand-alone company, can be sensible or indeed, necessary.

Restructuring practitioners are frequently engaged to implement cost-cutting measures, or to seek to rescue a business. Maybe for this reason, the term “restructuring” is often associated with insolvency. However, this does not have to be the case. Whilst administration and insolvency proceedings are tools available to those involved in restructuring, they are certainly not the only procedures. The scope is much wider and solvent restructuring is as common as, if not more so than, insolvent restructuring.

What is business restructuring?

Restructuring is (as the term indicates) the introduction of a new structure, a revision to an existing structure, or a reorganisation.  

Restructuring business examples

Restructuring often arises where the potential of a business is held back by its structure, either in terms of financial or practical inefficiency. Examples include a present structure not serving business needs as originally intended, or where unforeseen tax consequences may arise. During the lifecycle of a business, a company or an existing group may:

a. re-organise or restructure itself, or certain assets contained within it, for example, by transferring certain functions or assets (such as intellectual property or property) into a single entity. This would occur most commonly to “ring-fence” or protect those assets;

split out or separate business activities or assets (such as property or different trades within the group) into two or more separate entities or groups, termed “de-grouping”. This enables the running of separate businesses or to look to sell part of the separated business;

b. simplify the structure of its group by removing or liquidating certain companies which may be dormant or redundant. This can be coupled with a “hive up” of assets from those entities or may follow a previous hive up. Commonly, this simplifies a group structure and leads to cost savings; or

the conversion of debt into equity may lead to a drastic improvement in a company’s balance sheet. As such, a company previously shackled by debt and unable to secure borrowing could find itself able to raise finance or appear a more attractive proposition for an onlooking suitor.

Advantages of corporate restructuring  

There are situations where a restructure of a business may provide advantages not otherwise available. Some examples include:

1. there may be a successful business weighed down by historic debt, where to enable the potential to succeed, valuable assets need to be freed from the stranglehold of debts and potential liabilities. In such a case, an administration may be the solution;
2. it may be advantageous to separate assets in advance of a sale of the business or part of it, maybe to enable certain assets to be sold, or otherwise to enable certain assets to be retained;
3. certain investment activities may be “tainting” tax reliefs such as Business Relief in relation to inheritance tax or Business Asset Disposal Relief affecting capital gains tax leading to a restructure to preserve the ability to seek such reliefs;
4. unlocking value or ring-fencing risks or liabilities by separating out an unprofitable or less profitable or more risky parts of a business, to alleviate their impact upon the overall value or avoid the hindering of access to finance;  

Following an acquisition, it is often advantageous or desirable to move the purchased business and assets around the acquirer's group, so assets are moved to the most appropriate or tax efficient place.

Restructuring a business to be more tax-efficient

Tax consequences will always need consideration and may form the basis or the driving force behind a restructure. If not driving the restructure itself, tax implications may dictate the steps to be undertaken or the timing of those steps. There are various commercial reasons why shareholders may want to review the structure of a business, move assets around or “split” the group. How the activities of a company, or of a group of companies, is split will often be dictated by tax considerations to ensure steps taken fall within the relevant conditions required to qualify for tax reliefs and exemptions. Although tax is so often the driving factor, there are numerous other factors which are of importance.

Restructuring tools

In subsequent articles we will look to comment on several of the tools available to the restructuring practitioner. These include:

• the implementation of reorganisations via group demergers;
• consideration of a debt restructure;
• capital reductions;
• section 110 reorganisations; and
• administration sales, including “pre-pack” administrations,

whilst also, spending some time considering matters to the side of any restructure.

The need to properly understand a company or group’s corporate documentation is a fundamental to ensuring the successful outcome of any restructure, and the next article will look at some of the initial practical considerations necessary prior to progressing with the implementation of any restructure.