Corporate Reconstruction

Corporate reconstruction and turnaround are the processes that are implemented to help a business in distress.

At Irwin Insolvency, we have become increasingly active with businesses at an early stage of crisis in a ‘company doctor’ role, to advise on corporate reconstruction, turnaround and work-outs before a state of formal insolvency is reached.

There are many types of corporate reconstruction, as the process depends on the problems that are occurring at the business. However, it is often that the reconstruction process will include the formation of a contract that will indicate how the business should be operated to resolve its current issues, and following this how much and when the creditors will be repaid.

The reasons why a business may seek corporate reconstruction include:

1. Preparation for sale

One of the most common drivers behind corporate reconstruction is ensuring a smooth preparation for a future sale of a company or part of the company. Business owners or a majority of shareholders may have decided that the best course for the continued future of the company is for it to be sold to new owners, either in full or in a majority.

Companies can be sold for various reasons. Owners or directors may have reached retirement age, or may simply be looking for a new challenge elsewhere. Business owners might fear a loss of worth or declining profits so attempt to extricate themselves from the business early on, or the company might require fresh investment or cash injections to ensure its long-term viability.

Corporate reconstruction before a sale ensures that the company becomes more attractive to prospective buyers. Streamlining business processes and procedures, restructuring departments or company hierarchies, or readjusting the chain of company command to be more efficient – these are all factors that can increase the value of a company before it’s sold to new investors and increase the attractiveness of the company as a long-term purchase.

2. Company mergers or acquisitions

Companies can find themselves in need of corporate reconstruction if they are heading towards a merger or acquisition. Companies often merge with similar businesses in times of trouble or financial hardship, or one company may buy a failing company outright to boost their own revenue and opportunities for growth.

Before the merger or acquisition takes place, corporate reconstruction can assist in creating the correct conditions for a smooth transition. Both companies can be reconstructed to follow the same corporate structures, policies and procedures. Alternatively, one company may be reconstructed to bring it in line with the new parent company or to allow it to operate on the same terms as the larger or better-known business.

3. Increase profits

If a business is showing a depleted profit and loss graph, with a loss in profitability or a loss in growth, then corporate reconstruction could be the best way to turn things around. Restructuring different parts of the business to run more efficiently or more cost-effectively can help to decrease losses and positively improve the company accounts.

Corporate reconstruction can be used as a way to avoid insolvency if profits have been continually down year on year. The most effective way to avoid insolvency is to increase profits. To do this, corporate reconstruction will be aimed at increasing sales, cutting expenditure, and finding new avenues for investment and growth that lead to long-term profitability.

4. Tax efficiency

Companies can undergo corporate reconstruction solely for tax purposes. This involves restructuring the company and streamlining services or departments in such a way that allows the business to post more expenses on its tax returns or pay less tax on its revenue.

Companies are often run inefficiently, without realising the different gains that can be made in terms of tax efficiency. Corporate reconstruction specialists, such as Irwin Insolvency, are able to find new avenues for tax efficiency based on their experience of working with similar companies in the same industry.  

Ultimately, the goal of tax efficiency is to ensure that more funds are available to invest back into the business for continued business growth in the future. Creating a more tax-efficient corporate structure is essential for long-term growth and sustainability.

5. Segregation of trading and/or investment activities

Companies commonly undergo corporate reconstruction when they need to segregate their trading and/or investment activities. An appropriate restructuring allows a company to separate different aspects of their business plan, creating independent areas that can be better managed to create future profit and improved sustainability.

6. Avoid the insolvency process

While many companies actively seek out an effective corporate reconstruction process in order to improve their profitability or prospects for long-term growth, during economic downturns some companies need rapid corporate reconstruction to avoid entering into insolvency.

Insolvency occurs when a company can no longer pay its creditors. Before this happens however, a company that has recognised it’s in danger of entering insolvency has the opportunity to find means for a turnaround.

Corporate reconstruction can offer ways of streamlining the business process to cut down on expenditure with the goal of balancing the books and avoiding insolvency. Unfortunately, this can mean that hard and tough decisions need to be made. Staff may have to be laid off or made redundant, and departments folded or merged together.

Once insolvency has been avoided in the short term, corporate reconstruction aims to create a more viable business model to ensure long-term growth, rather than a return to insolvency.

How We Can Help to Solve the Problem

The financial world recognises that insolvency is a ‘business problem’ and Irwin Insolvency is increasingly asked to provide professional advice to avoid the formal insolvency process.

Work-outs, in particular, have become important. Often creditor-led, the objective is the reduction of indebtedness by way of the disposal of assets but, most importantly of all, formal insolvency is avoided and the business lives to trade another day.

In a corporate reconstruction, valuations are used as negotiating tools with the creditors. To ensure a successful reconstruction, the agreement between the business and creditors needs provisions established to prevent the creditors making demands for payments, enforcing their security or initiating any formal insolvency procedures.

Therefore with provisions in place with the creditors, this will prevent any claims against the business and make the reconstruction process much more effective.

The results of corporate reconstruction are very effective in the short term, by addressing the issues the business is facing and having a plan of action to take the necessary steps to ensure the business does not go into liquidation.

Is Reconstruction the Right Move?

To ensure long-term success of business reconstruction, managers are responsible for ensuring that as their environments change the business can continue to grow and debts are repaid. It is therefore important to assess whether reconstruction is right for your business, to develop a sustainable competitive advantage whilst removing any financial issues.

If corporate reconstruction offers a company an opportunity to create sustainable growth and to secure their long-term success as a profitable business, it would be the duty of the company director to initiate such a change.

Typically, companies that are projecting a drop off in growth or sales in the future will act ahead of time to ensure that they make adequate changes while they have capital available and are not facing insolvency. In trying economic times however, businesses may also need to instigate a corporate reconstruction to deal with rapidly changing economic or political climates that have dramatically affected profits in an adverse way.

It’s important to receive outside advice and consultation in order to assess the need for corporate reconstruction in an independent manner. Corporate reconstruction experts, such as Irwin Insolvency, are able to offer impartial advice based on years of experience across multiple sectors of the UK economy.

We can not only assess the need for corporate reconstruction, but also assess the value it could provide to a company and the steps that would need to be taken to achieve a successful restructuring of the company.

When Should Corporate Reconstruction Take Place?

Corporate reconstruction can take place at any point throughout the lifespan of a company. However there are typical situations where corporate reconstruction should be instigated by the directors.

Corporate reconstruction is often employed as a business turnaround measure. When a company is facing insolvency and is no longer able to pay its debts, directors or creditors may seek a corporate reconstruction in order to save the company from liquidation.

In this instance, corporate reconstruction needs to be employed rapidly to be effective. There is often a short space of time in which a company needs to be reconstructed, which often results in tough yet decisive action being taken. This often has an adverse effect on employees but is designed to save the company as a whole so it can continue to trade in the future.

Creditors may seek corporate reconstruction rather than insolvency or liquidation, as it gives the company the opportunity to turn a failing business around and to ultimately repay the debts that are owed to them.

Companies can also begin the process of corporate reconstruction before they enter into financial difficulties. In fact, as experienced insolvency practitioners our team always advises that directors look at reconstruction in the earliest instances possible. This means taking responsibility for falling profits or lack of growth early on and moving swiftly to a phase of reconstruction that allows a company to flourish, rather than face further decline.

Proactive reconstruction is always more effective in the long term than rapid reconstruction as a last resort, but this does take foresight and expert consultation to be achieved.

When Is Corporate Reconstruction Complete?

Corporate reconstruction in a practical sense is complete when the company has been reconstructed and reorganised. Once a company has begun following new procedures and policies and has successfully merged departments or reorganised the chain of command as per the requirements of a given reconstruction, then that reconstruction can be considered complete.

However, it’s never an easy or simple process. A total corporate reconstruction can take months to be set into motion and could take years to be fully complete if a long-term plan for reorganisation has been implemented. Every company is different and each company has its own reasons for entering into a phase of corporate reconstruction. This means that the timeframe for completion can vary drastically from one company to the next.

Contact Irwin Insolvency for Your Free Consultation

At Irwin Insolvency, we have an experienced team of professionals ready to offer your company advice and consultation. Our tailor-made service is personalised to meet the specific needs and requirements your business needs to survive. Our corporate reconstruction services are just a quick phone call away.

We have over two decades’ experience turning around businesses and reconstructing companies across the UK. We’ve successfully implemented corporate reconstruction programmes across a wide range of industries, from retail and construction to admin and hospitality. Our clients continue to experience long-term financial stability after positive corporate reconstructions.

We offer a consultation service and advice on the best possible corporate reconstruction procedures for the fastest possible turnarounds. As licensed insolvency practitioners, we also deal with corporate recovery and liquidation, should the worst-case scenario need to be implemented.

To find out more information about corporate reconstruction and turnaround and whether it is right for your business, contact Irwin Insolvency today at 0800 009 3173 to speak to one of our specialists.