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Restructuring and insolvency are critical areas of corporate law in England and Wales. They provide mechanisms for businesses facing financial distress to either rehabilitate or orderly liquidate their assets. Understanding these processes is essential for company directors, creditors, and stakeholders to navigate financial challenges effectively.

Restructuring is one route that many business owners will seek to take to avoid insolvency.

Annecto Legal helps insolvency practitioners and distressed businesses in finding the right legal assistance, funding and insurance for their restructuring plans and insolvency cases. Moreover, we help insolvency teams to secure the optimal financial result for creditors in insolvency litigation.

Corporate restructuring and insolvency

Insolvency occurs when a company cannot pay its debts as they fall due, or its liabilities exceed its assets. Restructuring, on the other hand, involves reorganizing a company’s structure, operations, or finances to improve efficiency and restore profitability, thereby avoiding insolvency.

The insolvency process

The insolvency process in England and Wales is governed by the Insolvency Act 1986. This Act sets out insolvency procedures, including administration, liquidation, receivership and company voluntary arrangements (CVAs).

Administration:

Administration is a rescue mechanism aiming to reorganise a company or realise its assets more advantageously than liquidation. An administrator is appointed to manage the company’s affairs, business, and property.

Liquidation:

The liquidation process involves winding up a company’s affairs, selling its assets, and distributing the proceeds to creditors. Liquidation can be compulsory (court-ordered) or voluntary.

Receivership:

Unlike administration, receivership is initiated by the company’s creditors rather than the company itself. A receiver is appointed by the court with the primary objective of recovering as much money as possible to settle creditors’ claims. In receivership, the interests of the creditors are prioritized over the company’s survival.

Company Voluntary Arrangement (CVA):

A CVA allows a company to reach an agreement with its creditors to pay off its debts over time. It requires approval from creditors holding at least 75% of the company’s debt.

Restructuring to Avoid Insolvency

Restructuring is a proactive approach to financial difficulties, aiming to stabilise and revitalise a business before it becomes insolvent. It can include financial restructuring, operational restructuring, and organisational restructuring.

Financial/ debt restructuring:

Debt restructuring involves renegotiating debt terms with creditors, converting debt to equity, or obtaining new financing to improve liquidity.

Operational restructuring:

Operational restructuring focuses on improving the efficiency of business operations. This may involve cost-cutting measures, streamlining processes, or divesting non-core assets.

Organisational restructuring:

Organisational restructuring entails changes in the company’s hierarchy or business model to enhance management effectiveness and strategic direction.

Restructuring can provide a lifeline for companies by addressing the root causes of financial distress. It can help them return to profitability and avoid the more drastic measures associated with insolvency proceedings.

Mergers and Acquisitions

Mergers, acquisitions, and pre-pack sales are important strategic options that can fit within the broader context of restructuring and insolvency.

These processes can help distressed businesses by either combining with stronger entities, selling parts of the business, or facilitating quick sales of assets.

Mergers:

A merger involves combining two companies to form a new entity. This can create synergies, reduce costs, and improve market competitiveness, providing a viable path out of financial distress.

Acquisitions:

In an acquisition, one company purchases another. This can infuse the distressed company with needed capital and management expertise, stabilising its financial situation.

Pre-pack Sales:

A pre-packaged administration sale, or pre-pack, involves arranging the sale of a company’s business and assets before appointing administrators. This method allows for the quick sale of assets, preserving value and potentially saving jobs.

Selling part or all of an insolvent business in a distressed M&A or prepack sale is an effective method to maintain its going-concern value and prevent significant value loss that could occur through piecemeal liquidation

Funding and insurance options for insolvency cases

When pursuing insolvency litigation, legal costs can escalate quickly. Therefore, it is essential that parties are aware of the funding options that are available to them. Listed below are some of the cost-effective options for funding insolvency litigation:

Assignment

Some types of dispute can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE + CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger disputes. When assigning a claim it is important to understand the pros and cons, and to show the process followed to maximise value. Working with a broker can be an effective way to do this, and provide your file with a written record.

After the event insurance 

After the event (ATE) insurance is a type of insurance that can provide cover for legal costs in the event that a case is unsuccessful. This option can be particularly useful in cases where the outcome is uncertain, and the costs of losing a case could be significant. ATE insurance is often used with conditional fee agreements and contingency fee agreements. ATE can also be used to meet Security for Costs applications, sometimes sitting alongside a Deed or Indemnity. There are many providers or ATE insurance and it can be useful to have a broker secure the best deal and explain the different options.

Third party litigation funding

In some cases, third party litigation funders may be willing to provide funding for an insolvency dispute claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pay for legal fees, but the case is strong and there’s a good chance of making a recovery. There are many different forms of non-recourse third party litigation funding, ranging from disbursement funding up to full funding for all legal costs and an IP’s WIP. It is sensible to consider what retainers will be used and what actually needs to be funded, as opposed to insured. The interaction between retainers, own costs insurance and funding is crucial to securing the best deals. Annecto Legal is well placed to explain the different options and what could be available on any particular case.

Funding options for restructuring

When it comes to restructuring a business, litigation assets may be used to generate cash to pay for restructuring costs such as lay-offs or tax liabilities.

A claim for money has a present value and could either be sold outright or used to attract funding for both the legal costs of the actual claim, and any wider costs of the restructure.

In circumstances where litigation is the only asset of the business, understanding these options and getting best value is critical.

In mergers and acquisitions, potential litigation can depress the value of a business as a buyer will use the prospect of a costly dispute to reduce the sale price. Insurance can be used to shift litigation risk off the balance sheet, allowing a seller to secure full value for the business.

Equally, if buying a business with litigation risks against it, the buyer may insure against such claims upon purchase, to immediately benefit from the removal of said liabilities.

Understanding all of the options available in the insurance and funding markets is an important tool for insolvency and restructuring experts. Annecto Legal provides independent guidance to help you understand what might work best in any given scenario. Our written reports can be added to your file to show the process followed and ensure you comply with your professional obligations.

Why choose Annecto Legal?

At Annecto Legal, we assist a wide range of clients in finding the appropriate funding, assignment options and insurance for restructuring and insolvency cases.

Annecto Legal regularly assists licensed insolvency practitioners and liquidators who are involved in the administration or liquidation of a company, as well as trustees in bankruptcy. If you are in the process of pursuing or defending an insolvency claim and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.