Corporate Restructuring Rule Book for 2020 – By CS Anchal Jindal and CA Mayank Garg

Corporate Restructuring Rule Book for 2020

 Business in Present Scenario

The global pandemic caused by the inconspicuous virus in the form of COVID-19 is taking a toll on every business health across the world. The economic downturn, weak financial performance, liquidity crunch, fall in revenue, weaken credit movement, disturbed prediction, capital stuck down are the key words associated with majority of the business in one or other way irrespective of the sector with which they are associated. Part of the economic sectors are adversely hit with little chance of early revival whereas few sectors are still evolving ways to strive in this unprecedented time. In the wake of present catastrophe; government, economists and policy makers across the globe are working day in and day out to achieve the macroeconomic stabilization to the extent possible. Number of fiscal stimulus packages are designed in different jurisdictions for businesses to survive this economic furore.

With so much fluster, fuzzy and dynamic scenarios across the globe, businesses are looking for every possible way to undergo corporate restructuring to mitigate the business risk in the prevalent time. To combat the interruptions and extreme market conditions, financially distressed businesses are looking for restructuring their operations, capital mix and asset base in order to bring their ventures back on track. Generally also corporate restructuring is a time consuming and complex process having its own uniqueness for every assignment under consideration but existing situation poses more challenges to carry out a result oriented and successful restructuring. Carrying out the task of corporate restructuring is not only the responsibility of professionals associated with it but requires more effort on the part of management, organisation and team to collectively work towards generating synergies from the restructuring strategy.

Management Roleplay

The business plan designed by management for FY 2020-21 or master business plans structured by the Board of Directors for five years down the line post 2020 may not be feasible for execution in present scenario due to unforeseen circumstances that pandemic has posed on the businesses. However, the management can use this downfall phase to bring in place the new changes across the organization.

Effective and proficient correspondence with the team and stakeholders is a key element in order to align the restructuring goals. While undergoing restructuring, management must effectively engage with the regulators, judiciary, beneficiaries and creditors to keep them updated with the different phases of restructuring. It is the  management duty to ensure relevant information access to different class of stakeholders while undergoing restructuring. This calls for creation of a secure and auditable information repository. Being proactive enables management to achieve long term objectives via restructuring. Apart from this, timely decision making and grabbing of right business opportunity in present situation will also spells out the success of restructuring plan.

Action by Organisation

A very famous quote by Vince Lombardi postulates that “ Individual commitment to a group effort—that is what makes a team work, a company work, a society work, a civilisation work.” It is the team and talent working in an organisation that will actually make any corporate restructuring to reap the fruits. The present challenging environment exhorts for extra proactive and diligent action on the staff of the organisation undergoing restructuring while execution of the restructuring plan. Periodic training and upgraded skill set of the team is one such area that requires utmost attention in order to mitigate risk and liabilities and to manage the liquidity crisis.

Although every organisation willing to restructure itself hires a team of external advisors who are well versed with the legal and financial aspects involved in the corporate restructuring, yet it is the cooperation, support and diligence on part of the team and employees of a corporate entity to enable the business stay on top of the restructuring.

Be Compliance Friendly

 Companies undergoing insolvency or liquidation process are often subject to the stringent and time bound compliances and regulations. Also the restructuring is very well supervised by different regulators depending upon the scope of restructuring. Though in co-existing circumstances, adherence to the compliances may turn out to be complex process yet ensuring statutory compliance can never be done away during restructuring. The key route to take in confidence the regulators and judiciary is via compliance fulfilment. Generally this is an area which although requires utmost importance yet being ignored off. Delayed compliance or compliance with penalty is not actually the compliance. Leveraging right use of technology in the process can actually make compliance part an easy one. Compliance calendars and reporting timelines should ideally be integrated directly into the organisation’s system. A dedicated team should be entrusted with an opportunity to fulfil every single compliance requirement as and when required. Corporates should integrate an in build process that offers comprehensive audit and reporting capabilities that provide full audit trails of all user activity.

 Transparency with Stakeholders

 As Corporate Debtor (“CD”) / Resolution Professional (“RP”) seeks to restructure an uneconomical contracts and obtain financial relief, financial and operational creditors can request enormous amounts of data to look to the future earnings from the potential restructuring to satisfy their claims. Further, restructuring often have to address the critical question of whether everything is following due legal process, particularly when the legal process is different across countries. Transparency towards different stakeholders such as Employees, Financial and Operational Creditors in all information dissemination and decision making is critical to this effort.

When  CD/RP shares information with the financial and operational creditors, employees and potential investors, they should ensure that appropriate parties have access to the information as and when they need it. A standardized data approach can provide sound basis for decision making to relevant stakeholders, which, simplifies implementation of potential restructuring plan. Once decisions have been made, legal steps can be taken, making for a more methodical approach and enabling management to concentrate on stakeholder communication, change management, employee morale, and operational issues.

Being Tech Savvy

 In the present time space, large quantum of electronic data is being produced every day consisting of both structured data (accounting, payroll and other transactional level business data) and unstructured data (electronic mails, documents, mobile backups, and server backups). In order to make any sense of the large amounts of available information, use of technology becomes pre-eminent. For e.g. while conducting restructuring of the complex and large insolvencies, while tracing the assets of the CD, while running the business(es) of the CD under the limitation of the resources and within stringent timelines, while identifying key performance drivers to inform the most effective strategies to impact on businesses or during investigations to identify potential avoidable transactions as provided under the provisions of the Insolvency and Bankruptcy Code, 2016.

In all the aforesaid scenarios, the utilisation of technology-aided software or tools is pre-dominant to enhance the conduct of any review of the company’s books and records. Technology makes it possible to cluster the documents by specific rules and procedures which are defined by an expert on the basis of the businesses of the CD in order to review the information in the minimal time frame. Being Tech Savvy can aid CD/RP Debtor to save significant time and cost in comparison to the traditional information review model.

Because Every Restructuring is Unique

Corporate Restructuring has gained substantial steam in past one or two decades in the world of business. Corporate Restructuring is an ultimate business strategy where one or more aspects of a business are redesigned to improve commercial efficiency, manage competition effectively, drive faster pace of growth, ensure effective utilization of resources, and fulfilment of stakeholders’ expectations. It serves different purposes for different companies at different points of time and may take up various forms. Restructuring typically occurs to address challenges or it can be driven by the necessity to make financial adjustments to its assets and liabilities.

Mergers, amalgamations, acquisitions, compromises, arrangement or reconstruction are various forms of corporate restructuring exercises. The purpose of each of these restructuring exercises may be different but each of these exercises attempts to bring in more efficiency in the system. Every company has unique positioning in terms of capital, business structure, cash flow, lending arrangements and revenue streams. Therefore, during the situation of stress, companies have to manage all above mentioned variables to achieve the level of stability. Therefore, coming out with different execution plan for each and every company on part of RP is quintessential.

Restructuring Today for Shaping Tomorrow

Keeping businesses operating is among the most important goals of insolvency systems across the globe. A good restructuring mechanism should discourage lenders from issuing high-risk loans, promoters from taking imprudent loans and making other reckless financial decisions. All stakeholders such as employees, financial and operational creditors and potential new buyer should be benefited from an effective restructuring plan. A credible restructuring plan work towards achieving maximum recovery on the part of creditors, job retention on the part of employees with add on incentives and preserved network of suppliers and customers.

Various studies and surveys across the globe depicts that effective restructuring plan can reduce the costs of credit, increased access to credit, improved creditor recovery and strengthened job preservation within the economies. If at the end of insolvency proceedings creditors can recover most of their investments, they can continue to reinvest in the businesses and companies in the longer run of the future and further this will also improves the companies’ access to credit from the lenders, investors or creditors. In the end, an effective restructuring plan will build an ultimate confidence in the insolvency regime, creditors, employees and the government.

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