Essential Considerations for Corporate Restructuring

Introduction

Corporate restructuring occurs when a company makes substantial changes to its structure or its operations, including by altering aspects of its financial and/or operational functions.

Generally, a corporate restructure represents a change that transforms the business significantly.

A corporate restructure may be necessary for various reasons and as such, the restructure will require careful legal and financial consideration, amongst other things.

Before commencing any form of corporate restructure, it is integral to obtain advice from the relevant qualified professions.

Some of the key considerations that you should obtain professional advice on include:

• compliance with relevant laws and legislation
• financial and accounting implications
• legal and procedural issues
• organisational and operational aspects
• taxation implications
• human resources (including redundancies and consultation with employees)
• existing contracts and transfers

When and why do companies restructure?

There are various reasons why businesses restructure.

The most common include that the business is underperforming, experiencing financial difficulties, has an inappropriate existing structure, and for asset protection. Restructuring can also occur during the process of a change in ownership structure such as takeovers, mergers and/or acquisitions.

Business owners/directors may utilise restructuring when a business is struggling with profitability.

This might occur when profits are declining, and the business owners/directors want to help the business back to its former success.

As such, restructuring can involve the sale of property, closure of enterprises, debt restructuring, and redundancies.

A restructure can also be a final effort to avoid insolvency. There are strict rules when it comes to the actions that a company can take when it is unable to pay its debts, so in that case, you should seek the advice of a lawyer before attempting a corporate restructure.

Corporate restructuring is also a tool that creditors/liquidators use when a business is insolvent.

In that event, creditors/liquidators may determine that a corporate restructure offers the best path to repaying the company’s debts.

If your company is struggling or facing cashflow problems, especially where there is a threat of insolvency, you should seek expert legal and financial advice as soon as possible to minimise financial and other losses.

Resolving any issues will assist in potentially saving your company from going under and getting your finances back on track.

Restructures under the Small Business Restructuring Process

Restructuring can help a company retain control of its business while a plan is developed to reorganise its affairs with the assistance of a ‘restructuring practitioner’.

Rather than facing insolvency, certain eligible Australian businesses who are insolvent or likely to become so may be able to utilise the Small Business Restructuring Process (SBRP).

The SBRP entails the implementation of a restructuring plan with the assistance of an appointed restructuring practitioner who communicates with the company’s creditors and can help the company enter into a restructuring plan with them.

The objective of the SBRP is for the company to avoid insolvency and ultimately revive the business.

Generally, to be eligible for restructuring under the SBRP, the company’s liabilities must not exceed $1 million, and the company or one of its directors must not have previously undergone restructuring or have been subject to a simplified liquidation process in the past seven years.

The company must also be substantially up to date with its obligations for tax lodgements and employee entitlements.

Complying with employment laws during a restructure

A critical consideration in planning and preparing for a company restructure is the effect it will have on human resources.

Before restructuring, employers must understand their obligations to existing employees, and ensure that:

• any redundancies made are genuine
• notice requirements to employees are complied with
• a determination has been made as to whether severance pay is required, and the amount of severance pay to be paid
• all redundancy requirements under any relevant award or enterprise agreement have been complied with
• where applicable, payment in lieu of notice has been made, in addition to redundancy pay
• all contractual obligations have been complied with

Working with an experienced lawyer and/or accountant can help employers and directors ensure that they meet their obligations under relevant employment laws and regulations.

Tax implications and reporting requirements

A corporate restructure will likely have taxation and reporting implications. The tax implications of a proposed restructure may be unanticipated, so it is important to consult a tax professional on the potential impact of restructuring before implementing any plans.

For example, if the restructure encompasses the disposal of assets, Capital Gains Tax (CGT) liabilities may be triggered unless an exemption applies.

Similarly, the restructure may result in the entity losing accumulated tax depreciation due to changes in ownership.

Conclusion

Corporate restructuring may be undertaken for many different reasons, however the overarching purpose and goal is generally to improve the business’ prospects during challenging times.

When facing financial difficulties, it is crucial that business’ assess and explore the options available to them and implement strategies that are aimed at minimising loss and giving the business the best possible chance at survival.

A successful restructuring strategy must carefully evaluate the most viable path forward based on the challenges at hand, the desired goals and in consideration of the legal obligations and other relevant factors.

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