Alternatives to financial restructuring

Jan 17, 2021
Restructuring & recovery Liquidity Financial consulting

Financial restructuring processes can resolve multiple issues, but it’s possible that a more formal restructuring process will be required - especially if there are more stakeholders than it’s possible to engage with or greater cash savings are needed to ensure survival.

Some of the things a financial restructuring can achieve include: 

  • Reduction in debt repayments to a more appropriate level with revised EBITDA
  • Loan note reductions or capitalization
  • Revised debt levels or maturity extensions
  • Revised covenants
  • Incentives for management teams
  • Upside instruments for all stakeholders

However, if there are other key challenges faced by the business, you may need to consider other restructuring solutions either alongside or instead of the aforementioned informal financial restructuring.

In Canada, these are likely to include:

Proposal under the Bankruptcy and Insolvency Act (“Proposal”)

A Proposal is a restructuring tool that allows a company to make an arrangement with its unsecured creditors for payment over a prolonged period and potentially at a reduced level. This is a formal process wherein unsecured creditors are required to vote whether or not to accept the Proposal. For a Proposal to be accepted, a majority in number of those unsecured creditors voting, who hold at least two-thirds in value of the unsecured claims being voted on, must vote in favour of the Proposal. Once accepted by the unsecured creditors, the Proposal is then subject to approval by the Court. Upon Court approval of the Proposal, all unsecured creditors are bound by the Proposal’s terms.

The benefits of a Proposal can be significant, as it can reduce liabilities and payments and allow time for the business to recover. There are downsides, too, however: (i) it can result in reduced recommended credit limits and credit insurance limits; and (ii) if the Proposal is not accepted by the company’s creditors or approved by the Court, the company is automatically deemed to be bankrupt.

Plan of Arrangement

An alternative to a Proposal is a restructuring completed pursuant to the Companies’ Creditors Arrangement Act (“CCAA”). A CCAA restructuring is akin to a Proposal or Scheme of Arrangement (Chapter 11 in the United States) for a company or affiliated companies with claims against it or them exceeding $5 million. While the end results of a restructuring plan may be similar to those achieved in a Proposal, a restructuring proceeding commenced under the CCAA can provide more flexibility which may be of benefit. While this proceeding is usually aimed at preserving larger businesses, there may be some advantages to middle market businesses utilizing this form of restructuring process.

Whichever solution you adopt, it’s important that you be properly advised and that the specifics be tailored to your individual circumstances.  

Learn more about RSM’s Restructuring & Recovery solutions and how our professionals can help evaluate available options,identify creative solutions and maximize recoveries where appropriate.

RSM contributors

  • Arif Dhanani

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