Welcome to the sixth piece in our 'Building a resilient balance sheet for 2021' series looking at solutions and opportunities for 2021 viewed through the balance sheet. In this post, we look at the new restructuring regime introduced in June this year and how creditors can be forced to forego some of their debts whilst leaving directors and shareholders in control of their business.
Businesses need capital to invest and grow. The lost revenues and increased costs caused by Coronavirus will constrain growth for many. This will at best impact shareholder value and at worst threaten the ability to continue to trade.
Government reforms for restructuring law
In response to this threat, the Government finally implemented reforms to restructuring law that have long been in the pipeline to maintain the position of the UK as a leading jurisdiction for restructuring.
The measures include a moratorium to protect companies from creditor action while seeking to restructure and a new restructuring plan similar to the Company Voluntary Arrangements (CVA) currently in use. The new plan has much greater flexibility than a CVA and does not carry the potential stigma of insolvency. Virgin Atlantic was the first company to use it but it is equally applicable to smaller companies.
Are CVA's an effective solution?
At the same time, the CVA is undergoing a renaissance. A CVA allows a business to continue trading under the same ownership and control whilst its debts are compromised. Used particularly to deal with onerous lease portfolios by reducing rents, a well thought through CVA can be an effective solution.
These reforms are aimed at increasing the numbers of director and company led restructurings. In our view, they will be beneficial to the recovery of the wider economy. They will promote a more collective approach to restructuring which will benefit more stakeholders than at present.