Business Restructuring During Troubled Times
The last few months have seen several companies listed at the Nairobi Securities Exchange (NSE) issue profit warnings. Listed companies are required by law to issue profit warnings if their profit for the current year is going to be at least 25% lower than the profit for the previous year. Additionally, several companies (including private companies) have continued to lay-off employees signaling tough economic times faced by such businesses. Sadly, other companies have closed shop altogether.
Companies going through economic turbulent times should consider business restructuring mechanisms that seeks to re- energise their businesses. This involves the re-arrangement or re-alignment of businesses and their structures. Business owners worldwide have the managerial discretion and prerogative to restructure their businesses as they deem fit. Equally, under Kenyan law, such business owners have several options to restructure their businesses in order to reduce operation costs and make their business more competitive in order to maximise on profitability.
Some of the options include:
(a) Mergers and Acquisitions: Company restructuring can be implemented by way of a merger or acquisition of a business, demerger of companies or hiving off a business.
(b) Administration as opposed to Liquidation: Administration is a corporate insolvency procedure by which a company (usually one that is or is likely to become insolvent) can be re-organised or have its assets realised for the benefit of its creditors. Administration aims to achieve the following:
(i) The primary objective is to rescue the company as a going concern.
(ii) The achievement of a better result for the company’s creditors as a whole than would be likely if the company were wound up.
(iii) The realisation of some or all of the company’s property – this will result in a better realization should such assets be sold.
Administration allows for the re-organisation of a company or the realisation of its assets under the protection of a statutory moratorium, which prevents creditors from taking action to enforce their claims against the company during the administration process and so hamper the implementation of a strategy for the company’s rescue or asset realisation.
(c) Standstill Arrangement: This is a contractual arrangement by way of a binding contract between the debtor and creditors (the ones who agree to have their debts “stood”) to put on hold their debt or repayment of such debts for some time. This action gives the debtor company a new leaf of life by allowing it to trade and pay a nominated supervisor of such scheme an agreed amount at agreed intervals, which can be distributed to the on-hold creditors as agreed in the Standstill Agreement. This offers the company protection during the still period and a second chance to rectify the financial mistakes that led it into the red in the first case.
(d) Debt to Equity Swaps: This is a capital re-organisation of a company in which a creditor converts indebtedness owed to it by a company into one or more classes of that company’s share capital (which may not be equity share capital in the strict sense). This lowers the level of the debt of the debtor company, hence improving cash flows. On the other hand, unless the existing shareholders are willing to pump more capital, such conversion of debt into equity in favour of the creditor often results into a dilution of existing shareholders.
(e) Job Restructuring: Job restructuring means reorganizing jobs/positions and it occurs when an employer changes the nature and functions of jobs in their business. Job restructuring includes: horizontal restructuring which involves modifying current jobs/positions to include new tasks or responsibilities performed in other jobs on the same level; and vertical restructuring which involves increasing the responsibilities of a current job/position with tasks performed at a higher level. Redundancy and voluntary early retirement programs are among the most common types part of job restructuring.
Business owners need to implement either of the above options professionally. We would be happy to assist you to implement business restructuring in your organisations. For assistance with business restructuring, do not hesitate to contact Bernard Musyoka (firstname.lastname@example.org) or James Wairoto (email@example.com).
Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.