Insolvency processes and debt restructuring are plagued by misconceptions. An insolvency practitioner does not restructure entire business operations. They do not provide a magical solution that can transform an unprofitable business into a roaring success.  

The role of an insolvency practitioner in debt restructuring  

A restructuring practitioner investigates a company’s financial records to ascertain its financial position. The purpose is to determine the root causes of financial difficulty. Once this is identified, a practitioner will prepare a report for creditors. Creditors then vote for or against a restructuring plan.  

Commercial viability for creditors 

The key consideration for creditors considering a restructuring plan is commercial viability. When insolvency practitioners are conducting their investigations, they seek to understand the causes, and determine whether financial hardship is a short-term, temporary challenge, or an ingrained long-term feature of the business.  

Temporary or enduring financial challenges   

The covid lockdown orders are a good example of short-term conditions which significantly impacted the ability for businesses to generate profit. Many businesses were forced to close, and their customer base dried up. These conditions do not reflect the businesses’ core viability, and once lockdowns eased, their customer base (and profit) recovered. The debt build-up during lockdown was an unforeseeable, isolated event that led to insolvency. 

Mismanagement is an example of a long-term, enduring challenge that will not improve.  

Will a restructuring or a liquidation give creditors the best return? 

Creditors generally vote in favour of a restructuring plan if it offers the most commercially viable outcome. For example, a liquidation and realisation of assets may generate a 12-cent divided return on the dollar for creditors. A restructuring plan may provide creditors with a 17-cent dividend return on their debt. Creditors are looking for the best return, which requires an accurate projection of future trading prospects.  

The cover of covid  

‘The cover of covid’ refers to the impact of the pandemic on business trading activities. It presents significant challenges for insolvency practitioners during debt restructuring proposals. It is important to identify if the business was struggling before covid (and the pandemic is the scapegoat) or whether the pandemic itself had a significant, but temporary, impact on profitability.  

The takeaway 

Commercial viability is the key consideration in debt restructuring.