If your business has slowed or has been sinking into financial distress it can be a devastating and stressful experience. It seems you have limited options and as you struggle, all too often so does your customer service. This can add more fuel to the fire and can lead to further lost revenue. Many business owners feel their only option in these situations is to claim bankruptcy. However, there is another option available in Canada: Debt restructuring. Debt restructuring is available for companies of all sizes and structures making it accessible as an opportunity to reduce your liabilities so you can get back on track.

Debt Restructuring 101

Debt restructuring allows companies with financial issues to reorganize their debt to help restore liquidity. This allows companies to remain operational and begin to build themselves up again. The process requires negotiation between your company and your creditors. The goal is to reduce the amount of debt you owe and decrease interest that is accumulating. There is also usually an agreement reached for a longer payment plan. Debt restructuring provides a final chance for you to regain your leggings and avoid bankruptcy. Often creditors prefer this route as it allows them to collect at least some, if not most of the debt owed.

When is Debt Restructuring Advised?

If you have slid further into debt than is manageable, you can consider debt restructuring. Signs you should consider debt restructuring include:

• Having to default on the terms and conditions for your loans
• You have been dipping into personal funds and credit to stay afloat
• You have not been able to pay your own salary
• You are experiencing a drastic reduction in net profit
• Your operating expenses have become unmanageable
• Creditors are threatening legal action

Types of Debt Restructuring

There are two forms of debt restructuring: Informal and Formal. In both cases, the goal is to reduce the burden of debt using new payment amounts and terms that will suit your current cash flow. This allows you to remain in business, pay off debt and get back on track without the need for costly bankruptcy proceedings. It also helps to limit your personal liabilities. Below is an overview of each option:

1. Informal corporate debt restructuring:

Negotiations take place directly with your creditors to come up with either a one-time settlement sum or to make a new payment arrangement. This is designed to work with your current financial situation to allow you to pay down debt. It can also be used for both secured and unsecured creditors, including your taxes and suppliers. You will have to provide proof you are under financial strain. Although your creditors are under no obligation to accept new terms or make a settlement on a lump sum payment, they will often prefer this approach to bankruptcy. In some cases, often for larger companies, there can also be plans to reduce liabilities and personal obligations your company executives and yourself as the owner by winding the company down.

2. Formal corporate debt restructuring

Companies owing less than $5M can use the Bankruptcy and Insolvency Act to restructure by filing a Division One Proposal. This presents the same opportunity for you to renegotiate terms and also appeals to creditors as they receive more money than if you were to file for bankruptcy. This will still work in your favour as the negotiations on your part are still designed to lower your debt burden. You can then make payment arrangements for the new amount so you have better cash flow and remain operational.

Again, creditors are under no obligation to negotiate or accept new terms. In fact, should they disagree with the proposal then you will automatically be forced to file for bankruptcy. The good thing in the formal corporate process is that there will also be a court issue that will allow you time to prepare your proposal. You can continue operations of your business without the need to worry about making debt repayments until the proposal has been presented and accepted by your creditors. Once your proposal is presented, your creditors will consider the conditions and a vote is taken collectively by all creditors involved. In order for your proposal to be approved 66.6% in dollars and more than 50% of your eligible creditors must vote in favour of your proposal. In the case of larger corporations that owe more than $5 million, the Companies’ Creditors Arrangement Act (CCAA) is available. It addresses both shareholders and creditors with court protection provided during the proposal preparation period.

The Advantages of Business Debt Restructuring

All of this can seem a little scary. However, when it comes to salvaging your business, debt restructuring either formally or informally offers the most hope for you to regain — or even maintain — solvency. Although refusal of your proposal by your creditors can mean you must file for bankruptcy, without a restructuring plan, that chances are that you are headed down that road anyway.

Debt restructuring has proven to be the saving grace for many companies both large and small. It offers you a final opportunity to get your company back on track. You can maintain your dignity by still paying off your debt, without the burden of interest, and often for a smaller amount. Although creditors won’t like this, they will still be happier to receive a proposal showing your intent to pay off your debt rather than receiving nothing at all. It can also help you repair relationships with much-needed suppliers you might depend on for your business.

Although it is a stressful prospect, debt restructuring will help reduce stress in the end. It will end calls from creditors and also stop them from being able to take legal action against you. Business debt restructuring using a Division 1 Proposal will allow you to avoid bankruptcy.

For more information about business debt restructuring, give Charles Advisory Services at (416) 915-9007 or contact us here.