Corporate restructuring refers to a business restructuring process in which an entity makes modifications to its legal structure to ensure a continuous and smooth running of the business.
The process of business restructuring is done in terms of the Company and other Business Entities Act [Chapter 24:31].
This process of restructuring is usually employed by corporates when the business is facing financial or economic constraints for example, when a company is failing to pay a corporate debt, it has an option to enter into a restructuring agreement with its creditors to which have impact on its legal structures while simultaneously reviving the business to endure competition within the market.
In this agreement, the company’s strategy to pay the corporate debt would be mentioned and be such that it changes the structure of the business be it in terms of share distribution or ownership of the company.
It is therefore imperative to note at this point that Creditors and Lenders in this regard are an essential part of the corporate restructuring process as it also impacts on their interests.
Financial distress in the operation and running of a business is not the only ground for corporate restructuring as there are other grounds which include a company entering into an acquisition agreement, or a joint venture to mention a few as will be dealt with more under volume 2 of this article.
What are the Benefits of Corporate Restructuring?
Usually, corporate restructuring is employed as tool or rather vehicle to necessitate and accommodate at the same time, business growth and escalated performance in the market. There are specific benefits of restructuring which include the following:
It gives the company room to bring out new approaches so as to endure in the competitive commercial market environment.
When a company is in financial distress, corporate restructuring procedures are employed to alter the financial strategy. Through this strategy, the company can ease its financial distress and still have room to excel.
Cash flow is a crucial requirement for a company to endure in the market.
Without cash flow, a company will not pay its employees, suppliers, and third parties.
Hence a company utilises different forms of restructuring strategies to ensure there is sufficient cash flow and does not lead to business disruption.
Corporate Restructuring occurs when a company wants to restructure its debts and finances.
When a company is being acquired or merged with another company, restructuring happens as a result of the acquisition of assets, intellectual property, and employees of the other business.
Through this process, the company can enjoy the benefits of synergies from different departments.
The restructuring option also helps in improving the economies of scale and scope for a business entity.
In summation, corporate restructuring stands as vehicle to aid businesses in excelling in the competitive market while also allowing sustenance especially in situations where a business is under financial distress diminishing its capacity to repay its corporate debts as well as interfering with its cash flow.
It also safeguards the interests of creditors. It is more viable as an option as will be further illustrated under volume 2 of Corporate/ Business restructuring.
Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at fungai@zenaslegalpractice.com and WhatsApp 0772 997 889. Theophilus Mubemi is a is a Legal Intern, email address is theomubemi@gmail.com, 0717936310
