It is open to a company to negotiate and agree deals with one or more of its creditors, that is, on the basis of a contractually binding agreement under which the debtor will have longer and/or less to pay and/or the payment terms are otherwise changed in a way which is beneficial to the debtor. These sorts of deals are not regulated by the IA 1986 or CIGA 2020 and do not involve the company entering into a ‘formal insolvency procedure’ (by which is meant an administration, a liquidation, a restructuring plan, a CVA or a scheme of arrangement). Where they can be done, they represent a relatively easy, quick and cheap way for companies to restructure their liabilities. However, the main difficulty with them will be in trying to reach agreement with all necessary creditors at the same time. Creditor A may be unwilling to compromise its debt claims against the company unless creditors B, C and D do so on acceptable terms at the same time and vice versa.
If agreement can be reached, it will often be documented by a restructuring agreement. This will have contractual force and if entered into in a workable timescale, the company will avoid a formal insolvency procedure and it will survive in its current form.
As a preliminary step to beginning negotiations with creditors, the company may have to enter into a ‘standstill agreement’ with relevant creditors (perhaps just the major ones) in which they agree on a binding basis not to exercise their usual rights and remedies for a specified period to enable the parties to have time to negotiate the terms of the restructuring agreement. The need for standstill agreements is likely to continue even though a company can obtain a pre-insolvency moratorium out of court under CIGA 2020 which prevents creditors from exercising certain remedies (such as enforcing security) during the existence of the moratorium. Although the aim of the moratorium is to give the company time to negotiate a restructuring deal with creditors with a view (if possible) of rescuing the company as a going concern, financial creditors are still able to exercise all their contractual rights during a pre-insolvency moratorium and as explained below, if they do so, this is likely to mean the moratorium will come to an early end.
In a restructuring agreement, the debtor will often seek a combination of debt write off, debt rescheduling and/or or grant of additional facilities. To obtain creditor agreement, the company may have to do one or more of the following: (i) grant new or additional security, (ii) replace directors or senior employees, (iii) sell failing businesses or subsidiaries or profitable ones in order to raise cash, (iv) reduce the workforce or the salary bill, (v) issue new shares to the creditors (this is known as a “debt for equity swap”) and/or (vi) procure that the directors or others grant guarantees for existing or new facilities.