While this can relieve uncertainty and stress, bankruptcy also has a stigma associated with it – directors may find it impossible to raise future credit. They can also find themselves personally liable to the creditors of their companies. But as Adrian Doble, head of restructuring at Vantis Numerica explains, the alternative is early restructuring of the business, which could mean that not only is bankruptcy avoided but the business itself survives, at least in part.
UK use of administration
In the US, bankruptcy is a tried and tested strategy for corporate restructuring. Some of the largest global organisations have successfully entered the protection offered by Chapter 11 and emerged intact, stronger and ready to compete. Yet the UK’s attempt to offer the same restructuring tool, the 2002 Enterprise Act, is a poor imitation. While in theory designed to save a company as a going concern, more often than not entering administration is a one-way road to company break up.
In the US, directors retain operational control within Chapter 11, but under the UK Enterprise Act an appointed insolvency practitioner takes control, and responsibility for trading the business moves to him, becoming his personal liability. His job is therefore more than often to recoup as much money as fast as possible. It is little surprise, therefore, that in the majority of cases the company does not remain intact but is sold off piecemeal to the highest bidders.
And because the expectation in the US is that the corporation will survive, funding is made available by banks to assist ongoing trading. We don’t have this in the UK.
Early intervention
Instead of deluding themselves that their bank or the Enterprise Act will rescue them, UK business owners need to take a far more proactive attitude towards early intervention when things go wrong. For instance:
• Be brave enough to recognise the warning signs and seek help
• Don’t fool yourself that nobody will notice the problems your business is experiencing. Techniques for mapping company performance are in widespread use by banks, who will watch your ‘account behaviour’ very closely, and trade insurers run credit circles and monitor defaults closely too
• Early intervention is more cost-effective – it’s hard work trying to salvage your business when problems have been left unresolved, so you are likely to have to pay more to advisers and turnaround experts the closer you get to insolvency. The costs of intensive care versus the cost of early intervention and remedial treatment makes using experienced turnaround professionals the prudent choice. Sadly, hope reigns eternal and many business owners only see the folly of their ways when it’s too late.
• In up to 90 per cent of turnaround attempts, most of the effort concentrates on financial reconstruction, including debt restructuring, to keep the company solvent. Yet this fails to address the underlying operational problems that have contributed to the crisis. Operational restructuring is key, using change management skills such as closing manufacturing facilities, transferring skills to improving quality, or outsourcing. To be most effective, this restructuring is best conducted within a solvent business, preferably in close collaboration with your main creditors. Waiting for your company to hit a cash crisis is too late.
Early intervention can be a tough decision, especially if a company is still making a profit, albeit a declining one. But if insolvency is to be avoided, it’s not about crisis management – too often this will result in your company entering bankruptcy and being broken up. Instead, it’s about profit improvement through timely operational and financial restructuring of your business while it’s still solvent. Those are the companies that will survive.
