A version of this article first appeared in Financier Worldwide Global Restructuring & Insolvency Review 2003
The 21st century has seen the firm establishment of a rescue culture in the UK, exemplified by the growing influence of the Society of Turnaround Professionals and the now familiar corporate insolvency provisions of the Enterprise Act 2002.
The legislative developments have served to lower entry barriers to insolvency proceedings in terms of cost and perception, the latter through reducing the "stigma of bankruptcy". In particular, the statutory objectives of administration, which is firmly established as the jurisdictionís principal non-terminal corporate insolvency procedure, are defined with "rescuing the company as a going concern" as the first priority.
Solutions like those in the case studies below are now easier to implement (if not necessarily to conceive or manage), making it all the more vital to consult an experienced and rescue-oriented insolvency practitioner at an early stage.
In Case Study 1, early realisation that the groupís cost reductions had lagged the industry-wide market collapse was a key factor, enabling the (nevertheless rapid) formulation and execution of a refinancing and balance sheet restructuring plan. Had this company not been caught in time it would have hit the buffers really hard ñ speed of reaction was of the essence.
Case Study 1
Antal International Limited ñ £20m turnover global recruitment business
Problem:
- Dramatic market contraction 2001
Solution:
- Bank debt replaced by invoice financing.
- Invoice financiers would only fund with administrators controlling company.
- Administration (August 2002) allowed more cost cutting and "breathing space".
- Subsequent Company Voluntary Arrangement (October 2002) eliminated excess creditors and restored profitability and cash generation.
Other Features:
- Paramount distinguished (administrator did not automatically adopt employment contracts after 14 days).
- European Insolvency Regulations tested in action.
Case Study 2 was a relatively healthy core business being turned around successfully. However, the reverse premium that would have been required to effect a trade sale of the two most seriously underperforming subsidiaries would have brought it down. Selling the subsidiary businesses and assets as going concerns through a formal insolvency process was anathema to the incumbent management, but we showed them the value of an insolvency tool in the right hands. Here it both avoided a potentially terminal cash drain and protected the core business from the likely counter-claims of group-wide customers if the subsidiariesí businesses had not continued.
Case Study 2
£10m turnover engineering business
Problem:
- Restructured 2000
- Ongoing turnaround
- 2 subsidiaries draining cash.
Solution:
- Subsidiariesí administrative receivership (October 2002).
- Going concern sales of their businesses and assets.
- Remaining group freed of cost, risk and contingent liabilities.
Other Features:
- Group pension fund issues required preparation for parent company administration to precipitate commercial settlement on the steps of the Court.
Case Study 3 is the most innovative. The cash-rich quoted shell with a positive balance sheet had contingent liabilities that the Court was persuaded (unlike in
Colt Telecom) were more likely than not to render the company unable to pay its debts as they fell due. However, the very use of a formal insolvency procedure prompted the crystallisation of many of those contingencies, yielding significant benefits to shareholders. The administration exit was the return of control to its directors, when the company's shares were relisted at 6 times the price at which they had been suspended.
Case Study 3
PNC Telecom plc ñ £60m turnover AIM-listed former mobile retail and fixed line telephone company.
Problem:
- Contingencies remaining after sale of operating businesses/subsidiaries precluded use of the shell as a vehicle for a reverse takeover or distribution to shareholders via a membersí voluntary liquidation.
Solution:
- Administration order (June 2003) prompted landlords to accept replacement obligations from the business purchaser and enabled litigation contingencies to be reduced.
Other Features:
- s236 Insolvency Act applications allowed the administrator to obtain information about the companyís affairs more quickly and cheaply than could the turnaround managers.
In each of these cases a turnaround manager not well-versed in the benefits of formal insolvency procedures might have continued to "think positive", avoiding insolvency at the risk of missing the opportunity of a successful rescue. I believe that a balanced mix of turnaround and insolvency skills and an ability to innovate are most likely to deliver optimal solutions to the stakeholders of companies in financial distress.
