“A ship in the harbour is safe, but that’s not what ships are built for”, a quote attributed to John A Shedd, is translated in the context of this column to “doing what is easy is safe – it takes courage to do what is hard”.
That could often be said of insolvency practitioners and business turnaround engagements. Why? Insolvency appointments seek the safety of the Corporations Act 2001 within which an administrator, liquidator or receiver has certain protections, rights, obligations and qualifications to the work being performed. They have the ability to compel the production of things, to include or exclude claims and to avail themselves of the Courts as required.
Restructuring (or turnaround) engagements involve none of the protections offered by the Corporations Act and often can expose the turnaround expert to the same risks as company officers. Why do it? Simply – it generates better outcomes.
In a recent matter, it was suggested that a Company indebted to a commonly-occurring creditor for a substantial sum ought to be wound up. Following review of the financial statements and discussion with the director, the following became clear:
1. The Company utilised specialised plant and equipment which would suffer a severe reduction in value if put to the market in a distressed sale;
2. The Company generated sustainable revenues through a captive clientele and operated in a niche market;
3. There were good systems and procedures that supported the business operations.
Therefore, rather than simply wind up the company, a decision to run a structured market-based sale process was made. The benefits over liquidation were:
1. The sale process was competitive and drove the price up;
2. Sufficient funds were generated to discharge all the Company’s creditors;
3. The director entered into a ‘golden handcuffs’ arrangement with the purchaser – securing his personal income stream;
4. The Company’s employees remained employed; and
5. A small surplus was returned to the shareholders.
This is a simplistic example and true turnaround engagements are inherently complex. It often requires creditors to commit to outcomes that may compromise future claims or result foregoing security in return for restructured contractual arrangements. Additionally, there is no practical means of binding creditors agreements reached – the analogy of ‘herding butterflies’ is often used when trying to achieve creditor consensus. However, if undertaken by an experienced and qualified practitioner, turnaround engagements can and do yield enduring real benefits to traditional insolvency appointments.
Tony is a Director at Vincents Chartered Accountants and provides specialist advice to clients in the areas of insolvency, business risk and financial conflict and dispute resolution.
For more information, contact Vincents, Level 7, AMP Tower, 1 Hobart Pl, Canberra City.T: 6274 3400 F: 6274 3499
E: [email protected] | W: www.vincents.com.au