“The Enterprise Act (2004) was supposed to herald a ‘rescue culture’ for companies in serious difficulty but it has failed in that aim. David Cameron’s proposals to promote company turnaround rather than forms of insolvency should be welcomed by UK businesses, provided his advisers do not allow themselves to be bewitched by US-style Chapter 11,” says the Institute for Turnaround.
“Regrettably, David Cameron’s Turnaround train may arrive too late. Over the next 18 – 24 months many businesses capable of being turned around will be propelled into insolvency because of the current system’s shortcomings,” warns Institute for Turnaround Chief Executive Christine Elliott. We applaud well-executed plans that can help rehabilitate under-performing companies. But we need action now or the downturn will claim too many of the business casualties already in the waiting room,” said Elliott.
However, the Institute says that introducing a US-style Chapter 11 regime is not the answer. Its members have experienced Chapter 11 cases that have lasted several years. In a survey on July 14 – 15, there was universal agreement in the Institute that Chapter 11’s best feature is an ability to obtain ‘Debtor in Possession’ financing. This provides liquidity to stabilise a business financially and encourages suppliers to continue their supplies. There are some other useful aspects in respect of contracts and leases and compelling ‘unreasonable’ minorities to accept restructuring plans.
The downside of Chapter 11 includes:
• The fact it is expensive and where there is litigation, costs can become astronomical
• When the company pays the costs (as opposed to fees met from recoveries that high yield investors receive) there is no incentive to keep costs down
• Chapter 11 is difficult to implement in a multi-jurisdictional case
• It is really only suitable for large companies – 80% of the UK’s are SME’s
• The process is inflexible and can be needlessly lengthy
Research this month* by the Institute for Turnaround shows a significant increase in the number of companies in financial difficulty. The credit crunch is no longer an issue for financiers. Pain in the real economy has sharply increased. Rampant commodity inflation, over-leveraged balance sheets and lack of available credit contribute to a difficult trading environment. Debt, when it can be obtained, is prohibitively expensive. Job cuts are proliferating in the worst-hit sectors.
“Accredited turnaround professionals should be given the power now to set up a creditors’ moratorium without using an insolvency process. They should also be legally protected when helping companies that are close to insolvency and could be rescued – but companies should not confuse insolvency with turnaround. That way we will maximise the jobs and companies saved for the long term,” said Christine Elliott.
Christine Elliott, Chief Executive and Director
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1. Turnaround Credentials
The Institute for Turnaround recommends that company directors should do a careful credentials check before appointing someone to lead a turnaround. The Institute suggests that businesses find out how their potential turnaround executive’s or adviser’s fees are structured and their primary sources of remuneration over the last five years. Companies should also check professional references and qualifications including an opinion from their lead bank and whether the person is a licensed insolvency practitioner. For information about various forms of insolvency, they should contact R3, the insolvency practitioner’s organisation.
2. The *‘Turnaround Traffic Lights Survey’ was conducted between June 26 and July 8 2008 amongst Institute for Turnaround accredited members responsible for rehabilitating almost 1,000 businesses with serious operational and financial difficulties. The companies ranged in size from £2 million to £13 billion turnover.
3. The Institute for Turnaround (IFT) is Europe’s leading professional body for the whole Turnaround Community. IFT was founded in 2000 as The Society of Turnaround Professionals. We represent a unique audience responsible for funding, structuring, negotiating and executing business turnaround that shapes the real economy. We have a membership of rigorously accredited turnaround executives and advisers, with corporate partners representing the best in law, accountancy, corporate banking and finance, private equity and other experts involved in the field.
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