A new approach to corporate failures

Some useful insight into a new approach that banks and other credit-grantors are taking with respect to corporate failures

A NEW APPROACH TO CORPORATE FAILURES

This an article appeared in ITC’s e-newsletter of 9/11/2001, What’s new…s? (www.itc.co.zawebmaster@itc.co.za)This week’s edition of What’s new…s? provides some useful insight into a new approach that banks and other credit-grantors are taking with respect to corporate failures.

Too often credit people are so anxious to extract payment from a problematical account that they apply for liquidation without fully considering the consequences. These decisions are often so charged with emotions that one tends to forget that liquidation is almost always a lose-lose situation.

There was a time when banks appeared to passively accept that corporate failures are an unfortunate fact of life, and that losses resulting from failures are an occupational hazard to be factored into the expected return on investments. What is more, banks appeared, once the corporate borrower had been placed in liquidation and the loss had been provided for, to resign themselves to the outcome of the winding up, and to deem whatever dividend was received to be a bonus.

Today banks are no longer prepared to stand on the sidelines and merely watch their corporate customers slide into insolvency. They are furthermore waking up to their vital role, as creditors, in the liquidation process, and the substantial benefits to be gained from greater control of and accountability from professional liquidators appointed by the Courts. Where a company finds itself in financial trouble, winding up should be a last resort.

Everyone, including shareholders, banks, other creditors, the workforce and the economy as a whole, loses when a company fails. Many companies that are fundamentally sound have good products and add real value to the economy, fail as a result of a temporary liquidity crisis or the inability of management to keep pace with growth. Banks are redefining their role where medium to large corporate customers stumble. They are more inclined (although mindful of the risk of being held accountable as quasi managers of the company) to participate in, and even initiate, controlled recovery programs designed to nurse the company back to financial health.

Most major banks have invested in the creation of intensive care units, staffed by skilled professionals, who while looking after the interests of the banks and other creditors, can engage and advise management of faltering companies in constructive and innovative strategies towards recovery. Invariably, such strategies involve co-operation between creditor banks and other creditors in debt re-scheduling, interest relief and standstill arrangements. Standstill and debt rescheduling programs require, to succeed, not only co-operation between banks and other creditors, but also the support and commitment of the other stakeholders including shareholders, directors, management and staff of the troubled company. The failure of such programs is most often occasioned by failure to disclose relevant information, lack of co-operation and commitment in implementing suggested strategies, and fraud and other criminal behaviour.

Regrettably, there have been a number of recent highly publicised instances where, despite the best efforts of banks and creditors involving comprehensive debt standstill arrangements, the relevant companies have failed. There have, fortunately, also been significant successes, although these are understandably less well publicised. The recent negative publicity surrounding the appointment of liquidators by the Master of the High Court has once again highlighted the urgent need for the restoration of public confidence in the liquidation industry, which deals with billions of Rands worth of assets at any given time.

Allegations of irregularity in the appointment process and in the disposal of assets and distribution of liquidation proceeds, have not only created an awareness that the insolvency legislation is in need of overhaul but have also focused the attention of banks and other major creditors on their important role in the process. In some instances they have induced banks, which are usually the largest creditors of liquidated companies, to drive the liquidation process from a creditor’s point of view to ensure that the maximum possible value is achieved from the insolvent estate and that, where necessary, the culprits responsible for the demise of the company are held accountable.

This increased awareness and involvement of the banks is to be welcomed, and coupled with the expected overhaul of the relevant statutes, will hopefully have the effect of increasing the affectivity of the liquidation process, lowering the potential for irregularity and increasing public confidence in the industry players. With the expertise available in banks presently, companies, which are on the brink of insolvency, are more regularly identified prior to actual liquidation. A lot of time and effort is expended in attempts to turn troubled companies around before liquidation becomes inevitable. Apart from the debt re-scheduling, interest relief and standstill arrangements currently employed by banks as mechanisms to restore solvency to the struggling company, it is envisaged that the existing judicial management procedure provided for in the Insolvency Act will be re-engineered to allow for more informal and practical procedures.

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