|Focus:||Series: Draft business restructuring recommendations|
|Services:||Restructuring & Insolvency|
|Industry Focus:||Financial Services|
This article is the fifth and final in our series focussed on the business restructuring recommendations set out in the Productivity Commission's Business Set-up, Transfer and Closure draft report. Our earlier articles may be accessed here.
This week, we consider the Productivity Commission's draft finding with respect to the role of culture in delivering more effective restructurings and to foster a coordinated approach to assist the recovery of a company.
Draft finding 14.2, the role of culture in delivering more effective restructurings
- The Productivity Commission's draft finding 14.2 provides that the current culture, incentives and legal framework around voluntary administration inhibit its effectiveness as a genuine restructuring mechanism.
- The Productivity Commission made a number of interesting observations about the role of an insolvency system, reporting:
- Business exits facilitate structural change within and between industries. They also allow entrepreneurs to learn and experiment, transferring skills and information between old and new businesses.
- It is important that an insolvency system facilitates these exits in a structured, predictable and expedient manner to enable learning and adjustment without undue delay or cost.
- The insolvency system should encourage economic activity through the productive use of assets, be it the continuation of existing (valuable) activity, or the rapid and orderly redeployment of employees and assets.
- Wherever there is either continuation of a business or the redeployment of its employees and assets, a number of stakeholders will be affected and not all of their interests will necessarily be aligned with those of secured creditors. This is particularly the case when the business is struggling. In this light, an undue focus on the rights of creditors at every stage of the process (a perceived feature of the current Australian system) can risk diminishing the overall economic value of the process. Instead, a more balanced group-focussed process may provide the best opportunity for restructuring and the best overall outcome in the long run.
- It follows that the objective of an insolvency regime should be to provide a genuine opportunity for restructure. If restructure is not possible, the insolvency regime should aim to provide an efficient process for winding up. The regime should foster a coordinated approach to recovery of a company, or if that is not possible, its assets.
- These observations reflect a significant change in the way that Australia has traditionally viewed the role of an insolvency system, revealing a new emphasis on the recovery of the company (ie a turnaround), with an orderly wind down where that is not possible.
- The Productivity Commission cites the main reasons for business failure as inadequate cash flow or high cash use, poor strategic management of the business, and trading losses.
- This suggests that the primary role of the turnaround practitioner is to provide expert advice to companies about managing cash flow, improving business strategies and identifying and fixing items in the income statement that are causing recurring losses.
- If companies become more accustomed to engaging turnaround practitioners who provide this type of expert advice, then we should expect greater facilitation of structural change within companies on a going concern basis, and a decreased reliance on insolvency solutions.
- In DibbsBarker's view, to reach a position where this type of advice is routinely sought, there will need to be a cultural shift that begins with redefining what we mean by turnaround expert advice. If the market continues to associate this expertise with insolvency, then companies will not engage experts soon enough. Further, the experts that are engaged will tend to provide insolvency advice that is focussed on exit solutions via (or immediately prior to) insolvency mechanisms.
- To assist the cultural shift, a protocol should be established to facilitate these turnarounds in a structured, predictable and expedient manner. The benefit of such a protocol is that it mitigates the risk of uncertainty and inconsistency, which exhibits itself in delay, cost and execution risk.
- Applying learnings from overseas protocols and successful turnarounds conducted domestically, there are five key principles which, if routinely applied, will maximise the prospects of turning around a financially troubled company. These five principles might therefore form the basis of an Australian protocol aimed at encouraging and facilitating corporate turnarounds. The principles are:
- creditors remaining supportive when they receive bad news
- creditors agreeing to stand still and not take enforcement action or exercise rights triggered by insolvency
- the company preparing a plan which addresses financial and operational sustainability
- the plan being supported by accurate, reliable financial information about the company, which is shared equally with creditors (ie those whose agreement to the plan is sought)
- creditors coordinating their response to the plan.
- Companies, their expert advisors and material stakeholders can play a key role in bringing about a positive cultural shift by adhering to these key turnaround principles.
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