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Reorganization protects entrepreneurs prior to the company turns out to be in utter distress.

Guest post by: Dr. Mohamed Ibrahim

Article Overview: Restructuring a company in distress, prior to the stage, when a company falls into low financial waters is conceived as a cogent option, which requires following the requisite legal procedure as would achieve the ultimate objectives.

Reorganization protects entrepreneurs prior to the company turns out to be in utter distress.



Reorganization protects entrepreneurs prior to the company turns out to be in utter distress.

Needless to say prosperous entrepreneurs have a higher opinion of their aptitude to handle dealings. They usually assign positive results to their aptitude of decision making. Courage may be the fundamental raison d'être that directors relax in placing a troubled company in bankruptcy even in situations where it is obvious that a company's current liabilities exceeded the fair market value of its current assets. If the rescue attempt is made for a public corporation the result would definitely affect wide latitude of interests. This is because a public corporation is not only a fortune of privately owned rights, but represents interests of a group of people. This may be verified by considering the interests of employees, creditors, suppliers, shareholders, and the local community in which the firm operates. It is submitted that the shareholders' interest remain the primary goal of directors. Directors' are only bound to take reasonable care to ensure the interests of shareholders. They are not legally obliged to serve the interests of non-shareholders. However, it would be a helpful attempt if directors initiated a scheme of arrangement before actual insolvency. Directors, accountants and legal advisors may be involved at an early stage instead of concealing or misrepresenting the company's true statement of insolvency. The act of concealing a company's low financial standing may extend the life of an insolvent company but would not ultimately avoid its death.

Financial restructuring in a scheme of arrangement is envisaged to address a distribution of economic interests in the company's assets between creditors and shareholders. The practical question is this: how could a restructuring scheme provide the requisite rescue as would restore the financial position of the company in distress? This requires a constructive business plan which may be appropriately structured with the debtor's involvement. One of the main factors behind a company's fall into financial distress may be attributed to a host of factors, however primary causes may be attributed to incompetent management, shortage of capital structure and corporate governance. In most of the cases corporate governance comes at the forefront which invariably leads to corporate failure. On the other hand, an efficient well conversant board of directors having industry expertise and financial literacy is prone to prevent a company's fall into liquidation. Perhaps it is important to indicate that a restructuring process demands the ability to maintain sufficient liquidity during the restructuring process, unadulterated cooperation of major creditors of the company in distress, the availability of qualified personnel, supporting broad-spectrum economic and business conditions, corporate governance, quality of enforcement procedure and institutional capacity. These may be the underlying reasons why in some jurisdictions companies opt for a restructuring process while in others straight liquidation is always preferable

In support of restructuring one may indicate the following reasons. First, the rationale underlying restructuring of company arises in situations where the assets employed for the business appear to be more valuable than a piecemeal sale; however the return on the assets employed is inadequate to repay the debts of major creditors. The main problem is a cash flow problem which requires major creditors to wait for payment of the debt if not prepared to afford fresh infusion of cash. Second, restructuring worth the effort when it appears from the facts that the company in distress is likely to be returned to a viable state of affairs. Under the circumstance it would be more efficient to restructure or reorganize whatsoever the terminology employed rather than to liquidate on the ground that restructuring is apt to preserve the assets and the available human force. The whole process entails a fine-tuning exercise between creditors and the company in distress as would increase the likelihood of a successful restructuring, even though the company in distress would not remain in possession and operate its business during the restructuring process. The restructuring process requires the court to appoint a liquidator as a trustee in the scheme of arrangement proposal. The liquidator would probably advance the interest of the creditors, in addition to helping the company in distress to organize its financial affairs. The liquidator may utilize the services of accountants, lawyers and financial advisors if he deems fit. In the event the restructuring fails, the liquidator would eventually turn into a receiver for the creditors. Third, cost of liquidation may erode a substantial portion of the assets. Fourth, the going concern of company in distress appears significantly better than its liquidating value. Fifth, the company in distress could maintain its present customers. Sixth, at the end of the day, it is more in the interest of the creditors to accept a plan for restructuring or rehabilitation or reorganization because the funds envisaged to be recouped will be much larger than could be obtained if a liquidation procedure is adopted. Seventh, liquidation entails losses. Assets sold by auction would not maintain their obtainable value. Considerable related costs such administrative, accounting and legal would be incurred.

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Article Tags: corporate governance, Reorganization, Restructuring, scheme of arrangement



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