The news is talking freely of the corner being turned but it is matched with editorials about the prudent approach we need to take in order to rebuild the economy. After all, if the market crashes 50% and then rises 50% we are still 25% down.

The financial experts have had their hands full, sorting out issues faced by firms needing to tighten up their accounts. Creditors have been pressured to relax their terms and debtors to tighten. Attempts have been made to renegotiate covenants and cost reductions have been made. People are fighting to keep their positions as swathes of staff are laid off.

Companies are now looking to improve their systems. The numbers will reflect the efforts made by the sales and delivery staff. They will need to improve significantly as the economy has changed from being able to take orders, to having to hungrily seek new work.

How can we change the systems to improve without damaging delivery?

Transparency
How many times have you become increasingly frustrated with dealing with certain companies because you cannot get hold of the right person to discuss your issues?
Can you really drill down into all live orders under your aegis and know where they are in terms of budget and timeframes?
Who is on each team and what have they delivered against their contract in the past reporting period?
Where is this information captured and who has eyes on it?

Many styles of management fiercely protect this sort of information to protect themselves, but if staff knew who was assigned to each task, where that project or task was in its plan, this would foster a team approach that would improve results as opposed to encouraging partisan approaches.

Accountability
Why was Sir Fred Goodwin able to retire with such a pension pot when he made such a poor effort at running RBS? How many times have you seen management in companies not take the blame for mistakes?

By assigning clearly defined and open issues of accountability, companies are able to promote the capable individuals and identify those who are failing to deliver. This might seem a little harsh, but no-one wants to carry weak staff if livelihoods are at stake.

Responsibility
Who is your personal bank manager? Who is your account manager for your company’s telephone supplier? Who is in charge of each programme at your firm?

As private companies have had benefits slashed before the jobs started to go, a change in culture to one of overtly taking responsibility can be encouraged. This will highlight areas that need to be addressed by those who are capable of taking on the challenges.

This might sound like common sense but it is staggering how many companies seem to have systems in place that avoid such simple ways of reaching results. Communicating such methods effectively can be achieved easily and cheaply.

As the economy starts to recover, the slow climb to a stable growth cycle will require the addressing of systems within companies, systems which currently expose weak flanks. These can be improved by implementing transparency, accountability and responsibility.

Contributed by Alex Boyd – Dalton Byrne

An estimated 3000 businesses will fail in October following the post-holiday period, according to Tenon Recovery, showing an increase of 43% on the same time last year.

The turnaround, restructuring and insolvency specialists have identified entrepreneurs allowing problems to escalate over the holiday period as the main reason for this post-summer surge in insolvencies.

Sectors most at risk are property development, retail, leisure, printing and manufacturing.

Carl Jackson, National Head of Tenon Recovery, said:

“Owners neglecting key issues combined with the difficult economic climate could send the number of business failures spiralling to unprecedented levels this autumn.

“Entrepreneurs who fail to deal with crucial business issues before they go on holiday could return to a nasty surprise.  Ignored, these issues can escalate posing a serious threat to the viability of that business.”

Tenon’s factor eight checklist addresses key issues that entrepreneurs are likely to face during the summer months and highlights actions that could be taken to minimise any threats to the business.

SME’s factor eight checklist:

1. Forecasting is vital
   Confirm that there will be no unexpected cashflow peaks that will not be covered by bank or ABL facilities during the holiday period.  Ensure that there is sufficient contingency headroom to avoid any significant problems.
2. Authorise key payments in advance
   Ensure that any key payments that will need to be made during the holiday period are authorised prior to departure to retain the goodwill of creditors.
3. Liaise with debtors to improve cashflow
   Improve cashflow by informing any large or key customers of planned holidays and negotiate early settlement of large invoices.
4. Speak to key stakeholders
   Make key stakeholders – creditors, bank managers, advisors – aware of any absence so that negotiations and decisions can be postponed.
5. Review continuity planning
   Ensure that appropriate staffing levels are in place and those in charge are empowered to run the business effectively for a protracted period in the event of unforeseen circumstances.
6. Consider recent events
   Review recent performance and business actions to assess whether a holiday (a) is realistic at the present time and will not have a negative impact on the business; (b) will not be considered inappropriate by employees, customers and suppliers in light of poor business performance
7. Check all contact details
   Provide emergency contact details to key staff; agree best times and means of communicating to keep in touch with any important issues that may need to be addressed.
8. Clear the diary
   Clear time before and after a holiday in order to address any potential problems and catch-up on business performance.

Carl Jackson added:

“The next few months may well define how long the downturn will last.  There are some 4.5 million SMEs in the UK, making up a significant proportion of the UK economy – a considerable increase in the number of small business insolvencies would be hugely detrimental and could prolong what has already been a very painful recession.

“By developing a pre-holiday checklist, we hope to impress on entrepreneurs the need to plan – a proactive approach is vital in this climate.  It could be the difference between survival and collapse.”

About Tenon Recovery
Tenon Recovery is the second largest corporate appointment taker in the UK.  Specialising in turnaround, recovery, restructuring and insolvency in both the corporate and personal sectors, Tenon Recovery is led by 43 directors supported by 350 staff operating from a network of 30 offices across the UK.  Tenon Recovery has strong relationships with secured lenders, both banks and asset-based lenders.  Tenon Debt Solutions assists over 3,000 individuals suffering from sever debt problems – see www.tenondebtsolutions.co.uk

The JCB Tough Phone made headlines last year as gadget reviewers lined up to put its “indestructible” tag to the test. In the name of science the phones were dropped, pummelled, battered and crushed – and emerged still working. What many people reading those reviews didn’t realise is that the Silicon Valley-based company behind the phones, Sonim, had been through a similar ordeal. 

‘We became the pariah of the industry,’ says Bob Plaschke, Sonim’s CEO. ‘We spent millions of dollars [of investors’ money] chasing a grand vision that wasn’t grounded in solving real people’s problems.’ 

The vision was internet telephony (VoIP) over mobile phones; a prospect that excited Sonim’s venture capital (VC) investors so much they invested $47 million (£34 million) before the company had made a sale. Sonim won awards and contracts, but critically, failed to deliver working software on time to the mobile operators it had signed up. The hype quickly turned to derision, and with a burn rate of $1.8 million a month, it was only a matter of time before Sonim ran out of cash with ‘no chance of any viable funding after that’. 

It’s a position many entrepreneurs will be familiar with, though Sonim’s journey from stardom to near-bankruptcy will be faster than most. Jamie Constable, CEO of turnaround investment firm RCapital (which now owns Little Chef) says there’s ‘a very steady flow of companies getting themselves into serious financial trouble’. Survival in this environment depends ‘not on how well run you are, but on how you’re structured financially’.

Limited options 

The Art Group, which supplies touch screen kiosks enabling visitors to art galleries to print off their favourite works, is a case in point. RCapital got involved with the business last year after its VC backer decided not to invest further.

There was an added irony as the backer had already replaced the old management team and agreed in principle to a fresh injection of funds.

‘The company’s only choice was to go to the bank for the money, and of course, if the VCs won’t do it, the bank won’t do it,’ says Constable. ‘The business had already put in place the operational changes it needed to return to profitability; it was just a case of [repairing] the balance sheet.’ RCapital bought the company for £2.5 million and made the changes needed to get it back on track. 

Deeper cuts

For investors like Constable, it’s essential to distinguish between good businesses that are simply running out of cash, such as The Art Group, and those with more fundamental issues. When Rob Woodward took over Scotland’s ITV franchise STV in 2007, he knew it was in serious financial difficulties: its market cap had shrunk from £2.1 billion in 2001 to less than £200 million that year, partly the result of an unsuccessful expansion strategy. Now he admits that he underestimated the scale of the problem.

‘We informed the City upfront of the reality of the situation, and it was far worse than anyone had expected,’ says the CEO. ‘All the good news had been drained from the company: the plans were far too optimistic. So the starting point was very different to what we had anticipated, though the endgame remained the same.’

When Woodward took over, STV’s board resigned en masse, leaving him free to pursue his threefold strategy of rectifying the ‘challenged’ balance sheet, reducing costs by 
refocusing on STV’s core business, and investing in new areas he believes have growth potential.

Though the company’s share price is still in the doldrums, Woodward has transformed losses of £23 million in 2007 to pre-tax profits of £14 million, reduced net debt from £47 million to £36 million, and returned £30 million to shareholders (after a rights issue raising £92 million in December 2007).

The most difficult aspect of the process, he says, was ‘delivering the message of huge cost reductions and at the same time investment in future growth opportunities’. Some 120 staff were made redundant, while a ‘new team’ was brought in to grow STV’s online presence. 

Strategic thinking

Woodward’s point is instructive. Few turnarounds can be achieved without an injection of cash, and cutting costs is another common theme. But simply paring a business down and pumping it with money could be flogging a dead horse unless there is a fresh approach to go with it.

For Plaschke, whose role at Sonim changed from CFO to CEO after the company went into crisis mode, the first priority was survival. By cutting the company’s head count from 180 to 15, its monthly burn rate was reduced from $1.8 million to $500,000. But Sonim still had no way of making money.

Plaschke began in-depth research into potential markets, leading him away from the idea of selling generic software to mobile operators towards producing a ‘ruggedised cell phone’ aimed at blue-collar workers. It’s a fascinating story with its own ups and downs: Plaschke secured another $10 million from his investors, but battled long and hard to find a distribution channel for the phones, eventually striking lucky in Sweden. But the essential point is that Plaschke had completely changed tack.

‘The board found a presentation I’d given to them before, and there was one slide that listed “12 reasons we’ll never become a cell phone company”,’ Plaschke relates. ‘Well I still believe in six of the 12, but I’ve disproved the other six. It was a choice between shutting the company down and firing all the employees, or selling more phones.’

The decision to sell more phones resulted in sales of $31 million last year (which Plaschke expects to increase to more than $40 million this year). With just three salespeople, Sonim distributes its phones in 42 countries and is now at break-even.

Out with the old

Sometimes turnarounds are more about a fresh approach than a complete change of direction. Richard Brighton, MD of electronics manufacturer Exception EMS, was hired to turn round a company that was ‘going through a degree of stagnation, always making around £17 million, always chasing sales to make up for the customers it had lost, always at a break-even level’.

When Brighton first walked into the company, he saw a sea of green printed circuit boards covering every available surface. Looking into how it was run, he found it ‘chaotic and disorganised’: the manufacturing process was ‘a collection of fiefdoms’ and there was ‘a lot of work in progress’ with no one taking responsibility for it. Underlying these problems was the autocratic management style of the previous MD, who had been ‘asked to leave’.

‘One of the first meetings I had with management, I asked people for their thoughts and it was like tumbleweed. It was so obvious they had never been asked that kind of question before,’ Brighton reveals.

The changes were radical, but they were operational rather than strategic. Brighton created five ‘mini-MDs’, each of whom was given responsibility for a number of customers. Work for each customer was to be managed in a separate, U-shaped area, so that progress was clearly visible. There were management changes too, and a reduction in head count, from 250 to 210, achieved mainly without redundancies.

The result was that turnover increased from £17.5 million in 2007 to £20 million 
in 2008, with an operating loss of £500,000 transformed to a profit of £1.1 million. Most notably, that was achieved by gaining only one major new customer and simply serving the others better so the company won more work and, in some cases, could justify raising prices which had not been adjusted in years.

In a similar vein, RCapital’s Constable states that Little Chef’s problems boiled down to the fact that outlet managers had no sense of accountability, and staff were demoralised. ‘It was about giving ownership back to the people running the restaurants; we improved the food but kept prices the same, and told managers that if they made excess 
profits they’d be rewarded.’

Deep breath

Viewed with hindsight, the solutions to a company’s problems may look obvious. But when you’re at your lowest ebb, those troubles can seem insurmountable. Plaschke, an ex-employee of consultancy firm McKinsey, says that if he had applied the principles he learned there to Sonim, there would have been no option but to liquidate the company as quickly as possible.

‘There are lots of folks who told me to shut [Sonim] down and get another job,’ he recalls. ‘And if you looked at the business in any rational way, I should have done just that. But entrepreneurs defy logic. At times like these, you’ve got to trust your gut conviction and follow it, even if it leads to failure.’

Business Recovery Terms 

DIY turnarounds

Cutting costs, accepting low profitability and focusing on retention of customers may work in the short term, but often you’ll need to look further ahead and consider more radical changes to your business, writes Malcolm Prowle, a professor at Nottingham Business School. 

Restructuring

Think big, like a revision of product specification, a change of location or a different distribution method. Or withdraw from your current line of business entirely and invest in an alternative more suited to the times.

Working partnerships

Economies of scale can be achieved as businesses pool resources such as buildings, equipment, specialist staff and back office functions. New products can be developed on the back of the companies’ combined expertise.

Mergers

A business may not constitute a viable independent entity in the long term. If other companies are in the same position, a merger may be the most feasible option, minimising competition and increasing market share. 

Contributed by Growth Business:   

GrowthBusiness is an invaluable resource for entrepreneurs and leaders of fast-growth enterprises. It offers a goldmine of practical information, insights and inspiration for established businesses which are achieving rapid expansion, helping them overcome obstacles to their growth and maximise their potential.

The website is brought to you by Vitesse Media plc, itself a fast-growing media company quoted on the AIM market of the London Stock Exchange.

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Jurisdiction to sanction a scheme is dependent on winding up jurisdiction

Section 899(1) of CA 2006 provides that if a majority in number representing 75 per cent in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the relevant meeting, agree a compromise or arrangement, ‘the court’ (as defined in s 1156) may sanction the compromise or arrangement.

Only the scheme of a company within the meaning of s 895 of CA 2006 may be sanctioned. Other than in the case of reconstruction or amalgamation, s 895(2)(b) provides that ‘company’ means any company liable to be wound up under the Insolvency Act 1986 (‘IA 1986’).

The court’s jurisdiction to wind up the company in question is essential. This is made clear in the definition of ‘the court’ in s 1156. In England, ‘the court’ means the High Court or a county court, subject to the proviso in s 1156(2) in these terms: ‘The provisions of the Companies Acts conferring jurisdiction on “the court” … have effect subject to any enactment or rule of law relating to the allocation of jurisdiction or distribution of business between courts in any part of the United Kingdom.’ The significance of the proviso in s 1156(2) in this context becomes apparent when one takes account of ss 117 and 120 of IA 1986. Sections 117 and 120 provide that only English courts may wind up English registered companies and only Scottish courts may wind up Scottish registered companies. In relation to foreign companies, the English court’s winding up jurisdiction is to be found in s 221(1) of IA 1986.

The court’s jurisdiction to sanction a scheme hinges on its jurisdiction to wind up the scheme company in question. Thus an English court may not sanction a scheme of arrangement proposed by a Scottish registered company.

The impact of EU/EEA legislations on the English court’s winding up jurisdiction

The English court’s winding up jurisdiction under IA 1986 has to be considered in conjunction with panoply of EU/EEA measures, in particular the following:

·          Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (‘Judgments Regulation’).

·          Council Regulation (EC) 1346/2000 on insolvency proceedings (‘EU Insolvency Regulation’).

·          Directive 2001/17/EC on the reorganisation and winding up of insurance undertakings (‘Insurers Directive’).

·          Directive 2001/24/EC on the reorganisation and winding up of credit institutions (‘Credit Institutions Directive’).

The Judgments Regulation is relevant only if one is concerned with a solvent winding up. The unanimous voice of authorities is that solvent liquidation is within art 22(2) of the Judgments Regulation which provides that, ‘in proceedings which have as their object … the dissolution of companies …, the courts of the Member State in which the company … has its seat’ shall have exclusive jurisdiction.

Article 22(2) of the Judgments Regulation thus conditions the English court’s jurisdiction over a solvent winding up and by extension the English court’s jurisdiction over a solvent scheme of arrangement. For a detailed review of the impact of art 22(2) of the Judgments Regulation on solvent schemes promoted by EEA insurers, see L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145. This same analysis applies to companies subject to the Brussels and Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.

The English court’s winding up jurisdiction to wind up an insolvent company and hence to sanction a scheme promoted by an insolvent company is as follows.

Companies subject to the EU Insolvency Regulation

To fall within the scope of the EU Insolvency Regulation, the company in question must have its centre of main interests (‘COMI’) within the EU (apart from Denmark) and must be not be a credit institution, an insurance undertaking, an investment undertaking holding funds or securities for third parties, or a collective investment undertaking. Where the EU Insolvency Regulation applies, the English court has jurisdiction under IA 1986 to wind up a company only if the company has its COMI or establishment (as defined in the EU Insolvency Regulation) in the UK.

Accordingly, the English court has jurisdiction to sanction only a scheme promoted by a company having either its COMI or an establishment in the UK.

Admittedly, the above proposition does not sit well with the decision in Re DAP Holding [2005] EWHC 2092 (Ch); [2006] BCC 48. However, the reasoning in DAP is most suspect: it appears inconsistent with a prior decision in Re Drax Holdings [2003] EWHC 2743 (Ch); [2004] 1 WLR 1049 and has been apparently repudiated by a subsequent decision in Re Sovereign Marine & General Insurance [2006] EWHC 1335 (Ch); [2007] 1 BCLC 228. For a detailed explanation, see L C Ho, ‘Schemes for foreign insurers – how the court got it so wrong: Re DAP Holding NV’ (2005) 21 IL&P 171, and L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145.

Companies subject to the Insurers Directive

The Insurers Directive was implemented in the UK via the Insurers (Reorganisation and Winding Up) Regulations 2004 (‘Insurers Regulations’).

Article 8(1) of the Insurers Directive provides that ‘[o]nly the competent authorities of the home Member State [are] entitled to take a decision concerning the opening of winding-up proceedings with regard to an insurance undertaking, including its branches in other Member States’. Accordingly, reg 4(1)(a) of the Insurers Regulations provides that ‘a court in the United Kingdom may not, in relation to an EEA insurer or any branch of an EEA insurer, make a winding up order pursuant to s 221 of [IA] 1986’.

However, reg 5 of the Insurers Regulations provides that ‘[f]or the purposes of s 425(6)(a) of the Companies Act 1985 …, an EEA insurer or a branch of an EEA insurer is to be treated as a company liable to be wound up under [IA] 1986 … if it would be liable to be wound up under that Act … but for the prohibition in reg 4(1)(a)’. Although reg 5 has not been updated to reflect CA 2006, its intention is to ensure that the Directive would not prevent EEA insurers from promoting an English scheme of arrangement. While reg 5 does not prescribe the jurisdictional basis for winding up an insolvent EEA insurer, the court’s winding up jurisdiction is to be found in s 221 of IA 1986.

Therefore, the English court should have jurisdiction to sanction a scheme promoted by an insolvent EEA insurer, provided reg 5 of the Insurers Regulations is not ultra vires the Insurers Directive. The court in Re Sovereign Marine & General Insurance wrongly refused to rule on this vires issue: see L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145.

Companies subject to the Credit Institutions Directive

The Credit Institutions Directive was implemented in the UK via the Credit Institutions (Reorganisation and Winding up) Regulations 2004 (‘Credit Institutions Regulations’). What is said above about the Insurers Directive and the Insurers Regulations applies mutatis mutandis here. Therefore, the English court has jurisdiction to sanction a scheme promoted by an insolvent EEA credit institution, subject to possible ultra vires challenges.

The court’s jurisdiction to sanction a scheme against a dissenting class of stakeholders

Section 899(3)(a) of CA 2006 provides that ‘[a] compromise or agreement [sic] sanctioned by the court is binding on all creditors or the class of creditors or on the members or class of members (as the case may be)’. Some argue that the effect of s 899 is that the court may never sanction a scheme compromising the rights of a dissenting class of stakeholders.

However, case-law suggests that the court may indeed sanction a compromise even if a class of creditors or shareholders vote against the compromise, provided the dissenting class of stakeholders have no economic interest in the company.

One begins with the decision in Re Tea Corporation [1904] 1 Ch 12. There a scheme was proposed in a liquidation whereby the ordinary shareholders were to be given shares in a new company in place of their existing shares. The shareholders as a class voted against the scheme; the other stakeholders voted for it. As the financial state of the company was that the ordinary shareholders had no economic interest in the company’s assets, the court held that the shareholders’ dissent could be disregarded when sanctioning the scheme. The decision seems to contain two strands of reasoning.

Lord Justice Romer and Lord Justice Stirling appeared to rest their reasoning on treating the scheme as only an arrangement as between the company, the creditors and the preference shareholders such that the new shares offered to the ordinary shareholders were in the nature of a gift of which the ordinary shareholders could not complain. However, when dealing with the argument that the scheme was rendered defective by the ordinary shareholders’ dissent, Lord Justice Vaughan Williams held that ‘if you have the assent to the scheme of all those classes who have an interest in the matter, you ought not to consider the votes of those classes who have really no interest at all’ ([1904] 1 Ch 12, 23).

Some have argued that Tea Corporation does not stand for the proposition that a scheme may modify the rights of a dissenting class of creditors or members even if they have no economic interest in the company’s assets. This argument is most probably wrong in light of recent case-law. Instead of viewing the shareholders in Tea Corporation as having been given a gift, the first instance judge in Re Mytravel Group [2004] EWHC 2741 (Ch); [2005] 1 WLR 2365 at [46] held that the shareholders ‘were affected by the scheme’.

In Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26; [2007] 1 AC 508, a group of insolvent Isle of Man companies went into voluntary Chapter 11 proceedings in the USA. The Chapter 11 plan of reorganisation provided for the group’s assets to be transferred to the creditors. As these assets were ultimately owned by a Manx parent company, the Chapter 11 plan purported to vest the shares in the Manx parent in the creditors’ representatives. The Privy Council agreed to assist the US Bankruptcy Court by giving effect to the Chapter 11 plan, reasoning that because the shareholder had no economic interest in the company’s assets, the court could sanction a scheme of arrangement which leaves them with nothing. Despite the shareholders’ dissent, the scheme wouldbe by virtue of legislation ‘binding upon the shareholders when it receives the sanction of the court’ (at [26]).

Author: Look Chan Ho, MA, BCL (Oxon), LLM (Cantab), LLM (NYU), Attorney-at-Law and Solicitor, is a member of the Restructuring and Insolvency Group at Freshfields Bruckhaus Deringer LLP, based in London. He is also a co-editor of Corporate Rescue and Insolvency. Email: lookchan.ho@freshfields.com 

Contributed by: LexisNexis – Originally published in Corporate Rescue and Insolvency www.insolvencylawforum.co.uk