respond that their efforts benefit the broad array of corporate stakeholders and that many small creditors, who do not contribute to the costs of the rescue, are to some extent free-riding on the efforts of the banks. This response might, however, overlook the ability of the banks, in certain instances, to compensate themselves for their efforts by improving their security or equity position in a rescue agreement. There is evidence that during periods of rescue, bank credit tends to contract but unsecured trade credit tends to expand, sometimes dramatically.101

In summary, then, the London Approach exemplifies a number of the virtues and vices of informal rescue activity. It tends to be practised in relation to large debtor companies only and gives grounds for concern on a number of fronts. If, however, it is placed alongside the available formal alternative procedures, its virtues appear more prominent.

Implementing the rescue

Once agreement is reached on a strategy for rescue, a number of measures will often be taken in an effort to achieve corporate turnaround.102 These steps may be put in train by pursuing formal insolvency procedures (as discussed in chapters 8–10 below) or informally, by agreement. The first of these steps may, indeed, have already commenced before any final agreement between creditors is arrived at.

Managerial and organisational reforms

A successful rescue will almost always involve the retention or institution of an appropriate workforce and managerial team. Once the future activities of the company are settled upon, it will be necessary to see that persons with the appropriate skills are employed and that those who will no longer contribute appropriately will part ways with the company. Replacements, recruitments, promotions and staff reductions may all

101See Franks and Sussman, ‘Cycle of Corporate Distress’, p. 2: trade credit expansions of up to 80 per cent are noted in cases that end in a formal insolvency procedure.

102On turnaround techniques and their use, see Society of Practitioners of Insolvency, Eighth Survey, Company Insolvency in the United Kingdom (SPI, London, 1999) pp. 12–

14.The survey revealed that turnaround efforts failed (and formal insolvency ensued) in

37per cent of cases in the manufacturing, wholesale, distribution and construction sectors. R3’s Ninth Survey in 2001 revealed that respondent insolvency professionals considered that in 77 per cent of cases there were, by the time they were appointed, no possible actions that might realistically have averted company failure. Nearly one in five businesses did, however, survive insolvency and continued in one form or another.

have to be brought about and attempts made to reduce the attendant disruptions and confusions. Changes at the top of management will often be required in order to move a company in a significant new direction out of crisis and to signal to outsiders and markets that positive remedial steps are being taken. R3’s Ninth Survey of Business Recovery (2001) found that insolvency professionals considered that for companies with over £5 million turnover a change of management could have averted company failure in 10 per cent of cases. When the SPI asked its members, in 1998, what actions companies might have taken to avoid falling into ‘intensive care’ scenarios, a change of management (in 28 per cent of cases) came second only to earlier actions to stem losses.103 In more than half of SPI-studied cases inadequate management was noted as an obstacle or hindrance to obtaining a non-insolvency solution to corporate difficulties (but such difficulties were rarely so serious as to prevent turnaround).104 As for methods of company rescue, the R3 Ninth Survey revealed that turnaround practitioners used change of management as a primary tool of rehabilitation in 20 per cent of cases.

On the organisational front, a variety of steps can be taken. The corporate governance structure of the company can be reformed so as to improve checks and balances, but the organisation of operations can also be revised in ways that may improve performance: for example, by decentralising and devolving power so as to create lower-cost modes of supervision, greater senses of responsibility, increases in morale and tighter management. Such decentralisations of operations may also lead to greater flexibility by creating identifiable free-standing parts of a business and, accordingly, greater opportunities to sell off these units as elements in asset reduction strategies.105

Asset reductions

A strategy designed to secure profitability is the reduction of corporate activities to a healthy core by cutting away unprofitable products, branches, customers or divisions and disposing of assets that are poorly utilised or are not needed for core profitable business operations.106 Such

103SPI Eighth Survey, p. 13. R3’s Twelfth Survey (2004) suggested that poor management was responsible in 32 per cent of failure factors cited: see ch. 4 above.

104SPI Eighth Survey.

105See Campbell and Underdown, Corporate Insolvency, p. 67.

106Ibid., p. 66. On the use of sell-offs and management buyouts see Belcher, Corporate Rescue, pp. 26–31.

reductions may include sales of subsidiaries, equipment or surplus fixed assets, closure of branches or streamlining of stocking arrangements. Asset reductions may, however, involve considerable costs. Beyond the fees payable to lawyers, accountants and other professionals there may be redundancy expenses, prices attached to contract cancellations and other divestment costs.

Cost reductions

An essential element in most rescue packages is a programme of cost reductions.107 This will involve investigations into current costs and potential savings and will cover not merely raw materials and equipment but also workforce expenditure.

Debt restructuring

Troubled companies are often too highly geared or in possession of a pattern of borrowing that is inefficient. A number of steps can be taken to reorganise corporate debts but successful reorganisation depends on the ability of those managing the company to convince financiers and other interested parties that the appropriate rescue plan has been put into effect, that the prospects of recovery are sound, and that the proposed debt reorganisations offer a better prospect of returns to creditors than would be delivered by resort to formal insolvency procedures.

If the company’s main problems relate to cash flows, short-term difficulties or underinvestment, steps can be taken to inject new funds into the company. Creditors in such circumstances will usually demand additional levels of security and may act to improve the overall security of their positions: for example, by using floating charges over the

107The SPI Eighth Survey indicated that the most common primary turnaround techniques were cost reductions, debt restructurings, raising new equity and negotiating with banks. These steps were followed in (descending) frequency of use by improved financial controls, asset reductions, changes of management, product/market changes, organisational changes and improved marketing (SPI Eighth Survey, p. 13); the R3 Ninth Survey of 2001 indicated that the primary method of rehabilitation used most frequently by turnaround managers was debt restructuring, resorted to in 39 per cent of cases involving such practitioners. Cost reduction, however, was only used as a primary method in just over 11 per cent of cases. The R3 Twelfth Survey of 2004 did not return to this issue.

corporate assets.108 Co-operation from banks is most likely to be found where large reputable companies encounter such difficulties. Banks fear bad publicity and any association with conspicuous failure or large-scale unemployment. They will, accordingly, tend to be most helpful to large, high-profile and respectable firms with considerable numbers of employees.109

Consolidation of funding is a step that can also be taken when banks are helpful. Substantial benefits can be obtained by reorganising a proliferation of funding agreements and bringing these together in a simple financial arrangement. This process may allow a firm to negotiate a reduction in the overall cost of borrowing or a conversion of shortto longer-term credit facilities. Other arrangements, such as sales and leasebacks of property and equipment, may additionally be employed.

Debts can also be rescheduled in order to ease immediate problems. This may be a useful course of action where the company’s credit is supplied by a small number of banks and the company’s financial problems are short term in nature.110 Rescheduling does not, however, remove balance sheet deficits or improve gearing ratios. It involves a contract between the debtor company with all or some creditors, and this may alter obligations by deferring payments, harmonising obligations between different creditors or granting security (or additional security) to creditors.

Rescheduling may appeal to banks because, as noted already, such informality avoids the adverse publicity involved in precipitating the liquidation of a company. It may also allow securities to be adjusted and, where a number of banks are involved, rescheduling may prove far less complex and expensive than receivership. Similarly, where creditors in a variety of jurisdictions are involved with a company, it may be quicker and cheaper to respond to difficulties by negotiating new contracts than by resorting to formal proceedings. Problems with rescheduling will tend to arise when many banks are involved but some of them feel uncommitted to the company involved, lack a close relationship to it and feel no loyalty to the enterprise.111 In these circumstances, the

108When new security is given to a creditor in a rescue operation it may be questioned whether this constitutes a preference under the Insolvency Act 1986 s. 239; see also Insolvency Act 1986 s. 245. See ch. 13 below.

109See Lickorish, ‘Debt Rescheduling’, pp. 38, 39.

110See generally ibid. 111 Ibid., p. 40.