In both cases the real challenge was to solve
organizational and management problems, despite their
initial belief that their problems were simply financial.
continued from page 5
difficulties by short-paying its tax
liabilities over a long period of time,
to the point that it eventually owed
substantial tax arrears. Secondly,
the company’s two (50/50) owners/
directors fell out after the business had
grown very rapidly. The two had very
different objectives for the business.
For the turnaround practitioner
brought in to deal with the situation,
the issue at first appeared to be solely
financial. HMRC had served notice
of its intention to issue a winding-up
petition following a demand that the
company couldn’t meet. It quickly
became apparent, however, that a more
substantial issue existed. The deadlock
situation between the two owners/
directors who no longer agreed on
decisions following a breakdown of their
relationship threatened the viability of
the business. Indeed, one was holding
the other to ransom, albeit quite subtly,
in a passive-aggressive manner.
It was also clear that this business
depended upon introductions to large
clients by its global sponsors, who
would withdraw patronage if they
became aware of the financial situation
and the prospect of any reputational
damage. This also was why an
insolvent restructuring was not feasible,
despite the obvious conclusion that
it would solve the ownership issue.
Getting ongoing support from their
lenders, the financial institutions,
for dealing with their liquidity crisis
was not the problem, since there
was plenty of security available. The
real issue for secured lenders was
the inability of the directors to reach
agreement. Fortunately, the directors
did agree to the appointment of a
turnaround practitioner to represent
them as a caretaker manager while
their dispute was resolved.
A review of the business also revealed
that the relationship problem had taken
the owners’ attention away from the
business, where the focus had been
on growth without considering how to
run the increasing number of projects.
There was no focus on managing for
profit, and cash flow was concealing the
fact that profits had fallen significantly.
Employees were not properly organized
to manage projects efficiently. Worse was
a reliance on subcontract managers who
had been brought in to manage projects
under terms such that it was in their
interests to extend the life of projects.
The restructuring involved secured
lenders withdrawing support. That
imposed greater pressure on the
company to agree to deals with HMRC
and one other large creditor, who both
supported an extended time to pay.
One director/shareholder agreed to
buy out the other on deferred terms
that allowed the other to resign from
the board. This allowed strategic
decisions to be made and plans for
fundraising and growth to be developed.
Dealing with the organizational
issue involved a fundamental shift of
culture and focus away from growth
at all costs to one based on resource
availability and capability. Managers
were recruited, and an internal
training program was initiated.
The outcome was successful with
all elements of the restructuring
completed in 12 months as planned.
The organization was left with an
ongoing recruitment and training
program and a culture of continuous
Company B is a construction company
that had grown rapidly without adequate
systems in place to monitor the cash flow
and profitability of its building projects.
This is common in an industry that relies
on applications for payment by clients
and an ability to withhold payments
to suppliers, subcontractors, and tax
authorities. This is often compounded
by inadequate financial systems that
do not highlight growing liabilities and
project losses. Liabilities grow and losses
accrue to the point that they cannot be
ignored, normally when creditor patience
breaks. Unfortunately, such pressure
is often concealed when construction
companies grow, as there is a tendency
to pay suppliers on old contracts
with funds drawn from new projects.
Eventually, however, the party ends.
Similar to Company A, the core issue
facing this company was that it had lost
control of its ability to manage projects.
In this particular case, the company
owed a lot of money to a lot of firms,
many of which were key suppliers and
therefore crucial to Company B staying in
business. The company would not have
survived as a business if it were to impose
a write-off of debts due to key suppliers
via a formal insolvency procedure.
Local construction companies operate
in a close community, where everyone
knows everyone else’s business.
Restructuring this company required
the ongoing support of suppliers and
subcontractors, while at the same time
reaching agreement for compromise
of some debts and time to pay the
balance with approximately 70 of
them as creditors. This would gain
the time needed to solve Company
B’s organizational problems. The key
principle adopted was to agree to terms
for future supplies and stick to them
as a prerequisite before agreeing to
terms over the historical liabilities.