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Timing is key when rescuing companies in financial distress

By Beatrice Nyabira and Judy Muigai

To many people, being an undertaker is considered an undesirable profession owing to its close proximity to death, something that is universally feared. Sadly, Insolvency Practitioners (IPs) are viewed with similar trepidation as their arrival typically heralds the demise of a company.  

The Insolvency Act 2015 expanded the roles that IPs can perform by allowing them to serve as administrators and supervisors for rescue-oriented procedures like company voluntary arrangements.  The idea was to empower IPs to save dying companies rather than just to perform the funeral rites.

However, in practice, by the time an IP is engaged, the ill health of the corporation has deteriorated beyond the point of salvageability so the end result is equally bleak.  One may ask why IPs are brought in so late in the day.  A key reason is that their role as turnaround advisors is not fully appreciated.  An IP has a wealth of experience on financial strategy and cash optimization which a struggling company can draw on when considering its options for survival.  There is no need to wait until an insolvency process is imminent as an IP can be consulted well in advance.  The IP should be able to identify measures to secure funds for working capital and debt reduction such as the sale of non-core assets, mobilization of receivables, and injections from existing or new investors.  An effective IP’s skills and independence enable them to explore a wider range of rescue options including the drastic step of selling the entire business or its crown jewels. The trick is to consult the IP before the recovery options dwindle and disappear entirely.

A second reason why IPs are consulted too late is that the involvement of an IP may expose the failures of the company’s leadership in precipitating the crisis or failing to arrest it.  Questions could be asked about the decisions and actions that led to becoming over-leveraged.  If an IP is engaged to provide consultancy services before an insolvency procedure like administration commences, then their focus is on remedial action rather than allocating blame. In fact, the action of consulting an IP is a demonstration that the company’s leadership is proactively looking for solutions.

Consulting an IP before formal insolvency commences enables the company to develop and implement a rescue plan while it still has control of the situation.  If creditors are satisfied that the company is executing a credible revival plan with the support of an IP, they may hold off on placing the debtor in administration or liquidation.  

As the role of IPs evolves from undertaker to rescuer, we see that even the designation of IPs has been updated in some countries to reflect their new paradigm.  In South Africa for instance, they have Business Rescue Practitioners whose mission is to ensure that businesses are preserved as going concerns.  

It would be good to have some corporate insolvency war stories with a positive ending because an IP was brought in to advise when the company’s condition was still curable.  This would grant the IP an opportunity to administer the kiss of life rather than the kiss of death.

The article was published in the Business Daily on 11 July 2023 and can be accessed here.