de955 turnaround management 1

Amity Business School

1

Amity Business SchoolMBA Class of 2010, Semester IV

Strategic Financial Management

Prof Akhil Swami/Anuj Srivastava


TURNAROUND MANAGEMENT---1

The present business scenario is one wherein constant change is the name of the game.For any firm to survive in any industry, there has to be constant monitoring and

improvement of its systems and operations. When a firm faces severe cash crisis or aconsistent downtrend in its operating profits or net worth, it is on its way to becoming

insolvent. The slide cannot be prevented unless appropriate actions, both internal andexternal, are initiated to change the future prospects. This process of bringing about a

revival in the firm’s fortunes is what is termed as “Turnaround Management”.There are 3 phases in


• The slide cannot be prevented unless appropriate actions, both internal and

• external, are initiated to change the future prospects. This process of bringing about a

• revival in the firm’s fortunes is what is termed as “Turnaround Management”.


• There are 3 phases in any Turnaround Management.

• 1 The diagnosis of the impending trouble or the danger signals

• 2. Choosing appropriate Turnaround Strategy

• 3 Implementation of the change process and its monitoring.

• Let us understand each phase individually


• Phase I: Watching out for the danger signal• Do companies turn sick overnight and qualify as

potential candidates for turnaround, or• do they become sick slowly, which can be

stopped by timely corrective action?• Obviously only the latter is possible. But in

reality, most companies do not recognize this• fact.. The following are some of the universally

accepted danger signals, which a• company should watch out for:


• Decreasing market share / Decreasing constant rupee sales

• · Decreasing profitability• · Increased dependence on debt /

Restricted dividend polices• · Failure to plough back the profits into

business / Wrong diversification at the• expense of the core business.• · Lack of planning


• Inflexible CEO / Management succession problems / Unquestioning Board of

• Directors• · A management team unwilling to learn from competitors.• Phase II: Choosing appropriate Strategy• Hoffer, an expert management guru, classifies Turnaround Management

into two broad• categories. They are• 1. Strategic Turnaround• As the name itself suggests, strategic turnaround choices may force the

company to• completely change its current way of operations. The choices under this

method are• A• new way to compete in the existing business• Entering• into an altogether new business


• Under the first choice, the focus is either on increasing the market share in a given

• productmarket• frame work or in repositioning the productmarket• relationship. The• increase in market share can be achieved by improving

product quality perception• through dealer push or by a consumer pull.• Alternatively, entering a new business as a turnaround

strategy can be approached• through the process of product portfolio management.


• 2. Operating Turnarounds• Basically they are of 4 types and the strategy adopted

depends on the various situations in• which the firm is. All these strategies focus on shortterm• effects only.• 1 Asset reduction strategies• 2 Revenue increasing strategies• 3. Cost cutting strategies• 4 Combination strategies• ·


• · If a firm is operating much below the Breakeven• level, it must take steps to• reduce its assets. This will reduce the level of fixed costs

and help in reducing the• total costs of the firm.• · If the firm is operating substantially but not extremely

below its breakeven• level,• then the appropriate turnaround strategy is to generate

extra revenues.• ·


• Operating closer but below breakeven• levels calls for application of combination• strategies. Under this method all the three namelycost• reducing, revenue• generating and asset reduction actions are pursued simultaneously

in an integrated• and balanced manner. Combination strategies have a direct

favourable impact on• cash flows as well as on profits.• · If the firm is operating around or above the breakeven• level, cost reduction• strategies are preferable as they are easy to carry out and the firms’

profits rise once• the unnecessary costs are cut down.


• Phase III: Implementation of the change process• Implementation plays an important role in any

turnaround management. Identification of• an appropriate strategy by itself will not guarantee

success. Similarly partial adoption of a• strategy is also not useful. The selected strategy needs

to be pursued relentlessly and with• allout• effort to make it work. The success or otherwise of a

Turnaround strategy depends• on the commitment shown by the top management as

also the operating management.


• Success Stories• The case of Hindustan Machine Tools• HMT was formed to manufacture machine tools with a

foreign collaborator. After nearly• a decade of operation, it decided to diversify into Watch

industry. The effect of this• diversification was felt only after 57• years when the main business of HMT crashed and• the company started incurring losses. The watch division

came to the rescue and it• generated cash profits to keep the company going.


• The case of Bharat Heavy Electricals Limited• The company was started with the objective of producing

power generating equipments• and virtually enjoyed monopoly. But as the years went by

because of the inability of the• State Electricity Boards and private sector to set up new

power plants, its capacity• utilization fell down tremendously. To offset this

depression, BHEL ventured into• Telecommunications, Metropolitan Transportation and

Defense production. Due to this• timely diversification, BHEL is now one of the rare profit

making PSUs


• Strategic restructuring: The focus lies on core markets and promising business segments. Corporate divisions destroying value are divested.

• Operational restructuring: It focuses on leaner organization and leaner processes, on the simplification of manufacturing networks and corporate structures, as well as on maximizing efficiency and effectiveness.


• Financial restructuring: A combination of cost reduction, more flexible structures, and the development of a sustainable financial concept. Paralyzed management and poor financial systems are central to a sinking company. The first step to recovery for the professional turnaround manager is to quickly select a turnaround team. Good team members have a sense of urgency and haven't isolated themselves at corporate headquarters. They know what needs to be done and who can help.


• The director's role in a troubled company is very different from that of a director of a healthy business. meeting with lenders, suppliers, customers, employees, and shareholders. A director can lend significant objectivity during the development of a turnaround game plan through his or her independence, broad business skills, experience. The director must evaluate top management and intiate a change if required.


•

• Sickness in SSI sector is attributed to a number of factors like inefficiency in management, over ambitious projects, dispute among partners and non-availability of credit which is one of the major factors responsible for rendering SSI units sick. Government of India has taken various measures from time to time to detect sickness at the incipient stage and rehabilitation of sick units in the small scale sector. Nayak Committee set up by the Reserve Bank of India in 1991 dealing with aspects of adequacy and timeliness of credit to SSIs had gone into the issue of sickness in detail. on.


• Reserve Bank of India has taken action on its recommendations which relate to modified definition of sick SSI units, reduced rate of interest for rehabilitation, prompt viability studies/nursing programmes of identified sick units, setting up of cells at important regional centres and Head Office to deal with sick industrial units and provision of expert staff, including technical personnel to look into technical aspects. RBI is also advising its officers from time to time to activate State Level Inter-Institutional Committee. The other main decisions such as: to set up Sub-Committee of SLIIC in all the States/ UTs, to invite SSI Entrepreneurs, Bankers and other concerned Government Departments to discuss and arrive at the rehabilitation package. meeting of Sub-Committee to be held every two months and that of SLIIC every quarter, to set up district level committee of SLIIC in districts having SSI concentration, have been conveyed to all State Governments for implementation.


• The Reserve Bank of India, in November 2000, had constituted the Working Group on Rehabilitation of Sick SSI units, under the Chairmanship of Shri S.S. Kohli, Chairman, Indian Banks’ Association, to review the existing guidelines in regard to rehabilitation of sick Small Scale units and to recommend the revision of the guidelines for rehabilitation of current sick and potentially viable SSI units, making them transparent and non-discretionary. Reserve Bank of India has accepted all the major recommendations of the Group.


• 1. It is of utmost importance to take measures to ensure that sickness is arrested at the incipient stage itself. The branch/bank officials should keep a close watch on the operations in the account and take adequate measures to achieve this objective. The managements of the units financed should be advised about their primary responsibility to inform the banks if they face problems which could lead to sickness and to restore the units to normal health. The organizational arrangements at branch level should also be fully geared for early detection of sickness and prompt remedial action. Banks/Financial Institutions will have to identify the units showing symptoms of sickness by effective monitoring and provide additional finance, if warranted, so as to bring back the units to a healthy track. An illustrative list of warning signals of incipient sickness that are thrown up during the scrutiny of borrowal accounts and other related records e.g. periodical financial data, stock statements, reports on inspection of factory premises and godowns, etc. is given in Appendix-I which will serve as a useful guide to the operating personnel. Further, the system of asset classification introduced in banks will be useful for detecting advances, which are deteriorating in quality, well in time. When an advance slips into the sub-standard category, as per norms, the branch/bank should make full enquiry into the financial health of the unit, its operations, etc. and take remedial action. The bank/branch officials who are familiar with the day-to-day operations in the borrowal accounts should be under obligation to identify the early warning signals and initiate corrective steps promptly. Such steps may include providing timely financial assistance depending on established need, if it is within the powers of the branch manager, and an early reference to the controlling office where the relief required are beyond his delegated powers. The branch/bank manager may also help the unit, in sorting out difficulties which are non-financial in nature and require assistance from outside agencies like Government departments / undertakings, Electricity Boards, etc. He should also keep the term lending institutions informed about the position of the units wherever they are also involved.


• An illustrative list of warning signals of incipient sickness that are thrown up during the scrutiny of borrowal accounts and other related records e.g. periodical financial data, stock statements, reports on inspection of factory premises and godowns, etc. is given in Appendix-I which will serve as a useful guide to the operating personnel. Further, the system of asset classification introduced in banks will be useful for detecting advances, which are deteriorating in quality, well in time. When an advance slips into the sub-standard category, as per norms, the branch/bank should make full enquiry into the financial health of the unit, its operations, etc. and take remedial action. The bank/branch officials who are familiar with the day-to-day operations in the borrowal accounts should be under obligation to identify the early warning signals and initiate corrective steps promptly. Such steps may include providing timely financial assistance depending on established need, if it is within the powers of the branch manager, and an early reference to the controlling office where the relief required are beyond his delegated powers. The branch/bank manager may also help the unit, in sorting out difficulties which are non-financial in nature and require assistance from outside agencies like Government departments / undertakings, Electricity Boards, etc. He should also keep the term lending institutions informed about the position of the units wherever they are also involved.


• A unit may be regarded as potentially viable if it would be in a position, after implementing a relief package spread over a period not exceeding five years from the commencement of the package from banks, financial institutions, Government ( Central / State ) and other concerned agencies, as may be necessary, to continue to service its repayment obligations as agreed upon


• including those forming part of the package, without the help of the concessions after the aforesaid period. The repayment period for restructured (past) debts should not exceed seven years from the date of implementation of the package. In the case of tiny/decentralised sector units, the period of reliefs/concessions and repayment period of restructured debts which were hitherto, two years and three years respectively have been revised, so as not to exceed five and seven years respectively, as in the case of other SSI units. Based on the norms specified above, it will be for the banks/financial institutions to decide whether a sick SSI unit is potentially viable or not. Viability of a unit identified as sick, should be decided quickly and made known to the unit and others concerned at the earliest. The rehabilitation package should be fully implemented within six months from the date the unit is declared as 'potentially viable' / 'viable'. While identifying and implementing the rehabilitation package, banks/FIs are advised to do ‘holding operation' for a period of six months. This will allow small-scale units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such ‘holding operation'.


• It is emphasised that only those units which are considered to be potentially viable should be taken up for rehabilitation. The reliefs and concessions specified are not to be given in a routine manner and have to be decided by


• concerned bank/financial institution based on the commercial judgment and merits of each case. Banks have also the freedom to extend reliefs and concessions beyond the parameters in deserving cases. Only in exceptional cases, concessions/ reliefs beyond the parameters should be considered. In fact, the viability study itself should contain a sensitivity analysis in respect of the risks involved that in turn will enable firming up of the corrective action matrix.


• 5. Units becoming sick on account of wilful mismanagement, wilful default, unauthorized diversion of funds, disputes among partners / promoters, etc. should not be considered for rehabilitation and steps should be taken for recovery of bank’s dues. The definition of wilful default, will broadly cover the following:


• a) Deliberate non-payment of the dues despite adequate cash flow and good networth.

• b) Siphoning off of funds to the detriment of the defaulting unit.

• c) Assets financed have either not been purchased or have been sold and proceeds have been misutilised.

• d) Misrepresentation/falsification of records. • e) Disposal/removal of securities without bank's

knowledge. • f) Fraudulent transactions by the borrower. •


Appendix-1• Illustrative list of warning signals of

incipientsickness that are thrown up during the Scrutinyof Borrowal Accounts and other Related Records(e.g. Periodical Financial Data, Statements, Reporton Inspection of Factory Premises and Godowns, etc.)


• a) Continuous irregularities in cash credit/overdraft accounts such as inability to maintain stipulated margin on continuous basis or drawings frequently exceeding sanctioned limits, periodical interest debited remaining unrealised;

• b) Outstanding balance in cash credit account remaining continuously at the maximum;


• d) Complaints from suppliers of raw materials, water, power, etc. about non- payment of bills; e) Non-submission or undue delay in submission or submission of incorrect stock statements and other control statements; f) Attempts to divert sale proceeds through accounts with other banks;

• g) Downward trend in credit summations; h) Frequent return of cheques or bills;

• • i) Steep decline in production figures; • j) Downward trends in sales and fall in profits;


• k) Rising level of inventories, which may include large proportion of slow or non-moving items; l) Larger and longer outstandings in bill accounts;

• m) Longer period of credit allowed on sale documents negotiated through the bank and frequent return by the customers of the same as also allowing large discount on sales;

• n) Failure to pay statutory liabilities;


• t) Diverting/routing of receivables through non-lending banks.


Relief and concessions which can be extended by

banks/financial institutions to potentially viablesick SSI units under rehabilitation

• The viability and the rehabilitation of a sick SSI unit would depend primarily on the unit’s ability to continue to service its repayment obligations including the past restructured debts. It is, therefore, essential to ensure that ordinarily there is no write-off or scaling down of debt such as by reduction in rate of interest with retrospective effect except to the extent indicated in the guidelines. The guidelines on various parameters on reliefs and concessions are given below.


• If penal rates of interest or damages have been charged, such charges should be waived from the accounting year of the unit in which it started incurring cash losses continuously. After this is done, the unpaid interest on term loans and cash credit during this period should be segregated from the total liability and funded. No interest may be charged on funded interest and repayment of such funded interest should be made within a period not exceeding three years from the date of commencement of implementation of the rehabilitation programme. Unadjusted interest dues such as interest charged between the date up to which rehabilitation package was prepared and the date from which actually implemented, may also be funded on the same terms as at (i) above.

•


• The rate of interest on term loans may be reduced, where considered necessary, by not more than three per cent in the case of tiny/decentralised sector units and by not more than two per cent for other SSI units, below the document rate.


• After the unadjusted interest portion of the cash credit account is segregated as indicated at (i) and (ii) above, the balance representing principal dues may be treated as irregular to the extent it exceeds drawing power. This amount may be funded as Working Capital Term Loan (WCTL) with a repayment schedule not exceeding 5 years. The rate of interest applicable may be 1.5 % to 3% points below the prevailing fixed rate / minimum lending rate of the bank, wherever applicable, to all sick SSI units including tiny and decentralized units.


• Cash losses are likely to be incurred in the initial stages of the rehabilitation programme till the unit reaches the break-even level. Such cash losses excluding interest as may be incurred during the nursing programme may also be financed by the bank or the financial institution, if only one of them is the financier. But if both are involved in the rehabilitation package, the financial institution concerned should finance such cash losses. Interest may be charged on the funded amount at the rates prescribed by SIDBI under its scheme for rehabilitation assistance. Future cash losses in this context will refer to losses from the time of implementation of the package up to the point of cash break-even as projected. Future cash losses as above, should be worked out before interest

•


• Interest on working capital may be charged at 1.5% below the prevailing fixed / minimum lending rate charged by the bank wherever applicable. Additional working capital limits may be extended at a rate not exceeding the minimum lending rate chargeable by the bank.


• For meeting escalations in capital expenditure to be incurred under the rehabilitation programme, banks / financial institutions may provide, where considered necessary, appropriate additional financial assistance upto 15 per cent of the estimated cost of rehabilitation by way of contingency loan assistance. Interest on this contingency assistance may be charged at the concessional rate allowed for working capital assistance.


• There will be need to provide the unit under rehabilitation with funds for start-up expenses (including payment of pressing creditors) or margin money for working capital in the form of long-term loans. Where a financial institution is not involved, banks may provide the loan for start-up expenses, while margin money assistance may either come from SIDBI under its Refinance Scheme for Rehabilitation or should be provided by State Government where it is operating a Margin Money Scheme. Interest on fresh rehabilitation term loan may be charged at a rate 1.5% below the prevailing fixed / minimum lending rate chargeable by the bank wherever applicable or as prescribed by SIDBI / NABARD where refinance is obtained from it for the purpose.


• As per the extant RBI guidelines, promoter's contribution towards the rehabilitation package is fixed at a minimum of 10 per cent of the additional long-term requirements under the rehabilitation package in the case of tiny sector units and at 20 per cent of such requirements for other units. In the case of units in the decentralized sector, promoter’s contribution may not be insisted upon. A need is felt for increasing the promoters' contribution towards rehabilitation from the present limits. It is, therefore, open to banks and financial institutions to stipulate a higher promoters' contribution where warranted. At least 50 per cent of the above promoters' contribution should be brought in immediately and the balance within six months. For arriving at promoters' contribution, the monetary value of the sacrifices from banks, financial institutions and Government may be taken into account, in addition to the long - term requirement of funds under the rehabilitation package.


• While evolving packages, it should be made a precondition that the promoters should bring in their contribution within the stipulated time frame. Further, in regard to concessions and relief made available to sick units, banks should incorporate a ‘Right of Recompense' clause in the sanction letter and other documents to the effect that when such units turn the corner and rehabilitation is successfully completed, the sacrifices undertaken by the Fls and banks should be recouped from the units out of their future profits/ cash accruals.


• Turnaround experts do not just work with businesses in trouble. Many clients seek their advice for general profit improvement.

Is it too late to turn things around?The good news is that if you put your hand up for the right sort of help early enough, it is possible to turn around many of the danger situations companies can find themselves in.


• Companies must be willing to admit they need help. The earlier we get engaged, the more options we have to restructure the business.

The three key elements of any turnaround are financial restructuring, operational restructuring and stakeholder management.

A turnaround practitioner will use skills in insolvency/corporate finance/audit; management consulting/CFO; project management; negotiation & stakeholder management; HR skills; financial modelling; as well as lateral thinking ability and the ability to stay calm under pressure.


• The key is to critically assess the troubled entity’s business plan and review profit and loss to determine the causes of underperformance such as rising production costs, loss of customers or increased competition.

Timing is crucial when a company is underperforming. Turnaround specialists create and implement rolling 100 day work plans detailing the key initiatives being targeted to improve business performance and ensure that the initiatives are implemented in a timely, efficient manner


• The work focuses around improving cash flow, stabilizing operations, communicating with key stakeholders to re-build their support, exploring all strategic options and developing a comprehensive turnaround strategy.

The turnaround specialist will undertake strategic, financial and operational reviews to identify areas of underperformance and then work with management to implement strategies to improve the overall performance of the business.


• It is not unusual for the turnaround expert to turn to their extensive network of financiers and private equity firms to introduce the right combination of debt and/or equity to fund the troubled business.

Warning signs to look forWhile the ways companies can get into trouble are many, there are common themes.

These include when management has been too focused on growing revenue without considering the impact on margins and profit; if businesses don’t have the right systems and controls in place to manage their working capital; or if businesses don’t have the right management team depth of skill and don’t review financial and operational performance regularly.


• The key signs that should start senior management’s alarm bells ringing are:

Actual/potential bank covenant breaches Working capital growth outstripping revenue growth Profit warnings/missing forecasts/declining margins General industry downturn or industry consolidation Loss of key management personnel or increase in staff turnover Difficulty in obtaining general finance Management “buying” sales at the expense of margin


• Creditor or debtor ageing issues Competitor risk ATO and Super arrears Loss of a major customer Post merger integration issues

Cash flow is keyAny improvement in working capital – the amount of cash tied up in accounts receivable, inventory and accounts payable - is beneficial, especially in current deteriorated market conditions.


• Extra capital can be used to pay down debt, fund capital expenditure, satisfy seasonal cash requirements or further invest in growth initiatives such as research and development.

For specialist performance improvement and turnaround management firms, the aim is to deliver strategies which rapidly improve profitability and cash flow. To do this, we need to know what drives their business, how to achieve above industry benchmarks and more importantly implement strategies that increase the financial performance and value of their business.


• The following is a summary of the 6 essential elements required (in our view) to achieve a successful turnaround.

1. Ability to prove business viability by demonstrating the various initiatives that will restore earnings and cash flow2. Ability to manage “all” key stakeholders and keep them all moving in the right direction3. Credible management which might mean making certain replacements to bolster the credibility of management4. An ability to maintain or enhance the reputation of the business5. An ability maintain supplier credit and terms6. An ability to release internal working capital and secure external funding


• CASE STUDY – Project Bumper

Background

This well established manufacturing business with a blue chip client base had grown by 93% over 3 years to reach an annual revenue of $46M. Unfortunately, management had not implemented sufficient controls and management skill to maintain control of this growth culminating in a loss of $4.4M for financial year 2008.


• Key issues

Poor working capital management No visibility on product & customer profitability Refinance not an option Lack of management depth Core business still viable 84% staff turnover Business requires additional working capital


• Major Initiatives

100 Day Work Plan incorporating 55 initiatives to stabilise the business Implemented a robust cash flow and earnings forecasting system Implemented a working capital management program to improve cash flow Undertook a capital raising process Implemented price increases ranging from 6% - 18% Recruited a new CFO, HR and Supply Chain Manager to bolster management Implemented a staff retention strategy


• Aggressively managed the many stakeholders Implemented a round of redundancies

Outcome

Crisis averted $3M in financial support Conversion of $2M of debt to equity Stakeholder relationships restored Staff turnover down to 30% from 84% FY09 H1 Profit of $0.3M (versus a $4.4M loss for the previous year) 10% reduction in workforce


• Breakout box: How to effectively “stress test” your businessTurnaround specialists Vantage Performance are regularly seeing evidence of companies being sideswiped by major changes to their business. We recommend that all organisations should be placing a focus on stress testing their business whether they are in trouble or not. Given tough and fast-changing economic times, it’s essential to be undertaking detailed financial modelling and "what if" scenario testing to gauge how various sudden changes in market conditions will affect your business and more importantly, what initiatives management can deploy to combat these challenges.


• At Vantage Performance, these are the key questions we ask clients to answer when they want to “stress test” their business:

1. What is the new breakeven level for the business and how does it change from the previous level?2. What is the impact on revenue and earnings if you lost a major customer?3. If customers are demanding lower prices, what is your tipping point and are you prepared to lose customers in order to maintain earnings? What changes will you need to make to your cost base to match the new lower revenue base?4. How is cash flow impacted if debtors take an extra 10 days on average to settle their accounts?


• 5. Could there be a breach of banking covenants and if so, how will you respond to your financiers concerns?6. What changes will you require to your banking facilities and what would be your banks attitude to an increase in lending, if required?7. Are staff cuts needed and how will you deal with this (4 day work week, pay reductions, retrenchments)? Do you have the cash flow to fund redundancies? 8. What overheads will you reduce and what capex plans need to go on hold to preserve cash? 9. What non-core assets could be sold to reduce debt/provide additional cash flow? 10. Are sales or production levels too low to remain viable and is a merger/strategic partnership needed to maintain critical mass? Who would you approach?11. What plans do you have to meet ATO requests?


• EVERY COMPANY IN DISTRESS AND ITS CREDITORS ARE FACED WITH CHOOSING AMONG THESE SIX OPTIONS. THESE STRATEGIES TOGETHER COMPRISE A “GLOBAL” VIEW OF RESTRUCTURING, A USEFUL ROAD MAP FOR NAVIGATING THE COMPLEX MAZE OF OPTIONS INHERENT IN ANY FINANCIAL RESTRUCTURING.1


• Resurrection. This strategy involves rehabilitating a company internally, without the need for relief from creditors. Managers look for ways to raise the top line or to repair the bottom line, to turn the company into a performer quickly enough that it can pay back its creditors before they take harmful action against the company.

This sort of correction, without the need for other relief, usually only happens with very early intervention and typically consists of performance enhancement, reduction of expenses, and the like. By the time most companies recognize their financial straits, however, the conditions are too dire for a simple resurrection, and more relief is needed to supplement the top line and bottom line adjustments being made by the company.


• Refinancing. This strategy usually involves finding a new source of capital to do one of two things: take out existing lenders entirely or provide supplemental funding in addition to the lending facilities already in place.

A traditional refinancing might simply take the form of a new financing facility with lower interest rates, when interest rates have dropped since the initiation of the original loan. A more aggressive refinancing may involve finding a lender that is willing to loan at higher multiples of the company’s assets or earning before interest, taxes, depreciation, and amortization (EBITDA) and that is more comfortable with the struggling company’s industry and profile. The new lender may be willing to stretch the amortization schedule, as well as provide a better multiple, and might also be willing to take payment-in-kind interest for a time (the interest is simply rolled into a growing principal).

With the excess liquidity in the markets over the last few years, refinancing has been one of the most popular and successful exit strategies. As an advertisement for one online lender points out, “When banks compete, you win.” The credit bubble has given businesses significant leverage in obtaining refinancing. Of course, this changed after August 2007 with the disruption of the credit markets, and more companies are now having to employ different, and often more difficult, strategies to weather financial difficulties.


• Re-equitizing. This is the practice of pumping new capital into a company on an equity basis, whether from existing equity, management, or new investors. Lots of marginal companies, especially in the small business and mid-market sectors, do not need new financing to survive the crisis—they simply need an infusion of equity to serve as working capital.

Obviously, many money sources would rather advance new money in the form of debt rather than equity, especially when the company is troubled. If the financial crisis is not averted by the capital infusion, investors will lose their money; at liquidation, debt always gets paid before equity.

But equity is often the quickest source of money, and in the right circumstances, it can be the right choice. A capital contribution that bridges the company through a cash crunch, one that either is repaid on a preferred basis or that results in additional upside ownership for the contributor (and dilution of other equity) can be a successful strategy to implement in appropriate conditions.


• Re-amortizing. A re-amoritization, in the broadest sense of the word, involves changing the amount owed or the timing of the payments, which can be accomplished either voluntarily or involuntarily. This usually involves giving creditors a “haircut.”

In more extreme circumstances, such as a Chapter 11 bankruptcy, the debtor might strip down the total debt owed, reduce the interest rate, and extend the timing of payments over a greater number of years. In less extreme circumstances, a re-amortization could simply involve working with creditors who voluntarily agree to an extended repayment schedule, thus giving the company time to work through the doldrums. Interest during the downtime might be deferred entirely, rolled up as payment-in-kind interest, or written off.


• Going Concern Sale. Because a business usually brings more return when it is sold as a going concern than when it is sold in pieces, another exit strategy is to sell the company as an operational whole, using the sale proceeds to pay creditors.

This is not always true, as the corporate raiders of the late 1980s realized. They capitalized when they found that asset values on the books of a corporation significantly exceeded the sum of all of its outstanding stock. Nevertheless, in most cases, a company can be sold for more intact than it can in pieces, because of the efficiencies of the business, the developed supply and distribution channels, and the goodwill in the operating business.

A distress sale as a going concern usually requires early planning. As with other strategies, the later the intervention and decision to sell, the less successful it usually is because the distress reaches dire proportions. Early decision making can be critical, and in recent years, going concern sales have become more prevalent as an early exit strategy in bankruptcy. Judges have often allowed Bankruptcy Code Section 363 sales early in cases without requiring an accompanying plan of reorganization.


• Liquidation. The age-old exit strategy of last resort, a liquidation, involves selling a business in pieces, usually after it has shut down or has reached death’s door. Liquidation usually brings the least value for the business, and it is accompanied by the greatest disruption—loss of jobs, loss of supply and distribution contracts, loss of institutional knowledge and goodwill, and a poor return for the creditors.

This strategy takes hold in some cases when it shouldn’t. For example, a company may deny its financial difficulties until it’s too late, so that all of the good options evaporate before it realizes the need to seize on them. This strategy also can be rejected for far too long in cases when it should be embraced. For example, there may be an entire industry of dinosaurs that are no longer profitable and must be shut down, but whose existence is prolonged at great cost in search of other exit strategies that were never realistic.

It is worth noting that there is a seventh option for creditors that deserves consideration. They can sell their debt. Claims trading has been a very common strategy in the last few years, with debt selling at par or even par plus accrued. However, claims trading is not a true exit strategy in the sense of the other six, because it merely changes the face at the table, putting the claim buyer in the position to choose between the other strategies to maximize its return.


• WHILE THERE MAY ONLY BE SIX EXIT STRATEGIES, RESTRUCTURING IS A COMPLEX BUSINESS BECAUSE OF THE MYRIAD TOOLS THROUGH WHICH EACH STRATEGY CAN BE IMPLEMENTED AND THE NUMBER OF POSSIBILITIES WHEN COMBINING STRATEGIES. FOR EXAMPLE, A VOLUNTARY WORKOUT INVOLVING A COMPANY AND ITS CREDITORS COULD INCLUDE TRADE VENDORS, BANKS, AND LANDLORDS THAT ARE WILLING TO WORK TOGETHER TO HELP THE COMPANY THROUGH ITS FINANCIAL STRUGGLE.


• IN SUCH A CASE, THE STRATEGY MAY INVOLVE A VOLUNTARY RE-AMORTIZATION IN WHICH THE CREDITORS AGREE TO LOWER RATES OF INTEREST AND A REDUCTION IN AMOUNTS DUE. AT THE SAME TIME, IT MAY ALSO INVOLVE A RE-EQUITIZATION, IN WHICH CREDITORS TAKE THE POSITION THAT IF THEY’RE GIVING A DISCOUNT, EQUITY ALSO NEEDS TO HAVE SKIN IN THE GAME. ANY NEW MONEY PUT IN BY EQUITY WILL BE THE FIRST MONEY LOST IF THE COMPANY GOES INTO BANKRUPTCY.


• IN THIS WAY, THE CREDITORS CAN DISINCENTIVIZE THE COMPANY FROM NEGOTIATING CONCESSIONS NOW AND THEN FILING BANKRUPTCY TO GET EVEN MORE CONCESSIONS LATER; THE LEVERAGE ON EACH SIDE IS EQUALIZED FROM THE EQUITY INFUSION THAT OWNERSHIP MUST PUT IN. THE COMPANY THEN BEGINS TO WORK ON ITS BOTTOM LINE BY CUTTING EXPENSES AND ON ITS TOP LINE REVENUE BY RAISING SALES, RESULTING IN A SORT OF RESURRECTION OVER TIME (BUT ONE THAT ALSO REQUIRED RE-AMORTIZATION AND RE-EQUITIZATION).


• AS ANOTHER EXAMPLE, THERE IS THE CHAPTER 11 BANKRUPTCY. THIS STRATEGY USUALLY INTERTWINES ALMOST ALL OF THE SIX OPTIONS. THE STRUGGLING COMPANY GETS A NEW LOAN UPON ENTERING THE BANKRUPTCY AND THEN AN EXIT FINANCING FACILITY, BOTH OF WHICH ARE FORMS OF REFINANCING. THE COMPANY GIVES PRE-BANKRUPTCY CREDITORS A SUBSTANTIAL HAIRCUT BY REDUCING THEIR INTEREST RATE AND STRETCHING THE PAYMENT DATES (I.E., A RE-AMORIZATION). EQUITY PUTS NEW MONEY INTO THE COMPANY TO KEEP CONTROL, MAYBE THROUGH AN AUCTION PROCEDURE AT THE END OF THE BANKRUPTCY, RESULTING IN A RE-EQUITIZATION OF THE COMPANY.


• THE COMPANY ALSO SELLS A NON-PERFORMING LINE OF BUSINESS IN A GOING CONCERN SALE AND A FEW PIECES OF EQUIPMENT FROM ABANDONED BUSINESS LINES IN LIQUIDATION SALES. FINALLY, DURING THE CHAPTER 11 THE COMPANY RESTRUCTURES ITS OPERATIONS AND RETRENCHES INTO ITS CORE BUSINESS, SHEDDING UNNEEDED EXPENSES AND WORKING TO INCREASE REVENUE TO GENERATE ADDITIONAL CASH TO WORK ITS WAY INTO FINANCIAL SUCCESS (I.E., A RESURRECTION).


• WHERE DOES A DEBT-FOR-EQUITY SWAP IN WHICH CREDITORS AGREE TO CONVERT THEIR DEBT CLAIMS INTO EQUITY IN A COMPANY FIT? THIS IS AN EXTREME FORM OF A RE-EQUITIZATION IN WHICH THE COMPANY’S BALANCE SHEET IS ENERGIZED NOT BY NEW MONEY COMING IN BUT BY EXISTING DEBTS BEING ERASED. A DEBT-FOR-EQUITY SWAP COULD ALSO BE CONSIDERED THE ULTIMATE IN RE-AMORTIZATION, WITH CREDITORS TAKING A 100 PERCENT HAIRCUT (WHAT COULD BE A BETTER AMORTIZATION SCHEDULE THAN THAT?) IN EXCHANGE FOR GETTING THE UPSIDE IN THE NEW COMPANY.


• WHAT OF A FORECLOSURE BY A BANK? IN THE CASE OF NON-OPERATING REAL PROPERTY, THIS OFTEN CONSTITUTES A LIQUIDATION. IN THE CASE OF AN ONGOING OPERATIONAL BUSINESS THAT IS TO BE CONTINUED BY THE BUYER, THIS IS LIKENED MORE TO A GOING CONCERN SALE.


• THESE ARE JUST A FEW EXAMPLES OF THE LEGAL TOOLS USED TO WORK THROUGH THE SIX EXIT STRATEGIES. OTHER TOOLS ABOUND, SUCH AS STATE LAW DISSOLUTION OR INSOLVENCY PROCEEDINGS, ASSIGNMENT FOR THE BENEFIT OF CREDITOR LAWS, RECEIVERSHIPS, AND THE SIMPLE COLLECTION LAWSUIT.


• REGARDLESS OF HOW COMPLICATED A RESTRUCTURING MAY SEEM, IT NEARLY ALWAYS COMES DOWN TO THESE SIX OVERARCHING FINANCIAL STRATEGIES. AND WHEN CONSIDERING HOW TO ADVISE A STRUGGLING COMPANY, THESE SIX FINANCIAL STRATEGIES MAKE FOR AN EASY ANALYTICAL TOOL. THIS HELPS TO AVOID THE AGE-OLD PROBLEM THAT THOSE OF US WHO ARE HAMMERS (FOR EXAMPLE, CHAPTER 11 LAWYERS) USUALLY SEE THE WORLD AS A NAIL (UMM, CHAPTER 11).


• THE GLOBAL ANALYSIS LENDS ITSELF TO A BROAD SEARCH FOR EXIT STRATEGIES THAT CAN BEST BENEFIT A STRUGGLING COMPANY. AND IN THE REAL WORLD, TURNAROUND MANAGERS, FINANCIAL ADVISORS, AND LAWYERS ARE ALL TASKED TO WORK TOGETHER TO IDENTIFY AND THEN IMPLEMENT FOR THE CLIENT THE APPROPRIATE STRATEGIES, MAKING SURE THAT THE CHOSEN STRATEGIES ARE OPERATIONALLY, FINANCIALLY, AND LEGALLY VIABLE.


• InLaw, liquidation is the process by which a Company (or part of a company) is brought to an end, and the assets and property of the company redistributed. Liquidation can also be referred to as winding-up or dissolution although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding custom duties determines the final computation or ascertainment of the duties or drawback accruing on an entry.


• Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation) or voluntary (sometimes referred to as a shareholders' liquidation, although some voluntary liquidation. The parties who are entitled by law to petition for the compulsory liquidation of a company vary from jurisdiction to jurisdiction, but generally, a petition may be lodged with the court for the compulsory liquidation of a company by petitons are controlled by the creditors, .


• the company itself

• any creditors who establishes a prima facie case

• contributories

• the secretary of state (or equivalent)

• the Official receiver.


• The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions, but the normal grounds to enable an application to the court for an order to compulsorily wind-up the company are:


• the company has so resolved • the company was incorporated as a public company, and has not

been issued with a trading certificate (or equivalent) within 12 months of registration

• it is an "old public company" (i.e., one that has not re-registered as a public company or become a private company under more recent companies legislation requiring this)

• it has not commenced business within the statutorily prescribed time (normally one year) of its incorporation, or has not carried on business for a statutorily prescribed amount of time

• the number of members has fallen below the minimum prescribed by statute

• the company is unable to pay its debts as they fall due • it is just and equitable to wind up the company • In practice, the vast majority of compulsory winding-up


• Once liquidation commences (which depends upon applicable law, but will generally be when the petition was originally presented, and not when the court makes the order), dispositions of the company's property are generally ,void and litigation involving the company is generally restrained.


• Upon hearing the application, the court may either dismiss the petition, or make the order for winding-up. The court may dismiss the application if the petitioner unreasonably refrains from an alternative course of action.

• The court may appoint an official receiver, and one or more liquidators, and has general powers to enable rights and liabilities of claimants and contributories to be settled. Separate meetings of creditors and contributories may decide to nominate a person for the appointment of liquidator and possibly of supervisory liquidation committee.


• Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of the company and dissolve. Voluntary liquidation begins when the company passes the resolution, and the company will generally cease to carry on business at that time (if it has not done so already). If the company is solvent, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members' voluntary winding-up. In such case, the general meeting will appoint the liquidator(s). If not, the liquidation will proceed as a creditor's voluntary winding-up, and a meeting of creditors will be called, to which the directors must report on the company's affairs. Where a voluntary liquidation proceeds by way of creditor's voluntary liquidation, a liquidation committee may be appointed. Where a voluntary winding-up of a company has begun, a compulsory liquidation order is still possible, but the petitioning contributory would need to satisfy the court that a voluntary liquidation would prejudice the contributories.


• In addition, the term liquidation is sometimes used when a company wishes to divest itself of some of its assets. This is used, for instance, when a retail establishment wishes to close stores. They will sell to a company that specializes in store liquidation instead of attempting to run a store closure sale themselves.


• The liquidator will normally have a duty to ascertain whether any misconduct has been conducted by those in control of the company which has caused prejudice to the general body of creditors. In some legal systems, in appropriate cases, the liquidator may be able to bring an action against errant directors or shadow directors for either wrongful trading or fraudulent trading.


• The main purpose of a liquidation where the company is insolvent is to collect in the company's assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law. The liquidator must determine the company's title to property in its possession. Property which is in the possession of the company, but which was supplied under a valid of title clause retention will generally have to be returned to the supplier. Property which is held by the company on trust for third parties will not form part of the company's assets available to pay creditors.


• Before the claims are met, secured creditorsare entitled to enforce their claims against the assets of the company to the extent that they are subject to a valid security interest. In most legal systems, only fixed security takes precedence over all claims; security by way of flotation charge may be postponed to the preferential creditors


• Claimants with non-monetary claims against the company may be able to enforce their rights against the company. For example, a party who had a valid contract for the purchase of land against the company may be able to obtain an order for specific performance and compel the liquidator to transfer title to the land to them, upon tender of the purchase price.


Charge Creation• Whenever a company create a charge on

its assets, with in 30 days it has to file Form 8 with ROC ( Form 10 in case of series of Debentures).

• 1. Get the details of charge -if the charge is created in favour of a bank, get the sanction ticket, copies of the documents creating or evidencing charge,copy of the Board resolution given by the Company.


• 2. Download Form 8 from MCA website and fill up.

• 3. Scan the documents creating or evidencing charge ( black & white, Resolution 200dpi, pdf file) and attach it with Form 8.

• 4. Toal file size should not exceed 2.5 MB, if exceeds, remove the scanned attachments. Attachments can be uploaded separately as Addendum.

• 5. Get the Digital Signature from Company & Bank.

• 6. File the signed form 8 by E-Filing through MCA website.No paper filing is possible.


• 7.The fee will be Max.Rs.500/300/200 depending on the Authorised capital of the Company.to be paid either through credit cards or Bank Challans.

• 8.See that FOrm 8 is filed with in 30 days( 60 days with additional fee) after the date of the Document creating charge.

• First charge/second charge/Pari-passu charge.


Winding up of Company• Winding up of a company is the stage ,

where by the company takes its last breath. It is a process by which business of the company is wound up, and the company ceases to exist anymore. All the assets of the company are sold, and the proceedings collected are used to discharge the liabilities on a priority basis.


• Modes Of Winding Up ----There are three ways, in which a company may be wound up. They are :

• Winding up by the court. • Voluntary winding up,

– Members Voluntary winding up. – Creditiors Voluntary winding up.

• Winding up subject to supervision of the court •


• A company may be wound up by the court in following situations. Here, the court means "High Court".

• If the company itself, has passed a special resolution in the general meeting to wound up its affairs. Special resolution means, resolution passed by three-fourth (3/4") of the members present.

• If there is a default, in holding the statutory meeting or in delivering the statutory report to the Registrar.

• A company which is limited by shares, and a company limited by guarantee having share capital, is required to hold a " Statutory meeting" of its members, within six months, and after one month, from the date of commencement of it's business. A statutory report of the meeting so held shall also be forwarded to the registrar.


• If the company fails to commence it's business within one year from the date of it's incorporation, or suspends it's business for a whole year.

• A company limited by shares, has to obtain a "certificate of commencement" of business from the registrar. Unless it obtains such certificate, it cannot carry on it's business operation.

• If the number of members, in a public company is reduced to less than seven, and in case of private company less than two.

• The statutory requirement of minimum number of members in a public company is seven, and in case of private company, it is two (sec 12)

• If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets, it is still unable to extinguish it's liabilities, it means that company is unable to pay it's debts.

• If the court, itself is of the opinion that the company should be wound up.


• Who Can Apply To Court, For Winding Up Petition?( SEC 439)

• Following persons can apply to the court, for petition for winding up:

• The company itself • The creditor • Any Contributory • Registrar • Any person authorised by central government, in

case of oppression or mismanagement (397)


• What Orders, The Court May Pass ?(SEC 443)

• The court may pass any one of the following orders on hearing the winding up petition.

• Dismiss it, with or without costs • Make any interim order, as it thinks fit, or • Pass an order for winding up of the

company with or without costs.


• Consequences of court passing an order for winding up : • If the court is satisfied, that sufficient reasons exist in the petition for

winding up, then it will pass a winding up order. Once the winding up order is passed, following consequences follow :

• Court will send notice to an official liquidator, to take change of the company. He shall carry out the process of winding up, ( sec. 444)

• The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the winding up petition or not.

• The official liquidator is appointed by central Government ( sec. 448) • The company shall relevant particulars, relating to, assets, cash in

hand, bank balance, liabilities, particulars of creditors etc, to the official liquidator. ( sec. 454)

• The official liquidator shall within six months, from the date of winding up order, submit a preliminary report to the court regarding


– Particulars of Capital – Cash and negotiable securities – Liabilities – Movable and immovable properties – Unpaid calls, and – An opinion, whether further inquiry is required or not

( 455)

• The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry.


• Stay Order • Where, the court has passed a winding up order, it may stay the

proceedings of winding up , on an application filed by official liquidator, or creditor or any contributory. (466)

• DISSOLUTION OF COMPANY (481) • Finally the court will order for dissolution of the company, when : • the affairs of the company are completely wound up, or • the official liquidator is unable to carry on the winding up procedure

for want of funds. • APPEAL : 483 • An appeal from the decision of court, will lie before that court, before

whom, appeals lie from any order or decision of the former court in cases within it's ordinary jurisdiction.


Priority in winding up• Firstly, the costs of the liquidation are met out of the company's

remaining assets • Secondly, the preferential creditors under applicable law are paid • Thirdly, in many legal systems, the claims of the holders of a

floatation charges will be paid; other claims may also fit into this layer.

• Fourthly, if there is anything left, the unsecured creditors are paid out pari passu, in accordance with their claims. In many jurisdictions, a portion of the assets which would otherwise be caught by a floating charge are reserved for the unsecured creditors.

• In the very rare instances where the unsecured creditors are repaid in full, any surplus assets are distributed between the members in accordance with their entitlements.

• Unclaimed assets will usually vest in the state as bona vacantia.


• Dissolution• Having wound-up the company's affairs, the liquidator

must call a final meeting of the members (if it is a members' voluntary winding-up), creditors (if it is a compulsory winding-up) or both (if it is a creditors' voluntary winding-up). The liquidator is then usually required to send final accounts to the Registrar and to notify the court. The company is then dissolved.

• However, in most jurisdictions, the court has a discretion for a period of time after dissolution to declare the dissolution void to enable the completion of any unfinished business.


• Striking off the Register• In some jurisdictions, the company may elect to simply

be struck off the Register as a cheaper alternative to a formal winding-up and dissolution. In such cases an application is made to the Registrar, and they may strike off the company if there is reasonable cause to believe that the company is not carrying on business or has been wound-up and, after enquiry, no case is shown why the company should not be struck off.

• However, in such cases the company may be restored to the Register if it is just and equitable so to do (for example, if the rights of any creditors or members have been prejudiced).