It is surely preferable to try to turn around and restructure a business than allow it to fail, with the consequent financial and human cost to the business, to employees and to creditors.
This has been acknowledged by both the European Commission (EC) and the UK Government, both of which produced proposals last year that included a 90-day moratorium staying creditors’ action and extending the duty of essential suppliers to continue supplying the troubled business.
In both cases, the aim was to re-balance insolvency proceedings towards turnaround and rescue, while acknowledging the interests of creditors.
Yet, according to the findings of an independent review commissioned by the Financial Conduct Authority (FCA) into the behaviour of the Global Restructuring Group (GRG), the treatment of SME clients referred to GRG by its owner, Royal Bank of Scotland (RBS) hardly followed best turnaround practice.
The FCA’s interim report published at the end of October this year highlighted a number of GRG failures.
Turnaround should be a clear and detailed process for achieving a viable business
The review found that in its training material GRG had clearly recognised the need for careful assessment of a business’ viability based on a wide-ranging investigation, followed by immediate recovery action where it was deemed unviable.
If it had been judged potentially viable, GRG should support a turnaround plan, that was considered, documented and as far as practicable addressed the SME’s underlying issues.
However, in practice, the review found “frequent failures to pay appropriate attention to turnaround considerations.”
These included not carrying out adequate viability assessments and failing to implement and document viable and sustainable turnaround options for the medium and longer term, instead focusing on short term measures such as rescheduling the credit facilities on revised terms.
Nor, said the report, did GRG make adequate use of the broad range of turnaround tools or consider the impact of RBS’ actions in pressing for payment and withdrawing working capital facilities.
In short, GRG’s commercial objectives were prioritised at the expense of turnaround objectives, placing a disproportionate weight on pricing and debt reduction rather than the SME’s longer-term viability.
Some RBS SME transfers to GRG were too late for turnaround assistance, more than one in ten of those sampled were transferred directly to the GRG recoveries unit.
The inescapable conclusion was that RBS’ and GRG’s commercial considerations took priority over any serious efforts at turnaround.
The report, however did not address who should help everyone, the bank as well as the struggling SME it was dealing with. Most banks’ or their insolvency advisers’ review of a struggling SME owner’s ‘turnaround’ plans are likely to include that they are not viable. The underlying causal factors are rarely addressed with proposals for fundamental change in the SME’s plans. And forecasting such plans is something very few have done. Specialist turnaround help is needed as very few bankers, insolvency practitioners and SME managers have ever actually managed a business with the objective of turning it round.
The primary objective of the turnaround advisor and the turnaround process must be, and generally is, to help a struggling business to survive. This normally means initiating fundamental change to achieve a viable business model that can survive in the future, not just get through its immediate crisis.
This is achieved by a careful, detailed and systematic review of every aspect of the business to identify those aspects that are viable, and those that are not and to then come up with a workable plan that will not only save the business but will encourage creditor support, increasing the chances that, if patient, they will in time get their money back.