There can be a fine line between steering a successful company and finding yourself at the helm of a corporate Titanic. A bit of onerous debt, an unfavourable contract with a key supplier or customer, new cutthroat competition–any number of events, both predictable and unforeseen, can tilt a formerly healthy ship into bankruptcy proceedings. Most companies can be rescued, but the best way to avoid a court date is to manage like one of the execs on our fourth annual All-Stars list: be proactive, recognize and deal with potential problems promptly, and communicate with your key stakeholders and employees. And if things get rough, restructure the business before someone else guns for it.
Sounds simple, yet thousands of companies go bankrupt every year. In 2004, 8,128 businesses filed for bankruptcy, with net liabilities of $2.3 billion, and another 2,835 filed proposals to satisfy their creditors. The majority of bankruptcy or protection cases are settled quietly and as amicably as can be expected. But high-profile scuffles, such as those being currently played out at Lord Black's Ravelston Corp., Jetsgo Corp. and Stelco Inc.–or Air Canada last year–give the impression that such cases are typically filled with rancour and acrimony, with management, unions, investors and creditors hurling invective through the media.
It doesn't have to be that way. The key to avoiding a messy cleanup is early recognition that a problem actually exists. Jetsgo's management, for example, repeatedly denied the airline was in trouble, even though most in the industry suspected it anyway. Denial, rather than incompetence, at both the management and board levels, is usually the main barrier to early detection, says Robin Schwill, a lawyer specializing in insolvency and restructuring at Osler, Hoskin & Harcourt LLP in Toronto. While you don't want to press the panic button too early, you definitely don't want to push it too late. Keep in regular contact with key creditors and stakeholders, call in an accountant for a “look see,” and hire a turnaround specialist or chief restructuring officer to fix problems while continuing to focus on the existing business. “It's always better to go to the doctor at the first sign of trouble,” says Schwill, “rather than waiting in hopes that it will get better.”
The doctor, however, may recommend that seeking protection from creditors is the only way out. Or worse, a creditor may force a company into protection. Either way, the easiest decision you'll have is whether to file under the Companies' Creditors Arrangement Act or the Bankruptcy and Insolvency Act. CCAA is the most flexible alternative, given it's a piece of legislation with virtually no restrictions on what a company can do to get afloat again. There is, however, an impressive body of case law that guides the courts as they consider proposals. CCAA sounds ideal for most companies, but it isn't available to those with less than $5 million in debt.
That's where BIA comes into play. It is quite restrictive, which means all the stakeholders will know exactly how things will shake out, and a business has only six months to solve its troubles or the court automatically puts it into bankruptcy. “Six months is a relatively short period of time if I know that I have to market and sell a couple of divisions and also raise new financing,” says Schwill.
The positive thing about being under court protection–if there is one–is that it stops all legal actions being taken or contemplated by creditors, prevents contracts being terminated by stakeholders, and gives a company the time it needs to get back into the good books. It also allows a debtor company to terminate or renegotiate contracts under certain conditions. For example, says Alan Farber, founder of A. Farber & Partners Inc., a Toronto-based insolvency and restructuring firm, a retail operation that has a number of leases draining its coffers could get out of the bad ones while under court protection, whereas in an informal restructuring process, the landlord could simply say no. More often than not, companies have a debt load that has to be restructured so that new capital can be pumped in. Sometimes this is as simple as giving creditors a percentage of what they're owed or swapping debt for equity and/or cash.
Typically, a trustee appointed by a major secured creditor (or group of creditors), the debtor or the court oversees the process. A trustee–who acts on behalf of all stakeholders–can be the saviour even when the horizon appears at its darkest. For example, Toronto Film Studios, one of the largest movie production firms in Canada, owes its life to Farber, who managed to keep its predecessor company afloat throughout bankruptcy protection during the mid-'90s, even though its major creditor, a bank, figured it was doomed. “It was a huge property with huge environmental problems right on the lakefront,” says Farber. “Our instruction from the bank was 'Close the property down.'”
The initial plan was to find a buyer, but nobody was biting. Along with a considerable environmental cleanup bill, there was also a lack of co-operation from existing management, as well as building and fire code deficiencies and substantial tax arrears. Farber ran the company himself, renting out the facilities and running environmental tests–and managed to turn a seven-figure profit two years running. In fact, he ran it so well that one of the original potential purchasers returned to buy the business, pump some money into it to fix the environmental woes, and now, roughly five years later, it is on the market for several times what they sank into it.
Of course, not all businesses survive intact. The worst-case scenario is a liquidation of assets. Even then, there can be some success. Farber points to his firm's liquidation of Itemus, a once high-flying dot-com that managed to raise US$80 million in financing, buy roughly 35 companies in 18 months and then die. “By the time Itemus came to us, it was clearly a dead issue,” says Farber. “Having said that, we were able to successfully sell some of its business investments–and that actually was better than what we thought.”
None of these strategies is exactly rocket science, practitioners admit. Sure, some professionals can be more creative than others, but the real difference is how the human equation is handled. “Often, says Farber, the inclination is to “go in, take the CEO by the scruff of the collar and chuck him out of the office in front of everybody.” But that can create a counterproductive climate of fear and intimidation. “Some people think that's a great way of setting the stage,” he adds, “but we kind of think honey works far better than the stick.”