Corporate Restructuring and Administrative Rescue - Essay Example

Corporate Restructuring and Administrative Rescue Introduction Town and Country Flooring Limited (TCFL) was integrated in the year 1980 as a small corporate flooring company servicing the Cambridgeshire area from its office and workshop in St Ives and the London area from an office in London (Report and Proposals, 2008). TCFL has been a stand alone business although setting off Town and Country Flooring (Norfolk) Limited, also known as TCFN, which traded prosperously in Norfolk. Both the companies enjoy a general principle which states that they would benefit from operating under a common 'Town and Country' banner. On the other hand, Town and Country Flooring (Norfolk) Limited (TFCN) was incorporated in the year 1984 and was traded as a small contract flooring provider who services the local market place in Norfolk. TCFN has been a stand alone business in complementing Town and Country Flooring Limited. In the year 2005, TCFN was sold to John Maidment, Robin Eglen, Brian Pestana and Jean L Hicks, who acquired TCFL at the same time (Report and Proposals [2], 2008). Pursuing this acquisition, there was an incessant drive to apply further development strategies for both TCFL and TCFN, which was inclusive of increasing the geographical coverage of the group with branches introduced in diversified cities. An armor service series was introduced to TCFN which involved the supply and installation of hygienic wall armor surfaces (Report and Proposals [2], 2008). TCFL grew gradually for many years whilst supplying as well as installing floor coverings, such as carpets and carpet tiles, along with dcor flooring, vinyl as well as wood floor coverings. It served four key markets, developing a powerful stand within the public sector, chief building contractors, new house builders as well as the management of facilities (Report and Proposals [1], 2008). The company has carried out several contracts by purchase order, framework type as well as standard construction industry sub-contracts. As a result, by the year 2002, the business had been performing well and has significantly incremented in infrastructure, both in the turn-over as well as the size of its work-force. This incessant growth strategy generated prosperous results, with turn-over incrementing year on year. However, unfortunately, whilst the turn-over was improvising, the directors were experiencing other problems in the management of expansion program. Overheads, which had incremented across the group so as to provide the continuing drive in order to increase volumes, were influencing on the productivity as well as the cash-flow restrictions were becoming more recurrent. In accordance with some more facts from the Directors' report, the company increased turn-over by 31 per cent during the year it gave rise to a new business unit in the Southern England are (Annual Report, 2006). Nonetheless, with the ending of the year, the Southern Office was shut and the business from there was merged in to another branch. Moreover, in addition to this, the group also experienced intricacies in the recruitment and retaining of a powerful and strong financial director. Currently, within the last six to eight months, many officials quit the business for some personal reasons, which contributed to the factors, together with a general worsening in the market place, meticulously in the construction sector, which construed to the fact that TFCL was facing a challenging period (Report and Proposals [1], 2008). By the middle of the year 2008, the group had debts outstanding to the HM Revenue and Customs and was also experiencing significant creditor pressure. There was an urgent requirement for further working capital. The directors required advice from solicitors and insolvency practitioners and by the end of July 2008, there was filed a Notification of Intention so as to appoint a new Administrator in the Birmingham District Registry (Report and proposals [1], 2008). 2. Problems Faced By the Company The aim of this analysis is to ascertain the reasons which led to an insolvent entering liquidation proceeding, and whether any conclusions could be drawn with regards to the causes of failure and the profile of insolvents. Moreover, this analysis may add to the evidence basal for future policy decisions and the information would assist in concluding the scope for further research in to liquidation. As a director of the company, if the business is in trouble, it is up to him to decide whether the company should continue trading or cease it. If the director is aware about the company to become insolvent and still continues to trade anyway, there is a chance for it to be liable for wrongful trading and they need to prove the steps taken to minimize the loss of creditors in order to escape liability. 2.1 Causes and Results of Failure The TCFL group experienced intricacies in the recruitment and retaining of a powerful and strong financial director. Currently, within the last six to eight months, many officials quit the business for some personal reasons, which contributed to the factors, together with a general worsening in the market place, meticulously in the construction sector, which construed to the fact that TFCL was facing a challenging period (Report and Proposals [1], 2008). By the middle of the year 2008, the group had debts outstanding to the HM Revenue and Customs and was also experiencing significant creditor pressure. There was an urgent requirement for further working capital. The directors required advice from solicitors and insolvency practitioners and by the end of July 2008, there was filed a Notification of Intention so as to appoint a new Administrator in the Birmingham District Registry (Report and Proposals [1], 2008). With regards to TCFN, with the improvisation of the turnover, the directors experienced problems in managing the expansion program. Prior to the administration, the company came across unplanned changes to the circumstances and faced the reduction of income. The grades of this case where the primary cause of failure attributed to the loss of the bankrupt's income remained unchanged for many years. The breakdown of the reasons for business failure is significant as it includes loss of market and excessive overheads and also tax affairs. Moreover, incessant new ventures, and increment in expansion and acquisition proved to ascertain the indication of an on-going trend. Poor management, poor accounting systems, and poor market research share the blame for the business failure. The company lost its control of market due to the competitor strength which is another key reason. Manufacturing businesses like TCFL are also affected by natural disasters where materials and products are sourced from a weak pound on the stock exchange. The bad management led to undercapitalization which that the increment in high gearing resulted in the menace of company failure. In big companies like TCFL, taking on the project which is too big for the organization or over-dependence on a single large customer often leads to lack of control. The management of TCFL fails to comprehend the key drivers of business and is incognizant of the accounting which proves to be a factor in company failure. Moreover, unless the organization looks after the business funds borrowed from other individuals and firms as their own, the money would soon slip through their fingers. The quality of management does not essentially improvise with the size of the company and TCFL failed to understand it. The other players of the organization, for example, the accountants, auditors, regulators as well as the liquidators may be ignorant, slipshod, careless, or even complicit in the collapse and may contribute to the aggravation of the problems faced by the company. One of the Directors' reports of TCFL states that during the year in which the branch network was incremented, the service offering extended to include wall cladding and the management of major projects which led to the increment in the turnover by 8 per cent during the year (Annual Report, 2006). Some substantial expenditure was incurred in developing the units to develop new businesses which led to a slowdown in work from the public sector, and two important debts were acquired which influenced on the operating results. Moreover, the directors who held office at the date of approval of this Directors' Report confirm that, so far as they are aware, there is no pertinent audit information of which the company's auditors are incognizant. The directors have taken all possible steps in order to make them aware of any relevant audit information. They missed to realize the property in order to make a distribution to one of more secured preferential creditors (Report and Proposals [1], 2008). A view of the accounts of receipts and payments from the commencement of administration which incorporated their projected result for the creditors led to instantaneous discussions over appointments with the RE so as to assess the contract debtors, chiefly, in concern with the value of accomplishing certain contracts during a short trading period. It apparently justified that relationships with definite key customers as well as suppliers had become injured and continuing to trade the business would be tremendously challenging. Unfortunately, the principal and certainly the most significant customer of the group turned out to be gradually more nervous of the Company's financial position and, as a result, decided to source alternative suppliers. The Company had inadequate property so as to allow a distribution to be made to the unsecured creditors. This is, in the administrators' viewpoint, an efficacious way of bringing about the administration proceedings to an effectual conclusion, as soon as they are satisfied with having entirely discharged their duties as administrators and that the rationale of the administration has been entirely accomplished. As a result, they can implement the provisions under which, on the registration of a notice sent by them to the Registrar of Companies, their appointment as administrators concludes to have influence, and at the end of a quarter of the year, the Company would mechanically be dissolved (Report and Proposals [1], 2008). In addition to it, another problem which may become obvious that it is not possible to confirm the administration as construed with one year of the date of their appointment. This situation may take charge if the administrators are not able to conclude the realization of the contract debtors, chiefly the retention constituents, which have been falling due to the appointment centenary. They, previously, failed to attend the trading address, and hence, made it an attempt to meet the management section in order to advise for their appointment, thereby, confirming the administrator's strategy and take authority over the assets of the company. The employees were incognizant of the appointment and their instantaneous joblessness was required to be corroborated. The assets of the company were previously not insured and agents were not instructed to attend the site (Report and Proposals [1], 2008). Hence, they took an initiative to immediately insure and agents were inculcated to attend the site. They had no idea regarding the competitors so that they could gauge interest regarding the acquirement of the business as well as the assets, even though from a trading location. Unluckily, the gradation of interest did not seem to be meticulously powerful or strong as the Company had ceased to trade and it was concluded that any sale of this sort would not be possible (Report and Proposals [1], 2008). The major intricacy for the Company which witnessed its failure was that it traded from the premises which were on lease, whose rent was disbursed until the end of the month of July (Report and Proposals [1], 2008). The lease-hold ownership can be construed to as a long tenancy which is fixed at the beginning and decreases in length with years passing by. The contract between the lease-holders and the conditional owners for a fixed period of time is an important document as the lease-holders often fail to ensure that they have a copy for comprehension. The administrators are required to contact the landlord in order to agree to a further short period of occupation, which means to meet the rental charge for the upcoming month, so as to allow time to entirely explore opportunities to make the most of the value in the remaining touchable or tangible assets. Moreover, when their agents attended the premises in order to go through the assets, they produced a detailed account of the assets which delineated that there were no tools which individually held any significant worth. According to the report regarding the equipment inventory, the stock chiefly constituted to the carpet rolls, off cuts, floor tiles, adhesives and other related floor fitting consumables. The report also delineated that there was little stock which physically remained at the premises and they also conceived a large volume of claims for the preservation of title (Report and Proposals [1], 2008). In addition to it, there were certain stocks which marked their presence on a consignment basal and hence, were duly returned. The apprehension over the low levels of imaginative stock was that, if it could not be sold in its totality, then the costs which were laid themselves on to in clearing as well as disposing of items on a bit-by-bit basis could exceed the net recuperations. As a result, after a short period of receiving the offers, chiefly for specific items, they agreed to sell the implements, stocks as well as the office furniture to Reform Flooring Limited, and their agents suggested receipt of this offer for the reasons we have discussed above. There have been many debtors who created conundrums amongst the completed contracts as well as those contracts which were in progress. They had not yet paid for their resources and hence, had received a written notice for the appointment and an application for immediate payment. The collection process has been inclusive of all the obtainable paperwork, that is the invoices, job-cards etc, and has been retrieved and collated. There have occurred many disputes within the company with regards to the assets and the staff, and as a result, the administration is aware of such conundrums and it setting off the claims on certain accounts (Report and Proposals [1], 2008). There is a need for them to keep the chase on with regards to the debtors and also seek for efficacious relevant advice. The continuous failures are the result of the meager and pitiable management of the company which is required to deduce an innovative marketing strategy which would include team-work with their agents, as it would maximize the apprehension for the unburdened assets, contract debtors, as well as free-hold properties (Report and Proposals [1], 2008). The realization or the apprehension of the Company's property is the most important factor as lacked by the administration and the principal matters to deal with in this respect are about agreeing to the two free-hold properties, allocation of the outstanding contract debtors on the sales ledgers, and eventually, conclude all the statutory duties (Report and Proposals [1], 2008). 2.2 Effects on the Company The problems regarding poor management and administration can have adverse effects over the company. With the growth of global products, it is suitable to view the handling of communication during the crisis on a global basis. The loci of know-how, decision making, and product distribution may prove to be dispersed. The number of potential stake-holders is large for bug companies and, therefore, home and host government involvement, diverse media, and dispersed operations, as they possess diversified frames of reference, may worsen the situation. Low probability, high-influence which threatens the viability of the company is characterized by the uncertainty of cause, effects, and the means of resolution (Godar, 2003). The organizational crises which involve products of this company have the most direct impact upon the marketing efforts. A product harm, as discussed above, usually involves the three attributes, the first one being the marketing objectives of sales and product honesty as threatened, the second one being the marketer who has a constrained ability to regulate the environment, and the third one being the forceful marketer to respond rapidly to the problem. Influences such as economic restructuring, intensified rivalry, government regulations as well as technological advances have led to heightened environmental turbulence and uncertainty for TFCL. This turbulence is a result of the limited sources and poor managerial decisions. The ability of TFCL to survive in the business environment is dependent upon their selection and implementation of a competitive strategy which differentiates the organization from its competitors. To cope up with the forces associated with the threats of entry, replication, bargaining authority of the suppliers, the implementation of a generic competitive strategy is proposed by Porter, which is cost leadership, differentiation or focus in order to outperform its competitors. This strategy would focus on achieving a low cost of the products of the company without sacrificing the quality and service. It demands cost minimization and potential for large capital investment. Therefore, a high market share, broad assortments and attention to pricing are essential to it. 2.3 Financial Ratios Verifying Failure After verifying the financial data, it can be concluded that both the companies, TCFL and TCFN had been facing depression in their businesses. With regards to Town and Country Flooring Limited, the measurement of solvency has come out to be in a ratio 2:1, which indicates the extent to which the funds are available for the company's operations. Since the ratio is higher than 0.75, it designates that the firm is susceptible to unanticipated events and transformations in the business vicinity. The interest cover ratio, when calculated with the help of the financial statement of the company, has come out to be 40.79, which depicts that the company is burdened by debt expense and it is unable to generate adequate revenues to satisfy interest expenses. Moreover, its sales to fixed assets ratio has come out to be 18.31 which construes to the inefficacious utilization of fixed assets which may be caused by excess interruptions in the supply of raw materials. The stock turn-over period for TCFL has come out to be 102 days, which is quite long. Its length makes it worse for the business as the money is not available to be used elsewhere. On the other hand, the same has come out to be 10 days for TCFN, which is a short span. As far as the creditor and debtor collection periods or TCFN are concerned, on calculating, they came out to be 24 and 338 days respectively. Where the creditor collection period is small, it may highlight difficulties in paying the creditors and the loss of creditor discounts by not paying on time. On the other hand, the debtor collection period is quite long and on an average, it may create difficulties to collect the money owed to the company by its trade debtors. With reference to the Profitability ratios, regarding the Turnover Growth, TCFN has experienced a fall of 31.05 per cent, and therefore, its Gross Profit Margin has come out to be 89.8 per cent. On the other hand, the Gross Profit Margin for TCFL has come out to be 206.35 per cent, which delineates the efficaciousness of the company in managing its core production costs. The higher the gross profit margin, the better it is. For TCFN, the same is calculated as 89.8 per cent, which is again an appreciable figure. On calculating the net profit margin for both the companies, TCFL makes a profit of 43.7 per cent, whereas TCFN makes the same as 7.67 per cent. For both the companies, it is quite easy to pay interest, taxes and dividends etc. The Working Capital ratio for TCFL has come out to be 0.84 per cent, whereas, the same for TCFN is 0.016 per cent. Since, for both the companies, the current assets do not exceed its current liabilities, it may run in to trouble paying back creditors in the short term. The companies' sales volumes decrease, and as a result, their accounts receivables number continues to get smaller and smaller. In a similar expression, the Acid Test Ratio for TCFL and TCFN is 0.84 per cent and 0.058 per cent respectively. It is well prominent a fact that the companies with ratios less than 1 find difficulty in paying their current liabilities. Also, since, the Acid-test ratio is lower than the working capital ratio, it means that the current assets are highly dependent on the inventory. Lastly, where the ratio of sales to the number of employees for TCFL has come out to be 27775, the same for TCFN has come out to be 122838, which depicts that with higher sales-per-employee figures, the company can operate on low overhead costs, and as a result, for more with less employees which often interprets in to healthy profits. The Change in Shareholder funds is the balance sheet value of the shareholders' interest in the company (Pietersz, 2008). For TCFN, it has come out to be 35.62 per cent, which accounts for its assets less all liabilities. 2.4 SWOT Analysis, PESTEL Analysis and Porter's Five Forces Town and Country Flooring Limited is a renowned company. However, it is subjected to various opportunities and threats as it possesses both strengths and weaknesses in its silhouette. Its strengths include the new trends of business it timely sets for which demand outstrips the supply of quality options. Report analysts in the UK say that profit margins for this company are high with successive years. It is a flooring contractor with all its operatives in direct employment which ensures responsibility, reliability as well as consistency. Being a big organization or company does not only involve strengths, but its size is its biggest weakness. Conundrums and tantrums amongst administration, poor management and loss of market finances are some of the weaknesses which the company is subjected to. Amongst the opportunities is the diversity of products in TFCL. The company installs all types of floor coverings which include carpet, vinyl, linoleum, wood, ceramics, decorative flooring as well as hygienic wall cladding (Company Overview, 2008). The assortments of products under one roof can lead to various opportunities in the upcoming years for the company. Lastly, amongst the 155 companies in the UK report of the flooring market, there are 22 companies in danger and who may not likely be surviving. TFCL should gain market and competitor knowledge before investing in the market and should bench mark its own performance as the shift in consumer tastes happens unknowingly and emergence of substitute products by other competitors can contribute to the threats. TFCL should necessarily pursue the more lucrative opportunities for it may have a better chance to establish a competitive advantage by recognizing a fit between its strengths and opportunities. The PESTEL analysis for TCFL involves the scrutinizing of the political governance under which the company operates. The government policies influence the laws which regulate or tax the company's business as it is a huge banner in the field of flooring and government's strategies over the economy are worth conforming. The EU law affects TCFL. Moreover, it has to follow the rules set by the Advertising Standards Authority as well. TCFL should abide by all economic environments as it would help it in operating globally. It may face some problems while operating in diversified vicinities, but it would, later on, prove to be a catalyst in TCFL's business. The company has huge opportunities for maintaining socio-cultural relationships as it functions in the field within the society, which is largely acceptable. Technological factors like the internet bestow efficacious reliance over TCFL as it would, anyway, augment the business and reach the global charts. Analysis of Porter's five forces regarding the company would include examination of the suppliers, which is weak as it is not easy for suppliers to drive up the prices of the products. The uniqueness of the products or services, their strength and control are the drivers to it. For the company, the fewer the supplier choices it has, the more it requires the suppliers' assistance and the more powerful the suppliers are (Porter, 1998). On the other hand, the buyer force is weak as well as the customers are insensitive towards prices but are influenced by mortgage availability. It is not easy for the buyers to drive the prices down as it is driven by the number of buyers and the importance of each individual buyer to the business. The number of the company's competitors can lead to most likely a little power in the hands of TCFL. Since, they'd offer equally attractive products and services, the buyers would go elsewhere. The less there is rivalry, the more there is authority in the hands of the Company. Threat of substitution is affected by the ability of customers so as to seek for a different way of doing what the company aspires to do. The company needs to make sure that the replication or substitution of its products is not viable, or else it would weaken its power. Lastly, the power of TFCL may also be affected by the ability of new entrants to disturb the market. The flooring market is a booming industry and if it costs little in time or money to enter the market and compete efficaciously, the new competitors would quickly enter the market and may weaken the company's position. 3. Rescue and Rehabilitation All the failures related to the company are different, since, they arise from different circumstances and seek different rescue strategies. Where we have identified that TFCL can possess appreciable potential, there are a series of strategies to improvise the current state of its business. The bespoke solutions discussed can be tailored to the exact requirements of the company. Comprehension of the Cash and Working capital cycle of the business as well as recommendation of the practical actions in order to target the root causes of the cash-flow issues can better Cash Management (Business Rescue, 2009). TFCL should concentrate upon its day-to-day operations, communication and flow of information through its business. Manufacturing, Production and logistics play the most important role, and hence, modification of the processes, incrementing efficaciousness and optimization of the productivity are a call for. Amongst the most significant factors is the pricing policy, or ways to increase prices, offering menu pricing, widening the price range for the company's products and services would certifiably help in the administrative rescue of the company. Modification of the range of flooring products and services, expansion or contracting the range as well as product diversification would help retaining the previous grandeur of the company. The Slatter and Lovett generic strategies with regards to the rescue and rehabilitation of the company include three termed strategies. Amongst the short term planning may be included crisis-stabilization which involves the development of crisis plans, short-term services and acute assistance. Moreover, leadership is one of the salient aspects of the organizational context. It is largely recognized and accepted by practitioners and researchers that leadership is significant as the leaders contribute to the key organizational outcomes. Amongst the middle term planning are included the stake-holder support and efficacious focus on the strategies. The success of the company can be highly influenced by the assistance from the stake-holders. Moving from middle term to long term strategies are included organizational transformations which may involve critical process improvements and also, financial restructuring as in the case of excessive debt, the company may directly negotiate with its creditors in order to create repayment plans which are acceptable to both the parties. With the help of limited asset liquidation and accounts obtainable funding, the capital which TCFL may use to expand can be secured. Finance is a major feature of rescue. The company ought to take care of putting right amount of money in the right place. The company should make sure that there are sufficient funds available to attain the resources required to help the organization in achieving its targets. Moreover it should ensure that the cash flow is regulated and establish the profitability levels. One of the major roles of the finance department is to identify appropriate financial information prior to communicating this information to managers and decision-makers, in order that they may make informed judgment and decisions. Re-assessment of the existing marketing strategy and implementing the innovative ones can help for long and re-assessment of the products and services, existent markets as well as additional prospective target markets would efficaciously assist in rehabilitation of the company. Moreover, sometimes, a huge number of staff members create hassles amongst the administration and, therefore, reduction of staff members in particular areas. Redundancies as well as re-allocation of the staff would definitely save the extra costs of the company's funds. Administration of the company is a rescue mechanism by which the company which is insolvent, as an alternative to liquidation, may be allowed to continue trading. The administrators are expected to have total regulation over the running of the business and all its assets. The administration would efficaciously rescue the company as a going regard and operate in the interests of the creditors, generally, to affect the trade sales of the business. The company should involve stabilization of the crises so that it is geared up for the inevitable menaces. The administration along with the staff members are required to possess leadership traits so that during the bad times, they represent themselves as true leaders who are focused on their work. Moreover, the company may seek help and support from stake-holders, both primary as well as secondary, which may improvise the critical process and restructure the finance anatomy of the company. The speed of transformation in the extrinsic environment and grades of competition make it quite intricate for TFCL to operate. Hence, it is essential for the staff and administration to efficaciously comprehend the nature of the business and the sensitivity of its network. Cash management is one of the most important key factors which would maintain the cash flow. Rigid regulation over expenditure and ceased purchase of assets may contribute, in some way, to the rescue strategies of the company. There should be regular meetings and discussions regarding the eradication of problems within the company. Effectual planning must cover all the failure causes and the plan must equally respond to potential competitor aggression. The planning ought to be crucial towards the corporate resources and competencies and should be duly approved by the share-holders, bank, and creditors as a whole. Lastly, it does not matter whether the company is new or old. However, timely innovations, both intrinsic and extrinsic, may help in eradication of negative issues prevailing within the company. Timely administrative charge would help regaining the lost reputation and would rebuild the grandeur of the company so that it may touch new global heights. For the company to sustain in the market world, it is suggested that the administration may function for maximum 12 months so that the existing management may experience innovation and employees may get to know about new techniques to work together for the welfare of the company. References 1. Annual report. 2006, Directors' report and financial statements For the year ended. Town & Country Flooring Limited, (30 September 2006). 2. Business Rescue. 2008, Arrangements: working together towards a common goal. Business Rescue Group, Secretary of State D.T.I. 3. Company Overview. 2008, Town & Country Flooring Ltd. Reed Business Information. 4. Godar, Susan H. 2003, A Model for Communication Locus in International Product Crisis Management. AIB-SE (USA) 2003 Annual Meeting. Clearwater, FL. 5. Pietersz, Graeme. 2008, Shareholders' Funds. moneyterms.co.uk, Graeme Pietersz 2006-2008. 6. Porter, Michael E. 2008, Porter's Five Forces: Assessing the Balance of Power in a Business Situation. Mind Tools Ltd. 7. Porter, Michael E.1998, Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press; 1 edition. 8. Report and Proposals [1]. 2008, Town and Country Flooring Limited (InAdministration). Report and Proposals of the Joint Administrators under the Provisions of Paragraph 49 of Schedule B1 to the Insolvency Act 1986. ADM 5900-VII-0171 9. Report and Proposals [2]. 2008, Town & Country Flooring (Norfolk) Limited (In Administration).Report and Proposals of the Joint Administrators Under the Provisions of Paragraph 49 of Schedule B1 to the Insolvency Act 1986. ADM 5900-VII-017. Read More