Lessons from Arrium and other business failures – how companies can avoid a headline by default

13 April 2016 by Brian Silvia

In recent months, a number of high profile companies – many of which are household names – have failed.

The reasons for these corporate collapses vary. In each case, however, the impact has been far-reaching. When a ‘mother-ship’ crashes, all parties in the supply chain are affected, from employees to lenders, trade creditors, contractors, landlords and the community as a whole.

Steelmaker and miner Arrium Limited, the latest big-name company to be placed in the hands of administrators, is a case in point.

As reported widely in the media, Arrium employees throughout Australia face a potentially bleak future.

Arrium’s financiers, including the four major banks, have no certainty that they will recoup their debts. This may provide an insight into their influence in the decision to replace Grant Thornton with KordaMentha as administrators.

The landlords of Arrium facilities in many regions face a possible interruption to rental flows and a likely long-term reduction in their property values.

Even governments – including a number of state governments as well as the federal government – now have Arrium-related decisions to make that may significantly affect their economic and infrastructure policy development.

Another media headline, and example of creditors caught by surprise, is the failure of Dick Smith Electronics.

Voluntary administrators were appointed to Dick Smith in January this year after the company amassed debts of $400 million.

Again, many stakeholders have been negatively affected, from creditors and suppliers to retrenched employees and even customers left with potentially worthless gift cards.

Retail insolvency appointments such as this represent the most difficult form of administration – the main reason being that available ‘hard assets’ are minimal, as most stock lines supplied to modern retailers are the subject of retention-of-title clauses currently known as ‘purchase money security interest’s (PMSIs).

Typically, retention-of-title clauses entitle the retailer to trade the retention-of-title stock in the ordinary course of business. It’s not unusual for 80-90% of a retailer’s stock to be subject to retention of title where individual title holders may be confronted with logistical issues as to the collection of stock (particularly in instances of a retailer with a national footprint).

Whatever industry a business operates in, its stability can be threatened at any time for a variety of reasons. These can include:

  • financing and debt restructuring
  • changed market conditions
  • regulatory and compliance requirements
  • operational costs
  • key personnel and management issues
  • legal threats
  • cash flow and working capital constraints

Of course, each case will usually comprise a cocktail of more than one contributing factor. The task of the appointed administrator is to investigate these reasons and, if possible, devise potential solutions.

At BRI Ferrier, our turnaround management services provide a comprehensive, tailored process from developing to implementing innovative turnaround and recovery strategies for businesses in need.

We understand, therefore, that an effective turnaround strategy must focus on an objective outcome based on three elements:

  1. diagnostic assessment – recognising statutory compliance obligations
  2. process re-engineering – encompassing the stabilisation of the business and the development of strategic management to deliver growth
  3. access to funding.

Our restructuring and turnaround management services may take many forms of review, including:

  • stabilisation of business and identification of risk factors
  • assessment of management
  • compliance reviews
  • cash flow and working capital reviews
  • funding and other financial reviews
  • divestment of certain business operations or assets
  • restructure implementation
  • development of an operational and financial restructure plan.

Through an alliance with a team of qualified process engineers, BRI Ferrier’s turnaround management specialists offer a combined initiative to manage and restructure complex businesses.

When we address companies’ financial challenges early enough, and implement the right combination of turnaround and recovery strategies, there’s always a reasonable chance of helping businesses avoid the negative media headlines.

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