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When a company gets into
financial difficulties, i.e. becomes insolvent, a receiver is usually
appointed. This can be done in several ways, but with public companies it is
often the company's bankers who have security for their loans who do so.
Historically the company was then usually liquidated, i.e. the assets sold
off to pay the company's creditors - the sequence of who gets paid first is
determined by law, but if any outstanding loans are secured against assets,
as they usually are, then the bankers will take precedence over ordinary
trade creditors. Preference shareholders, if there are any, will have some
priority, but often there is nothing remaining to redeem their shares.
Ordinary shareholders will typically get nothing - indeed they are lucky if
the receiver or liquidator even tells them what is going on.
However it was
recognised a few years ago that it is often more in the interests of
creditors if the business is continued in some manner, so that time is given
to restructure the company and revitalise it. This can be appropriate for
example if a section of the business continues to trade profitably, or the
assets are such that a "rescue" or refinancing may be achievable. This is
called "Administration" where an administrative receiver is appointed.
Unfortunately, ordinary shareholders have gained little benefit from this
arrangement. In reality it appears mainly to simply give more time to enable
a sale of actively trading parts of the business. If any refinancing is
attempted, ordinary shareholders are often so diluted by the issue of new
equity, that the original shares become almost worthless.
It is a recurring
complaint when receivership occurs that the process is too costly, and the
assets of the business often sold too cheaply. Liquidators fees often take a
very substantial portion of the realised cash, and the process of
liquidation can take years.
UKSA believes that the
arrangement of these affairs in the UK is not as satisfactory as in some
other countries (such as under the US "Chapter 11" procedure). Viable
businesses that could easily be resuscitated, thus protecting the interests
of employees, suppliers, customers and shareholders, are too often simply
wound up. |
