Why do most insolvency proceedings fail? There are several key factors that contribute to such outcome.
1️⃣ Firstly most of insolvency procedures are bankruptcies because there is no intention to pursue a restructuring of the business.
2️⃣ Another important point is that in the majority of the judicial reorganization procedure, the reorganization plan is drafted and proposed by the debtor and not by the creditors, whereas the support form creditors (or lack thereof) can lead to a successful reorganization or, on contrary to its failure.
Below we highlight the main factors that prevent a successful reorganization:
🔹 Lack of restructuring Mindset: Insolvency is not just a procedure; it is genuine strategy, this of course excluding purely formal procedures. This means that the decision makers need to set for a long-term strategy, potentially with major changes to the way the business is carried out, and just simply use the procedure to restructure debts. Also, the historical and cultural perception of businesses undergoing insolvency, along with the negative stigma associated with it, can influence how it is approached by the stakeholders. Sometimes, it is seen as a personal failure of the entrepreneur, leading to reluctance in seeking and implementing restructuring measures. It’s important to understand that insolvency can be an opportunity for the business if the mindset is there.
🔹 Late intervention (also because of the negative stigma associated with insolvency): In many cases, insolvency proceedings are initiated too late, when the business is already in a critical state. In such situations, relationships with essential suppliers may have already been compromised, and finding new contractual partners becomes difficult. For effective restructuring, timely intervention is crucial, allowing for the business partnerships to be conserved. Also, it is in such scenarios that the decisionmakers have alternatives and solutions cand be identified and implemented.
🔹 Reluctance to sale non-core asset sales: Debtors are often reluctant to sell non-core assets, which can limit liquidity and at the end of the day hinder business restructuring.
🔹 (lack of) Creative solutions: In most cases, restructuring focuses on the reorganization of debts significant changes to the way the business is carried out. On the other hand, in most scenarios this is not enough. Generally, it is the way the business has been carried out that lead to the potentially critical state in the first place so that of course needs changing. Also, creative solutions often can be seen implemented in successful reorganization, whereas forward thinking is a must.
🔹 (lack of) Support from the state creditors: Difficulties may arise in the relationship with state creditors, such as government institutions. This category benefits from extensive rights within the insolvency procedure. There have been cases where the was little to no support from such creditors and restructuring without such support was difficult to impossible.
🔹 Effective communication with all stakeholders, including therein the debtor’s employees. In lack thereof, key employees may leave the company and de disengaged.
Of course, there are many other at play for a successful restructuring, such as the debtor’s possibility to secure financing. Although the law has changes to better accommodate financing for the debtor undergoing insolvency in many cases financing is not available or just to expensive.