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Entreprises en difficulté et initiative publique

 | 
Anne-Marie Kumps
, 
Paul Grand-Jean
, 
Robert Wtterwulghe

Deuxième partie. Diagnostic des entreprises en difficulté

Enterprises in difficulty the point of vue of the department of industry

Cyril Benjamin

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1I am very glad to come after my previous speaker on the platform here, because I was gratified to hear from what he said that some of our difficult cases in the United Kingdom are not entirely unique. We have an odd company or two that we have rescued as many as four times. So I think, if there is nothing more to be learned of experience, it is that if you are not very careful, this process of intervention can become like taking heroin; it becomes addictive, and it is particularly an addiction where viability is weak and political concerns high.

2I’d like to start by outlining our institutions, which are rather different, I think, from those of many of the states represented here. First of all, in the field of providing finance for industry from Government sources, we have the National Enterprise Board, which is a State Corporation. Basically its terms of reference are to make a return on its money. It was set up relatively recently, and it was only in the middle of last year, that it really became effective. So the whole period of the recession and the very substantial number of bankruptcies that we also experienced occurred when the NEB was really not effective. Over this period, the only powers that we had to assist were those under the 1972 Industry Act, which my previous UK colleague mentioned to you.

3These powers allow Government to provide selective financial assistance for two general kinds of purpose: one is related to assistance in the areas we have marked as of special regional difficulty. Every European State has such specially defined areas of higher unemployment and severe social problems. And then, there is the other part giving general powers for the provision of aid, but we have to be satisfied that whatever we are doing is genuinely in the national interest. Now, this difference means that we have to respond to companies in difficulty in different ways.

4If a small company in difficulty is in an Assisted Area, we view this employment as likely to be jeopardised, and we can therefore consider whether it is feasible and justifiable to save that employment. If that same small company was not in an Assisted Area, we have to think: «Is there something really special about this case in a national context that warrants us saving it»? There is therefore a much closer net applied to the range of cases to which we can respond outside Assisted Areas.

5Now, because of this selective nature, rescue cases do raise in the sharpest possible way the dilemma of Government in who to choose, why to choose, and should you choose. And this is a decision which has to be made in a very short space of time. To help us to do this, we have to set up the unit of which I am the Secretary, which is staffed largely by commercial experts; we have senior partners from accounting firms, banks, finance directors from major industrial companies, management consultants — quite a specialist team. Our task is to examine approaches from companies, and see that public money is spent sensibly. I would go back to what my earlier colleague said that we are hyper-conscious of ensuring that, if we are going to intervene, we must be able to defend what we are doing as not being arbitrary. The Government has published its Criteria, which are the general principles under which we provide assistance. We have through Parliament something comparable to France’s «Cour des Comptes», but ours is called the Public Accounts Committee, and they really are a very severe discipline on us in Government. Every one of our files is open to their inspection. Their staff can go through them and ask any question related to a case and how we handled it, and the head of our Department has to answer to a group of Members of Parliament. And indeed they do examine us very critically. If anyone has the time, you can look at the last two reports of the Public Accounts Committee and you will see that what we were doing in rescue cases was very closely scrutinised, and in some instances criticised.

6So, we have these powers and scrutiny behind us. Now, it would be quite useful if we considered what is a rescue case. What is a company in financial difficulties? Every case is unique. There is no general rule. There is no magic wand that you can wave. Governments always ask us to say: «Can you, please, give us something which will save us having to exercise our judgement». Because no one likes exercising judgement in controversial matters. And we have to say every time: «I am sorry, whatever the company — if it is a nylon manufacturer or a machine toolmaker — you can’t compare the two. They are entirely different types of operation». So we have to look at them both on their own terms.

7However, it might be helpful to take an applicant, and divide him into two distinct levels of operation: one is the business, which consists of the assets, the know-how, the basic commodity — the product, its technology and its skills. Then, secondly, there is the company, which is the organisation which is responsible for funding the operation, and using the basic resources of the business sensibly. As the success of an enterprise is achieved when those two elements gel together and work well; failure is when there is a weakness in one or the other, or both. Now, the way in which this affects the Government, of course, is that — I will take very much the point made by the previous speaker — what we want to do is to use assistance to preserve something which is permanent. We don’t simply want to get into the heroin habit of putting out a bit of money, when we know the company would come back in nine months time, and the choice to put out more money arise again. And so to go on. Therefore, what we are looking for is a viable business in the hands of a sound company, and that is our essential objective. So it follows that 1 go along entirely with what the previous speaker said, namely that simply the provision of money for a company in financial difficulties does not achieve a permanent result. You have got to do something else, and, in most instances, in our experience, you have got to change the management.

8Now, the other main feature of rescue cases is: the company has been losing money, and its equity or asset base is completely eroded by the time it comes to you. It has a heavy dependence on borrowing, and, as losses go up, it is having to borrow more. Therefore, its capital structure is in a complete mess.

9Just before it comes to you, it has been fighting creditors off, while rushing around to see if it can raise money from some other source. If you asked before it came to you whether it was in financial difficulties, the chances are that the management would smile and say: «Not at all, old chap, we’re doing very well!», because the last thing the company wants to be known abroad is that it is in financial difficulty. The moment that happens, confidence in the company goes, the creditors press, and it is forced into receivership, bankruptcy or whatever. So in the period just before the company reaches its critical state, confidence is absolutely crucial. Thus, it follows that, by the time it comes to Government the company has tried every single door where it could have considered raising finance, and failed. It confronts Government therefore in a very weak financial condition.

10Before deciding on assistance, a key question is: how has it got into this condition? One of the commonest reasons is that the internal disciplines of management have failed to warn in time when the company is getting into difficulty, and it has not acted to take corrective action. It has built up stocks when there was no demand to justify stocks. It has not priced its products right, and so on. But, going back to the distinction I drew earlier between a company and a business, the internal disciplines of the company have let the business down.

11So again, when we ask «Can you, please, give us your records, and indicate what you are doing» the chances are we will either get no very good answer, occasionally we don’t get any answer at all, or the answer we get, we have to treat with suspicion. Companies in financial difficulties will invariably say «We have a temporary liquidity problem; in 3 months time with a couple of million pounds of bridging finance, it will be fine. » And there is always a rainbow around the corner, at which they are going to suddenly emerge from their problems, and produce splendid results. To this we can only reply blandly that we need a proper accountants examination, and invariably the situation is never as rosy as the company makes out.

12So to summarise, the dilemma Government faces in dealing with approaches from companies confronting financial collapse is that it opens itself to the most difficult type of decision in terms of the proper use of public money and public criticism if things go wrong. The problem is even more complex, because Government has got to make up its mind whom to save. As a first step we make a close financial appraisal of the company’s position. We also look at the company’s financial record; what its products are; what its prospects are; what its markets are; and the risks involved, in as much detail as possible.

13But Government has other problems on its mind. The interest of creditors and shareholders is very straightforward. Creditors want their money. Shareholders, if they can, would like some of theirs. The Government, however, has got to think around a whole range of concerns not all pointing in the same direction. For example, a company can be a substantial employer in an area of severe unemployment. In other words, if it ran out of business and unemployment rose in the area, the chances of that employment being used elsewhere would be remote, and involve unused resources.

14Secondly, of course, some of these areas are suffering historic decline and the social problems are very severe. Consequently the effect on local morale can be very serious. Then, of course, this unemployment will mean the Government has to pay extra social security and unemployment benefits. That represents an exchequer cost.

15At another level, we have to look at the industrial significance of the business — this is a point which was raised from the floor. It is questionable to save one company in a situation where the industry is suffering from severe overcapacity, because, by preserving weak-capacity, this is going to put pressure on somebody else’s capacity somewhere else. Whatever we are doing, we risk transferring the problem from one area to another, of possibly even greater unemployment difficulties. So, you save Mr A and again the drug starts working: pressure builds up to save Μr B. That then puts further companies under pressure, and so on. The industrial context is therefore an aspect we look at very carefully.

16Also, a company may be a key manufacturer. It may be a major supplier of defence equipment to the Government or to overseas Governments: an example is a case like Ferranti in England. Then, it may, like Chrysler, be providing an industrial capacity abroad. Or there may be many suppliers or distributors dependent upon its products.

17Just to illustrate this dilemma, let us take the case of a nylon-stocking manufacturer in the Manchester area. Local unemployment was close to 20%, and it employed about 800. The situation in the ladies nylon market was such that price-cutting was fierce; there were cheap imports coming in from Ireland; and this company really had no chance. And if you assisted this company, there would be increased pressure on other manufacturers of ladies nylons. That was the dilemma for Government. In this case, unless assistance was provided, unemployment would go sharply up. On the other hand, if Government did so, this would create a reaction elsewhere. So, Government confronted an extremely awkward dilemma.

18Then, of course, some of these rescue cases involve a lot of money. If you take cases like Chrysler, British Leyland, or Ferranti, all are major enterprises. Yet Governments are under pressure to conserve public expenditure. The costs of achieving a long-term return to viability may be measured in tens or hundreds of millions of pounds, which is bound to involve a shift in the priorities of Government spending. So, taking all these considerations together, the problem for Government can be very difficult.

19Then finally, we have what we call «political aspects». Now politicians have their own preoccupations, and it is in their nature that they are bound to be open to representations from pressure groups, whether the local Member with a constituency interest, from party colleagues, Trade Unions, industrial interests, press commentators, and concerned with the need to defend decisions in Parliament. These pressures will inevitably come to bear on the balance of judgement in already complex circumstances.

20Against this background where the issues are complex and any decision sure to be contentious, the IDU is compelled to make a very close analysis of the company, and in particular a diagnosis of where the faults lie, what its prospects are, and the sensitivity in the risks. This is quite a sophisticated analysis, which is done by expert staff — the staff we recruit from the City are hand-chosen. Our basic criterion is viability. By this, we mean that a company, after a period of about 3 years, should be able to sustain a profitable level of operation. In other words, with our assistance, the company does not run out of money but can sustain itself. And that is the basic parameter against which we assess every single case. Then we say: «how do you rescue the business?» I stress, it is essentially the business and not the company that represents the essential industrial capability, which it might be worth perpetuating, save where collapse of the company may harm the business.

21What are the options open? Certainly in the UK, these are not so simple as they appear. The first option is to say: «No, we will not provide you with assistance». That has the merit of not costing Government anything. But it is also a very good way of saving a company, because many companies come to Government, largely dominated by the interest of shareholders. They see the company declining and they want to get something—for something is better than nothing — from the Government in order to keep going a bit longer and avoid bankruptcy, where shareholders would be confronted with the risk of getting nothing.

22And in that sort of circumstance, particularly with the small private company, «no» is a very good way of encouraging the shareholders to seek salvation by merging with another stronger company. It is rather like Dr Johnson’s reference to hanging as a way of concentrating the mind wonderfully. And that is exactly what the answer «no» does to a small company. We have, in fact, secured the rescue of a very large number of businesses, leading to the company selling out to a stronger partner, simply by saying «no».

23The other thing which can happen when you say «no» in England — and I don’t know whether you have the same functions of a receiver on the Continent — but the principal creditor, who is normally a bank with a fixed and floating charge, can appoint a receiver. Now, he is a cautious animal and the company legislation surrounding his functions is very complex. But basically, he is put into the company to look after the assets of the business. He has a personal responsibility of trying to realize as much of those assets as he can for the principal creditor and the other creditors. And he has wide powers: he can cancel a contract, he can renegotiate contracts, he can kick the existing management out, he does not have to give first thought to the shareholders. The receiver can, in practice, run a business for a considerable time; some companies have been in receivership for 15 years, and they are still being run by an accountancy firm who were appointed as the receiver. But more important, he will get a better price if he sells the assets as an ongoing business, as opposed to just break up value. So, he has, in effect an incentive to do half your work for you. He will look at the business and he will say: «What are the bits that are actually worth going on?» and the ones where «I personally will not lose money if I carry them on». We find that receivership is a particularly useful way of dealing with conglomerate companies, for example, with a large range of divisions or subsidiaries, some of which are quite good, but others of them have pulled the business down.

24So far as a potential purchaser of the assets is concerned, the debts of the previous company are cancelled. So, the new company will take over simply the assets, the essential workforce, the technology, the trade name or what it is prepared to buy. In certain circumstances, we can offer assistance to a stronger company to acquire the assets from a receiver and restart the business on a viable basis under a new banner.

25The other option is to say «Yes, we will give you assistance». This is not an easy judgement. Because we have to ask, how much is it going to cost us? What terms should we attach to our assistance? How can we correct the weaknesses of the company? These are major problems. And we try to use the pressure of the market mechanism. We have to instill discipline into the company, and in our experience, the best discipline is to see that somebody runs the business sensibly with his own money at risk. Nothing, we find, encourages as sharp a sense of discipline as the undertaking having its money at risk. Therefore, we always look for some private sector element to come in and put up the bulk of the money. If the case is such that no source of finance is prepared to put up most of the money, we look at it extremely suspiciously, and we invariably have the greatest difficulty in persuading Government to support it.

26Secondly, the condition of a company in financial difficulty is such that one of its paramount needs is an injection of some equity finance. Moreover, any such business is going to have to go through a period before it recovers, and will experience a negative cash-flow for 2 or 3 years. One of our problems about equity is that under our powers, the 1972 Industry Act, we cannot take equity without agreement. And moreover, we would have reservations about doing so, for we do not want to put money into shareholders’ pockets in circumstances where the shareholders are not entitled to it. So, in most of these cases, where this type of assistance is involved, a quite complicated financial reconstruction is needed usually under pressure of time.

27Then, finally, we will insist that assistance is once-for-all. Once paid, that’s the end. After that, the company is on its own, with its own money at risk. Now, this can, in fact, mean that the apparent sums of money are quite high; for example, Chrysler (UK), with total assistance of 165 million pounds. But a large part of that sum was guaranteed and secured firmly by Chrysler Corporation as part of our pressure to get them committed to the UK subsidiary. And again, a part of the assistance was a contingent element depending on the level of losses they reach over certain periods of time, but shared with Chrysler Corporation.

28We therefore always try to negotiate a set of terms which create an incentive on the business to pick itself up and sort itself out. This is the fruit of our experience. We have handled probably several hundred queries from many companies. We have actually looked at in detail probably about 70 or 80. And some form of assistance is being provided for about 50. This gives you an indication of the sort of selective approach that we apply. The terms of assistance have varied widely: in each case, they are negotiated quite separately. For example, a large building construction company professed that it could not forecast how much it would need and wanted a stand-by facility from the Government of £7 million. We reckoned they needed £3 million.

29So we agreed an initial loan of £3 million, but any pound drawn above £3 million had a conversion option attached to it; in other words, we could convert that into equity in the company. Thereby, we built in a disincentive on the company to draw further assistance. Assistance structured in this way is a mechanism to encourage the company to run the business efficiently, without increasing its borrowing, and therefore, hopefully, achieving a proper future for the business.

30Now, to summarise, it is very difficult to encapsulate our experience in very brief form. But I would say that I fully endorse what some of the other speakers have said about the need for a very careful look before government gets involved in this sort of situation. Secondly, you must never think that simply putting out money is going to solve the problem. Given the limited amount of time, there is pressure to move quickly. If short-term finance alone is provided, Government puts itself in a situation where it is on the road to disaster. It has lost its negotiating position completely; there is an obligation on it because it has supported that company in adverse financial circumstances; and, if creditors were to lose money, in the event of Government not continuing to provide funds, there could be very contentious claims against the Government. Therefore, whenever we consider providing that sort of interim assistance, it is only in circumstances where we have effectively accepted that the company is sufficiently in the national interest to be preserved as it stands: such cases would be British Leyland and Alfred Herbert.

31A rescue situation thus calls for very considered thought, preceded by clear analysis. Preserving potentially viable businesses, or parts of businesses — as distinct from companies, must be the first aim. For without viability none of the advantages to employment, industry, local social conditions or general policies can be achieved, and the cost in expenditure and false hopes will be high.

Auteur

Assistant secretary Industrial development unit Department of industry

© Presses de l’Université Saint-Louis, 1978

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