Strategic commercial interventions: options and case studies

2. Businesses In Financial Distress

Where businesses are experiencing financial distress, early intervention is optimal. The earlier that the directors of an organisation recognise the challenges, the more time and options they have to try to turn it around and avoid insolvency. Solvent restructuring options are more likely to be successful. When restructuring is unsuccessful a company may then become insolvent, which occurs when a company is unable to pay its debts.

There are three main forms of insolvency for companies, which are:

1. Administration is designed to keep an insolvent company running while the insolvency practitioner (the Administrator) determines the most appropriate course of action. It should be noted that during administration, contracts are not terminated automatically as the business can continue to trade. Administration is only viable if sufficient funds are available to cover the costs of the process and the ongoing working capital needs.

2. Company Voluntary Arrangements allows a company to continue trading by agreeing a payment plan with its creditors. The creditors agree to accept reduced or rescheduled repayments while the company is restructured.

3. Liquidation occurs when it is determined that the company needs to be closed down and its business operations stopped in order to avoid it accruing further debts.

In the potentially short period of time between a supplier experiencing financial difficulty and entering a restructuring process, if a request for public sector financial support is made it will be necessary to assess the risks and potential benefits and develop a view as to the type of intervention that is most likely to achieve business objectives. In the Strategic Commercial Assets Division we apply the stand-up criteria detailed below to help assess the grounds for large scale investment. These are:

• Risk of disproportionate harm to Scottish (national/regional) and/or the UK economy - significant impact job loses/skills and GVA;
• Long-term adverse economic impact for Scotland through permanent loss of capacity due to only temporary disruption;
• Undermine long-term competition (sustained impact with no sign of correction) domestically or internationally in a market and lead to longer term consumer/market detriment with no prospect of a subsequent competitor emerging;
• Could threaten identified national security interests or critical infrastructure and services;
• Strategic public policy objectives could be undermined/Important for the delivery of Scotland’s national priorities (e.g green economy etc).