What makes a judicial reorganisation succeed

The Business Continuity Act, commonly referred to as judicial reorganisation, was passed in April 2009. Doubts remain about how effective it is, and with reason: many companies end up filing for bankruptcy after going through it.

Those questions lead back to where the company’s difficulties came from, and to what is needed for it to return to break-even.

If you are at that point, there is a problem to be treated

The causes are many, and the purpose here is not to consider them all. But one obvious thing bears repeating: if a company turns to judicial reorganisation, it has a problem, and that problem has to be treated.

It may be circumstantial. A customer failing to pay a large order, when the company is otherwise sound. That ideal case is not representative of most companies in reorganisation.

Most are facing an unfavourable shift in their market. New competitors arriving. An inability to raise prices to pass on rising costs. A declining market, and the difficulty of reinventing themselves and finding new things to sell.

The pattern, almost always the same

Margins narrow little by little. Then losses appear, small at first. Invoices take longer to pay. You hope things will be better tomorrow, or next year. But the losses grow, and the better day never comes.

That pattern is common, in this form or in variants of it.

What reorganisation does, and what it will not do

Judicial reorganisation is without doubt an excellent tool for helping put a company back on track. It freezes the debts for a time, allows solutions to be sought and creditors to be negotiated with. It will probably secure a rescheduling of repayments, with or without a reduction.

But it will not solve the problem that caused the debts. It will not improve profitability and it will not fix management problems. It will not grow sales and it will not cut costs. It addresses one aspect of the problem only: the debts.

Yet the company’s problem is not its debts, but what caused them. The debts are only a consequence.

What a recovery actually demands

It will often demand vigorous, rapid measures, and a change of course in how the company is run. In a small business the owner is head-down in the day-to-day. He fights the nearest fire and cannot find the time to step back. He struggles to identify and carry out the urgent, radical measures that are needed.

In other words, a successful and lasting recovery will come through initiatives on the management side, added to the legal procedure. The owner has to understand that. And if he cannot bring about the necessary change himself, he must take advice in order to achieve it quickly.

It is most likely by taking that on board that the success rate of judicial reorganisation — in the sense of companies surviving over time — can be raised significantly, preserving activity and jobs.

That realisation is urgent today, particularly for small businesses. Without change in how the company is run, the same results are likely to repeat themselves, with unhappier consequences still.

Nady Bilani