Corporate Governance in Transition : Dealing with Financial Distress and Insolvency in UK Companies

This book presents an account of legal, economic and managerial perspectives on governance in situations of financial distress and insolvency. It uses detailed real-life case studies of executive decision making to explore and illustrate the discussion. The book deals with the emergence of corporate governance as a framework of checks and balances on executive decision-making, before moving to the core issues of governance during financial distress and insolvency and alternative informal and formal rescue. Identifying and reviewing turnaround strategies and formal rescue processes available to management, the book also examines the increasing importance of creditors and their impact on business decision-making. The book provides a detailed interpretation of governance in five mega insolvencies in retail and construction following the financial crisis in 2008. It also sets out a methodology which is designed to inform and help those readers seeking to analyse and interpret director behaviour in such circumstances. Contents 6 List of Tables 8 Part I 9 1: Governance in Distress 10 Overview 10 Financial Distress: A Challenge for Governance 11 Scope and Contribution 14 Narrative 14 2: Corporate Governance in Public Companies 16 Overview 16 Early Perspectives of Corporate Governance 17 Origins of Modern Corporate Governance 19 Models of Corporate Governance 21 Corporate Governance in the UK: The Primacy of Directors 23 Three Major Board Sub-Committees 26 Common Law and Statutory Aspects of Governance 29 Shareholder Influence on Governance 33 Derivative Claims 37 External Governance Mechanisms 39 Concluding Remarks 42 Bibliography 43 Legislation 47 Cases 47 Directives 48 3: Financial Distress, Insolvency and Business Rescue 49 Overview 49 Legal Definitions of Financial Distress 50 Business Definitions of Financial Distress 51 Causes of Financial Distress 54 Formal Non-Rescue Procedures 56 Formal Business Rescue Regimes 59 Administration and Company Voluntary Arrangement 61 Concluding Remarks 65 Bibliography 66 Legislation 70 Cases 70 4: Corporate Governance in Financial Distress 71 Overview 71 Informal Rescue Processes 72 Board of Directors’ Role 72 Shareholder Influence 80 Creditor Influence 80 Director Liabilities During Financial Distress and Insolvency 86 Concluding Remarks 94 Bibliography 95 Cases 98 5: Corporate Governance in Insolvency 100 Overview 100 Company Voluntary Arrangement (CVA) 101 Creditor Influence 103 Shareholder Influence 105 Administration 106 Administrator’s Role 106 Secured Creditor Influence 116 Unsecured Creditor Influence 120 Concluding Remarks 122 Bibliography 123 Legislation 123 Cases 124 Part II 125 6: Corporate Governance Research: An Empirical Approach 126 Overview 126 The Case Study Approach 127 Case Selection 130 Data Collection 135 Data Sources 136 Data Collection Prior to Informal Rescue Process 138 Data Collection Related to Informal Rescue Process 138 Data Collection Relating to Formal Rescue Process 142 Limitations of the Data 143 Organisation of Case Studies 144 Bibliography 144 Legislation 146 7: Case Study 1: Stylo plc 147 Overview 147 Financial Distress and Associated Causes 149 Informal Rescue Process 150 Board of Directors’ Role 150 Board Change 151 Cost Reduction 152 Asset Sale 152 Equity/Share Issue 153 New Debt Financing/Debt Renegotiation 153 Shareholder Influence 153 Creditor Influence 154 Formal Rescue Process: CVA and Administration 154 Company Voluntary Arrangement (CVA) 155 Administration 156 Administrator’s Role 156 Management of the Going Concern 156 Asset Sale and Recovery 157 Distribution of Proceeds to Secured Creditors 158 Distribution of Proceeds to Unsecured Creditors 159 Investigation into Directors’ Conduct 160 Creditor Influence 160 Summary 161 Bibliography 162 8: Case Study 2: JJB Sports plc 164 Overview 164 Financial Distress and Associated Causes 166 Informal Rescue Process 166 Board of Directors’ Role 166 Board Change 167 Cost Reduction 168 Asset Sale 169 Equity/Share Issue 170 New Debt Financing/Debt Renegotiation 170 Shareholder Influence 172 Creditor Influence 172 Formal Rescue Process: CVA 173 Company Voluntary Arrangement (CVA 1) 174 Process 174 Board Change 176 Asset Sale 177 Equity/Share Issue 177 New Debt Financing/Debt Renegotiation 178 Company Voluntary Arrangement (CVA 2) 178 Summary 180 Bibliography 180 9: Case Study 3: Waterford Wedgwood plc 185 Overview 185 Financial Distress and Associated Causes 187 Informal Rescue Process 188 Board of Directors’ Role 188 Board Change 188 Cost Reduction 189 Asset Sale 189 Equity/Share Issue 190 New Debt Financing/Debt Renegotiation 191 Shareholder Influence 192 Creditor Influence 193 Formal Rescue Process: Administration 194 Administrator’s Role 194 Creditor Influence 197 Summary 198 Bibliography 199 10: Case Study 4: Woolworths Group plc 202 Overview 202 Financial Distress and Associated Causes 204 Informal Rescue Process 205 Board of Directors’ Role 205 Board Change 205 Cost Reduction 206 Asset Sale 207 Equity/Share Issue 208 New Debt Financing/Debt Renegotiation 208 Shareholder Influence 209 Creditor Influence 210 Discussion 210 Formal Rescue Process: Administration 211 Administrators’ Role 211 Creditor Influence 214 Summary 216 Bibliography 217 11: Case Study 5: Connaught plc 221 Overview 221 Financial Distress and Associated Causes 223 Informal Rescue Process 224 Board of Directors’ Role 224 Overview 224 Board Change 225 Cost Reduction 226 Asset Sale 227 Equity/Share Issue 227 New Debt Financing/Debt Renegotiation 227 Shareholder Influence 228 Creditor Influence 229 Formal Rescue Process: Administration 229 Administrator’s Role 230 Summary 236 Bibliography 237 Part III 243 12: Insights from the Case Studies 244 Overview 244 Sample Companies 245 Financial Distress and Associated Causes 249 Financial Distress 249 Internal Causes 251 External Causes 251 Informal Rescue Processes 252 Use of Informal Rescue Options 252 Board of Directors’ Role 253 Board Change 253 Cost Reduction 256 Asset Sale 257 Equity/Share Issue 259 New Debt Financing/Debt Renegotiation 260 Shareholder Influence 261 Creditor Influence 263 Formal Rescue Processes 264 Administrator’s Role 264 Management of Business as a Going Concern 264 Asset Sale and Recovery 266 Distribution to Secured Creditors 268 Distribution to Unsecured Creditors 268 Investigation into Directors’ Conduct 272 Creditor Influence 272 Secured Creditor Influence 272 Unsecured Creditor influence 276 Conclusions 279 Bibliography 281 Legislation 281 13: Conclusions 282 Overview 282 Comments on the Extent to Which the Aims Have Been Realised 283 Treatment of Financial Distress in UK Law and Corporate Governance Codes 283 Directors’ Duties to Exercise Commercial Judgment in Financial Distress 285 Shareholder and Creditor Influence on Informal Business Rescue 287 The Role of Insolvency Practitioners 289 Contribution to Knowledge 293 Analysis of Changes to Corporate Governance During Insolvency 293 Identification and Analysis of Multiple Influences and a Holistic Approach 293 Innovative Approach to Data Collection 293 Research Implications 294 Further Research 295 Concluding Remarks 296 Index 297 Front Matter ....Pages i-vii Front Matter ....Pages 1-1 Governance in Distress (Marjan Marandi Parkinson)....Pages 3-8 Corporate Governance in Public Companies (Marjan Marandi Parkinson)....Pages 9-41 Financial Distress, Insolvency and Business Rescue (Marjan Marandi Parkinson)....Pages 43-64 Corporate Governance in Financial Distress (Marjan Marandi Parkinson)....Pages 65-93 Corporate Governance in Insolvency (Marjan Marandi Parkinson)....Pages 95-119 Front Matter ....Pages 121-121 Corporate Governance Research: An Empirical Approach (Marjan Marandi Parkinson)....Pages 123-143 Case Study 1: Stylo plc (Marjan Marandi Parkinson)....Pages 145-161 Case Study 2: JJB Sports plc (Marjan Marandi Parkinson)....Pages 163-183 Case Study 3: Waterford Wedgwood plc (Marjan Marandi Parkinson)....Pages 185-201 Case Study 4: Woolworths Group plc (Marjan Marandi Parkinson)....Pages 203-221 Case Study 5: Connaught plc (Marjan Marandi Parkinson)....Pages 223-244 Front Matter ....Pages 245-245 Insights from the Case Studies (Marjan Marandi Parkinson)....Pages 247-284 Conclusions (Marjan Marandi Parkinson)....Pages 285-299 Back Matter ....Pages 301-309