Insolvency Feature
Issue No. 45 - Feb/March 2009
Insolvency: Threat can make us better
Insolvency is a grim spectre of defeat that few entrepreneurs care to think deeply about. But facing up to the situation and working through the process can lead to a healthier, viable business, according to SA’s most experienced consultants in the field.
Sam Davies, Partner at McGrath Nicol Corporate Recovery, says a classic example in SA played out only a few years ago.
Castalloy Manufacturing, a subsidiary of car parts group Ion Ltd, made engine components for Holden and virtually all of Harley-Davidson’s motorcycle wheels. The group, including Castalloy, went into administration in December 2004.
At the time, Castalloy faced severe operational and financial issues, including:
• $20 million annual operating loss from a turnover of $100 million
• Harley-Davidson threatening to terminate its most critical contract due to supply delays
• Disengagment from its 1100 workers and their union,
low levels of work force morale and productivity.
EPA threatening immediate shutdown due to many operating licence breaches
• Frequent machinery breakdown causing production loss and supply issues.
• Inadequate OHS&W programs resulting in one of the highest WorkCover claim histories in SA.
Return prospects for creditors were low, Sam says. There were no buyers for the business in its existing state but elements necessary for a viable business were evident.
Administrators, directors and creditors faced a stark choice: shut down, throw 1100 people out of work, and disrupt many businesses upstream and downstream including Harley-Davidson’s plant; or develop and implement a restructure plan to make the business viable and more attractive to potential buyers, knowing that a restructure would take time.
“Creditors resolved in May 2005 to execute a pooled Deed of Company Arrangement for certain Ion entities, including Castalloy,” Sam says. “The business would be restructured and sold wit...
