The number of corporate reorganizations that have taken place in the past decade has increased significantly in Canada. There have been several high-profile transactions that have raised the level of awareness of terms such as CCAA (Companies’ Creditors Arrangement Act), NOI (Net Operating Income), Proposal, BIA (Bankruptcy and Insolvency Act) and Chapter 11 to the ordinary citizen.
The initial period of a reorganization is often characterized by a rapid decline in the cash flow from operations and a chaotic atmosphere where priorities shift rapidly. This is often provoked by the lenders, who move quickly to protect their interests and make legitimate demands on the company to comply with its agreements or as an alternative, to provide reasonable assurance by way of a business plan as to how the situation will be redressed. In the meantime the core business must continue to receive the critical attention it needs. Many restructuring efforts fail, because without a reliable framework and system to identify, plan and implement positive corporate-wide change rapidly, the organization often spins out-of-control. Too often, management efforts will gravitate toward fixing the balance sheet whilst paying lip service to structural and operational issues. This is completely understandable given the vested interests at play.
One of the most powerful tools available to a company, is an experienced corporate recovery and restructuring professional who will work with management and the board to guide the company through the often murky and unpredictable waters of a reorganization, whether or not it is under the protective umbrella of the law. This role has traditionally been played by the restructuring professional in tandem with management.
Enter the turnaround professional or CRO (Chief Restructuring Officer), an independent thinker with proven leadership skills. This is not a job for the light hearted. Decisions must be made rapidly, often without the benefit of detailed analysis. Short-term plans must be laid out clearly in order to garner the support of lenders whilst a medium-term strategy is being crafted.
The complex regulations in U.S. Chapter 11 together with precedents set in Canadian CCAA proceedings has often required a trained professional at the helm of the company. In fact, in many circumstances it is essential to ensuring all stakeholders are represented and will get the best deal. Often, the board may opt to consolidate the functions of CRO and CEO into one individual. This is expeditious to implementing decisions and removes any historical bias (no sacred cows) when evaluating the plethora of options available.
The CRO may come from either a financial, legal or operations background. However, keeping the roles distinct is preferable, given that at the heart of the matter is a business that needs to be managed. Industry experience is also desirable but should fall lower down the spectrum of qualifications, unless it is a specialized industry. Employees of troubled companies can be motivated to tremendous achievements if given the proper guidance, leadership and management. I have often found that problem specific technical skills are usually resident in the company, diamonds in the rough. Once you have peeled away at the layers of management, there are people who are eager to take up the challenge as a once in a lifetime opportunity to rapidly ascend the ladder of experience. Ordinary people will do extra-ordinary things, with the right leadership. The CRO leads by commitment and decision. He/she is a turnaround professional who is a specialist in distressed business. The CRO is focused on the rapid analysis and treatment of problems and, if possible, the early restoration to profitability, preferring to formulate a strategy which will enable the company to survive. The commitment and experience of a CRO is best optimized because he or she becomes an insider dedicated to maximizing the company’s value to the stakeholders. They empower the organization by fostering management talent for the long term. In a time of crisis, the CRO is a company’s best friend.
The role of the CRO differs significantly, depending on the size of debtor, is it public or private; the potential clout of the secured lenders, have they followed through with a DIP (Debtor-in-Possession) loan or forbearance agreement; the boardroom commitment to effect change. In small and medium size businesses, the CRO role is almost always set in an operating context, whilst the owner, manager / controlling shareholder cedes authority to the professional.
In order to be effective the CRO must work closely with the court appointed officer recognizing his role, obligations and responsibilities be that monitor, trustee or interim receiver. The ultimate balance for impartiality for stakeholders will always be the court appointed officer. The CRO provides the credibility from the company’s perspective in ensuring the integrity of information, the management skills in implementing the turnaround plan and the Boardroom presence in keeping them apprised of developments and seeking approval of actions as necessary.
Raoul Heredia CPA,CA is a Restructuring Advisor with our Montreal office with over 20 years experience as a CRO, CEO and CFO in public and private enterprise. To learn more about how MNP can help, you may contact him at 514.228-7927.
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