SW 1-3 Flashcards
Financial Crisis:
Strategic Reasons (5)
(Internal Issues)
Misjudgment of future sales markets and procurement markets;
Wrong corporate strategy or unsatisfactory realization of such strategy;
Misinvestments (Product development; operating assets; real estate; acquisitions; foreign subsidiaries etc.);
Unsatisfactory corporate management (BOD, Management);
Intransparent corporate structures / inappropriate organizational structures
Financial Crisis:
Finanical Reasons (8)
(Internal Issues)
Drop in sales; unsatisfactory Cash Flow;
Bad debts / inappropriate level of reserves for bad debts;
Not enough provisions for risks;
Excessive investments (over-investing);
Excessive cost structures;
Excessive inventory levels; overstatements of inventories;
Thin equity base; non risk conform equity;
Misleading financial reporting.
Financial Crisis:
Operational Reasons:
(Internal Issues)
Corporate Culture; Management stile; «calculated optimism»
Missing management tools (intransparency);
Suboptimal operational structuring (unclear; risky; inefficient etc.)
Inappropriate risk management;
Under-qualified staff (issues with selection, education, personnel turnover);
Quality issues (products / services);
Delays in delivery.
Financial Crisis:
Operational Reasons: External Issues
Economic cycle
Technological changes
Market compression (competitors / substitutes);
Unforeseen events:
- loss of an important business relationship;
- insolvency of a client or a supplier
- drastic changes on raw material / energy / capital – markets
- exchange rates;
- economic shocks;
- trade barriers;
- loss of key personnel (know how).
Symptoms of a crisis
Strategic Crisis
- Lower order inflow / shrinking order books
- high infrastructure cost
- drop in sales
- price wars
- loss of market share
- over capacities
- low productivity
Symptoms of a crisis
Profitability Crisis
- higher deducations (Abzüge)
- lower operating margin
- unsatisfactory equity level
- low quality of costing
- droping EBITDA /EBIT
- escalating use of credit lines
- rising trade accounts payable (FLL)
- management / staff turnover up
- lack of ressources
Symptoms of a crisis:
Liquidity Crisis
- permanent full use of credit lines
- over-drawing credit lines (Überziehungskredit)
- inability to take deductions (Skonto)
- payment hold-up (Zahlungsaufschub)
- escalating need for information of creditors
How does the general crisis model look like?
What is an adverse balance sheet?
(adverse = negativ)
- if a company makes losses
- it eats away equity
Adverse Balance sheet: difference between open/concealed and genuine/ not genuine?
open/disclosed:
- the loss is fully visible on the face of the balance sheet
- there are no more components to offset the loss
- Genuine (echt)
- no reserve anymore
- you can’t make the B/S look nicer
- not Genuine
- you still have hidden reserve/ disclosed reserve
- as long as you can make the B/S look nicer it is NOT genuine
concealed/ undisclosed:
- the loss is not visible on the balance sheet
- the loss has been offset, f.e. through reservations
How does the position “equity” look?
Equity:
- Shareholder’s equity
- Reserve
* Legal reserve
- Capital reserve
- general legal reserve
- revaluations reserve
- reserve for own shares
* free reserve
* statutory reserve
* retained reserve
- Profit/ Loss
How do you calculate over-indebtedness?
Either:
Equity ./. loss
- > if positive: no over-indebtedness
- > if negative: over-indebted
Or:
Total liabilities ./. total assets
- > if negative: no over-indebtedness
- > if positive: over-indebted
Art. 725 OR, Adverse Balance sheet
Without legal implications:
assets fully cover debts and at least 50% of share capital and legal reserves
With legal implications (Art. 725 OR):
Abs. 1
assets fully cover debts but less than 50% of share capital and legal reserves
Abs. 2
assets no longer fully cover the debts
—> Art. 671, 3 OR: free reserves may always be used to offset losses, also general reserve is meant to absorb losses.
Which reserves can not be recorded against a loss?
(2)
- revalutation reserves
- reserves for own shares
Für was darf die allgemeine Reserve gemääs OR Art 671, 3
nur verwendet werden?
Die allgemeine Reserve darf (soweit sie die hälfte des AK nicht übersteigt) nur zur Deckung von Verlusten oder für Massnahmen verwendet werden, die geeignet sind, in Zeiten schlechten Geschäftsganges das unternehmen durchzuhalten (…)
Which 3 Scenarios for “Adverse BS” (Capital Loss) in short?
1. Assets fully cover debts and at least 50% of shareholders capital and legal reserves
2. assets fully cover debts but less than 50% of shareholders capital and legal reserves
–> BOD call in AGM
3. assets do no longer fully cover debt
–> interim F/S
Name different things that are typical for
Profitabilty Crisis
and
Liquidity Crisis
Profitability Crisis:
- margin is shrinking
- company is making loses
- equity is shrinking
Liquidity Crisis:
- can’t pay the salary
- than everybody knows that the company is in trouble.
–> The end is near
Adverse B/S (Capital Loss)
Disclosed vs. Undisclosed
Disclosed: they show the Loss in the B/S
Undisclosed: Assets are overstated or Liab. are understated
–> the loss is not / or no fully visable
Over-indebtness
General (!)
Equity < Loss
or
Assets < Liabilites
–> Over-indebted
What does restructuring mean? And how does the concept look of restructuring?
- restructuring = turnaround
- recovery of a financially stricken economy subject
- Private Person
- Corporation
What should you check before you start the restructuring process?
ability
- does the plan have a high probability of success?
worthiness
- expected financial expense in prop. to the chances of success/ expect. corporate value?
- existing personal prerequisites? (pers. Voraussetzungen)
- Management
- Board of Directors
- are the people motivated
Excurs: What ist the IDW-S6 of Germany?
(not sure if MEP relevant)
- third party confirmation as to the feasibility of a restructuring plan
- used so that banks participate
- this report is needed if
- close to illiquidity
- insolvency
- over-indebtedness
- see more details 02a page 9
What is actio pauliana?
- it is a name of a lawsue
- treat the creditors equally
- The issues in focus are “delay in filing bankruptcy petitions” and “undue preference of a creditor”
- > if you delay it you are liable
a restructuring plan is successful if all interested parties work positively and constructively together.
-> Who are the key players?
Restructuring: order of the key stakeholder
Board of Directors (BOD)
- > overall responsibility of corp.
- > Art. 716 OR -> not delegable
- > takes decisions of all necessary steps
- > document all decisions
Management or Chief Restructuring Officer (CRO)
-> operational transformation usually delegated to them
- CRO: handles the restructuring issues
- Management: tries to get the corporation back on track in the “daily business”
What is the destructive (zerstörerische) side of turnarounds?
- stakeholder suffer from dramatic negative impacts
- loss of all receivable
- damage of reputation
= different interests of stakeholders
Equity Providers
- > want to increase/maintain value of invested capital
- > want a reasonable return
- danger of full/ partial loss of inv. capital
- no withdrawable gains
Debt lenders
- > want to ensure repayment & interest payments
- > collaterals
- > want to maintain business relationship
- loss of int. payments/ amort./ notional amount
Employees
- > secure workplace
- > reasonable Total compensation
- downsizing of workforce
- short labor schemes
- etc.
Customers
- > receipt of service on time
- > etc.
- delivery stop/ delays
- loss of warranty period
Suppliers/ Credit Insurers
- > timely payment
- > lasting business-relationship
- untimely payments
- loss of payment terms
Communities/ State
- > political interests (employment, etc.)
- > tax
- l**ess tax
- gov. has to pay
- higher payment for social welfare
- need for risk guarantees
What are constructive impacts of restructuring?
- Shareholders:
- going concern
- future profit potentials
- Employees / management:
- ensure workplace security
- positions
- -> new career opportunities
- Debt Lenders:
- ensure repayment and interest payments
- Suppliers:
- stable business relationship
- potential for business extensions
- Clients:
- maintain a stable supplier
- State:
- maintain future tax substratum (corporate taxes and private individual taxes)
- less unemployment compensation payments
How does the corporate analysis look like? (part of restructuring)
What different financial restructuring measure exist?
- Equity Measure: Increase
- Equity Measure: Decrease
- Liability Measure
- Additional Measure
Equity Measure: Increase
- A fonds perdu payment
- Issue new shares and partic. certif.
- apprecriation real estate or investments
- change of reval. reserve into share cap.
Equity Measure: Decrease
- Formal decision of the AGM to decrease share
Liability Measure
- renunciation (Verzicht) of a claim
- composition agreement (Vergleich) (in or out of court)
- debt conversion (Schuldumwandlung)
- special terms and conditions
- Leasing
- Debt-Equity Swap
- Shareholder Loans/ Loans of related parties
- restructuring loans
- subordination agreements
Additional measure
- Offset Reserve against loss
- release hidden reserves
- sale of assets/ parts of the corporation
- restructuring merger
How does the claim enforcement (Betreibung) basic process look like?
There is a card for each process
Claim enforcement: Invoice
- payment term = 30 days (if nothing special agreed)
- overdue (überfällige) fees only are only payable if agreed
- debtor is in default if he doesn’t pay and if he is in receipt of a reminder note
- if in default, debtors owes interest (usually 5%)
- no cash discount if nothing agreed
- LSV = Beware of Debit Advice Procedures
Claim enforcement: payment summons
- no reminder notice is needed
- payment summons is delivered by the execution officer or the post
- payment within 20 days
- objection by debtor within 10 days (grace period)
- payment summons is entered into a public register (Betreibungsauskunft)
- it is helpful if the claim is substantiated (begründet)
- if substantiation misses -> creditor has to enforce claim by court proceedings
- if collateral: enforcement by realization of security
–> it is advisable for debtors to pay the claim to the enforcement office!!! Falls Debtor behauptet es wurde immernoch nicht bezahlt -> Beweis einfacher
Claim enforcement: Enforcements with no reason
- entry into public register is done automatically
- sometimes started for bullying reasons
- the concerned party must ask the enforcement party to delete it
- if not done: concerned party must file a court petition for denial (time consuming and lawyer needed)
Claim enforcement: Claim enforcement process
If court decision exist
- debtor can only defend himself by proving that he has paid the claim/ that claim falls under the statue of limiations/ has been deferred (wurde verschoben)
- definite approval for continuation by court -> creditor may request the continuation of the claim enforcement with the enforcement office
If a public document or a promissory note exists
- debtor may defend himself by establishing prima facie evidence that no such claim exist
- if judge follows the debtor’s arguments
- -> creditor has to sue the debtor in a seperate lawsuit
- if judge follows the creditor
- -> the debtor may appeal to the cantonal court (20 days period)
- -> sue for denial of claim
- if appeal is declined
- -> creditor may request the coninuation of the claim enforcement with the enforcement office
- creditor can request provisional continuation
- possible documents:
- signed delivery slip
- purchase contract
- signed loan agreement
- signed rental contract
- signed employment contract
No document is available
- creditor must sue for acceptance of the claim
- if judge follows the arguments of the creditor
- -> creditor may request the continuation of the claim enforcement with the enforcement office
1) Enforcement by seizure: decision by enforcement office based on legal provisions
2) enforcement by realization of security:done by enforcement office -> seizure document for creditor and debtor (seizure of salary)
3) enforcement by bankruptcy: debtor receives notice for bankruptcy
Claim enforcement: Claim enforcement process
-> Enforcement by Seizure (Pfändung)
- for private persons (cases where bankruptcy is not possible)
- if no collateral has been granted
- claims under public law
- creditor has to request the realization of the seized assets
- earliest: 1 month/ latest: 1 year after seizure
- in case of real estate: earliest: 6 months/ latest: 2 years after seizure)
- real estate: public auction -> purchaser has to pay in cash or within 20 days
- if not enough to seize: further seizures/ deficiency note (Verlustschein)
Claim enforcement: Claim enforcement process
-> enforcement by realization of security
- for all collaterized claims
Claim enforcement: Claim enforcement process
–> Enforcement by bankruptcy
- for corporations
- also for trusts, associations and corporations
- also for private persons which are entered into the commercial register (self-employed, etc.)
Discontinuation of process
-> if no material assets
summary proceedings
-> only few assets are existing
ordinary proceedings
-> enough assets
(-> separate card)
Claim enforcement: Claim enforcement process
–> Enforcement by bankruptcy
Ordinary proceeding:
- how does the process look like?
- how does the collocation plan look like?
1. creditor call
- creditors are to report their claims within 1 month
2. 1st creditor reunion
- election of receivership and creditor committee
3. collocation plan by receivership
4. 2nd creditor reunion
- decides on realization of assets
5. distribution of funds according to distribution list
(Private Persons may declare bankruptcy -> however claims against them do not disappear -> cred. may open new enforcement at any time)
Enforcement by Seizure (Pfändung):
specify the framework conditions for the auction of the assets
- normal assets
- real estate
earliest: 1 month / latest 1 year after seizure
real estate: earliest 6 months / latest: 2 years after seizure
The general Crisis Model:
What are some of the key statements this Model makes (4)
1. Corporate Value is shrinking over time
2. Scope of available action (tools, restructure etc.) shrink over time
(am Anfang gibt es 100te Möglichkeiten am Schluss vlt nur noch 1 Notlösung)
3. Detection of crisis increases over time
(am Anfang gibt es nur schwache Signale (Strategic Crisis), am Ende erkennt es jeder, dass die Firma Liquiditäts Probleme hat ((Lohn)Zahlungen bleiben aus)
