ANALYSIS OF CAPITAL RESTRUCTURING AS A SOLUTION TO CORPORATE FAILURES
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ANALYSIS OF CAPITAL RESTRUCTURING AS A SOLUTION TO CORPORATE FAILURES
INTRODUCTION TO CHAPTER ONE
1.1 BACKGROUND OF THE STUDY
The Nigerian economic crisis, which has lasted until 1999, peaked in 1989. The consequences were gross underutilization of human and material resources, operational level, and outright business failure.
Almost every industry in the Nigerian economy has seen some type of difficulty. The banking industry, through which it controls the most financial resources in the economy,
has had and continues to experience its own share of difficulties. Since the Decree of 2000, the building business has had ongoing negative growth trends, and the manufacturing industry, among others, has not been spared.
Prior to the economic crises, there was the decade of economic boom (1970-1980), during which the oil sector dominated, accounting for up to 80% of total foreign exchange earnings in 1985 and 90% in 1999. Nigeria had the unique fortune of benefiting from the rising during this decade.
As a member of the Organisation of Petroleum Exporting Countries (OPEC), oil prices are volatile. The lack of government planning apparatus to channel these large resources into alternative investment pools resulted in the economy’s current major problems.
This lapse resulted in inflationary pressures manifesting themselves in growing prices, a scarcity of fundamental commodities and services, a low income per capital, a high unemployment rate, many enterprises closing and a slew of them producing at well below installed capacity (Baffa S.S. 1999).
A time of recession is defined as “a recurring period of decline in total output income, employment, and trade, usually lasting six months to a year, and marked by widespread contraction in many sectors of the economy.”
These unfavourable economic patterns persisted until the Structural Adjustment Programme SAP was implemented in 1999. The economy had experienced severe internal and external disequilibrium and structural imbalances,
resulting in all economic metrics such as inflation rate, GDP, employment rate, and idle capacity. Several industries, among others, attested to this truth, as there were clearly visible.
In this context, the Structural Adjustment Programme (SAP) was implemented with the goal of altering the structural pattern and reshaping the productive base of the economy in order to assure viability and sustainable growth.
These factors, however, rendered corporate restructuring unavoidable in order to ensure firm sustainability. To make them possible, most companies had been liquidated, and some were on the verge of being liquidated. Those who survived were those that restructured and altered considerably to fit the new economic transformation tenet.
These were completed at a high economic expense and with tremendous difficulty. The Structural Adjustment Programme, on its own, has been a blessing in disguise, bringing with it reliance. Viability, affluence, and long-term growth.
All of this lends credence to the notion that a company’s delayed growth and subsequent failure is frequently influenced by its financing, structure, and financial risk.
It is so believed that the minor efforts made in this project would help to expand understanding of how to prevent company collapse while developing a workable capital structure (Ama G.A. 1992).
1.2 STATEMENT OF THE PROBLEM
The “oil boom” may have begun corporate troubles. Adequate financial decisions were rarely made throughout the era, investments were not made, and where it was never considered.
Most enterprises failed because of problems such as a lack of capital, unskilled workers, a bad management team, fierce competition, and heavy government regulation, which inhibited raw material acquisition.
Firms in Nigeria who were unable to acquire raw materials locally faced substantial issues, and a significant number of them began to produce below installed capacity. In fact, it is estimated that at least 140 businesses failed during this time period. Depending on government policy and implementation, the detrimental impact is still seen today (2002).
Aside from the issues outlined above, the majority of enterprises collapsed as a result of excessive trading, undercapitalization, poor research methodologies, and excessive investments in fixed assets, leaving little or no working capital.
Some of these enterprises are being reactivated, with varied degrees of success. The majority of them have obtained one with the help of the other, while others have sold off unproductive fixed assets and others have sold a portion of their accrued debt in exchange for ownership proportion (debt equity shares) in the corporation.
Overall, some issues remain, such as insufficient finance and the inability to acquire materials locally. There is also the issue of an appropriate capital composition, and creditors have refused to accept various restructuring schemes (proposals).
The issue of interest rates (before the government implemented a ceiling policy in 1995) has not helped matters. When all considerations are considered, the cost of money has continued to rise.
The researcher attempts to determine the appropriateness of capital restructuring as a potential remedy to company failure (Ojo O. A. 1992).
1.3 OBJECTIVES OF THE STUDY
1. To discover the causes of corporate failure.
2. To detect the consequences of corporate failure
3. Investigate the issues around corporate failure
4. Determine whether capital restructuring is an effective technique for reviving failing businesses.
5. Determine whether competition from international corporations led to the despite its downsides.
1.4 THE SIGNIFICANCE OF THE STUDY
Companies: Opportunities for new investment outlets are usually available, but most firms are unable to take advantage of them due to clear financial incapacity and other external circumstances.
This research aims to enable enterprises to capitalise on strong investment possibilities after restructuring, despite their unequal position and other structural disadvantages. It is also a wise and judicious financial mix benefit that maximises profitability and growth.
Society: More importantly, the society in which the firm exists benefits (in a variety of ways), for example, good amenities are provided by such firms, in the surrounding environment (business social responsibilities), employment opportunities are created, and development is brought closer to the people living near the situated firms.
Government: The company pays corporate taxes to the government, which are then used to benefit the citizens. And the majority of the upgraded goods and services are made accessible to clients for purchase at a significantly lower cost by such a corporation.
When such firms are founded, the government normally collects various sorts of taxes, which is another source of money for the government (Adegbite S.I. 1994).
1.5 RESEARCH QUESTIONS
The researcher attempted to answer the following questions in order to carry out the investigation properly and give relevant recommendations:
1. What are the root causes of corporate failure?
2. What are the consequences of corporate failure?
3. Is the use of capital restructuring an effective approach for reviving failing businesses?
4. Does unfair competition from international corporations lead to the failure of indigenous enterprises, despite the disadvantages?
1.6 RESEARCH HYPOTHESES
For the investigation, the following hypotheses are being investigated.
1. Ho: An articulate and well-prepared financial expert
Management policy will prevent corporate failure and promote enterprise performance.
Hi: An eloquent and well-prepared financial statement
Management policy will not prevent company collapse and will not result in better firm performance.
2. Ho: There is a good relationship between efficiency and
Capital application among enterprises, economic progress, and increased (better) citizen welfare.
Hi: There is a negative relationship between efficient capital application among firms and economic progress, as well as greater and enhanced citizen wellbeing.
3. Ho: The size and rate of expansion of enterprises in both the private and public sectors, manufacturing and service industries, are inversely proportional to their financial management. Capital was injected at the right moment and in the right amount.
Hi: Firm size and growth rate are not determined by financial management and capital inflow.
4. Ho: A lack of capital is not always the case. Other factors such as government policies, poor management, and general recession may also contribute to business failure among firms.
Hi: The sole reason of corporate failure among firms is a lack of cash.
1.8 PROGRAMME DEVELOPMENT PLANS OF THE STUDY
This study is organised in a way that makes it easy for the reader to digest and implement. The study is divided into five chapters.
Beginning with the backdrop of the study in chapter one and progressing to the purpose of the investigation, limitations and assumptions, research technique used, and research questions and hypothesis, everything is organised in a rhythmic and explanatory manner.
The second chapter is devoted to a survey of related literature, beginning with the introduction and ending with the references.
The nature of the research work, as well as the methods for data collecting and analysis, are all covered in chapter three of this 100.
The fourth chapter is about data presentation analysis and interpretation. It also deals with the analysis of interview questions.
The final chapter, chapter five, contains the research work’s findings, summary, and conclusion. The researcher made an effort in this chapter to provide recommendations to those who are about to start comparable businesses.
Finally, the questionnaires, accounting technique, and even the opening letter are included in the appendices.
1.9 DEFINITIONS OF TERMS
The following terms are defined and described to provide clarity, remove ambiguity, and improve understanding of the entire text.
They are as follows:
1. Inadequate corporate performance
2. Reorganise the organisation
3. Budgeting and financial management
4. Market overtrading in general
5. the concept of equity
6. Maximum capital and profitability
7. The economic downturn
Corporate Failure: Failure in a company, firm, or corporation may indicate technical insolvency if it is unable to meet its present obligations. Corporate failure in bankruptcy indicates that a company’s obligations exceed its assets, implying that the company’s net worth is negative. Corporate failure encompasses the entire spectrum of possibilities in between these two extremes.
Financial restructure is to redesign the form of financial input/application in a firm in order to provide higher returns on financial management uses. This is largely due to the company’s philosophy and the exploitation of working capital.
Cash flow, inventory control, gearing strategies, and credit facility issuing in accordance with proper cover to avoid the incidence of bad and doubtful accounts, as well as management effort to consolidate working capital.
Overtrading: Ineffective expansion planning. This happens when a company’s management fails to recognise its capital basis, cash flow, and annual strategy while investing in new and old activities.
It should always be based on a realistic forecast and the highest possible profit. Inverse relationships should always serve as a warning sign to firm executives to avoid overtrading.
Gearing: This is the ratio of a company’s equity capital to loan capital. A corporation with high gearing at launch would begin paying high interest upon the expiration of approved moratoria, reducing its profitability and capital consolidation.
Equity: An ordinary share that does not earn a fixed profit or interest. The holders are the major owners of the companies.
Optimum Capital: A firm’s optimal capital arises when the capital structure cost or value of the firm’s capital is at its highest.
Recession: A recovery period of reduction in overall output, income, employment, and trade that typically lasts six months to a year and is characterised by widespread shrinkage in many sectors of the economy.
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