AN ANALYSIS OF CAPITAL RESTRUCTURING AS A SOLUTION TO CORPORATE FAILURES

Introduction

1.1 Background Of The Study

The Nigeria Economic Crises, which has persisted up to this 1999, got to its peak in 1989. The effects then had seen that of gross underutilization of human and material resources, how level of operations and out right corporate failure.

Virtually every industry in the Nigeria economy has suffered one form of a problem or the other. The banking industry through it controls the greatest financial resources in the economy experienced and is still experiencing its own share of Decree of 2000 construction industry has enjoyed continuous negative growth trends, manufacturing industry amongst other was not spared.

Prior to the economic crises was the decade of economic Joom (1970 − 1980) which saw the dominance of the oil sector accounting for up to 80% of the total foreign exchange earning in 1985 and 90% in 1999. During this decade, Nigeria had the singular good fortune of benefiting from the skyrocketing. Oil prices being of member of organization of Petroleum Exporting Countries (OPEC). The failure of government planning machinery to channel these vast resources into other investment pool culminated into serious problem the economy is facing.

This lapse resulted into inflationaring pressures manifesting itself in escalating prices, shortage of basic goods and service low income per capital, high unemployment rate, with many industries shut and a host of them producing at far below installed capacity (Baffa S.S. 1999).

A period of Recession is this period when firm failures is high pronounced research “a recurring period of decline in the 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 negative economic trends continued until the introduction of Structural Adjustment Programme SAP in 1999. The economy had witnessed serious internal and external disequilibria and structural imbalances, such that all economic indicators like inflation rate, Gross Domestic Product (GDP), employment rate, idle capacity. In industries amongst other attested to this fact as there were obviously manifest.

It was against their background that Structural Adjustment Programme (SAP) was introduced with the intention of reforming the structural pattern and restructure the productive base of the economy, in order to ensure viability and sustained growth. These, however made it inevitable for restructuring of corporate bodies to ensure survival in business. To make these possible, most companies had rolled off liquidated, some were on the verge of rolling off. The surviving ones were those that restructured and adjusted extensively to accommodate the new precept of economic change. These were done with great economic cost and difficulties. Structural Adjustment Programme on its own has been a blessing in disguise in that it has brought with itself reliance. Viability, prosperity and sustained growth.

All these have lent credence to the fact that slow growth and subsequent failure of an enterprise often depends to a large extent, on its financing, structure and its implication for financial risk.

It is therefore hoped that this little efforts made in this project will contribute in no small measure to increase the knowledge of how to curb corporate failure while establishing a workable capital structure (Ama G.A. 1992).

1.2 Statement Of The Problem

Corporate problems perhaps started with the “oil boom”. During the era adequate financial decision were hardly taken, investments were no made, and where it was never considered. Specifically most firms failed due to some factors such as capital shortage unskilled labour, poor management team, rigorous competition and excessive government control which hampered raw material procurement.

In Nigeria, firms that could not source their raw material locally ran into serious problems and a considerable number of them started to produce below installed capacity. Infact it is estimated that not less than one hundred and forty firms failed during this period. The negative effect is still being felt today (2002) depending on government policies and implementation.

Apart from the problems mentioned above, most of the firms failed as a result of over trading, undercapitalization, poor research methods and excessive investments in fixed asset leading to little or nothing for working capital.

Reactivation of some of these companies has been in progress with varying degree of success. Most of them have acquired one from of assistance of the other, while some have sold off unproductive fixed assets, other have sold some part of their accumulated debt for ownership proportion (debt equity shares) in the firm. In all there still exist some problem like inadequate funding and inability to source for materials locally. Also there is problem of an acceptable capital mix and creditors refused to some restructuring schemes (proposals). The issue of interest rates (until the ceiling policy by government since 1995 till date has not helped matter. Cost of funds has however continued to move upwards when you consider all factors involves.

The researcher tries to find out the adequacy capital restructuring as a viable solution to corporate failure (Ojo O. A. 1992).

1.3 Objective Of The Study

1. To identify causes of corporate failure
2. To identify the effects of corporate failure
3. To examine the problems of Corporate failure
4. To find out whether the use of capital restructure ids an adequate tool for resuscitating ailing firms.
5. To find out whether the competition from the multinational companies contributed to the bearing in mind their disadvantages.

1.4 Significance Of The Study

Companies: Opportunities usually exist for new investment outlets however, most firms due to obvious financial incapacity and other extraneous factors are unable to utilize such. This study is aimed at enabling firms, inspite of their imbalanced position and other structural disadvantage to still exploit good investment opportunities post restructured. It is also a prudent and judicious financial mix benefit maximized to affect increased profitability and growth.

Society: Moreso, the society in which the firm exist also benefits (in so many) revitalized, for instance, good amenities are provided by such firms, in the surrounding environment (business social responsibilities) employment opportunities are also create development is brought nearer to the people living near the situated firms benefits a lot.

Government: The firm pays its corporate tax to the government, which are in turn, used for the advantage of the citizenry. And most of the improved goods and service are made available to the customers for purchase at relatively cheaper price by such firm. Also when such firm are established, government usually collect different types of taxes which is also a source of generating revenue for the government (Adegbite S.I. 1994).

1.5 Research Questions

In order to carry out the research effectively and make appropriate recommendations, the researcher attempted to answer the following questions:

1. What are the causes of corporate failure?
2. What are the effects of corporate failure?
3. Is the use of capital restructuring an adequate tool for resuscitating ailing firms?
4. Does the unfair competition from the multinational companies contribute to the failure of indigenous companies bearing in minding the disadvantages?

1.6 Research Hypotheses

The following hypothesis are considered for the study.

1. Ho: An articulate and well prepared financial management policy will prevent corporate failure and bring about increased performance among enterprises.
   Hi: An articulate and well prepared financial management policy will not prevent corporate failure and would also not bring about increased performance among firms.
2. Ho: There is a positive correlation between efficient capital application among firms and growth in the economy and increase (improved) welfare of the citizenry.
   Hi: There is a negative correlation between efficient capital application among firm and growth in economy and increased and improved welfare of the citizenry.
3. Ho: The size and growth rate of firms in both private and public sectors, manufacturing and service industries, are inversely functions of its financial management. Appropriately timed and adequately injected capital.
   Hi: The size and growth rate of firm are not functions of their financial management and capital injection.
4. Ho: Lack of capital is not necessarily. The only cause of corporate failure because other factor such as government policy bad management, general recession could cause corporate failure among firms.
   Hi: Lack of capital is the only cause of corporate failure among firms.

1.8 Plans For The Development Of Study

This research is organized in a sequence that would make it easy for the reader to digest and apply. The research is organized in five chapters.

Beginning with background of the study in chapter one to the objective of the study, limitation and assumption, up to the research method adopted and research questions and hypothesis are all arranged in a way that would sound rhythmic and very expository.

The chapter two deal with the review of related literature from the prelude to the references.

The nature of the design of the research wok and the methodology of collection and analysis of the data contained here in are all contained in chapter three of this 100.

Chapter four deals with the data presentation analysis and interpretation. It also deal with the interview question analysis.

The finding of this research work, its summary and the conclusion are in the last chapter, chapter five. It is in this chapter that the researcher made efforts to make recommendation in respect of people who are about to venture into similar firms.

Finally, the appendices contain the questionnaires accounting method and even the introductory letter.

1.9 Definition Of Terms

The following terms are defined and explained in order to lend clarity and remove any ambiguity as well as to enhance understanding of the entire text

They are −

1. Corporate failure
2. Restructure
3. Financial management
4. General overtrading
5. Equity
6. Optimum capital and
7. Recession

Corporate Failure:

Failure in a company, firm or corporation may mean technical insolvent if it is unable to meet its current insolvency denotes only lack of liquidity. Corporate failure in bankrupting means that the liabilities of a company exceed its assets, otherwise put it means the net worth of the company is negative. Corporate failure includes the entire range of possibilities between these extremes.

Restructure:

To give new structure or arrangement to organization procedure or practice financial restructure is to remodel the form of financial input/application in a firm in order to yield more returns on uses financial management. This is largely the policy of the company and the exploitation of the working capital. Cash flow, inventory control gearing policies as well as granting of credit facility in line with adequate cover to avoid the incidence of bad and doubt account and management effort to consolidate the working capital.

Overtrading:

Poor management of expansion plans. This occurs when the management of firms fail to recognize its capital base, cash flow and annual plan while engaging in both new and old ventures. It should always be based on realistic forecast and optimum profit. Inverse relationship should always serve as a guard to company managers to avoid overtrading.

Gearing:

This is the ratio of equity capital of a company in relation to the loan capital. A company with high gearing at inceptions on expiration of granted moratoria would start paying high interest and thereby weaken its profitability and capital consolidation.

Equity:

This is an ordinary share which does not attract fixed profit/interest. The holders are like the primary owner of the firms.

Optimum Capital:

Optimum capital of a firm occurs when the capital structure cost or value of the firm’s capital is at a maximum.

Recession:

A recovery period of decline in total output, income, employment and trade usually lasting for period of six months t a year and marked by wide spread contraction in many sector of the economy.