Financial situation of pre-packed insolvencies
Abstract
This paper is focused on the financial situation of companies entering insolvency proceedings. It does not work with all kinds of the insolvent companies, but this paper concentrates on one specific issue. The issue is pre-pack insolvencies. The main aim is to show if the financial situation is an important factor for consent to pre-pack. The pre-pack insolvencies are insolvency cases which start with an insolvency proposal which is accompanied by a reorganization plan already approved by creditors. Prepacks should help make the insolvency process quicker and enable enterprise financial rehabilitation and sustain the going concern principle. On the other hand, the procedure can hardly be successful when the financial situation of the company is extremely poor. Therefore this paper evaluates the financial situation of the companies with pre-packed insolvency in the Czech Republic. The analysis of companies was conducted over one, two or three year periods prior to the companies entering an insolvency proceeding. According to the literature, financial indicators used for evaluation are commonly EBITDA, cash liquidity, debt ratio, ROA and the Altman Z-Score prediction model. Results for the individual enterprises are summed up in this paper using basic descriptive and variable statistics. Conclusions have especially practical implications because they show financial inability of majority pre-packed cases.
Keyword : pre-pack cases, financial viability, financial ratios, Altman Z-Score, Insolvency Act, Czech Republic, insolvency proceedings
How to Cite
Schönfeld, J. (2020). Financial situation of pre-packed insolvencies. Journal of Business Economics and Management, 21(4), 1111-1127. https://doi.org/10.3846/jbem.2020.12820
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Appiah, K. O., Chizema, A., & Arthur, J. (2015). Predicting corporate failure: a systematic literature review of methodological issues. International Journal of Law and Management, 57(5), 461–485. https://doi.org/10.1108/IJLMA-04-2014-0032
Armour, J., Hertig, G., & Kanda, H. (2009). Transactions with creditors. In R. Kraakman, et al. (Eds.), The anatomy of corporate law: A comparative and functional approach (pp. 115–151). Oxford University Press.
Ayotte, K. M., & Morrison, E. R. (2009). Creditor control and conflict in Chapter 11. Journal of Legal Analysis, 1(2), 511–551. https://doi.org/10.1093/jla/1.2.511
Balcaen, S., & Ooghe, H. (2006). 35 years of studies on business failure: an overview of the classic statistical methodologies and their related problems. The British Accounting Review, 38(1), 63–93. https://doi.org/10.1016/j.bar.2005.09.001
Bisnode MagnusWeb (n.d.). Pre-paid corporate database MagnusWeb. https://magnusweb.bisnode.cz/
Bokšová, J., & Randáková, M. (2013). Zveřejňují podniky, které procházejí insolvenčním řízením, své účetní závěrky? (Diskuse ke zveřejňování účetních závěrek). Český finanční a účetní časopis, 8(4), 164–171. https://doi.org/10.18267/j.cfuc.364
Bork, R. (2012). Rescuing companies in England and Germany. Oxford University Press.
Branch, B. (2002). The costs of bankruptcy: A review. International Review of Financial Analysis, 11(1), 39–57. https://doi.org/10.1016/S1057-5219(01)00068-0
Campillo, J. P., Serer, G. L., & Ferrer, E. V. (2013). Validez de la información financiera en los procesos de insolvencia. Un estudio de la pequeña empresa española. Cuadernos de Economía y Dirección de la Empresa, 16(1), 29–40. https://doi.org/10.1016/j.cede.2012.05.001
Cera, G., Belas, J., & Zapletalikova, E. (2019). Explaining business failure through determinist and voluntarist perspectives. Serbian Journal of Management, 14(2), 257–275. https://doi.org/10.5937/sjm14-23348
Čámská, D. (2016). Accuracy of models predicting corporate bankruptcy in a selected industry branch. Ekonomický časopis, 64(04), 353–366.
Čámská, D., & Klečka, J. (2020). Comparison of prediction models applied in economic recession and expansion. Journal of Risk and Financial Management, 13(3), 52. https://doi.org/10.3390/jrfm13030052
Čámská, D. (2015). Impact of the Czech changing economic environment on bankruptcy models. International Advances in Economic Research, 21(1), 117–119. https://doi.org/10.1007/s11294-014-9481-0
Čámská, D. (2017). Time postponents of classical corporate bankruptcy models. In T. Löster & T. Pavelka (Eds.), 11th International days of statistics and economics (pp. 264–272). Melandrium.
Čámská, D. (2013). Základní charakteristiky podniků v insolvenci. In P. Jedlička (Eds.), Sborník recenzovaných příspěvků z mezinárodní konference Hradecké ekonomické dny (pp. 83–88). Univerzita Hradec Králové, Hradec Králové, Czech Republic.
Cepec, J., & Grajzl, P. (2019). Measuring the effectiveness of bankruptcy institutions: filtering failures in Slovenian financial reorganizations. Journal of Institutional Economics, 15(3), 553–567. https://doi.org/10.1017/S1744137418000437
Cepel, M., Stasiukynas, A., Kotaskova, A., & Dvorsky, J. (2018). Business environment quality index in the SME segment. Journal of Competitiveness, 10(1), 21–40. https://doi.org/10.7441/joc.2018.02.02
Cihak, M. (2009). Financial crisis (introduction). Czech Journal of Economics and Finance, 59(6), 502–506.
Czech National Bank. (2019). Central bank exchange rate fixing. https://www.cnb.cz/cs/financni-trhy/devizovy-trh/kurzy-devizoveho-trhu/kurzy-devizoveho-trhu/
De Laurentis, G., Maino, R., & Molteni, L. (2010). Developing, validating and using internal ratings. John Wiley & Sons. https://doi.org/10.1002/9780470971901
De Weijs, R., & Baltjes, M. (2018). Opening the door for the opportunistic use of interim financing: A critical assessment of the EU Draft Directive on Preventive Restructuring Frameworks. International Insolvency Review, 27(2), 223–254. https://doi.org/10.1002/iir.1305
Dobeš, K., Kot, S., Kramoliš, J., & Sopková, G. (2017). The perception of governmental support in the context of competitiveness of SMEs in the Czech Republic. Journal of Competitiveness, 9(3), 34–50. https://doi.org/10.7441/joc.2017.03.03
Eidenmüller, H. (2017). Contracting for a European insolvency regime. European Business Organization Law Review, 18(2), 273–304. https://doi.org/10.1007/s40804-017-0067-1
Eidenmüller, H., & van Zwieten, K. (2015). Restructuring the European business enterprise: the European Commission’s Recommendation on a new approach to business failure and insolvency. European Business Organization Law Review, 16(4), 625–667. https://doi.org/10.1007/s40804-016-0042-2
Eklund, J., Levratto, N., & Ramello, G. B. (2020). Entrepreneurship and failure: two sides of the same coin?. Small Business Economics, 54, 373–382. https://doi.org/10.1007/s11187-018-0039-z
European Commission. (2013). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Entrepreneurship 2020 Action Plan Reigniting the Entrepreneurial Spirit in Europe. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52012DC0795
European Parliament, & Council of the European Union. (2016). Proposal for a Directive of the European Parliament and of the Council on Preventive Restructuring Frameworks, Second Chance and Measures to Increase the Efficiency of Restructuring, Insolvency and Discharge Procedures and Amending Directive 2012/30/EU. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:0723:FIN
Farooq, U., Jibran Qamar, M. A., & Haque, A. (2018). A three-stage dynamic model of financial distress. Managerial Finance, 44(9), 1101–1116. https://doi.org/10.1108/MF-07-2017-0244
Fisher, T. C., & Martel, J. (2004). Empirical estimates of filtering failure in court‐supervised reorganization. Journal of Empirical Legal Studies, 1(1), 143–164. https://doi.org/10.1111/j.1740-1461.2004.00005.x
García Lara, J. M., Osma, B. G., & Neophytou, E. (2009). Earnings quality in ex‐post failed firms. Accounting and Business Research, 39(2), 119–138. https://doi.org/10.1080/00014788.2009.9663353
Hlaváček, P., Zambochova, M., & Sivicek, T. (2015). The influence of the institutions on entrepreneurship development: Public support and perception of entrepreneurship development in the Czech Republic. Amfiteatru Economic Journal, 17(38), 408–421.
Jordan, B. D., Westerfield, R. W., & Ross, S. A. (2011). Corporate finance essentials. McGraw-Hill Irwin.
Kapliński, O. (2008). Usefulness and credibility of scoring methods in construction industry. Journal of Civil Engineering and Management, 14(1), 21–28. https://doi.org/10.3846/1392-3730.2008.14.21-28
Karas, M., & Režňáková, M. (2015). The prediction capabilities of bankruptcy models in a different environment: An example of the Altman model under the conditions in the visegrad group countries. Ekonomický časopis, 63(6), 617–633.
Kislingerová, E., Richter, T., & Smrčka, L. (2013). Insolvenční praxe v České republice: v období 2008– 2013. C.H. Beck.
Klečka, J. & Scholleová, H. (2010). Bankruptcy models enunciation for Czech glass making firms. Economics and Management, 15, 954–959.
Ključnikov, A., & Popesko, B. (2017). Export and its financing in the SME segment. Case study from Slovakia. Journal of Competitiveness, 9(1), 20–35. https://doi.org/10.7441/joc.2017.01.02
Ključnikov, A., Kozubíková, L., & Sopková, G. (2017). The payment discipline of small and medium-sized enterprises. Journal of Competitiveness, 9(2), 45–61. https://doi.org/10.7441/joc.2017.02.04
Lee, S. H., Yamakawa, Y., Peng, M. W., & Barney, J. B. (2011). How do bankruptcy laws affect entrepreneurship development around the world?. Journal of Business Venturing, 26(5), 505–520. https://doi.org/10.1016/j.jbusvent.2010.05.001
Levratto, N. (2013). From failure to corporate bankruptcy: a review. Journal of Innovation and Entrepreneurship, 2(1), 20. https://doi.org/10.1186/2192-5372-2-20
Leyman, B., Schoors, K. J., & Coussement, P. (2011). Does court-supervised reorganization work? Evidence from post-confirmation firm failure. International Review of Law and Economics, 31(3), 149–168. https://doi.org/10.1016/j.irle.2011.05.001
Malega, J. & Horvath, R. (2017). Financial stress in the Czech Republic: Measurement and effects on the real economy. Prague Economic Papers, 26(3), 257–268. https://doi.org/10.18267/j.pep.608
Parliament of the Czech Republic. (2006). Act No. 182/2006 Coll. on bankruptcy and settlement. https://www.zakonyprolidi.cz/cs/2006-182
Peng, M. W., Yamakawa, Y., & Lee, S. H. (2010). Bankruptcy laws and entrepreneur–friendliness. Entrepreneurship Theory and Practice, 34(3), 517–530. https://doi.org/10.1111/j.1540-6520.2009.00350.x
Smrčka, L., & Čámská, D. (2017). Methods of enforcing receivables and results in the Czech Republic. International Advances in Economic Research, 23(1), 125–126. https://doi.org/10.1007/s11294-016-9616-6
Smrčka, L., Arltová, M., & Schönfeld, J. (2013). Příčiny neúspěchu prosazování sanačních postupů v insolvenční realitě. Politická ekonomie, 61(2), 188–208. https://doi.org/10.18267/j.polek.894
Tollenaar, N. (2017). The European Commission’s Proposal for a Directive on Preventive Restructuring Proceedings. Insolvency Intelligence, 30(5). https://ssrn.com/abstract=2978137
Xie, B. (2016). Comparative insolvency law the pre-pack approach in corporate rescue (1st ed.). Edward Elgar Publishing.
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Appiah, K. O., Chizema, A., & Arthur, J. (2015). Predicting corporate failure: a systematic literature review of methodological issues. International Journal of Law and Management, 57(5), 461–485. https://doi.org/10.1108/IJLMA-04-2014-0032
Armour, J., Hertig, G., & Kanda, H. (2009). Transactions with creditors. In R. Kraakman, et al. (Eds.), The anatomy of corporate law: A comparative and functional approach (pp. 115–151). Oxford University Press.
Ayotte, K. M., & Morrison, E. R. (2009). Creditor control and conflict in Chapter 11. Journal of Legal Analysis, 1(2), 511–551. https://doi.org/10.1093/jla/1.2.511
Balcaen, S., & Ooghe, H. (2006). 35 years of studies on business failure: an overview of the classic statistical methodologies and their related problems. The British Accounting Review, 38(1), 63–93. https://doi.org/10.1016/j.bar.2005.09.001
Bisnode MagnusWeb (n.d.). Pre-paid corporate database MagnusWeb. https://magnusweb.bisnode.cz/
Bokšová, J., & Randáková, M. (2013). Zveřejňují podniky, které procházejí insolvenčním řízením, své účetní závěrky? (Diskuse ke zveřejňování účetních závěrek). Český finanční a účetní časopis, 8(4), 164–171. https://doi.org/10.18267/j.cfuc.364
Bork, R. (2012). Rescuing companies in England and Germany. Oxford University Press.
Branch, B. (2002). The costs of bankruptcy: A review. International Review of Financial Analysis, 11(1), 39–57. https://doi.org/10.1016/S1057-5219(01)00068-0
Campillo, J. P., Serer, G. L., & Ferrer, E. V. (2013). Validez de la información financiera en los procesos de insolvencia. Un estudio de la pequeña empresa española. Cuadernos de Economía y Dirección de la Empresa, 16(1), 29–40. https://doi.org/10.1016/j.cede.2012.05.001
Cera, G., Belas, J., & Zapletalikova, E. (2019). Explaining business failure through determinist and voluntarist perspectives. Serbian Journal of Management, 14(2), 257–275. https://doi.org/10.5937/sjm14-23348
Čámská, D. (2016). Accuracy of models predicting corporate bankruptcy in a selected industry branch. Ekonomický časopis, 64(04), 353–366.
Čámská, D., & Klečka, J. (2020). Comparison of prediction models applied in economic recession and expansion. Journal of Risk and Financial Management, 13(3), 52. https://doi.org/10.3390/jrfm13030052
Čámská, D. (2015). Impact of the Czech changing economic environment on bankruptcy models. International Advances in Economic Research, 21(1), 117–119. https://doi.org/10.1007/s11294-014-9481-0
Čámská, D. (2017). Time postponents of classical corporate bankruptcy models. In T. Löster & T. Pavelka (Eds.), 11th International days of statistics and economics (pp. 264–272). Melandrium.
Čámská, D. (2013). Základní charakteristiky podniků v insolvenci. In P. Jedlička (Eds.), Sborník recenzovaných příspěvků z mezinárodní konference Hradecké ekonomické dny (pp. 83–88). Univerzita Hradec Králové, Hradec Králové, Czech Republic.
Cepec, J., & Grajzl, P. (2019). Measuring the effectiveness of bankruptcy institutions: filtering failures in Slovenian financial reorganizations. Journal of Institutional Economics, 15(3), 553–567. https://doi.org/10.1017/S1744137418000437
Cepel, M., Stasiukynas, A., Kotaskova, A., & Dvorsky, J. (2018). Business environment quality index in the SME segment. Journal of Competitiveness, 10(1), 21–40. https://doi.org/10.7441/joc.2018.02.02
Cihak, M. (2009). Financial crisis (introduction). Czech Journal of Economics and Finance, 59(6), 502–506.
Czech National Bank. (2019). Central bank exchange rate fixing. https://www.cnb.cz/cs/financni-trhy/devizovy-trh/kurzy-devizoveho-trhu/kurzy-devizoveho-trhu/
De Laurentis, G., Maino, R., & Molteni, L. (2010). Developing, validating and using internal ratings. John Wiley & Sons. https://doi.org/10.1002/9780470971901
De Weijs, R., & Baltjes, M. (2018). Opening the door for the opportunistic use of interim financing: A critical assessment of the EU Draft Directive on Preventive Restructuring Frameworks. International Insolvency Review, 27(2), 223–254. https://doi.org/10.1002/iir.1305
Dobeš, K., Kot, S., Kramoliš, J., & Sopková, G. (2017). The perception of governmental support in the context of competitiveness of SMEs in the Czech Republic. Journal of Competitiveness, 9(3), 34–50. https://doi.org/10.7441/joc.2017.03.03
Eidenmüller, H. (2017). Contracting for a European insolvency regime. European Business Organization Law Review, 18(2), 273–304. https://doi.org/10.1007/s40804-017-0067-1
Eidenmüller, H., & van Zwieten, K. (2015). Restructuring the European business enterprise: the European Commission’s Recommendation on a new approach to business failure and insolvency. European Business Organization Law Review, 16(4), 625–667. https://doi.org/10.1007/s40804-016-0042-2
Eklund, J., Levratto, N., & Ramello, G. B. (2020). Entrepreneurship and failure: two sides of the same coin?. Small Business Economics, 54, 373–382. https://doi.org/10.1007/s11187-018-0039-z
European Commission. (2013). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Entrepreneurship 2020 Action Plan Reigniting the Entrepreneurial Spirit in Europe. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52012DC0795
European Parliament, & Council of the European Union. (2016). Proposal for a Directive of the European Parliament and of the Council on Preventive Restructuring Frameworks, Second Chance and Measures to Increase the Efficiency of Restructuring, Insolvency and Discharge Procedures and Amending Directive 2012/30/EU. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2016:0723:FIN
Farooq, U., Jibran Qamar, M. A., & Haque, A. (2018). A three-stage dynamic model of financial distress. Managerial Finance, 44(9), 1101–1116. https://doi.org/10.1108/MF-07-2017-0244
Fisher, T. C., & Martel, J. (2004). Empirical estimates of filtering failure in court‐supervised reorganization. Journal of Empirical Legal Studies, 1(1), 143–164. https://doi.org/10.1111/j.1740-1461.2004.00005.x
García Lara, J. M., Osma, B. G., & Neophytou, E. (2009). Earnings quality in ex‐post failed firms. Accounting and Business Research, 39(2), 119–138. https://doi.org/10.1080/00014788.2009.9663353
Hlaváček, P., Zambochova, M., & Sivicek, T. (2015). The influence of the institutions on entrepreneurship development: Public support and perception of entrepreneurship development in the Czech Republic. Amfiteatru Economic Journal, 17(38), 408–421.
Jordan, B. D., Westerfield, R. W., & Ross, S. A. (2011). Corporate finance essentials. McGraw-Hill Irwin.
Kapliński, O. (2008). Usefulness and credibility of scoring methods in construction industry. Journal of Civil Engineering and Management, 14(1), 21–28. https://doi.org/10.3846/1392-3730.2008.14.21-28
Karas, M., & Režňáková, M. (2015). The prediction capabilities of bankruptcy models in a different environment: An example of the Altman model under the conditions in the visegrad group countries. Ekonomický časopis, 63(6), 617–633.
Kislingerová, E., Richter, T., & Smrčka, L. (2013). Insolvenční praxe v České republice: v období 2008– 2013. C.H. Beck.
Klečka, J. & Scholleová, H. (2010). Bankruptcy models enunciation for Czech glass making firms. Economics and Management, 15, 954–959.
Ključnikov, A., & Popesko, B. (2017). Export and its financing in the SME segment. Case study from Slovakia. Journal of Competitiveness, 9(1), 20–35. https://doi.org/10.7441/joc.2017.01.02
Ključnikov, A., Kozubíková, L., & Sopková, G. (2017). The payment discipline of small and medium-sized enterprises. Journal of Competitiveness, 9(2), 45–61. https://doi.org/10.7441/joc.2017.02.04
Lee, S. H., Yamakawa, Y., Peng, M. W., & Barney, J. B. (2011). How do bankruptcy laws affect entrepreneurship development around the world?. Journal of Business Venturing, 26(5), 505–520. https://doi.org/10.1016/j.jbusvent.2010.05.001
Levratto, N. (2013). From failure to corporate bankruptcy: a review. Journal of Innovation and Entrepreneurship, 2(1), 20. https://doi.org/10.1186/2192-5372-2-20
Leyman, B., Schoors, K. J., & Coussement, P. (2011). Does court-supervised reorganization work? Evidence from post-confirmation firm failure. International Review of Law and Economics, 31(3), 149–168. https://doi.org/10.1016/j.irle.2011.05.001
Malega, J. & Horvath, R. (2017). Financial stress in the Czech Republic: Measurement and effects on the real economy. Prague Economic Papers, 26(3), 257–268. https://doi.org/10.18267/j.pep.608
Parliament of the Czech Republic. (2006). Act No. 182/2006 Coll. on bankruptcy and settlement. https://www.zakonyprolidi.cz/cs/2006-182
Peng, M. W., Yamakawa, Y., & Lee, S. H. (2010). Bankruptcy laws and entrepreneur–friendliness. Entrepreneurship Theory and Practice, 34(3), 517–530. https://doi.org/10.1111/j.1540-6520.2009.00350.x
Smrčka, L., & Čámská, D. (2017). Methods of enforcing receivables and results in the Czech Republic. International Advances in Economic Research, 23(1), 125–126. https://doi.org/10.1007/s11294-016-9616-6
Smrčka, L., Arltová, M., & Schönfeld, J. (2013). Příčiny neúspěchu prosazování sanačních postupů v insolvenční realitě. Politická ekonomie, 61(2), 188–208. https://doi.org/10.18267/j.polek.894
Tollenaar, N. (2017). The European Commission’s Proposal for a Directive on Preventive Restructuring Proceedings. Insolvency Intelligence, 30(5). https://ssrn.com/abstract=2978137
Xie, B. (2016). Comparative insolvency law the pre-pack approach in corporate rescue (1st ed.). Edward Elgar Publishing.