How restructuring and insolvency professionals create and preserve jobs

Avoiding job losses by rescuing distressed businesses

A key function of insolvency law is facilitating the reorganisation of viable but financially distressed companies. By allowing struggling firms to restructure their debts and operations, insolvency law helps preserve jobs that would otherwise be lost in a liquidation. 

World Bank data shows that in Portugal the layoff rate in reorganisations is 56%, compared to 93% in liquidations. Insolvency reforms, such as pre-packs or other rescue procedures, facilitate saving viable but distressed firms and jobs, and the length and costs of insolvency proceedings. These positive effects on job preservation are enhanced where there are efficient insolvency courts. 

Facilitating access to finance and boosting entrepreneurial activity creates jobs

An efficient R&I system increases the availability of credit and reduces borrowing costs. The World Bank cites Brazil, where reform increasing creditor protection while improving the insolvency system led to a 18% increase in total debt and a 17% drop in the cost of credit. 

In Italy, reorganisation reforms that empowered debtors at the expense of creditors pushed financing costs up by 11.6%, however later reforms strengthening creditors’ rights in liquidation reduced bank funding costs by 7%, and had a positive impact overall on lending markets. 

In turn, this can stimulate entrepreneurial activity and therefore job creation. The World Bank has shared reports showing that access to loan financing increases a business’s number of permanent employees by 3.1%. Other studies have found that companies with access to loans have an annual employment growth rate 3.29% higher than for businesses with no funding access.

Eliminating “zombies” means productive reallocation of capital and safer jobs

Another vital aspect of a well-functioning insolvency system is facilitating the speedy liquidation of non-viable firms. A swift exit route for unviable businesses cuts the number of zombie firms, which drives re-allocation of resources towards more productive activities. 

Evidence from Japan and other OECD countries shows reducing zombie firms encourages investment and job creation in healthier businesses. Another example is South Korea, where insolvency reforms have eased the elimination of inefficient firms. The outcome has been productivity growth and the creation of more and better jobs.

The lessons

Good R&I systems and the dedicated professionals using them can make a significant, positive impact on economies, despite entrenched negative public attitudes.

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Nick Hood is Senior Adviser to the Opus Business Advisory Group. He was a Chartered Accountant for over fifty years and a licensed insolvency practitioner between 1992 and 2010, specialising in mid-market and SME business problems. He is a committed internationalist, having previously created and run the largest international association of specialist business rescue firms.