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DOI: 10.1177/0266242611407409
2012 30: 275 originally published online 7 July 2011 International Small Business Journal
Gary A.S. Cook, Naresh R. Pandit and David Milman
law, SMEs and corporate recovery A resource-based analysis of bankruptcy
 
 
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International Small Business Journal
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DOI: 10.1177/0266242611407409
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407409ISB30310.1177/0266242611407409Cook et al.International Small Business Journal
Corresponding author:
Gary A.S. Cook, University of Liverpool Management School, Chatham Street, Liverpool L69 7ZH, UK
Email: [email protected]
A resource-based analysis of
bankruptcy
1
law, SMEs and
corporate recovery
Gary A.S. Cook
University of Liverpool, UK
Naresh R. Pandit
University of East Anglia, UK
David Milman
Lancaster University, UK
Abstract
The UK Company Voluntary Arrangement (CVA) is an early example of a bankruptcy regime
designed to aid the rescue of financially distressed SMEs. Its efficacy hinges on its application to aid
only viable companies with liquidation as the preferred option for companies that are not viable.
This article proposes the resource-based view as a theoretical means to assess the viability of
bankrupt SMEs. Seven hypotheses are tested and provide support for the central proposition, that
a company which has resource strength, but is pushed into bankruptcy by temporary factors, is
more likely to succeed in a CVA. The article concludes that the resource-based view is useful for
analysing the viability of bankrupt companies and that well-designed bankruptcy law can promote
SMEs and entrepreneurship.
Keywords
bankruptcy law, entrepreneurship, insolvency law, rehabilitation, SMEs, turnaround
Introduction
One of the principal findings of research on small and medium-sized enterprises (SMEs) is that the
financial performance of SMEs is inherently more volatile than large firms, and that a significant
number will naturally experience periodic financial difficulty (Dannreuther and Kessler, 2010).
Governments in many countries have focused on improving their bankruptcy regimes so that they
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276 International Small Business Journal 30(3)
are more SME-friendly. Collective frameworks have been proposed by the International Monetary
Fund (IMF, 1999), the Organisation for Economic Co-operation and Development (OECD, 1998)
and the European Union (European Commission, 2007). There is much to improve. The European
Commission (2007) concludes that many countries had introduced appropriate measures only
recently or not at all, and the academic literature concurs. In their review of the literature on SMEs
and entrepreneurship, Blackburn and Kovalainen (2009) classify general public policy research as
‘enduring’, as it is in need of continuous theoretical and empirical development. More specifically,
in a recent overview of bankruptcy law design, Lee et al. concluded that the topic is ‘an important
but understudied area’ (2007: 268).
What should an SME-friendly and efficient bankruptcy regime look like? Franks and Torous
(1992) suggest that bankrupt SMEs fall into two categories: those that are not viable (economically
distressed), and those that are viable but are experiencing temporary financial difficulty (finan-
cially distressed). Lower levels of entrepreneurship and economic growth will occur if a bank-
ruptcy regime allows the former to limp on and/or allows the latter to fail. Therefore, a bankruptcy
regime should facilitate the speedy reallocation of resources tied up in SMEs that are not viable,
while at the same time facilitate the rehabilitation and recovery of SMEs that are viable (Finch,
2009). Particular bankruptcy regimes may be biased one way or the other. Getting the balance right
hinges on the ability to discriminate between firms that ought to be liquidated and firms that can be
rehabilitated: that is, deciding on viability. The literature provides little practical guidance on how
such a choice should be made (Mokal, 2004).
This article aims to address this lacuna by suggesting that the resource-based view of the firm
which is rooted in economic theory (Penrose, 1959) provides an appropriate framework for consid-
ering the economic viability of bankrupt SMEs. It does so by analysing data on the UK Company
Voluntary Arrangement (CVA) procedure, which was designed to encourage the directors of viable
companies to instigate change before bankruptcy and, failing this, to promote the rehabilitation of
viable SMEs once bankruptcy had occurred.
Specifically, the article addresses two questions. First, what factors discriminate between those
bankrupt SMEs that should be saved and those that should not? Second, can the resource-based
view be used to explain the factors that discriminate between bankrupt SMEs that should be saved
and those that should not?
The article is structured as follows. The next section provides an overview of bankruptcy law
and the CVA in the UK. This is followed by a literature review which leads to the generation of
seven hypotheses. Next, the study’s research design is elucidated and this is followed by a presen-
tation of its results. A final section discusses these results and concludes the article.
Bankruptcy law and SMEs in the UK
The serious promotion of viable SME rescue through bankruptcy law in the UK dates back to 1982,
when the Cork Report (Cork Committee, 1982) was produced. Legislation based on the recommen-
dations of this report was enacted in 1985–1986. Practice began to change, and by 2002 administra-
tive receivership, which favoured secured creditors and incentivized company liquidation, had lost
dominance to collective procedures aimed at business rescue. In addition to schemes of reconstruc-
tion and arrangement, the legislative changes saw the advent of two customized rescue procedures
for bankrupt or financially troubled companies. Of these, the administration order was the more
formal, requiring petition to a court for an administration order and the potential removal of the
directors from control of the company. By contrast, the second procedure, the CVA, was intention-
ally designed to be more informal, being both an out-of-court and a debtor-in-possession procedure:
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Cook et al. 277
that is, similar to the USA’s Chapter 11 procedure, where the company’s management remain in
place during the course of the procedure (see Weisgard et al. 2010 for a comprehensive account of
the CVA). Of course, debtor-in-possession will be undesirable when the firm is unviable, as existing
management may block liquidation. However, it becomes desirable when the firm is viable and even
more so when the firm is small and therefore unable to function without top management remaining
in place (Mokal, 2004). Additionally, Lee et al. argue for debtor-in-possession thus:
Managers make firm-specific investments during their tenure with firms. This firm-specific knowledge
may especially be required when a firm is in distress … If managers are going to be driven out when a firm
files for reorganization bankruptcy, not only will they be reluctant to file bankruptcy but they also may lack
incentives to make firm-specific investments in the first place. (2007: 264)
The UK CVA procedure is now a mature SME rescue mechanism that is viewed to have achieved
good results overall (Weisgard et al., 2010) and has become part of a general regime aimed at fos-
tering entrepreneurship in the UK. Its success is indicated in the UK chancellor’s (finance minister)
Budget Report of 22 April 2009, which announced a consultation towards extending the proce-
dure’s moratorium against creditor action to large corporate entities (The Insolvency Service,
2009).
2
However, its take-up has been ‘disappointingly low’ (Department of Trade and Industry,
2001: 9), although to an extent the gradual uptake of the reforms was expected as accountants,
lawyers and bankers need time to acclimatize (Mokal, 2004). To speed uptake, moratorium reforms
were implemented in the Insolvency Act 2000.
Literature review and hypotheses
Resources are acknowledged increasingly within the SME and entrepreneurship fields as impor-
tant influences on survival, strategy and performance (Terziovski, 2010). It is not hard to see why
this is the case. The resource-based view emphasizes the heterogeneity of firms, which sits well
with the idea that an entrepreneurial firm will do something innovative compared to other firms in
the market. It has a natural affinity with Kirzner’s (1973) view that entrepreneurs have the vision
to spot unexploited opportunities, and hence can acquire resources for less than they are worth. The
resource-based view has been used to illuminate many issues in entrepreneurship, but what is miss-
ing from this growing literature is anything on resources and the prospect of failure and bank-
ruptcy. This article addresses this gap.
As stated previously, the first research question of this study is how to tell which among bank-
rupt firms are viable, and so warrant an attempt at rehabilitation, and which are not viable and so
warrant liquidation. There is a consensus in the literature that it is very difficult to predict success
and failure, whichever way these terms are defined (Gartner et al., 1999). The current study
attempts to improve on this state of affairs by framing the analysis of SME viability within the
resource-based view (Barney, 1991), which has rapidly become influential in the strategy, interna-
tional business and entrepreneurship literatures (Barney et al., 2001).
The essential argument of Barney (1991) is that in order to provide a basis for viability, resources
must be valuable, rare, imperfectly imitable by rivals and not subject to strategic substitution by
alternative resources. Barney’s definition of resources is broad and inclusive:
firm resources include all assets, capabilities, organizational processes, firm attributes, information,
knowledge etc. controlled by a firm that enable a firm to conceive of and implement strategies that improve
its efficiency and effectiveness. (Barney 1991: 101; emphasis in original)
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278 International Small Business Journal 30(3)
Despite some progress in operationalizing resources for the purpose of empirical investigation,
Wernerfelt laments the fact that the definition of resources leaves them resembling ‘an amorphous
heap’ (1995: 172).
Bearing this shortcoming in mind, what can be said about resources, failure and rehabilita-
tion? Here, we recall Franks and Torous’ (1992) suggestion that bankrupt SMEs fall into two
categories: those that are not viable (economically distressed) and those that are viable but are
experiencing temporary financial difficulty (financially distressed). This thinking draws from
conventional microeconomics, arguing that failing firms which do not have the resource base
necessary to earn a ‘normal’ (in the sense used by economists) return on capital should be liqui-
dated, and their resources reallocated elsewhere. However, those firms which do have the neces-
sary resource base to earn at least a normal return, but are pushed into bankruptcy by one or more
adverse temporary factors – that is, are experiencing financial difficulty in the short run (in the
sense used by economists) – should be subject to a rehabilitation attempt. On this basis, we have
the study’s central proposition which informs seven hypotheses that are subsequently developed:
A firm which has resource strength or lacks resource weakness, that is pushed into bankruptcy by one or
more adverse temporary factors, will be more likely to succeed in a CVA.
A number of resources have been identified as being important to SMEs, although there is little
detail on the precise type of firm or context in which each type of resource will be more or less
critical: a weakness also of the more general strategy-related resource-based view literature
(Barney et al., 2001). Brumagim (1994) argues that the most important resources are strategic
vision resources. In SMEs, these will reside in the entrepreneur (Barney, 1995). In line with this,
much of the literature on the resource-based view and entrepreneurship places high importance on
the quality of top management as a resource (Brush and Chaganti, 1999). The entrepreneur has a
vital role in seeing opportunities, and assembling and coordinating resources to bring to bear capa-
bilities within the market (Barney et al., 2001; Brush et al., 2001; Chandler and Hanks, 1994). This
also fits with Bozner et al.’s (1998) emphasis on the importance of mental models and cognitive
capacities as inimitable resources. Moreover, they argue that tacit, socially complex resources of
the firm are often unique to and inseparable from the founder, cognate with Peteraf’s (1993) obser-
vation that imperfect mobility can arise where the firm and the factor are in essence a team. This is
particularly salient, given the distinctive nature of the CVA as a debtor-in-possession regime which
is, at least implicitly, predicated on the assumption that incumbent management is an important
resource of the firm. This leads to our first hypothesis:
H1: CVA success will be less likely when poor management is the primary resource weakness.
No matter what resources the firm possesses, unless they are effectively marshalled, it will be to
little avail (Thomas and Pollock, 1999). Hence Barney’s (1995) suggestion that to create competi-
tive advantage, resources must be well organized, implying a premium on effective management
in general – but which management functions might be most important?
Hunt and Morgan (1995) and Hunt (1997) make a strong case for marketing management. In
essence, this approach fuses the resource-based view and marketing by stressing
the importance of market segments and resources. Market segments are identifiable groups of consumers
whose tastes and preferences with regard to an industry’s output are relatively homogeneous within each
group but significantly heterogeneous across the groups. Resources are tangible and intangible entities
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Cook et al. 279
available to the firm that enable it to produce efficiently and/or effectively a market offering that has value
for some market segment(s). Competition among firms is an ongoing process and consists of the struggle
among them for a comparative advantage in resources that will yield a marketplace position of competitive
advantage and, thereby, superior financial performance. (Hunt, 1997: 60; emphasis in original)
Accordingly, this approach places the marketing function at the core of the firm: it is marketing
management that marshals resources, such that a particular marketplace position is achieved with
associated competitive advantage and financial performance. Deshpande and Webster concur: ‘the
marketing concept defines a distinct organizational culture … that put the customer in the centre
of the firm’s thinking about strategy and operations’ (1989: 3). This leads us to our second
hypothesis:
H2: CVA success will be less likely when poor marketing management is an important resource weakness.
Building on this line of thinking, Brush and Chaganti (1999) argue that an SME’s ability to serve
a market segment successfully will be positively correlated to the human resources that it pos-
sesses. Indeed, they maintain that the quantity and quality of human resources will be more impor-
tant than the pursuit of a generic strategy (Porter, 1985) in determining financial performance.
Ceding control of family firm to external professional managers can be critical to SME survival
(Ng and Keasey, 2010). Chandler and Hanks (1994) also link market orientation and human
resources when explaining SME financial performance:
[F]irms seeking to provide high quality products require a strong commitment to customer service which
they show by training and empowering employees, delegating to lower ranks the authority to solve
customer problems, and by rewarding employee efforts. (1994: 335).
They conclude:
The ability to organise and harness the creative and productive capacity of human resources appears to be
of key importance. (1994: 343).
This leads to our third hypothesis:
H3: CVA success will be less likely when poor human resource management is an important resource
weakness.
Brush et al. (2001) categorize resources on a scale from utilitarian to instrumental. Resources clas-
sified as utilitarian are applied directly in the productive process. At the opposite extreme, although
instrumental resources are applied indirectly, they are fundamental as they allow access to other
resources. The best example of an instrumental resource is finance: it is via financial resources that
other resources (e.g. human) may be accessed. If a firm’s financial difficulty is caused by poor
financial management which, over time, has had the effect of weakening or failing to strengthen
other (utilitarian) resources, then we would expect the chances of successful recovery to be slim
(Thorburn, 2000). This leads to our fourth hypothesis:
H4: CVA success will be less likely when poor financial management is an important resource
weakness.
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280 International Small Business Journal 30(3)
Dyer and Singh (1998) have developed our understanding of resources by extending the scope of
the search from resources residing within the firm to resources that exist between firms. They argue
that critical resources may span firm boundaries and may be embedded in inter-firm relationships,
stating that ‘the (dis)advantages of an individual firm are often linked to the (dis)advantages of the
network of relationships in which the firm is embedded’ (1998: 660). Moreover, they find that the
importance of such relationship resources is increasing as firms have become more dependent on
supplier relationships. Subsequent empirical work has supported this line of thinking by showing
that network resources do have a significant influence on firm performance (Cope et al., 2007;
Pittaway and Rose, 2006). Regarding the focus of this article, the extent to which creditors are sup-
portive during CVA indicates the strength of the firm’s ‘relationship’ resource. All classes of credi-
tor can be important, but for different reasons. Secured creditors, generally banks, have a very
strong position in the UK bankruptcy system, and can make life very difficult for a firm which does
not have their favour. Similarly, preferential creditors, especially HM Revenue & Customs (which
collects corporation tax and sales taxes), have a strong position.
4
Unsecured creditors often have
little choice but to go along with a CVA proposal. In other types of bankruptcy regime they will
almost certainly receive nothing, whereas in a CVA they have at least some prospect of a return.
Nevertheless, they can be both hostile and awkward during the course of the CVA where they judge
the directors of the firm to have been either reckless or dishonest in the course of running up their
debts. In summary, supportive creditor attitudes indicate the existence of relationship resource,
whereas unsupportive creditor attitudes indicate the opposite. We should expect that firms with a
strong relationship resource will have a better chance of recovering from financial difficulty. This
leads to our fifth hypothesis:
H5: CVA success will be positively related to the strength of ‘relationship’ resources.
In the resource-based view, what matters is not the absolute quantity and quality of resources,
but rather the quantity and quality of resources that a firm controls relative to competitors (Hunt,
1997). In addition to resource strengths relative to competitors, resource weaknesses relative to
competitors are important. West and De Castro (2001) maintain that resource-based view schol-
ars have tended to focus on resource strengths, but this is one-sided because financial outcomes
for the firm will be influenced also by its resource weaknesses and distinctive inadequacies rela-
tive to its competitors. This leads to the conclusion that poor performance may arise either
because the firm has no particular resource strengths and resource weaknesses or where the
weaknesses are serious enough to offset any strengths it may possess. This perspective informs
our sixth hypothesis:
H6: CVA success will be more likely when the firm has relative resource strength, and less likely when the
firm has relative resource weakness.
The final hypothesis relates to a firm which does have at least an adequate resource base, but is
pushed into bankruptcy by one or more adverse temporary factors that do not damage this base. The
concept of core competence (Prahalad and Hamel, 1990) is pertinent here. Hunt and Morgan (1995)
define core competencies as higher-order intangible resources that enable a firm to perform –
perhaps better than the competition – activities within its value chain (Porter, 1985). When this
ability is unaffected by the cause of bankruptcy, then the firm can be thought of as having an ade-
quate resource base before, during and after bankruptcy. For adequate firms that are temporarily
pushed into bankruptcy by factors that do not affect their core competence, the CVA allows part of
the debt to be written off and the breathing space to recover. Examples of such temporary factors
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Cook et al. 281
include a single bad debt and bad luck. Indeed, Storey (2011) has challenged those attempting to
explain the performance of small firms to acknowledge more honestly the large role played by
chance, with bad luck in one period often being reversed in a succeeding period. This leads to our
final hypothesis:
H7: CVA success will be more likely when a factor that does not affect core competence is an important
reason for bankruptcy.
Method
Data collection
Data to test the seven hypotheses were collected from a postal questionnaire
3
sent to all 1522
names appearing on the HMSO list of licensed insolvency practitioners.
4
Given the legal restric-
tions on who can carry out a CVA, the HMSO list is in effect the only sampling frame required for
the purposes of this study: 435 replies were received, a response rate of 28.6 percent. Of these, 350
indicated that they had no experience of CVAs and therefore could not complete the questionnaire,
itself an interesting finding. In some cases the insolvency practitioner, having conducted more than
one CVA, was able to fill in more than one questionnaire, and so our final sample consisted of
questionnaires on 97 different CVAs. There is no basis on which to test formally for non-response
bias by comparing the composition of the present sample with the population of all CVAs, since
information beyond the simple number of CVAs per year is not compiled. However, we do not
have any obvious evidence that the sample is biased. In terms of sector membership, the proportion
of companies in the sample in construction, manufacturing, distribution and services is similar to
the proportion of all bankrupt companies in these sectors. The insolvency practitioners who
responded were spread across small, medium and large accounting firms and all areas of the coun-
try. The questionnaire was piloted with two experienced insolvency practitioners to check for clar-
ity and relevance in terms of the possible range of causes of bankruptcy asked about, and the
reasons why the CVA was attempted.
Given that the CVA was designed for SMEs, we expected that the average company would be
small, and indeed this was the case. The median company within the sample had sales revenue of
£1.5 million and 20 employees. Mean sales revenue was £3.8 million, and mean employment 54
employees. Of the total debt owed, 20.8 percent was owed to secured creditors, 7.8 percent to
preferential creditors and 71.5 percent to unsecured creditors (figures do not sum to 100 due to
rounding).
Operationalization of hypotheses
CVA success or failure, the dependent variable, was measured on the basis of the rating given by
the insolvency practitioner of the extent to which the CVA plan had been realized. The categories
of performance against plan were ‘unsuccessful’, ‘satisfactory’ or ‘very successful’. This has
potential validity problems as it could be subjective – success in the mind of the insolvency prac-
titioner may not equate with more objective notions of success. However, two things reassure of its
use. First, a statistical analysis was conducted, which found that success as rated by the insolvency
practitioner was strongly correlated with more objective measures of success such as total divi-
dends paid and the proportion of promised dividends paid to preferential and unsecured creditors
(secured creditors are almost always promised and paid 100 percent of their debt). Second, a fur-
ther analysis of a previous cohort of companies in CVAs (Milman and Chittenden, 1995) revealed
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282 International Small Business Journal 30(3)
that the insolvency practitioner’s assessment at the time of the original survey in 1995 was signifi-
cantly correlated with survival, free of insolvency five years later in 2000.
In terms of variables indicating resource strength or weakness, causes of bankruptcy and rea-
sons for attempting rehabilitation, respondents were asked to rate each possible factor on a Likert
scale (ranging from 1 = ‘not important’ to 5 = ‘very important’). Independent variables were coded
1 = ‘important’ where respondents ranked them as being ‘important’ or ‘very important’ in the
questionnaire, and as 0 = ‘not important’ otherwise to economise on degrees of freedom, given the
limited sample size. Robustness tests were conducted by adding ‘moderately important’ cases to
the ‘important’ category and repeating all analyses. In addition, robustness was checked by using
alternative groupings of outcomes in the ordered Probit analysis. These robustness tests led to no
substantive differences in the results.
The most important indicators of resource weakness were when respondents judged the bank-
ruptcy to have occurred due to poor marketing management, poor human resource management
and poor financial management (H2 to H4). In addition, a new variable was constructed which
indicated where the company’s problems were solely attributable to poor management (H1). This
was a dichotomous variable which took the value 1 when any of the specific types of poor manage-
ment were rated as being either an important or very important reason for the company’s bank-
ruptcy, and no other reason was given for the bankruptcy. Also, when it was indicated that the
arrival of new management was a reason for attempting the CVA, this was taken to indicate an
existing resource weakness in the company.
The strength of relationship resources was measured in terms of the attitudes of each class of
creditors. The respondents were asked to rate these attitudes as either positive, neutral or negative
(H5). Similarly, to test H6, CVA success was related to the importance attached to increased com-
petition as a cause of a company’s bankruptcy, and insolvency practitioners were asked to assess
the extent to which companies were able to compete as normal while in the CVA. The existence or
otherwise of resource-based strength was inferred from the reasons for implementing the CVA by
assessing: (a) shareholders’ willingness to commit new capital; (b) the identification of turnaround
potential by the supervising insolvency practitioner; and (c) the identification of the company’s
problems as being temporary.
Finally, variables which might lead to company failure that did not relate to resource weakness
(H7) were: (a) the failure of one major contract; (b) one bad debt; (c) sheer bad luck; (d) a general
downturn in the market; and (e) adverse macroeconomic conditions.
Control variables
There are a number of important control variables which have been suggested by the literature on
small firm success and failure which were worthy of inclusion in this study. In studies examining
the relationship between resources and performance, size and age are the two most common, being
consistently associated positively with firm survival (Audretsch, 2002; Brush and Chaganti, 1999;
Chandler and Hanks, 1994). There are many reasons why size may matter, particularly in the con-
text of firm survival. Larger firms are simply likely to have more resources. Furthermore, they are
more likely to have surplus assets that can be disposed of, generating cash. Age too may be associ-
ated with the accumulation of resources and learning (Jovanovich, 1982), overcoming the ‘liability
of newness’ (Stinchcombe, 1965). The square and cube of age are included in the full model to
allow for a non-linear effect of age on the likelihood of survival. Very young firms are particularly
vulnerable, and it is well understood in the literature that chances of survival improve with age, but
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Cook et al. 283
do so at a diminishing rate. This may lead plausibly to an S-shaped relationship best modelled with
a cubic functional form. The strong correlation between age, age-squared and age-cubed will lead
to the separate effects of these three variables being confounded, but should not lead to more gen-
eral problems of multicollinearity in the rest of the model (as indicated by stable coefficients
between the full and restricted models).
In terms of industry membership, although SME survival, failure and turnaround rates are found
to vary from one sector to another, the differences are relatively insignificant. This is in line with
the resource-based view, which is predicated on the assumption that variability in performance is
greater within industries than between them. Nevertheless, dummy variables are used to account
for the broad type of activity in which the firm was engaged.
Three further control variables, not addressed in the literature, are whether or not the CVA is
carried out in conjunction with another bankruptcy procedure, the experience of the insolvency
practitioner charged with implementing the CVA and the size of the company to which the insol-
vency practitioner belongs. First, regarding these further control variables, one important feature
of UK bankruptcy law is that it provides for a CVA to be carried out in conjunction with an admin-
istration order, as well as allowing each procedure to be carried out independently. The administra-
tion order provides far greater powers of control and investigation to the insolvency practitioner as
well as providing a strong moratorium against hostile creditor actions. With an administration
order, the insolvency practitioner has the important power to dismiss and appoint directors.
Therefore, one would expect that CVAs conducted in conjunction with an administration order
would be more likely to succeed, since the insolvency practitioner has a better chance to assess the
prospects of the company and to remedy any senior management deficiencies. Second, the simple
expectation is that the more experienced the insolvency practitioner, the higher the probability of a
successful outcome. By the same token, one might expect the larger the accounting firm to which
the insolvency practitioner belongs to be positively correlated with CVA success, as the insolvency
practitioner will have a greater wealth of expertise within the firm from which to draw.
Results
The ordered Probit analysis results are presented in Table 1. Table 2 presents the correlation matrix
and Table 3 provides the key to the variables in that matrix. The correlation matrix shows that, with
the exception of age, age-squared and age-cubed, there are no worrying large correlations between
the independent variables.
The results shed considerable light on the central proposition and hypotheses. Both the full and
restricted models are highly significant. In the latter, nine independent variables are statistically
significant at conventional levels. Comparison of the coefficients between the full and restricted
models reveals stability in most of the coefficients. The full model was tested down to the restricted
model by eliminating those variables which appeared least significant based on t-ratios or extant
theory. These variable deletions were data admissible as evidenced by a likelihood ratio test. As a
robustness check, the sequence of deletions was altered. This had no effect on the principal conclu-
sions reported below.
Poor management as a sole cause of a company’s problems took a counterintuitive positive sign.
However, this was entirely due to collinearity with the three variables indicating problems with
marketing, human resource management and financial management. Without these three variables,
the sign switches to being negative as expected, although not significant. The difficulty experi-
enced in CVAs of dealing with poor management is underscored by the negative coefficient on new
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284 International Small Business Journal 30(3)
Table 1. Ordered Probit Analysis Results*
Variable Full Model Restricted Model
Coeff. t-ratio Coeff. t-ratio
Poor management was the sole major cause of the
bankruptcy
0.357 0.331
Poor marketing management was an important
cause of the bankruptcy
?2.618 ?1.451 ?1.960 ?1.750*
Poor human resource management was an
important cause of the bankruptcy
?0.962 ?0.467 ?0.732 ?0.666
Poor financial management was an important cause
of the bankruptcy
?0.560 ?0.539 ?0.353 ?0.972
The arrival of new management was an important
reason for the CVA
?0.833 ?0.648 ?0.767 ?1.073
Secured creditors were supportive of the CVA ?0.154 ?0.150
Preferential creditors were supportive of the CVA 0.251 0.401
Unsecured creditors were supportive of the CVA 1.541 1.277 1.391 2.440**
Increased competition was an important cause of
the bankruptcy
?1.241 ?1.322 ?1.363 ?2.186**
A general demand in decline for the company’s
type of product was an important cause of the
bankruptcy
1.180 1.160 0.852 1.635
The company had difficulty acting as a normal
competitor due to the CVA
1.723 1.543 1.086 1.926*
The company’s turnaround potential was an
important reason for the CVA
1.059 0.707 1.052 1.924*
The fact that the company’s problems were
temporary in nature was an important reason for
the CVA
0.192 0.173
Shareholders willing to invest additional funds was
an important reason for the CVA
0.108 0.066
A single bad debt was an important cause of the
bankruptcy
0.317 0.154
The failure of one big project was an important
cause of the bankruptcy
0.709 0.957
Bad luck was an important cause of the bankruptcy 0.452 0.225 1.004 0.875
Poor macroeconomic conditions were an
important cause of the bankruptcy
?0.870 ?0.684
Failure of another company was an important
cause of the bankruptcy
?0.280 ?0.176 ?1.019 ?0.988
Problems with a major contract was an important
cause of the bankruptcy
?0.768 ?0.617
Amount of debt owed to secured creditors ?0.0003 ?0.741 ?0.0001 ?0.709
Amount of debt owed to preferential creditors 0.0007 0.237
Amount of debt owed to unsecured creditors 0.0001 0.561
Age of the company 0.182 0.872 0.026 2.238**
Age
2
?0.007 ?0.868
Age
3
0.00007 0.895
Firm belongs to manufacturing sector 0.250 0.180
at University of Liverpool on July 3, 2012 isb.sagepub.com Downloaded from
Cook et al. 285
Variable Full Model Restricted Model
Coeff. t-ratio Coeff. t-ratio
Firm belongs to distribution sector ?0.475 ?0.374
Firm belongs to service sector ?1.117 ?0.779 ?0.980 ?2.169**
CVA done in conjunction with administration
order
?0.571 ?0.775
The IP’s accounting practice has between 10 and
50 partners
2.663 1.816* 1.617 3.866***
The IP’s accounting practice has more than 50
partners
3.105 2.129** 2.016 3.643***
Years of experience of the insolvency practitioner 0.016 0.465
The IP’s accounting practice has supervised
between 5 and 25 CVAs
0.052 0.052
The IP’s accounting practice has supervised more
than 25 CVAs
?1.132 ?0.743
The major purpose of the CVA was to rehabilitate
the company
?0.302 ?0.345 ?0.374 ?0.760
CONSTANT ?1.983 ?0.968 ?0.964 ?1.524
Log-Likelihood ?45.036 ?51.083
?
2
74.780*** 62.685***
% correct predictions 71 71
LR test of restriction ?
2
(19) 12.095
***indicates significant at 1% ** significant at 5% and * significant at 10%
Table 1. (Continued)
or improved management being an important rationale for attempting the CVA. Therefore, there is
support for H1. The three management failings all emerge with negative signs as expected, with
poor marketing emerging as the strongest influence, significantly reducing the chances of a suc-
cessful CVA. The influence of problems of financial management on the chances of success was
stronger than that of problems with human resource management in all specifications. Therefore,
this evidence supports H2 to H4.
Regarding creditor attitudes, the results indicate that chances of success are significantly
higher where unsecured creditors are supportive of the CVA. Interestingly, support from secured
and preferential creditors is not influential. A somewhat different picture emerges when the
dummy indicating supportive creditor attitudes is replaced by one indicating unsupportive credi-
tor attitudes (not reported in the table). Here, it is unsupportive secured creditors who exert the
most important and significant negative influence on chances of a successful outcome. Overall,
the evidence supports H5.
The importance of the relative position of the company, which is the basis of H6, is indicated by
the significant influence of increased competition as a cause of the company’s problems.
Furthermore, the positive – and in some specifications significant – coefficient on the variable
indicating that the company’s problems stemmed from a general decline in demand, indicates that
prospects are less impaired by general difficulties facing all companies than where difficulties stem
from a disadvantage relative to rivals. The fact that poor marketing management has a consistently
negative coefficient is also consistent with H6, as poor positioning in the market will place a
at University of Liverpool on July 3, 2012 isb.sagepub.com Downloaded from
286 International Small Business Journal 30(3)
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288 International Small Business Journal 30(3)
Table 3. Key to Variables in the Correlation Matrix
Variable Variable description
Secure Amount of debt owed to secured creditors
Pref Amount of debt owed to preferential creditors
Unsec Amount of debt owed to unsecured creditors
Age Age of the company
Age
2
Age
2
Age
3
Age
3
Length Years of experience of the insolvency practitioner
Rehab The main purpose of the CVA was to rehabilitate the company
Purebad Poor management was the sole major cause of the bankruptcy
Part1050 The IP’s accounting practice has between 10 and 50 partners
Part50 The IP’s accounting practice has more than 50 partners
CVA25 The IP’s accounting practice has supervised more than 25 CVAs
Difdebt A single bad debt was an important cause of the bankruptcy
Difecon Poor macroeconomic conditions were an important cause of the bankruptcy
Difprod A general demand in decline for the company’s type of product was an important cause of
the bankruptcy
Difcomp Increased competition was an important cause of the bankruptcy
Difco Failure of another company was an important cause of the bankruptcy
Difproj The failure of one big project was an important cause of the bankruptcy
Diffinma Poor financial management was an important cause of the bankruptcy
Difhrm Poor human resource management was an important cause of the bankruptcy
Difcontr Problems with a major contract was an important cause of the bankruptcy
Difluck Bad luck was an important cause of the bankruptcy
Attsec Secured creditors were supportive of the CVA
Attpref Preferential creditors were supportive of the CVA
Attunsec Unsecured creditors were supportive of the CVA
Whynma The arrival of new management was an important reason for the CVA
Whytemp The fact that the company’s problems were temporary in nature was an important reason
for the CVA
Whyinv Shareholders willing to invest additional funds was an important reason for the CVA
Whyturn The company’s turnaround potential was an important reason for the CVA
Admin CVA done in conjunction with administration order
Manu Firm belongs to manufacturing sector
Dist Firm belongs to distribution sector
Serv Firm belongs to service sector
Difop The company had difficulty acting as a normal competitor due to the CVA
company at a competitive disadvantage. These findings make sense, as CVAs were simply not
designed to deal with this kind of strategic failure. Accordingly, H6 is also supported.
Where turnaround potential was an important reason for the CVA, success is more likely, sig-
nificantly so in the restricted model. The fact that the company’s problems were temporary in
nature and that the shareholders were prepared to invest additional funds were also positive influ-
ences, as expected. Those causes of failure which did not imply a company’s resource weakness
generally took positive signs, as expected. A general decline in demand for the type of product that
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Cook et al. 289
the company sold was positive and not far from significance in the restricted model. Overall, there
is clear support for H7.
Regarding the control variables, there is little evidence that size (proxied by debt owed to credi-
tors) is a significant influence on chances of success, yet neither does it appear to exert a counter-
intuitive influence. In the full model, none of the polynomial terms for age are close to statistical
significance due to a high degree of collinearity. When the squared and cubed terms are removed,
age emerges as a positive and significant influence on the chance of success. The industry sector
dummies for manufacturing and distribution were a long way from statistical significance, there-
fore there is no meaningful difference between chances of success for companies in these sectors
compared to the default category of construction. Companies in the service sector emerge as hav-
ing significantly lower chances of success.
The size of the accounting practice to which the insolvency practitioner belongs is a positive
and significant influence on the chances of success, while the insolvency practitioner’s years of
experience is positive but not significant. Very interesting is the result that where a large number of
CVAs had been previously managed by the insolvency practitioner’s firm, the chances of success
were lower. One possible interpretation of this result is gained from a discussion with a senior
insolvency practitioner who complained of a small number of ‘cowboy’ insolvency practitioner
firms that oversold the CVA as a panacea.
Discussion
It is clear that where problems are due to poor management, then the chances of successful delivery
of the CVA plan are lower. This reflects the difficulties of correcting poor management within the
CVA, where the debtor remains in possession and the CVA supervisor has no powers to direct
management or investigate the company (Mokal, 2004). The singular importance of the quality of
management within SMEs is entirely consistent with the resource-based view (Rouse and
Daellenbach, 1999).
The utility of the resource-based framework is also attested to by the support for H2, H3 and H4,
which indicate that companies with important resource weaknesses are unlikely to be associated
with a successful CVA process. Resource weaknesses that leave the company at a competitive
disadvantage relative to rivals (H6) are particularly problematic, while strong relationship resources
in terms of relationships with key creditors (H5) emerge as having a fundamental bearing on
chances of success within a CVA. Ultimately, we find that a successful outcome following bank-
ruptcy is likely when a company has resource strength and became bankrupt for non-resource
related reasons (H7). Accordingly, we find strong support for this study’s central proposition, that
a firm which has resource strength or lacks resource weakness but is pushed into bankruptcy by
adverse temporary factors will be more likely to succeed in a CVA.
The findings that a resource weakness is negatively associated with the prospects of success,
and resource strength positively associated, fits with the broader findings on the success and failure
of entrepreneurial firms (Audretsch, 2002). Strategic posture has been found to have an influence
on the likelihood of survival and success rates of small firms, typically measured either by growth
or profitability (Lussier and Pfeifer, 2000). In addition to strategic posture, a range of operational
factors have been proposed as bearing some relationship to chances of survival: financial manage-
ment (Peterson et al., 1983), product or marketing management (Gartner et al., 1999) and human
resource management (Lussier and Pfeifer, 2000). The present results are consistent with this lit-
erature. The association between age and survival is also well established in the broader literature
(Everett and Watson, 1998).
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290 International Small Business Journal 30(3)
Conclusion
In summary, the consistency of the present findings with the existing literature on SME success
and failure provides additional validation for the utility of the resource-based view for consider-
ing these issues. The resource-based view has the advantage of providing an overarching con-
ceptual framework within which this body of work can be interpreted, and one which can guide
future research. The article has also widened both the resource-based view and the literature on
entrepreneurial success and failure by addressing the under-researched question of the turn-
around of bankrupt SMEs.
What does this evidence imply about the utility of the government’s attempts to use bankruptcy
law reform to promote entrepreneurship? First, the procedure does allow the problems of bank-
rupt SMEs to be addressed, resulting in good rates of business survival, and orderly liquidation in
those cases where the firm cannot be saved. Thus CVAs can help to avoid failure or, if not, miti-
gate its effects. A series of R3/SPI surveys (formerly Society of Practitioners of Insolvency;
Weisgard et al., 2010) have shown the CVA to outperform other bankruptcy regimes in terms of
business survival, preservation of employment and debt recovery by creditors. To that extent, the
CVA deserves to be more strongly promoted. One aspect which is particularly important is that
CVAs pay better returns to trade creditors than other types of regime, thus helping to avoid a
‘domino effect’ where the failure of one firm can lead to the failure of its suppliers (Weisgard et
al., 2010). Nevertheless, policymakers (and indeed insolvency practitioners) should be realistic.
The CVA is not – and neither could it be – a panacea.
In terms of specific implications, the nature of a debtor-in-possession regime requires careful
consideration. The results presented here indicate that such a regime can work well when the firm
is viable, but can present problems when the firm is not viable. For an SME the main resource, and
therefore the factor on which viability hinges, is the quality of its management. When management
quality is good, a CVA will be appropriate and preferable to a management displacement regime,
since the evidence shows that debtor-in-possession regimes involve significantly lower costs than
management displacement regimes such as receivership (Thorburn, 2000). Designing a bankruptcy
procedure which is capable of correcting senior management and strategic deficiencies would
appear to be extremely difficult.
What are the implications for entrepreneurs or would-be entrepreneurs? This research indicates
that poor management, in particular poor marketing management, failing to keep up with the com-
petition and poor financial management are all associated with lower degrees of CVA success.
These can all be influenced by the entrepreneur: for example, through appropriate training or tak-
ing professional advice and being vigilant about competitive position (Brush et al., 2001). The
research also indicates the importance of managing customer and supplier relationships. The atti-
tude of creditors can make or break an attempt at survival (Cook et al., 2001). The evidence regard-
ing poorer chances of success where the cause of the firm’s financial problems was the failure of
another firm, or problems with a major contract, support the traditional advice to avoid over-reli-
ance on a single customer. Additionally, the quality of the insolvency practitioner has been seen to
influence outcomes, therefore entrepreneurs need to choose their advisers with care.
Recommendations for future research
This research was based on broad measures of resources and not on in-depth research carried out
within the organization, where many complex resources reside (Rouse and Daellenbach, 1999).
The article suggests from both a theoretical and empirical standpoint that the resource-based view
is a useful and potentially powerful framework for explaining the success and failure of SMEs. In
at University of Liverpool on July 3, 2012 isb.sagepub.com Downloaded from
Cook et al. 291
so doing, it responds to the call for further theoretical development in the otherwise mature gen-
eral topic of picking winners (Blackburn and Kovalainen, 2009), and builds on the small but
growing body of literature that is advancing the use of the resource-based view within the field of
SMEs and entrepreneurship.
Funding
The authors acknowledge the support of the Institute of Chartered Accountants in England and Wales, grant
number 5-403.
Acknowledgement
The authors acknowledge the support of the three anonymous referees that helped considerably in the devel-
opment of this article. All remaining errors remain the authors’ alone.
Notes
1. In the UK the correct term to apply to companies is insolvency and in this case, ‘technical insolvency’ –
when the company is unable to pay its debts on time. Bankruptcy applies only to individuals. However,
throughout this article the more usual international term ‘bankruptcy’ is used. Similarly, when referring to
the dissolution of a company, the international term ‘liquidation’ is preferred.
2. Initially, larger companies were not included because, having access to greater resources, they are more
able to resolve financial difficulties through non-legal informal arrangements, and so were less needy of
legislative reform than SMEs.
3. The research instrument is available on request from the corresponding author.
4. Over the time period relating to the current sample these agencies were separate – the Inland Revenue
and HM Customs & Excise – they are unified now as HM Revenue & Customs.
5. An insolvency practitioner is authorized to implement a bankruptcy proceeding.
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Gary A.S. Cook is Senior Lecturer in Applied Economics at the University of Liverpool Management School.
His research interests relate to the relationships between industrial clustering, internationalization and inno-
vation and to the relationship between insolvency law and entrepreneurship.
Naresh R. Pandit is Professor of Management at Norwich Business School, University of East Anglia. His
research interests relate to the phenomena of corporate turnaround and industrial clustering.
David Milman is Head of the Law School at Lancaster University, where he has been based since 2005. He is
an insolvency law specialist and one of the co-authors of the Annotated Guide to Insolvency Legislation (with
Len Sealy, Sweet & Maxwell), which will enter its 14th edition this year.
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