allco and abc may help centro, page-14

Good article ,also in same context from Business Spectator, Stephen Bartholomeusz "Behind the Allco scuttling"

excerpt

"That issue of personal risk came into sharp focus at the weekend. Because Allco has been in the hands of its banks all year its cash was consistently swept from its accounts by the lenders. When it needed cash for its day-to-day operations, the directors would draw down on the facilities. To do that they needed to sign a certificate attesting to their ability to repay.

The dilemma for the directors in the post-Lehman environment was that if asset sales were more difficult or only doable at absolutely distressed values, and there was little if any ability to raise new third-party money for transactions that would grow its funds under management and enable it to pursue its new business model, by remaining in place they were effectively working purely for the banks – there wouldn’t be any equity left in the group once the asset sales were concluded. "


continuing in same article

"if the directors came to the conclusion that they were de facto liquidators, working purely to reduce the exposures of the senior lenders, then it would have been pointless to continue to expose themselves to the liabilities associated with continuing to trade.

Allco may have been solvent with the banks’ support but they would have been very conscious that they were trading within an insolvency context, putting their own assets at risk without any reasonable prospect that their efforts would benefit shareholders or subordinated creditors.

Under the circumstances, the directors’ decision to call in the administrators was rational. It would also be disquieting for the banks.

There are a number of large and complex groups that have been kept alive only through the forbearance of banks that know from their experiences in the 1990s that they have a better chance of salvaging loans by providing life support and retaining key management than by sending in a liquidator.

If other boards and senior managements of troubled organisations reached the same conclusion as the Allco board – that there was no prospect of salvaging value for shareholders and therefore they were exposing themselves to personal liability for no good reason – there could be a spate of corporate failures, a surge in bank loan losses and a lot of distressed assets over-hanging already extremely fragile markets."