Insolvency practitioners: Thriving in an age of doubt
Insolvency practitioners relish the challenges of business uncertainty but could the combination of Brexit and regulatory reform be enough to tip them over the edge?
If there’s one thing that insolvency professionals thrive on, it’s change; and a good job too. UK business confidence plummeted to its lowest level since the height of the Eurozone debt crisis in the wake of the Brexit vote, according to a study by Lloyds Bank, one of the first surveys of corporate optimism published since the referendum result.
Blair Nimmo CA, UK Head of Restructuring at KPMG, pictured left, said: “We’re still a long way from knowing how this will pan out but our industry thrives on uncertainty and disruption.
"We’ve seen a number of M&A deals that have been called off, but it’s not the doom and gloom that some have suggested.”
Colin Dempster CA, Chairman of the ICAS Technical Committee and Partner and Head of Restructuring at EY added: “I certainly don’t think we’ll see any impact on insolvency figures in the short term.”
Levels of debt in most companies are much reduced compared with 2008, Colin explained and, at the same time, interest rates coming down should offer some respite to those with debt.
“Our banks are also in a much stronger position and their balance sheets have been shored up so they’re better placed to help companies showing signs of distress.”
Of course, that’s not to stop companies using Brexit as a scapegoat for business failure. Just a week before the EU referendum, the collapse of travel company Lowcost Travelgroup left 140,000 customers not knowing if their trips would proceed as planned.
Administrators Smith & Williamson and CMB Partners blamed uncertainty ahead of the EU referendum and the fall of the pound for its demise.
Potential for the future
Those organisations looking to earn euros and dollars through exporting are set to benefit from the Brexit fallout.
Losers are likely to be those reliant on imported goods or raw materials, and companies in sectors exposed to falling consumer confidence, for example, the automotive market, high-end consumer goods and, as we have already seen, the travel sector.
For the insolvency profession itself, the likely effect of Brexit is unknown. Nonetheless, there is no excuse for practitioners to stick their heads in the sand, according to Blair.
“As a firm, we were quicker to appoint a head of Brexit than the government was,” he joked.
Given the potential for insolvency cases to drag on, Andrew Tate, President of insolvency trade body R3, said there’s real urgency for the government to provide clarity on its post-Brexit insolvency model.
He stated: “The sort of thing we need to prioritise is the mutual recognition of insolvency procedures in different member states through EU regulations. We need to make sure we can maintain that."
Claire Middlebrook CA, Managing Director at Middlebrooks Business Recovery and Advice, said: “Brexit may start to take effect when the terms of the ‘deal’ are known. It may be that the UK becomes a tax haven for international countries, or it may be that some of our EU neighbours will move out.
"For me, the issue right now is that of uncertainty, and that may decrease the number of formal insolvencies, and those ‘zombie’ companies that still keep paying their interest will be allowed to limp along.
"At present, dealing with other EU countries is already a troublesome process. Some countries recognise the process, for example, the Lithuanian owners of Hearts football club when it entered administration; however, other countries such as Spain will not enter into negotiations to recover property based in Spain.
“It would be lovely to have some clarity on how the EU will view assets owned by UK companies that are situated abroad.”
Colin at EY commented: “People like the UK because it is creditor-friendly, it’s well-established and it’s flexible. Cross-border issues will likely become more complicated, but the flexibility and creditor-friendliness of the UK regime is unlikely to change.”
Bruce Cartwright CA, a Partner in business recovery services at PwC, is similarly confident that the UK will retain its attractiveness among creditors on pan-European insolvency projects.
He said: “We have a very pragmatic approach to finding solutions and I don’t see why that should change as a result of Brexit.
"We’re saying to clients, keep yourselves flexible in terms of costs. We’ll have a fair degree of warning about what will happen and which legislation we’ll keep.
Colin warned: “I wouldn’t say that there are going to be trainfuls of insolvency practitioners heading over to Paris or Brussels from the UK. But EY’s UK practice is currently bigger than any other European practice and other countries will become more important. That balance will shift."
A need for skills
Scotland is facing a shortfall of senior level practitioners as more than half of senior IPs look to retire over the next decade, according to analysis by Donald McNaught CA, Chair of the ICAS Insolvency Committee and Restructuring Partner at Johnston Carmichael.
He said: “You have IPs who have been running departments for more than 20 years, they have been the figurehead, and it may not be the case that they’ve developed the next generation.
“There’s definitely the risk of an experience gap. For those firms that invest in IPs, there will be opportunities."
Those opportunities lie increasingly in business consultancy and informal solutions and the implications for the kinds of skills needed by insolvency practitioners must not be underestimated.
Andrew at R3 added: “Everyone who deals with distressed companies has a core skill set but the skills needed by those looking to restructure a banking facility with lots of parties involved are very different to those conducting fraud investigation work.
"Some practitioners are not keeping up with that change curve. It’s a struggle to find good people and the number of people taking insolvency exams is falling. People don’t see it as a good career path.”
It may not be the case that they’ve developed the next generation. There’s definitely the risk of an experience gap.
Derek Forsyth, Head of Recovery and Insolvency at Campbell Dallas, commented: “IPs are quick to identify the key elements of the core business, and will provide clear strategic advice on how to deal efficiently with under-performing areas.
"Additionally, strong negotiating skills are a prerequisite, and the introduction of a restructuring expert can bring an independent perspective when negotiating a compromise for the various stakeholders involved, leaving the directors free to focus on running the business.”
Donald added that the emergence of a hugely fragmented banking sector that has seen new entrants to the market acquire debt from high street banks has added a new layer of complexity to insolvency work. At the same time, IPs are continually battling the conflict between insolvency rules and other laws, notably health and safety, and employment legislation.
He said: “Something like the Transfer of Undertakings (Protection of Employment) Regulations is quite rightly there to protect employees but it can result in deals not going ahead. So instead of a transfer saving 75% of employees, 100% end up losing their jobs. We will continue to push for caveats for IPs."
Changes to regulation
Regulatory issues are also high on the agenda as a major review of corporate insolvency rules inches nearer completion.
In particular, the government is consulting on four proposals:
- A three-month moratorium from creditor action for struggling companies.
- Further protections for insolvent companies to ensure they can access essential supplies.
- A new restructuring procedure.
- Changes to encourage rescue finance.
The proposals would also allow the UK’s insolvency regime to tick enough boxes to push it up the rankings in the World Bank’s annual Doing Business Report.
Despite being cautiously welcomed by many in the profession, elements of the proposal have raised concerns about the detrimental impact they could have on availability and cost of finance for SMEs. In particular, the length of the moratorium is seen by many as excessive.
Practitioners have also voiced their concern at the proposed use of an 'authorised supervisor' rather than a qualified insolvency practitioner during this critical stage of the business recovery process.
Donald commented: “It is essential that any process which involves corporate restructuring or insolvency retains the confidence of the relevant stakeholders.
“There is a risk that those who are not members of a professional body could use these provisions to facilitate the removal of assets during the period of the moratorium.”
The ICAS view
ICAS warns that in addition to the immediate detrimental effect on creditors, this would pose a significant risk to the trust in the UK restructuring system and profession, which, in turn, is likely to result in increased lending costs and even restrictions on credit lending.
Claire said: “It is often the case that directors wish they had made decisions earlier to avoid either ploughing in more personal monies or indeed prolonging stress. Being blunt, if a company does need restructuring through formal liquidation, then sometimes dealing with it up front is better.”
The issue adds further fuel to the debate about whether accountancy should be a regulated profession. Although around one-third of those practising as accountants in the UK have not undertaken any form of qualification or training, Ninety-three per cent of those responding to a poll recently conducted by ICAS said all persons and businesses providing accountancy services should be regulated.
Colin said: “Suppliers will have past debts frozen during the moratorium and that can be enough to bring smaller companies down so it’s very important that companies in distress are supervised properly.
"When companies are in distress they stop seeing the wood for the trees and could be taken advantage of at a time of vulnerability."
R3 is not alone in expressing concern about the proposed expanded role in insolvency for a court system that may not be ready for the work.
Andrew added: “The essential supplies proposals, and others, could lead to a significant extra workload for the UK court system, which is not set up to deal with a large amount of insolvency work."
Donald at Johnston Carmichael said: “Life is a lot harder for IPs than it was 20 years ago. There was less fee pressure, you’d get better value for assets and there was more speed and efficiency in receiverships.
"But I still believe insolvency is a very important arm of the accountancy profession and it can be very rewarding.”
Colin concluded: “It’s a good time to be an insolvency practitioner. There’s going to be turbulence and our skill lies in navigating a pathway through uncertainty.”
The full version of this article appears in the September 2016 edition of CA magazine.
The ICAS Insolvency and Restructuring Conference on 22-23 November is one of the essential events in the IP’s calendar. The conference, in association with Close Brothers Asset Finance, will be chaired by Gillian Carty of Shepherd and Wedderburn LLP, and Donald McNaught CA, partner in Johnston Carmichael’s restructuring team.