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Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Conflict of interests for insolvency practitioners doing restructuring & turnaround work

conflict of interestsWhen a business is either in financial difficulty or heading that way, I would always advise getting expert help and the earlier the better.
Leave it too late, to when the business is formally insolvent, and the opportunity to restructure and survive becomes much more constrained.
But insolvency, whether actual or approaching, is characterised by a cash flow problem and advice doesn’t come cheap.
This is because advisers need in-depth knowledge and experience in a wide variety of disciplines. They include experience of business processes and finances including the ability to analyse accounts, cash flow forecasts as well as know the various legal compliance issues including HR and redundancy, insolvency law and litigation. They also need to be familiar with options for restructuring and negotiating them with stakeholders including banks, shareholders, HMRC, creditors and enforcement officers.
While restructuring and turnaround advisers and insolvency practitioners generally have this knowledge and experience, their approaches are very different.
Insolvency practitioners are appointed by creditors and work for their interests, while restructuring and turnaround advisers are appointed by the company and primarily work for its interests.
When a company is insolvent all board advisers essentially become shadow directors and as such their advice should be in the creditors’ best interests, however this does not mean the company should be liquidated, which is the normal outcome that follows the appointment of an insolvency practitioner.
Consensual restructuring with the approval of creditors should offer them a far better outcome providing the underlying causes of the financial situation are addressed – hence the need for turnaround alongside any financial restructuring.
The crucial difference between the two is that the restructuring and turnaround adviser will have your company’s best interests at heart. Their fees ought to be success based and linked to their ability to save your business and their rates are generally far less than those for insolvency practitioners. Call them in early enough and let them carry out an in-depth investigation of all aspects of your business and they will identify what, if any, parts are unprofitable and should be discontinued as well as ways of restructuring debt that can save the company, albeit in a modified form.
Although a business in difficulty can enlist the services of an insolvency practitioner as an adviser, their focus and experience are more likely to have been on recovering creditors’ money at the earliest opportunity. They may not, therefore, be open to options that could lengthen the time it would take for creditors to be satisfied and their focus is more likely to be on realising the value of your business’ assets and preventing further losses, therefore the likely outcome is liquidating the assets of the company rather than saving it.
While insolvency practitioners claim to do restructuring and turnaround work I believe this is a conflict of interests since they cannot serve two masters: creditors and the company. If they do restructuring and turnaround work, they should not take formal insolvency appointments.
It would be better, therefore, for restructuring and turnaround advisers to be entirely separate from insolvency practitioners.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery Turnaround

Are businesses waking up to the positive benefits of early restructuring?

Are businesses waking up to the positive benefits of early restructuring?
a building in need of restructuringIn the weeks since the collapse of the facilities management and construction company Carillion, there has been a noticeable increase in companies announcing plans for restructuring.
Capita, the outsourcing company frequently used by local and national government, whose shares have recently dropped by over 50% has just appointed a new CEO to turn it around after finally admitting that it was in financial difficulties.
Other businesses that have come under the spotlight include M & S, which is to close up to 14 of its stores, the burger chain Byrons closing 20 of its branches as part of a CVA rescue plan, House of Fraser looking to negotiate rent reductions, New Look is working on a store closure plan, B & Q axing 130 head office positions, Jamie’s Italian that is doing a CVA and there are employee changes under way at Sainsbury’s, Tesco and Morrisons.
While the majority of recent announcements have been in retail, they are not exclusively so.
What is perhaps more interesting is that efforts to restructure large businesses seem to be happening earlier.
This can only be welcomed as the earlier a business realises that it is, or could be, heading for financial difficulties or insolvency, the greater the likelihood that it will survive, albeit as a slimmed down business.
It is the job of a restructuring and turnaround adviser to carry out a thorough review of every aspect of a business, its products, processes, cash flow, business plan and overheads to identify those parts that are healthy and those that are draining cash or depressing profits.
She or he will make recommendations on anything that needs to change, including those products or services that need to go, as well as those that have potential to grow. Some of this advice may be painful, but it is in the interests of the business to be open to advice and to act on it.
Remember, the restructuring and turnaround adviser is looking to save the business and it is in their interests to help it to survive and grow. They are not insolvency practitioners whose role is to realise assets for creditors.
It goes without saying that the earlier the restructuring process begins, the greater the likelihood of success.
Once a company has appointed an insolvency practitioner its prospects of survival are reduced.
There is a lesson here for businesses of all sizes, from SMEs upwards, and this is to be proactive in monitoring business performance, enlist the help of an experienced restructuring and turnaround adviser at the first signs of trouble and be willing to take their advice, however painful, if the business is to survive and return to profitability.
It is to be hoped that those subcontractors affected by the collapse of Carillion will heed this advice and enlist support sooner rather than later.

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Cash Flow & Forecasting County Court, Legal & Litigation Insolvency Rescue, Restructuring & Recovery Turnaround

Insolvencies – the signs are not good for struggling SMEs

insolvencies signpostMore businesses have been declared insolvent during July to September, according to the latest statistics released by the Insolvency Service on Friday, October 27, 2017.
An estimated 4,152 companies entered insolvency in the third quarter of the year, an increase of 15% on the previous three months and of 14.5% compared with the third quarter of 2016.
Construction companies, Manufacturing and Accommodation and Food Service Activities topped the list of insolvencies, as they have in the previous two quarters, and, although final figures have not yet been released for the latest period, the trend is clearly upward.
The news comes as R3, the insolvency and restructuring trade body, released the latest findings of its long-running research into business health.
It revealed that more businesses were showing signs of financial distress increasing from one in five in April to one in four in September. Among the causes cited were decreased sales and increasing use of overdrafts with many reporting that they were at their overdraft maximum limit.
R3 President Adrian Hyde said: “Businesses have faced a number of fresh challenges over the last year. Increasing input costs caused by post-referendum inflation increases and a weaker pound, a rising national living wage, the added costs of pensions auto-enrolment, and, for some businesses, rising business rates will have hurt bottom lines.”
He said investment in new equipment had dropped between April and September from 33% to 22%, which suggested that concern over the economic prospects for the UK was prompting company directors envisaging trouble ahead and building up cash reserves to get them through tougher times ahead.
“The question of balancing competing needs – whether to prioritise solidifying their cash position or investing in their businesses, a key concern in the digital age – is more urgent than ever for many companies, especially with the economic landscape becoming more unsettled,” he said.

Time to revisit the business model?

It is, in our view, more imperative than ever that businesses retain tight control over their cash flow, revisit their business plans and have a close look at their operations to identify where savings could be made. Uncertain times only offer opportunities for those with deep pockets, for most businesses surviving them requires a focus on margins and hoarding cash until a more stable future can be predicted.
It may be a time, sooner rather than later to take a thorough look at the whole operation to identify whether it is time to restructure or pivot the business model to one which is more sustainable. This can involve some level of restructuring in order to be prepared for the possibility of worse to come.

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Banks, Lenders & Investors Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

How should a business in difficulty choose a turnaround or insolvency adviser?

trusted advisorAll too often directors can feel overwhelmed by the problems they have to confront when their business is in difficulties.
In fact, they may have been hoping the problem will resolve itself for some time, while instead the situation has escalated to a crisis point.
However the problem has arisen, the result is often a shortage of cash and the knock-on problem of not being able to meet payroll, buy supplies or pay creditors. This is where the early intervention of a trusted expert can be crucial to business survival.
Calling in a turnaround or insolvency advisor to look at the whole operation, not just the finances, is essential as their independence will mean any recommendations are honest and impartial.

The questions to ask when choosing an advisor

Advisors may not come cheap, but there is a good reason for this.  The best advisors have a breadth of knowledge and experience across a range of disciplines.  While the most obvious and pressing problems may be insufficient cash and impatient creditors, the right advisers will look for and advise on overall solutions for the business that may involve operational reorganisation, not just a short-term financial fix.
In the course of their investigations and subsequent work to save the business the advisor may have to cover financial analysis of statutory accounts, cash flow forecasts and be able to forecast trends. They will need to understand legal compliance requirements with HR and employment, especially if staff are to be made redundant as a means of saving the business.  If they have run their own business so much the better as they will understand your own anxieties.
They should be able to identify viable parts of the business with potential for growth and be able to negotiate with clients, creditors, employees and union representatives, suppliers, HMRC, banks and if relevant insolvency practitioners, who often represent banks.
Advisors often need to deal with Winding Up Petitions, attempts of seizure of assets by Bailiffs or High Court Enforcement Officers and other action by creditors. This requires them to know the different procedures and the legal options for dealing with them.
Professional qualifications, a track record in saving businesses and people skills are all aspects of restructuring work that directors would be advised to explore when choosing the right advisor. Being aware of the difference between different types of adviser may also help since insolvency practitioners generally work for creditors while turnaround professionals work for companies.
It goes without saying that some companies cannot be saved but with the input of objective and impartial advice from the right advisor, there are normally myriad options for saving most of, or at least part of, a business.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

What is the difference between a CVA and a CVL?

insolvency signpostA CVA, a Company Voluntary Arrangement, is a binding agreement between a company and those to whom it owes money (creditors).
It can allow a company in difficulty to carry on trading, by proposing affordable, realistic and manageable repayment terms to creditors and depends on the company’s proposals and what is finally agreed. It may also include provision for some of a company’s debts to be written off and will usually include a plan for restructuring the company.
The directors formally agree that the company should continue to trade and propose a CVA to creditors.
A CVA proposal is prepared by the directors, normally with the help of turnaround advisers, and then sent to the Company’s creditors along with an independent report on it by a licensed insolvency practitioner acting as Nominee and Convenor of a decision procedure through which creditors are invited to consider and vote on the proposal.
Creditors may respond to the proposal, either by accepting it, accepting it with modifications or rejecting it. Their votes are counted; 75% by value of all those voting, and 50% by value of all ‘non-associated’ creditors voting, must accept the proposals and modifications for a CVA to be approved.
The Nominee/Convenor will also convene a physical meeting of shareholders, to take place after the creditors’ decision procedure.  The meeting of shareholders will decide whether to accept or reject the CVA by simple majority; however if they reject a CVA proposal already approved by creditors, the CVA is still approved.
A CVL, Creditors’ Voluntary Liquidation, on the other hand, is a process by which the directors of an insolvent company can close it down without involving a court procedure and like a CVA, the CVL procedure is defined by the Insolvency Act 1986.
The directors formally agree that the company should cease to trade and propose the CVL to shareholders, and will also propose a liquidator to be appointed. At least 75% of the shareholders must approve the company be placed into liquidation, and over 50% must agree on who should be the liquidator.
The directors will also propose a liquidator to creditors via a decision procedure – either a virtual meeting, where creditors are invited to log on or call into a meeting and vote on who is liquidator, or deemed consent, where creditors are told by the directors who they want the liquidator to be, and will be given a deadline by which they can lodge an objection.
In both cases, the company is insolvent but the difference is the crucial test of its situation and whether with restructuring it can survive to emerge from insolvency in a way that will improve the position for creditors.
In both cases, also, the directors of the company should seek advice from a qualified professional, such as a turnaround professional or insolvency practitioner, to ensure they are abiding by their director duties, the legal obligations that all directors must adhere to and that are designed to ensure that their actions and decisions are in the best interests of the creditors and the company in that order.
Ultimately, the directors have to decide, with advice, realism and honesty, whether their company’s insolvency can be rectified with the right measures to return it to profitability, or whether the situation is irretrievable and the only solution is to cease to trade and liquidate the assets.
In summary, a CVA is a formal procedure for restructuring the balance sheet as one of many tools that can be used to save a company while a CVL is an efficient procedure for closing down a company.
 

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Cash Flow & Forecasting Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Turnaround

HMRC is dialling up the pressure to collect overdue tax

overdue tax sinking companiesMany of our new clients are contacting us after a visit from HMRC (HM Revenue and Customs) who are becoming much more proactive with businesses whose payments are overdue.
Non-payment and ignoring letters from HMRC in the past often meant they would leave you alone but this is no longer the case. They now have real time information about the payment of PAYE as well as knowing from the returns how much VAT and corporation tax is due. This information is making it easier for HMRC to track late payments. Whether a failure to pay on time or file returns on time HMRC are geared up for dialling up the pressure.
Despite an inability to pay, HMRC is supportive of those who contact them early and is still approving Time to Pay arrangements, but ignore them and expect a reaction.
In addition to letters and phone calls HMRC are increasingly using enforcement officers to visit the business’ premises to collect payment or seize goods.  Their schedule of fees is:

  • Notice fee of £75;
  • Visit fee to take control of goods £235 plus 7.5% of the tax owed that is over £1,500;
  • Non-payment removal fee of £110 plus another 7.5% of the tax owed that is over £1,500;
  • Interest may also be charged on the amount due.
  • £60k £4,700

The visit normally results in significantly increased costs with officers may are demanding fees of up to £2,000 for the visit or 7% of the amount owed in relation to an enforcement notice.
Despite a phone call from the collection officer fixing a week’s notice before visiting, a new client had just received a visit in respect of VAT arrears of £60,000. The client wasn’t able to pay so the enforcement officer distrained (seized) assets but didn’t remove them saying they would return a week later. The following day the director paid the bill which now included an additional £4,700 in fees. Having paid they contacted K2 to say they couldn’t now pay other bills, fortunately we were able to help.
Had the company known more about the collection process, they could have saved themselves £4,700 in fees.

HMRC powers and its collection options

When a business has reached this point, it has invariably failed to respond to a number of approaches from HMRC, starting from ignoring initial letters warning that payment is due.
The process from there on most likely will result in either a visit by an enforcement officer or a Winding Up Petition. It may also result in a demand for a security bond. While security bonds are rare for trading companies they are becoming increasingly common with new companies that have been started up following the insolvency of a company run by the same directors.
Enforcement visits are carried out by field agents who have the right to issue enforcement notices (also called distraint warrants) to seize assets for sale at auction. They don’t have to actually remove the goods when they visit but the notice has the effect of transferring control from the company to the enforcement officer such that they cannot be removed without committing pound breach, a criminal act which has been covered by other blogs.
As an alternative or a final stage after goods have been removed, HMRC tends to apply to the courts for a Winding Up Petition.
Businesses should keep track of cash flow and their ability to pay PAYE, VAT and corporation tax liabilities on time. Persistent late payment of these indicate that a business is in financial difficulties but in most instances any late payment is a one-off. If not then a time to pay arrangement with HMRC won’t solve the underlying problem and in such instances advice from turnaround or insolvency professionals most likely will be necessary.
In the hope that the problem is simply a one-off, the message is clear: respond to HMRC communications sooner rather than later. The problem will not go away and can only get worse the longer it is left.
HMRC’s collection processes were further strengthened in November 2015, by the introduction of the power to recover debt directly from cash held in bank and building society accounts in addition to existing powers to seize and sell assets.
In addition, HMRC has been increasingly outsourcing collection to private debt collection companies to recover overdue income tax payments and to claw back overpaid tax credits.
In March 2017 CityAM reported that HMRC’s spending on the use of these agencies had increased by 92% to £24 million in 2016. Since private companies can also charge debtors this will only add to the overall bill for those targeted.
 

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Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

Has negative pressure taken over your life?

Negative pressure can spill over into the rest of life because it often gives rise to feelings of frustration, anger or helplessness.
It is very common when a business is struggling, when perhaps its owner is unable to see a way through the problems, or when the numbers don’t stack up.
Pressure normally affects the way a person behaves towards their staff, colleagues, friends and family.
How this manifests will depend on the individual.
If they feel that there is no escape, perhaps because of financial responsibility for others, then the pressure may be exacerbated by feeling trapped and the pressure can become intolerable.
It could be that there is a desire to make demands on everyone else to compensate for the frustration that things aren’t working out. So someone under pressure may try to assert their “authority” by using anger, controlling behaviour or shouting. Without thinking, this becomes a normal behaviour at work and home.
On the other hand a different personality, perhaps someone more prone to suppressing their worries or not facing an issue, may retreat into themselves and withdraw from communicating with others. Waking in the middle of the night to feelings of despair is not unusual.
Such feelings can lead to attempts to avoid confronting reality, whether through obsessive behaviours such as extreme exercise, clubbing, alcohol or drugs.
Think of the character Charlie Price, owner of a failing shoe business, in the musical Kinky Boots.

Breaking the spiral of despair

It always seems impossible until it's doneFamily and friends are rarely the best people to help to deal with the situation as they are emotionally involved and dealing with harsh realities can put a strain on the relationship. Close family and friends are however important when it comes to providing support and understanding, and even encouraging the right help.
In situations like this, someone or something is needed to break the cycle. All too often events escalate to an extreme level before this is acknowledged. While time can heal, dealing with immediate situations will normally need some form of intervention.
It is best to find someone to talk to, someone you trust but who can be objective about the problem. For the owner of a struggling business the need is for clarity about the situation and what can be done to solve it.
An expert in restructuring or turnaround will be able to look at the whole picture as well as the details in depth, to help analyse the problem and suggest solutions.  But there has to be a willingness to face the realities, however grim, and to take the steps necessary to rectify what is wrong and thus relieve the pressure.

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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Corporate psychopaths: motivation is about being firm but fair not ruthless and rude

A few years ago the Journal of Business Ethics published an article on “corporate psychopaths”, identifying several senior figures in the financial sector as typifying this approach to management.
Examples of such people exhibiting this rude, ruthless and cold-blooded behaviour include Dick Fuld, former, former CEO of the Lehman Brothers, and, the late Steve Jobs in the earlier days of Apple.
However, particularly when a business is in difficulty and hard decisions may have to be made for it to be restructured to survive, it is often necessary to have the support of employees if changes are to be implemented.
More than 20 years of research by Professor Christine Porath of Georgetown University have shown that actually to get the best out of people, regardless of whether a business is in trouble or doing well, shouting, rudeness and lack of empathy from the business’ leaders is actually counter-productive.
Her evidence has shown that this kind of aggressive behaviour can result in higher staff sickness rates, can stifle creativity and can also affect staff retention.
Shouting at people, she says: “robs people of focus and they don’t perform”. Frankly it undermines them and will not get their support even when shouting appears to work.
While it may be understandable that the senior management and CEO of a business under pressure will be worried and stressed and therefore prone to aggression, such behaviour is not likely to help the business to recover.
Firm but fair is likely to go further towards getting the best out of others, whatever the situation, than being ruthless and rude.

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Rescue, Restructuring & Recovery Turnaround

Saving a business may mean changing behaviour

It is a common reaction when a small business is in trouble for the owner/MD to hope the problem will resolve itself.
Indeed most owners and MDs live with pressure every day and have seen it all before, the cash has been found to settle creditors, They toughed it out last time so why not this time.
Cash flow pressure and the prospect of insolvency threaten the loss of a business which has involved a lot of passion, energy and money where like any loss can lead to feelings of anxiety or fear, even of grief.
It is hardly an ideal state of mind in which to address the causes of the problem and very often the initial reaction is denial. This can lead to a number of feelings such as anger, blame and despair all of which get in the way when trying to think logically and rationally.
But the longer the delay the more overwhelming, and dangerous, the situation becomes.
Behaviour is normally instinctive and directed by an emotional reaction rather than logical thinking.
Saving a business however requires rational and logical thinking so that decisions can be made and implemented.
This is where trusted colleagues and friends or professional advisers are key to providing the support needed to help make the right decisions which all too often can be personally painful. A form of tough love. Especially when change to a business is needed to both save it and prevent the problem recurring.
Please feel free to let us know about such painful decisions you have made.

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Banks, Lenders & Investors Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Ruling on creditors meetings will help improve CVA outcomes

Creditors meetings for insolvency proceedings will no longer be needed unless requested by least 10% of creditors following a new government ruling as part of its small business reforms.
The Insolvency Service argued that attendance of creditors’ meetings is poor and there are more effective means of engagement in the 21st Century.
When trying to rescue a business in difficulty, Insolvency Practitioners have a number of options and one of the most helpful is the CVA (Creditors’ Voluntary Agreement) by which debts can be negotiated by a company to repay its creditors over a longer period and sometimes repaying a reduced amount.
Proposals must be drawn up and submitted to all creditors in advance for negotiation and approval. Approval requires a majority of 75% of votes cast.
Since any insolvency proceeding has to comply with a series of steps laid down by law, and IPs are paid for their services, the costs can quickly mount when creditors’ meetings are added to the mix.
Subject to approval the cost of holding creditors’ meetings can be saved and reduce the burden on both the company as well as improving the distribution to creditors.

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Banks, Lenders & Investors Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Interim Management & Executive Support Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Many companies for sale turn out to be insolvent

Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.
However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it. 
This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.
Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.
In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.
One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.
As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.

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Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Factoring and Invoice Discounting: Be Wary of Hidden Fees

Factoring and invoice discounting (borrowing money against invoices) can be a helpful tool for funding the working capital of a business.
While it used to be regarded as a means of borrowing by businesses in financial difficulties, it is now a common source of finance for managing cash flow and has the additional benefit of imposing discipline on the collection of outstanding sales invoices.
The service charge fee is pre-agreed with the finance provider and generally relates to the level of service provided. Fees for factoring are generally at a higher rate of between 0.8% and 3%, than for invoice discounting because the factoring service charge includes debt collection.
However, hidden in the small print are usually contingency fees that can be triggered by a default. These fees are sufficiently large to justify some lenders looking for reasons to trigger them.
There are many examples of companies in financial difficulties where the factor or invoice discount provider pull the plug on a facility and collects in the outstanding debts to recover funds loaned as well as their retaining the default and recovery fees.
Typical default fee are 10% of the ledger held plus recovery fees which are generally not specified. Such is the scope for earning fees that advisers to lenders might be persuaded to recommend the exercising of rights under a default knowing that they, as advisers, can be paid out of the recovery fee clause as well as repaying their lender client the loan and default fee.
Such self interested behaviour may swell the coffers of lenders but it doesn’t help preserve businesses or improve the reputation of the finance community.