Categories
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.

Categories
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.

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

Further questions need to be asked

 

In our last blog we highlighted the case of businessman Michael  Hockin’s 15-month battle to be allowed to sue RBS over a mis-sold Interest Rate Swap (IRS) which added over £600K to his company’s annual repayment bill to the bank.

The High Court ruled in his favour even though his company had been put into administration and, as mentioned, the administrators had declined to pursue the bank for the benefit of creditors.

We’ve found an interesting little note on the Financial Conduct Authority’s (FCA)website regarding reviews of  a bank’s mis-selling of an IRS, which clearly states that businesses in administration are (our italics) eligible to participate in the review:  http://tinyurl.com/pgqsr9p  

“…when banks invite businesses in administration to submit any relevant information…..we would generally expect administrators to offer the former directors or shareholders the opportunity to put forward their perspective.

“However, it will be the administrators and not the former directors or shareholders who will engage with the banks during the review.”  (our italics again)

We have previously questioned the conflict of interests between panel firms advising directors and their relationship with banks. Is there another potential conflict between panel firms representing banks and their duty to unsecured creditors? These issues were not included in last month’s review by the Insolvency Service of the regulatory regime and fee structure. A missed opportunity.

Categories
Banks, Lenders & Investors Debt Collection & Credit Management Insolvency Rescue, Restructuring & Recovery Turnaround

Does the latest banking revelation have an impact on the insolvency profession?

The treatment of SMEs in the aftermath of the 2008 credit crunch by RBS, one of the UK’s two main lenders to small businesses has come under scrutiny this week.
An investigation, by businessman and government adviser Lawrence Tomlinson, has claimed that RBS may have “engineered” firms into RBS’s turnaround division Global Restructuring Group (GRG) so that RBS could generate enhanced revenue at the expense of their SME clients.
Tomlinson claims there was a “systematic abuse” of corporate clients by RBS that allowed them to charge significant fees before appointing administrators who immediately sold the clients’ business assets back to RBS’s property division West Register.
It is assumed that West Register has been required to generate its own profits for RBS by increasing the value of those assets it acquired from clients. This would suggest that the assets were bought at a very low value before they appreciated in value for the benefit of RBS.
The whole sorry saga is now being investigated by the Financial Conduct Authority and the Prudential Regulation Authority following a referral by Business Secretary Vince Cable.
While the focus has so far been on banks, the saga raises the question as to whether there has been a conflict of interests among some insolvency practitioners (IPs), who following an introduction by RBS to clients then sold the clients’ assets back to RBS under an Administration Pre-pack procedure.
While such realisations may have been legal the practice stinks and reminds me of the activities of HBOS’s Impaired Assets division in Reading which resulted in senior managers being charged with conspiracy to corrupt, fraudulent trading, money laundering and blackmail. Fortunately none of the IPs involved in that saga was charged, but it would seem that their role was not investigated.
All this suggests that the directors in these situations are not getting independent advice.
It would also seem there is a need to review the relationship between banks and their panel IPs?

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

Why isn’t more effort made to rescue failing businesses?

It is almost 30 years since legislation in the Insolvency Act 1986 introduced Administrations and Company Voluntary Arrangements (CVAs) as mechanisms intended to help with turning around failing businesses.
This legislation followed the 1982 Cork Report, which recommended procedures for trading out of insolvency.
Despite this and further legislation, however, there has not been any noticeable increase in rescue attempts where Insolvency Practitioners have been brought into companies in distress.
We explore why this should be and whether anything can be done to encourage more banks and IPs to embrace the rescue culture so that more businesses can be saved.
To see the full article please visit: Insolvency Today at http://bit.ly/17TpoJj or join the lively Insolvency Today LinkedIn discussion here http://linkd.in/1cBA6vD

Categories
Banks, Lenders & Investors Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Administrator's fees of £500k for a small firm

This shocking story in the Daily Telegraph did not name the insolvency firm who built managed to charge a staggering £500,000 for the administration of a small company with 40 employees, see http://tinyurl.com/jwzlcmc.
It appears that secured lenders pulled the plug on this small shopfitting business, presumably to recover their secured loan. The article refers to 10p in the £1 being paid to unsecured creditors.
Given that secured loans are paid ahead of the insolvency fees and that these are paid ahead of unsecured creditors, then this business had significant assets. While the fees will have been justified as representing the time and costs incurred in performing their duties, administration fees also need to be proportionate. Stories like this don’t do the insolvency profession any favours.
Insolvency firms will always justify any adopted procedure and its associated fees but sometimes we might question whether they are justifiable.  If there were sufficient funds in the business to pay such fees then why wasn’t an effort made to restructure and save it such as by using the much less expensive CVA (Creditors’ Voluntary Arrangement) procedure?
Indeed who was advising the directors and shareholders? Too often directors make the mistake of trusting the advice of an insolvency practitioner who is normally working for the secured or unsecured creditors. They rarely ever appoint their own advisors.  
All too often a company in difficulty is closed down rather than being restructured. In most cases everyone loses out: directors, shareholders, unsecured creditors and employees. 
The only “winners” in an administration are the insolvency firm and the secured creditor that appointed them.

Categories
General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround

Saving insolvent companies needs both a restructuring and business plan

Following the demise of Rok and Connaught, a third national building maintenance company, Kinetics Group, has gone into administration with 500 employees being made redundant leaving a skeleton staff of 50 to deal with its five sites.
Insolvency practitioners Begbies Traynor were appointed as administrators in July and attribute the demise to the loss of key contracts and delays in payments by customers.
The background to this dramatic failure seems to be rather complicated. In June 2011, there appears to have been an attempt to save the company through acquisition of the business and assets of a number of its own subsidiaries by a newly formed subsidiary SCP Renewable Energy Limited (SCP).
It is not yet clear if the acquisition took place before or after these companies were placed in liquidation or administration and a further complication is SCP Renewable Energy Limited’s status, referred to by the administrators as a newly incorporated company owned by Kinetics. But this name is not listed at Companies House.
In my view it is clear that the June restructuring was flawed. What exacly was the role of the various stakeholders? Did they ensure that viable restructuring and business plans were in place as a condition of their approving the acquisition?
Is this an issue with the sale of business and assets by an administrator, where the administrator is not responsible for the ability of any purchaser to run or fund the acquired business?
Administrators rarely save a company as a going concern, so their only real objective is to maximise realisations for the benefit of creditors.