Return of the troubleshooters
16 December 1997
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With forecasts of an imminent mini-recession, specialists are devising ways of keeping companies afloat. Mike Yuille reports
Insolvency lawyers are once again packing their bags in readiness for a major tour of duty. After the recent wave of upheavals in global markets, some now expect an imminent economic downturn which will result in a glut of company failures as early as next summer.
Opinions differ as to the exact timing, or the degree of severity, but most, particularly those in close contact with the banks and other finance experts, believe a mini-recession could be on the way. "I've just lost £100," says Michael Prior, head of insolvency at Nabarro Nathanson. "I took a bet in 1993 that there would be a market drop-off in 1997, but I may be out by about six months."
Peter Horrocks, soon to retire as head of insolvency at Lovell White Durrant, agrees. He says: "Before we know it, we could get into a mini-recession during the first half of next year."
As two of the most experienced and respected solicitors in the business, Prior and Horrocks recognise that the line-up of negative factors is ominous. Rising domestic interest rates and adverse exchange rate movements are putting the squeeze on UK businesses. On top of this comes the liquidity crisis in the Japanese banking sector, together with major structural problems in the tiger economies of South East Asia and Europe-wide uncertainty over monetary union.
Equity markets have been prone to the jitters, too. The record 554-point plunge on New York's Dow Jones index in October, in response to currency problems in South East Asia, wiped $800bn off US stocks. The FTSE100 index followed suit with a record 458-point fall. Although both bounced back, dealers are edgy about the "domino theory" of markets dropping one after the other around the world.
Peter Rees, head of insolvency at Bristol-based Wansbroughs Willey Hargrave, says: "We are now seeing a combination of elements that, individually, may not be too worrying, but together could have an effect." Mark Andrews, senior partner at Wilde Sapte and a senior insolvency specialist, adds: "I detect enough unease among bankers that there will be some sort of crash."
The next recession, when and if it comes, will be more international than the last, according to Andrews. These expectations are not the mere dreams of under-employed company grave diggers praying for a plague. Most leading insolvency players are not short of work and have remained busy, even though it is three years since the end of the last recession.
There were 13,461 company liquidations in 1996, according to the Government's Insolvency Service annual report. While representing a big fall from the 24,425 of the last recession's height in 1992, the figure shows that companies are getting into trouble. Official figures are also only the tip of the iceberg when it comes to companies with cash problems. This is because much insolvency work has now been relabelled "corporate recovery" work.
"We are very busy," says Andrews. "Whenever any market declines in volume, the serious, committed specialists carry on. Clients tend naturally to choose the people who are good." These lawyers believe that some "market sector shake-outs" will soon be an inevitable, although natural, consequence of the downturn in the economic cycle. It is unlikely to match to the scale of the early 1990s' recession, which affected a number of financial institutions.
But Prior wonders how the banks will react to another recession. They suffered a lot of bad PR after pulling the rug from under companies during the last recession and have since been keen to show support for struggling companies - hence the current climate of "corporate recovery".
Corporate recovery, the buzz word of the 1990s, is more than just a market-friendly euphemism. In fact, it is a significant alternative to insolvency, amounting to two-thirds as many cases as those involving administrative receiverships, administrations, and company voluntary arrangements (CVAs) put together. About one fifth of all qualified insolvency practitioners are spending half their time handling such intensive-care work.
With the trend toward keeping companies afloat, the activity of insolvency lawyers has remained in the background. The first rule in such work is to keep it quiet, in case publicity turns a potential rescue into a collapse. A recent survey by the Society of Practitioners of Insolvency (SPI) showed the huge, invisible contribution that insolvency practitioners make to the UK economy. From the study, the SPI estimated that 1,800 to 2,100 companies with a combined turnover of around £22-25bn were put into intensive care in the year to June 1996.
Intensive care of stock exchange-quoted companies is almost entirely the domain of the big six accountancy firms plus one or two specialists. Lawyers say this has sustained a continuous stream of quality work for the main half a dozen or so law firms which are true specialists in insolvency work.
The banks have driven the intensive care process, asking insolvency specialists to step in in 76 per cent of cases, compared with the 13 per cent of cases where directors initiated the process.
Despite the banks taking this lead, bank-led cases were most often (57 per cent) concluded without recourse to any formal insolvency procedure. A further 6 per cent were recovered using a CVA, 8 per cent after appointing administrative receivers, and in 11 per cent of cases the patient was beyond help.
When directors instructed insolvency practitioners, far fewer cases could be continued without the use of formal insolvency procedures (42 per cent) and yet overall rescue rates were boosted by directors opting for a high proportion of CVAs (37 per cent).
Rates of return for creditors have been much higher where an intensive care approach has been taken. Returns of more than 50p in the pound were likely in 9 per cent of cases; but where companies were likely to go into formal insolvency, forecast returns fell below 10p in 59 per cent of cases. In cases where formal insolvency applied, creditors received about 23p in the pound. CVAs came out on top, at 40.5p in the pound, followed by administrations, at 25.5p. Liquidations, by contrast, produced just 18.5p.
Regulatory changes for insolvency practitioners are on the cards which could affect the solicitors they instruct.
The Insolvency Practitioners Association (IPA) is looking at a number of issues, including whether an insolvency ombudsman is needed and whether insolvency practitioners' licences should have separate categories for different kinds of insolvency work.
It is also considering whether there should be a single regulator. Currently, there are a number of regulators, including the IPA, the Law Society and several accountancy bodies.
Meanwhile, controversy over fees charged for insolvency work has led the Department of Trade and Industry to launch an inquiry. It is focusing on the receivers, Buchler Phillips, and the law firm, Nabarro Nathanson, which charged £1.62m for recovering £1.67m from the collapse of Robert Maxwell's personal businesses.
All practitioners agree there is a need for demonstrable value for money. But they also stress that there is no guarantee about the level of recoveries and think it is unfair to single out those in the Maxwell case.