Insolvency lawyers are shedding their reputation for picking over corporate carcasses, writes Anne McGrath.
Amid continuing uncertainty over Britain's ability to head off a recession, one certainty remains – should the current slow down surge into recessionary proportions, insolvency solicitors will be fully geared up for it.
There has been clear evidence of firms beefing up their insolvency capability since the last recession. Stephen Gale, who was himself recruited in January 1998 to expand and head up the corporate recovery team at Herbert Smith, says: “There has been a significant realignment and reshuffle of insolvency lawyers in the past two or three years, and a substantial strengthening of teams.”
Perhaps the greatest change though is in the insolvency solicitors' role itself. No longer the social equivalent of funeral directors, insolvency lawyers have undergone a professional evolution this decade as a far larger proportion of their work is rescue-orientated.
There has been a fundamental and irreversible move in the UK away from formal insolvency, according to Biddle's head of insolvency, Chris Mallon.
“Globalisation of markets has accentuated a two or three tier insolvency world, where at the very top there are the large corporations which nobody can allow to become insolvent. Here the focus is on reorganisation to rescue these companies,” says Mallon.
“Then there is the middle tier, where it can go either way – and increasingly that way is via informal work-outs – and finally the bottom tier, where formal insolvency still has a place,” he says.
Gale agrees that there has been a changing role for insolvency solicitors and says the pace of that change will accelerate as more and more companies are relegated to the top two tiers defined by Mallon.
“There is a culture of addressing problems earlier, with an emphasis on attempting to rescue the company, not just the business. That is a cultural change born out of the last recession,” he explains.
Agreement comes from across the profession that the day when the insolvency solicitor did just that – advised in an insolvency situation – has gone.
These days insolvency lawyers get involved at a much earlier stage in the process, with strategic advice and restructuring dominating the proceedings. As well as specialist advice, turnarounds, consensual work-outs and restructurings, all insolvency cases entail the drafting of legal documents. Lawyers act as a conduit to get a package of deals across the board, which give cognisance to everyone's interests.
The insolvency solicitor has become a lot more “upstream”, Gale adds, and he sees this as a welcome development of his role.
“We are now painting on a much larger canvas and advising a much greater diversity of clients, from boards of directors, through to shareholders and buyers.”
Jeremy Goldring, a partner in the corporate recovery and insolvency department at Dibb Lupton Alsop, says that the change in roles is a very discernible one, and a far greater package of skills is required from today's insolvency practitioner. There is no doubt, he says, that the jobs of the corporate financier and insolvency solicitor are moving closer together.
“Our skill sets are widening and now include many of those required by corporate financiers,” he points out.
The way in which firms satisfy this requirement differs. Some are skilling up individual insolvency solicitors, while others merge skills through departments, according to Goldring.
Murdoch McKillop, president of the Society of Practitioners of Insolvency, points out another change as being the shift away from accountants' domination (most licensed insolvency practitioners being accountants) to more of a partnership with lawyers. The banking community is trying to deal with problems themselves at an earlier stage and in resolution of these problems, McKillop says, lawyers are now often the first port of call.
Insolvency players have also always needed to have one eye on what is happening in the rest of the world because of the possible effects on the UK economy.
Clifford Chance partner Adrian Cohen emphasises that there is now a far greater international flavour to insolvency work. Even at the lowest level there is an increasingly international aspect, and knowledge of multi-jurisdictional insolvencies is becoming far more relevant.
So with the specialist skills that today's insolvency solicitors need to employ, those non-specialist solicitors, who in the last recession donned their insolvency hats and gave insolvency advice, will find that this time around the hat no longer fits.
The only appropriate advice they will be able to give is: “Go and see an insolvency specialist – and quickly,” because solicitors can only intervene effectively if advice is sought at an early stage.
The mop and bucket are no longer the tools of the trade for the new breed of insolvency lawyer, who are more likely to help rebuild a big company than clean up after it collapses.
Banking on banks
Insolvency lawyers' new role may be to help companies survive rather than just wind them up, but their effectiveness in doing this, and their opportunity to carry it out to its full extent, depends on the attitudes of the banks.
If Britain does enter a recession then John White, insolvency partner at Cameron McKenna, suggests that how soft the landing is will depend on how supportive the banking community shows itself to be.
In the aftermath of the last recession, banks came in for a lot of media criticism. While they felt that the resulting public perception was a bit harsh, they did try to rectify this by publicly issuing their policy in a statement of principles laid down by the British Bankers' Association.
If they adhere to these principles, White emphasises, then the landing will be a much softer one. If, however, the view taken by Austin Mitchell MP proves correct and “banks don't live up to their fine words, then the consequences will be much harsher”.
Mike Young, director of the British Bankers' Association, admits that “during the last recession everyone got their fingers burnt, and all have learnt painful lessons from that”.
But Young maintains the nature of lending is one major change this time around, Banks have encouraged businesses to rely less on overdrafts, which are payable upon demand, and more upon fixed term structured loans which are not. This gives businesses much more certainty in their funding.
Another point to come out of the 1990/92 recession, says Young, was that everybody needs to act early when companies get into financial difficulties.
Banks have become far more adept, with their own in-house monitoring systems, at recognising these difficulties and trying to find creative ways to overcome them.
The importance of continuing communication between banks and their clients cannot be stressed enough, says Young.
If the company faces up to problems when they first surface, takes professional advice and approaches the bank with a reasonable proposal, then the bank will do all it can to avoid insolvency procedures and seek some creative remedy instead. The key to an effective rescue culture, he says, is early recognition, advice and action.
Biddle's Chris Mallon says there is increasing evidence that the banks are using a rescue-minded approach to problem solving. This is the view which is now generally held within the insolvency profession.
Nigel Ward, a partner in the banking division at Ashurst Morris Crisp, says the ethos is very much more corporate rescue rather than corporate shutdown, and this is true across the board, regardless of size. Howard Morris, an insolvency partner at Denton Hall, agrees, but points out that so far this has operated in a relatively stable environment.
Banks have had the time, people and resources to adopt a more creative and supportive approach to a company's financial problems. As Morris points out, they have yet to be tested in a harsh economic environment.