Road to recovery

Corporate recovery is alive and kicking in the regions, providing promising opportunities for specialist lawyers with profile and vision. But the market is changing, with a wider source of work providers and a rescue culture that is gaining momentum. One of the causes of the changing corporate recovery environment is change in the law itself: within two years the corporate recovery profession will have seen the most serious challenge to fixed charges on book debts since Siebe Gorman and an enterprise act promoting administration at the expense of administrative receivership. These changes will hit both London and the regions, but in different ways.

The regional corporate recovery market has been patchy – and therefore challenging – since 2000. The exceptional features have been the insolvency of global businesses that have traditionally been the preserve of London and the US.

Cross-border insolvencies impinge on the regional corporate recovery market through US investments in the UK and the increasing number of businesses with operations in other European countries. Regionally, the South East remains significant because of its concentration of businesses compared with elsewhere in the UK. The Midlands and North East typically account for between 12 and 15 per cent of insolvencies and the South West around 10 per cent.

The players in the regional market remain pretty much the same, which is perhaps not surprising given the level of market activity. However, these players may change as the sources of work evolve. Traditionally, insolvency practitioners (IPs) have been a major provider of work for law firms, but increasingly they are taking less formal appointments. This is as a direct consequence of the rescue culture. Another reason is the rise in administrations, which are generally board-led and therefore may not give rise to the IP opportunity for an introduction.

The position of the banks is also shifting away from formal appointments. This can only increase with the abolition of administrative receivership and the improved administration procedure resulting from the Enterprise Act. Bank-led administration orders will be an option, but based on the limited number of recent hostile administrative receiverships, the use of that new procedure may be limited.

The uncertainty over fixed charges on book debts has led to a trend towards the US funding system, whereby asset and receivables financiers dominate the working capital market, as opposed to the traditional UK overdraft. Corporate recovery is often led by those financiers, and with receivables financing there is often supporting debenture security.

The other, more significant, source of corporate recovery work is existing clients. For some firms this has been an untapped market; for others it provides advisory work to boards, sources of referrals to IPs and opportunities for administration petitions. However, turnaround is probably the most significant opportunity with law firms’ corporate clients.

The creation by Barclays of a corporate recovery panel demonstrates that the bank’s influence in the corporate recovery market is far from over. It also shows the rising influence of the regions, with Barclays increasing its access to specialist corporate recovery advice in these areas. Other banks have panel arrangements for corporate recovery work in a range of formal and informal guises.

One of the threats to regional law firms is the national link-ups that asset/receivables financiers have generated with firms such as DLA and Hammond Suddards Edge. These involve national law firms in pre-recovery action, which gives them a natural introduction into any subsequent turnaround or formal recovery process, often to the exclusion of regional IPs’ links with regional lawyers.

Regional law firms continue to deliver real cost advantages over London. One unexplored area is opportunities for cooperation within panel arrangements. Good project management must mean that a mix of London and regional lawyers can produce the best realisation prospects for creditors (and therefore the banks). For example, need a London firm deal with the sale of a subsidiary in South Wales just because the process is driven by a London bank or asset financier? Watch this space for inter panel cooperation.

Apart from the economy, the major influence on the regional market is the enterprise or turnaround culture. At its most basic level, there are less formal insolvencies and therefore less work. But that hides very significant activity outside the Insolvency Act procedures occurring much earlier in the corporate’s life cycle. The momentum behind turnaround is growing for a variety of reasons. The banks have changed their approach, and Brumark has only accelerated that process. In addition, the Government has embraced an enterprise culture leading to the Enterprise Act in spring 2003. Finally, there is US influence, felt through recent global failures and turnarounds, and the dominance of the Chapter 11 rehabilitation procedure.

For the insolvency practitioner, turnaround means more investigation work and more hands-off advisory work. There is also a growing body of turnaround professionals: interim managers, company doctors and turnaround specialists. Some are independent, some linked to regional or national accountancy firms that have corporate recovery capability.
How long will it be before regional law firms employ turnaround specialists?

For the insolvency lawyer, turnaround brings the corporate client base into sharp focus. Some of the most challenging work is advising boards in financial difficulty. This demands a mix of technical legal skills and general business awareness. Much of that work never features in the media, but neither does generating the work require external marketing spend. Even if turnaround fails and formal insolvency follows, the referral opportunities can mean the lawyer ends up dealing with the board’s administration petition. Invariably, the corporates’ lawyers will be conflicted out of acting for the administrators, although they can be instructed in some cases.

The opportunities for corporate recovery lawyers within regional firms with good corporate client bases have never been better. For those close to management, it is easier to spot problems earlier. Statistics still point to management as a key factor in failure – and early access to management can be a key factor in a turnaround. The other feature of turnaround is the requirement for a blend of corporate recovery, banking and corporate finance skills. The boundaries between those practices begin to be blur, so the corporate recovery lawyer moves from corporate recovery to rescue and renewal.

And so what about the professional bodies, such as the Association of Business Recovery Professionals (R3 – Rescue, Recovery and Renewal), the Society of Turnaround Professionals (STP), ILA, NARA and the Turnaround Management Association (TMA)? Are they active in the regions? R3 is perhaps the best performer regionally. Its regional activities committee is led by an IP, but with a mix of lawyers and accountants as regional chairmen who organise regular meetings, drawing accountants and lawyers in to both a networking and a training forum.

Despite all the hype, IPs remain an important source of work for corporate recovery lawyers. The ‘big four’ work hard to justify their increasingly centralist corporate recovery offices – for example, KPMG’s focus on Reading and Bristol in the South. The next layer of practices, including Grant Thornton, Begbies Traynor and Baker Tilly, appear to be flourishing. But watch out for the new players such as Tenon and Numerica.

There is much to play for in the regional corporate recovery market and the opportunities can only increase with the new turnaround culture. They also bring responsibility for the lawyer who is often close to management at critical times in the corporate’s life cycle.

R3’s recent survey of the past 10 years cites: “A striking 20 per cent [of businesses] were thought to have had a chance of success had earlier action been taken by the firm.” And with management failure the “single most significant primary cause of insolvency”, lawyers have a genuine role to play and should be looking to become the objective facilitators of rescue solutions.

Victor Tettmar is a corporate recovery partner at Bond Pearce and regional chairman of R3 for South Wales and South West England

The regional players

Eversheds, DLA and Hammond Suddards Edge continue to offer credible national corporate recovery practices, although none of them feature in the South outside London. The North is well served by Walker Morris, Addleshaw Booth & Co and Dickinson Dees, with the Midlands giants of Wragges & Co, Pinsent Curtis Biddle and Edge Ellison continuing to make their mark. Bond Pearce, Osborne Clarke, Boyes Turner and Mills & Reeve take more than their fair share of the Southern corporate recovery market.

The Bar in the regions

The increased activity and interest of 3-4 South Square and Enterprise Chambers in the regions suggests that opportunities are being missed by the London Bar because of the increasing specialist regional Bar. (Enterprise Chambers has Hugo Groves and Hugh Jory based in the North East circuit). There are good examples in the West Midlands, North East and Northern circuits. An example is Stephen Davies in Guildhall Chambers, Bristol, who is a leader specialising in insolvency. But the chambers also contains talented juniors such as Jeremy Bamford and Nick Briggs. Other regional leaders include John Randall of St Phillips Chambers in Birmingham, Allen James of No 6 Barristers Chambers and Peter Smith of 40 King Street in Manchester. The competition is healthy and offers more choice. The stronger specialist regional Bar is coupled with an improving regional chancery court system.