Blow away

It was a huge accolade, but for Herbert Smith partner Stephen Gale there was a sting in the tail. When he was nominated to be the president of the Society of Practitioners of Insolvency (SPI), it must have seemed as if he had reached a pinnacle. The SPI, the professional association of insolvency specialists comprising both lawyers and accountants, had only ever had one lawyer president in its history – Gordon Stewart, insolvency partner at Allen & Overy (A&O). For Gale to be confirmed among the elite was an honour indeed.

But Gale may look back on his term as president with mixed feelings. As he was steering the SPI, now rebranded as R3, through the most radical changes in its history, the fledgling insolvency group at Herbert Smith was crumbling. "You can't avoid the fact that I've been enormously preoccupied with the profession and the presidency of R3," concedes Gale. "During the last 18 months a significant amount of my energy, creativity and time has been devoted to the profession. But during that time we as a group have been remarkably busy."

Most insolvency specialists will say Gale has done a sterling job with R3 during his term of office. But like an absentee crusader coming back to find his tenants in revolt, when Gale returns from his term as president in April, he will find a group that has lost 10 lawyers in just a few months.

It began when partner Richard Obank – who had worked with Gale in his previous post at Hammond Suddards – quit in February for a position with DLA in Leeds right in the thick of Gale's term as SPI president. "Richard's departure couldn't have come at a worse time," says a source close to the group. "You can't really market when you haven't got a partner spearheading it."

Since then, nine have left (The Lawyer, 8 January). The issue has caused considerable heat which, according to two sources, has resulted in current members of the insolvency group having to agree not to talk to The Lawyer on the subject. None of the leavers will comment on their time at Herbert Smith except to stress that it is a "fine firm". The Herbert Smith corporate recovery group has certainly become a pool for other firms to raid: seven year-qualified associate Ben Larkin has joined Dechert as a partner; seven year-qualified associate Mark Fennessy, along with three year-qualified Louise Hales, has joined Clyde & Co; and three year-qualified associate James Terry has just joined James Roome at US firm Bingham Dana.

Although several sources close to the group claim that there was considerable personal dissatisfaction internally, Gale plays down the departures. "There's no common denominator, no cancerous reason why people have left the firm," he says. According to Gale, the group of lawyers reporting to him now numbers seven – although he fails to mention that those numbers include a newly-qualified solicitor, a professional support lawyer who does no fee-earning and two trainees. "I expect the turnover of people in the group is the same as in other firms," he asserts. Not quite: A&O, Clifford Chance and Linklaters & Alliance have each had one departure in the last six months from much larger groups.

But the more interesting question surrounding the Herbert Smith insolvency group is whether it can really play in the premier league, and whether Herbert Smith itself can provide the platform. In this context, it is instructive to compare Herbert Smith's performance with those of Linklaters and Freshfields, both of which started a drive into insolvency at around the same time.

When Gale – who seemed to have Hammond Suddards etched into his bones – left for Herbert Smith back in 1997, it caused quite a stir. This may seem strange now, but it was a bold move for the City firm. In the mid-1990s, few top 10 firms would have hired laterally from national or mid-sized practices. But Herbert Smith – which had been entirely absent from the insolvency scene since the receivership of Rolls-Royce back in the 1970s – spent the early 1990s watching virtually every other major City firm vacuuming up insolvency work. Gale would be the man to kick-start the Herbert Smith insolvency practice.

A few months later in March 1997, Tony Bugg, Richard Wright and a team of assistants left DLA for Linklaters, a move which caused even more ripples than Gale's. Both Bugg and Gale, who share similar reputations ("tough" and "good operator" tend to be used interchangeably for both), had to build an insolvency profile in two firms which had traditionally eschewed what was considered to be a grubby market.

Over at Herbert Smith, Gale started well enough and was helped by the fact that Obank, by now a junior partner, was already there and already effectively working the Herbert Smith internal market. Gale certainly proved his ability from day one by pulling in some neat jobs. He was gifted the receivership of Knickerbox by close friend Simon Freakley at Kroll Buchler Phillips, for example (Freakley is godfather to one of Gale's children).

But although Herbert Smith is working on Ocean Marine with Ernst & Young, it is the only major piece of work with a big five accountancy firm. The firm's jobs have instead come from the medium-sized players: Knickerbox and Smartwall from Kroll Buchler Phillips; Solvera from Begbies Traynor; and Rose & Hubble from Levy Gee. "We don't have a standalone group servicing an insolvency practitioner marketplace," says Gale. He adds: "We're still looking to attract major formal appointments."

There is no such ambiguity about the insolvency market at Linklaters, its recruitment of the DLA team showing its commitment to the concept. While restructuring lawyer Robert Elliott – universally regarded as a class act – smoothly works the banks, Bugg has adroitly mined the PricewaterhouseCoopers (PwC) seam. "He's worked the internal market very well," says a source who knows Bugg well. "He's introduced large jobs to PwC, and they've [reciprocated]." Bugg says: "Any major insolvency flows from a workout. We have a strong brand and a strong and growing finance practice, so the initial route map was very solid."

Meanwhile at Freshfields, the commitment to insolvency over the last few years has made it into a credible, if low-key, player in the market. Former Clifford Chance partner Sandy Shandro joined Freshfields in March 1998. Since then, Freshfields has managed to develop relationships with the top five accountants. It did work for ICO and with KPMG and is currently advising Ernst & Young, Deloitte & Touche, PwC and KPMG on seven major offshore liquidations. "It's fair to say that most of our work is with [the top five accountants]," says Shandro.

Linklaters' and Freshfields' international networks – far more developed than Herbert Smith's – has provided the former with VSZ in Central Europe and the latter the huge Brunei job, to name just two examples. As a leading restructuring accountant told the Insider's Guide to Corporate Rescue and Insolvency last year: "[Herbert Smith] is going for the global idea, but it's not yet effective."

Gale declines to discuss the group's figures, but according to one source the group's turnover for the last financial year was £2.7m. The Ocean Marine and Solvera jobs, each billing some £1m over a couple of years, account for a large proportion of that, and that figure also includes Obank's time at the firm. Compare this with Linklaters' figures, believed to be £12.5m for the period up to 31 October 2000.

Rather than going hell for leather after the insolvency practitioners, Herbert Smith is after what it considers to be big game – the major debtor-based restructurings or turnarounds. Theoretically, not only does the focus on restructuring tap into Herbert Smith's considerable corporate client base, but it also segues straight into Gale's major preoccupation as president of R3. That preoccupation centred on the concept of turnaround – the art of using insolvency practitioners' skills to rescue companies prior to insolvency. Herbert Smith's potential in this arena is certainly interesting. After all, this was the firm that worked on Eurotunnel, one

of the biggest and most protracted restructurings ever. (Linklaters, by the way, acted for

the banks.)

But it is the insolvency group's misfortune that the Herbert Smith client base is made up of solid companies that just refuse to go bust (although Gale says he has been developing a practice advising company boards). Contrast this with Simmons & Simmons, whose listed client base in the lower reaches of the FTSE means that it has actually done rather better at high-profile restructurings for debtors, with workouts such as Eagle Geophysical and food company Booker.

More importantly, there are serious problems with marketing the very concept of turnaround. First, you have to be able to work your own internal market. Maurice Moses, head of corporate recovery at Levy Gee, says: "Where I think Herbert Smith is in a strong position – although it's not known as a firm that acts for banks like a Denton Wilde Sapte – is that it has a very strong [corporate] client base. [But] it needs internal marketing to the corporate partners. You have to keep the message simple, keep repeating it. It took us several years, but we've cracked it now."

Second, turnaround is by definition an accountancy-led concept. "The actual turning around of businesses – like the PwC regeneration group does – is very accountant-based," argues a leading insolvency lawyer at a major City firm, echoing several others. "It's not a practice area as such for lawyers." Even Gale admits that "it's not impossible to market turnaround, but it is a bit nebulous". However, he goes on to argue: "But there will be a market of practitioners for turnaround. Vulture capitalists, equity financiers, company doctors, restructuring lawyers – they're all coming together."

Third, and most importantly, the UK does not have a debtor-based rescue culture. As long as there is a floating charge, senior lenders will hold sway. What this means in practice for law firms is that it is well-nigh impossible for firms outside the magic circle to win premium restructuring work – even for debtors – without a finance client base to start with. "There's a continuing polarisation," says KPMG restructuring and insolvency partner Phil Wallace. "The big ticket stuff is getting into the four main magic circle firms."

"Herbert Smith's aim was always to build a big five restructuring practice," says a source close to the group. But that is easier said than done, and Herbert Smith is nowhere near the inner circle yet. The top restructuring lawyers act for both lenders and debtors – Gordon Stewart and Nick Segal from A&O, Linklaters' Robert Elliott and Denton Wilde Sapte's Mark Andrews are the obvious examples. Clifford Chance's recent hirings of James Johnson from Wilde Sapte and Nick Frome from Lovells provides the firm with workout specialists.

What links them all is that they started off acting for lenders. "You can't have insolvency lawyers driving restructuring," argues Tony Bugg. Certainly Gale – who is in the market for lateral partner hires in this area – is not a workouts man, and there is no one at Herbert Smith who seems keen to assume such a crown. As such, it has a long way to go before it can be viewed in the same league as CMS Cameron McKenna, Lovells and Denton Wilde Sapte, let alone A&O.

The fourth problem with turnaround is that it poses severe difficulties in terms of recruitment. As depicted by Gale, the insolvency/turnaround lawyer is just a cog in a larger restructuring team made up of corporate, litigation and finance specialists. "The concept of a standalone insolvency service was never appropriate," says Gale. As such, he had walk-on parts on Nomura's bid for the Millennium Dome, which had obvious insolvency implications, while the firm had a role on the collapse of Independent Energy, where he advised the regional electricity companies on certain insolvency aspects.

So instead of leading a deal, the insolvency/turnaround specialist would advise on a very small and discrete aspect of it. They would be part of what is essentially a service department – in much the same way that property is a service department in many corporate-led firms. It may make sense strategically, but it is hardly an exciting career proposition for younger lawyers. Any approach that leans too heavily on turnaround is simply one where the insolvency lawyer is relegated to the background – rather like arguing yourself into invisibility.

At Linklaters, by contrast, the restructuring and insolvency sides are being developed and marketed in tandem, by Elliott and Bugg respectively – and the firm has not de-emphasised insolvency work in favour of turnaround or rescue. This all-round approach has enabled Linklaters to recruit in a tough market, attracting fought-over associates such as Chris Howard and Bruce Bell from Denton Wilde Sapte, to name but two.

In the end, whether you are building a restructuring or insolvency practice, it comes back to recruitment. "You have to give clients in the market the confidence that you've got the resources," Gale acknowledges. Unfortunately, he may have to use his considerable powers of persuasion in certain segments of the insolvency practitioner market. "If Herbies is going to stay in the serious market, it's got to have a team," warns a leading accountant. "You can't just have one high-quality guy. There's a lot of confidence about Steve Gale as an individual, but there's nobody else there who could fill the gap."

Another well-known insolvency practitioner is even more acidic: "Herbert Smith hadn't staffed up for the last recession, so they realised they had to build a team to make sure they could handle the next one. So here we are, just about to hit a downturn, and there's no one there. I won't be using them any more. There's no one left to give work to. If you want to give work to the man, he's not there."

In the meantime, Gale dismisses any talk of an impending slowdown. "The idea that we're facing a recession is journalistic sensationalism," he declares. "It's a lot of hype." Given the size of Herbert Smith's team right now, one can only hope he's right


Clyde & Co's new insolvency group is aiming to market not only to insolvency practitioners, but to build on its existing strengths of shipping and financial services with trade insurers. Partner Jonathan Wood and associate Mark Fennessy see the trade insurers' market in particular as untapped. "The idea is to build on the existing strengths of the practice and establish and develop a dedicated corporate rescue and insolvency group," says Fennessy. "It presents a marvellous opportunity. We'll [also] be focusing on the secondary finance market, banks – the firm acts for approximately 90 banks – and distressed corporates in the technologies, media and telecommunications sector, plus shipping and insurance."


An intriguing proposition: a mid-sized firm able to handle mid-market insolvency work without profitability taking a battering, but also with a potentially lucrative US connection. That, at least, is what attracted Ben Larkin from Herbert Smith to join Sally Unwin's team at Dechert. "The spinoff work from the US practice and the growth in corporate and banking here since the merger shows that there's obviously a lot of opportunities in insolvency here," says Larkin.