In the October/November issue of Insolvency Today, Tony Groom, head of restructuring at K2 Business Partners, posed the question: do IPs do turnaround? Here we present some of the reactions this question received in our Insolvency Today LinkedIn group.
“Why does this debate matter? Business distress has never warranted a one size fits all approach. When there is a risk that creditors might go unpaid, bespoke advice and action – even for small businesses – is critical. Businesses are, after all, unique combinations of resources, especially to the people most affected by their failure or success. Turnaround and insolvency can and should work well together.”
“Turnaround inside a formal insolvency is great in theory and I am sure many IPs would be supportive in principle. However, they are commonly thwarted by the creditors (secured and unsecured) who will not supply a turnaround with fresh credit so as to provide working capital. That is why trading administrations and CVAs commonly don’t work. Hence, to save businesses, we have to pre-pack the business into a new company as the only way to help the management achieve a turnaround. So a pre-pack is the tool of choice to promote the rescue culture.”
“Only a minority of IPs do turnaround in the sense I understand it because the Insolvency Act does not require them to and if they do they are going above and beyond their statutory duties. They can give an opportunity for others to affect a turnaround if a turnaround is possible through changing the business model. The Act (Enterprise Bill) is very well suited to rescues but they are the exception rather than the norm.”
“In my view that is like asking, ‘Do solicitors carry out the property valuations for their own conveyancing instructions?’ or ‘Do barristers undertake all of the pre-legal investigates on a case they are to present before the courts?’ The simple answer is ‘no’, but IPs do work in conjunction with and can assist turnaround specialists. To coin a phrase, ‘You do not have a dog and bark yourself!’ Like insolvency, turnaround is a specialist field and those who work within and alongside the company directors do so without any protection from the likes of a moratorium or an approved CVA. It is comparing apples and oranges.”
“The excellent and accurate historical portrayal from Tony Groom is totally misdirected and ignores the current and changing market place for professional services in both the turnaround and insolvency markets. Of course insolvency practitioners want to do turnaround work. This was the intention of Kenneth Cork when he designed the administration and CVA processes. Unfortunately, trends in the insolvency services market are no longer dictated by the relevant legislation or the practitioners. A large number of IPs in the UK dance to the tune of secured lenders, who through the creation of confidential panel agreements have taken control of the rescue culture. The practitioner firms who are on the panels sometimes dance like puppets to the tune called by the secured lenders and carry out their instructions for an unbelievably low price in return for a share of the business available from the secured lenders panel.”
“Turnaround to me is the survival of the limited entity thereby giving a better return to creditors and currently that does mean CVA. I have seen CVA proposals where the secured lender, having refused to support a CVA in the first instance, is then repaid thereby exacerbating the company’s financial position by the time the proposal is put forward. I have also seen proposals where the secured lender cannot sell the assets (or at least for a comparatively poor amount) and therefore saw the CVA as their only route forward. If anything I have reached a place where my first reaction to a CVA is why this and not a pre pack sale. The very simple point is that it where it comes to the presence of a secured lender, the current prime mechanism for a turnaround depends at first sight on whether it suits the secured lender or not.”
“Most insolvencies by volume are SME’s, where the resources or will to carry out a turnaround of the existing entity is limited and then reduced further by the statutory framework that provides an opportunity for an easier quick win (for management and IP) of simply prepacking the business.
In medium situations, where the resources and will may exist, the statutory process is generally controlled by the secured lender, who at the point they involve an IP, have probably concluded they want out and where the mantra seems to be ‘the first loss is the cheapest’.
Therefore, unless you are able to undertake a CVA and carry out a non-statutory extended function, or achieve the survival of the company via administration, the legislative framework, does not encourage turnaround in an insolvency process.”