Next month the formerly known Insolvency & Rescue (I&R) Awards will re-emerge as the re-branded Turnaround, Restructuring and Insolvency (TRI) Awards. Content writer, Amber-Ainsley Pritchard, digs out one of last year’s most exceptional winners to highlight the importance of this event.
| Amber-Ainsley Pritchard |
Content writer, Credit Strategy and Insolvency News
When companies, individuals and teams win awards at any of our events, most of the audience is unaware of the backbreaking and often pioneering work that secures a winning spot.
Guests may wonder how and why our independent judging panels (in place for all our award schemes), decide that one entry is so overtly impressive; it deserves recognition above all others.
That’s particularly true of our TRI Awards scheme – formerly the Insolvency & Rescue (I&R) Awards.
But throughout the event’s nine-year history, we’ve never documented the fascinating details of winning entries. This year, we’re changing that.
We’ve started by choosing one of the truly outstanding winning entries from last year.
In 2015 KPMG won the category: Business Rescue of Year- up to £20m turnover.
Due to commercial sensitivity the recovered business wished to remain anonymous and will be referred to here as ‘Business A’.
KPMG pulled out all the stops to save crisis-stricken ‘Business A’ from going under.
The second generation family-run business was at risk of watching years of hard work, blood, sweat and tears slip through their fingers.
More than 100 employees were at risk of losing their jobs, millions of pounds of tax would have been pumped into the government’s buckets of debt.
But, with the help of KPMG this nightmare turned fairy-tale became the success story of the year.
During the time spent restoring ‘Business A’ for operation it successfully traded through a period when no less than six government agencies took enforcement and action against the project.
These included the Environment Agency, HM Revenue and Customs (HMRC), Health and Safety Executive and several reviews from a well-known high street bank.
A series of unfortunate events
‘Business A’ create a range of recycled wood-based products and won a contract in 2011 with E.on to supply wood into a new biomass plant set to be commissioned in early 2014.
E.on suffered delays but the business continued to take landfill wood on site and two fires broke out.
The Environment Agency instructed the fire brigade to use millions of gallons of water to extinguish them which caused water to run over into acid-filled lagoons.
‘Business A’ was forced by the Environment Agency to spend £20,000 a day to pay for the transfer of the lagoon water to an effluent works in Leeds.
The biomass plant was eventually commissioned and granted ‘Business A’ a £40,000 loan to cover wages and critical payments whilst the plant was being set up.
Amid all this, KPMG had to manage the relationship with the Crown.
Although the Environment Agency had agreed to keep the site open, ‘Business A’ did not generate any cash and eventually built up HMRC arrears which resulted in a winding up petition for £1.1m.
While operating under this threat from HMRC, KPMG managed the payment of more than £1m of tax arrears.
KPMG then agreed a repayment plan with HMRC stating that if just one payment was missed – there would be an automatic winding up hearing, advertisement and insolvency.
Finally, in March 2015, after three months of supplying the E.on plant at full capacity, HMRC was repaid its last instalment and the winding up petition was lifted.
Somehow, KPMG also restored shareholder value from zero to more than £10m.
This year’s TRI Awards will take place at the London Hilton, Park Lane, October 19. To book one of the few tables left, call 020 7940 4848.
Associate at Reed Smith, Colin Cochrane, has analysed an unusual case where the high court decided against issuing an administration order to two insolvent companies.
| Colin Cochrane |
Associate at Reed Smith
A high court judge recently made an unusual decision that could have major consequences for insolvency practitioners by reaffirming the discretionary nature of the court’s right to grant an administration order.
In August Judge Purle found that two companies, Oak Property Partners and Oak Forest Partnership, were technically insolvent and the statutory purpose of administration would likely be achieved.
Despite this, the court refused to grant an administration order on the basis that it would be better for creditors to give the two companies more time to turn themselves around.
If the companies eventually enter into an insolvency procedure there would be questions around how the appointed insolvency practitioner would consider the question of wrongful trading, given that the court has allowed the companies to continue trading notwithstanding their insolvency.
An application for an administration order had been brought by the creditors of Oak Property Partners and Oak Forest Partnership.
The business of both companies was to sell off hotel rooms on long leases.
The applicants acquired leases from the companies on terms entitling them to serve notice on the owner to repurchase the lease, they also served notice on the companies and made their application as prospective creditors.
Judge Purle considered the pre-conditions to making an administration order.
The conditions are that the court must be satisfied:
1) The company is or is likely to become unable to pay its debts.
2) The order is reasonably likely to achieve the purpose of administration.
On the first pre-condition Judge Purle considered the cashflow projections produced by the companies to be “highly optimistic” and did not have any confidence they would be able to pay their debts.
On the second pre-condition Judge Purle agreed with the applicants that an administration would likely achieve a better result for creditors than a winding up.
However, he considered that compulsory liquidation was not the only alternative to this “premature” administration.
The other option was to give the companies time to bring their businesses round.
Therefore, while the two pre-conditions to administration were “technically satisfied”, Judge Purle exercised his discretion not to grant an administration order as it would be better for creditors to give the companies more time.
The judgment is particularly interesting as the courts have traditionally refrained from exercising discretion to refuse an order when the pre-conditions are satisfied.
From a wrongful trading perspective, it will raise some potential concerns for directors of companies if the court has found them to be insolvent but allowed them to continue trading.
It will be interesting to see what recourse insolvency practitioners may have against such directors for wrongful trading claims.
Whether this case sets a precedent whereby judges are more willing to allow insolvent companies the opportunity to trade their way out of insolvency remains to be seen.
Such decisions could have far-reaching implications for creditors who may feel aggrieved that they are not able to best protect their interests.
The time period that the applicants in this case must wait before they make another application to the court is unclear from the judgment.
This may be a concern because the court will not wish to delay proceedings to the point where the companies are in an even worse position.
Co-authored by Elizabeth McGovern, counsel, at Reed Smith.
Charlotte Møller, partner, and Estelle Victory, associate, at Reed Smith explain how legislation changes have affected the reviews of directors’ conduct, when companies go bust
| Charlotte Møller |
Partner, Reed Smith
Slightly misleading in its title, the Small Business, Enterprise and Employment Act 2015 (the SBEEA) introduces a number of changes affecting businesses, whether small or not.
The provisions of the SBEEA come into effect at different times, depending on the subject matter in question.
Of particular interest to the insolvency profession, and to directors, are the changes to the requirements of an official receiver, administrator, liquidator or administrative receiver (insolvency practitioner) to review the conduct of the directors of an insolvent company prior to the commencement of its insolvency.
Section 107 of the SBEEA amends the Company Directors Disqualification Act 1986, such that the insolvency practitioner must prepare a report into the conduct of any person who was a director at the time a company enters into insolvency, or during the three years prior to that date (director report).
The amendments required to allow further legislation to implement these changes took effect in May 2015. It is envisaged that the changes themselves will take effect in the near future.
The director report now also extends to shadow directors, so those involved in the management of a business must be careful not to act as shadow directors without realising this to be the case.
In addition, the extension of directors’ duties under sections 170-177 of the Companies Act 2006 to shadow directors (effective from May 2015) further underscores how important it is for management, whether or not they are called a director, to be aware of the regulatory framework to which they may be subject.
The extension of the ‘look-back’ period from two years to three years for the director report will increase the workload of an insolvency practitioner, given the additional year for which investigations must be made. The director report must be filed by the insolvency practitioner within three months of the onset of insolvency, unless this period is extended. This will be a burdensome requirement in many cases, and we anticipate a number of such extensions being sought.
Directors who are found to have failed to conduct the affairs of the company appropriately may face disqualification from acting as a director (or shadow director) for up to 15 years, plus a fine and/or imprisonment.
Where director misfeasance such as wrongful trading is found, directors may also be required personally to make good any losses suffered by the company due to their misfeasance.
Presumably, a key reason for the SBEEA changes is to enhance the recoveries available where directors have acted inappropriately, in favour of the insolvent estate of the company.
Another more important reason may be the hope that directors will have regard to the look-back period and the serious potential repercussions of misfeasance, and therefore ensure they manage the affairs of the company in an appropriate manner throughout their appointment.
Directors, and anyone who may be classified as a shadow director, should ensure they act properly with regard to the company, monitor its financial and commercial status regularly and take relevant professional advice where required.
Unfortunately for creditors, involvement in insolvency transactions may only serve to put them in a worse position as time and publicity erode value, writes Graham Lane of Willkie Farr & Gallagher (UK) LLP.
| Graham Lane |
partner, Willkie Farr & Gallagher (UK) LLP
In recent years, pre-packaged sales in UK administrations (“pre-packs”) have attracted a good deal of public and political attention, notably culminating in the “Graham Review into Pre pack Administration” (the “Graham Review”) conducted by Teresa Graham CBE published in June 2014, and the newly revised Statement of Insolvency Practice 16 (“SIP 16”) effective from 1 November 2015.
Pre-packs frequently cause controversy, principally because of a perceived lack of transparency, particularly in circumstances where the purchaser is connected to the seller. A pre-pack involves the sale of the business/assets of a company on “day one” of the administration process with the marketing and valuation process front-loaded ahead of appointment to minimise insolvency stigma and thus maximise value. However, necessarily, details of the sale are only published following its completion. The resulting absence of up-front information has prompted some creditors to be concerned that they are not getting maximum value from “secret” insolvent business/asset disposals.
Unfortunately, there is no easy answer to these types of issues. Whilst creditors want to be more involved in insolvency transactions, their very involvement may only serve to put them in a worse position because time and publicity can quickly erode value in distressed situations.
The Graham Review recognised that pre-packs have a place in “the UK insolvency landscape”, but recommended that changes be made to SIP 16 (which forms part of the professional guidelines that insolvency practitioners should follow when carrying out their duties) in an effort to restore creditor confidence.
The revised SIP 16 gives effect to a number of confidence building reform proposals. In brief, these include:
The Pre-Pack Pool – the revised SIP 16 requires insolvency practitioners to inform connected party purchasers of their ability to approach, on a voluntary basis, the “Pre-Pack Pool” (the “Pool”). The Pool consists of a panel of business experts, who can be approached by insolvency practitioners in order to obtain their opinion as to the reasonableness of the proposed transaction.
Details of the proposed sale are to be provided to the Pool via its website and, subject to timely payment of an £800 fee, Pool members will return their reasonableness opinion within two business days. Comprehensive guidance and information is available on the Pool’s website.
Market participants will no doubt be keen to see how the Pool will operate in practice, particularly in light of the following features:
• the Pool member will not give reasons for his/her opinion, there will be no appeal process, and there are no guidelines as to what will constitute a “reasonable” pre-pack. In addition, a Pool member will not necessarily have relevant industry sector experience for the proposed transaction which they are assigned to evaluate;
• the two business day turnaround time may appear swift, but as many will know, pre-packs are often negotiated right up to completion against the backdrop of a business in free-fall and with directors concerned about their personal liability for continuing to trade pending a sale. As such, timing concerns will likely arise, notably as to whether the Pool can meet the two business day timescale in practice and at what point it is appropriate for a purchaser to make the application; and
• the Pool is not a judicial body and its opinion is not binding. However, we may start to wonder whether purchasers and insolvency practitioners will complete deals in circumstances where the Pool’s opinion is that the sale is unreasonable. Will we start to see sales being made conditional upon the Pool issuing a favourable opinion? If so, we must query whether the risk of a “no sale” scenario as a result of the Pool’s existence will be more detrimental to creditors than a sale which has not been independently evaluated.
Valuation and marketing guidelines – there are some revised valuation guidelines and “marketing essentials” which apply to all pre-packs. The revisions include a provision that valuations should be carried out by independent valuers or advisors with sufficient professional indemnity cover. The marketing essentials set out a number of key principles to which the marketing exercise should conform. This includes placing emphasis on the insolvency practitioner explaining the particular marketing strategy to creditors and justifying (in a “comply or explain” manner) why any deviation from the essentials was appropriate. The effect of these new valuation and marketing guidelines may be limited in practice, as most IPs should have been complying with these principles as a matter of best practice in any event.
Enhanced disclosure – SIP 16 has always required that insolvency practitioners disclose details of the sale to creditors reasonably promptly after completion. However, the scope of information required to be disclosed has been enhanced with a view to ensuring that creditors are better informed about key transaction particulars. It will be interesting to see what certain organised unsecured creditor groups (e.g. Her Majesty’s Revenue and Customs for tax liabilities and the Pensions Regulator / the Pension Protection Fund for defined benefit pension scheme liabilities) will do with the additional information that will be made available and whether the new SIP 16 will, in practice, prompt more active scrutiny of insolvency practitioners, and potential ensuing litigation, arising from pre-packs.
Val Smith, credit authorisations director at the FCA, reviews the application process for consumer credit firms ahead of a milestone in March.
| Val Smith |
Credit authorisations director, Financial Conduct Authority
Responsibility for regulating the consumer credit sector transferred to the FCA from the Office of Fair Trading in April 2014.
Our aim was to create a more robust regulatory regime that protects consumers while encouraging innovative businesses that meet our standards. We want firms to treat their customers fairly and operate with integrity in a competitive market.
Recognising that existing consumer credit firms must be able to continue to operate while we assessed their applications, we invited them first to register for interim permission. In itself, this was a major undertaking – telling roughly 50,000 firms that they were going to be regulated in future by the FCA and helping them to register for interim permission. This was just the start of our journey.
Consumer credit is a large, diverse sector. We regulate firms that introduce people seeking credit or loans to lenders, firms that offer credit to people wishing to buy goods and services, firms that actually provide loans and others that provide a range of debt services, including debt collection and providing debt advice.
These are some of the firm types that we regulate. Obviously this covers banks, payday lenders and debt management firms. It also includes advice bodies, peer-to-peer lenders, pawnbrokers and retailers, including motor traders, as well as a range of less obvious firms and organisations, including sports clubs, dentists and vets.
Regulating such a broad range of businesses presents challenges. We recognised that the vast majority of consumer credit firms would not be familiar with the FCA regime and that while some have staff dedicated to dealing with their regulator, most do not. We have worked hard to help firms, in particular the smaller ones, to understand the new regime and to navigate our systems and processes.
As well as giving information and advice through our website and contact centre, we have run roadshows around the country, and broadcast videos and webinars to help firms tackle the authorisation process.
We regularly introduce new ways to help firms understand how we operate and our expectations from them. I recommend that consumer credit firms sign up for our regular emails to receive the latest news and information.
Firms are finding that their relationship with the FCA is different to the one they had with the OFT. We have a broader range of powers and more resources than the OFT, which enables us to take a much more proactive ‘hands on’ approach particularly in areas where there are higher risks to consumers.
The first key difference that most firms notice is the process by which they apply for permission to carry on regulated activities.
We will authorise a firm only if it demonstrates, to our satisfaction, that it meets – and will continue to meet – our high-level principles and a set of minimum standards, which we call ‘threshold conditions’.
We require firms to provide more information, reflecting the tougher regime for which we are responsible. We do so in a proportionate way, however. This means that we require firms operating in higher risk areas, such as payday lenders and commercial debt management firms, to provide more information than those operating in less risky areas, for example retailers of goods that offer credit to customers.
Consequently, it takes us longer to assess applications from higher risk firms than those that operate in lower risk sectors.
I am pleased to say that some firms have responded positively to our more robust approach, taking steps to put right previous problems, in some cases paying redress to customers, and to ensure that customers are treated fairly.
Many have made changes to how they operate in response to problems that we have identified during our consideration of their applications.
Others, concluding that they are not ready to be authorised, have withdrawn their applications.
A full version of Val Smith’s update on the authorisation process will feature in Credit Today’s February edition