RSS feedsInsolvency practitioners, says Brendan Guilfoyle, head of the Leeds office of the P&A Partnership, are heading for a busy period. Fall out from banks trading in toxic consolidated debt obligations to the detriment of their own financial solidity, is going to be protracted. ‘It has become clear to everyone that this is not going to be a short sharp shock. This is going to take years to unravel,’ he says.
While it is still possible to single out sectors – retail and property, for instance – showing acute signs of distress, Guilfoyle expects to be dealing with companies across the board from all kinds of industries. This recession will not be sector specific.
An ardent football fan, Guilfoyle has lately become something of a regular contributor to the football finance scene, having conducted Luton Town FC’s third administration in November 2007 in a matter that concluded in July this year. Football teams have become notorious for their use of the administration procedures to bail out of difficulties, as a recent BBC Radio 4 programme has documented, but Guilfoyle says the technical challenges in this arena make it a rewarding environment to work in.
Football League rules require teams to exit insolvencies via a CVA and also give preference to football-related creditors, such as other teams. It is an oddity that other creditors, notably HM Revenue & Customs, find difficult to swallow, he points out.
Guilfoyle takes on personal insolvency appointments ‘because it’s difficult to specialise in the regions’, but his main interest lies in corporate insolvency. That’s good news for businesses in the Leeds area, because resilient though the local economy has proved, recessionary notes are being sounded here as they are elsewhere.
Some companies, depending on how they have handled their activities and fina nces, will be more vulnerable than others – those that are highly geared, those showing an already weakened balance sheet – but the effects of the downturn are likely to be wide ranging.
Insolvencies on the up
Taking the firm’s own work into account and talking to other insolvency professionals around Leeds, where he is based, Guilfoyle says we’ve yet to see a marked acceleration in the number of companies going into insolvency. That situation is not going to last, however. ‘There are not yet the levels of insolvencies that you’d expect, but we all sense that the pace is hotting up,’ he says.
Insolvencies often lag behind other signs of economic distress in a downturn. ‘Historically, we would expect to pick up more insolvency work as the economy picks up again,’ says Guilfoyle.
Businesses come out of downturns requiring working capital, often having used up their borrowing facilities, while simply weathering the storm. With banks under pressure it will become difficult to see where further help will come from on that front, particularly when you take into account the current proliferation of asset-based lending. Buildings, machinery, invoices, stock supplied on a retention of capital basis – some businesses have become virtual companies with few concrete assets, he says.
Guilfoyle trained as a chartered accountant straight from school in Bromley, Kent and specialised in insolvency from qualification onwards. He joined Bernard Phillips, one of the predecessor firms of Buchler Phillips Kroll, in 1976 and moved to his current berth in Yorkshire in 1978, where he has remained ever since.
Professionally, he has been involved in R3, the Association of Business Recovery Professionals, or SPI as it was then, and the Insolvency Practitioners Association. But Guilfoyle has stayed firmly in the insolvency camp in the face of a growing focus on turnaround work.
Turnaround professionals, encouraged by banks looking to assist businesses without recourse to formal insolvency arrangements, aim to secure appointments when companies show early signs of distress. Their inclination is to avoid the legal mechanisms of insolvency, renegotiate borrowing and restructure finances, says Guilfoyle.
Preserving value
Insolvency practitioners, meanwhile, also look to preserve value and businesses, but through the insolvency procedures. ‘I’m not a turnaround professional. I do get involved in rescues, but I do it through the mechanisms of insolvency,’ he says. Businesses and advisers in the capital have more readily adopted business turnaround practices than the regions, due in part to the influence and presence of US lenders there, he argues.
With a fairly benign economy over the past ten years and plenty of liquidity among backers, conditions have favoured the turnaround approach, he says and insolvency has tended to be marginalised. But Guilfoyle says his first priority is always to save a company and if that can’t be achieved, such viable business as still exists within it. The Insolvency and Enterprise Acts have introduced more flexibility, but rescues aren’t always practical – or even the desired outcome in some cases. ‘Sometimes you come across someone who has just had enough,’ he says.
In cases where there is business to save, the more savvy the introducer or director, the better.
‘Someone who is more commercially-minded will have a plan. To some extent you can give all the options and ask where do you want to be at the other end of this?’ Here again, today’s big liquidity problem rears its head. ‘The potential for refinancing will not be as readily available.’
In spite of that very practical approach, insolvency practitioners still face an image problem. ‘It’s been relatively easy for us to be characterised as expensive and risk-averse and as people who have never been involved in running a business,’ he says.
Ethical code
Guilfoyle is no longer active in R3. But he is a believer in ‘putting something back’ into professional life and is actively involved with the IPA’s ethical standards committee. The committee has just set about reworking its code of ethics, following IFAC’s introduction of an ethical code and its request that as far as possible other accounting and regulatory bodies align themselves with it.
The main stumbling block in this exercise proved to be IFAC’s inclusion of confidentiality as one of its guiding principles. Insolvency practitioners are accountable to a range of creditors, as well as ultimately holding a wider public remit in cases where they need to look into directors’ conduct on behalf of BERR. It has been widely accepted that the accountancy profession could do itself a lot of good by embracing more transparency, he says.
Client confidentiality does not sit well with these wide-ranging duties and so the IPA’s ethical standards committee, having debated the issue back and forth, is introducing a code effective from January 2009 that will provide a framework for insolvency practitioners to identify threats to their integrity and their duties.
The dilemma is commonplace in insolvency appointments. ‘We have this strange situation of accepting assignments from company directors and moving very quickly to a situation where we’re working for creditors. There are times when we are walking a tightrope, so having a fundamental principle of confidentiality would give rise to a situation that was less than transparent. We felt the code didn’t pay due regard to transparency.
‘A lot of people want to have off-the-record discussions with an IP. To my mind, there is no such thing. We always have to make clear that we are acting for a person as a director of an insolvent company, not ‘you as an individual’. For that you need separate advice. We have to make it very clear that we don’t act for directors personally. The moment you’re appointed as an IP formally you can’t guarantee confidentiality.’
For the IPA balancing the possible conflict between confidentiality and transparency has not been a huge battle, but he suggests the IPA is the only regulated public body issuing this kind of guidance. And yet – like much committee work – getting transparency worked into guidance for the benefit of members has been at times difficult and protracted work. ‘It seems to have come to a successful conclusion and has met with some approval. We’ve made [the code] a more practical document and made it readable and workable.’
There is a subsidiary role: a statutory obligation to identify bad business practice. ‘We fulfill that public policy.’ IPs are not required to investigate, but to highlight areas of concern for the director disqualification unit within the government Insolvency Service. ‘We load the gun, they fire the bullets,’ he says. He concedes it is not really considered an onerous duty by members of the profession. Mostly, they are simply asked to comment. ‘I don’t think many of us see it has a burden,’ he says. Perhaps the more worrying point is that information is not always acted upon.
‘Most of us would continue to complain that when we recommend disqualification, they don’t go through with it, due to public interest.’
Insolvency procedures have also come under fire from Conservative party leader David Cameron, who has suggested they are not fit for purpose. Cameron favours an approach closer to the US system, where an investor arriving late on the scene of a rescue or insolvency would be given preferential creditor status to protect their risky investment. Guilfoyle argues that Cameron’s thinking on insolvency is flawed. ‘Essential ingredients of turnarounds are increased headroom on finance. But time and liquidity are not going to be available.’
A lot to offer
So what can the insolvency profession offer? Guilfoyle says experience will out. ‘Cynics would say we’ve been on our prayer mats since the early 90s, but turnaround functions within the banks are starting to struggle and the banking sector will need to oversee a lot of difficult situations. A lot of us [in insolvency] have got grey hair, which isn’t necessarily the case in the banks. In fact, anecdotally, we’re hearing of retired recovery bankers being recalled.’
He is under no illusion as to the seriousness of the challenges that lie ahead. Selling businesses as going concerns, preserving employment – these are laudable aims and something the business community ardently hopes will be achieved in as many insolvency cases as possible. Just how challenging those aims will prove, in the face of today’s economic crisis, is still an open question.
Private equity houses will be looking to acquire good businesses at keen prices. Banks may take property, pub and hotel estates, for instance, into special purpose vehicles, engaging agents and letting them out. The value of those assets and the difficulties in maintaining their value will be all-important.
For IPs acquiring those assets and trying to realise their worth, there is a related difficulty. ‘The issue for us is we’re looking for an a upturn, but realistically, are we going to be able to sell assets or will we be stuck with them?’ For IPs, the cost of work in progress in such situations can go through the roof. ‘We don’t get paid until assets are realised and surpluses distributed,’ says.
As a veteran IP located in Leeds’ vigorous financial community, however, he will be better placed than most to seek out a route through the woods.
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