Vol 7 (2010) - Issue 4

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An Odd Market: What Now for the UK Restructuring and Insolvency Profession?

If the first five months of 2010 were characterised by falling insolvency numbers, Banks largely reluctant to take precipitate action but not lending, landlords resting on their laurels due to Goldacre and Her Majesty’s Revenue and Customs (HMRC) continuing with its relative leniency towards non/slow payers, what does post-election 2010 hold for us? More of the same?

For larger corporates, proactively seeking restructuring advice is second nature to them – in good times as well as bad – however the larger bulk of mid-sized corporate and SME’s are less used to this, do not have regular advisors and therefore have just, quite sensibly, battened down the hatches and tried to keep their noses clean. Some who did well in the preceding years have had some fat to live off but that will soon run out. This has left a large number of zombie enterprises, who are lacking access to either investment or rescue funding, staring into an abyss unable to deal with what is now a significant medium/long-term under-performance issue whilst waiting daily to see if the Bank, HMRC or their landlord is going to pull the trigger and send them over the edge.
Perhaps if these companies can hang on through this slow economy, and if they are given enough leniency by their creditors, they may come out the other side and hang on the coat tails of the recovery increasing revenue via osmosis. They will have avoided the cost of restructuring or the loss of the business through insolvency. But is this a realistic outcome for these companies?

I fear not. Once the economy shows real signs of a consistent upturn, the creditors will most likely abandon (or be forced to abandon) their lenient attitudes. This, coupled with the fact that these entities will have whittled away any working capital, will mean that they will not be able to leverage any upturn leaving competitors and new entrants to sweep up any increasing revenue. All the cost reductions, part-time working, lay-offs and generally inward facing focus will hamper their ability to take advantage of the upturn.

The recovery will be hampered until there is a stronger flow of these enterprises facing up to their issues and seeking advice from the restructuring profession which in turn can help create the proverbial ‘phoenix from the ashes’ with the investor community. Bringing new liquidity and optimism from investors into these companies will generate re-invigorated markets and revenue. The increase in working capital and the ability to concentrate focus on the market rather than costs and debts will lead to more sales and more jobs.

To be fair no one is pulling the trigger, so no one is forcing them to seek advice. If they did seek advice then up until recently no one has the liquidity or inclination to leverage acquisitions of distressed assets, or was not as willing to do so as they once were so quick trade sales were off the agenda too leaving only insolvency as an option.

I do sense a change in the investor community; there are funds out there now looking for opportunities. However, as the flow of distressed businesses into the arms of the restructuring specialists has dried up, these investors are not getting the right number of decent opportunities presented to them.

If restructuring and insolvency is essential in our market economy (ie dealing properly with failure but encouraging entrepreneurial activity) then we must find active lenders and investors. But who would invest at this point in the economic cycle in anything other than very sound or very large businesses? The cycle must get us to the point where educated bets are taken – otherwise paralysis will abound alongside stagflation or even deflation! Isn’t Japan’s previous decade a lesson?

A restructure with advisory or executory assistance with or without an insolvency process has to be a better solution to this rather curious stale mate. The lack of activity is troubling for the fragile economy trying to emerge from its stupor. As Lady Thatcher once said 'you can’t buck the market', yet this is what appears to be happening.