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Review of the Insolvency and Restructuring Landscape in the UK
Lee Manning, Partner, Restructuring Services, Deloitte LLP, London, UKThe demise of Comet (followed quickly by Jessops, HMV and Blockbuster) cast a dark shadow over the high street, harking back to the collapse of Woolworths in November 2008. Up to 6,000 employees were made redundant, meaning the government will have to pay GBP 23.3 million in compensation. The company has debts of GBP 233 million which is owed to many dozens of unsecured creditors, and over GBP 26 million is owed to HM Revenue & Customs (HMRC) which won’t be paid. These two businesses fell victim of changing retail markets and consumer shopping habits which is a reality that other retailers will have to face.
This prompted some soul searching from Vince Cable, the Business Secretary as to whether to change the insolvency rules, but he did concede that 'in general the British insolvency regime is regarded as one of the best internationally.'
In fact the collapse of Comet raises questions about governance of Comet pre-insolvency, more than the insolvency process itself. Moreover, the suggestion of importing some Chapter 11 proceedings and thereby leaving management in place has prompted many restructuring professionals to warn this could prolong the life of certain 'zombie companies', but more of the zombies later.
R3 has been consistent in its calls, now backed by the shadow business secretary Chuka Umunna, that more delinquent directors need to be disqualified following an insolvency. Whilst the number of delinquent directors being reported by insolvency practitioners to the Insolvency Service has risen dramatically in recent years, the percentage of those reports resulting in disqualification has more than halved – from 45% a decade ago to just 21% in 2011-12.
With a New Year dawning, it is time to comprehensively get a grip on 'dodgy' directors and protect the UK economy from the damage they cause. Directors that escape liability have a negative impact on UK plc as they are able to set up elsewhere. The Insolvency Service estimate a net benefit of GBP 88,000 to the market for every company director disqualified in terms of potential damage they might have otherwise caused.
You would think we were in a period of high corporate insolvency from the bloodshed on the high street (and splattered in the national press), but really the situation is very different, and atypical to previous recessions.
In fact there should be very little talk of corporate 'bloodbaths', 'massacres' or 'collapses'. The insolvency hearse has remained parked as a predicted surge of collapsing businesses actually never materialised. Many doubt now it ever will, although some banks are planning for more business failures in the longer term. But what has capped corporate insolvencies so far? There were nearly 8,000 fewer corporate insolvencies in 2009 compared to 1992, while personal insolvency has seen far bigger increases.
Instead we are given to believe that an army of undead, ‘zombie businesses’ is lurking in the shadows, undetected by official corporate insolvency figures. Some credence to the zombie theory comes from a poll by insolvency trade body R3, revealing that 8% of businesses are barely managing to pay interest but not reduce their debt, which would equate to some 146,000 zombie businesses stalking the UK. The survey was repeated in November, when another 14,000 zombies had been created, bringing the total to 160,000. More outspoken industry commentators have called for lenders to accelerate the slow death of many of these companies, so that their assets can be recycled for better use, but this is unlikely to happen in such a benign economy.
In recent years, a popular and sensible approach to dealing with companies overburdened with debt is for lenders to exchange debt for equity which in many cases has succeeded, typically so long as management retain a sufficient stake in the business to motivate them to turn it around.
In the past we saw an 'insolvency lag', with liquidations rising three years after the end of the 80’s recession, and two years at 90’s recession, as creditors felt able to improve on their returns. This hasn’t happened this time, with the liquidation rate currently at 0.7%, against a peak of 2.6% in 1993.
Rather than harp on about a low interest rate environment, HMRC’s 'Time to Pay' scheme or a general reluctance to pull the plug by the banks, I would point to the now overlooked Enterprise Act, introduced ten years ago.
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