Welcome to News
We don’t expect to be breaking many stories in IP-BID.com’s News. However, you will
find a range of articles focusing on business rescue, recovery and turnaround, as
well as hot topics such as pre-pack administrations and SIP16 guidance to insolvency
practitioners, plus a digest of business and financial news that affects the insolvency
sector.
We will also include specially written pieces by leading professionals who have
expert insights to share.
To access specific stories and News Briefs, please click on the menu to the left.
If you have relevant news, comment or feature ideas you wish to contribute, please
contact
IP-BID.com News
Call for Changes to Insolvency Laws
Members of the European High Yield Association (EHYA) have met with lawyers, academics,
civil servants and judges to press their case for reform of UK insolvency laws,
warning that the current system makes it more likely companies will fail.
Claiming broad consensus for change at the meeting, Andrew Wilkinson, co-chair of
the EHYA's insolvency committee and head of Goldman Sachs's European restructuring
team, says: “We hope on the back of that the government decides to launch a consultation
paper."
Calls for changes to the UK's insolvency laws have grown in recent months as more
companies have run into difficulties. The EHYA believes that UK rules have not kept
up with the rapid rise in the number of investors and capital structures, and that
they make restructuring more difficult because creditors have to accept a deal unanimously.
As a possible way forward, Wilkinson cited recently introduced "sauvegarde" rules
in France, which allow a judge to strike a deal that binds all creditors into a
restructuring proposal.
The Insolvency Service has no plans for changes to the UK's laws, believing that
the existing framework is “sufficiently robust” to cope with the current crisis.
£20m Business Turnaround Fund for Distressed Businesses
Five of the North West’s leading business turnaround and insolvency experts have
joined forces to launch a £20m investment fund to salvage distressed businesses.
The Eternitas Fund aims to deliver a fast and flexible source of finance and management
expertise to struggling businesses across the UK, during a time of unprecedented
economic upheaval.
The fund has been established and will be managed by leading North West figures
Andrew Redmond, Andrew Duckworth, Neil Duckworth, Alec Craig and David Shaw – all
respected names from the region’s top financial and legal institutions.
An investment commitment of up to £20m is being sought from investors over a five
year period from 2009 to 2014.
North West entrepreneur Andrew Redmond – the founder of leading debt advice company
Debt Free Direct – said: “We have entered a year of unprecedented change for
UK plc, a time when innovative new approaches will be needed if we are to prevent
solid businesses going to the wall.
“Business turnaround and restructure are at the top of our list of investment
priorities;
our structure will enable us to move quickly to deliver management strategy and
flexible funding to ailing businesses, and to safeguard jobs wherever possible.
“We will also be looking at acquisition opportunities – in particular, distressed
property, asset and debt portfolios – in order to maximise returns for our investors.”
Andrew Duckworth – partner in specialist distressed asset investor Winterhill Asset
Management – added: “Our unique combination of expertise and contacts will enable
us to generate a flow of immediate opportunities for the Eternitas Fund. We are
anticipating an extremely busy 12 months.”
News briefs
Insolvency Service Enabling Change
The Insolvency Service has formed a five year partnership with Northgate Public
Services in a contract worth £2.8 million designed to transform services and enhance
the efficiency and effectiveness of the redundancy payments service.
As part of The Insolvency Service’s Enabling the Future programme, Northgate will
support the Redundancy Payments Service in providing citizen-focused services to
employees who have been made redundant and whose employers are unable or unwilling
to make redundancy payment. This project is a core element of the transformational
Claims Handling and Making Payments project. In the last 12 months, more than 165,000
workers made claims to the RPS, and the total amount paid out to redundant workers
was more than £350 million.
Pain All Over
While industrial production is falling faster than at any time since 1981, financial
services have so far escaped lightly, confounding forecasts. The West Midlands,
Wales and the north of England are losing jobs as fast as the south, leading consultancy
Oxford Economics to predict a fall in output across the board.
Although it predicts that London will fare worst with a 3.4 per cent fall, the north
and the Midlands will also suffer badly and could take up to a decade to recover.
It predicts that London and the South East could recover pre-recession employment
levels within five years.
MPs Call for More Action on Pre-packs
Public confidence in the insolvency regime is being and will be further damaged
if the worst examples of pre-pack deals are not curbed, according to a report by
the Business and Enterprise select committee into the Insolvency Service.
“Prompt, robust and effective action is needed to ensure that pre-pack administrations
are transparent and free from abuse,” the report concludes. “Unsecured creditors
tend to be kept in the dark and recover even less than they would in a normal administration.
This causes particular outrage where the existing management buy back the business
and continue to trade clear of the original debts. Pre-packs of this kind fuel understandable
concerns about illegitimate, self-serving alliances between directors and insolvency
practitioners.”
The report demands that the interests of unsecured trade creditors must take a higher
priority, especially in ‘phoenix’ pre-pack administrations, and suggests that the
insolvency system, the Insolvency Service and the insolvency profession all risk
real reputational damage if the situation is not addressed.
“More worryingly,” the MPs’ report continues, “many SMEs appear to be suffering
unreasonable financial harm with no corresponding benefits to the wider economy.
Where there are good reasons for an insolvency practitioner agreeing to a pre-pack,
which there can often be, this must be explained clearly and fully. Where there
are no good reasons for entering a pre-pack, this must be exposed before the damage
is done.”
R3 Believes SIP 16 Can Work
R3 has made a robust defence of the insolvency profession’s handling of pre-packs
in response to the Business and Enterprise select committee’s report into the Insolvency
Service and has called for more time for the new Statement of Insolvency Practice
16 to take full effect.
Peter Sargent, President of the insolvency trade body, says: “The investigation
of the Insolvency Service has certainly picked up on the exaggerated claims about
the perceived dangers of pre-packs. As yet there has been no evidence of any systematic
abuse of pre-packs and there are clear benefits in pre-packs for secured creditors
and saving jobs.
“We believe that SIP 16, which came into force on January 1, will succeed in its
aims to increase transparency; and together with the Insolvency Service’s ‘policing’
of pre-packs should be given time to show that these systems and checks are working.
A survey of our members in April showed that of the 35% of insolvency practitioners
that performed a pre-pack since 1 January 2009, 99% of them said they had complied
with SIP 16.”
R3 expressed concerns to the select committee over the reduced levels of funding
for the investigation and enforcement activities by the Insolvency Service and Sargent
adds: “We know that not all reports submitted by IPs believed to merit investigation
are pursued by the Insolvency Service. Therefore reducing funding for this activity
is counterintuitive during these recessionary times where fraud is on the increase
and IPs are unmasking more incidences of fraudulent behaviour.”
A recent survey, carried out for R3 by polling company ComRes in April 2009, revealed
that more than 39% of respondents (to whom this question was applicable) had seen
an increase in the number of corporate fraud cases, and 33% had seen an increase
in personal fraud.
Pre-Packaged Sales – New Guidance for Administrators
By Tim Ball - Partner, Shadbolt LLP
Pre-packaged sales have long been regarded with suspicion by unsecured creditors.
These are where a company is placed into administration and, almost simultaneously,
its assets and business are sold by the Administrator without any prior consultation
with unsecured creditors. To add to the general discomfort it is often the management
of the failed company who are the buyers who then start trading all over again,
sometimes using a name for the new entity which bears striking similarity to the
previous failed company. Now, with effect from 1 January, 2009 Administrators will
be subject to new professional guidelines when executing a pre-packaged sale with
the introduction of the new “SIP 16”.
All Insolvency Practitioners are governed by a series of “Statements of Insolvency
Practice” known as “SIPS”. These are not legally binding but failure to abide by
SIPS could render an Insolvency Practitioner liable to disciplinary or regulatory
action from his regulatory body.
Administrators owe a duty to all creditors but it has long been accepted by the
courts that it is sometimes in the best interests of creditors as a whole to execute
a pre-packaged sale because this can be the most effective method of maximising
returns to creditors. A series of cases have confirmed that Administrators do have
the power to sell assets without the prior approval of creditors or the court where
the circumstances warrant such a course of action. A pre-packaged sale often preserves
the goodwill of the company’s business which might otherwise be damaged by the stigma
of being placed into Administration and, accordingly, the Administrator may be able
to obtain a better price for the sale than would have been achieved by trading the
business for a while under Administration and carrying out a more detailed marketing
exercise. Likewise, the most attractive deal will often be with the existing management
who know the business and its customers so will often be prepared to offer the best
deal to the Administrator. That said, pre-packaged sales have caused difficulties
for Administrators who could face criticism from creditors (including the failed
company’s shareholders) if it can be shown that there could have been a better deal
available. SIP 16 seeks to give some comfort to Administrators by setting out the
actions that they should take before entering into a pre-packaged sale.
SIP 16 begins by reminding Insolvency Practitioners of the duties that they owe
to parties who may be affected by the planned arrangements, both where they are
acting in an advisory role prior to appointment and after formal appointment as
Administrator and cautions as to the risks involved. It advises Insolvency Practitioners
that they should keep detailed written records of the reasons leading to their decision
to opt for a pre-packaged sale and be able to explain and justify why such a course
of action was considered appropriate.
The importance of identifying conflicts of interest is also highlighted. Prior to
formal appointment Insolvency Practitioners should take care to identify whether
they are advising the company or its directors. This is particularly important where
it is likely that the directors may be acquiring assets in the subsequent Administration.
Directors should be urged to seek independent advice. SIP 16 reminds Insolvency
Practitioners that an Administrator must perform his functions in the interests
of the company’s creditors as a whole and, where the purpose of the Administration
is to realise property in order to make a distribution to secured or preferential
creditors (as opposed to rescuing the business as a going concern where circumstances
mean that this is not a realistic outcome) they are reminded that they have a duty
to avoid unnecessarily harming the interests of creditors as a whole and that they
should be prepared to be able to demonstrate that they have given due consideration
to this.
Because pre-packaged sales in Administration do not, by their nature, give unsecured
creditors the opportunity to consider the sale of the business and assets before
it takes place it is important for the Administrator to be able to provide unsecured
creditors with a detailed explanation and justification as to why the pre-packaged
sale was undertaken so that they can be satisfied that the Administrator has acted
with due regard to their interests. To this end SIP 16 sets out a detailed list
of information which should be disclosed by the Administrator to creditors in all
cases where there has been a pre-packaged sale. These include the following (which
should be disclosed so far as the Administrator is aware after making appropriate
enquiries):
- The source of the Administrators initial introduction
- The extent of the Administrator’s involvement prior to appointment
- Any valuations obtained of the business or the underlying assets
- The alternative course of action that were considered with an explanation of the
possible financial outcomes
- Why it was not appropriate to trade the business and offer it for sale as a going
concern during the Administration
- Whether efforts were made to consult with major creditors
- The consideration, terms of payment and any other condition of the contract that
could materially affect the consideration
- The identity of the purchaser
- Any connection between the purchaser and the directors, shareholders or secured
creditors of the company
- The names of the directors, or former directors of the company who are involved
in the management or ownership of the purchaser, or of any other entity into which
the assets are transferred
This information must be provided in all cases unless there are exceptional circumstances
and, where such circumstances do exist, the reason why the information has not been
provided must be stated. SIP 16 makes clear that where the transaction is with a
connected party it is most unlikely that considerations of commercial confidentiality
will outweigh the need to provide creditors with this information.
Although pre-packaged sales will probably continue to be viewed with suspicion by
unsecured creditors, SIP 16 should at least provide them with some comfort that
Administrators do have certain professional guidelines which must be observed including
a duty to provide creditors with information.
Restaurant Raider Relishes Risk
Risk Capital Partners, founded by pizza entrepreneur Luke Johnson and Ben Redmond,
aims to take a bite out of the credit crunch by identifying bargains from among
distressed businesses. The private equity group has raised £75m, with £50m from
institutional investors and £25m from the group’s founders.
Johnson described the current climate as “possibly a once in a lifetime opportunity
to seize bargains” and this new international fund is designed to help Risk Capital
Partners to exploit the opportunity. “I’m optimistic that if you are investing from
here then you are going to do well,” Johnson added.
Johnson rose to prominence when he acquired and floated Pizza Express and he also
owned The Ivy and Le Caprice restaurants. He is currently Chairman of Channel 4.
Risk Capital Partners has previously invested in companies such as restaurant group
Strada and Borders UK. It intends to invest between £3m-£10m in any single opportunity
and is looking for minority stakes, as well as management buy-outs and buy-ins.
Vital Role of Small Business
Small business is vital in rebuilding economies, writes American businesswoman Georgette
Mosbacher in the Financial Times.
“Even though the world business climate is in turmoil and 51m jobs could be lost
by the end of the year, small business is being ignored by US president Barack Obama,
French president Nicolas Sarkozy, UK Prime Minister Gordon Brown and dozens of other
leaders.
“As world leaders devise massive stimulus plans and bail out entire industries,
they have lost sight of the role of small business in creating jobs. There are 27m
small businesses in the US, employing half of the US workforce. An estimated 99
per cent of all new jobs come from small business, typically defined as a company
with fewer than 500 employees.
“Small business is also the greatest source of innovation. The large companies –
the Microsofts, the Apples – were small ones two decades ago. Small business today
is big business tomorrow because true innovation comes from garages, basements and
storefronts when entrepreneurs find better and more efficient ways to do things.”
Financial Times