The Role of the Insolvency Profession in Supporting Business Rescue

The struggling economy and the subsequent impact on businesses in the UK has meant that the work of insolvency practitioners has remained in the spotlight.  In 2012, this is it set to continue, with high profile cases such as La Senza, Blacks and Peacocks already having caught the attention of the press.

As the insolvency trade body, representing 97% of insolvency practitioners (IPs), R3 has been involved in a number of Government consultations and worked hard to improve the reputation of the profession and crucially, the understanding of what its members do.

One such issue for the profession is that of pre-packs.  A pre-pack is an agreement for the sale of an insolvent company’s business and assets, put in place before the company goes into a formal insolvency process.  The speed at which this happens is necessary to preserve the value to the business; however in 2011 the Government announced that creditors will be given a three day notice period when a business is being sold to a connected party.

Earlier this year, the Government decided to reconsider the three day notice period, a decision that was welcomed by R3.  Had this have gone ahead, it would have lead to more businesses closing, job losses and secured creditors losing out as more businesses would have been liquidated rather than pre-packed.  Research has found that in 92% of pre-pack cases, all of the employees were transferred to the new business, compared to 65% in a business sale and that they deliver higher returns to secured creditors than a business sale (secured creditors get 35% back compared to 33% in a business sale).  We believe Government’s decision to reconsider this legislation sends a positive message about business rescue in the UK.

We do however appreciate concerns about pre-packs, especially sales to connected parties and more can be done to improve the perceptions around lack of transparency.  It is worth noting that safeguards against abuse are already built into the pre-pack process and under SIP 16, the administrator must justify and explain to creditors why a pre-pack was considered appropriate in the circumstances.  The profession is keen to work with the Government to look into ways to allay some of the fears about pre-packs but if the UK wants to encourage an entrepreneurial society, then people must be allowed second chances and businesses must be rescued where possible. 

Another key issue for insolvency practitioners and UK businesses, is that of administration expenses. R3 has long campaigned for the implementation of legislation to clarify what is an administration expense to improve the UK’s business rescue culture.  A recent survey of R3’s members found that on average, 28% of potential trading administrations are now pre-packed or liquidated because of the uncertainty around the expenses regime.

Until recently, an administrator understood that if he was trading a business and trying to rescue it he had to pay certain trading costs (administration expenses) as a priority, but recent court rulings have thrown uncertainty on this principle.  The interpretation of what is considered an administration expense has widened considerably, particularly for rent and pensions obligations, to the extent that rescuing a business through a trading administration can be too costly.

Our concern is that the UK’s business rescue culture is being hampered by the Government’s refusal to implement legislation to clarify what is an administration expense.  If insolvency practitioners are not sure about how much it is going to cost to trade a business they may have to make the decision to close it, meaning creditors lose out and jobs are at risk.

Not only does this uncertainly have huge consequences on the ability to rescue businesses, but also on the lending culture, and returns to unsecured creditors.  For these reasons, a decision on administration expenses should not be left up to judicial discretion on a case by case basis, but needs to be laid out clearly in legislation.  R3 wants to see a solution as to which items of expenditure should be payable as an expense of administration and which should not to ensure costs are known, therefore giving practitioners the ability to save more businesses.

The UK’s rescue culture and the cultivation of an entrepreneurial society are vital to the health of the economy.  To support this, we believe that the Government also needs to look into the issue of ‘ransom’ payment demands from suppliers when a business enters insolvency.  We estimate that some 2,000 businesses every year could be saved if not for the opportunistic actions of suppliers that demand ransom payments, increase their prices, or cease supply as a business goes into insolvency.  We would like to see an amendment of the Insolvency Act 1986 which will ensure that insolvent businesses are not denied the resources they need to trade out of their financial difficulties.  Specifically, we would like to see a wider stay to hold ‘ordinary terms of business’ in place in the event of insolvency.  This would mean that as long as contractual payments are made then suppliers still have to supply on the same, pre-insolvency, terms.

Insolvency Practitioners play in vital role in supporting businesses and contributing to the health of the economy.  Research has shown that those IPs that work on corporate cases spend nearly a quarter of their time on business rescue and turnaround activity, working to prevent insolvencies. We have yet to see the volume of insolvencies that have characterised previous recessions, indicating that more is yet to come.  As the economy starts to recover, we expect to see more ‘zombie’ businesses start to fail as part of a clear out.  IPs will continue to work hard to turnaround businesses where possible or maximise returns to creditors in the event of failure.  Insolvency practitioners work with the statutory tools determined by government and fulfil statutory duties. They are well placed to advise on the effects of current and proposed regimes and so we hope Government will take on board the views of the profession.

Frances Coulson, R3 President

•  R3 is the trade body for Insolvency Professionals, and is made up of 97% of the UK’s Insolvency Practitioners from all over the UK.
• R3 comments on a wide variety of personal and corporate insolvency issues. Please contact the press office, or see www.r3.org.uk for further information.
• R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by one of nine recognised professional bodies.
• R3 stands for ‘Rescue, Recovery, and Renewal’ and is also known as the Association of Business Recovery Professionals.

 To contact R3 please call +44 (0) 207 566 4217 or by email at r3.press@r3.org.uk