The role of insolvency professionals in saving jobs and businesses as the pandemic wanes

November 2021 | SPOTLIGHT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

November 2021 Issue

Ever since the pandemic struck early in 2020, there have been doom-laden predictions of record numbers of business failures and restructurings. Governments around the world have committed unprecedented amounts of public money to preventing enterprises going under. It has been one of the most successful strategies in commercial history, flattening the insolvency curve almost to the zero-baseline.

Now comes the reckoning as government support measures are phased out and we return to whatever passes for the new normal. Statistics for insolvency filings are rising and the figures for the growth of financially-crippled zombie entities are almost off the chart. In the UK alone, there are now some 240,000 zombies with a combined negative net worth of £340bn, borrowings of £512bn and total assets of almost £1 trillion.

Their negative drag on the economy is a major concern. The task facing insolvency professionals is daunting. They will very soon be dealing with a rush of failures, about which the only doubts are the scale and intensity. They have to sort the wheat from the chaff, identifying first those which can be restructured outside a formal procedure. For those where only a statutory process will provide a solution, even if it is a business rescue procedure rather than liquidation, they have a wide range of responsibilities imposed by the relevant legislation but an overriding duty in most jurisdictions to obtain the best possible outcome for the general body of creditors.

This is all very well in theory, but how will this play out in the real world of too much work, too few resources and far too many ‘empty’ cases with insufficient realisable value to reward them adequately for their work? The understandable temptation will be to focus on the high value assignments, which will generate the most fees, or those with the low-hanging fruit of easy asset sales, which can be sped swiftly through the insolvency process and forgotten about.

There is another dynamic in play here. All insolvency professionals dread the post-recession phase of the economic cycle, when it is close to impossible to value assets and there are too few buyers with the funds to turn their interest into a completed transaction. Time wasters are always a problem, but they seem to breed like locusts at these times, devouring the capacity of hard-pressed business rescue staff.

What will be needed as the carnage of this pandemic and its once-in-a-century economic damage is worked out is the space and the patience to avoid rushing the task. This in turn will need the proactive cooperation of creditors and other stakeholders in avoiding precipitate decisions. How willing they will be to assist must be open to question, especially as so many of them have been prevented from taking enforcement action by statutory prohibitions for so long.

A prime example is the situation for commercial landlords in the UK, banned since the very start of the pandemic from any type of rent recovery action and currently unable to progress debt collection until at least March 2022, while other creditors have been given the right to enforce from October 2021. This is the most unlevel of playing fields and has inevitably hardened attitudes to restructuring and debt forgiveness proposals within the landlord community.

Funding for workouts will be another issue. Corporate balance sheets are bloated with government loans granted on soft interest and repayment terms, as well as huge amounts of other unpaid liabilities for rent and government taxes. Over a third of all UK businesses have taken on extra debt under various government schemes during the crisis. Asset values have plummeted, prompting widespread impairment provisions and reducing the value of collateral even for existing borrowings.

Lenders already face being distracted by the task of collecting the advances they made under government guarantees during the pandemic. In any case, their risk appetite will be reduced by the losses they have suffered in the crisis, as always happens when economies transition out of recessions. Will they be willing to provide additional debt in this scenario? Also, will there be sufficient investor interest and, if so, can new equity be secured at anything more than bottom-feeder prices?

The current, unparalleled supply chain issues around the globe will offer unique challenges to those rescuing businesses or trying to transfer the viable parts of them into more secure hands. Every week seems to bring another unexpected shock to the smooth running of commerce. Those who believe these effects to be temporary may prove to be on the wrong side of history. It will be necessary and beneficial substantially to re-engineer struggling businesses and their day-to-day operations before a buyer can be found for them.

Leaving financial considerations aside, the insolvency profession around the world has always struggled to live down a reputation for being heartless exploiters of others’ misery. One high-profile practitioner was described in a leading national newspaper in the 1990s as having a smile like ‘moonlight shining off silver coffin handles’. Another was called a ‘vampire of the recession’ in a front page headline in the early 2000s. It seems to matter very little that they do not create the chaos they are so often criticised for clearing up.

Experienced professionals swear by the benefits of applying soft skills to what they do, getting business owners, managers, creditors and other stakeholders on their side and enlisting their cooperation in maximising outcomes. This time round, these skills will be more essential than ever, in fact doubly so. Every part of the business community is stressed and distressed by what they have been through since the pandemic entered their lives. Sensitive handling of interpersonal relationships within rescue assignments or insolvency cases has never been more vital.

The upshot of all these considerations is that insolvency professionals have a clear responsibility to play a constructive role in how the post-pandemic recovery plays out. Churning through cases without any thought about more innovative strategies will do neither themselves, the creditor community nor the business world in general any good.

There is an undeniable duty to try even harder than usual to rescue as many businesses or parts of them as is feasible and to save as many jobs as possible. If all the public hear about is huge fees billed and bloated incomes earned, it will be a failure of historic proportions and a stain on the profession’s integrity which will be hard to eradicate.

Steve Parker is a founding partner, Mark Harper is a partner and Nick Hood is senior business adviser at Opus Business Advisory Group. Mr Parker can be contacted on +44 (0)7432 296 096 or by email: steve.parker@opusllp.com. Mr Harper can be contacted on +44 (0)7545 215 824 or by email: mark.harper@opusllp.com. Mr Hood can be contacted on +44 (0)7967 658 296 or by email: nick.hood@opusllp.com.

Steve Parker, Mark Harper and Nick Hood

Opus Business Advisory Group