Kicking off our Thought Leader section, Finance Monthly turns its attention to Richard Cacho – one of the directors of Parker Andrews who has a wealth of experience in insolvency and restructuring proceedings and offers us a rich insight into the sector in the UK.
Which sectors would you say are faced with insolvency and restructuring proceedings more than others in the UK?
It is fair to say that no industry sector is immune from insolvency and restructuring proceedings. However, certain industries are more susceptible to changes in the economic cycle and often figure more highly in insolvency statistics. From my national perspective, I see a lot of the retail sector struggling because of high levels of competition and price pressure from the high street chains. These woes are only exacerbated by the onslaught of on-line retailing as well. It is very difficult for traditional, small, bricks and mortar retailers, particularly if they don’t have an online presence and online retail strategy. The industries that traditionally figure prominently in insolvency statistics include building and construction and allied trades and services. These industries are particularly vulnerable because profit margins are slight and often the profit element is locked into retentions and provisions. Also, the collectability of the contract sum can often be the subject of disputes, arbitration and mediation. The timing of the receipt of cash inflows relative to ongoing cash outflows creates immediate liquidity problems and many business owners fall into the trap of using other people’s money to fund their, often lossmaking, business. Other industry sectors that have suffered recently include the Offshore Oil and Gas sector (as a direct result of the falling/low crude oil price) – and allied service providers; as well as the Renewable Energy sector (with particularly sellers and installers of solar energy panels that were hit particularly hard when a change of government policy significantly reduced the tariff payable to homeowners for selling electricity back into the grid, extending the estimated payback period on the investment required). The UK economy has experienced a general malaise since the financial crisis that hit the world economy in 2007/8 and throughout this period, there has been a general tightening in the market for business credit. Many businesses have experienced a “credit squeeze”, which causes a domino effect throughout the economy as businesses struggle to pay their creditors before they have collected their debtors. Accordingly, any business with a weak balance sheet before the crisis would be vulnerable to failure and encounter difficulties in raising working capital finance.
What are the most common restructuring mechanisms for distressed corporations in the UK? What are the key strategies that you employ when assisting distressed corporations with restructuring?
As an insolvency practitioner, I have the ability to assist distressed businesses informally or by using any of the formal insolvency processes at my disposal. Formal insolvency procedures include, for individuals, an Individual Voluntary Arrangement (“IVA”) and Bankruptcy; and for companies, Administration (including “Pre-packaged Administration”), Company Voluntary Arrangement (“CVA”) and Creditors Voluntary Liquidation (“CVL). My primary objective when assisting a distressed person or business is to look realistically at saving all or as much of the business as possible, and thereby, save as many jobs at possible. At the core of this objective, there must be at least some sort of viable business operation. If there is no viable business, then the only real solution would be to liquidate the business using a CVL or Bankruptcy. In some cases, where there is a viable business but the level of legacy debt carried by the business is too high to resolve within a reasonable time period, the option of phoenixing the business via a Pre-packaged Administration or from a CVL may prove to be a viable means of re-structuring the business and/or its debts. It is a difficult task to mention all possible permutations as each case is unique and requires its own bespoke solution. The above explanations are intended only to give a flavour for the types of solutions that are available.
What are currently the hottest topics being discussed in relation to insolvency and restructuring trends in the UK?
The Insolvency and Business Recovery Industry in the UK has moved towards higher levels of regulation and increasing compliance requirements in recent years. This has been the result of lobbying for increased transparency in the way Insolvency Practitioners operate and deal with the assets and funds of insolvent estates. Of particular note is the change in the procedures for approving the remuneration charged by insolvency practitioners by requiring more detailed explanations and providing a cap on the limit of fees that can be drawn. In the past, there has been a general perception that insolvency practitioners would seek approval of their remuneration on a time cost basis and that this had the effect of providing, effectively, a blank cheque. In the interests of increased accountability and transparency, not only are practitioners required to cap their remuneration, but also to provide detailed explanations and to demonstrate some sort of cost benefit to creditors of the insolvent estate. This is a very controversial topic at present and the new requirements are still relatively new, and some insolvency practitioners are encountering difficulties in balancing their statutory obligations and remaining compliant against the commercial aspects of running their practice (which is a business after all) while remaining competitive with their fees in an overcrowded insolvency market.
In your opinion, how is Brexit going to affect UK businesses and the insolvency activity in the country?
This is a very difficult question for me to answer as there are too many unknown factors to consider, such as will it be a soft or hard Brexit, or will it be some sort of compromise or hybrid solution? Also, when will Article 50 be triggered and will there be some sort of overriding political interference or delays? The only certainty I can see is that continued uncertainty will affect business confidence and that this will surely lead to delays in business spending and investment decisions. The other major unknown factor is whether the UK will continue to trade with the other EU member states on similar terms to the present arrangements, and/or, set up new trading relationships with the rest of the world.
The uncertainty surrounding how life will look like post-Brexit is not helping any business that is currently struggling and vulnerable to small changes in the economy, its external customers or its access to liquidity and capital markets.
What has been your flagship piece of work in recent years and how did you apply particular thought leadership to this scenario?
I am not able to provide details of any one specific case or scenario. I treat all of the cases I have worked on over the past few years with the same approach, whether it be a small “mum and dad” company or a much larger concern. I am skilled at identifying problems and then solving these by applying my knowledge, experience and the formal processes available to me which can be applied, with force of law, to achieve a particular objective. People place all of their trust in my ability to get the job done and I therefore show leadership in every client matter I work on. The major challenge I face on all of my statutory appointments is to remain balanced and independent in seeking to achieve workable solutions that achieve a positive result for all stakeholders. The key problem arises when, for example, I start advising the director of a company and the recommended course of action is to place the company into CVL. Once appointed as liquidator, I am required to work in the interests of the company’s creditors which is often at odds with the interests of the director/shareholders who initially approached me for advice.
Do you have a mantra or motto you live by when it comes to helping your clients with insolvency and restructuring procedures?
“I create order from chaos” People often come to me in a horrible mess and they can’t see the wood for the trees. My role is in part accountant, part lawyer and part psychologist. I need to use my skills and experience to analyse a client’s situation from an accounting and recommend appropriate solutions. Dealing with emotional and ego issues, particularly at the initial stages of any engagement, is a big part of my role in restructuring a business. It’s only human nature to avoid insolvency related issues and many people feel very embarrassed and uncomfortable about coming to see me. Often they come to me “kicking and screaming”, usually prompted by a trusted professional adviser because of having received a nasty letter or legal proceeding. I am not judgemental and I treat people with empathy and respect. I would never claim that going through a formal insolvency process is pleasant but it is not the end of the world and brings issues to a head, to the point where they are dealt with and resolved. I can truthfully say that confronting these types of issues and resolving them relieves a lot of stress and in many cases I’ve seen directors a couple of months later that look ten years younger. I swear this is true!