An Interview with Garry Lock from Quantuma
To find out more about insolvency and restructuring proceedings in the UK, Finance Monthly reached out to one more professional operating within the sector. Garry Lock is a partner with Quantuma – a leading restructuring and insolvency practice, delivering partner-led solutions to businesses and individuals facing financial distress, with offices in London, Southampton, Marlow, Watford, Brighton and Bristol.
As a professional whose practice spans sectors from retail to recruitment, what are the sectors that experience insolvency and restructuring proceedings more than others in the UK?
Those sectors that would experience the highest number of failures would be those with low barriers to entry and low, or no regulation. Businesses which have a high-fixed cost base and rely upon high-volume and low-margin sales also struggle when the economy is unstable. An example would be a retail chain of shops or restaurants.
Construction always has a moderate level of failure because contractors often have to fund projects for considerable periods of times, whereby the profit element is typically not earned until the project is completed. Project holdups, not always the fault of the contractor, can create a cash flow crisis or, in a worst case scenario, the failure of a company.
An understanding and appreciation of the working capital cycle for a business, as well as having a sufficient working capital base to support the turnover, is key. The significance of understanding margins, costings and break-even are often overlooked.
Sectors that also experience high-failure rates often struggle with an overview of the company finances to the point where decisions are made, which decisions tend to be more reactive than proactive. Smaller business in particular often don’t survive a bad trading year.
The continuing recovery in the UK economy has resulted in corporate insolvency falling down steadily in 2015– how have these trends impacted your practice over the past twelve months?
Quantuma was set up in early 2013 by industry veteran Carl Jackson. In the last 4 years the firm has grown to a 12-partner firm, employing over 100 staff in 6 offices. Our firm has grown when other firms have cut their restructuring teams. Quantuma was ranked in the national top 10, for number of formal appointments during the calendar year 2016. The firm has managed to grow market share in a declining market through its good connections and the hard work of the partners and staff.
Market conditions are very challenging, so with declining numbers of formal appointments you have to adapt your approach and also deliver an excellent service when the opportunity arises. Reputation is very important.
The partners in the firm have a good referrer base, which means that we engage with a wide range of stakeholders and retain a high level of input into the work that is carried out.
The firm has a strong management structure which enables flexibility to make decision and to act quickly when opportunities arise. Maintaining regular contact and an open dialogue with those who refer work to you is vital.
What are the typical issues that you face when conducting investigations on corporate and personal insolvencies?
Investigations in insolvency proceedings are carried out for a number of reasons. Primarily, the purposes in both corporate and personal insolvencies is to identify and recover assets for the benefit of creditors. In addition, there are instances where insolvencies give rise to claims that can be pursued by insolvency practitioners where there has been wrongdoing. These claims are covered by both the Insolvency Act 1986 and the Companies Act 2006.
For corporate insolvencies, the actions of the directors in the period after the company became insolvent will also come under close scrutiny to establish whether they have acted in a way that has either enriched themselves or prejudiced the interests of creditors individually or collectively.
Investigating personal insolvencies is generally more challenging than for corporates. This is largely due to the lack of an audit trail for the affairs of an individual, which is often present, in one form or another, for a corporate.
Albeit it is a criminal offence if an individual fails to deliver up a full account of their affairs to the Official Receiver at the outset of a bankruptcy, there are often occasions where full disclosure has not been made. The insolvency practitioner will need to build up a picture of the person’s affairs either with, or sometimes without, the cooperation of the individual.
Not all individuals are fully cooperative with the proceedings, particularly if you are contemplating bringing proceedings for the recovery of assets they might have transferred to third parties before they were made bankrupt. There are sanctions available to deal with instances of a lack of cooperation with the use of court proceedings for interviews and the option to suspend the individual’s automatic discharge from bankruptcy proceedings being available. This does not however always achieve the desired outcome and some individuals can remain bankrupt for many years until they decide to cooperate.
The extent of any investigation will largely be determined by the level of the insolvency, the type of claims against the individual and also representations made by those creditors. If the information and representations provided by the directors or individual are considered reasonable, then investigations may be little more than routine searches. Conversely, if it is clear that the position as a whole just doesn’t stack up then it may lead to follow up detailed investigations which may include reconstructing accounts from incomplete company records, applications to court to deliver up information or even oral examinations.
Corporate investigations tend to have trail to follow and the starting point is a review of the statement of affairs of the company provided by the directors, and then comparing it to the last filed statutory accounts. This helps to assess what happened in the final period of trading and whether it supports the directors’ version of events.
Further review of the company’s books and records, back-ups of electronic data, information obtained from professional advisors and also representations made by the company’s management and its creditors should provide most of the answers. It is rarely the case that the company’s records are up-to-date and complete at the point of insolvency. We also consider whether management have any other entities trading that might suggest the company’s assets, both tangible and intangible, have been transferred.
With all corporate insolvencies, the key aspect is to establish when the company became insolvent and what happened in the period from that point through to the company entering an insolvency process. There are two tests to establishing insolvency. The first is the cash flow test, which is the point at which the company could not pay its debts as and when they fall due. The second test is the balance sheet test. The point at which the company’s liabilities exceeded the value of its assets. Proving insolvency can sometimes be problematic but there will often be information available to be able to pin point an approximate date.
The next stage is determining what happened from that date through to the date of the insolvency. In essence, did management recognise that the company was insolvent and can we establish what steps were taken by management to address the decline. If no proactive steps were taken, the directors may well be liable but in all instances the evidence has to be clear and presented in a format that can be put before a court if an agreement cannot be reached on settlement.
Creditors’ expectations can be unrealistic and have a tendency to focus on self-interest. Managing those expectations at the outset can also influence the level of investigation work carried out. For larger assignments the formation of a creditors committee can be useful for the purposes of assisting with the understanding of the affairs of corporates.
With any investigation there has to be an element of proportionality and so a cost benefit analysis is always required. The insolvency practitioner has to consider whether detailed work will ultimately lead to a recovery for the benefit of the company’s creditors taking into consideration the costs that may arise from a recovery action by legal process which is always costly and risky. Furthermore by the very nature of the matter there may not be funds available initially to cover detailed investigation work so the insolvency practitioner needs to weigh up the risk of not being paid.
What are the most common tactics that you implement when assisting distressed corporations with restructuring?
Firstly you need to understand how much time you have to implement changes. Where time is short and directors have left it too long, to the point that creditors are threatening winding up, then an insolvency process may be necessary whereby the process is a precursor to restructuring the business operations.
Where circumstances are not quite so critical and you have more time, you need to assess how restructuring will be most effective and so a business review of current operations should be carried out. The level of detail of the review will depend upon the size and complexity of the company’s operations as well as the extent of the company’s current losses. The business review will cover an assessment of the past and current financial performance as well as an overview of the operational aspects of the business. It may also cover the strengths and weaknesses of existing management. The review will highlight the aspects of the business that are both good and bad, and will aid the formation of a number of strategies that should assist turnaround.
Typically the initial focus will be trying to return the company to profitability in the shortest possible time frame.
An assessment of how that will be achieved will be quantified in the business review following which a cost reduction programme and efficiency drive will be implemented. This is likely to include rationalisation of the workforce, as well as a review of the remuneration policy for management which may not be in keeping with financial performance. Those assets that, after review, are considered to be non-performing will be sold.
Sometimes less means more. Often management become obsessed with ever increasing turnover at the expense of profitability and so cutting high volume, low margin products can result in considerable cost savings and increased profitability. Pricing will also need to be assessed.
Over time management can lose focus. Furthermore, corporate governance is often lacking with distressed companies. A refocus of corporate strategy, financial budgets, cash flow projections and key performance indicators will be necessary to understand what is realistic in the short and medium term.
What is the likelihood of insolvency and restructuring processes that cannot save a company and what are the circumstances that typically lead to liquidation? How common are Company Voluntary Arrangements, Creditors Voluntary Liquidations and Members Voluntary Liquidations and how do you assist with them?
For any restructuring process you need the support of the stakeholders of the business, whether that be management, employees, banks, funders, customers and suppliers to effect change. Sometime despite best efforts of management and their advisors, external factors can undermine the restructuring process. An example of this would be the loss of a major contract or key members of staff, high exit costs of an unprofitable contract. These situations can make the company’s operations not financially viable whereby the only option will be to liquidate the company.
Company voluntary arrangements are a useful process where a company may have experienced a one off event such as a significant loss on a contract or a bad debt. Again viability is key to whether it is the correct procedure and also whether there is sufficient working capital to keep trading. There are also other factors to consider because a CVA can last up to 5 years. During that time the company’s credit rating will be recorded as poor meaning that it will have a knock on effect to securing new contracts.
Creditors Voluntary Liquidations form the majority of work for insolvency firms. The process appropriate for directors to wind up failing companies before it reaches a stage of creditors taking their own enforcement action with winding up petitions.
Members voluntary liquidations (MVL’s) apply to solvent companies and are a tax efficient way of winding up a company that has reached the end of its useful life and has surplus capital to return to shareholders. Where the company is not part of a group, by using this process, it gives rise to lower tax for the shareholders and also the option, should the criteria be met, to claim Entrepreneur’s Relief. For group companies the MVL process can end unnecessary administration of maintaining compliance.
The MVL process is very common. With most instructions of this nature timing is very important, particularly with owner managed businesses.
For more information, please go to: http://www.quantuma.com/