Since our last issue, the global credit crunch has deepened with the collapse of some leading financial institutions. Economists predict that the worst is yet to come.
FOREWORD
Uncertain future for UK businesses
Over the last quarter financial headlines have again been dominated by the credit crunch. The latest developments have seen the collapse of Carlyle Capital Corporation and the distressed sale of Bear Stearns, as well as the ongoing debate concerning the consequences of the nationalisation of Northern Rock.
It is clear that banks and other lenders are becoming more risk averse when dealing with home mortgages and loans to individuals, but has there been any impact on UK corporates? Based on the evidence of what we are seeing in the restructuring and recovery sector, there is undoubtedly a growing number of companies getting into financial difficulty. But, to date, these issues have been more to do with a deteriorating economic environment rather than a direct result of the credit crunch. The situation, however, still remains highly uncertain. The Bank of England recently said: "The financial crisis has moved into a new and difficult phase. Across the world, confidence in financial markets is fragile."
In retail there have been gloomy forecasts for this year predicting falls in like-for-like sales. Several recent retail failures may be evidence of this already happening.
To broaden the scope of our services in the retail sector, I am delighted to welcome Barry Knight who joined the Restructuring & Recovery team as a director in March 2008. Barry has 18 years’ experience working on advisory and restructuring projects, ranging from the initial public offering of Selfridges, to the rescue of MyTravel and many others. There will be a full profile of Barry in our summer newsletter.
In this issue we introduce another of our new directors, James Money, who brings with him two decades of restructuring experience.
Smith & Williamson has particular experience of advising local authorities on debt recovery options and Toby Holt outlines how a new rule change on empty properties will affect both landlords and councils.
We look at bankruptcy from the point of view of a trustee and at Section 110 solvent reconstructions or ‘de-mergers’. We also comment on the use of forensic accountants in asset tracing.
DE-MERGERS
Article by Martin Courtney
For parties going through a corporate divorce where the aim is to split two or more businesses, traditional solutions – whether buyouts, buybacks or sales of part of an enterprise – often flounder on the rocks of valuation, funding issues or taxation. But the happy ending can be a Section 110 solvent reconstruction (Insolvency Act 1986), otherwise known as a de-merger.
De-mergers can be a neat way of resolving shareholder/management disputes and for separating two or more businesses, especially where operating the businesses together is not working and they will perform better under separate ownership. Therefore, commercial motivation is usually the key, but tax is also a big driver as solvent reconstructions can offer taxefficient solutions.
Without a de-merger, transferring corporate assets to individual shareholders can be expensive in tax terms. Corporate tax chargeable at 30% and personal tax rates between 18% and 40% may be costly, especially where there is no cash to pay the bill without selling the assets concerned.
A formal Section 110 reconstruction allows corporate assets, such as shares, land and buildings, goodwill and businesses to pass directly to the shareholders (either corporates or individuals) tax free. Typically, this involves inserting a Newco between the existing shareholders and the company to be de-merged, for which some preparatory internal restructuring and re-organisation of the share capital may be required. Newco then goes into solvent liquidation, and the liquidator distributes the corporate assets under a distribution agreement. Tax clearance should always be obtained from HM Revenue & Customs because the corporate and personal tax costs of getting it wrong can be substantial.
Sounds simple doesn’t it? Well, yes and no. The devil, as always, is in the detail and in practice it requires the liquidator, accountants, lawyers, tax advisers and shareholders to work in partnership to deliver the desired result. It is not a cheap solution, so the benefits need to outweigh the costs.
De-mergers are typically considered when all the relevant businesses have significant value. After all, if the departing business is of low value, why not simply sell out for a nominal sum?
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Smith & Williamson routinely assists clients by managing the separation of businesses without incurring corporate or shareholder tax costs. We have recently advised on several de-mergers, including the following.
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BANKRUPTCY - A GAME OF CAT AND MOUSE
Article by Claire Morris
People often ask why anyone in their right mind would do bankruptcy work. It’s a question I often ask myself, particularly after a bad day in court. Bankruptcy is usually invasive and personal, so the challenge while seizing someone’s assets is to remain dispassionate and professional in the face of insults, threats or just plain despair. Issuing possession proceedings against a property may mean evicting not just the bankrupt, but his or her family. Personal feelings must be put to one side as, ultimately, the trustee’s job is to realise assets for the benefit of creditors.
Concealing assets
The days of simply dealing with a single prime asset, usually the matrimonial home, are disappearing fast. We see an increasing number of cases involving complex fraud across multiple overseas jurisdictions, where the sole intention has been to hide assets from the trustee. We have dealt with cases where individuals have bought properties all over the world. As a result, we now regularly seek to trace and recover assets from overseas. Not only do we have to cope with foreign languages, but we need to understand entirely different legal systems, often resulting in more complicated and prolonged cases than in the UK.
Unfortunately, many bankrupts have become more knowledgeable and devious about concealing their assets, often moving them around in an attempt to thwart tracing and seizure. It can feel like a game of cat and mouse when we try to second guess the bankrupt and remain one step ahead to prevent concealment.
Legal powers
Trustees do have powerful weapons at their disposal under the Insolvency Act 1986, although certain provisions are surprisingly underused. Some powers, regarded by many as somewhat draconian, are frequently overlooked when they could help the trustee to recover assets and bring an errant bankrupt to heel. The Act also gives the trustee power to seek suspension of a bankrupt’s discharge for non-cooperation or failing to comply with his or her obligations.
Trustees can obtain a warrant to search and seize property in the bankrupt’s estate or to seize any books, papers or records which are in the bankrupt’s possession or under his or her control. This is a useful tool for obtaining information about assets which the bankrupt has failed to disclose and can be used in conjunction with the humble, but extremely efficient, power to redirect the post.
Warrant timing
If multiple properties are involved, it is important to try to preserve assets and information at the various locations. For this reason, we always execute all warrants at the same time to ensure the best possible outcome. This can sometimes resemble a dawn raid from The Sweeney, so it requires careful co-ordination of support staff, police and the High Court’s Tipstaff.
Remaining professional
As you might expect, the feelings and emotions of a bankrupt can run high, and the challenge for us is to remain focused on the job in hand and never give up. Perseverance and professionalism in demanding circumstances are key to success.
ASSET TRACING
Article by Graham Hain
When suspicions of fraud arise during an administration or liquidation, the number of professionals in the team can grow quickly. It is often thought that forensic accountants simply get thrown reams of bank statements and are asked to make sense of them. But in reality there are a variety of other ways for the forensic accountant to add value.
There are typically three stages at which forensic accountants can assist the asset tracing and recovery process:
- collection of information
- support of other professionals
- analysing financial data.
Collection of information
If forensic accountants are not involved in the collection process, important documents can be overlooked. For example, debtor information without the correspondence that reflects side agreements does not tell the whole story.
For example, we investigated a securities fraud case in which a US technology company altered the terms of its contracts with customers through side letters. This meant that sales were being recorded prematurely and gave a misleading impression of the company’s financial performance. The forensic mindset can usefully point to such sources of information, but this must happen before they are lost.
John Holden, head of Forensic Technology at Smith & Williamson, estimates that 70% of information never makes the transition from electronic media to paper. This makes it all the more important to capture a forensic copy (image) of the computer systems. Even if the digital information is not used straight away, it is secured for the future and may avoid the need to store large quantities of hardware.
Support of other professionals
Despite the volumes of paper and digital data stored in a business, a lot of useful information is known by staff, but never written down. Smith & Williamson’s Forensic Services team employs three former police officers with extensive interviewing experience. They are trained to elicit leads during formal interviews and informal conversations that may otherwise be missed.
Analysing financial data
One of the most useful sources of evidence can be obtained during the examination of a judgment debtor. While this process will largely be led by the legal team, solicitors have found the input of forensic work in advance of immense benefit. Forensic accountants can help minimise the scope for ‘wriggle room’ and interpret ‘jargon-loaded’ answers designed to mislead. This is particularly true when the witness is a trained accountant and can answer questions in a way that is technically correct, but which may give a misleading impression to those that are not financial experts.
Forensic accountants are regularly thrown reams of bank statements and are asked where the money went. This will often involve corroborating findings against other data sources, but this also works the other way round. By using information obtained from informal and formal interviews as well as other documentary evidence, forensic accountants can narrow down the work that needs to be done with bank statements and get on the trail of assets more quickly and cost effectively.
NEW DIRECTOR – James Money
At a time of increased market uncertainty, it is an exciting time for James to join Smith & Williamson.
James says: "The firm has a strong reputation in restructuring and recovery work and I have often seen Smith & Williamson in pitches for new opportunities. It clearly has an imaginative and innovative approach to assignments and offers a high-quality alternative to the larger firms.
"With more time now spent planning for insolvencies, the need to throw huge numbers of staff at jobs is increasingly rare. Sound industry knowledge and experience is key."
With a background in ‘Big Four’ firms, James has been at the heart of several high-profile complex and challenging insolvencies and restructurings. The Bank of Credit and Commerce International collapse case takes some beating in terms of size, while the receivership of the Cardiff-based Allied Steel and Wire highlighted the plight of members of underfunded pension schemes. Particularly memorable for James was planning to be administrator of British Energy, the nuclear generator, in case the restructuring failed.
"We had staff on standby to visit every power station and had to give strict undertakings to the Nuclear Installations Inspectorate that we wouldn’t press any buttons."
James started his restructuring career immediately after Nigel Lawson’s 1988 Budget which helped fuel the housing price bubble.
"People thought I was mad to consider a career in insolvency at such a buoyant time, but within days of starting I was working seven-day weeks. The source and shape of the current crisis in the capital markets may be different, but there is real concern that the effect on UK Plc will be similar."
The challenge is to spot particular sectors in need of support.
"In the last three or four years there has been no obvious trend in the type of appointments made and investigations undertaken by lenders. I have taken appointments over, or advised on, businesses including sandwich retailers, construction companies, racehorse trainers, transport companies, pubs and clubs. Over the last year I have been administrator of a business that supplies the majority of the UK’s spring onions and another company that provides key components to Ford and Jaguar.
"The leisure sector is clearly under pressure. Smoking bans have hit pubs and clubs hard, and young people are loading up on cheap alcohol before setting out for the evening. It is increasingly difficult for tenants to make ends meet, especially where brewers themselves are seeing reductions in margins. I have seen this at first hand as receiver of a large tenanted pub estate.
"I’m looking forward to sharing my experience with the team at Smith & Williamson. I’ve joined a hugely talented team, and with the extension of our presence into the British Virgin Islands and the Cayman Islands, and the addition of litigation funding to our portfolio of services, I believe that we will have a market-leading offering for both corporates and lenders."
LOCAL AUTHORITIES AND LANDLORDS BEWARE
Article by Toby Holt
As from 1 April 2008, most properties remaining empty for more than three months (six in the case of industrial property) will no longer receive relief from rates after that period. There are some exceptions such as charities and sports clubs but, essentially, landlords will have to start paying for their empty properties.
Most local authorities have already started identifying the owners of empty properties that will become liable for rates. Landlords, therefore, can expect bills to land on their doormats fairly soon after 1 April. It is anticipated that this will have the effect (as intended by the Government) of making more properties available at attractive rents. Any attempt to avoid paying rates by altering or damaging properties will not work because the new legislation permits the introduction of regulations to ensure that properties are valued as if still intact. A landlord could therefore be left with both a rates bill and a property that cannot be let.
It is likely that the new legislation will have a significant effect on the yields for rented industrial and commercial property as landlords endeavour to let property to avoid liability. It is also likely that local authorities will consider recovery procedures where rates remain unpaid, including winding up a corporate landlord.
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Tracing landlords Chris Bird, of specialist tracing agents Heligan Investigations Limited, warns: "Most landlords will face periods of time when their properties are empty and this will now be one of their worst nightmares. Not only does the empty property represent an under-utilised asset but now it will also be a drain on costs as the rates will need to be met. Naturally some landlords are not going to accept the new rating regime lying down and will attempt to avoid paying rates at all costs. "Some landlords may simply ignore rates demands. Ignorance is often bliss and ‘I haven’t received a letter’ or ‘I don’t know what this is for’ may become common excuses. Such responses are, however, short-term measures and may be merely a delaying tactic, often until a new tenant can be found. "But what if a landlord has property vacant on a long term basis? A common ruse for non-corporate landlords involves family members being used as shields. Returned mail and unanswered telephone messages may be used to throw local authorities off the scent. Some will even claim that the landlord is deceased, abroad, or has moved out of the area with no forwarding address. "Local authorities must not delay in tracing errant landlords because, with a small degree of forethought, they can easily vanish and become extremely difficult to find." |
ABOUT US
Smith & Williamson
We are a professional and financial services group consisting of the following.
- The eighth largest accountancy practice in the UK
- An investment house with in excess of £8bn of funds under management
- A private bank
Restructuring & Recovery
Smith & Williamson’s Restructuring & Recovery team has a market-leading reputation built upon innovation and consistently reliable performance.
The department consists of 18 directors and over 100 fee earners. The team operates from key UK locations with offices overseas. In addition, we have established offices in the British Virgin Islands and the Cayman Islands.
The size and depth of our team ensures that we are flexible enough to deal with both large and small assignments. Our clients include leading banks, UK and overseas financial institutions, corporates and individuals. The asset value of assignments ranges from £10,000 to £16bn.
Services
Our services include the following.
- Turnaround and interim management
- Refinancing and exit management
- Business restructuring
- Distressed investing
- Corporate advisory
- Insolvency – corporate and personal
- Litigation funding and support
We work with private equity, as well as private investors, to seek a solution for companies facing difficulties. Our team can advise on the most effective method of dealing with a non-performing investment through performance improvement and restructuring. In addition, we can advise on distressed investment funds and trusts using our substantial experience in investment banking and our offshore expertise.
We have representation in around 97 countries with 23,000 professional staff offering expert advice on cross-border issues.
IN-HOUSE TRAINING SEMINARS
Seminars offered
- Successful business turnaround
- Knowing when to stop trading
- Asset tracing and recovery
- Restructuring and recovery update
- Administrations
- Company Voluntary Arrangements
- Litigation funding
Bespoke
Seminars can be customised to focus on key issues surrounding restructuring and recovery, including areas of relevance to your specific business needs.
Complimentary
Each one hour presentation is free of charge and can be held at a time and location convenient to you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
