UK: Restructuring & Recovery Quarterly Bulletin Spring 2010, Another Busy Year?

Last Updated: 30 March 2010
Article by Anthony Spicer

Editor's comment

Steady start to 2010

Thank you to everyone who responded to our last newsletter and opted to have future editions to be sent out electronically. The vast majority of copies will be sent out electronically in future but of course we remain happy to provide printed versions if that is preferred. Should you wish to opt for an electronic copy please contact Joanna Camp,

It is generally fair to say that the restructuring & recovery industry has seen a steady volume of new cases in 2010 but perhaps not the rush that had been expected. The reasons for this are many and varied but perhaps the use of HMRC as a 'lender of last resort' has been a factor and in this issue Mark Webb and Martin Courtney give an overview on HMRC's time to pay scheme.

Also in this issue, Mark Boughey gives some guidance on acquiring failing business and Jamie Gould reminds us of the basic steps and procedures, factors and invoice discounters can take to protect against fraud. Claire Morris also discusses the increasing number of insolvent personal estates caused by fallen property prices.

Finally, if you know a business which could benefit from a review of its funding arrangements, then Smith & Williamson could help. We are offering a free funding review through our fast track funding service to businesses with more than £2m turnover, or over £500k in bank debt. Please see the back cover of this newsletter for further details.

Anthony Spicer

When buying a failing business, seeking some distressed acquisition assistance will give you the best chance of success.

While we now know that 2009 was unprecedented in terms of the banking and economic crisis, it takes a brave economist to make predictions on the prospects for 2010. Some foresee a 'V' recession, others a 'W'; certain forecasts are more optimistic than others and we are still braced for a wave of business failures. The most honest confess they are only making a qualified guess.

While we're sure that insolvency practitioners will be busy in 2010, it is unclear exactly how busy. One thing we will predict is that 2010 will also be a year of opportunity for certain groups of investors, buyers and management teams actively looking to acquire distressed businesses and assets.


By Mark Boughey

The reasons for business failure are wide and varied. Some of the businesses we have dealt with this year have failed due to lost customer orders, low consumer confidence, over-leveraged balance sheets or poor management. In many instances, however, there is a core profitable business or team of people worth rescuing.

When buying a business in distress, the potential acquirer may be in a competitive situation, will certainly need to act quickly and is likely to be dealing with an insolvency practitioner, their specialist insolvency lawyer and probably a business support bank manager. While the usual fundamentals of a 'corporate finance' type transaction will apply, the playing field and rules can be very different. Therefore, a purchaser will be most likely to succeed in winning and completing the transaction in a quick timeframe and for the right price if they have a strong team of advisers on board and sign up for some distressed acquisition assistance (AA). Here is a brief look at some of the benefits.

What's in the toolbox?

Distressed AA can be flexible and tailored to fit the specific circumstances of the deal. It is about pulling together an advisory team which builds on the strengths of the existing corporate finance advisers and the needs and experience of the buyer and transaction.

For example, distressed sales may involve the buying of a 'business and its assets' rather than shares, so an insolvency specialist can be introduced to help structure the deal and sale consideration in a way that would be expected and on terms that are most likely to be accepted by the seller.

Distressed funders and investors will also be a key part of the AA team, and the insolvency practitioner will be able to introduce these parties quickly, with an up-to-date knowledge of their capacity and appetite to deliver funding solutions in the tight time scales required.

Qualified mechanics?

The advisory team can be very broad. For example, Smith & Williamson has access to corporate financiers, insolvency specialists, tax advisers and sector experts, who will be used depending on the needs and demands of the transaction. It is also not uncommon to introduce an independent specialist to the team, such as a turnaround director, who can help identify and repair the operational or accounting problems in the business that may have caused its downfall. Organisations such as the Institute for Turnaround (IFT) offer access to a good network of accredited and experienced turnaround professionals.

Be there in an hour?

Time is of the essence in any distressed sale, so it is important to get your distressed AA adviser to the scene of the deal as soon as possible. Most insolvency specialists are used to working at short notice and to tight deadlines, so the call will be welcome and your chosen adviser responsive.

What services are provided and how much will it cost?

Assistance needn't be expensive and fees will reflect the size and complexity of the transaction. Your distressed AA team can be engaged to deal with the full transaction, or have a role tailored to specific pieces of work such as cashflow reviews or acting as a facilitator for the buyer between the incumbent insolvency practitioner, the company, the specialist lawyers and the business support manager in the bank. All these parties will take comfort in dealing with a buyer who is advised by a professional familiar with the workings and terms of the Insolvency Act and distressed sales generally.

How do I sign up?

Smith & Williamson is, of course, a good first point of contact, but the buyer's existing banker, accountant or lawyer will be able to help refer the right people to the situation at, hopefully, the right time. Even better, talking to the directors or investors in your network who may have been through this process and successfully worked with distressed AA advisers will offer a first-hand recommendation. We have a few we can introduce you to.


By Martin Courtney and Mark Webb

In 2009, HM Revenue & Customs (HMRC) introduced the 'time to pay' (TTP) initiative scheme for businesses struggling to survive the recession. It was recently reported that this has now topped £4.3bn in deferred payments. Continuation of and commitment to the scheme was announced in the December Pre-Budget Report, notwithstanding that we know HMRC is now coming down much harder on first-time applications and certainly repeat deferral applications. HMRC suggests that for deferral requests in excess of £1m it will require some form of third party comfort.

HMRC is clearly contributing to business survival – which is good news – but there will come a time when enough is enough. Businesses need to manage their tax cash flows and this is an ideal time for identifying opportunities for tax refunds and minimising tax obligations. It may also mean using the TTP arrangements for VAT, PAYE/NIC and corporation tax, and possibly even renegotiating repeat deferrals with HMRC where perhaps over-optimistic projections have not materialised and businesses struggle to meet agreed payment plans.

Businesses need a holistic approach to getting their proposals to HMRC right at the first, and certainly no later than the second attempt. This means understanding the timing of all tax cash flows. We've outlined three key steps to help you fulfill your requirements.

  1. Communicate with HMRC at the right time, to alert it to the need for payment assistance, or extension/amendment to the existing TTP arrangement. The business must be able to demonstrate a genuine need for business support, the steps taken to address the issues, and its commitment to meeting obligations.
  2. Articulate the business case for deferral, while anticipating HMRC's likely responses and concerns regarding current circumstances.
  3. Ensure sensible but achievable cashflow projections and payment plans that meet the needs of the business within HMRC's constraints.

Most of HMRC cases can be expected to be dealt with through the helpline channel as routine. However, the more complex cases with significant amounts and special features, and/or repeat deferrals, are escalated. This is typically where businesses need specialist help. Bear in mind that HMRC intuitively does not regard itself as the nation's banker, and expects all other sources of finance to have been explored.


By Jamie Gould

Fraud, whether it is pre-meditated or circumstantial, remains the biggest threat to all factors and invoice discounters. The members of the invoice finance sector (discounters) are only too aware of this, yet fraud still remains and is growing in line with the speed with which the sector expands.

None of the discounters are immune to fraud but some are better at highlighting and deterring it than others. The fraudster will always find the path of least resistance and so will prey on those most desperate to complete a deal. These are sometimes also those with the weakest controls and checks. Often a lot of time and effort is put into a new deal to find that it falls down at the 11th hour due to 'irregularities'. The time and effort is well spent if it means that a potential fraud is deterred. There are no short cuts to underwriting and due diligence has to remain thorough and tight.

In an ideal world, the hours of work put in at the front of a deal will deter a premeditated fraudster, who will opt for a less diligent discounter. Having said that, we do not live in an ideal world and almost every month we hear of pre-meditated frauds. So the fraudsters seem to be getting smarter.

We recommend that the deepest searches possible are undertaken on the individuals, and their current and previous companies where they act as director and also shareholder. Search their names in popular sector websites such as PrintWeek or TruckUK and read the blogs. Undertake a name search of newspapers in their local area as well as national newspapers. Take references from respected sources and always be guided by your gut feeling.

Circumstantial fraud is far more common but no less devastating. It can happen to anyone and often catches the discounter off guard as it is sometimes the most established and well respected client which is the perpetrator. As the economy slowly eases itself out of recession and clients start to chase turnover again, the incidence of this type of fraud will increase. Many clients will have arrears built up to HMRC and possibly rent arrears too and the temptation for some to pre-invoice the next big contract will be great. The best way to pre-empt this is to get out and see your clients more, totally understand where their business is and talk with them regularly.


By Claire Morris

One of the less obvious effects of the recession is the impact it has had on deceased estates due to the continuing fall in property prices. Also, as elderly people struggle to make ends meet and seek to cover their expenses by taking out equity release schemes or by borrowing from banks and credit cards, at the time of death many properties are no longer free of mortgages. Values of shares have also been affected and often dividends which were being used to supplement income have virtually vanished over night.

Solicitors instructed by personal representatives to deal with obtaining a grant of probate and the administration of the estate are sometimes left in a difficult position. The estate might take years to conclude and during that period the value of the assets may well have diminished to such an extent that the estate becomes insolvent. If the value of the property falls, there may be insufficient funds within the estate to meet all the liabilities. Solicitors and personal representatives need to tread carefully in determining whether a deceased's estate is insolvent.

If it is they can either seek to administer the estate in accordance with bankruptcy law or an application can be made for an Insolvency Administration Order.

If solicitors choose to administer the estate they will need to have a detailed knowledge of bankruptcy proceedings as there are many pitfalls for the unwary. As soon as it is determined that the estate is insolvent it is essential that the parties administering the estate should make no distributions to ensure that the estate is protected.

The alternative route would be to seek an Insolvency Administration Order. If made by the Court the estate will be managed initially by the official receiver, and often then by a trustee who would either be appointed by the Secretary of State or by the creditors. The trustee would seek to administer the estate, essentially as a bankruptcy, by realising the assets and making a distribution to the creditors.

The Insolvency Administration Order is often the preferred route for solicitors and personal representatives who have been left in this difficult position. Although the personal representatives or executors will be asked to complete a statement of affairs in relation to the deceased estate, they have no further involvement in administering the estate. If an Insolvency Administration Order is made, it is deemed to have been made on the date of the debtor's death and takes effect retrospectively from that date.

From a practical perspective, this means that any payments made out of the estate by the solicitors/personal representatives are likely to be void under Section 284 of the Insolvency Act 1986 unless they have been ratified by the Court. To avoid falling into this trap, seek advice immediately once it becomes apparent that the deceased estate is likely to become insolvent, even if there is an impending sale of a property.

We can only hope that the property market recovers quickly, although current predictions seem to indicate that this is unlikely to return to 2007 levels for some time (albeit various commentators are already talking about green shoots of recovery). Certainly, in ordinary bankruptcies, we are not seeing an upturn in property values and most insolvency practitioners acting as Trustees are still faced with dealing with a huge number of properties which have negative equity.

To avoid making expensive mistakes where insolvency might threaten the deceased estate being dealt with, seek expert and timely advice.

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.

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