COMPANY DIRECTORS are unlikely to shed many tears at the news that business is decidedly sparse for insolvency practitioners featuring in the Accountancy Age Top 50+50. The environment for IPs is very Spartan indeed.
Corporate insolvencies for the calendar year 2013 fell 9% to 18,856 from 20,749, according to the data from the Insolvency Service. And while it is difficult to measure the health of the profession as a whole – on 32 out of the top 100 firms declared insolvency income as an individual service line – such bellwethers of the profession as Begbies Traynor have had a trying year.
Profits and revenues at Begbies Traynor, the largest business recovery specialist in the Top 50, have been hit by a drop in the number of corporate insolvencies, with fee income down 11.5% over the past year and adjusted pre-tax profit down to £5m from £6.7m.
Giles Frampton, president of insolvency trade body R3 and a partner at Richard J Smith & Co, a practice based in the South West which specialises in all types of insolvency, says the picture at Begbies reflects the “general view” of the market. “I doubt anyone is vastly different,” he says.
Zolfo Cooper, another insolvency specialist, suffered a 12.3% hit to its fee income. In June, the firm announced it has created an advisory services practice in an effort to grow its non-restructuring disciplines. According to chief executive Simon Freakley, the firm has been expanding its advisory services for some years “due to demand from clients”.
That move seems increasingly prescient in the current environment in which 15 of the 32 Top 50+50 firms to publish insolvency fees reported a decline, compared to ten in 2013. Nevertheless, there have been some notable successes for specialist recovery firms.
FRP Advisory, created following the collapse of Vantis in 2010, posted a 20.6% rise in fee income to £25.96m. The firm has been steadily expanding its business having picked up the entire Scotland RSM insolvency team in December, allowing it to open three new offices in the region.
When RSM Tenon was sold to Baker Tilly via a pre-pack administration last year the restructuring team in Scotland voted against it and broke away. FRP also bolstered its London and North England office with the appointment of four Baker Tilly partners last summer when Russell Cash , Phil Pierce and Tony Wright left the firm to join Baker Tilly’s senior insolvency partner Geoff Carton-Kelly, whose departure Accountancy Age revealed in November 2012. The departures don’t appear to have harmed Baker Tilly overly much. Following the acquisition of Tenon, the firm increased insolvency fee income by 39% to £32m.
Other notable successes include Menzies, which more than doubled its insolvency fee income to £1.72m after launching a new turnaround service in January and a new forensic accounting service last month. The firm said at the time of the launch that it established itself as a well-developed insolvency and recover practice but lacked visibility in the turnaround, interim management and restructuring fields.
So why is so little business around for practitioners? Much of the blame has been attributed to the apparent hardiness of zombie companies. Insolvency Service figures for the final three months of 2014 show company liquidations and corporate insolvency procedures declined 7.4% compared to the previous quarter- and 7.1% down on the same period in 2012.
The decline in overall corporate administrations is an indication that banks are propping up zombie companies in the hope that they can achieve a higher return through keeping the company going. However, this is, in turn, freezing liquidity for viable businesses.
This comes at a time when some in the profession had expected distressed businesses to start failing. Lee Manning, partner at Deloitte, doesn’t share the philosophy that the number of companies failing and link to uptick in economy.
“We live in different world. There has been an increase in forbearance and we have seen a decline in volumes,” he explains. Deloitte, which does includes its insolvency fees within its Top 50+50 corporate finance data, is seeing a different mix of business. The number of retail insolvencies on the market – Deloitte took on Blockbuster, HMV and Comet in 2012/13 compared to Modelzone and Paul Simon in 2013/14 – “doesn’t compare in size or scale”, although there is more work around corporate loan books.
“We are more active in dealing with institutes looking to sell off non-core loan portfolios,” Manning says, adding there is more advisory work where the IPs are “hands on in meetings giving constructive advice”.
Manning says he expects “a quiet market” and, depressingly for IPs, Frampton sees “no reason” for the volume of deals to be “vastly different” in the future. It could even get worse.
The Insolvency profession believes that government proposals to change fee structures – in corporate collapses – the government is proposing to prohibit insolvency practitioners charging their fees on a per-hour basis will lead to fewer business rescues. More than three quarters of practitioners said that enforcing the use of fixed-fees would lead to practitioners taking fewer cases, according to findings published by R3 earlier this year.
Wave of insolvencies
More positively however Moore Stephens, which reported insolvency fee income of £9.05, suggests HMRC’s proposed new powers to force businesses and individuals who have used tax avoidance schemes to pay the disputed tax upfront could trigger a wave of insolvencies.
The Treasury has estimated that 33,000 individuals and 10,000 businesses will potentially be given accelerated payment notices by HMRC. In the “very worst cases” receiving such notices could trigger bankruptcies or insolvencies David Elliott, restructuring partner at Moore Stephens, says.
“Receiving a demand to make upfront payment of tax could put some taxpayers under financial strain, and in the very worst cases, could even trigger personal bankruptcies or business insolvencies before the technical merits of the arrangement have been tested,” says Elliott.
Businesses that could be hit with an accelerated payment notice may already face a ‘contingent liability’. Any dividends that are taken out of the business by its shareholders ahead of the request for money could later be deemed illegal and therefore repayable, the firm warned.
“Directors, who are also shareholders, taking dividends from a company that has used a tax planning scheme may face claims against their own assets if the company is unable to pay an advance notice bill,” Elliott said.
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Mather boasts a quarter century of restructuring and insolvency experience gleaned across various roles at Deloitte and Begbies Traynor