NO MORE TALK of corporate ‘bloodbaths', ‘massacres' or ‘collapses'. The insolvency hearse has remained parked as a predicted surge of collapsing businesses never materialised. Many doubt now that it ever will, although some banks are planning for more business failures in the longer term. But what has capped corporate insolvencies so far? There were nearly 8,000 fewer corporate insolvencies in 2009 compared to 1992, yet personal insolvency has seen far bigger increases.
Instead we are given to believe that an army of the undead, ‘zombie businesses' are lurking in the shadows, undetected by official corporate insolvency figures. Some credence to the zombie theory comes from a poll by insolvency trade body R3, revealing that 8% of businesses are only managing to pay interest but not reduce their debt, which would equate to some 140,000 zombie businesses stalking the UK.
In the past we saw an ‘insolvency lag' , with liquidations rising three years after the end of the 80s recession, and two years after the 90s recession, as creditors felt able to improve on their returns. That hasn't happened this time, with the liquidation rate currently at 0.7%, against a peak of 2.6% in 1993.
Rather than harp on about a low interest rate environment, HMRC's tax deferral ‘Time to Pay' scheme or a general reluctance to pull the plug by the banks, I would point to the now overlooked Enterprise Act, introduced ten years ago.
When I was fighting to save Oddbins, we started with a loss-making company with more than £20m worth of debt and a substantial unprofitable store portfolio, which a rescue deal known as a Company Voluntary Arrangement (CVA) proposal was created to address.
The Act allowed an administration contingency plan to be developed that could be implemented quickly and without substantial operational cost, should the CVA fail to be approved by creditors. CVAs need 75% or more of creditors, by value of debt, to vote in its favour for it to be implemented.
Since the advent of the Enterprise Act, we didn't have to prepare an additional and expensive pre-administration report for the Companies Court to place the company in administration after the deal was rejected.
In the end, HMRC – owed more than 30% of the debt – voted down the CVA, but we had a viable second option. Despite the failure of the proposal and the consequent administration, we were able to save 43 stores, of which 35 still trade under the Oddbins name.
The origins of the Enterprise Act came from Peter Mandelson's visit to Silicon Valley in 1998 to import the American ‘entrepreneurial' spirit to our business culture, while reducing the stigma of failure entrenched in UK business. In 2002, the Enterprise Act fundamentally altered our insolvency regime, reducing bankruptcy from three years to one, while favouring ‘business rescue' over liquidation.
From my perspective, the Act introduced a streamlined administration procedure, with the principal aim to rescue the company rather than subjecting it to a break-up or liquidation process, thereby preserving jobs. The Act reduced procedural costs by removing the requirement for a detailed report to be presented at court to have an administrator appointed.
Acting in the best interests of all creditors overtook those of just the secured creditor (such as lenders) as the duties of care for the appointment taker evolved. The new regime promoted the rapid rescue of ailing businesses or even the restoration of the company itself through a CVA, which is being used more this year.
Businesses in the retail sector since the start of 2011 have emerged from administration with more than half the jobs and stores intact on average. Corporate insolvencies have not spiked, which is good for employment, even if some now argue that zombie firms are tying up useful employees and assets that could be better recycled elsewhere.
With more than 25 years' experience in retail insolvency, I believe the Enterprise Act formed the landscape of a rescue culture in which this recession occurred. We may not have entirely adopted the American laid-back attitude towards corporate failure, but the fact there was no insolvency boom this time around shows the Enterprise Act did its job.
Lee Manning is president of insolvency trade body R3 and partner at Big Four firm Deloitte
Lee, This is a very good summary of the benefits of the EA 2002 but do you not think that the formalisation of IP qualifications and authorisations helped to reduce the asset strippers and excessive fees for the benefit of the creditors?
Posted by: Jon Golding, 11 Nov 2012 | 20:53
Good addition to the debate. I think the effects of the EA02 have been underestimated.
If the argument is correct about its contribution to the relatively soft landing that companies have suffered, does this undermine the argument for more liberalisation? The argument is being put that the success of our rescue culture is to create zombies that inhibit recovery. Should we be tweaking the procedures gently back from the carrot to the stick to find what regime would best suit our economy?
I think that one success of the EA02 has been to demonstrate the ability of the UK Licensed IP to control a complex procedure where other court-driven jurisdictions might have struggled.
Posted by: Stephen Hunt, 20 Nov 2012 | 12:43
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