Interview: R3 president Phillip Sykes

PHILIP SYKES clearly likes to keep busy. For a man who has just taken on a new job as head of Baker Tilly’s London restructuring practice, his latest role as president of R3 will give Sykes little time to pause for thought as the insolvency profession gets to grips with a raft of legislative change over the next 12 months.

The list is extensive. The new pre-pack pool is being set up; a new mechanism for setting fees needs to bed in, while many of the insolvency-related clauses from the Small Business Bill come into effect from October at the same time as new rules on bankruptcy and Debt Relief Orders (DRO).

On top of all that, there is the long-running battle with government insolvency’s exemption from no-win-no-fee legal reforms and a government consultation on how to address the inherent conflicts that exist within employment legislation and insolvency law to be dealt with.

Having previously served as vice-chairman of the ICAEW’s investigation committee and insolvency licensing committee, sat on the institute’s professional standards board and as its representative on the joint insolvency committee, Sykes could be forgiven for believing he had paid his dues to the profession.

“I had rather thought I had paid my debt to society,” Sykes says somewhat dryly when Accountancy Age caught up with him earlier this month. “Giles Frampton [R3’s outgoing president] said ‘have you ever thought about putting your name forward?’ to which I firmly said no, and he firmly said ‘think again'”.

Think again Sykes did. “R3 does an incredibly important job for the profession in terms of pulling together all the various strands of the insolvency profession, ranging from the very small firm up to the Big Four,” he explains.

The role must be important, given he only recently left Moore Stephens where he had served for 14 years as head of corporate advisory services, to join Baker Tilly. It could be argued that Sykes will have his hands full stabilising the firm’s practice after it lost a clutch of insolvency practitioners since its merger with RSM Tenon.

His appointment ended a run of departures from the mid-tier firm’s restructuring division. which has lost in excess of 40 people to Quantuma, the insolvency practice launched in January 2013 by former RSM Tenon head of restructuring Carl Jackson.

The reason Sykes moved to Baker Tilly was that “fundamentally, they asked me to”.

“Baker Tilly is a bigger but a challenging role. It’s good to be part of a firm expanding,” he says.

Digesting law conflicts

That is quite a handful in anyone’s book, but Sykes has a depth of experience to fall back on.

He has specialised in corporate restructuring since 1980 with experience across multiple sectors, including retail, property and construction, financial services, insurance, manufacturing, commodities and international trade, engineering and agriculture. He has an extensive caseload in Britain and Northern Ireland, and has also worked on international projects in the US, Bermuda, British Virgin Islands, Cayman Islands, Romania, Latvia, France, Germany, Austria, Spain, Thailand and Indonesia.

Some of his more memorable cases include working with the Indonesian Bank Restructuring Agency, acting as the trustee in bankruptcy for Kevin Maxwell – then the biggest personal bankruptcy in UK history with debts of £406.5m in 1992, the administrator of Reader’s Digest UK and liquidator for the members’ voluntary (solvent) liquidation of LOCOG (the London Organising Committee of the Olympic Games and the Paralympic Games).

And it is his experience at Readers Digest, which collapsed into administration in 2010 after plans to deal with its pensions liability fell through, which will inform the profession’s latest battle with government over how best to address the dichotomy of insolvency and employment law.

In March, the Insolvency Service launched a call for evidence on the issue, after two influential groups of MPs demanded a change to the law. In a damning report into the collapse of delivery firm City Link and the actions of private equity owners Better Capital, MPs from two select committees said the rules governing insolvencies are too heavily skewed in favour of directors and investors.

As a result of the recommendations, Business Minister Jo Swinson launched a consultation on how to improve the consultation and information sharing process between employers and employees when a company is faced with insolvency and how to make it more effective.

The nub of the problem is that current legislation on collective redundancies – where an employer proposes to make 20 or more employees redundant – is clear but often difficult, if not impossible, to implement in some insolvencies.

Under the Trade Union and Labour Relations (Consolidation) Act 1992, consultation must start as soon as there is a ‘clear intention’ to make redundancies and begin at least 30 days before the first dismissal takes effect. This is an almost impossible task in many administrations when the business is “shot to pieces” and there is little, if any, money left to pay employees while a full consultation is carried out.

As administrator of Readers Digest, which was bought by Better Capital – a private equity vehicle owned by Jon Moulton – the first thing Sykes did on day one was summon all the employees to a meeting. “I said ‘look guys here we are…I don’t know any better than you do if we are going to get a going concern sale away, that’s what we are aiming for, we have got the funding to keep trading, we are going to sit down and make sure where we can keep trading but it is only fair to tell you it may be that we reach a decision in one week, four weeks or eight weeks’ time that there is no prospect of sale, but I cannot give you formal notice now because as I stand here today don’t know’,” he recollects.

“That’s the dilemma within the legislative structure but there is clearly an understanding within government that it needs to be resolved,” Sykes adds.

Lobbyist

But how does he see his broader role at R3? Lobbying is a key plank of R3’s past victories and future successes. In the case of the redundancy consultation, Sykes says R3 will engage closely with employment tribunals and trade unions to “get a real understanding of their perspective”.

According to Sykes, trying to legislate in this area is very difficult, long-winded and would not necessarily achieve the right result. Agreeing some protocol with the employment tribunals and unions “is probably the way forward”.

The key – and the same applies to attempts to retain insolvency’s exemption from no-win no-fee litigation under the Jackson reforms – is the art of negotiation. Lobbying is “not a terribly difficult profession” but it requires two things, Sykes explains.

“You have got to have a reasonable cause and you have got to be very persistent because, particularly in the Jackson matter, we were being told all along by parliamentarians and civil servants, ‘look you’re beating your head against a brick wall’.

“So we went on beating our heads against a brick wall because we were absolutely convinced what we were doing was the right thing. We were prepared to go down with the ship,” he says.

For now the ship remains afloat, but pessimists could argue it is still listing. In February, the government backed down over controversial plans to scrap an exemption for insolvency litigation from a 2012 crackdown on the way no-win-no-fee legal cases are funded, after coming under pressure from practitioners and MPs to retain the exemption.

Insolvency professionals had been on a collision course with the government over its decision to end practitioners’ temporary exemption from the Legal Aid, Sentencing and Punishment of Offenders Act (LAPSO) when it was due to expire in April. The two-year exemption was granted to the profession following a far-reaching report by Lord Jackson into civil litigation and costs, which resulted in conditional fee arrangements (CFAs) and after-the-event insurance premiums being paid out of any damages awarded, thereby reducing the amount returned to creditors.

In a dramatic U-turn from the government’s original position, Justice Minister Lord Faulks said in a written statement that although the exemption was granted to give IPs time to “prepare for and adapt to the changes” the Ministry of Justice “now agrees that more time is needed” before the legal aid reforms apply to IPs.

“They could easily revert and say ‘we have thought about it and we were right in the first instance’. What the profession needs to do is very simple. We have got to make the case and the way we make the case is by providing concrete examples whereby we have used CFAs to extract money from people who shouldn’t have had it out of estates where we have been appointed and been able to return those funds to creditors.

“From the government’s perspective it is particularly important that the creditor in question is HMRC. So that gives you two really solid arguments.”

Bedding down

Lobbying for reform aside, Sykes says his main priority is to “bed down” changes already, or set to, come into force – such as new rules on DROs bankruptcy and the introduction of upfront estimated insolvency costs.

The new rules, announced by business minister Jo Swinson earlier this year, will require a summary of estimated costs, the work to be undertaken and an estimate of the expected time to work on a case where an hourly rate is proposed. The estimate will create a ‘cap’ on costs that can only be increased with agreement between the IPs and those owed money.

“The effect we hope is that it could lead to better creditor engagement,” Sykes says. “I want to make sure all those things bed down, work as we would like them to, and improve creditor engagement and stakeholder satisfaction.

“If you want to draw a parallel, the last thing anybody wants to do is go into hospital, but if you do, you want to come back out again in some form or another. In order to do so you need the best possible surgeon and the surgeon needs to be regulated. I hope the things coming down road will aid that.

“The focus for me is to make sure those things work properly, people engage with them and treat them in right spirit as well as letter of law.”