Business recovery special: what goes up…

Business recovery special: what goes up...

The insolvency profession has seen business boom in the current climate – but can it survive better times?

While it may still be premature to talk of the appearance of economic ‘green
shoots’, it certainly seems fair to conclude that things are at least getting
less bad.

Although this is still well away from the positive territory of more normal
times, it does provide some encouragement for those accountants trying to help
steer their companies and corporate clients through the choppy financial waters.

The first, most delicate signs that economic recovery may be on the way may
not be quite so encouraging for the profession’s insolvency practitioners,
however.

Economic recovery should bring with it some respite for many businesses which
would otherwise fall into the hands of the ‘corporate recovery’ experts, but
however positive an image the profession might like to present to the wider
business world, most businessmen still consider resorting to an insolvency
practitioner’s services as the equivalent of a last desperate throw of the dice
that is to be avoided at virtually any cost.

The more desperation in the economy, the better times are for the insolvency
profession. While bubbles have long since burst in most economic sectors, those
spreading the good times among insolvency practitioners continue to inflate.
Staff who have been used to handling a small number of cases can nowadays find
themselves burdened by a case load ten times that number.

When the avalanche stops

The avalanche of new business that has roared in will clearly keep
practitioners busy for a while yet. But this will surely eventually go the way
of all the other bubbles to bring challenge, very probably exceptional
challenge, to the world of insolvency.

On the personal insolvency front there has been a 25% increase in case
numbers compared with a year ago, but the collapse in the housing market has
left most bankrupts without a high value asset to pay creditors and the
trustees.

It is more of a lottery now as to how much can be recovered, and therefore
whether the IP can break even or make a profit on a case. Some smaller
insolvency practices had already decided pre-recession that they did not want to
take traditional compliance personal appointments, working within tight margins
and having to support the growing burden of work in progress, when the initial
work pre-appointment was more lucrative.

An extreme example of this is where a firm built up networking contacts with
criminal lawyers and barristers and acted for defendants in cases of benefit
fraud, and VAT fraud, and white collar crime.

When considering the market that this world consists of it has to be said
that large insolvency units in Top 20 practices can offer service variety a
world away from the smaller IP. Large firms have the capacity to draft people in
from other practice areas for the very large cases that may be signed up.

But most insolvency firms are small with fees under £1m, the majority of them
carrying personal bankruptcy, IVA, CVA etc type work and are not equipped for,
and do not have, the resources to pull people across from other parts of the
business.

How therefore do both larger and smaller firms cope with the upturn when
there is less work around? The answer requires some real strategic thinking by
managing partners as it is unlikely that the market and what it will accept will
remain the same. Over capacity will have to be shed by a switch of resources to
other practice areas, for example if the corporate finance sector picks up.
Where else can the requisite skills be utilised?

Corporate investigations and forensic work should require fresh resources, as
the recessionary climate generates more opportunities for and cases of corporate
and personal fraud that require unravelling. Corporate and personal debt
management services should also be geared up. The former could require partial
restructuring of the client’s business to adapt to changing circumstances and
away from actual; or potential problems in the new economic climate. Personal
debt management and negotiation, for example in relation to credit card debt,
will continue to be with us. Clearly some retraining of staff will be essential.

The recessionary backdrop also provides more opportunity for forensic work
covering commercial fraud, evasion of duty, theft and confiscation orders, or
civil areas covering partnership disputes, directors pulling out, loss of
profits, warranty claims, and divorce cases, where financial strictures produce
litigious circumstances. Those with more specialist practices would be wise to
consider achieving better balance through acquisition and diversification,
perhaps by acquiring/developing practice areas that can utilise the
investigation and commercial skills of the insolvency practitioner.

There are reasons to be positive, but not to be complacent. Whether in
banking, property, house-building or other now wrecked sectors, many at the
heart of those industries were still reciting the reasons for optimism virtually
as disaster swept them away. Enjoy and be thankful for the good times, but do
not count on epic prosperity continuing indefinitely for the insolvency
profession.

Phil Shohet and Andrew Jenner are directors of Kato Consultancy

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