Can they save you?
Administrations were heralded as the great break through in creating a corporate rescue culture - yet statistics indicate they are no better in saving businesses than old fashioned receiverships. Kurt Jacobs finds out why
Suggest that administration has ushered in a bright new culture of business rescue and you'll invite a snort of derision from those who do it as a day job.
Kim Rayment, administrator at BDO Stoy Hayward says: "Administration is receivership by another name.
There's no big difference. Most companies still have secured lending, so the bank is a significant stakeholder. And when the directors call an insolvency practitioners (IP) in it's still because bank's demand it."
Paul Mayer says: "Administrations are receiverships under another name and should be saved for that purpose." And Dominic Christie-Brown, of Robson Rhodes, concludes: "In practical terms administration is the same as a receivership.
We're no longer skewed to secure the bank's stake, but in practical things we are trying to do the best thing for the company."
So, hardly ringing endorsements for the provisions of the Enterprise Act 2002, then.
Under the previous regime of receiverships the banks, seeing a company was on its last legs, could barge to the front of the queue of creditors by calling in the receivers. Unsecured creditors could only hope that something might be left in the corporate ashes for them to salvage.
All that was supposed to have changed under the Enterprise Act, which came about as the government decided it was preferable for businesses to be saved rather than shut down.
As a result receiverships, which usually signalled the death of a business, were gradually replaced with the gentler administrations, where the emphasis was on saving the business and maybe even the company as a going concern.
But according to most IPs, it simply hasn't happened that way.
This is more than just professional cynicism. Dr Sandra Frisby, of the University of Nottingham, has been looking at thousands of business failures, both before and after the Enterprise Act, as a part of a major research project.
Although the research is still underway, she says it is clear the move to administration has had no effect of the chances of a floundering businesses being rescued.
She adds: "We looked at 2,063 cases, and the chances of a business being sold as a going concern has remained virtually unchanged at 40 per cent. We found just one business where the company had been saved in its existing form through administration."
Nor has the change in approach stopped the rate of business failures. According to the Department of Trade & Industry, the natural attrition rate of business - those going into voluntary or compulsory liquidation - has remained stubbornly unchanged at 0.7 per cent for the past three years.
However, it would be wrong to assume that nothing has changed.
Under the Enterprise Act administrators have been given a far clearer list of priorities. Top is to save the company, although, as Dr Frisby has discovered, this an almost unattainable goal.
Next is to get the best for creditors other than putting the business in liquidation - that is sell all or part of it as a going concern. Only if that proves impossible can IPs sell the assets.
And, thanks to the Enterprise Act although it is still the banks who determine whether an administrator is called in, they now stand alongside rather than ahead of the other creditors in waiting for whatever share of their money is salvaged from the wreckage of a business.
But more important than the Act has been a shift in business culture and thinking: corporate conservation is now seen as the politically correct stance. Accountancy firms no longer have insolvency practices, instead they have corporate recovery experts: it's a culture change best typified by the industry's main body, which had rebranded itself from the Society for Practitioners of Insolvency to become R3, the Association of Business Recovery Professionals. The R3 bit stands, optimistically, for Rescue, Recovery and Renewal.
And it's the banks, normally seen as the bad guys in the insolvency process, whom pundits say are really behind the move towards creating a corporate recovery culture in Britain.
They claim that, in a moment of enlightened benevolence, the banks voluntarily gave up their rights to be first in the queue, seeing that it was in their interests that troubled businesses continued.
Tony Supperstone, the Birmingham-based president of R3, says: "The banks realised they needed continuing customers. They were losing them at an alarming rate and not getting new ones to replace them, so they got behind the idea of rescue.
"There is a little more understanding and a little more mercy among the banks now, which have their own business support teams to help troubled companies."
Rayment adds: "It's been a shift in emphasis rather that a revolution. If you go back to 2003, the banks were criticised heavily for storming in, getting their money and damn everyone else. Banks tended to call in the receiver if there was a sniff of a problem.
"But as we moved from recession to good times, we have a more stable culture.
The banks were looking for saved rather than bust customers, so the emphasis went from liquidation to recovery, but it was a move driven by their sales guys. "The banks gave up their strong power to appoint a receiver at a drop of a hat out of self interest. If we had not been coming out of a recession they'd never have given up that power, they'd have been crazy to do so."
There is evidence that this rescue culture is filtering down to businesses generally. The DTI's insolvency statistics for the last quarter of 2006, published in February, showed a 119 per cent year on year increase to 1,479. This raised the total for the whole of 2007 by 57 per cent.
It would, typically, be IPs who find the idea of the number of troubled companies rising cheering. Yet many pundits believe that it shows businesses are becoming savvier to the idea of corporate rescue and see less stigma attached to calling in an IP.
Devinder Singh, restructuring and insolvency specialist at Hammonds in Birmingham, says: "The sheer scale of the increase in administrations took us by surprise.
"But a significant proportion has resulted in the rescue of businesses, rather than their demise. Financiers and restructuring specialists are not only more willing to address solvency problems at an earlier stage, but address them in realistic and innovative ways.
"This trend is positive - we're being consulted earlier to restructure and refinance businesses. There's a real appetite to save ailing businesses."
Singh touches upon a point made by many practioners: the culture shift under administration has led to IPs being called in at an earlier stage, rather than waiting for the Friday afternoon call.
Many experts say the greatest problem they face is not lack of money or goodwill, but time.
Give a good IP a month and he will probably save a good business.
Give him a weekend, and, wellx85
Supperstone says: "Get the call on a Friday and it's probably too late to do much because you're options become very limited. Hopefully, if I'm called in early enough, I have time to see what can be restructured and saved."
Rayment adds: "In administration you can get in early and possibly save the business in a way you can't with receivership. If there is a risk from creditors closing you down you get a court order that is like a short version of the American's Chapter 11, which stops bailiffs for ten days. With this moratorium you can look at ongoing contracts and see the best way for the business to be salvaged. There's thinking time, which enormously increases opportunities, maybe changing management, maybe a sale."
But before we all get a cosy feeling about the career-saving opportunities that administration and this business-friendly culture engender, it is important to remember that this warm glow is not shared by all - particularly the creditors.
It is a truth universally acknowledged that creditors will naturally be unhappy about any business failure which sees them left out of pocket.
However, their ire has been stoked, particularly by the growth of the two Ps - prepacks and phoenix sales.
A prepack is a deal to sell the business to a willing buyer being agreed before the company is put into administration - a prepackaged deal. It means the business is administration for a matter of minutes - Birmingham vanmaker LDV was famously in limbo for ten minutes before being sold to new owners in late 2005 - and emerges free of liabilities. The first most creditors know of the negotiations is when the announcement is made and their former trading partner is being wound up.
A phoenix is when the business is sold back to the former owners, often through a prepack, to carry on trading much as before, without the irritation of crippling debts.
The case for prepacks is that they avoid the worst effect of an administration - loss of confidence among suppliers, customers and staff.
Word of a business in distress travels quickly and whole lengths of a supply chain start to unravel.
The theory is that short, sharp surgery leads to the least pain and, despite the grumblings of creditors, they still have a partner they can trade with and some employees still have a job.
Both deals provoke a great deal of cynicism among creditors, who are presented with a fait accompli.
But there is also a growing feeling of unease among parts of the IP community as well.
Tyrone Courtman, of Cooper Parry, says: "Those involved in recovery predicted an increasing use of the pre-pack. However, the speed at which it has become the tool of choice for a growing number of IPs has caught many by surprise and has fuelled controversy.
"Some argue the label prepack is an unfortunate one, creating negative connotations in the mind of creditors, yet it does what it says on the tin. Simple, bring on the next case, but where's the mention of the creditors in this process?
"There is a strong feeling that the unscrupulous practitioners are abusing the system and should be reprimanded for their behaviour."
Steve Wood, IP at Mazars, adds: "Although it may be non-PC to say so, the banks did act as an informal regulator of IPs under receivership, keeping quality up and some of the cowboys out.
"It concerns me that the regulatory job isn't being done properly under administration, and that deals like prepacks and phoenixes are becoming the default positions of more unscrupulous IPs."
The other major concern is that prepacks often fail to get the true value of a business.
Many IPs believe that, ideally, a firm in administration should be put on the market to discover what it is really worth. If the former owners come up with the best bid, then so much the better.
However, Andrew Vaughan, of valuer Edward Symmons, believes it is possible to assess the value of business, even in the rushed conditions of a prepack.
He adds: "Our role is often overlooked, but it's essential to establishing the value of the assets - property, plant and machinery, office equipment, vehicles, stock and intellectual property. We'll consider comparable evidence combined with market intelligence and information obtained from directors and other employees.
"In many administrations, valuations are carried out within a restricted time and valuers have to rely on information from directors. It's essential we correctly interpret this, as directors may have a vested interest, especially if they're part of the new purchasing vehicle.
"Creditors are likely to closely examine values achieved for a business and its assets, especially in prepacks. Agents as well as insolvency practitioners must be expected to answer any questions or criticisms following a sale."
And just as we should not get too cosy about administration, perhaps we should not get too cynical about it either. To misquote Gordon Gecko: "If greed is good, failure is fine."
"Again, it's not very PC to say so, but there's nothing wrong with failure in the round - it's proof of a dynamic risk taking economy," says Wood.
"Sure, it's a disaster for those concerned, but as long as the numbers being created exceed the failure rate we shouldn't be unduly concerned about businesses going bust."
