Transparency welcome but route for rescue should not be hindered

Ann Condick, Director of Insolvency at ICAS, said: “Measures that help provide greater confidence and transparency into the pre-pack process are welcome. In our experience, insolvency practitioners already liaise with key creditors before a pre-pack sale is concluded and are in favour of open, two-way communication with all creditors. The Government’s announcement will enhance the current process. However, what must be ensured is that the flexibility and speedy route for rescue that a pre-pack currently offers is not lost through the Government’s proposal to introduce a three day notice period for pre-pack sales to connected parties.

“The primary reason that a pre-pack is used in many cases is that the business is likely to quickly decrease in value post-appointment, with little or no funds to trade or market the business for sale. Three days is a long time in business, and a company could risk losing the sale or key staff and customers.

“Businesses are operating in an economic environment where it is harder to access finance. Viable businesses that may not have run into problems before are now experiencing difficulties. In this environment, a pre-pack is sometimes the only way in which a business and jobs can be saved, particularly in a company where employees are the key asset.”

The results of an ICAS survey, of 14 leading insolvency practitioner member firms which handle administration appointments, show that for the period 2007 to 2010, these firms had handled 728 administration appointments. Of this number, 43 were cases in which the businesses had been sold through pre-packs. Out of a total of 7043 jobs saved, 3012 were as a result of pre-packs, representing 42% of the total number of jobs saved.

Commenting on the Insolvency Service’s report on insolvency practitioner compliance with (SIP 16) reporting on pre-packs, Condick said: “ICAS deals stringently with any breaches of guidance through our regulatory function, which includes lay involvement at all stages of our processes. In 2010, ICAS received two referrals on one practitioner in relation to SIP16 guidance, both referrals were fully investigated but required no disciplinary proceedings. There is a clear understanding amongst ICAS regulated IPs of the guidance relating to pre-packs and the level of compliance provides evidence of this.”

Article contributed by ICAS, The Institute of Chartered Accountants of Scotland

Image copyright: Flickr

Andrew Duncan of Bridge Business Recovery LLP reports that with statistics suggesting the number of companies going into liquidation is up 56% in the first quarter of 2009, insolvency is an issue that hangs heavily over many businesses in today’s gloomy economic environment. But ignoring it’s potential presence won’t make it any less real and, according to Andrew Duncan, Partner at Bridge Business Recovery LLP, we ignore the “I” word at our peril. 

Here, he lists the early warning signs that may indicate the onset of problems that, if left unaddressed, could lead to insolvency.

Financial Clues:

·         Bank overdraft consistently at or above its limit

·         Bank requesting additional security or personal guarantees – or reducing the overdraft facility

·         The business using Crown funds for working capital through non-payment of PAYE or VAT

·         Creditor and/or debtor days are increasing

·         Creditors supplying goods and services on a pro forma basis

·         Creditors sending warning letters or beginning legal action

·         Number of customers declining

·         Late filing of accounts or annual return

Management Clues:

·         Management is:

o        Constantly fire fighting

o        Not producing or interpreting management accounting information

o        Lacking a current year budget, accounting and internal controls

o        Avoiding tackling core issues

o        Lacking a strategic plan

o        Taking disproportionate levels of remuneration

o        Constantly arguing

·         There’s a high turnover of staff and the team is demoralised

Detecting problems using a check list such as this can be relatively straight forward; but appreciating the underlying causes can be more complex.  Of course, just because a business demonstrates one – or even several – of these symptoms, it doesn’t necessarily mean that insolvency is the diagnosis.  Businesses don’t generally become insolvent overnight and the early detection of the symptoms of failure could make the difference between resolving short term issues and having to deal with fundamental problems that may result in insolvency.  A frank assessment of the problems is essential in deciding whether or not the business is viable in the long term.

That’s why it’s also important to work with skilled experts like the team at Bridge Business Recovery when deciding what action to take. We specialise in finding ways to help shareholders, lenders and management preserve their stakes in a troubled business and, wherever possible, put it back on a viable footing.  This might mean taking advantage of our established relationships with a wide range of funding partners or our integrated restructuring support.  If, however, the problems are deeper rooted and a formal insolvency process is the answer, our team is here to guide you through the process.

The message is clear:  in today’s environment, it’s dangerous to ignore the possibility of insolvency.  It’s a fact of life in the current market and professionals should not be afraid to address the issue with their clients.  The earlier a problem is identified, the more options there will be available to preserve the value of a business and its reassuring to know that expert help is on hand.

For more information about how Bridge Business Recovery can help, contact Andrew Duncan on 0207 025 6130. www.bridgebr.co.uk

And, if so, when?
Ask any seasoned Interim or Turnaround Manager why distress is painful:  simply put, there’s a huge amount to do, inadequate and/or insufficient resources and time available, and frequently people are focused on doing things that are not top priority.  Early challenges include:  getting a clear understanding of the situation;  managing customer and supplier expectations;  understanding how long things have been deteriorating;  discovering what has prompted action now;  and gently challenging assumptions in the brief!

Probe deeper and ask why things don’t always go smoothly once the agenda is set.  Even then, denial, prevarication or obstruction by or between the stakeholders can easily constrain the speed with which the turnaround can be started, let alone executed … … and that assumes that taking modest risks is not restricted by an urgent need to operate within tight banking covenants and closely-monitored headroom. 

This results in more pain
Given a situation with many of these factors, the number of issues compounds; and, unless they have had prior experience of a distressed situation, few stakeholders understand how rapidly deterioration can accelerate with the passage of time.

As a company’s fortunes begin to decline, so do performance drivers: typically morale worsens, staff and management turnover increases, customer service levels decrease, operational issues emerge, levels of profitability become unacceptable, cash becomes scarce and working capital requirements increase.  In severe cases, products may become uncompetitive or obsolete due to lack of investment, key customers and contracts may be lost, and key suppliers may withhold supplies, or move swiftly from standard payment terms to cash-with-order.  Cash flow starts to run the business, confidence levels are shaken and relationships with creditors and backers alike can become adversarial.

Unless assertive, operational action is taken very quickly, reinforced by solid financial backing, control of the business may well be wrested away from the directors and the value of returns to the stakeholders will decline rapidly. 

…and here’s an example:

A private-equity-backed national wholesaler had failed to deliver the expected synergies from a recent merger.  A new CEO was appointed to stabilise and regenerate the business and an Interim CFO was recruited, initially for a 3-6 month period.

• First priorities:  close the accounts for the previous year, introduce cash forecasting and management disciplines, and provide support to accountants performing an Independent Business Review.
• During the first 3 months, the CFO uncovered a £2.7m black hole in net current assets, an undisclosed long-term liability of about £20m and significant record integrity issues.  Furthermore, his assessment of the break-up value of the business showed that the positions of the stakeholders were under water.
• A new business plan was prepared which won an injection of fresh equity, and the backing of the lenders conditional upon improved cash forecasting and strict adherence to facility headroom limits. 
• A second refinancing round further strengthened the balance sheet.  However, this was insufficient to prevent credit insurers withdrawing cover from the group.  The CFO subsequently negotiated self-insured trade terms with leading suppliers in order to ensure orderly trading continued.

The final outcome was highly successful, but the Interim CFO’s assignment, along with a return to profitable trading, had taken 25 months.

A less painful approach to distress
If you think you’re doing everything right, but the numbers don’t reflect that, go back to basics.  Double-check all operational and financial statistics and their interdependence.

If the numbers are still not right, or if things are starting to go badly wrong, why not bring in a Turnaround Manager or an Interim to help stabilise the situation?  As with any walk of life, there are times when it pays to seek out specialist help from someone whose training and experience equips them to work well in a specific field: they will almost always outperform those for whom this is uncharted territory.

…which is helped by…
Interims and Turnaround Managers have the added advantage of not being wed to any of the historical mental frames that inhabit most businesses.  Their focus is on a successful outcome for the company or the stakeholders, so they are not necessarily bound to existing strategies or emotional ties.  They are often able to ask pertinent questions based on their experience which may help to identify disconnects between the activity and the reported data.

…and here’s an example:
The MD of an online retailer saw a significant reduction in sales volumes.  He identified threats to profitability and liquidity.  Had the trend continued the business would have been at risk, so he approached a Turnaround Practitioner.

Together, their analysis of the business showed the product range had been extended too far, contributing to cash flow difficulties and depressing profit margins. 

Product lines were rationalised in order to remove unprofitable or slow-moving items.  More realistic assessments of future business were made and headcount was adjusted.  Only one round of redundancies was necessary, helping the company get into recovery mode more quickly and reducing uncertainty amongst employees.  A more responsive and cost-effective automated web platform was introduced and advertising agreements were improved.  Improved planning reduced inventory and eased the cash situation, whilst further strategic and tactical improvements were also implemented.

This allowed the business to trade profitably and positioned it well to capture market share when the economy rebounds.

Spot the difference!
In both cases above, difficulties were successfully overcome.  However in the second example, management took proactive steps to deal with a situation before it started losing control, and the turnaround in performance was more structured and far-reaching.  Because the business was proactive in its attitude all effort was spent on improvement, rather than on overcoming inertia or denial.

Lessons to remember
What you see in the numbers may not always reflect reality.   There is merit in having an experienced eye look over the financial reporting process, and in particular marrying short-term cash forecasts with medium-term sales and margin ambitions.

Turnaround specialists tend to have well-honed antennae which help them identify the true root-causes of a firm’s difficulties, and they bring broad experience, objectivity, lateral thinking, common sense, the courage to speak their mind and a willingness to act on their own initiative.  Their skill is knowing what is going to make the most impact . . . then getting on with it.

It takes courage for an executive board to call for help from an external source – - sometimes they need to be prompted to do so by other stakeholders – - but the earlier that operational and financial difficulties are recognised and an Interim or Turnaround Manager is engaged, the better are the chances of survival.

David Graham is a Partner in RiVO Partners LLP, which specialises in turnaround & performance improvement for mid-market companies. 
Mobile: +44 (0)7887 757178

www.rivopartners.com

The JCB Tough Phone made headlines last year as gadget reviewers lined up to put its “indestructible” tag to the test. In the name of science the phones were dropped, pummelled, battered and crushed – and emerged still working. What many people reading those reviews didn’t realise is that the Silicon Valley-based company behind the phones, Sonim, had been through a similar ordeal. 

‘We became the pariah of the industry,’ says Bob Plaschke, Sonim’s CEO. ‘We spent millions of dollars [of investors’ money] chasing a grand vision that wasn’t grounded in solving real people’s problems.’ 

The vision was internet telephony (VoIP) over mobile phones; a prospect that excited Sonim’s venture capital (VC) investors so much they invested $47 million (£34 million) before the company had made a sale. Sonim won awards and contracts, but critically, failed to deliver working software on time to the mobile operators it had signed up. The hype quickly turned to derision, and with a burn rate of $1.8 million a month, it was only a matter of time before Sonim ran out of cash with ‘no chance of any viable funding after that’. 

It’s a position many entrepreneurs will be familiar with, though Sonim’s journey from stardom to near-bankruptcy will be faster than most. Jamie Constable, CEO of turnaround investment firm RCapital (which now owns Little Chef) says there’s ‘a very steady flow of companies getting themselves into serious financial trouble’. Survival in this environment depends ‘not on how well run you are, but on how you’re structured financially’.

Limited options 

The Art Group, which supplies touch screen kiosks enabling visitors to art galleries to print off their favourite works, is a case in point. RCapital got involved with the business last year after its VC backer decided not to invest further.

There was an added irony as the backer had already replaced the old management team and agreed in principle to a fresh injection of funds.

‘The company’s only choice was to go to the bank for the money, and of course, if the VCs won’t do it, the bank won’t do it,’ says Constable. ‘The business had already put in place the operational changes it needed to return to profitability; it was just a case of [repairing] the balance sheet.’ RCapital bought the company for £2.5 million and made the changes needed to get it back on track. 

Deeper cuts

For investors like Constable, it’s essential to distinguish between good businesses that are simply running out of cash, such as The Art Group, and those with more fundamental issues. When Rob Woodward took over Scotland’s ITV franchise STV in 2007, he knew it was in serious financial difficulties: its market cap had shrunk from £2.1 billion in 2001 to less than £200 million that year, partly the result of an unsuccessful expansion strategy. Now he admits that he underestimated the scale of the problem.

‘We informed the City upfront of the reality of the situation, and it was far worse than anyone had expected,’ says the CEO. ‘All the good news had been drained from the company: the plans were far too optimistic. So the starting point was very different to what we had anticipated, though the endgame remained the same.’

When Woodward took over, STV’s board resigned en masse, leaving him free to pursue his threefold strategy of rectifying the ‘challenged’ balance sheet, reducing costs by 
refocusing on STV’s core business, and investing in new areas he believes have growth potential.

Though the company’s share price is still in the doldrums, Woodward has transformed losses of £23 million in 2007 to pre-tax profits of £14 million, reduced net debt from £47 million to £36 million, and returned £30 million to shareholders (after a rights issue raising £92 million in December 2007).

The most difficult aspect of the process, he says, was ‘delivering the message of huge cost reductions and at the same time investment in future growth opportunities’. Some 120 staff were made redundant, while a ‘new team’ was brought in to grow STV’s online presence. 

Strategic thinking

Woodward’s point is instructive. Few turnarounds can be achieved without an injection of cash, and cutting costs is another common theme. But simply paring a business down and pumping it with money could be flogging a dead horse unless there is a fresh approach to go with it.

For Plaschke, whose role at Sonim changed from CFO to CEO after the company went into crisis mode, the first priority was survival. By cutting the company’s head count from 180 to 15, its monthly burn rate was reduced from $1.8 million to $500,000. But Sonim still had no way of making money.

Plaschke began in-depth research into potential markets, leading him away from the idea of selling generic software to mobile operators towards producing a ‘ruggedised cell phone’ aimed at blue-collar workers. It’s a fascinating story with its own ups and downs: Plaschke secured another $10 million from his investors, but battled long and hard to find a distribution channel for the phones, eventually striking lucky in Sweden. But the essential point is that Plaschke had completely changed tack.

‘The board found a presentation I’d given to them before, and there was one slide that listed “12 reasons we’ll never become a cell phone company”,’ Plaschke relates. ‘Well I still believe in six of the 12, but I’ve disproved the other six. It was a choice between shutting the company down and firing all the employees, or selling more phones.’

The decision to sell more phones resulted in sales of $31 million last year (which Plaschke expects to increase to more than $40 million this year). With just three salespeople, Sonim distributes its phones in 42 countries and is now at break-even.

Out with the old

Sometimes turnarounds are more about a fresh approach than a complete change of direction. Richard Brighton, MD of electronics manufacturer Exception EMS, was hired to turn round a company that was ‘going through a degree of stagnation, always making around £17 million, always chasing sales to make up for the customers it had lost, always at a break-even level’.

When Brighton first walked into the company, he saw a sea of green printed circuit boards covering every available surface. Looking into how it was run, he found it ‘chaotic and disorganised’: the manufacturing process was ‘a collection of fiefdoms’ and there was ‘a lot of work in progress’ with no one taking responsibility for it. Underlying these problems was the autocratic management style of the previous MD, who had been ‘asked to leave’.

‘One of the first meetings I had with management, I asked people for their thoughts and it was like tumbleweed. It was so obvious they had never been asked that kind of question before,’ Brighton reveals.

The changes were radical, but they were operational rather than strategic. Brighton created five ‘mini-MDs’, each of whom was given responsibility for a number of customers. Work for each customer was to be managed in a separate, U-shaped area, so that progress was clearly visible. There were management changes too, and a reduction in head count, from 250 to 210, achieved mainly without redundancies.

The result was that turnover increased from £17.5 million in 2007 to £20 million 
in 2008, with an operating loss of £500,000 transformed to a profit of £1.1 million. Most notably, that was achieved by gaining only one major new customer and simply serving the others better so the company won more work and, in some cases, could justify raising prices which had not been adjusted in years.

In a similar vein, RCapital’s Constable states that Little Chef’s problems boiled down to the fact that outlet managers had no sense of accountability, and staff were demoralised. ‘It was about giving ownership back to the people running the restaurants; we improved the food but kept prices the same, and told managers that if they made excess 
profits they’d be rewarded.’

Deep breath

Viewed with hindsight, the solutions to a company’s problems may look obvious. But when you’re at your lowest ebb, those troubles can seem insurmountable. Plaschke, an ex-employee of consultancy firm McKinsey, says that if he had applied the principles he learned there to Sonim, there would have been no option but to liquidate the company as quickly as possible.

‘There are lots of folks who told me to shut [Sonim] down and get another job,’ he recalls. ‘And if you looked at the business in any rational way, I should have done just that. But entrepreneurs defy logic. At times like these, you’ve got to trust your gut conviction and follow it, even if it leads to failure.’

Business Recovery Terms 

DIY turnarounds

Cutting costs, accepting low profitability and focusing on retention of customers may work in the short term, but often you’ll need to look further ahead and consider more radical changes to your business, writes Malcolm Prowle, a professor at Nottingham Business School. 

Restructuring

Think big, like a revision of product specification, a change of location or a different distribution method. Or withdraw from your current line of business entirely and invest in an alternative more suited to the times.

Working partnerships

Economies of scale can be achieved as businesses pool resources such as buildings, equipment, specialist staff and back office functions. New products can be developed on the back of the companies’ combined expertise.

Mergers

A business may not constitute a viable independent entity in the long term. If other companies are in the same position, a merger may be the most feasible option, minimising competition and increasing market share. 

Contributed by Growth Business:   

GrowthBusiness is an invaluable resource for entrepreneurs and leaders of fast-growth enterprises. It offers a goldmine of practical information, insights and inspiration for established businesses which are achieving rapid expansion, helping them overcome obstacles to their growth and maximise their potential.

The website is brought to you by Vitesse Media plc, itself a fast-growing media company quoted on the AIM market of the London Stock Exchange.

http://www.growthbusiness.co.uk/channels/growth-strategies/leadership-and-management/
http://www.growthbusiness.co.uk/market-and-sector-focus/banking-and-finance/

However, when you are also able to find and build a list of unique prospects and have a direct link to Companies House documents, all risk and credit reports on UK and Irish businesses and their directors, you will realise that this is the only tool you will ever need.  ‘Investigate’ provides:- 

• Over 70 search fields covering company fundamentals, risk and financial data.
• The ability to build multiple lists on any Industry in the UK.
• Identify sales prospects which are low risk, identify distressed business that require recovery and restructuring or identify new suppliers so that you can tender your services.
• Simple to use system which can be customised so that you can store list criteria as a ‘favourite’ to repeat the list on a monthly, quarterly basis with one click.
• The ability to download all reports into Excel for easy manipulation.
• Links to all Company House reports and ICC credit and risk reports
• All companies can also be linked to the Tracker Monitoring Service to maintain your watch upon their development.
• Company House document packages for AML and KYC are also available as part of this package.

Case Study 

Tim is a business development professional in an accountancy firm who specialises in looking for businesses which require his services of debt collection, restructuring and recovery. Right now Tim uses several tools to help him identify distressed businesses.  However, he then needs to obtain financial and statutory documentation from Companies house and visit a credit reference bureau to view a business report. These procedures are both time-consuming, costly and frustrating, as the original searching tool is often out-of-date and businesses have gone beyond a point where his services can be used. 

Using ‘Investigate’, Tim has a ‘one stop shop’ of information. A tool which he can rely upon to identify businesses of a medium-to-high risk score, a negative net worth and several recent CCJ’s lodged against them.  He is able to determine their turnover and industry type which fits his company’s profile. Once a list of businesses have been identified, Tim can then obtain the latest set of accounts, mortgage data, shareholder data, annual return and a risk report which details their CCJ and adverse history. Tim now has a complete tool which saves time, money and increases productivity which, in turn, increases his firm’s ability to attract new business before his rivals. 

A decision is only as good as the quality of the information it is based upon.

Increase your productivity, reduce your workload and save on costs by using a solution that offers all the information required to identify, analyse and then continuing assess businesses within the UK and Ireland. 

ICC is offering a free trial period subscription to this service, used and endorsed by many Top Ten Accountancy, Legal & Banking firms.   The trial is being extended to allow you to trial our other reports and monitoring services.  

Email showard@icc.co.uk for your no obligation, free trial access or for more information.”

About ICC

ICC’s leading integrated technology provides intelligent analysis of data, allowing our clients to set foundations for efficiency. Our Credit & Risk services help to mitigate credit and supplier risk by minimising exposure and maximising opportunities; our Business Information delivers critical and timely data and documents to enable investment, acquisition and compliance based processes to run efficiently, empowering fast business decisions; and our Marketing Services provide intelligent insight into client’s data allowing for an enriched dataset that not only uncovers pockets of prospects, but also increases sales revenue through tailored data strategies.For more information, please visit www.icc.co.uk

Jurisdiction to sanction a scheme is dependent on winding up jurisdiction

Section 899(1) of CA 2006 provides that if a majority in number representing 75 per cent in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy at the relevant meeting, agree a compromise or arrangement, ‘the court’ (as defined in s 1156) may sanction the compromise or arrangement.

Only the scheme of a company within the meaning of s 895 of CA 2006 may be sanctioned. Other than in the case of reconstruction or amalgamation, s 895(2)(b) provides that ‘company’ means any company liable to be wound up under the Insolvency Act 1986 (‘IA 1986’).

The court’s jurisdiction to wind up the company in question is essential. This is made clear in the definition of ‘the court’ in s 1156. In England, ‘the court’ means the High Court or a county court, subject to the proviso in s 1156(2) in these terms: ‘The provisions of the Companies Acts conferring jurisdiction on “the court” … have effect subject to any enactment or rule of law relating to the allocation of jurisdiction or distribution of business between courts in any part of the United Kingdom.’ The significance of the proviso in s 1156(2) in this context becomes apparent when one takes account of ss 117 and 120 of IA 1986. Sections 117 and 120 provide that only English courts may wind up English registered companies and only Scottish courts may wind up Scottish registered companies. In relation to foreign companies, the English court’s winding up jurisdiction is to be found in s 221(1) of IA 1986.

The court’s jurisdiction to sanction a scheme hinges on its jurisdiction to wind up the scheme company in question. Thus an English court may not sanction a scheme of arrangement proposed by a Scottish registered company.

The impact of EU/EEA legislations on the English court’s winding up jurisdiction

The English court’s winding up jurisdiction under IA 1986 has to be considered in conjunction with panoply of EU/EEA measures, in particular the following:

·          Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (‘Judgments Regulation’).

·          Council Regulation (EC) 1346/2000 on insolvency proceedings (‘EU Insolvency Regulation’).

·          Directive 2001/17/EC on the reorganisation and winding up of insurance undertakings (‘Insurers Directive’).

·          Directive 2001/24/EC on the reorganisation and winding up of credit institutions (‘Credit Institutions Directive’).

The Judgments Regulation is relevant only if one is concerned with a solvent winding up. The unanimous voice of authorities is that solvent liquidation is within art 22(2) of the Judgments Regulation which provides that, ‘in proceedings which have as their object … the dissolution of companies …, the courts of the Member State in which the company … has its seat’ shall have exclusive jurisdiction.

Article 22(2) of the Judgments Regulation thus conditions the English court’s jurisdiction over a solvent winding up and by extension the English court’s jurisdiction over a solvent scheme of arrangement. For a detailed review of the impact of art 22(2) of the Judgments Regulation on solvent schemes promoted by EEA insurers, see L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145. This same analysis applies to companies subject to the Brussels and Lugano Conventions on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters.

The English court’s winding up jurisdiction to wind up an insolvent company and hence to sanction a scheme promoted by an insolvent company is as follows.

Companies subject to the EU Insolvency Regulation

To fall within the scope of the EU Insolvency Regulation, the company in question must have its centre of main interests (‘COMI’) within the EU (apart from Denmark) and must be not be a credit institution, an insurance undertaking, an investment undertaking holding funds or securities for third parties, or a collective investment undertaking. Where the EU Insolvency Regulation applies, the English court has jurisdiction under IA 1986 to wind up a company only if the company has its COMI or establishment (as defined in the EU Insolvency Regulation) in the UK.

Accordingly, the English court has jurisdiction to sanction only a scheme promoted by a company having either its COMI or an establishment in the UK.

Admittedly, the above proposition does not sit well with the decision in Re DAP Holding [2005] EWHC 2092 (Ch); [2006] BCC 48. However, the reasoning in DAP is most suspect: it appears inconsistent with a prior decision in Re Drax Holdings [2003] EWHC 2743 (Ch); [2004] 1 WLR 1049 and has been apparently repudiated by a subsequent decision in Re Sovereign Marine & General Insurance [2006] EWHC 1335 (Ch); [2007] 1 BCLC 228. For a detailed explanation, see L C Ho, ‘Schemes for foreign insurers – how the court got it so wrong: Re DAP Holding NV’ (2005) 21 IL&P 171, and L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145.

Companies subject to the Insurers Directive

The Insurers Directive was implemented in the UK via the Insurers (Reorganisation and Winding Up) Regulations 2004 (‘Insurers Regulations’).

Article 8(1) of the Insurers Directive provides that ‘[o]nly the competent authorities of the home Member State [are] entitled to take a decision concerning the opening of winding-up proceedings with regard to an insurance undertaking, including its branches in other Member States’. Accordingly, reg 4(1)(a) of the Insurers Regulations provides that ‘a court in the United Kingdom may not, in relation to an EEA insurer or any branch of an EEA insurer, make a winding up order pursuant to s 221 of [IA] 1986’.

However, reg 5 of the Insurers Regulations provides that ‘[f]or the purposes of s 425(6)(a) of the Companies Act 1985 …, an EEA insurer or a branch of an EEA insurer is to be treated as a company liable to be wound up under [IA] 1986 … if it would be liable to be wound up under that Act … but for the prohibition in reg 4(1)(a)’. Although reg 5 has not been updated to reflect CA 2006, its intention is to ensure that the Directive would not prevent EEA insurers from promoting an English scheme of arrangement. While reg 5 does not prescribe the jurisdictional basis for winding up an insolvent EEA insurer, the court’s winding up jurisdiction is to be found in s 221 of IA 1986.

Therefore, the English court should have jurisdiction to sanction a scheme promoted by an insolvent EEA insurer, provided reg 5 of the Insurers Regulations is not ultra vires the Insurers Directive. The court in Re Sovereign Marine & General Insurance wrongly refused to rule on this vires issue: see L C Ho, ‘A rational basis of jurisdiction over EEA insurers’ solvent schemes that the WFUM decision could be, but isn’t’ (2006) 22 IL&P 145.

Companies subject to the Credit Institutions Directive

The Credit Institutions Directive was implemented in the UK via the Credit Institutions (Reorganisation and Winding up) Regulations 2004 (‘Credit Institutions Regulations’). What is said above about the Insurers Directive and the Insurers Regulations applies mutatis mutandis here. Therefore, the English court has jurisdiction to sanction a scheme promoted by an insolvent EEA credit institution, subject to possible ultra vires challenges.

The court’s jurisdiction to sanction a scheme against a dissenting class of stakeholders

Section 899(3)(a) of CA 2006 provides that ‘[a] compromise or agreement [sic] sanctioned by the court is binding on all creditors or the class of creditors or on the members or class of members (as the case may be)’. Some argue that the effect of s 899 is that the court may never sanction a scheme compromising the rights of a dissenting class of stakeholders.

However, case-law suggests that the court may indeed sanction a compromise even if a class of creditors or shareholders vote against the compromise, provided the dissenting class of stakeholders have no economic interest in the company.

One begins with the decision in Re Tea Corporation [1904] 1 Ch 12. There a scheme was proposed in a liquidation whereby the ordinary shareholders were to be given shares in a new company in place of their existing shares. The shareholders as a class voted against the scheme; the other stakeholders voted for it. As the financial state of the company was that the ordinary shareholders had no economic interest in the company’s assets, the court held that the shareholders’ dissent could be disregarded when sanctioning the scheme. The decision seems to contain two strands of reasoning.

Lord Justice Romer and Lord Justice Stirling appeared to rest their reasoning on treating the scheme as only an arrangement as between the company, the creditors and the preference shareholders such that the new shares offered to the ordinary shareholders were in the nature of a gift of which the ordinary shareholders could not complain. However, when dealing with the argument that the scheme was rendered defective by the ordinary shareholders’ dissent, Lord Justice Vaughan Williams held that ‘if you have the assent to the scheme of all those classes who have an interest in the matter, you ought not to consider the votes of those classes who have really no interest at all’ ([1904] 1 Ch 12, 23).

Some have argued that Tea Corporation does not stand for the proposition that a scheme may modify the rights of a dissenting class of creditors or members even if they have no economic interest in the company’s assets. This argument is most probably wrong in light of recent case-law. Instead of viewing the shareholders in Tea Corporation as having been given a gift, the first instance judge in Re Mytravel Group [2004] EWHC 2741 (Ch); [2005] 1 WLR 2365 at [46] held that the shareholders ‘were affected by the scheme’.

In Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26; [2007] 1 AC 508, a group of insolvent Isle of Man companies went into voluntary Chapter 11 proceedings in the USA. The Chapter 11 plan of reorganisation provided for the group’s assets to be transferred to the creditors. As these assets were ultimately owned by a Manx parent company, the Chapter 11 plan purported to vest the shares in the Manx parent in the creditors’ representatives. The Privy Council agreed to assist the US Bankruptcy Court by giving effect to the Chapter 11 plan, reasoning that because the shareholder had no economic interest in the company’s assets, the court could sanction a scheme of arrangement which leaves them with nothing. Despite the shareholders’ dissent, the scheme wouldbe by virtue of legislation ‘binding upon the shareholders when it receives the sanction of the court’ (at [26]).

Author: Look Chan Ho, MA, BCL (Oxon), LLM (Cantab), LLM (NYU), Attorney-at-Law and Solicitor, is a member of the Restructuring and Insolvency Group at Freshfields Bruckhaus Deringer LLP, based in London. He is also a co-editor of Corporate Rescue and Insolvency. Email: lookchan.ho@freshfields.com 

Contributed by: LexisNexis – Originally published in Corporate Rescue and Insolvency www.insolvencylawforum.co.uk  

Whilst the government has recently been pumping huge sums into the banks to avoid financial meltdown, organised criminal syndicates have been extracting billions of pounds from the government on a major scale for a number of years.

Consider the following, a company is trading as a men’s outfitter in two rented outlets in the north of England. Suddenly new directors arrive on the scene suggesting the company diversifies into new markets. The company starts buying and selling millions of pounds of mobile phones and computer chips, often to and from the same companies. Turnover jumps from £250,000 per annum to £250 million per annum. 

The phones are never seen by the directors but they are willing to transfer and receive millions of pounds to companies they have only recently been introduced to. No credit checks are done and “credit” is often extended for millions of pounds. The payments are all made via a bank in the Caribbean “recommended” to them by their contacts in this new exciting trade. 

Welcome to the world of “Carousel Fraud” also known as MTIC Fraud – Missing Trader In Community. 

Vast sums have been fraudulently obtained by companies and individuals in this type of scam. The fraud centres on the ability to charge and reclaim VAT on high value, small volume items using a vast web of companies both in the UK and the EU. 

The UK company buys the goods from another member state net of VAT. The company, described as a defaulter/misser, then sells to a purchaser charging VAT for which they do not account, and the purchaser then reclaims the VAT from HMRC. The “sale” is then repeated a number of times, to companies referred to as buffers until the goods are exported and this seller, known as the broker, then reclaims the VAT back from HMRC – this is the big money end of the fraud. 

The same process happens within the EU and “goods” flow in and out of the country – hence the term Carousel Fraud. This is illustrated as follows. 

Company E in this example is the broker and on each set of transactions hundreds of thousands of pounds can be extracted from HMRC. 

With “trades” often in excess of £1m at a time vast sums of money can be illegally claimed over a relatively short space of time. 

The monies made often disappear into further offshore accounts or are laundered via foreign exchange companies. Where do they go then? 

Whilst it is believed that large sums are used to finance terrorism, others are used to fund the lifestyles of the perpetrators of the crime both in consumer goods, such as sports cars, jewellery and property – often the second property is situated in an emerging property market. 

The Dutch intervention on the MTIC fraudster’s bank of choice in 2006 resulted in many millions of pounds being frozen.  The government are now seeking ways to repatriate some of the money. 

HMRC are also active in trying to convict and recover monies from individuals following these frauds and it was reported in September 2008 that as a result of recent trials, twenty one people had been convicted and given sentences totalling 202 years following a £138m fraud. 

The other downside for the participants in Carousel Fraud? Having to find hundreds of thousands of pounds to settle with the Liquidator! 

Are there victims in this fraud? Yes, in this case, all of us…

Contributed by – Paul Fletcher, Partner at Griffins Licensed Insolvency Practitioners. Paul specialises in international fraud and investigation. Griffins Licensed Insolvency Practitioners – based in London, a boutique firm offering bespoke insolvency solutions to debtors and creditors alike. 

Website: www.griffins.net

Looking for investment opportunities or minimizing your exposure to bad debt? Keep ahead of the early warning signs with notification of insolvencies up to 10 days before announcements from the London Gazette or statutory data is filed at Companies House. The ICC Insolvency e-Alert is invaluable for all types of businesses keeping track of insolvencies and administrations within their customer or supplier portfolios.

Also available as part of the Insolvency e-Alert package is our monthly UK Insolvency & CCJ statistics report. This report provides timely and valuable information on the changing state of the risks in the UK corporate sector. The analysis highlights which sectors and regions are improving and worsening, and to what degree. Use this high frequency data to gain insights into the fast changing risk of UK corporate sectors and UK regions and to enhance your interpretation of individual company risk scores.

-   See a sample report

To find out more call Simon Howard on 0208 481 8835 or email:  insolvencyalerts@icc.co.uk

About ICC
ICC’s leading integrated technology provides intelligent analysis of data, allowing our clients to set foundations for efficiency. Our Credit & Risk services help to mitigate credit and supplier risk by minimising exposure and maximising opportunities; our Business Information delivers critical and timely data and documents to enable investment, acquisition and compliance based processes to run efficiently, empowering fast business decisions; and our Marketing Services provide intelligent insight into client’s data allowing for an enriched dataset that not only uncovers pockets of prospects, but also increases sales revenue through tailored data strategies. For more information, please visit www.icc.co.uk

As the effects of the credit crunch continue to bite, redundancies are increasingly common, particularly across the property, construction and finance sectors.  But for clients, the current economic climate can be used as an opportunity to redeploy where necessary, saving costly redundancy fees and avoiding loss of morale and the leaching of valuable experience from the business. The culture has evolved: if a department doesn’t have enough work, a change is in order, and ensuring that the muscle is not cut in order to maintain corporate knowledge is vital. By identifying transferable skills and any training and development gaps, valuable staff can be retained, ensuring that the organisation will survive, grow and prosper.

Embracing change is a valuable skill in these challenging times and the willingness to cross sectors is essential for candidates. Top achievers may find it hard to accept that they can no longer dictate the terms of their employment. But now is the time to think creatively and to use that intelligence to reshape the future. Recruitment agencies or a professionally accredited career coach or mentor can help with plans to ‘recareer’. 

Gin and golf may have to wait 

Each move will have its own unique learning curves for candidate and client alike. Despite uncertain times, there is a silver lining for early retirees or consultants as well as for seasoned managers, hardened by boom and bust, who have experienced earlier recessions and who understand how to manage risk and work-outs. It’s a sad fact that in the current crisis, gin and golf may have to be put aside for just a few more years… 

Many current business difficulties stem from employees suffering from under-skilled managers. When businesses have not traded through a recession it follows that its managers haven’t either. The problem is compounded if most of those in the organisation who could have helped to fill in the gaps and rescue the situation have been forced (voluntarily or otherwise) to take early retirement. Bring back these retirees as consultants, part-time if necessary, but come back they should and as quickly as possible. 

Retraining as an insolvency practitioner, for instance, could take several years for someone from another discipline. So an increased demand for those who have experienced the insolvencies of a decade ago makes sense – they may just be able to hit the ground running and lead the country out of recession. 

It may not be easy to predict exactly what systems will be needed in this current climate and the available range of skills is often sadly lacking.

But one thing’s for sure, a decision to bring back some ‘grey hairs’ – like the recent wise decision by the Conservative Party to bring back Ken Clarke, can only be to the good. 

As the international financial services industry continues to evolve and grow, the UK economy is in a better position at this stage than in recessions seen before. Low interest rates and inflation give the UK strong economic foundations for recovery. 

Bouncing back bigger and stronger 

A bracing shake-out of the industry will continue as the economy slows. But the need for high calibre employees means that those who get it right will bounce back bigger and stronger. Once things pick up, more companies will be formed in a thriving economy which means more competition and vulnerability for existing companies who will look for professional advice on profit improvement and working capital review. So whatever the economic circumstances there is always room for corporate recovery jobs and an accompanying demand for qualified professionals. 

Once the storm has passed, the industry will be able to go forward on much firmer foundations. 

Article written by BONNIE YUILL (commissioned by Commercial Finance People)

For any information on recruitment issues contact Prue Heron on 0845 260 2525 

TMA (UK) in association with Minerva Training Associates has announced a series of four seminars entitled Fundamentals in Turnaround Management to be held throughout March at leading business school venues in London, Manchester, Leeds, and Birmingham.

The seminars are aimed at professionals in corporate roles or private equity, accountants and lawyers either in practice or industry, bank workout and support teams, owner managers and interim managers at CEO, CFO and COO level, and workforce recruitment and planning specialists. Sessions on diagnosing core performance issues, planning a turnaround strategy and identifying corporate value, and applying the essential components of a successful turnaround will be led by senior TMA personnel including Conference Director Dominic Reimbold and Membership Director David Hole.

“This recession is going to be long and deep, and if the country is to come out of it with its economic base intact then the sort of skills businesses need to defend and recover their core corporate value urgently need to be disseminated as widely as possible,” said Mr Hole.

“Turnaround professionals today face two major challenges: more and more businesses will need their services, while the shortage of business credit will make individual turnarounds ahead of insolvency even more demanding. Our seminars can imbue both professionals and businesses with the practical, hard-headed skills they will need to make and implement the right decisions to enable them to go forward with confidence even in the toughest of times.”

* The price of attendance at the seminars includes a year’s membership of TMA (UK). Full details of dates, venues, sessions, speakers and making a booking online are available at:

www.tma-uk.org

Further information:

David Hole, Alexander Business Consulting – 07976 758246 – davidhole@alexanderbc.com

Dominic Reimbold, Global Talent Implementation – 07881 750467 – dreimbold@googlemail.com