Corporate and personal insolvency predictions for 2015

As a new year begins, Chris Laughton, partner at Mercer & Hole, and Mark Sands, partner at Baker Tilly Creditor Services LLP, share their corporate and personal insolvency thoughts and predictions for 2015.

Where did the majority of your instructions come from in 2014?

Chris Laughton: Most of our corporate insolvency instructions come via professional advisers, often solicitors or accountants who see the need for our specialist skills, but ultimately we are instructed by management, creditors or other stakeholders. Our sources of work in 2014 were similar to previous years, although the continued decline in bank instructions to firms on their panels led to more competition in the non-bank sector as bank panel insolvency practitioners (IPs) looked for work elsewhere.

Mark Sands: We are a largely creditor-led practice so most of our bankruptcy instructions came from creditors in 2014. These include high street banks, financiers, trade suppliers, local authorities and individuals--in many cases introduced to us by their legal advisors.

Are you expecting workloads for the insolvency profession in 2015 to increase, de-crease, or remain the same?

Chris Laughton: The current trend is for fewer corporate insolvencies. I estimate a total of around 33,000 for 2014, which is about 75% of the peak in 2009. Interest rates are generally expected to start to rise in late 2015 and UK GDP growth is currently expected to be slightly lower than in 2014. However, neither factor is sufficiently soon or severe to reverse the downward corporate insolvency trend. Some industries will face challenges. Oil and gas production and distribution start the year with uncomfortably low commodity prices, while new retail delivery demands caught out City Link in an example of the impact of rapid structural change, which will not always be technology related. 2015 will bring uncertainties—and hence more risk of insolvency—caused by the general election, continuing economic weakness in Europe, tensions in the Middle East, the risk of financial collapse in Russia and unforeseen events. However, overall, corporate insolvency numbers are most likely to decrease.

Mark Sands: Broadly speaking, the trend over the last year has been a small gradual decline. I am expecting the levels of bankruptcy cases to stay on a similar level throughout 2015, again with a very slight downward trend. During 2015, we expect to see interest rates creeping up, although this is unlikely to cause any upturn in bankruptcy cases until at least the following year, with any material impact likely to be delayed until base rates achieve their new expected norm of 3%.

Where do you expect the majority of new instructions for insolvency practitioners will come from in 2015?

Chris Laughton: There is no particular reason for the main sources of corporate insolvency instructions to change.

Mark Sands: I expect debt purchasers to continue to play an increasingly large role in bankruptcy appointments in 2015. We may also see a return to local authorities pressing for bankruptcies as pressures mount on councils to balance the books at a time when central funding is being squeezed. The new lenders to smaller corporates will also increasingly find themselves as creditors influencing the bankruptcy of directors and others who have provided personal guarantees.

What issues and challenges do you anticipate for the profession in 2015?

Chris Laughton: Regulation, legislation, communication and competition head the list:

Regulation

Our regulatory system is being tinkered with, but it needs to be and also be seen to be more effective. For that it needs a more robust design. At present it neither gives confidence to the public nor serves the profession well, often appearing to act too slowly or opaquely and with insufficient unanimity. The profession must be believed to be one of integrity, and that integrity has not only to be delivered by the profession but to be validated by a regulatory regime on which the public and the profession can rely.

Legislation

'Tinkering' also describes the current legislative approach to insolvency—rarely a good model for effectiveness and efficiency. Separate corporate and individual insolvency licensing is an astonishingly wasteful and regulatory introduction in the Deregulation Bill, although it is likely to have little impact on the profession. The crass removal in the Small Business, Enterprise and Employment Bill of IPs' ability to convene a physical creditors' meeting (without significant creditor support) is inefficient and costly—again the opposite of what was apparently intended—and this will affect the profession. We will lose many opportunities to obtain information from and engage with the creditors in whose interests we act. We will also face enquiry and hostility from creditors who have lost money, are deprived of the opportunity of challenging those responsible and cannot fully participate in meetings by telephone or video link. Another challenge is likely to be getting to grips with the Insolvency Rules 2015 (although they are not expected to come into force until 2016). Then there are the lost opportunities to address the conflicts between employment law and the rescue culture, not to mention the creeping extension of the reach of insolvency expenses, when what is needed are better mechanisms to facilitate business rescue through insolvency procedures.

Communication

IPs are at the sharp end of an increasingly complex system that is understood by few outside the profession. We have to explain, clearly and succinctly, what we do and why, and we have to do so over and over again. If we or the system in which we work are misunderstood, we have to explain ourselves better. We owe it to the creditors in whose interests we act—and who are responsible for approving our remuneration. We failed to communicate the benefits of pre-packs as they grew in popularity a few years ago and as a result they are widely misunderstood and risk being regulated out of existence. Our next communication failure, if we are not careful, will be of the value of the work we do, as the level of disquiet about IPs' fees continues to rise and the risk of legislative interference increases.

Competition

The insolvency market is small and shrinking. 33,000 corporate insolvencies a year will produce something like 20-30 cases each for those who take corporate appointments. That number of small liquidations is unlikely to make a viable practice. However, we face the challenge of retaining experience while bringing new blood into the profession as the market shrinks. Successful IPs in 2015 will:

  • be flexible
  • provide alternatives to insolvency solutions
  • be real experts in some areas
  • distinguish themselves from their peers
  • be efficient and operate profitable practices without excessive costs

Mark Sands: I anticipate a two-pronged challenge for the profession next year. First, several changes to the regulatory environment are coming into play, so the challenge for insolvency professionals will be to quickly adapt the way they operate to comply with the new/amended regulations. Secondly, continued costs challenges mean that practitioners will need to work out ways that they can add value, or try to do things differently, or simply find yet more efficiency savings in their processes.

Regulatory changes include:

  • Deregulation Bill—partial licensing, no automatic need for a statement of affairs in bankruptcy cases where the bankrupt petitioned, the Secretary of State no longer to licence IPs, IPs to be allowed to be appointed as interim receivers, and improved access for bankrupts to bank accounts
  • Small Business, Enterprise and Employment Bill—meetings of creditors not to be required to be face to face, requirements for final meetings to be removed, creditors to be able to opt out of receiving correspondence, removal of need to seek sanction for various actions and simplification of admission of small creditor claims
  • Debt Relief Orders—review of criteria
  • Financial Conduct Authority—regulation of consumer credit advice

What are you looking forward to in 2015?

Chris Laughton: A busy year of challenging, different and interesting assignments, solving problems and delivering solutions by doing what I do best. I wouldn't be in this job if I didn't thrive on such challenges and I'm confident that enough people value my particular skills and experience—European cross-border insolvency, the insolvency issues in interest rate hedging product mis-selling, acting as an expert witness on in-solvency practice and the constructive use of formal insolvency procedures—to make it happen.

Mark Sands: In 2015, I'm looking forward to improvements in the property market. Increases in property prices, in particular in London, have made the headlines in 2014. I'm looking forward to continued improvement in property prices, preferably nationwide and gradual so as to avoid a bubble which may then burst. This will increase the number of cases where IPs and their legal teams can achieve realisations for creditors. Both routine property cases, as well as investigations into antecedent transactions where a property is the target for the IP, will be a more attractive proposition with increased values and so is likely to result in better outcomes for creditors.

What are you not looking forward to?

Chris Laughton: Not much—I usually see challenges as opportunities—but we all have our bêtes noires and I am determined to better mine.

Mark Sands: The cricket world cup. Cricket is my passion, and while I hope England's youth will rise to the challenge, I fear I will have to cheer on another team in the final. The insolvency profession needs to learn from cricket selectors and ensure we give our up and coming talent every chance to succeed and develop despite a market in which many experienced players may prefer to keep the interesting cases for themselves.

How will the insolvency profession be affected if the insolvency exemption to the Jackson reforms comes to an end in April 2015 as currently planned?

Chris Laughton: Creditors will lose out because the threshold for economically viable claims will rise. There will be less litigation, less settlement and fewer claims, especially in no or low asset estates. It will be bad enough that in cases with assets the creditors will bear the cost of the risk of losing, when almost by definition the action will be against a party responsible for the creditors' losses—the creditors lose twice. Worse will be the no asset cases, where ending the exemption unconscionably invites the profession to bear all the risk. Larger claims will still be pursued, but the cost to creditors of covering the risk will significantly reduce overall returns.

Mark Sands: If the insolvency exemption comes to an end, as we expect it to in April 2015, then there will be less incentive to litigate, as the benefit to creditors in a win situation will be less. I think the changes will encourage more alternative dispute resolution—such as mediation—or simply without prejudice offers of settlement. Nonetheless, as practitioners, we will still need to build our litigation case to strengthen our position in any negotiations and, if the other side fails to produce an acceptable offer, to maximise the prospects during litigation. The fundamentals will not have changed—if a bankrupt has sought to put assets beyond the reach of creditors, then we have and will use powers to go after those concerned. They will still be found culpable where wrongdoing has taken place, will still be divested of the assets they have sought to deny creditors of, and will still in many cases be held liable for the costs of pursuing them through the courts. The reforms may lessen the net result for creditors—that will not deter me from pursuing the best outcome for creditors.

If you could bestow one piece of advice on insolvency professionals in 2015, what would it be?

Chris Laughton: IPs are privileged to have a statutory monopoly and much is expected of us—it isn't and shouldn't be an easy job. Insolvency professionals should always act properly, in creditors' interests and at proportionate cost, remembering to explain what we're doing and the value we're adding. That may well require sophisticated thinking to cope with our complex regime and the multitude of situations we face, and to enable us to deliver results simply and efficiently.

Mark Sands: Despite the current market, the constant changes to regulation, the cost pressures and the unhelpful approach being taken in the Jackson reforms, the insolvency profession (the combined skills of IPs, solicitors, barristers, forensic specialists and valuers) bring to bear on difficult situations an unprecedented set of skills and an energy and passion to tackle wrongdoing head on. Let's face the year ahead with confidence and together focus on outcomes for our creditor clients.

Interviewed by Stephen Leslie

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor

First published on LexisPSL Restructuring and Insolvency

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