You might think the current economic downturn is causing corporate recovery professionals to rub their hands with glee, says Mark Dunne, but you’d be wrong.
US presidential hopeful Barack Obama is not the only one talking about a need for change. In the UK, Nick O’Reilly is also hoping political influence will swing his way this year.
The director of accountancy firm Vantis wants politicians to amend the UK’s insolvency legislation to be able to handle the expected rise in business failures this year.
O’Reilly, who is also head of business recovery association R3, is concerned that current laws don’t go far enough and prevent turnaround firms from rescuing companies struggling under the effects of the economic downturn.
His concerns are supported by research compiled by professional services firm PwC, which reveals that corporate insolvencies reached a five-year high in the second quarter of the year. More than 3,200 businesses in England and Wales became insolvent during this period, a 22 per cent rise on the second three months of 2007.
“There are quite a few issues on the radar at the moment,” O’Reilly observes. “Normally something can be salvaged by selling the business, but our worry is that there could be such a high number of cases that there might not be enough buyers, which could lead to more shutdowns.”
When the economy slides, you imagine that corporate recovery firms would be delighted with the increased workflow, but O’Reilly is a veteran of the last recession in the early 1990s and knows of the problems the industry will face when trying to rescue struggling firms.
“There is nothing worse than having a business that gets into financial difficulty and having no one to buy it,” O’Reilly says. “There is no shortage of people interested, but none of them can get past the finishing post because they struggle to raise funds.”
O’Reilly says the government needs to give turnaround firms more time to help bring companies out of administration.“Current legislation is not perfect, but we have moved a long way from pre-1986, when anybody who had a company with financial problems was deemed to be somebody that society could no longer trust.”
He explains that one of the issues insolvency practitioners face when trying to save a company is that the business owners cannot borrow against the assets as they are often already leveraged.
“At the moment, these opportunities are lost because the business has no cashflow and the bank will not lend it any more money, therefore as insolvency practitioners we are having to close down these businesses.
“In several instances, I feel that with a little more effort we might be able to find a buyer, but the trouble is that we don’t have the funding to be able to carry that on.”
O’Reilly believes the government could solve the problem by putting a fund together to help pay overheads at troubled companies, giving them more time to rescue the business.
Interestingly, he claims the Conservatives “stole a march on us” when David Cameron, during a speech to the CBI, discussed the party’s ideas on introducing a form of the US’ Chapter 11 restructuring act to the UK. “We are interested in discussing amending current legislation with any party.”
O’Reilly predicts that the next few years could be difficult as numerous businesses have survived by simply cutting costs rather than becoming more profitable.
“There are a lot of businesses that have been tittering on the edge for years and are relying on bank support to keep them going,” he adds. “There may soon be a clear out of these files, and they may all end up becoming insolvent, leading to a large increase in corporate failures.”