In welcome news for the business community, corporate insolvencies are down according to the Insolvency Service. There were 4,082 compulsory liquidations and creditors’ voluntary liquidations in total in England and Wales in the first quarter of 2010 (on a seasonally adjusted basis). This was a decrease of 8.4% on the previous quarter and a decrease of 17.8% on the same period a year ago. Company Voluntary Arrangement (CVA) numbers have remained stable and have been seen as a useful rescue tool.

However, for people in the industry there is a feeling that the figures are only lower due to the HMRC “time to pay” policy where businesses can negotiate very good terms to pay VAT and PAYE owing. The Begbies Traynor Red Flag Alert backs this up as it has reported an increase in businesses facing financial problems that have not been reflected in the insolvency figures. The significant debts owed by businesses to government have not been called in for now.. As pressure increases to pay back the deficit it is likely that there will be more corporate failures going into 2011. As the economy improves there will be opportunities for investors to take advantage by buying up struggling companies to increase market share. For a list of struggling companies we have published our list of businesses facing winding-up petitions.

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There has been a great deal of fuss in the press about the “pre-pack” administration process not giving a fair deal for the business’s creditors and accountancy firms benefiting in the form of high levels of fees. Despite many attempts by the industry to highlight the benefits of a “pre-pack administration”, it seems that the process is going to be looked at in detail by the Office of Fair Trading.

The investigation is aiming to look at fee levels and recovery rates, following concerns about what’s returned to creditors and how much the preservation of jobs in the insolvent business has cost. If the OFT finds against the larger accountants’ fee levels then it is likely there will be more work for the next tier of accountancy firms.

It looks as if the whole insolvency industry is going to have an interesting 2010. This is because business groups, such as the Forum of Private Business, have asked the OFT to delve into “phoenix companies” as well.

For those not familiar with the processes a “phoenix company” is simply a new company that has bought the assets of an insolvent company and carries on in the same trade as insolvent company, often with the same name and most, if not all, of the directors from the failed business.
Complaints against this process focus mainly around accusations that the assets of the failed company have been transferred out at below market price.

However, a “pre-pack” is a deal for the sale of an insolvent company’s business (and/or assets) which is put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business will usually have been worked out before the insolvency practitioner (IP) is formally appointed, and is then rapidly executed once the appointment is made.

The Office of Fair Trading’s senior director, Clive Maxwell, commented: ‘We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers. Efficient insolvency services are an important component of a modern market economy.’

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Peter Harkness (above) and his business partner, Owen Davies, bought Highbury Communications, the North London-based publisher of many well-known newsstand magazines out of administration in 2006. The businesses downfall occurred after it had taken on too much debt – some £26m. This debt was mainly due to some disastrous acquisitions and the overly ambitious launch of new media products.

How Peter Harkness and his partner turned the company around so that it is now making a profit of £1m is an interesting story. The main focus was to get rid of the loss making magazines and concentrate on the “special interest” magazines that have a more loyal subscriber base. Due to the increased profitability of these new titles only 30% of the revenue now comes from advertisers. Profitability was further increased with the setting up of ecommerce websites closely linked to the actual titles.

Another successful entrepreneur, Simon Elliot (above right), saw an opportunity when the company he was interested in collapsed due to a £1m tax bill. Problems that were uncovered included a finance director who had been stealing from the company due to lack of oversight. One of the main attractions of the company were the long term contracts.

Both Elliot and Harkness found their target companies through careful research. Harkness says he ‘used to spend hours and hours downloading files from Companies House’, and Elliot’s successful bid came after two previous potential mergers had fallen by the wayside. Of course another great source of information is the Business Sale Report, where companies that have gone into administration are listed on the site each day.

Stuart Wilde just just saw a business, liked it and just bought it. Stuart was in the middle of a home renovation project when he found out his favourite supplier had gone under. Stuart was relatively wealthy but at 52 he had ‘itchy feet’. He jumped at the chance to buy the company, even though he had no experience in bathrooms or in retail.
‘I did question my sanity for a couple of minutes,’ he says, ‘but I felt there was a good business there, and the main reason it had gone into administration was because the previous owners had spent £750,000 doing up the showroom without thinking about cashflow.’

So what have the entrepreneurs learnt from their experience. A number of key lessons seem to have been learnt.

A more detailed version of this article where readers can gain more insight can be found by subscribing to the Business Sale Report

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Some of the latest businesses falling into administration are:

The radio station Abbey FM in Cumbria. Staff were asked to leave for good at 3pm on Friday.

Freeman & Proctor Ltd, the Warwickshire-based engineering firm. Makes pipes and tubing for the aircraft industry. PricewaterhouseCoopers (PwC) have been appointed as administrators.

Ffrith Leisure in Denbighshire. It leases Ffrith Beach festival gardens and employs 50 people.

What a day, more news on the insolvency front:

Vantis Business Recovery Services have been appointed administrators of freight forwarder Anglo Overseas. It has 210 staff, but is still operating as a going concern; 70 have been made redundant.

The management company behind UB40, Reflex Muzic, have appointed administrators Bond Partners after the latest albums by the band flopped.

Camden Group, the parent company of fleet services company Camden Fleet Solutions has folded into administration with the loss of 40 jobs. Zolfo Cooper has been appointed to find buyers for the business which is continuing to trade normally.

For details of these and other companies and their appointed insolvency practitioners, please subscribe to the Business Sale Report.

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Following vocal complaints by groups of aggrieved creditors, any future pre-pack administrations will be closely scrutinised by the UK Insolvency Service.

Pre-pack administrations have proved to be a fairly rapid way for companies in severe financial difficulties to shake off debts and burdensome assets and continue trading.

But several high-profile pre-pack business administrations, including Whittards of Chelsea and Tom Hunter’s USC have highlighted the simple fact that company creditors are simply shrugged off and left in the dark about what is going on.

This month a new code of practice was launched by the government with the intention of making the whole process more transparent, especially to creditors. If insolvency practitioners are putting a pre-pack deal together for businesses in administration, then creditors must be kept informed both before and after the process as to who is is dealing with the administrator, what the terms of the deal are and what was involved in selecting the individual(s) or organisation taking over the running of the business.

Yesterday’s statement to parliament by the deputy head of the UK Insolvency Service, Graham Horne, was the first clear indication that the service was going to be serious in the way they policed the code. He said, “We are going to get every statement into our office and see the administrator has followed the spirit”, adding that they would prioritize the policing of pre-packs.

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Pre-pack insolvency practice has had much bad press of late. Tenon Recovery has come out fighting and said that it can help to avoid the “domino effect” of suppliers to the business going bust. Critics have argued it has allowed owners of businesses to buy back their companies with most of the liabilities released, so leaving creditors out of pocket.

Tenon has identified six major benefits to the pre-pack insolvency route that must be considered.

So there we have it, a pre-pack is the best way forward. Or is it?

The problem is that with a pre-pack it can be difficult to argue there would have been a better outcome if the business was put up for sale to invite best offers. It can be argued that once the business had gone into administration all goodwill would have been lost, suppliers would have pulled the plug, and the value of the business and hence the chance of the creditors being paid off would have been reduced. But hey we have no way of knowing… Of course, the other problem with delaying any resolution is if the previous owner/manager tabled an offer for the business that was rejected and then the business completely failed then the knives would be out for the administrators and the lawyers would be sharpening their pencils.

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Now that the Summer of gloom is in full swing, some business sectors are looking forward to a bumper Autumn!… Insolvency experts and turnaround specialists are gearing up for a surge in corporate debt problems which they expect will generate the biggest wave of company restructurings in decades. This could mean lots of fees. Lucky them!

Given the difficult credit conditions banks have largely held off calling in loans, focusing instead on dealing with write-offs from the subprime crisis. But any struggling business may soon hear the bank knocking on their door.

With the potential for a serious downturn questions are being asked as to whether European insolvency regimes are in a position to deal with the consequences. Especially since corporate structures are much more complex now than they were when the Enterprise Act 2002 was initially envisaged.

It is these aspects of the current system that prompted David Cameron to raise the issue at the CBI employers’ group recently.

The answer, he suggested, was to borrow some of the best aspects of the US Chapter 11 bankruptcy regime – to save such companies from liquidation. Of course, he doesn’t completely understand things as liquidation really means that there is no hope left for the business. I think going into administration is what he really meant!
He pointed out that many of the likely casualties would be “fundamentally sound” companies, he said, but they would not have the “breathing space” to restructure and keep their businesses alive.

His comments have sparked a fierce debate between supporters of the US approach and defenders of the English system, introduced in the Enterprise Act 2002. The Enterprise Act works if more than 75 per cent of the creditors agree and do a scheme or pre-packaged restructuring but in the abscence of full agreement problems can arise.

When it works well, it can be cheaper and faster than the adversarial Chapter 11 approach, which is under the direct control of the courts.

Advocates of change, however, argue that the 2002 regime has not been fully tested in the sort of market conditions now seen across the advanced economies. Some predict it will buckle when the pressure builds and that a more formal legal framework is needed to provide stability, predictability and efficiency.

To many in Europe, the US system is seen as one that protects inefficient companies by allowing them to offload their commitments under court protection and emerge as stronger competitors who can undermine more efficient businesses that have not been able to do the same. The most obvious example of this is in the airline industry where large US airlines have been allowed to go into chapter 11 when perhaps they should have really been left to wither.

In conclusion, it is paramount that any system works well. Chaotic attempts at restructuring large UK corporates could do untold damage to UK plc as a place to do business.

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It’s prediction season again; one just has to glance through any financial or business publication for lists of what’s going to be hot or cold in 2008, which shares are going to explode and where to buy or not to buy your next investment property.

As far as I can see, the only sure thing is that there will be a massive shakeout of futurologists.

But on closer inspection, if we limit our assessment to the more sober UK publications, we soon realise that not many have much confidence in the present state of the British economy.

So it was no surprise to learn of the results of a survey of 55 of the country’s leading economists by the Financial Times. Around 90% thought that the nation’s finances are in a poor condition. Over 60% thought that there will be significant falls in house prices this year.
The determining factor will be the availability of credit to banks and businesses, together with the impact of economic conditions in the Americas, Asia and Europe.

Any continued downturn in the UK economy will have a immediate impact on those businesses that have a higher reliance on debt.

Already we are seeing a rise in the number of corporate insolvencies – I predict a five year peak this year, with smaller businesses and the services sector dominating the figures.

Later this month the Business Sale Report will be releasing figures for administrative receiverships for the last quarter of 2007, and early signs are that the credit squeeze has had and will continue to have a sudden and fatal effect on many medium-to-highly geared private businesses.

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