A View from the Danube

The 26^th Annual R3 Conference was this year held in Budapest and entitled ‘The Future of the Market – a gathering of thought leaders.’ Howard Kennedy was well represented; and I was joined by colleagues, Tim Bignell and Suzanne Jones. As ever the Conference presents valuable networking opportunities and leads to many discussions on the state of insolvency law and practice lasting well into the night!

For those unable to attend, or perhaps those who attended the conference but found the cultural distractions of Budapest a little too tempting, I thought I would take up the challenge of the conference title and share a few thoughts on the debates taking place both in and outside of the conference hall. I detected three main recurring themes.

1. The Future for the Economy

As is traditional, the early sessions of the conference focused on the economic and political climate. The BBC journalist Naga Munchetty, while at pains to point out her neutrality, referred to the angry voter syndrome in the UK, US and Europe and suggested that the current popularity of anti-establishment candidates could be a slow burn consequence of the banking crisis of 2008. Linking this to the Brexit debate she referred to a “scared electorate”. Will an increasingly belligerent and sceptical electorate back the establishment’s endorsement of the Remain campaign?

Iain Anderson of Cicero Group colourfully used the analogy of Humpty Dumpty when pointing to the fact that over 60% of Conservative party membership are opposed to its leadership stance on Brexit. Post Brexit, whatever the result, political realignment is a real possibility. Later sessions, focussing on restructuring and financing options, echoed a view found amongst delegates that whatever the rights and wrongs, the Brexit debate has contributed to uncertainty and dented business confidence, in some cases paralysing investment decisions. The ICAEW Business Confidence Monitor was referred to; amongst the 1,000 financial directors regularly surveyed, since 2013 confidence has been steadily falling to a point where on average there is no confidence in economic improvement. As we are acutely aware, restructuring requires investment and this requires business confidence; the fact that both are lacking is hindering economic growth and restructuring opportunities. It was difficult to detect any confidence that the economic outlook offers more than miniscule improvement in growth, with a widespread belief that an out vote would result in a (short) sharp shock to the economy.

2. The Future of Insolvency Regulation

This year’s R3 President, Andrew Tate, made clear his thought that the one size fits all approach to legislation and regulation is no longer an answer. Instead, differing solutions, processes and procedures may be required for the largest and the smallest of cases. The introduction of a 21 day moratorium with debtor in possession is an eye-catching potential proposal by R3 and a means of allowing restructuring techniques and stakeholder management outside of the straight jacket of formal insolvency.

Many of the speakers focused on reputational risk and issues of wider corporate responsibility in respect of restructuring inside and outside of formal process. Criticism of the industry, and potentially unfair press/political pressure often leads to a situation where ‘something must be seen to be being done.’ Legislative and regulatory reform were predicted, as a result of the BHS administration, whether specific to the pension issues involved or more generally related to the sale of distressed businesses pre-insolvency. A presentation on the tension between employment and insolvency legislation focused on the fallout from the CitiLink administration and can be seen as an example of where political pressure and criticism of a business/commercial decision leading to a restructuring process has resulted in criminal proceedings against the directors.

Reference to moral hazard and reputational risk also cropped up in discussions regarding the banking industry. In the session entitled ‘Psychology and distress situations’ reference was made to the banking industry, miss-selling claims and the potential abuse of authority that exists between creditor and debtor. Reputational damage has caused distrust, an unwillingness to borrow (corporate cash balances remain high) and a movement away from traditional forms of lending.

Alternative capital provision at least in part replacing traditional sources was looked at in a number of different sessions. Plans to see a SME business that has been refused funding being able to ‘advertise’ on an online platform were discussed as a means of introducing corporates to these new providers. Whilst one view was certainly proffered that there has never been a better time for SME businesses to obtain funding, Jamie Murray Wells in a session dealing with future digital trends pointed to a regrettable failure in the UK to back start-ups. The UK has an exemplary record for innovation and invention and leads the way in start-up businesses but equally there is an inability to scale up those businesses, which is a consequence of conservative lending practices.

More explicitly in regards to regulatory change, the session on the ‘new’ Insolvency Rules revealed that we are likely now to be looking at an April 2017 commencement. Criticism from the speakers and audience was directed at the effective ‘abolition’ of creditor meetings and the failure to tackle the problem of de minimise dividend returns, which do little to enhance the perceived value of the profession.

3. The Future of the Insolvency Profession

With corporate insolvency levels at record lows, much debate centred on how the skills and experience of the profession can be best utilised. Many sessions echoed the theme that ‘a holistic approach’ to restructuring is now required, which would include management consultancy, operational efficiency/turnaround with on-going financial and performance analysis of the business, with the insolvency professional providing effective project management of the non-formal restructuring. Examples of how insolvency professionals have used their skills in such a way were discussed in a session regarding the health and care sector - work in the public service sector seems to be a growing area for the profession.

So what was learned?

Firstly, the industry appears to be alive to the fact that there is a need to change and adapt or die. Andrew Tate felt that there will remain a place for formal insolvency but it is highly unlikely that we will ever see the profession engaged in formal insolvency process work at the levels seen in the past. Secondly, the bar mangers, hoteliers and restaurateurs of Budapest consistently underestimated quite how ‘thirsty’ the insolvency profession can be.