After attending this year's R3 Annual Conference in Dublin, I drew a conclusion that however much things change, things are just as liable to stay the same.
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Vernon Dennis | Partner, Head of Business Advisory
The conference programme covered huge areas of potential UK and worldwide political, economic and social change, as well as drawing attention to changes in practice and procedure, some existing and some proposed. However reflecting on all of this worldwide uncertainty and turbulence, I agreed with Simon Jack the BBC Business Editor observation in his opening address to the conference that while politically and culturally so much was going on, economically nothing is happening; a situation he felt would continue until Brexit negotiations are concluded.
As ever the conference kicked off with a look at the economic climate and its implications for the insolvency world. Coined the 'Goldilocks' effect, the UK economy is viewed as 'just about right' at the moment, but a variety of commentators felt that the current sweet spot wouldn’t last for long. A fall in sterling has caused inflationary pressure on imports and a likely fall in the standard of living will result when inflation starts to outstrip wage rises. A fall in business investment for the first time since 2009 points to a lack of business confidence and an unwillingness to invest while the political and economic climate remains so uncertain. This lack of investment will have significant impact on the economic prospects for the UK, but despite this and the underlying uncertainty as to the prospects for the economy as a whole (or perhaps because of it) commentators felt that, pending a Brexit settlement, neither boom nor bust is predicted. The UK economy will remain moribund.
On reviewing the political situation, Brexit was of course central to discussions, the conclusions being that the divorce settlement will be difficult to negotiate (the EU negotiating team driven by a need to show the remaining members that it is better in than out!); in context the potential settlement cost of £60bn is not actually material; and the free trade agreement with the EU required post Brexit will take at least a further five years. In contrast the forthcoming UK election seemed to generate little discussion inside or outside of conference. Difficult Brexit negotiations and a fall in standard of living will pose challenges to the UK and as a result the electorate may currently be more amenable to a continuing Conservative administration than they would be in two to three years time. As a result an election for reasons of political expediency was felt inevitable. One practical effect of the election however, was that representatives from the Insolvency Service and HMRC who were billed to attend the conference were not permitted to do so because of the election purdah. An absence of policy makers from the conference was a loss.
What does the political and economic climate mean for the insolvency profession? Not much for the time being seemed to be the considered response. Instead commentators focused on the localised pressure in various sectors of the economy. Nick Ram from Lloyds looked at potential difficulties within the oil and gas market (the low barrel price being predicted as one which will continue for some time to come). He also identified challenges in the care sector due to local authority spending cuts and a crisis in further education establishments due to inexperienced business management. A theme taken up by other commentators was the threat to the property market and in particular the construction and retail sector. A potential Brexit consequence for both the construction and retail industry is the possible loss of lower cost migratory labour but for retail, increased business rates, as well as systemic changes to consumer spending patterns, away from bricks to clicks, was identified.
One growing area of work for the profession identified by the R3 President Adrian Hyde is fraud investigation and asset recovery, with the profession being uniquely equipped to provide government, HMRC and enforcement agencies assistance in combating crime. Fraudulent criminal activity is said to have cost the UK an estimated £193bn. With an additional session on crypto-currencies and bitcoins the point was made that the criminal fraternity will be at the forefront of IT developments and will be quick to embrace changes, all must be vigilant as this will have major consequences for the economy as a whole.
A Change is Gonna Come
A significant proportion of the conference was spent looking to the future and potential reforms for both personal and corporate insolvency. A clear direction of travel was very evident, being both a political and cultural shift in power away from creditors, and particularly secured creditors, to debtors. While some audience members decried this shift and also proffered the view of 'if it's not broke, why fix it', in reality the sheer weight of proposals in favour of a more debtor friendly insolvency regime seems to make change inevitable, the election providing just a short break in this momentum.
The panel discussion on the future of personal insolvency highlighted the fact that consumer debt continues to rise; Joanna Elson of the Money Advice Trust commenting on the fact that the Trust had experienced its highest level of recorded activity in the last quarter of 2016. While a significant socio-economic problem is envisaged, Mark Sands of Baker Tilly Creditor Services reminded the audience that the vast majority of individuals facing personal financial difficulty will not enter into a bankruptcy and will not have assets capable of realisation by creditors. Pointing to a move away from tradesmen based insolvency and the rise of consumer debtors, with an increasing proportion of female debtors, insolvency numbers may have changed the socio-cultural landscape but this has not resulted in significant work for the insolvency profession. The message was that this type of work is not going to return to the profession. Consequently the steps, processes and procedures that need to be implemented to deal with this changing situation need to reflect the change in nature of the insolvent personal debtor and we may see an ever increasing move away from the use of formal insolvency processes.
One proposal in line with this thinking is the introduction of a so-called "breathing space" moratorium, potentially of use by the up to 8 million people that the Government estimates are facing a heavy debt burden. This breathing space would provide a legislative protective moratorium that would work in parallel to industry codes of practice, preventing creditors from taking enforcement action at a time where the debtor was coming up with a solution for her creditors. In Scotland, Debt Arrangement Schemes and in Ireland, Personal Insolvency Arrangements have been introduced providing a mechanism for financial rehabilitation, avoiding bankruptcy and binding both secured and unsecured creditors alike. Some form of statutory alternative to bankruptcy and the IVA process is therefore seen as likely, particularly one which will limit the powers of the home mortgage lenders to take perceived perceptive action.
The Government's review of the Corporate Insolvency Framework launched in May 2016 was also discussed and provided similar echoes of the suggested moratorium period, here providing a gateway to a business rescue, refinance or insolvency process. Whether this period of moratorium is three months or 28 days is still to be determined but clearly the move to debtor in possession restructuring is on the cards. The reason for this is not just to limit the social impact of insolvency, but also a reflection that the Government is driven by a need for the UK to compete on the world stage; to be an attractive place for international business investment. As Howard Morris of Morrison and Foerster commented 'capital flows where risk is familiar'. As a result, the fact that the World Bank and many major economies view US Chapter 11 as a model to be followed means a move in the UK towards a system that enables debtor in possession restructuring is increasingly likely.
Panellist noted that this potential move was despite commentary in the US pointing to the cost and satellite litigation resulting from Chapter 11, meaning it is difficult to use in any scenario other than for the largest businesses. Despite this, policy makers across the globe are increasingly promoting legislative reforms which mimic Chapter 11 and debtor in possession is becoming a standard practice. The UK Government has recognised this and is proposing reforms allowing for a debtor in possession moratorium. With this it is envisaged that definition of essential suppliers (who are prevented from changing terms of supply in the event of insolvency) will expand from utilities and IT companies to other business suppliers, perhaps even capital providers.
The proposed introduction of a flexible restructuring plan akin to a Companies Act scheme of arrangement seems to be no more than a push of such schemes into the remit of the Insolvency Service and insolvency legislation.
The future of insolvency seems to be away from formal process and towards a more flexible treatment of debt and restructuring. Tied up with this is a fundamental change to the socio-economic view of debt and in particular the primacy of the secured creditor. Perhaps such a change is unsurprising in a world post the 2007-09 financial crisis. It was of some note that not one delegate was sent by a bank to this year's conference, in previous year's bank provided sponsorship of the conference and events held by banks were a central part of the conference programme. In place litigation funders, insurers and private equity investors were significantly more visible. This is reflective of the change in the insolvency world which was once dominated by secured creditors, bank panels and enforcement action taken by those secured creditors. This is no longer the case; perhaps the legislative reform being suggested, which will see debtor in possession in some form or other, is a reflection of the practical dynamics of current insolvency practice, the banks are simply not as important as they once were.
The UK has been viewed as one possessing a creditor friendly insolvency regime, certainty of enforcement/recovery being a central tenet of capital investment. Allied to this historically the UK population was seen as a nation of shopkeepers, prudently living by the maxim 'neither the lender nor borrower be.' As a result the UK population and its businesses lived for many post war decades within its means and insolvency numbers were low.
The inextricable rise in consumer credit and spending has changed the way we look at debt; it is not viewed as a sin but rather an essential component of our day to day lives. The provision of debt was seen as attractive and offering reward with certainty as to recovery, debt providers in many different guises proliferated. Debt became a tradable commodity and collateralised debt obligations and derivative trading, the ticking time-bomb behind the crisis.
Of course the balance between risk and reward and indeed debtor and creditor is one that is at the centre of the insolvency regime. Like any balance a swing in one direction is likely to be countered by a swing back in the opposite direction. It is therefore perhaps not unsurprising following an unprecedented financial and banking crisis, which resulted in a public across the globe often turning to anti-establishment movements that decry the banks as having become too powerful and to heavily rewarded, we are seeing moves which will curb the power of banks and protect borrowers. Are proposals to curb the power of secured lenders, politically motivated by a wish to be seen to punish the banks? Are we seeing a future where lenders are expected to promote the greater good of the economy and society as whole, as opposed to simply obtaining repayment of their debt? Would such measures increase the cost of capital, resulting in a funding crisis and cause a swing back to more creditor friendly measures? Undoubtedly, and it is for this reason I was drawn to the conclusion that however much is likely to change, things are likely to stay the same.
P.S. No doubt the eagle eyed will have spotted that the brief sojourn with the lyrical, river dancing (were you at the Gala dinner?)Irish people have inspired reference to a collection of diverse song titles, but can you name the artists? Answers next month.
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Vernon Dennis | Partner Head of Business Advisory
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