Turnaround professionals

222 the context of corporate insolvency law

change of focus has brought a burgeoning group of new actors onto the scene. These are the individuals and organisations that assist banks and companies in effecting pre-insolvency turnarounds. They come with a variety of labels, notably: turnaround professionals, company doctors, business recovery specialists, interim turnaround executives, risk consultants, solutions providers, independent business reviewers, assetbased lenders, private equity providers, debt management companies, credit advisers and insurers, and cash-flow managers.200

When, however, more and more work for distressed companies is carried out in this pre-insolvency or ‘twilight’ zone,201 issues are raised about the growing role that is being played by the turnaround professionals. Does the use of such specialists actually produce processes that are more rescue-friendly? Are these persons qualified experts who are properly accountable? Do their interventions raise questions of fairness between creditors?

The Cork Report cautioned that if those who administer insolvency systems do not have the confidence and respect, not only of the courts and of creditors and debtors but also of the general public, then ‘complaints will multiply and, if remedial action is not taken, the system will fall into disrepute and disuse’.202 These comments were directed at those who administered formal insolvency procedures but similar concerns might be voiced about turnaround specialists because these actors, like IPs, play key roles in rescue processes and, like IPs, may be instrumental in putting into effect business solutions that impact on the interests of a host of creditors and other stakeholders.

The efficiency and accountability of the turnaround professional system

Are TPs subject to a control regime that is efficient and that is accountable? In formal terms, it is difficult to argue that the TP regime constitutes an efficient quality control mechanism to the same degree as the

200See D. MacDonald, ‘Turnaround Finance’ (2002) Recovery (Winter) 17; R. Bingham, ‘Poacher Turned Gamekeeper’ (2003) Recovery (Winter) 27; P. Godfrey, ‘The Turnaround Practitioner – Advisor or Director?’ (2002) 18 IL&P 3. On the role of credit insurers in turnaround see G. Jones, ‘Credit Insurance: A Question of Support’ (2004) Recovery (Summer) 21.

201See D. Milman, ‘Strategies for Regulating Managerial Performance in the Twilight Zone’ [2004] JBL 493.

202Cork Report, para. 732.

IP system (a matter to be returned to in the discussion of expertise below). Could it be contended, however, that the TP system is efficient since TPs’ activities contribute to the delivery of lowest-cost rescues? On this point, what is hard to deny is that TPs offer a range of services that are rescue relevant. The market, moreover, has clearly encouraged the development of a group of specialists that offer a wide variety of rescue services. It is, though, difficult to quantify the contribution of TPs to rescue and there are a number of reasons why this is so. First, a number of factors may have an effect on both the incidence of rescue attempts and the success or otherwise of such attempts. Assessing, for instance, the degree to which any particular development – such as the advent of the new cadre of turnaround professional – has impacted on rescue is impossible. Other relevant developments include the Enterprise Act 2002’s reforms relating to administrative receivership and administration, the Government’s newly invigorated espousal of rescue and the major lenders’ revised approaches to rescue.203 Statistics on overall numbers of corporate liquidations or of rescues, accordingly, would tell us little about the value of the turnaround professional – there are too many possible (and interlinked) drivers of rescue attempts as well as of success or failure. Second, there is an absence of statistical data on the extent to which TPs’ interventions produce successful rescues. There is, moreover, likely to be a continuing paucity of such data – and again for good reasons. What constitutes a ‘rescue’ is hard to define, even when referring to formal, statutory rescue processes.204 In relation to such processes a rescue can be thought of as a major intervention necessary to avert eventual failure of the company.205 Characterising a formal rescue as successful raises a host of further issues, notably: for which parties is the rescue a success?206 Is rescue of the company or rescue of the business what matters? Is the true measure of rescue the protection of employment or creditor value? How much downsizing or reorganisation constitutes failure?

When the focus is on turnaround activities, however, the difficulty of drawing a boundary line around ‘rescue’ services is yet more extreme. No longer is the focus on major actions that are taken to avert a failure that is

203See chs. 6–12 below.

204See e.g. A. Belcher, Corporate Rescue (Sweet & Maxwell, London, 1997) p. 12; and ch. 6 below.

205See Belcher, Corporate Rescue.

206On stakeholders’ divergent views on the objectives of rescue see J. Roome, ‘The Unwelcome Guest’ (2004) Recovery (Summer) 30 and see further ch. 7 below.

224 the context of corporate insolvency law

clearly identifiable and seen to be approaching. Turnaround professionals may assist companies in meeting challenges when those companies are in states ranging from relative health to absolute crisis. The essence of beneficial turnaround activity, moreover, is widely argued to be early intervention – and certainly action at a stage in corporate troubles that is early enough to prevent these from becoming chronic.207 The most successful ‘rescues’, accordingly, are likely to be those that are at no time ever labelled as ‘rescues’ – that is in the nature of preventative activity.

It might be responded that some statistics could be collected on such matters as the number of bank-induced referrals to turnaround specialists and the proportion of these that lead into formal insolvency procedures. Again, however, there would be difficulties in defining what constitutes such a referral. If, for instance, a bank recommended to a debtor company that it sought advice from a risk consultant or a solutions provider, would this be counted as a rescue-relevant referral? It might be suggested that a referral might be categorised as a ‘rescuereferral’ if it is made when the company is in a state of ‘near insolvency’ or ‘acute crisis’ but these terms lack precise meaning and it is to be repeated that much of the preventative work of turnaround professionals is likely to be done before companies reach such desperate straits.

What can be offered as an indication of the contribution of turnaround specialists to rescue is an account of the services that these professionals bring to the rescue party and which conduce to rescue. The list is impressive and includes: conducting independent business reviews (IBRs); carrying out external reviews of managerial performance; advising on financial, operational and managerial restructurings; devising financial plans; arranging the provision of new funds; providing new managerial skills; planning strategic realignments; implementing cash flow management systems and negotiating with customers, suppliers and other stakeholders.208

What, it might be posited, is added by using turnaround professionals to provide the above services? Surely these are all functions that have been and could be carried out by companies on the advice of their major creditors? The turnaround professionals, however, would argue, first, that niche specialists, in such matters as refinancing, are able to develop

207See N. Ferguson, ‘Early Intervention by STP Independent Executives’ (2004) STP News (Winter) 14.

208See A. Lester, N. Young and C. Hawes, ‘Help is at Hand’ (2002) Recovery (Winter) 18.

a higher level of skill and a more extensive list of contacts than generalists. Second, they would point to the benefits of using professionals that are independent of the major creditors. Such independence may mean that the troubled company’s directors are less threatened by turnaround specialists than by creditors’ staff and are thus liable to be more co-operative. Turnaround professionals, for their part, are increasingly inclined to work alongside existing managers and to improve the performance of those who are already in place. As the Chief Executive Officer of the Society of Turnaround Professionals (STP – now IFT), Nick Ferguson, has put it: ‘There has been a tendency to dispense with the existing management of a troubled company but people now recognise that it is worth trying to keep them, to hold their hand and to mentor them.’209 On the accountability of TPs, it can be argued that this tends to be modest in the absence of statutory controls and because a high premium is placed on the independence of these specialists. Independence encourages a level of trust, especially in the minds of those less committed creditors whose co-operation may be needed in order to effect a rescue. This allows for more effective negotiations on rescue proposals; it means that business reviews carry an authority that might not be present if they had been carried out by previously involved parties; it allows more objectivity in analyses of managerial capacities and it provides a fresh perspective on the company and its problems. From the point of view of the troubled company’s directors, a degree of trust in an independent TP may concentrate the mind wonderfully. It will often be the case that the need for urgent action within the company is only accepted when that necessity is hammered home by an authoritative and independent outsider.

Independence also encourages the development of a cadre of professionals who are specialists in gaining trust and co-operation through effective facilitation. A senior manager of a credit insurer made the point thus:

The key is how to build trust between stakeholders that allows them to discuss confidently more creative and supportive options that might save

209N. Ferguson, ‘Advice Squad’ (2005) Director (April) 31. The STP was renamed the Institute for Turnaround (IFT) in June 2008. Another turnaround specialist typified the relationship with existing directors: ‘I work with incumbent management rather than threaten their future’: see C. Wray, ‘A Day in the Life of a Company Doctor’ (2002) Recovery (September) 51. It is likely that the directors of a troubled company will feel more comfortable with an informal turnaround procedure than a formal rescue procedure which removes them from office.

226 the context of corporate insolvency law

some corporate lives … There is also a key role for highly skilled facilitators here. Neither the banks nor credit insurers have the resources to spend weeks investigating, planning a strategy and then enforcing that strategy. Company doctors and, increasingly, the Big Four accountancy firms are becoming interested in this role. The beauty of it is that the ‘independent’ facilitator can engage all the key stakeholders and bridge the gap of trust between the banks and insurers.210

A further advantage of independent facilitation is that this provides an often urgently needed boost to information flows within the troubled company. Establishing such information provision is seen by many as a central contribution that the TP can make. One highly experienced TP put it: ‘You need great communication skills because usually it is communication that has fallen apart in the company and people aren’t telling anyone anything because they are too scared or too busy.’211 He added that, in many troubled companies, the existing directors (or some of them) often knew what had to be done to effect a turnaround but it required the input of a TP to allow the necessary messages to strike home and cause action within the company.

It might be contended, however, that it is easy to overstate the independence of turnaround specialists. In most cases, TPs are hired at the prompting of the banks212 and observers might, accordingly, think that the banks will call the tune in the turnaround. There are, however, factors that militate against such a bank bias. First, it is the case in the vast majority of turnarounds that, although the hiring of the TP is at the instigation of the bank,213 the client and paymaster is the company itself. The turnaround specialist, accordingly, is obliged to act in the interests of the company not the bank.214 Second, turnaround professionals are repeat players in relation to corporate difficulties and they have reputational incentives to avoid bank biases. If their reputations for evenhandedness were to diminish this would affect their business prospects since their success in achieving turnaround will in no small part turn on the trust they are able to generate amongst stakeholders and on the

210Jones, ‘Credit Insurance’, p. 22.

211Les Otty, Director of Business Turnaround, BDO Stoy Hayward: interview with author, 8 April 2005.

212See e.g. Bingham, ‘Poacher Turned Gamekeeper’.

213Often, as noted, on the recommendation of a ‘catalyst’, for example an investigating accountant appointed by the bank. Author’s interview with Les Otty, 8 April 2005.

214STP members are, as indicated above, required to give the company advice free from ‘external or adverse pressures’ which would weaken their independence: STP Code of Ethics, Appendix, para. A.2.