“One swallow does not make a summer, nor one fine day”: from State of the Union to Fate of the Region

Each year as Autumn approaches, prompted by the President of the European Union’s annual address, I try to take stock of another year in the insolvency and corporate recovery world, primarily in the South of England, and to identify a few trends to look out for going forward.

The extract from Aristotle in the above title, truncated and slightly misquoted by Mr Barroso in his speech, continues, “similarly one day or brief time of happiness does not make a person entirely happy”. I am sure we all understand why he picked this as his theme this year, at a time which he described as one of “fragile recovery”. He went on at length to say how all of Europe might, and must, work as one to turn this brief time of happiness – having weathered the crisis without any actual casualties at member state level – into a sustained recovery for the benefit of all European businesses and citizens. “There is no way back to business as usual, ” he says, “we have to shape a new normal”. He speaks of a “need to avoid a jobless recovery” by “exploiting the full potential of the single market”. He points to a self-evident paradox in that the supposedly internal market actually has 28 national markets in the all important digital sphere, and sets out where the outgoing and (from 2014) incoming European administrations will be focusing “to complete connecting Europe” and remove national barriers to fair and effective competition. “[I]t is time to roll up our sleeves”, he said, but he also gave a nod to the Euro-sceptics, acknowledging that Europe has sometimes meddled where it did not belong, and “must focus on where it can add most value”.

We see the same themes mirrored at national level as the party leaders set out their stalls. It may be that none of them would be prepared to acknowledge that the aversion of the Euro crisis is what has largely laid the groundwork for the 5th consecutive quarter of increasing business confidence in the UK highlighted in Deloitte’s recent CFO Survey, which tells us, “[t]he defensive strategies of cost cutting and cash accumulation that saw corporates through the global financial crisis are increasingly out of favour… [t]he top priority for CFOs now is expansion.” Moreover, it seems that confidence in developed markets including the UK is now outstripping growth in confidence in the emerging markets, hitherto the major investor’s preferred target. But is this large scale trend in evidence in the regions, where SMEs are perhaps the major economic drivers. Are the swallows flying over our region again, or are we counting them rather prematurely?

My own perspective on the macro-economic factors at play in the South has, I confess, been rather better informed this year as a result of becoming Vice-Chairman of the Southern Regional Committee of the Association of Business Recovery Professionals (‘R3’). Having to call and host industry meetings, maintain the Southern Business Recovery group on Linked In, assist my Chairman with press commentaries and releases and prepare to attend my first Regional Communications Committee meeting in London, I inevitably find I am, if nothing else, more widely read than I was before. R3’s latest Business Distress Index acknowledges the widely reported stories that business confidence is on the up and business distress significantly down over the same period, but the (narrow) majority verdict was still that even the national economy has still not yet quite moved out of ‘rescue’ and into ‘recovery’. Indeed the prevailing theme of the regional press reporting has been that whilst a recovery may be underway, it will not feel like it on the front lines for some considerable while, and many will fail to catch the sunlight at all. The recovery phase is at all events a dangerous time for businesses which have been starved of investment for some time and now have to try to react to increasing demand, and the retail sector remains in particular jeopardy, with household incomes having reduced more in the past 3 years than at any time in the previous 30 years. It will undoubtedly be a hard climb for many, but fortunately there are a goodly number of very experienced and qualified insolvency professionals in the regions on hand and only too happy to help in the process, ensuring that profitable core businesses return to real and sustainable growth as soon as possible.

The insolvency market itself has seen its fair share of contradictions over the period, with many established IPs hitting out on their own paths and attracting younger talent to join them with partnerships and office-taking roles which could see them well positioned to take advantage of the potential upswing in demand for insolvency and restructuring advice and assistance. At the same time, however, as if by contrast (although in truth this is probably just the flip side of the same coin as some of the most established heavy hitters branch out) the market has seen a number of high profile consolidations as some of the larger players jockey for market share in anticipation of the eventual fulfilment of the insolvency practitioner’s (now rather cliché) prophecy: “the insolvency curve always follows the growth curve”! Lest any of us have become rather cynical of this, however, we need only really look to the incredible level of personal debt in the UK (£1.426 trillion of which £158.3 billion is unsecured), highlighted at the recent R3 Conference in Reading, which continues to grow much more steeply than UK banks and building societies are prepared to write it down (£7.61m per day). As other sources of lending become more available, it is inevitable that creditors (including bulk debt repurchasers who have acquired them for just this purpose) who have sat on their books already for a very long time will start to exert pressure on those who until now have been doing little more than paying off comparably low levels of interest. Pursuing such debtors is now less likely to result in an asset poor bankruptcy or insolvent liquidation, so the potential revenues from enforcement will improve. We are already seeing evidence of this change with a recently hardened attitude from HMRC and some landlords.

Insolvency lawyers (an odd breed at the best of times) have, by and large, somewhat dug in for the long haul, knowing that our skills will always be in demand, in good times as much (if not more so) as in bad, but even we are beginning to see signs of migration of talent amongst competitor firms, who have perhaps recognised that a genuine full service offering will invariably require all of the right skills in all of the right places. Unfortunately the UK legal sector (itself worth £28.3bn but growing at just 0.4{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} pa) has been far from immune to its own financial pressures, and if anything the sector has been more under fire from creditors and its regulator this year than last. For our part, though, we in the Insolvency and Recovery group at Paris Smith are pleased to report we have already seen an increase in both volume and quality of transactions and claims investigations with an insolvency theme, right across the piste (corporate, personal and technical), and that these have been enjoying increasingly positive outcomes. In the last few weeks alone, this has taken the form of an unexpectedly good value for a pre-liquidation sale, the revival of a failed multi-jurisdictional business restoring employment to dozens of people, and the continued funding through a trading administration of a group of hotels with a view to going concern sales. Whether these recent assignments are the product of genuine and sustained optimism or just a lucky patch is difficult to say with any certainty at the moment.

The one thing we can all safely predict, however, is that there will undoubtedly be more turbulent times ahead, which will throw up both new risks (for those still shackled in debt) and new rewards (for those prepared to take professional advice to address that debt and/or with the foresight and wherewithal to invest in / acquire distressed businesses). As one of my former mentors would say, if nothing else these are “interesting times” to be a member of the insolvency profession!