Leading lights profit from insolvency

About 30 companies a week entered an insolvency process last year, but who is running them now?

LAST MARCH, when the receivers moved into Fota Island Hotel in Cork, part of developer John Fleming’s empire, which collapsed last year, management said it would be business as usual for staff and guests. Anglo Irish Bank had taken control, but things would carry on as normal.

And so it turned out, the hotel is still under the charge of a receiver, Bill O’Riordan of PricewaterhouseCoopers, and it continues to trade. The incident was far from exceptional: an estimated 30 companies a week entered some type of insolvency process last year, while a similar number did so in 2009. This has left assets and businesses under the control of professionals – mainly accountants – who specialise in this field.

There are three types of insolvency: liquidation, receivership and examinership.

The specialists tend to practice all three. They don’t own the businesses that they are sent into, but take control of them primarily to protect various parties’ interests. Receivers focus on secured creditors, liquidators owe duties to creditors and shareholders, while examiners aim to save the company, but not to the point where creditors’ rights are unfairly prejudiced.

Insolvency practice has always been with us, businesses fail in good times and bad. But because a collapsed credit bubble followed by a drying up of cash caused this recession, more businesses are running into trouble, so practitioners are especially busy.

Commercial and residential property was particularly vulnerable. Liam Carroll’s Zoe group, which collapsed under debts of €2 billion, is now in the hands of various receivers, including Kavanagh Fennell, Deloitte, Pricwatershouscoopers and Ernst Young. In a connected area, hotels, many of which were built or redeveloped with tax incentives and easy credit, feature regularly on the list of cases taken on by the practitioners.

Along with Fota, Johnstown House in Meath, the Diamond Coast in Enniscrone, Sligo, Citywest in Dublin and a large number of others, are under the charge of receivers. Ken Fennell of Kavanagh Fennell says while construction and property-related insolvencies will continue, the number is unlikely to overtake last year’s total of 472.

He adds that others, such as retail, businesses that depend on discretionary spending and trading companies are likely to produce more casualties.

Banks may not jump in at the first sign of trouble. Carl Dillon of Moore Stephens Nathan believes there is evidence they moved too fast on some businesses early in the recession and damaged their value. As a result, he says banks are more likely to consider working with a debtor to see if it could pay in the long term.

Fennell and David Hughes of Ernst Young point out that a lot of their work involves going into businesses to carry out independent reviews to establish if they are viable. This is often due to the management going to the bank with rescue proposals that include a renegotiation of a loan. “But they must be viable, it can’t be just a pipedream,” Fennell says.

Equally important in that situation is that the banks trust the individuals involved. Hughes says lenders are more open to looking at proposals for an informal restructuring of a company and its debts if they already have a level of confidence in its management. “You have to have trust,” he says.

Banks are more likely to appoint receivers as they generally have security over their loans. Most will have a panel that includes the big accountancy firms and the specialists, and they will make a decision based on cost, the lead partner’s experience and their own view of what’s required.

The fees vary. Small practices work for about €100 an hour, while the bigger players can command up to €600 an hour. However, Brian McEnery of Horwath Bastow Charleton, says that open-ended, fee-based agreements are rare these days.

“What you really have to do is price a job,” he says, explaining that firms give banks estimates based on the individual case and a figure is agreed from there.

Examiners are paid from the company’s existing resources, while liquidators are paid from what the assets realise.

In situations where receivers are collecting income from ongoing operations, their fees are paid from whatever these generate.

Typically, a creditors’ meeting appoints a liquidator. As it is generally the directors who have called time on the company, they nominate the individual. The creditors have the right to oppose that appointment and propose a different candidate, but this rarely happens.

Where a creditor petitions the court to wind up a company, they can nominate someone, and if there is a dispute over this the court will decide. For example, a group of creditors nominated Simon Coyle of Mazaars to be appointed liquidator to Pierse Contracting last November, while the company was seeking to be wound up after deciding against an attempt to be placed in examinership. In that case, Mr Justice Peter Kelly agreed to Coyle’s appointment.

The courts appoint examiners. Again, the directors are likely to nominate their candidate and, assuming that the attempt to be placed in examinership is successful, that person is appointed. Where management play a role in the appointment, they often use someone recommended by other advisers, particularly their lawyers.

The practicalities of taking control can pose challenges. Receivers often meet some initial hostility as they are appointed by the bank. Hughes says they have to allow people to go through this. Once they get past this, he says they are more likely to work with the process.

Unless it is a liquidation, the process does not necessarily spell the end. Most examinerships end with the company being rescued.

An estimated 2,000 jobs were saved when David Carson sold services group Newcourt out of receivership. Shortly after Kavanagh Fennell’s Tom Kavanagh took charge of technology group Calyx, John Moulton’s Better Capital bought it, saving 75 jobs.