When a business is in financial trouble, crucial decisions need to be made, often critical to whether the business survives or not. These decisions have important consequences on its employees, its customers, its suppliers, its other stakeholders and the wider community both business and social at large, as well as not least, its enterprise value. And these decisions are so critical, that we at European Association of Certified Turnaround Professionals believe they should be made based on advice and judgments that have been given independently, and without any potential for conflict of interest, writes Tyrone Courtman.
I and my fellow EACTP directors believe the referral of three administrators from UK retailer Comet to the accountancy watchdog highlights the need for advisors to companies operating in the zone of insolvency to be independent of any conflict. We welcome the Institute of Chartered Accountants in England and Wales investigation to explore the possible conflicts of interest where Insolvency Practitioners act both for solvent but troubled and subsequently, insolvent companies. The collapse of the electrical goods chain, triggering 7,000 job losses, has been very controversial in the UK.
The EACTP, which has established the first European-wide accreditation programme for all turnaround professionals across the continent, is working to further the standing of turnaround and restructuring practitioners within an independent professional association dedicated to preserving enterprise value for the benefit of all stakeholders.
And we believe in many cases, the best way to preserve enterprise value and save jobs is through consensual restructuring. However, this requires specialist advisers with special skills, both commercial and legal. Administration is often a more predictable legal process, and whilst the merits of licensing of formal insolvency appointments are well understood, when value is eroding, the process often results in significant job losses, higher professional costs, reduced recoveries and thus, destruction of enterprise value. Using independent turnaround advisers, who are restricted from seeking appointment to any insolvency process, whilst exploring consensual restructuring options, eliminates that potential conflict of interest and enables them to represent a balance of stakeholder interests consistent with their relevant fiduciary duties.
It is not the first time this year that the need for professional independence when dealing with distressed businesses has been broached. The Royal Bank of Scotland independent lending review conducted by Sir Andrew Large raised broader issues than just lending to small and medium sized enterprises that we feel need to be addressed collectively by financial providers and the authorities, particularly the conflict of interest for secured lenders when recommending ‘preferred’ or ‘panel’ advisors in enforcing insolvency proceedings.
And the RBS report came hard on the heels of the Tomlinson Report, commissioned by the UK Department of Business, which revealed the banking industry’s conflict between commercial pressures and duty of care to customers when handling businesses in difficulty.
It is over ten years since the Enterprise Act 2003 introduced the current concept of Administration, which was originally designed to put to bed many of the well-versed criticisms of Administrative Receivership, the preferred restructuring tool of the early 1990s recession. It was meant to be an all-inclusive. How can a process which allows a lender to appoint its ‘panel-recognised’ Insolvency Practitioner to realise the assets the subject of its security be all-inclusive? How can the practitioner in such circumstances be entirely impartial, independent and all-inclusive?
For me, I am delighted to hear that Dr Vince Cable has grasped the independence nettle. Legislative change combined with a strengthened professional practice regulatory regime is the only way forward. The end of a floating charge holder’s ability to influence the appointment of an Administrator would be a real step change too. Perhaps then, we could look to the Administration process to being the fully inclusive process it was designed to be?
As an independent organisation the EACTP provides a respected and recognised pan-European certification scheme based on the Turnaround Management Association (TMA) Global Certified Turnaround Professional (CTP) programme. Achieving and demonstrating the standards required to become a CTP is recognition of the highest level of professional competence and the adherence to a code of professional ethics. It equips the professional with cross-professional knowledge, management practice, law and finance and to act with independence and integrity to approach assignments with an appropriate balance of stakeholder interests in business distress in the zone of insolvency. Achieving recognition through an independent body to globally-recognised standards gives practitioners an edge and the status to better manage their own commercial and professional conflicts.
By providing an industry standard kitemark of quality and expertise we are aiming not only to help professionalise the practice of turnaround and restructuring, but also demonstrate the significance of turnaround management as a specialised profession with specific skills in today’s current business environment. We also believe our accreditation programme will help those who need to employ the services of turnaround managers by providing a benchmark against which restructuring professionals can be measured.
However we feel there is still more that can be done to help promote the benefits of our work as a legitimate means of preserving enterprise and economic value for the benefit of the wider economy, and we are strong advocates for any moves to facilitate consensual restructurings, particularly in the UK, which has fallen behind France, Italy and Germany in the flexibility of its legislation.
The recent EU Regulation revision recommends all member countries introduce regulatory flexibility to encourage consensual restructuring as a preferred alternative to insolvency. Perhaps the issues raised by Comet will hasten this change. Mr Cable?
Tyrone Courtman is President of the European Association of Certified Turnaround Professionals