Crystal ball

This time last year, I scribbled a piece about my expectations for the forthcoming year.  It was interesting to re-read that piece of whimsy and reflect both on how the year actually panned out and what 2016 may bring.

At the start of 2015, the world of insolvency was shrouded in uncertainty.  The profession faced a number of changes which, it was feared, could have far reaching effects on Insolvency practitioners (IPs) and the way in which they ran their practises.

Amongst the anticipated changes was uncertainty over the future of conditional fee agreements (CFA) following the Jackson Reforms, which were set to be removed from the IP’s toolbox last April. Within the profession we were told to expect a greater level of transparency in the charging of fees and we expected an imminent wholesale change in the Insolvency Rules.  Pre-pack Insolvency was in the firing-line as usual and we awaited the introduction of the Pre-pack Pool with bated breath. We were informed that a whole raft of new regulation would come in with changes to the way in which we conduct our business, some designed to achieve savings in cost and time and some whose effect was likely to be the complete opposite. All of this was in the shadow of a forthcoming general election.

Lurking behind all this, there lay an inherent uncertainty over whether the levels of insolvency would start to recover from a slump that we all felt had gone on for an unprecedented length of time.  Interest rates continued to cause speculation as to when and by how they would rise.

So what actually happened?  Well, after strong lobbying by our trade body R3, the government relented and the abolition of CFAs was granted a reprieve, pending further consideration.  Regrettably, just before the end of the year, we received the unwelcome news that the insolvency exemption would, after all, be removed in April 2016.

A raft of new regulation in the form of the Small Business Enterprise and Employment Act (SBEE) came in as expected during the year and we all got excited about the exact interpretation of the new Insolvency (Amendment) Rules 2015, over provision of fee estimates at the outset of a job.  The new, super-dooper replacement to the Insolvency Rules 1986 never materialised however and is something to look forward to this year. The much heralded Pre-pack Pool remains untested by this firm to date and it remains to be seen what effect it will have on pre-packaged administrations.

Insolvency work continued to be relatively scarce, although a late flurry of activity before Christmas once again raised our hopes of better things to come.  Interest rates, of course, remained at an all-time low and in all probability the so-called zombie businesses continued to function in an un-dead way as a result

As a firm, our year was punctuated by an office move just a few doors down from the old office on New Walk.  This caused much upheaval, but I am glad to say we are now happily ensconced in the new building and enjoying the savings that the move has engendered.

What of the year ahead therefore?  Most people I speak to in the profession seem to think that it will be much like the last one.  No one is over optimistic that work-load will increase substantially, certainly not whilst interest rates remain so low, although we all harbour the hope that it will pick-up.

We now have a new government who will be in power for another four and a half years and we must hope that the economy grows during that period, for growth inevitably brings with it the sort of problems within businesses for which the IP is best suited to deal with.  We all like to exercise our skills at rescue and turnaround, as this brings the greatest job satisfaction, although there is always a place for the undertaker role when a business has reached its end.

New measures being proposed by the Government under a new Targeted Anti-Avoidance Rule (TAAR) will see distributions to shareholders in solvent windings-up treated as income rather than capital.  This will increase the tax to be paid by those shareholders in circumstances where, within two years after the winding-up, the recipient continues to be involved in a similar trade or activity and where the main purpose of the liquidation was to obtain a tax advantage.  This may create a flurry of activity for Members Voluntary Liquidations in the early part of the year, but once in place, the new measures may make the closure of a business via this route much less attractive.

We will watch with interest the fall-out which will be occasioned by the removal of CFAs from the IPs tool box.  Last year, R3 estimated that it could cost creditors around £160 million per year as IPs find themselves unable to pursue delinquent directors and business owners due to lack of funds.  This seems strangely at odds with TAAR, which seeks to crack down on tax avoidance whilst dodgy directors with insolvent companies may well walk away from similar misdeeds which an IP may not be able to pursue due to lack of money in the estate.

This same apparent hardening in the attitude of Government may also lead to a decline in the leniency exercised by HMRC, which we saw throughout the financial crisis.  We witnessed a more aggressive stance taken by the crown departments during 2015 and expect this to be replicated over the coming year.  This may well have the effect of pushing businesses which are experiencing cash flow problems over the edge.

We will doubtless continue to speculate over interest rates and IPs will continue to argue that work will only return to normal levels once rates increase.  Many of us still believe that there are a plethora of businesses close to financial distress and it is only a matter of time before business owners have had enough of fighting to maintain a non-profitable entity and decide to call it a day.  Hope springs eternal in the heart of an IP and, like last year, the headline failure of several large companies may well create a domino effect down the supply chain. We shall have to wait and see….

 

By John Harlow, Harlow Insolvency & Corporate Recovery