Insolvency: Why soft skills matter in hard situations

No wonder insolvency professionals have a bad reputation not only in business circles, but with the public too. The author can testify to this, having been called “a vampire of the recession” in the 1990s by a leading satirical magazine.

This is part of the PR challenge, with which the UK profession has been struggling unsuccessfully for many years. We do a tough job and we are frequently forced to deliver bad news to stakeholders in struggling and failing businesses. The outcomes from our work are usually deeply disappointing for those involved with the business. Unfortunately, we’re not good at trumpeting our triumphs and too often, we fail to make it clear enough that we’re part of the solution, not one of the causes of the problem.

The UK insolvency regime has two overriding characteristics: it is designed to be creditor-friendly, and it makes IPs all powerful within their statutory duty to act in the best interests of the creditors. Handled badly, the IP’s role is a recipe for arrogance and for making enemies. We make some gut-wrenching and difficult decisions, but it’s important not to seem like we enjoy it.

There is a better way, which involves listening to people and not judging them, explaining clearly, in simple language, what the particular insolvency process involves and what the IP can and can’t do, while constantly managing the expectations of the various stakeholders. This approach depends crucially on a number of key strategies, starting with how to treat directors and other senior executives. Deciding whether to involve them directly in the insolvency process, and to what extent that can mean supping with people that the IP and some stakeholders consider to be the devil. 

They may have been instrumental in the company’s difficulties, and they might be unwilling to help, but they could be vital to maximising the outcome, and, particularly, saving the business and some or all of the jobs. They should also know what went wrong, and, of course, the IP has a statutory duty to report on their conduct prior to and during the insolvency. There is no simple answer or AI template to help the IP establish a constructive relationship with the directors, but banishing them into outer darkness and ignoring them is very rarely the right way forward, no matter what they may have done. Nor is outright confrontation a wise option, unless it is unavoidable.

Interaction with the company’s existing professional advisers is equally important. They will probably have unpaid work-in-progress and they may feel threatened by the arrival of the IP. Nevertheless, they often have invaluable knowledge about key aspects of the business and may hold essential documents. The IP has the ability to compel co-operation, but accessing this information is best done by creating a good working relationship with former advisers rather than reaching for their own lawyers and the court. Wherever possible, IPs will look to reward co-operation by instructing the advisers on aspects of their work, if this is cost-effective.

Probably the greatest challenge for IPs is getting their communications right. There is a huge temptation to be secretive and only to disclose what the relevant insolvency legislation dictates they must. Open, meaningful, and regular communication with stakeholders is likely to be far more productive, and at its best, it should be a two-way conversation with parties like creditors encouraged to share the knowledge they have about the business and its conduct.

Of course, there will be some information which cannot be shared and some instances where the timing of communication must be considered carefully in the context of, for example, a prospective business sale or negotiations over complex litigation. On the other hand, a refusal to explain what is being done and how the insolvency is progressing inevitably creates suspicion, while dealing with the mounting level of questioning only raises costs which may not be recoverable for the IP, or could reduce creditor recoveries. Above all, unjustified secrecy makes managing expectations impossible.

These are just some of the ways in which the conduct of an insolvency can be materially enhanced by the IP taking a constructive and open approach to their work, rather than getting stuck in the doom loop of endlessly playing hardball. Most entrepreneurs don’t deliberately run their businesses into the ground, and their behaviour is often the product of desperation, ignorance, and a lack of experience of financial crises, however dubious it may seem. A little empathy from the IP can go a long way.

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Nick Hood is Senior Adviser to the Opus Business Advisory Group. He was a Chartered Accountant for over fifty years and a licensed insolvency practitioner between 1992 and 2010, specialising in mid-market and SME business problems. He is a committed internationalist, having previously created and run the largest international association of specialist business rescue firms.