With company liquidations on the increase, restructuring experts and insolvency practitioners are busier than ever. But are banks helping or hindering small firms?

Like most insolvency practitioners, Peter Windatt is busy. But he'd like to be busier. "Lots of people need me, but they can't afford me," he says. Windatt, a director at BRI Business Recovery and Insolvency, has been in the insolvency business for 24 years. The problem, he says, is there's seldom anything left to liquidize. "One of the reasons I can't help a lot of people is that they've actually got nothing with which to help themselves," says Windatt. "What does a recruitment firm have to deal with? Six fairly smart looking chairs and desks, six computers. If it's in a managed service office it probably doesn't even own the desks."

With the number of company liquidations up by a whopping 40 per cent year-on-year, and many directors seeking help to lead restructuring negotiations with the banks, it's a hectic period for the insolvency profession, the business world's last line of defence. These days, says Chris Laverty, restructuring partner at KPMG, "there's a lot more helpful dialogue between companies and their key stakeholders to try and work the problem out at an earlier stage. That's why we're busy."

Perhaps the credit crunch has delivered a heightened sense of paranoia, but Laverty says business owners are more sensitive to potential trouble bubbling under the surface than they used to be. "In the good times, when money was a lot more accessible, you would get brought in at the very last minute because people thought that everything was going very well until something happened. Now we seem to be brought in further up that chain-but it's still not early enough." There is though, according to Laverty, still a pervading sense of self-denial among some entrepreneurs, based on the unrealistic, egocentric belief that no matter how bad the balance sheet looks, the company will pull through. Windatt agrees: "Most people who have a problem do a very good impression of an ostrich," he says.

Simon Boadle, corporate finance partner at PwC, says a first meeting with the company, without the banks present, is vital for "removing the gloss" from the directors' version of events. "It's human behaviour to be defensive. We would prefer to have a first meeting with the company alone. Directors will be a bit hesitant about opening up completely. Maybe they are secretly worried about the situation but won't be prepared to voice that. Quite often there's a process of eking out information to understand the real situation. They are definitely glass half-full rather than glass half-empty."

Boadle says this stage is important because it allows the company to assess its position accurately and prepare a plan of action—anything from asset sales to cost cutting—that may prevent the bank "accelerating" into an insolvency procedure.

"In terms of trying to solve the problem with a restructuring solution, that period of preparation is very important," says Boadle. "Because if you start getting into the situation too quickly, you'll find that the company and the bank are working on very different forecasts, or have different views on the vulnerabilities of the forecasting. Then it becomes very difficult to agree on the best solution."

Negotiations aren't always ego-led, but with so many different parties in the room, each with their own separate agenda, things can often get fractious. Even if acting solely for the company in distress, the insolvency practitioner must ensure a workable deal for all parties, and that often requires the ability to referee a group with conflicting goals. "Sometimes there are egos to be managed," admits Boadle. "Particularly if you are dealing with an entrepreneurially run business, where the founder feels a lot of personal ownership."

Laverty, a tough Antipodean negotiator, says she is unmoved by egos and personal agendas. She says simply that "some people are difficult" and that it's a "highly emotive" situation. But she adds, "When they're in that highly emotive stage and there is a personal agenda, and when all this restructuring is new to them, you have to make sure that you bring them along in the right way, otherwise all those things are quite difficult all at once."

With the company on the rocks, it can be hard for entrepreneurs to stomach a bank bringing in its own people, but stomach it they must. Banks often insist on their own turnaround operative, says Laverty, because they may have worked with them before and are comfortable with the relationship and its chances of bringing success. With "another body sitting at the table", she says, the company has to "accept the level of assistance and work with, rather than against it."

Directors are sometimes nervous, sometimes sanguine. Some accept their predicament quickly, says Laverty. "They're in this position and they now need to follow a path to bail themselves out," she says. They are often "very focused" on trying to resolve the situation for both shareholders and employees. "Most of the companies we deal with at the moment are very concerned about redundancies," says Laverty.

In the midst of a negotiation, the number and variety of stakeholders in the room can quickly cause a stalemate. "It can go round and round in circles," admits Boadle. "At the end of the day, it is generally in everyone's interests to try and agree something. The downside of not agreeing is usually insolvency. And that's going to be bad for a whole load of people. The whole purpose of coming up with a consensual restructuring solution is to provide something better than insolvency." But that's not always possible, he adds. "Individual lenders will hold out for their own position, and sometimes they will take it too far. It's not a game where you win 100 per cent of everything you do."

That success rate depends greatly on creditors' flexibility. Many smaller businesses, particularly start-ups, use factoring to help finance new business, especially if they are still waiting to be paid for previous work. Factoring is a flexible form of loan, which advances money to a company as it issues new invoices. But the more complex a company's debt structure, the harder it is to unravel once that company gets into trouble. As Windatt puts it: "Very often you can't [resolve the problem] because some of the smaller factoring companies appoint insolvency practitioners who were basically Rottweilers in a previous life."

It's the insolvency practitioner's job to mediate, but many entrepreneurs lament a much earlier breakdown in communication. Data from the Bank of England shows that lending to small businesses dropped by £14.7bn during the last quarter, the largest fall since records began, 12 years ago. The Forum for Private Business (FPB) says the supply of credit is at the heart of SME survival. "A variety of factors are contributing to soaring insolvencies, but they all lead to the same major symptom: a lack of cash," says FPB spokesperson Phil McCabe. While some banks claim lending has improved, FPB research shows that demand for finance "is not being satisfied" by supply. "When finance is available," says McCabe, "it is often far too expensive." The average lending rate for overdrafts is currently 6.6 per cent, significantly above the base rate.

Many small firms say they feel victimised, automatically labelled as "high-risk" and denied additional lending, in some cases because banks don't have the resources to investigate individual cases fully. The relationship between the banks and their business customers appears at an all-time low. One entrepreneur, who contacted Director in confidence, says his bank is threatening the survival of his business with a "take it or leave it" doubling of interest rates after he tried to restructure his debt in a bid to reduce his monthly repayments. "The bank put the rates up and have said they are looking to withdraw it altogether unless we could come up with a proposal," he says.

Boadle says that in a post credit crunch world it's far more difficult to maintain useful contact with lenders. Banks and their oldest customers have "generally been able to sort things out in the past," says Boadle. "The banks are constrained in different ways. A lot of the teams have changed and even if you have the same relationship manager, the credit structure has changed. Entrepreneurs who were used to being able to put a call in to a main board director and getting things sorted, must now find a different way of getting things done."

Chris Evans, a director at Sales Resource Associates, a recruitment and sales development company, says his firm needed to restructure its debt as a result of the downturn. The recruitment business was suffering and the company needed more working capital to see it through. Evans says dealing with Lloyds bank was frustrating. "It was just bits of paper getting shuffled and people not able to make decisions at certain levels," he recalls. "The local business manager can only go up to so much and then it has to go to a different set of people for approval. The nod of the head to say, 'this is OK' goes up the food chain and then down again. It was just a nightmare quite frankly."

Evans says there was no recognition of the fact that at the end of such a protracted process, the firm's needs might have altered. "The fundamental issue with banks is they don't understand what SMEs are about. We put in an application, it got bounced around, finally we got what we wanted six months later. But I think throughout the process there was no review in terms of: 'six months ago it looked like this, but it's going to take this amount of time, will this facility satisfy your needs into the near future?'" Laverty says the restructuring process must be done quickly: "Because if it goes on it builds up in costs, morale issues arise and suppliers get nervous."

Case study: Food for thought

Bay Restaurant group has just completed a protracted restructuring deal, which follows the company's pre-pack purchase from administration last year. It was formed when the Robert Tchenguiz-owned Laurel Pub Company split into Bay Restaurant Group—which owns brands such as La Tasca, Slug & Lettuce and ha ha bar & grill—and Town & Country Pub Company, which owns Yates's. The deal was criticised by detractors of the pre-pack system because it meant Laurel was no longer liable for its £9m rent bill. Chief executive Paul Symonds says, "There were other things going on between [Tchenguiz] and the banks, but from our point of view, this puts us on a stable footing, and means we can keep our investment programme going and start to take advantage of some of the opportunities that this market is throwing up."

Symonds says the complexity of the deal meant that it took a "good deal longer" than expected. "There are many different stakeholders involved. It has to be right for all of them, not just one party or another." A great deal of stress was put on the finance team, he adds. "It can't be underestimated how much work goes into getting these things done. It's never that straightforward, there's so much due diligence to go through."

Icelandic bank Kaupthing and German lender Commerzbank agreed to swap £150m of debt for equity. Symonds insists cordiality was maintained. "We have a very good relationship with both our banks." Both Kaupthing and Commerzbank have, he says, been "very supportive of the business throughout the process. As a result, our relationship has stayed very strong."