MANAGING THE TURNAROUND/INSOLVENCY INTERFACE
Background
At the second annual general meeting of the INSOL Europe Turnaround Wing in October 2009 it was agreed to circulate a discussion document raising such themes as ethics, conflicts of interest and stakeholder interests. A group comprising Christine Elliott, Jim Luby, Sven-Holger Undritz and Speranta Munteau was established for this purpose.
Purpose of Paper
To foster discussion and eventual consensus within INSOL Europe with a view to publishing and promoting a Protocol governing the Turnaround/Insolvency interface that exists between the two sets of professionals.
Background
Insolvency procedures in the following jurisdictions have specifically been considered in preparing this paper: Republic of Ireland, France, Germany, Spain, Russia, Austria, Belgium, Italy, Norway, The Netherlands, Poland, and Sweden.
Clearly, practice differs according to the jurisdiction, though in each case there are between 2 and 5 main insolvency procedures; as do the key tests for insolvency. In Norway, for example, bankruptcy is by far the most common form of process. This paper is principally concerned with voluntary and turnaround situations
The abbreviations TP' andIP' shall be used to refer to Turnaround Professionals and Insolvency Practitioners respectively.
It is accepted that the duties (in particular to creditors) incumbent upon IP's and TP's mean that they are likely to have different professional priorities; and that there is an established legal framework for insolvency practice whilst a comparable environment and the legal protections that go with it, does not exist for TP's. A fundamental tension resides in TP's being appointed with a mandate to create value for `all stakeholders' and IP's being creditor-centric.
Future Possible Aims of Protocol
To promote restructuring (in-court or out-of-court) rather than liquidation
To provide the basis for a long-term sustainable future for the business at the turnaround/insolvency interface
To offer leadership to turnaround and insolvency practice in Europe by promoting transparency, accountability and best practice at the interface
To encourage the preparation and where possible, the implementation of a Turnaround Plan in potentially viable businesses; and to ensure that there is an Insolvency Contingency Plan is in place where necessary
To discourage the use of inappropriate insolvency practices
To demonstrate publicly how turnaround and/or insolvency skills can be applied to organisations at different stages in their development cycle return under-performing businesses to viability
To establish mutually agreed disciplinary procedures
To help ensure that costs are responsibly and openly managed
Preamble
This protocol contains guidance and information on the principles of conduct and ethics for all TP's and IP's operating in European jurisdictions. Nothing in the protocol shall relieve such an individual from any obligations, which may be imposed by primary or subordinated legislation or by any professional code or regulation to which the member is already subject.
A TP or IP shall be expected, in performing his or her duties, to observe the spirit, as well as the letter, of the protocol. The standards set out shall not be lowered and shall apply as a minimum.
Definition of Turnaround
For the purposes of this paper and protocol, a definition is proposed by the IFT:
``The rehabilitation and return to viability of under-performing organisations''
The Turnaround Professional Role
The role that a Turnaround Professional assumes will need tailoring according to the specific situation, broadly Chairman, CEO, CRO, FD/CFO, CRO, Non-Executive, Specialist Executive.
There are mixed views around whether it is better or not to be an appointed a director; often the role of a CRO has not been a formal appointment as director, but in reality the involvement and actions undertaken have been that of a director.
The turnaround/restructuring role also has distinct types of sub-role related to the length of appointment anticipated and the tasks to be undertaken:
Likely immediate term need to stabilise the business from a financial perspective through to a more comprehensive and systematic implementation of the Business Plan
Seeking out ways to grow and develop sales and establish more fundamental growth
Exit and realising the value for stakeholders
General Ethical Principles for discussion
The following are based on common factors in several relevant professional codes of conduct:
Integrity. Behave with integrity in all professional appointments. Integrity implies not merely honesty but fair dealing and truthfulness.
Objectivity. Strive for objectivity in all professional judgements. Objectivity is the state of mind that has regard to all considerations relevant to the task in hand and is independent of personal feelings or opinions in considering and representing the facts.
Objectivity may be threatened or appear to be threatened by acceptance of goods, services or hospitality from a client, other than explicitly provided for in the engagement letter.
Competence. Not accept or perform work for which the individual does not have the necessary ability or knowledge to undertake, unless he or she obtains advice and assistance which will enable him or her competently to carry out the work.
Due Skill. Carry out work with care and skill, diligence and promptness and with proper regard for the expected technical and professional standards.
Courtesy. Behave with courtesy and consideration towards all with whom the TP/IP comes into contact during the course of an assignment.
Disciplinary. A TP or IP is obliged to notify the relevant professional body of any matter which may render him or her liable to disciplinary action, including but not limited to, disciplinary action by another professional body, criminal conviction, or civil finding of dishonesty.
Conflicts of Interest. The Professional should always place the clients' interests before his or her own and should conduct the assignment in that spirit. For this reason TP's or IP's should not accept or continue an assignment where his or her interests conflict with the interests of a client or where such a potential conflict client may reasonably be expected to arise.
For the avoidance of doubt, any form of financial gain which accrues or is likely to accrue to a member as a result of an assignment, otherwise than in an agreed form under the engagement letter, will always amount to a significant conflict of interest.
Prior to accepting and during an engagement, all reasonable steps should be taken to ascertain whether any conflict of interest exists, or is likely to arise in the future. This should include consideration of the existing or potential implications arising from the possession of confidential information.
Examples of conflicts of interest include: threat of self-review; a material professional relationship and the TP or IP should perform a conflicts check in advance of accepting an appointment to avoid a situation where there is significant material interest.
Specific Ethical Principles for discussion
The TP and the IP each and with the interests both of respective and mutual stakeholders:
Pre-Assignment. Seek to encourage the appointment of appropriately qualified turnaround and insolvency professionals; and of professional advisers with relevant specialist expertise.
Letters of engagement will be mutually exchanged (with the exception of fees). The choice of IP may differ in situations when security has, or has not been given.
Where appropriate, TP and IP appointments will be `twin-tracked' to promote the optimum chance of business rehabilitation.
Insolvency licence holders who currently exercise that licence will make this clear to the potential client and turnaround professionals will make clear the potential limitations of their role.
Marketing. Market their professional services with accuracy, integrity and mindful that such services may be purchased by clients without comparable knowledge of the restructuring market and practices. Marketing will therefore be fair and not misleading.
Communications. Agree how these will be managed and documented between the parties; including with regard to media management in all its forms.
Contingency Planning. There will be both a Turnaround Plan and an Insolvency Contingency Plan and the TP/IP will ensure that these are understood by key stakeholders.
These Plans will:
Be useful to and comprehensible by, stakeholders
Avoid insofar as possible `de-railing' the business rehabilitation unilaterally
Demonstrate that the directors have acted responsibly;
And may assist in assessing future viability
Clearly explain the advantages and possible disadvantages of insolvency
Options Assessment. The prior assessment of options will include an assessment of the potential business viability should a Turnaround Plan be implemented; as well as the options for asset recovery.
Forms of Comfort. The following are advocated:
Information flow
Standstill agreements
In the case of an asset sale, assurances about additional credit from the parent company
Potentially Problematic Insolvency Tools. In pre-packaged insolvencies or equivalent situations, the prior assessment of potential viability and management capability to implement the turnaround will be mandatory through a Turnaround Plan.
Costs. Ensure that these are cost-effective for stakeholders and that the burden of costs does not undermine the business's return to viability.
Potential Collusion. Despite the inherent difficulties, strive to avoid situations in which either the authority of the TP or that of the IP is undermined by an unexpected event.
Audit Trail. Record keeping will be done in a way that facilitates the transfer of best practice.
Partial insolvencies. The following issues will be addressed in planning and communications:
Financial relationship: is the subsidiary able to operate financially without the support of its parent?
Inter-company position: is there an outstanding inter-company debt due by the subsidiary to the parent and if so has this debt been formally documented and in any event what are the repayment terms?
Trading relationship: does the subsidiary need the co-operation of its parent on a day to day basis in order to be able to operate its business? For example, does it share any assets or employees with its parent or will the subsidiary need access to any property owned by the parent in order to be able to continue to trade?
Intentions of the parent company: if the parent is insolvency then it is likely that the insolvency practitioner appointed in respect of that company will be considering some form of disposal of the subsidiary. It may be that the board of the subsidiary is therefore relying on a sale taking place in order to secure the subsidiary's long term future
(c)INSOL Europe/Institute for Turnaround(R) April 2010
