Rising insolvencies pose communications challenge for practitioners

qThis dynamic creates complexity for Insolvency Practitioners seeking to effectively manage stakeholders, perform their fiduciary duty to be clear and transparent and, in cases where a going concern sale is the objective, retain goodwill in the pursuit of returns for creditors.

Goodwill and brand value

Brand and reputation are an essential source of value for companies, and the primary component of goodwill.

As described by key case law relied on by HMRC and the Insolvency Service in their definitions, goodwill is:“The benefit and disadvantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one good thing which distinguishes an old-established business from a new business at its first start.” (Lord Macnaghten, IRC v Muller & Co Margarine Limited [1901] AC 217).

Although somewhat vague and hard to define, brand and goodwill are incredibly important and, while not (always) recorded on the balance sheet still a demonstrably valuable asset.

In some cases, it is the most valuable asset a company has.

According to the Financial Reporting Council, goodwill represented an asset class totalling £397bn for the FTSE 350 in 2021 (18% of total assets).

In an insolvency scenario the value of goodwill is quickly eroded and, as the Insolvency Service notes, where a business has ceased to trade the goodwill is likely to be worthless. Its preservation, where a turnaround or sale is the goal, is therefore essential. Effective communications are key to achieving this.

Negative publicity must be managed, stakeholders must be managed, and brand image maintained so far as is possible. This requires both adroit media handling, and sensitive, transparent and clear ‘internal’ communications with affected parties – including employees – whose sentiment can help or hinder the media narrative desired (i.e. a disgruntled employee may quickly become a star source for a journalist, with substantive negative implications for the brand).

With business failures continuing to rise, and a wider economic reset underway – particularly in sectors reliant on consumer spend – in response to the reversal of historically low interest rates and the cost of living (and doing business) increases, media and public interest in, and awareness of, insolvency is high.

When does an insolvency become a media story?

Looking back at 2022 – the last year for which we have full annualised data – the annual UK insolvency statistics  showed a significant uptick in business failures as challenges from energy price rises to business taxes took their toll. It was the year the ‘dam burst’ according to R3, following earlier predictions of a post-Covid tsunami. Those issues have continued into 2023.

Taken together, 2022 saw:

• The highest level of company insolvencies since 2009 (22,109)
• The highest annual number of Creditors’ Voluntary Liquidations (CVLs) since the statistical series began in 1960 (18,822)
• The highest company liquidation rate since Q3 2015 (49.5/1000)

As an aside, ONS information has shown a consistent fall in business births since 2015, with births in 2020 at their lowest since 2012 – which taken with higher insolvency levels may have longer term economic effects. Whether that means fewer job and growth opportunities, or a reduction in so-called zombie companies and a corresponding improvement in productivity, remains to be seen.

The rising insolvency figures have mainly been driven by the significant increase in CVLs. As R3 said in response, to March’s figures: “Business owners have spent three years trading through a pandemic and economic uncertainty, and an increasing number are choosing to shut their businesses before that choice is taken away from them and as the turbulent trading climate proves too much.”

Administrations, meanwhile make up only around five percent of total company insolvencies.

Yet it is administrations which, in general, account for the majority of media reporting focused on insolvencies.

In fact, according to our research, reporting on administrations made up around 70% of all press coverage of company insolvencies in 2022.

There are important lessons here regarding how insolvencies play out in the press, which is at the heart of why, more often than not, it is administrations which draw the attention of journalists.

Looking over reporting on administrations in 2022, a few points are notable.

There were three clear spikes in media coverage across the year. Broadly these correspond to:

• May: the collapse of Missguided and McColls
• September: the appointment of administrators over Worcester Warriors
• November: Joules and Made.com entering administration

With administrations usually aiming at a turnaround the reality is they’re more likely to be used by bigger companies with resilient brands and established goodwill from which future value can be derived.

They will also have more prospective levers to pull to streamline and gain efficiencies.

Those same companies are also much more likely to have larger workforces whose jobs will be put at risk should the administration result in redundancies or an eventual sale, as well as large customer bases who may feel the effects of disruption.

In the case of Worcester Warriors, such brands may also have wide cultural relevance in their communities.

These factors are indicative of what, at Infinite Global we define in our Reputation in Restructuring Framework as the drivers of media interest in an insolvency. Namely:

• Narrative: The story of the business to date, including previous media exposure and public awareness of the brand
• Personality: Any involvement of a high profile individual, such as a politician or celebrity, or a particularly vocal (or infamous) CEO
• Locality: The role and impact of the business in its local community
• Context: Whether the business, and its failure, plays into a wider contextual story – such as market disruption or political turbulence
• Scale: How widespread will the impact of the business failure be? Large numbers of prospective job losses, or large customer bases left out of pocket, will always make headlines

All, or any one of, these factors make the individual companies and their financial distress highly newsworthy.

Correspondingly, Insolvency Practitioners face a much more challenging communications mandate both in terms of the triage of journalist enquiries, as well as managing the overall narrative of the insolvency process while being mindful of the effect that unchecked negative press can have on goodwill and brand value.

Brand rescue

Some of the biggest company administrations in recent years have resulted in an eventual sale of brand (and other intangible assets), even including where other tangible assets have been left by the wayside.

Tesco, for example, purchased the Paperchase brand out of administration – providing opportunities for the mainstream retailer to bolster its non-grocery offering and seek to attract a younger and affluent demographic.

Frasers Group has harvested up numerous brands in recent years, notably including Missguided last year – again, to be operated distinctly from the operating company’s existing portfolio to continue to attract the brand’s existing audience of younger shoppers.

The collapse of Carluccio’s saw the closure of its high street restaurants, with the sale to Boparan Restaurant Group spurring a reimagining of the business to focus on its deli offering – now expanded to include certain physical locations in a tie up with Sainsbury’s. The goodwill inherent in the brand name provided new opportunities to connect with customers to create value.

The obligation to communicate 

There are certain communications activities that an Insolvency Practitioner is of course obliged to undertake with respect to their statutory role as office holder. This includes the public listing of the appointment (usually via the Gazette), potential advertisement of a business for sale in a reputable publication (often The Times),  and of course regular, transparent and clear reporting to creditors and other affected stakeholders.

As the insolvency code of ethics notes: An insolvency practitioner in the role as office holder has a professional duty to report openly to those with an interest in the outcome of the insolvency. An insolvency practitioner shall always report on their acts and dealings as fully as possible given the circumstances of the case, in a way that is transparent and understandable bearing in mind the expectations of others and what a reasonable and informed third party would consider appropriate.

At the same time, the code of ethics contains the foundational principles of objectivity and confidentiality.

These, then must always be considered with respect to any wider communications that are undertaken – including responding to media enquiries regarding the insolvency and / or proactively managing the public narrative to achieve an optimum result for creditors.

Needless to say, getting this right is both critical to the preservation of goodwill value in the insolvent, but also to the reputation of the insolvency practitioner him or herself.