An incoming wave of business failures will have many in the business community sweating, but not the liquidators, who carve a living picking up the pieces and who see more work but also the potential for patchier returns.
A few recent reports have pointed to an uptick in liquidations.
A recent update from BWA said a “second wave” of business failures was on its way because of a drop in consumer spending and the global economic slowdown.
Between July and September, insolvencies in the agriculture, retail, and food and beverage sectors rose by 130 percent, 43 percent and 46 percent respectively compared with the previous quarter.
That massive uptick in agricultural failures will continue to play into downstream sectors such as food and beverage.
Credit rating firm Centrix’s most-recent monthly report said overall company liquidations were up 40 percent year on year in September, led by retail, up 87 percent, and construction, up 57 percent.
It said credit defaults had climbed across the board in September, but particularly in property and retail space, which it said could be an indication of further hurt in the future.
Essentially, the vultures are circling above cashflow-starved businesses – in this situation liquidators, some of whom bill more than $600 an hour to restructure, strip or sell the businesses they are appointed to. (Vulture isn’t meant as a slur – the birds also play a crucial part in the ecosystem by keeping diseases such as the plague and anthrax in check.)
Insolvency firm hourly fees
A quick scan of fee schedules in liquidation reports from large, well-known or notable insolvency businesses put McGrathNicol in the priciest spot, with an hourly rate of $675 for a liquidator, $590 for higher-end insolvency staff, and $295 an hour for lesser-skilled staff.
This was followed by Deloitte at $620 an hour. The most common headline rate appears be $550 an hour, including from the small operator on the list, Waterstone Insolvency.
Liquidators are typically paid first in liquidations, and the amount of hours that can be put in on complex liquidations can be huge, leading to some eye-watering sums.
This was raised in the receivership and liquidation of Ruapehu Alpine Lifts, with the Ministry of Business, Innovation and Employment feeling that PwC was expensive.
Insolvency win
Does the predicted second wave of liquidations mean a boon for insolvency practitioners?
“That’s no different to asking a plumber if you’ve got more plumbing jobs and repair work to do, does that mean you get more in fees?” said Kare Johnstone, a McGrathNicol partner and chair of the Restructuring Insolvency & Turnaround Association (RITANZ).
“The answer would be yes, but whether all of that would be recoverable is on a job-by-job basis,” Johnstone said.
The recoverability issue is complicated.
Waterstone Insolvency principal Damien Grant is somewhat sceptical about a coming wave of insolvencies. “I’ve been confidently predicting a wave of insolvencies for about three years now,” he said. “I’m standing on the beach waiting for the tsunami, and I haven’t even got my ankles wet for god’s sake.”
Nevertheless, he said being busy didn’t always mean more money when it came to insolvency.
Pressures on businesses mounting
“Part of the challenge that we face is that when times are tough there’s simply less money, it’s harder for us to recover money.
“It’s harder to collect now than it was four years ago because they just have less money, their assets are worth less, they don’t have as much capacity.”
Further complicating things is that though liquidators want to see a return, they have a greater obligation to act in the interests of creditors owed money by the insolvent company.
BWA Insolvency principal Bryan Williams said that was an instant competing interest. “So the liquidator has first bite, that’s true, but it can’t be at the expense of the creditors. This practice deals with that issue on three limbs: proportionality, value and time spent.”
Questionable returns
Williams said his firm very rarely got paid its full fees. “Typically, this practice would divide its interest across employees to make sure employees get paid where they can and then there are those three metrics which drive the amount of fees that we deduct.”
Grant reckons he manages to get his full $550 an hour rate on just a quarter of the jobs his firm does. “We have a pretty big write-off every month of work that I’ve paid for, and that will be pretty common across the industry.”
The final fees paid to liquidators, if court-appointed, also need to be approved by a judge, and may be turned down if deemed unreasonable, such as too much money being spent on legal action that failed to create value for creditors.
Thomas said this was something liquidators were mindful of, and fee deductions were commonplace because of it.
Complaints about the cost of liquidators from creditors and company owners are also fairly common, but Thomas said it was misguided.
“Most professional people would have no issue with liquidators’ hourly rates, but there are a lot of hours.
“Typically the liquidator or administrator is in there to deal with a circumstance that has been created by the directors before them, so they’re criticised if they don’t deal with that properly. And yet if they spend the time and deal with it properly, they’re criticised because of the fees that have been deducted.”
