Interview: Fraser Gray, Scottish head of Insolvency practitioners Zolfo Cooper

The Scottish head of Zolfo Cooper tells Terry Murden why insolvency practitioners are vital in keeping firms alive during a recession

IT IS not easy being seen as the corporate grim reaper, the man with a briefcase full of P45s and a face like a wet weekend. Insolvency practitioners are not the sort of people generally welcomed with unbridled enthusiasm and a beaming smile, but this is their time and they're pretty busy right now.

Fraser Gray is far too young to be described as a veteran, but he's seen enough in his 20-year career to make him one of the more experienced in dealing with companies in distress. For those who think it's just about sorting out a poor set of trading figures, think again.

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"It is a horrible introduction to a business," he admits. "People say you must feel like the undertaker, but actually I see it more as the surgeon. You are trying to save a business and it is a big responsibility. Of course it means bringing bad news to some people, but you are also looking after the rest."

Gray is a partner and the head of the Scottish practice of turnaround specialist Zolfo Cooper. Formerly known as Kroll Corporate Advisory and Restructuring Group, Zolfo Cooper was set up at the end of last year following a management buyout of the European practice from Kroll.

It has been involved in some high-profile restructurings and insolvencies and Gray doesn't see any slackening in his workload any time soon. Figures out last week showed the number of liquidations in Scotland up by a quarter in February over the previous month.

Gray has been assisting a number of Scottish companies and their pension scheme trustees to deal with deficits, but his more public appearances have concerned the failure of well-known companies such as MFI, XL Leisure, Texstyle World, Motherwell Bridge, the Edinburgh-based homes and property company FM Group and Livingston Football Club.

Ah, football clubs. That must be the biggest challenge? "For an insolvency practitioner football clubs are a difficult assignment," he admits. "There is so much emotion and some (practitioners] have had to face a lot of vitriol.

"But you are there to run the business, not pick the team. You try to be as dispassionate as possible. But as with any business there is a human angle. I was lucky at Livingston. We met the fans every week and they treated us well. It helped, I suppose, that during my time there we won the cup (the CIS League Cup]."

So which is worst? Being the insolvency man or the referee? He laughs at the comparison, but the answer is a simple penalty kick. "I know a couple of referees and that is a job with no thanks. I don't envy referees," he says.

But like a match official, he also has to put up with jibes about being the man in the middle, with no apparent loyalty or emotional attachment. "There is an element of that. But often the employees and the directors see my arrival as bringing some relief to an already stressful situation. They begin to understand that I'm there to help them get out of it."

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Helping companies doesn't mean they're all basket cases. They may have a short-term problem that can be easily remedied, but inevitably the more visible situations are the administrations and liquidations.

Gray played a key role in reviving Motherwell Bridge, one of Scotland's largest engineering businesses, which employed more than 2,500 staff and was an iconic firm whose problems caused widespread alarm. An innovative approach resulted in most of the business being sold as a going concern, which not only enhanced the return to creditors but also enabled the staff to retain their jobs with the new company and the pension fund to participate in the restructured business.

Gray was also appointed to Brownhills Group, the UK's largest distributor of motor homes, where he led a complex restructuring of the business leading to a sale. Core supplier contracts were maintained, as were 300 jobs.

He was also administrator to Floors2Go, the UK's largest floor covering retailer. Gray and his team traded the business over several months and achieved a sale that retained more than 200 jobs.

"So, you see, it is not just bad news. We do manage to pull through with many of these companies, and that gives you a lot of satisfaction."

Gray is a member of the Institute of Chartered Accountants of Scotland's insolvency committee, which helps set policy for insolvency practitioners, and he has lectured extensively on recovery issues in a number of sectors. He is a regular speaker at technical seminars and conferences organised by ICAS.

With the economy in recession, it's no surprise that he is seeing more companies in trouble, though he admits that some may be guilty of blaming the banks for not lending, or the credit crunch, when they were going to fail anyway.

There has also been a preponderance of pre-pack administrations, a somewhat controversial procedure whereby a company slips into administration with the buyer already lined up, often the same management. It differs from the normal situation where the administrator runs the business and tests the market over a period of time.

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"They can be emotive if you have lost money (as a creditor] and see the same management coming in… but the reality is that those creditors have already lost their money. Pre-pack helps where the business is unlikely to be sustained during the insolvency process or it will erode rapidly.

"It is becoming more popular because businesses are in a harsh environment and creditors are not prepared to keep dealing with companies in administration."

Gray says that an increase in the number of insolvencies has been accompanied by tougher stress-testing by the banks, and the latter may be leading to the former.

"The banks have to justify why they are lending beyond an agreed facility. The test for everyone is more severe. Beforehand there may have been more latitude, giving businesses in difficulty more slack. We are now finding that those who put in equity – the directors and other shareholders – are also unable or unwilling to put more money into companies."

Gray says all sectors are affected by rising failures, though not surprisingly he's seeing a higher number in retail, property (mainly housebuilders) and engineering. "I don't know that it is bottoming out at all. In the retail and property sectors there are deals being done, but generally speaking they are being done in a much harsher climate. Every single retailer I come across is having problems with their rent."

But the inability to meet rental payments is forcing landlords to the negotiating table. If the only option is to have empty property they will look to reduce rent or agree to alter the payment schedule, in many cases from quarterly to monthly.

"It is clear that landlords are not finding tenants quickly and they are facing lengthy voids (periods with no tenants]. I used to be able to sell a lease at a premium, whereas that is now very rare." There has been a trend towards letting space, often the larger units, on short-term leases simply to bring in some money, he says.

As for creditors, they have been changing their habits too. There are more instances of paying on pro forma, or 'cash upfront'. Suppliers refusing credit terms is an indication of how the lack of confidence has worked its way through the system.

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"The trouble with demanding cash upfront is that it puts enormous strain on a company's cash flow. Companies have to pay for stock before they sell it, and so every company is watching its cash flow more than ever before. However, there is no doubt that at the present time cash is king."