BUSINESS INTERVIEW: As chairman of the Irish Society of Insolvency Practitioners, David Hughes is happy to shine a light on the work of an organisation whose members have been swamped as debtors struggle through the recession
INSOLVENCY practitioners rarely like speaking publicly about their work given the sensitive nature of winding up companies as liquidators, recovering debts as receivers or trying to restructure businesses as court-appointed examiners.
As chairman of the Irish Society of Insolvency Practitioners, however, David Hughes is happy to step into the limelight to raise the standing of
a low-profile organisation whose 350 members have been swamped with work as debtors struggle through the recession.
Set up in 2004, the society’s primary focus is on educating legal and accounting professionals working in the area of insolvency and enhancing the knowledge of members.
The group has hosted speakers such as Commercial Court judge, Ms Justice Mary Finlay Geoghegan, in front of whom many of its members answer to in court-appointed insolvencies.
It also donated €10,000 to Trinity Access Programme towards scholarships to assist students in law and accountancy at the Dublin university.
These all help increase the society’s profile, though upcoming developments in insolvency work are likely to push the group and its members further into the open.
Long overdue changes to the personal insolvency and antiquated bankruptcy regime means the work of debt doctors is going to become even more vital as borrowers try to emerge from the massive debt hangover.
Insolvency practitioners are not regulated, though Hughes says many liquidators and receivers are regulated through their respective professional accountancy bodies, while court appointments mean judges and the Office of the Director of Corporate Enforcement become regulators of sorts for corporate insolvency practitioners.
Regulation of insolvency has been “very slow in coming here” for some reason, he says, and the group is “very concerned” about the lack of regulation, given the enhanced role practitioners will play under the new legislation and the amount of people who will fall under that.
Under the legislation, personal insolvency trustees will be appointed where borrowers and lenders must reach a deal or personal insolvency arrangement for the write-down of debt.
It is still not clear who these trustees will be. Hughes, who is head of restructuring at Ernst Young, says there is no doubt that members of the Irish Society of Insolvency Practitioners will take on work as these trustees.
“The dynamic is very different when you are dealing with personal insolvency. There would have to be the proper licensing and regulation because you are dealing with the sensitivities of personal assets and all that entails, both in terms of family and everyone else,” he says.
“There is a suggestion in legislation that there will be licensing through the insolvency service. We are arguing that that should be controlled, not that we have any desire to be monopolising, but we will be saying it needs very strong regulation because we have seen instances in terms of people being caught on a personal level in some of the recent failures where you would want to make sure that there isn’t an abuse of people when people are very vulnerable.”
In his 38 years working in accountancy and insolvency, Hughes has never seen the scale of financial difficulty he has witnessed over the past five years.
The biggest change is the extent of personal insolvency arising from the devastating effect of personal guarantees given by borrowers, and particularly those working in property, to the banks.
“The volume of insolvency could not ever have been appreciated – it is unprecedented in terms of expecting the sort of throughput of insolvency going back five or six years,” he says.
“Second, nobody would have thought it would have lasted so long. We are not out of it in terms of ongoing insolvencies.
“Previously, there would not have been the same level of personal guarantees but, over the last number of years and connected to property, it was just the norm to give them and now there is a call on them.”
It is understandable that banks are calling on guarantees, but when borrowers have no income or jobs, there is little opportunity to recover any debt through such instruments, creating a “stalemate”, he says.
Personal guarantees given in good faith “are coming back to haunt people”, Hughes says, adding “no one would have anticipated the circumstances that have prevailed since then”.
Companies not involved in property got drawn into investing in it because of the surplus cash they built up during the boom years, he says. And while the underlying business would have been “capable of surviving, albeit in very difficult circumstances”, the property investments had piled on “additional pressures”.
“[There was] the expectation that the good times would roll forever; people had been a little bit ‘flaithiúlach’ in terms of how they borrowed. The difficulty at the time was not only could they borrow, but the rates were such that they were very attractive – so there was a huge encouragement to borrow,” says Hughes.
“There was a view that people would borrow because the rising tide would lift all boats and the tide would stay in. Unfortunately, the tide has gone out.”
Hughes sees the new personal insolvency and bankruptcy regime as “the first step towards a second chance”, but it is still a long way behind “the tried and tested” working regime in the UK where there are 150,000 personal insolvency arrangements every year.
The attitude towards restructuring personal debt doesn’t exist here, says Hughes. He hopes the operation of the new legislation will change that: “[The current regime] is punitive rather than any form of rehabilitation. This [the new insolvency regime] looks to give a level of rehabilitation.”
He is still not sure, once it is in operation. whether the new personal insolvency arrangements, through which mortgage debt can be written down if the banks approve, will give people a fresh start and how the banks will perceive them once they go through the process.
“It is a wait-and-see,” he says. “It is the right step in terms of addressing the issue. In this country, we sometimes put our head in the sand and hope these things will go away. This personal insolvency problem is not going away. It needs to be addressed.”
Hughes doesn’t believe the personal insolvency arrangements go far enough in putting a €3 million cap on the amount of mortgage debt that can be written down.
“I am not sure that €3 million is that significant in terms of the numbers they are trying to capture. Personally, I would have thought that the €3 million figure is too low,” he says.
He says the new regime will also carry some degree of moral hazard – where borrowers who can afford to pay, abuse new debt relief measures introduced for those who can’t afford to pay – but that shouldn’t prevent action.
“I don’t think you can legislate for everybody by reference to the consequences of the few,” he says. “This country will go nowhere with people in the jam they are in if they have no future with the overhang of debt. Unless this is introduced we are in the stalemate and we will be in the stalemate for a long time, notwithstanding the moral hazard.”
Hughes believes those who can repay their debts will, but he accepts that debt forgiveness is required; without it, nothing will change in the economy, he says.
“There is no impetus or incentive for people who find themselves in this personal quagmire to try to get out of it,” he says. “Unfortunately, in this country we have never had that ‘second chance’ mentality and I think the quicker we introduce it, the better.”
Is he surprised there is no debt forgiveness being offered in a jurisdiction which effectively is in receivership? Following the principles of corporate and personal debt, where you can’t pay, there would be some debt forgiveness, he says.
“On the one hand we have a situation where we are ponying up to the totality of our debt while at the same time we are not able to service our personal debt. There seems to be a disconnect, but I wouldn’t be privy to the conversations that have given rise to the situation that we find ourselves in,” he says.
Hughes, like most insolvency practitioners, has taken on high-profile work through the National Asset Management Agency and the non-Nama banks.
He was appointed by Bank of Scotland (Ireland) as receiver over parts of the Zoe Group, the firm once run by developer Liam Carroll, and over Ashford Castle in Cong, Co Mayo, previously owned by the Galway property developer Gerry Barrett.
Hughes, with his Ernst Young colleague Luke Charleton, were installed as receivers over Treasury Holdings’ companies behind Spencer Dock in Dublin (excluding the Convention Centre) by Nama.
He says that there is “merit” in maintaining rather than selling Liam Carroll’s property portfolio because “it is producing a very substantial amount of income”.
Speaking generally about why enforcement action is taken by lenders, Hughes says banks will move to protect their security where there has been “a breakdown in trust or communications” or where borrowers feel that the debts are so high and the value of the properties so low that they have “no skin left in the game”.
In most cases, it follows a period where banks have tried to work with borrowers.
Hughes says there is much focus on distressed companies in these tough times, but what insolvency practitioners are dealing with is distressed people.
“There has been a huge change in mindset from people who were running what they perceived to be as very successful businesses, with huge equity and planning their pensions. The situation now is where they don’t have a future, don’t have an income and don’t know how they are going to survive for the last couple of years,” he says.
“It has been a very difficult situation for some people to realise what they had is not coming back.”
But the market is coming back in certain areas. Hughes has had success in shifting commercial property where the right yields have attracted buyers.
While the Allsops distressed auctions have brought in a lot of Irish buyers, Hughes concedes that the residential property market is still “stagnant”.
There is a possibility that the market could “skip a generation” where first-time buyers cannot secure a mortgage because the banks are restricting credit.
As a receiver, he says, there is not much difference between working with Nama and with the non-Nama banks. Nama was “by its nature, a little more process driven” because it was setting up.
“Nama, in the early stages in getting to grips with this whole area, was slower. I think they have taken steps to ensure that the process is much more efficient now and the process is now working where Nama is as up to speed as some of the other banks,” he says.
Professional firms in general and the fees they charge were subject to criticism by High Court judge, Mr Justice Brian McGovern, in a recent case involving Charleton, Hughes’s colleague in Ernst Young’s restructuring department.
While approving his fees as special manager of Newbridge Credit Union, the judge expressed “general concerns” that certain professionals were “feasting on the carcasses” of insolvent firms when many were in difficulty and people’s pay was being cut.
The market decides the level of fees and, because there is no licensing arrangement for insolvency practitioners and no bar on entry into the market, competition is intense, he says.
“In terms of fees, again things can be taken out of context. The market is very competitive. You can go to different shops in adjoining streets and buy the same product for different prices. You choose where you shop,” he says.
“The fees have been regulated in all court work for years. But the competition is there and the market will dictate the fees.”
Hughes stresses that the underlying investment in staff, knowledge and resources in the big firms has to be taken into account when considering fees being charged.
“You need to look wider than just the underlying fees,” he says.
Although Hughes is not involved in audit work at Ernst Young, the firm has been criticised for not spotting the warning signs as the long-time auditor to Anglo Irish Bank prior to the collapse of that bank.
The problem of what an auditor should check for is a more universal debate, he says.
“There is an expectation gap that has arisen that needs to be addressed. What is the role of the auditor? That is an international standards issue rather than an Irish issue,” he says.
As far as insolvency work is concerned, Hughes says he adopts a sensitive approach when dealing with owners or managers at firms to which he is appointed and “considers how you are perceived on the other side”.
“If you show respect and dignity in those circumstances, you get that back. They may not be happy to see you, but they are at least willing to work with you,” he says.
So he has never been physically threatened or pinned to a wall?
“Not in the course of this work,” he says, smiling.
FRIDAY INTERVIEW
Name: David Hughes, chairman of the Irish Society of Insolvency Practitioners and head of restructuring at accountants Ernst Young
Age: 60
Family:Married with two adult children
Home: Castleknock, Dublin
Hobbies:Sport, including golf – he is a member of Castle Golf Club in Rathfarnham, Dublin
Education: Commerce degree from UCD
Career:He started his career at accountancy firm Stokes Kennedy Crowley (now KPMG) in 1974 before moving to Reynolds and McCarron which, in 1987, merged with Ernst Whinney. The firm became Ernst Young in 1989
Something you might expect:He has worked in the area of insolvency for almost four decades
Something that might surprise:He played football for Home Farm for seven years in the 1970s when Ronnie Whelan, who later played for Liverpool and Ireland, was at the club for a short time. Hughes played amateur football for Ireland six times and won the FAI Cup with Home Farm in 1975.
