Distressed investors seeking to avoid Insolvency Act appointments are increasingly turning to private individuals possessing the expertise and experience necessary to lead a turnaround. While the specific position will be different in each case, the role of such individuals is known generically by the US term of chief restructuring officer (CRO).

CROs appointed to UK companies rarely enjoy the benefit of a formal moratorium, given that they are likely to have been appointed as an alternative to a formal process. Accordingly, CROs must bring with them the credibility and communication skills crucial to persuading key stakeholders to hold their positions throughout the restructuring.

In order to be in a position to devise, drive and implement a complex restructuring, a CRO will usually accept an appointment as a director. In doing so, the CRO agrees to assume the potential for personal liability all directors face, at the very time that risk could become reality. The moral hazard provisions in the Pensions Act 2004 provide a timely reminder of the risks associated with being a director. However, unlike insolvency practitioners (acting within their functions), directors of troubled companies with under-funded defined benefits pension schemes face the uncertain prospect of being issued with contribution orders by the new pensions regulator.

As is common with any rescue attempt, it is important that the incumbent management recognises the need for outside help and acts early. A successful outcome will often be preceded by a CRO having arrived early enough to re-shape management into their own likeness. The gear change to crisis mode may also require the CRO to impose prompt changes to established internal systems, if the company is to be ready for the ride ahead.

In restructuring. the only thing more valuable than time is cash. However, there are probably few cash systems in the world currently in use by solvent, going-concern entities that would be adequate for a restructuring. Going-concern systems usually suffer from the same characteristics, namely:

. they are based on going-concern assumptions.

The 'headroom' contingency built into solvent cash-flow forecasts will often be a luxury too far for a company in crisis. Financial controllers will need to be persuaded to shake off their more natural instinct to be prudent and switch instead to survival mode. The switch can be the difference between the board remaining in control or suffering a filing for formal insolvency protection;

. they are usually consolidated rather than entity specific. Insolvency law is entity-specific and restruc-turing accounts must reflect this. Consolidated accounts will be of little assistance on these issues;

. they are unlikely to be in a form creditor commit-tees expect and can easily digest. An experienced CRO can be expected to know that banks and other financial institutions seated at the negotiating table require at least three things in terms of the company's accounts:

i. A robust cash management and reporting system capable of withstanding harsh stress testing by the creditors' financial advisers;

ii. an open-book policy within the company's financial and treasury departments, permitting those advisors general access; and

iii. a real and deliverable commitment to producing regular rolling cashflow forecasts and reconciliations to creditors.

. existing cash management systems will seldom provide realistically for adviser burn rate. During a time of crisis outside of a moratorium, such is the leverage of creditors that a request (or, as is often the case, a demand), that their advisers' fees are paid by the debtor, generates an inevitable conclusion. While they may be unpalatable, it is vital that these costs are not underestimated.

These factors often require a CRO to overhaul existing cash reporting systems if key creditors are to have confidence in the company's ability to turn itself around without a formal appointment.

An overhauled cash management system is only as effective as the personnel available to operate it. As has already been alluded to, the mind-set of incumbent finance managers may become incompatible with a rescue attempt. There is rarely much that is comfortable about producing a truly exacting cashflow for your creditors to pore over – there is no privacy in a crisis. A CRO may therefore seek to complement his own appointment by bringing in an interim finance manager with specific remit to own the company's new and unswerving commitment to produce quality, on-time cash forecasts. Much like the CRO's role, this is a specialist position requiring the interim manager to be able to hit the ground running and ask the awkward questions.

While it is true that neither CROs nor specialist interim managers are cheap, the cost has to be looked at in the context of the alternative. In the case of the CRO, at least, most of the remuneration package should be in the form of a steeply ratcheted bonus so as to incentivise high stakeholder recoveries.

The time demands of an informal restructuring should also not be underestimated. In a major organisation, it is a full-time job which, if not prop-erly staffed, can cause restructuring efforts to consume the very business they were intended to preserve. Delivering on promises will be the cornerstone to maintaining creditors' trust and to buying the time necessary to complete the job. Conversely, a cycle of broken promises is only likely to lead a company in one direction.

Free from the distractions of day-to-day business operation, a CRO can represent the company in negotiations with the creditors' committees from whom continuing concessions are required if trading is to continue. A CRO will ensure that decision-critical information is delivered, packaged and presented to key creditors on time and in a format they expect and understand. This consistency of delivery and accessibility to a 'qualified' CRO can then go some way to improving upon any legacy of poor debtor/creditor relationships a CRO may have inherited. The rest of the management team can largely be insulated from the restructuring and left to run the business for maximum yield.

In the recent example of Queens Moat Houses, this division of responsibilities meant that:

. the underlying hotel business performed at least as well as projected and often beat projections during the course of the strategic review;

. payment defaults were avoided, meaning the crisis was not exacerbated by acceleration of debts;

. PR was managed such that trade creditors were never alarmed: discontinuance of supply would have dealt a serious blow to cashflow;

. consequently, emergency measures such as holding deposits on trust did not become necessary – there was always the reasonable expectation of avoiding liquidation; and

. the restructuring was successfully completed without having to resort to a formal moratorium.

Once appointed as a director, a CRO will owe duties across the stakeholder spectrum. However, this may not always be appreciated by those stake-holders who want overall control of the restruc-turing for their own interests.

A CRO will need to remain robust in the face of partisan pressure from active creditors who may have mistaken his remit as being to do their bid-ding. Less vocal creditors are then unlikely to remain quiet for long if they consider their interests are being ignored.

Whereas an administrator's independence is well established, a CRO may often have to draw on some serious diplomacy and communication skills just to be recognised as impartial, even by those who might have sponsored his appointment. Discharging his director's duties while maintaining the respect of key creditors and, at the same time, retaining the trust of his fellow management without whose support little can be achieved, will not always be an easy balance to strike.

Although a useful restructuring tool, there are many challenges and costs associated with appointing a CRO. As change management increases in profile, it will be interesting to see how readily investors in distressed UK corporates opt for change over tradition.

Adam Gallagher is a senior associate in Freshfields Bruckhaus Deringer's restructuring and insolvency practice.