With
corporate insolvencies reducing in the last 6/12 months
in Scotland there has been comment that the Scottish economy
is on a steady course. Perhaps, but such view
may fail to recognise some industry sectors where significant
difficulties are being encountered such as fishing, farming
and engineering. It would be wrong to be complacent.
Business
sales: undue haste?
When
companies fail there has been a rising tendency for “pre-pack
sales” which has caused angst amongst creditors.
A pre-pack sale means that there has been prior consultation
between a business in financial difficulty and an insolvency
practitioner such that, when the formal insolvency incepts,
a sale appears to happen with undue haste: often
involving the directors of the failed entity. Creditors
opine that their interests have been prejudiced and best
value has not been obtained. In industries
such as leisure and catering, closure for a short period
of time can create significant danger to continuity of trading
and employment. It is not uncommon to find that the
buildings and equipment are leased, book debts are factored
and there are no contracts that can be sold for value: all
pointing to the fact that a business has little intrinsic
worth. Closing it for a short period, even one week,
could jeopardise the entire economic unit. The frustration
amongst creditors and other stakeholder groups is understandable
but the key issues are to work quickly in a confidential
manner, whilst trying to preserve a business. In
reality, if formal insolvency does not produce a return
anyway, creditors are no worse off and are arguably in an
improved position because they can elect to supply the new
entity and have the prospect of generating profit to offset
the previous loss.
The
issue of pre-pack sales will always be around. The
insolvency profession tries to ensure that there is full
disclosure and transparency once a deal has been done but
confidentiality and asset preservation means that the announcement
of corporate failure and a pre-pack sale will always come
as an unpleasant surprise to creditors. Current
legislation and statements of insolvency practice will ensure
that, whilst creditors may not like what has happened, at
least an explanation is available.
Protected
Trust Deeds: ongoing consultation on reform
In
January 2006, the Scottish Executive issued a consultation
document on protected trust deed reform. Despite
the fact that many of the key statistics in the document
have been shown to be wrong and hence, the resultant conclusions
flawed, the Scottish Executive seemed to have the bit between
their teeth in terms of reforming the protected trust deed
process. Some commentators have suggested that such
determination is based upon embarrassment regarding the
failure of the Debt Administration Scheme process which
was launched in December 2004 and has been an almost complete
failure. Such view may be unduly harsh and one can
understand why the Scottish Executive wish to introduce
reforms which render the trust deed process more transparent
for debtors and creditors. The Institute of Chartered
Accountants of Scotland introduced Statement of Insolvency
Practice 3A “SIP 3A” in January 2004 which has had the effect
of regulating protected trust deeds much more closely and
it is regrettable that the Scottish Executive do not seem
to have given the Institute due recognition for such initiative.
The
Scottish Executive suggest that there should be a minimum
distribution rate before a trust deed can become protected
but this fails to reflect reality where individuals can
have little or no assets, fairly modest income and substantial
debts in terms of credit cards and loans. Recent
research has shown that at least 90% of trust deeds are
consumer-debt related rather than as a result of a failed
business enterprise. Also the consultation document
fails to recognise that a key benefit of a trust deed is
a willing debtor, prepared to pay a sensible contribution
from earnings over a period of three years. Contrast
this to the new sequestration period of one year and it
is easy to suggest that a dividend to creditors is likely
to be higher where a debtor is paying contributions over
a three year period rather than a one year period.
The
Scottish Executive appears somewhat distrustful of the insolvency
profession and are seeking to introduce various audit mechanisms
and to place these within the power of the accountant in
bankruptcy. This seems curious on the basis that
creditors are always provided with information regarding
a trustee's fee claim and have the opportunity of lodging
an appeal: so why does the State believe there is a problem
in this area? Remarkably, the Scottish Executive
further suggest no limit to the audit fee that the accountant
in bankruptcy can charge, that the trustee will pay such
audit fee prior to the audit being carried out, and that
if the audit suggests a fee below that which the trustee
has requested, the audit cost will be met by the trustee
personally rather than as an expense of the trust deed estate.
Draconian measures indeed, and one wonders why the
Scottish Executive seem to have such a jaundiced view of
the insolvency profession.
Communication
from the Scottish Executive refers to negative feedback
regarding the actions of insolvency practitioners generally
but no specific issues have been explained and the Institute
of Chartered Accountants of Scotland advise that they do
not have a large file of complaints: either from debtors
or creditors. Thus, one would question who is providing
such negative feedback to the Scottish Executive and why
documentary evidence is not produced in support of contention.
If
trust deed reform occurs, it is unlikely to be before 2008
and further animated debate is almost guaranteed beforehand.
Sensible
reform which dovetails the trust deed process with other
forms of debt management/debt relief are always welcome
in terms of being able to provide a linked set of options
for those in financial difficulty. If you wish to
review the Scottish Executive consultation document it can
be seen on the Meston Reid & Co insolvency website www.scotdebt.net
under personal difficulties/ bankruptcy and
diligence bill.
Money
laundering : would you dare report it?
Section
330 (6) of the Proceeds of Crime Act 2002 provides that
a person does not commit an offence of failing to report
a crime if he has reasonable excuse for not disclosing information.
If one is trying to save a company that owns
bars/restaurants and finds that a large percentage of takings
are paid in cash for local “protection”, is either the owner
or the insolvency practitioner liable to an offence by not
disclosing the payments to the National Criminal Intelligence
Service? Whether or not the payments make the
difference between financial success or failure, the court
would have the final say about the correctness of not submitting
a report if physical harm was considered a realistic prospect.
The
question is : would an insolvency practitioner wait for
court directions, pay the money, decline the job, or find
some new recruits from the local rugby club? Never
let it be said that an insolvency practitioner's life is
easy!
Conclusion
This
insolvency update is provided for general information purposes
and does not purport to offer definitive advice on the topics
covered. If any further information is required or
specific advice sought, please do not hesitate to contact
either Michael Reid
or Michelle Byrne
at this office.
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