Total
personal debt in the UK has been in excess of £1trillion
for the last 12 months. Indeed, a recent survey suggested
that personal debt is now in excess of the UK 's gross domestic
product i.e. if everyone spent their entire income in repaying
current mortgage and credit cards, personal loans
etc all existing debts would not be repaid until January
2007. Frightening, and this may explain why attention
is focussed upon personal insolvency issues.
Many
readers will be aware of the discussions regarding the new
bankruptcy bill which, as far as the insolvency profession
is concerned, have been largely overshadowed by the ongoing
protected trust deed process with the Scottish Executive.
Howsoever the Scottish personal insolvency framework
changes, there must continue to be a range of options available
to individuals who are experiencing significant financial
pressure. There will always be individuals
who try to dodge liability and look for an easy way out,
but the Meston Reid & Co experience is that the majority
of individuals want to pay what they can, but simply find
that the total debt burden is unmanageable.
There is much talk about promoting an enterprise culture
in Scotland by making financial failure easier to address.
This is highly laudable, although statistics from the Institute
of Chartered Accountants of Scotland show that more than
90% of personal insolvencies are consumer related i.e. individuals
who are mired in debt as a result of personal loans, credit
cards and other consumer liabilities.
Perhaps
there is merit in trying to create a system that allows
a different set of rules for those who try to succeed in
business and fail compared with those who might be seen
as somewhat feckless in managing their personal financial
affairs. Whatever happens in the next eighteen months
or so suggests that debate and argument are guaranteed.
Administration
or Liquidation: does it matter?
The
number of administration appointments in 2005 was greater
than at any period prior to this, which may be because of
the comparative ease of a company applying for an administration
order. This is having an impact on the general shift
toward this type of insolvency process.
The
term “liquidation” tends to create negative thoughts amongst
stakeholder groups and, whilst liquidation can be useful
in trying to save/sell all or part of a business, the administration
process is more flexible and avoids the stigma and negative
publicity normally associated with a liquidation.
The Insolvency Act 1986 and subsequent legislation gives
an administrator substantial powers to preserve and protect
a business whilst steps are taken to reorganise and save
all, or part, thereof. Although the costs can be
higher initially because of the more proactive approach
in terms of saving a business rather than taking steps to
provide a corporate burial, current indications suggest
that administration is gaining approval amongst all stakeholder
groups and there is support for its use.
There
have been a few adverse comments that administration is
being used when liquidation is the correct route thus sullying
the turnaround and positive image of an administration.
Time will tell how the business community responds
if the system does become prone to abuse.
If
directors wish to appoint an administrator, the new process
is fairly quick and expedited considerably if a qualifying
floating charge holder is happy to support the process in
terms of both statutory notification and ongoing funding.
Meston
Reid & Co have been involved in providing advice to
companies contemplating administration and acting as administrator.
If you wish to discuss the implications of an administration
order, please do not hesitate to contact us. The
first consultation is free!
The
Bankruptcy Bill : will the reforms be worthwhile?
It
seems inevitable that a one year sequestration period in
Scotland will be introduced shortly in order to bring us
into line with that which has been in force in England since
1 April 2004 . In England there has been a
mushrooming of bankruptcies without any discernible change
in attitudes to debt. Indeed, a recent study
indicated that 90% of credit card issuers do not ask for
proof of income or evidence of ability to afford repayments.
Credit card debt in the UK has been estimated at
almost two thirds of the total credit card debt in the EU,
which suggests that there is a significant issue of over
indebtedness.
The
threat of having a bad credit rating is meaningless for
many individuals who have already defaulted on liabilities
and are black-listed. Also, the threat of losing
one's home is only an issue for those who have equity in
their houses. A significant number of individuals
rent, either privately or from the council, and many homeowners
are already fully borrowed against their home which means
that, as long as they continue to service the mortgage the
house is unlikely to be attacked. Experience suggests
that the main stigma of bankruptcy tends to be public knowledge
of a person's situation and the bankruptcy bill makes no
change to the current system whereby the matter is private
between an individual and his creditors. Whilst
it is true that a person's insolvency is advertised in The
Edinburgh Gazette, the reality is that very few individuals
read it or have even heard of it!
It
is suggested that being sequestrated is worse than signing
a trust deed but if all that one has to offer is an income
flow to pay a contribution to one's trustee, there are few
practical differences .
If
you have spent thousands of pounds on credit cards but there
are no assets to show for it, the reality for creditors
is that there is nothing for a trustee to sell. Limiting
the period of sequestration from three years to one will,
for the majority of people, seem a mercifully easy way to
walk away from debts: whilst the trustee is trying
to persuade individuals to pay a contribution for a longer
period in the hope of creating improved dividend prospects.
Fat
chance : unless a bankruptcy payment order to force a debtor
to pay for more than one year is obtained from court, which
the English experience suggests is an infrequent occurrence.
Thus,
the proposed reforms appear to continue to be debtor-friendly
which suggests that any finance company advancing credit
should be more vigilant in the future.
Once
someone with insurmountable debt problems consults a debt
advisor and becomes aware of the options for debt relief,
formal insolvency procedures invariably incept. Sometimes
one could argue that it seems the main difficulty many people
face is who to talk to or where to turn at a time of financial
difficulty because most people finding it embarrassing to
discuss such an issue with family and friends. Even
when formal insolvency is the most suitable way forward,
one of the problems in the current legislation is the ability
to secure an award of sequestration when there are insurmountable
debts and creditor pressure is intense. If the new
bill allows individuals to seek the benefit of debt relief
more readily, it will be most welcome to thousands of Scots
but perhaps not to creditors.
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
of this office.
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