Sorry
Mr Bin Laden I cannot act for you!
The
Money Laundering Regulations 2003 became effective on 1
March 2004 and have a direct impact upon an insolvency practitioner,
broadly in the same way as they affect an accountant in
general practice. If Osama Bin Laden wished to appoint a
north east practitioner as his trustee then, assuming that
he has been in hiding in the north east long enough to satisfy
the residency requirements, he would find difficulty obtaining
someone to act for him because the money laundering regulations
require the practitioner to undertake steps to evidence
identity. For example, a passport, driving licence or utility
bill, together with a face to face meeting are required.
Even then, one suspects that the Proceeds of Crime act 2002
and the Terrorism Act 2000 would force the practitioner
to advise NCIS (National Criminal Investigation Service)
on the basis that there may be suspicions of money laundering.
Does
this mean that all unsavoury characters such as known drug
traffickers cannot avail themselves of formal insolvency
proceedings in Scotland ? Any person can be subject to formal
insolvency proceedings, but the legislation referred to
above will take precedence if there is either known or convicted
criminal activity which has given rise to the accumulation
of assets in the debtor's name/possession. It means that
such assets may fall outwith the scope of the formal insolvency
process, leaving the trustee with little or no funding to
meet the costs of the insolvency. If Osama Bin Laden is
in hiding in the north east, and reads a copy of this update,
he may be disappointed to note that neither sequestration
nor trust deed proceedings in Scotland are likely to protect
him from those who are chasing him.
Early
warning signs: another one bites the dust
In
January 2004 the DTI increased the annual turnover threshold
from £1 million to £5.6 million as one of the
requirements for a company to have an external audit. Although
there are other methods of determining whether an audit
is required, the turnover threshold is the one used in the
vast majority of cases. The new level means that some fairly
substantial companies can decide to dispense with an audit,
which may be of some disquiet to those who are financially
exposed to such companies e.g. financial institutions and
trade creditors. Unaudited accounts can be signed by unregulated
accountants and hence, have the potential to become less
reliable. Of equal importance is the fact that an auditor
is required to look 12 months beyond the date of signing
the audit report in order to determine if, in his view,
the company is likely to have sufficient resources to continue
trading. The directors are also required to consider this
matter prior to signing the balance sheet, which creates
a higher onus of care in terms of ensuring that the company
is likely to be around to fulfil its obligations in the
foreseeable future. A qualified audit report or other unusual
comment in the accounts can prove a valuable early warning
sign and one might question the wisdom and business reasons
of the board of a company with annual sales of £5
million if the directors decided against an external audit.
Another
aspect is that a liquidator has the ability to sue an auditor
who signs accounts which are, with the benefit of hindsight,
shown to be incorrect. This opportunity will be lost if
an accountants report is attached rather than an audit report.
Before
you allow the benefit of audited accounts to be removed,
think carefully about the consequences.
Does
the new insolvency regime enhance dividend prospects?
The
Enterprise Act 2002 came into force on 15 September 2003
and introduced the new concept of a pot of cash for unsecured
creditors. Basically, once assets subject to standard securities
have been
sold,
the remaining assets e.g. plant, equipment, vehicles, book
debts will be collected in an insolvency account for distribution
to creditors. On the basis that preferential creditors are
likely to be modest, the vast majority of monies in the
insolvency account would normally have been paid to the
bank under its floating charge. However, the new legislation
allows, in general terms, 20% of the balance in the insolvency
account, up to a maximum of £600,000, to be made available
for unsecured creditors: money which would otherwise have
been paid to the bank.
The
banks have agreed to this change because the government
lost preferential status for unpaid PAYE, NIC and VAT. As
a result, the government hopes that unsecured creditors
will take a closer interest in the outcome of asset realisations
compared with the old legislative regime. This may not be
the case in practice because, where there was little prospect
of a dividend being paid to unsecured creditors in the past,
many potential claims were ignored. For example, a claim
for unfair dismissal/racial discrimination would often be
ignored on the basis that such claim would be unsecured
and hence, unlikely to be paid. Similarly, a landlord may
take an active interest in terms of formulating a claim
for dilapidations and unpaid rent if he thinks there is
a chance of a dividend, whilst finance companies will wish
to ensure that a claim is lodged for the loss on disposal
of assets subject to finance. These are three examples,
and there are more, of the opportunity that an unsecured
creditor has to increase the total claims position and the
insolvency practitioner will be obligated to ensure that
only claims which are correctly and fairly calculated are
admitted for dividend purposes.
The
double whammy of increased unsecured claims and higher costs
of agreeing them may have the effect of dissipating the
allegedly improved dividend prospects which unsecured creditors
are led to believe will be available. It remains to be seen
if the hopes for greater unsecured creditor input to an
insolvency process and higher dividend prospects come to
fruition as the new regime takes effect. Perhaps the only
beneficiaries of this new system will be accountants and
solicitors as they quarrel over the quantum of claims!
Employment
Rights Act 1996
For
those of you involved in dealing with redundancy costs,
it should be noted that statutory instrument 2003 no. 3038
(Employment Rights (increase of limits) Order 2003) increased
the limit on a week's pay for redundancy and insolvency
payments to £270 with effect from and including 1
February 2004. This limit applies to the period to which
the debt relates rather than the date that it is paid.
The
new Scottish bankruptcy bill
The
consultation process is continuing regarding the new bankruptcy
bill which, it would appear, will bring Scotland into line
with the bankruptcy legislation coming into effect on 1
April 2004 . One of the main changes in England which one
suspects will be replicated in Scotland is a one year bankruptcy
period rather than the current three year period.
It
is understood that a large number of students in England
are proposing to use the new legislation to declare themselves
bankrupt for one year and thereby divest themselves of all
debts. Conscious of the impact of the tuition fees and student
loan position in England , the government are moving to
close this loophole towards the end of 2004 by exempting
student loans from the bankruptcy process. Time will tell
whether the Scottish bankruptcy bill elects to follow this
line such that Scottish students cannot write off their
debts before they start working.
Conclusion
This
insolvency update is provided for general information purposes
and does not purport to provide definitive advice on the
topics covered.
Further
information can be obtained by contacting either Michael
Reid (Insolvency Practitioner) e-mail reidm@mestonreid.com
or Michelle Byrne (Insolvency Manager) e-mail byrnem@mestonreid.com
who will be pleased to meet with you for a no obligation
consultation.
Thank
you for taking the time to read this update.
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