Introduction
The
buoyancy and optimism of the north east economy is most
heartening although, whilst it is always tempting to accept
that extra sale to boost profits, there are signs of overtrading
in several business sectors. There are always businessmen
who believe that competitors are performing at a higher,
more profitable level than them and seek to expand without
due regard to basic business principles. For example, it
is all very well to show increasing sales but if book debts
increased disproportionately a strain is placed on cash
flow and, most likely, bank support. Such support cannot
be guaranteed long term unless steps are taken to regularise
cash flow and it is not a unique experience to see a profitable
business run into difficulty. Thus, attention should be
focussed upon returning a business to positive cash flow,
and there are numerous areas of opportunity for advisers
to revert a business to the fundamental business model,
restore it to health and allow it to continue upon its way
in the corporate world. The challenge is to spot such difficulties
at an early stage and take decisive action rather than rely
on hope and third party goodwill.
Over
the last twelve months or so the insolvency focus has been
on personal debt issues. As has been noted in previous Updates,
some of the forthcoming changes relate to aligning the Scottish
system with that used in England and the Scottish Executive
want to try and make Scotland a country of entrepreneurial
flair where business risk is encouraged. The concept of
encouraging business risk is to be applauded given the consistently
low business start-up statistics quoted for Scotland , although
regional variations suggest that the north east economy
enjoys a disproportionately high level of business creation.
There is evidence in the North East that current economic
circumstances generate success although it could be argued
that the fortunate few mask extensive individual financial
difficulties which are reflected in a continuing rise in
both sequestration and trust deed numbers.
A
lop-sided economy with more haves and plenty have-nots?
Evidence suggests that the have-nots are individuals who
are disappearing under a mountain of consumer debt rather
than businesses. Whilst such individuals may not have a
significant negative effect in a North East economy with
a substantial oil industry, there can be unfortunate consequences
for retailers and the leisure industry. There are a few
negative comments in the months leading up to Christmas
so this Update will be no different, but January, February
and March 2007 may well witness a new high of personal debt
misery as festive credit card spending continues unabated.
The
great personal debt write-off
Whilst
the split between corporate and personal bad debts tends
not to be provided by major lending institutions, the disclosed
level of bad debt provisions in 2006 is fairly stunning.
Lloyds provided £800 million for the first 6 months
of 2006 Abbey £127 million (more than double for the
same period last year), HSBC £365 million, HBOS £592
million. Both HSBC and Lloyds noted with frustration the
ease with which individuals appear to be walking away from
their debt, exacerbated by the one year bankruptcy period
in England which is likely to be introduced to Scotland
in 2007. The arguments have been well rehearsed in terms
of who is to blame for increasing consumer debt: the credit
card companies for lending too easily and not having strict
recovery frameworks, retailers for tempting consumers in
ever-more subtle ways whilst confusing purchasers with complicated
payment arrangements; consumers for living a lifestyle that
their income cannot support; and the government for a poor
legislative framework and social conditions. Whatever the
reason(s) it is undeniable that personal insolvency is becoming
far more prevalent with the stigma which used to be associated
with financial failure long forgotten.
The
Meston Reid & Co experience is of a growing acceptance
amongst many consumers that living life to the full on borrowed
money before dumping the debts and starting again is an
acceptable approach to life. Whatever happened to the canny
Scot? Personal insolvency is a complex and emotive issue
which causes distress, pressure and embarrassment to many
but when individuals realise
that debt relief can be obtained fairly readily without
specifically adverse consequences and no publicity, the
guilt of dumping debts, frequently measured in tens of thousands
if not hundreds of thousands of pounds disappears.
Perhaps
the most significant reason for not electing for debt relief
is property ownership. Generally, people are proud of the
house that they own and wish to avoid selling it if possible.
There are methods of refinancing whilst personal insolvency
proceedings are in force with a competitive lending market
developing. An individual wishing to keep control over a
home generates a strong desire to avoid personal insolvency
and hence service unsecured debts in the normal way. That
is not to suggest that everyone should own property, but
if a person has something of value to lose there seems to
be far greater desire to maintain unsecured/consumer debts
at a realistic and serviceable level.
Perhaps
the Scottish Executive are keen to promote the Debt Administration
Scheme as a means of keeping one's home but creditors are
unlikely to accept any changes to a system which denies
access to property if that is the only asset available.
The new legislation is awaited with interest.
Redundancy
Payments: the cost has increased
The
Employment Equality (Age) Regulations 2006 came into force
on 1 October 2006 and deals with employees who are dismissed
on or after that date. The key changes are that the upper
and lower limits no longer apply thus, the calculation of
a redundancy payment is:
1.
Up to the age of 21, an employee will receive
one half of a week's pay for each completed year of
service (the lower limit of 18 is removed).
2.
Between 22 and 40 years of age an employee
will receive one week's pay for each completed year
of service (no change).
3.
For 41 years of age and above an employee
will receive 1.5 weeks' pay for each completed year
of service (previously capped at 65).
Beware
loans to directors
A
recent court case has highlighted the risk that can arise
if a director of the company does not have sufficient knowledge
or interest in a company's affairs. Section 330 of the Companies
Act 1985, as amended, generally prohibits a company from
making a loan to a director. In the case of the company
under review, it had advanced monies to two directors. The
company was subject to formal insolvency proceedings and
when one of the directors was unable to repay his loan,
the court held that the other director was personally liable
for payment of both his loan and his fellow director's
loan.
The
effect is that a director requires to maintain close knowledge
of a company's financial affairs together with those of
any director who borrows money because, if one is aware
of the loan (and deemed to be acquiescing thereto) and the
director is not in a position to repay it for whatever reason,
personal liability may ensue. You have been warned.
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