Introduction
Relatively
stable and low interest rates, business failures at their
lowest level in the North East for the last seven years,
a firm domestic property market and cautious optimism from
drilling contractors and offshore service companies .....all
suggest that the North East economy is in reasonable shape.
Whilst it may be the case that some sectors are facing financial
challenges such as fishing, licensed trade and light engineering,
the relatively benign conditions are welcome.
We
live in interesting times.
Sequestration
for rent: Still a threat?
The
Enterprise Act 2002 abolished the statutory preference afforded
to the Inland Revenue for unpaid PAYE and Class 1 NIC for
the period of 12 months immediately preceding the date of
formal insolvency. It was thought that this might have an
effect on a landlord's position because sequestration for
rent proceedings are often threatened at the onset of a
formal insolvency. Briefly, a landlord has the opportunity,
subject to the wording of the lease, to change the locks
and sell the contents of his rented premises in satisfaction
of both unpaid rent and rent due in advance. Sequestration
for rent proceedings have become less popular because the
vast majority of business assets tend to be financed and
hence, do not belong to the tenant in the first place, but
also, the insolvency practitioner is often able to argue
that section 64 of the Taxes Management Act 1970 "TMA" makes
such a process uneconomic. The TMA means that if a landlord
changes the locks and removes the tenant's assets for sale
with the intention of retaining such monies, the landlord
must pay the unpaid PAYE relating to the period of twelve
months prior to the date of formal insolvency. Indeed, if
the unpaid Inland Revenue liability exceeds the value of
the assets sold, the landlord is still required to pay the
full amount of Inland Revenue arrears, even if it creates
a financial loss to the landlord: tending to make the procedure
less attractive to a landlord.
The
Inland Revenue have confirmed that the Enterprise Act 2002
did not abolish the provisions of section 64 of the TMA
and hence, whilst landlords and their advisers should continue
to be aware of this option, restrictions on the effectiveness
of sequestration for rent proceedings must be borne in mind.
Pride
and joy: But will it survive?
There
have been many studies in recent years about the failure
rate of new businesses, but there seems to be general consensus
that the majority of business start-ups that fail do so
within the first two years. On the basis that the process
of failure is usually painful and embarrassing for all involved
it seems sensible to plan ahead in order to create a successful
enterprise. It is easy to say that most small businesses
fail because they run out of money and, whilst that may
be true, a sensible business plan and realistic objectives
are vital ingredients to help entrepreneurs trade successfully.
One
would argue that whatever one's initial corporate vision,
survival in the first two years is due to a mixture of:
hard work; support from all stakeholder groups (shareholders,
employees, customers, suppliers etc.); government legislation;
finance.. and some luck. After 15/18 months or so, the novelty
of a new business can wear off. At about the same time,
government grants and enterprise grants disappear, customers
become less supportive and suppliers place greater pressure
on payments.
This
is likely to coincide with a sense of fatigue at dragging
your new corporate baby into the world, with the consequent
effect of the entrepreneur and staff being too tired to
keep the business fresh and innovative.
When
everyone is running around saying they are far too busy
to think ahead, that is the time to take a break from the
daily grind and start planning for the next year or two.
It is a task that must be done and the future cannot be
allowed to take care of itself. Plan to succeed, do not
fail to plan. Having a plan and sticking to it will not
guarantee survival but it improves the prospect of becoming
a sustainable and flexible business with long-term survival
and growth prospects.
Regulation:
A bureaucratic nightmare
Earlier
this year the Association of Business Recovery Professionals
"R3" asked insolvency practitioners how they felt about
the current system of regulation. It comes as no surprise
that, in common with virtually every other business, government
intervention and legislative change is a significant area
of complaint. The relatively few number of insolvency practitioners
in Scotland have many bodies which influence the issues
of the day: the Association of Business Recovery Professionals,
the Joint Insolvency Committee and the Insolvency Practices
Council, the Institute of Chartered Accountants of Scotland,
the Association of Chartered Certified Accountants, the
Law Society of Scotland and the Insolvency Practitioners
Association. Further, the Insolvency Service has a role
to play in terms of director disqualification proceedings.
So many bodies for so few practitioners: it is little wonder
that the regulation is a costly and bureaucratic nightmare.
Given
the trusted position enjoyed by an insolvency practitioner
when dealing with a distressed business and the level of
reliance placed on his actions, it is important that both
public perception and reality is maintained at a high level.
However, regulation carries a compliance cost which helps
explain, even if only a little, why hourly rates can seem
quite high.
Debt
Arrangement Scheme: A good idea but will it work?
Included
in the flurry of bankruptcy bill consultation meetings are
the new debt arrangement scheme procedures which are likely
to come into effect in December 2004. The fine tuning of
the scheme has yet to be announced but already some disquiet
has arisen regarding what training/experience debt advisers
are required to have, coupled with the process of accreditation.
Further, some commentators suggest that it will offer a
balance between sequestration and trust deed proceedings
whilst allowing an individual to retain his house, perhaps
on the basis that the government wishes to avoid having
to provide accommodation to individuals who lose their houses.
Whilst the old adage of "you get what you pay for" may be
true, one proposed benefit of the debt arrangement scheme
is that debt advice and support will be provided free of
charge to everyone, regardless of their ability to pay:
a general principle which seems to be followed by the Scottish
Executive in terms of ensuring all members of society have
access to advice.
Time
will tell how the new system develops: particularly once
rules and procedures have been finalised.
Conclusion
This
insolvency update is provided for general information purposes
and does not purport to offer 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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