The Autumn reporting season for banks has, for the last
few years, been noted for the significant provisions for
consumer bad debts. The slight increase in interest rates
in recent months also gives an opportunity to provide for
various corporate debts which have been in intensive care
for a number of months and unlikely to recover. As has been
noted in this newsletter before, and repeated in many media
articles thereafter, the level of consumer debt in the UK
exceeds one year’s GDP for the whole country. Whilst
many people feel happy to carry large amounts of consumer
debt on the basis that the value of their house is increasing,
unless one is mortgaging at regular intervals the situation
remains that monthly income becomes increasingly insufficient
to service a debt burden that is accumulating with ongoing
spending and interest.
There are a number of ways of dealing with unmanageable
personal debt and it is fair to say that in a Scottish context,
sequestration and trust deed are popular choices for those
who do not have substantial assets. The recent changes to
the Debt Administration Scheme and the approach being adopted
by many advisers may give this debt management tool a much
needed boost although, with the vast majority of the larger
creditors being based in England (or handled from an English
centre such as The Insolvency Exchange) it is difficult
to project how another Scottish concept will be perceived
in England where the blunt instruments of either bankruptcy
or an IVA are all that is on offer.
Wanted: A latter day Wyatt Earp to take
action
In the quarter ended 30 June 2007 Scotland saw 190 liquidations,
22 receiverships and 12 administrations. The vast majority
of these companies had more than one director. In the same
quarter there were only 9 proceedings issued against delinquent
directors and 5 disqualification orders. Whilst it is appreciated
that many companies fail as a result of circumstances that
are outwith the immediate control of the directors, one
of the key threats of formal insolvency is that an individual
may face disqualification from being director of a company
for a period of up to 15 years. Even those who escape a
disqualification order or undertaking but are pursued by
the Director Disqualification Unit face a fairly hefty bill
in terms of both time and cost. The mere threat of disqualification
tends to make most directors act promptly, responsibly and
in an equitable manner but if the perception begins to pervade
the corporate world that disqualification is highly unlikely
unless, for example, one behaves like the late Robert Murdoch,
much of the danger of formal insolvency might be ignored
and directors could continue to trade with relatively little
risk of impunity for longer than should be the case. Further,
many disqualification proceedings include an action for
wrongful trading which seeks to attach personal liability
to a director, or directors, for creditors assumed by the
company after the date on or which the director, or directors,
should have been aware that formal insolvency could not
be avoided. This is another source of financial recovery
as far as creditors are concerned and the current lack of
Insolvency Service activity is seen as a cause for concern.
We believe that this is an area where public interest is
paramount and it would be disappointing if corporate rogues
were allowed to operate with little concern or danger of
being brought to account for their misdemeanours.
If the State won’t take action who will?
Family home: Get out of pay up
Dealing with the family home in a personal insolvency is
perhaps the most contentious and emotional issue, and one
which causes a large number of complaints to the Institute
of Chartered Accountants of Scotland. It is hardly surprising
when the family home is at risk that occupants, particularly
those family members who are not subject to personal insolvency
proceedings, do whatever they can to protect the family
home.
An expanding group of companies is emerging who are prepared
to lend to distressed borrowers, advancing about 85% of
the net equity. The principle is that this allows the majority
of monies to be released to the trustee, pays a prompt dividend
to creditors, allows the debtor and family to remain in
residence, and concludes the insolvency process. However,
it must be noted that the trustee is charged with the task
of realising all of the equity and it is only when the unrealised
balance is fairly modest that an 85% figure might be accepted
by both the trustee and the general body of creditors. For
example, if the net equity is £10,000 and £8,500
is being released, it is probably not cost effective to
pursue the debtor for the balance, whereas 85% of £100,000
still leaves a £15,000 sum to be pursued: difficult
to ignore. In such situations the trustee tends to take
instructions from the general body of creditors in terms
of accepting a refinancing exercise which provides the majority
of net equity and a prompt dividend compared with cost and
speculation of court action. As far as the debtor is concerned,
the finance company will enter into a rental agreement for
a specific period and then allow the debtor to repurchase
the house at an agreed figure once the sequestration process
has concluded.
The process is not ideal but allows the emotive issue of
forcing someone to leave their house to be addressed in
a practical manner and, with the advent of the one year
sequestration period commencing in April 2008, one suspects
that trustees will become more inclined to accept a reasonably
high percentage of the net equity rather than becoming embroiled
in a lengthy court action.
Perhaps the increasing number of companies offering this
refinancing alternative is testament to the general acquiescence
that it allows a satisfactory return in a cost effective
manner. It does not work in every case, particularly when
the 15% balance is high but at least it offers a workable
solution for many.
Liquidation: Why does it take so long?
Many creditors sigh in disbelief when there is yet another
notice of an annual general meeting in a liquidation. The
longest liquidation on record is more than 100 years and,
whilst most insolvency practitioners seek to achieve closure
within 12/18 months, the regrettable reality is that the
liquidation process is lengthy, hence the desirability of
interim dividends.
Collecting book debts for an insolvent estate can prove
a challenging process because the individuals who were involved
in the original supply are not around to respond to the
catalogue of excuses provided by debtors and the position
tends to worsen in certain types of industry e.g. construction
and IT. Sometimes a liquidator has to wait for a number
of years in order for a royalty/licence income stream to
be received; wait for an appropriate time to sell a particular
asset as a result of market conditions, prepare final accounts
(once the financial information has been retrieved) and
pursue a director for loan monies, raise and continue legal
action which is designed to produce a reversion to the liquidated
estate, or argue with creditors about the value of their
claim e.g. a landlord seeking dilapidations or a customer
seeking damages for faulty goods. The notion of swimming
through treacle springs to mind.
The transparency of the liquidation process means that progress,
however slow and frustrating, is not hidden from creditors
and creditors should not feel guilty about asking for a
progress report.
Conclusion
This update is provided for general information purposes
and does not purport to offer definitive advice. If any
further information is required or specific advice sought,
please contact either Michael Reid or Michelle Byrne at
this office.
Thank you for taking the time to read this update and please
feel free to pass a copy to your colleague or anyone else
who you think might be interested.
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