Insolvency Updates   >  September 2003

Pittodrie Stadium:  A Seat for Every Debtor

On the basis of the current quarterly trust deed statistics, there are enough people subject to a trust deed at any one time in Scotland to occupy every seat at Pittodrie. That's a lot! As the debt boom continues, partly as a result of the fact that base rates are at a 50 year low, the cost of borrowing is not seen as a significant issue. Indeed, the level of debt which one can acquire in a short space of time is frightening. A recent Sunday Times survey indicated that, on average, every UK household has debts of £45,000 and total UK consumer borrowing is estimated to be £10 billion.

The new debt arrangement scheme provisions do not appear to be of particular interest to an individual. Why not? Well, a debt arrangement scheme offers repayment proposals to creditors at an agreed monthly sum, based on one's ability to pay. If the repayment period is 6 or 7 years, why should someone contemplate such an arrangement when a trust deed will allow the debts to be either paid, or written off, in a maximum period of 3 years? It is appreciated that, on occasion, an individual may have realisable assets but the vast majority of trust deeds contain no proposals other than a regular weekly/monthly contribution.

The proliferation of trust deeds in Scotland has given rise to comment that the terms offered to creditors are weighted too much in favour of the debtor's position rather than the creditor. When faced with either approving or rejecting a trust deed, we suggest that creditors should consider:

1. Do you believe that the debtor has made a full and frank disclosure of assets to the trustee?

2. Are you satisfied that all assets are reflected in the statement of affairs submitted with the proposals, e.g. house, endowment/insurance policies and other assets?

3. On what basis is the trustee collecting contributions from the debtor? Are they being paid direct to the trustee or through an agent who is paid a "commission" for such task, thereby reducing available funds for creditors?

4. Does the trustee work in the approximate locality of the debtor in terms of meeting the individual and dealing with issues that arise during the course of the trust deed?

If the answers to these questions are not to your satisfaction is it in your interests to accept such proposals without further enquiry? Apathy is no excuse and, remember that once the trust deed has become protected, there is little that you can do to influence matters thereafter.

 

Crown Preference

With effect from 15 September 2003 , the Crown's preference for VAT, PAYE and NIC arrears will disappear. Thus, such arrears will become unsecured and rank with all other unsecured creditors such as trade suppliers for payment of a dividend. Where there are funds available for distribution in a liquidation, this change is likely to mean more frequent dividends to unsecured creditors, but at a lesser level than before, given the fact that substantial government arrears will now be included in the calculation.

Opinion appears to be divided as to how the government will address this situation. Steps can be taken to work with a business at an earlier stage in order to identify/agree arrears and deal with them in a practical manner. Another view is that, as an involuntary provider of credit, the government is stuck in a system which allows arrears to develop fairly quickly thus requiring earlier and more direct steps to recover monies. Most creditors can stop supplies to a company overnight and insist upon payment of outstanding invoices before further supplies are given and, whilst this can place risks on the supplier, it is a significant avenue of debt collection which is not available to the government.

Time will tell how this matter will be addressed once the new regime is in operation.

 

Financial Failure - It's Not My Fault!

Meston Reid & Co acts in numerous formal insolvency situations and is actively involved in dealing with reviews of businesses experiencing financial challenges. When such challenges become insurmountable and failure of part or all of a business is inevitable, it is unusual to apportion the reason to one specific issue. There are a combination of circumstances which create failure and we note below the most common causes of financial failure which we have witnessed on many occasions, not necessarily in order of frequency:

 

People related reasons		Business related reasons
•  Inability to recognise when advice is required, and to take it		•  Competition/market pressures
•  Poor communication of ideas, actions and developments		•  Customer/supplier contractual problems
•  Inability to delegate and an over-developed sense of self perfection		•  Inadequate credit control and cash flow organisation
•  Inflexible attitude to new ideas and general resistance to change		•  Diversification into non-core areas, and areas of little experience/expertise
•  Lack of leadership combined with the inability to take difficult decisions		•  Government legislation
•  Poor understanding and use of company monies		•  Insufficient reinvestment in people/products
•  Reactive rather than proactive approach		•  Lack of timely, relevant and understandable management information
•  Unable to work as a team and instil workforce commitment		•  Over-reliance on one/few suppliers or customers
•  Insufficient time spent on training and general self/personal development		•  Overtrading
•  Poor quality attitude		•  Poor quality attitude

 

Do you recognise any of these symptoms? If so, early attention and professional advice is likely to be appropriate. Ignore difficult issues at your peril: and don't blame everyone but yourself.

 

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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