Introduction
Inflation, falling house prices, collapsing stock markets,
international concerns over oil supply/prices, and
difficulty in obtaining credit are all hot topics for
discussion. Whilst one can sense a general mood of
uncertainty, it is remarkable how media commentators see
different reasons for economic difficulties. There are also
conflicting views on how such issues should be addressed.
For example, some commentators suggest that the difficulty
in obtaining credit means that spending will reduce, with
the consequent effect of lower prices and a brake on
inflation. Others argue that the Government will be required
to print money and instigate projects, both of which will
flood the economy with money and cause inflation.
Most individuals tend to disbelieve the official figure for
inflation. When one looks at normal living costs it is
difficult to accept the official figure of 4.4%. So, who or
what do you believe?
If anyone knows how to read the current markets and plan
ahead successfully they will join the likes of Warren
Buffett and George Soros as highly respected investors ……….
and wealthy people.
The next six to nine months will be a challenging experience
for us all.
Low income low asset sequestrations “LILA”
Scottish bankruptcy law changed on 1 April 2008, and now
allows an individual with assets below £10,000 and an
average weekly income below the statutory minimum wage to
apply to the Accountant in Bankruptcy for a sequestration
order. It was predicted that there would be a large number
of LILA applications and, looking at sequestration
appointments advertised in The Edinburgh Gazette in July,
one sees approximately 300 every week. A prospective
bankrupt pays £100 to obtain a LILA and, for the vast
majority of such individuals, there will be no further
payments during the statutory one year period of
sequestration. This will be seen by many as an inexpensive
way of removing a debt burden.
It is estimated that more than 10,000 people are likely to
use LILA as a route to protection from creditors in Scotland
each year. This is in addition to those who are sequestrated
by a creditor, petition for their own sequestration under
the ongoing rule of apparent insolvency, or sign a trust
deed.
LILA was designed to help those who were becoming wholly
stressed by the burden and pressure of debt, but could not
access the protection of sequestration in the normal way.
The new legislation appears to be achieving that objective,
but if the Accountant in Bankruptcy only receives £100 to
fund a whole year’s sequestration process, it seems clear
that central Government funding will be required to meet the
cost shortfall i.e. the taxpayer.
The large increase in both number and value of consumer
debts, such as personal loans and credit cards, tends to be
the main reason cited for the explosion in the number of
sequestrations in Scotland and it remains to be seen how
public opinion will evolve when friends and neighbours see
individuals walking away from large amounts of debt with
relatively little pain.
Corporate failure: it’s not my fault
There is much debate currently about the effectiveness, or
otherwise, of UK corporate insolvency procedures.
The Government have hinted at revisions, but without much
considered research about the benefits that might accrue in
terms of the UK business economy. With the benefit of
hindsight, one could argue that revised procedures might
save more companies and hence jobs, markets and consumer
choice.
One commercial view that attracts support is that directors,
no matter how large or small the company they run, lack
sufficient knowledge, skills and experience to deal with
challenging issues. It is comparatively easy to be
successful and achieve growth when prices are increasing and
everyone is busy, but what happens when markets change,
trading conditions tighten and cash flow becomes tighter?
Forming a company is an inexpensive task and takes little
time. Virtually everyone qualifies automatically to be a
director under UK law. Professionals are required to
maintain annual technical training in order to remain in
practice such as accountants, solicitors and surveyors, but
there is no such requirement for directors. Unless they are
sufficiently responsible to recognise that training is
important, how will directors learn to deal with difficult
challenges. Indeed, it is perhaps those who are less
responsible and don’t accept the need for constant
improvement that tend to drive too fast and cause crashes.
Given the political mantra of “education education
education” one wonders if changing the law to punish after
an event has happened is always the answer. For how long
should one allow an unsuitable director to continue to
operate a company with the protection of limited liability
but without proper knowledge of what is required of him. Is
it more practical and sensible in the long term to ensure
that those in charge of UK corporate entities are properly
trained and maintain whatever skills are required for the
industry in which they operate? Whilst it could be said that
imposing more “red tape” requirements could blunt
entrepreneurial flair, one might argue that a company can be
likened to a team that requires to work in harmony with a
specific goal in order to succeed. After all, what football
or rugby team takes to the field every Saturday afternoon
without practicing and working together during the week
beforehand such that, when faced with third party
challenges, the team is fit to cope.
Changing the law for the sake of it is unlikely to foster UK
corporate wellbeing. If a company fails, it may be seen as
unfair to apportion fault to an individual, unless it is
evident that a director was trained correctly in the first
place. The corollary is that if a director is required to be
fully trained and maintains continuous development
throughout his career, it should be easier to apportion
blame and seek financial recovery from him if he is in
charge of a failed company.
Payments Distributor status
As outlined in an earlier Update, Meston Reid & Co are the
only firm of chartered accountants in Scotland to be awarded
Payments Distributor status and the increase in requirement
for such a service reflects the growing popularity of the
Debt Administration Scheme.
For those approved money advisers who have not yet used the
Meston Reid & Co Payments Distribution service, further
communication will follow shortly regarding the
documentation that has been developed to facilitate the
exchange of information and ability to deal with a debtor in
a prompt and sympathetic manner.
The cheque is in the post
Cash is king when the economy slows. A recent study has
revealed that certain large companies are taking up to 100
days to pay suppliers when forced into a corner by a
significant customer, who also demands lower margins, higher
quality and quicker delivery, a supplier may have to close
because there is no cash to fund the business. Legislation
has been introduced to deal with late payment in terms of
charging interest but there is no widespread evidence of
this being used. Those who can negotiate, innovate, improve
and be flexible, or secure external support to achieve these
goals, will survive and evolve.
Passing cashflow pain to a small supplier could be a sign of
an internal problem that should be addressed and every
company, no matter its size and complexity, should have a
structure in place to ensure that the business is running
efficiently. If there comes a time when cashflow pain has to
be absorbed the challenges presented will demonstrate how
fit a company is to operate successfully in difficult
economic circumstances.
Don’t be afraid to ask for an independent assessment because
sometimes, no matter what the customer promises, the cheque
might not be in the post.
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.
Meston Reid & Co August 2008
Return to Top
