INTRODUCTION
The media may be guilty of over-exaggeration when it comes
to describing current economic circumstances and prospects
of recovery: it is either great or terrible, but the recent
Budget acknowledged the parlous state of UK finances and
because these are largely uncharted financial waters, there
are numerous suggestions for dealing with the economic
challenges.
Many commentators blame banks and/or politicians for our
current financial woes, particularly in relation to the
domestic property market. Nobody forced an individual to
borrow money they could not afford to repay to buy an
overvalued house.
A recent survey of corporate failure in the first quarter of
2009 showed that the worst affected sectors are
manufacturing, construction, retail, hospitality and
leisure, and real estate. Challenging financial times offer
opportunities for those with entrepreneurial flair and a
positive attitude to risk and it is sometimes remarkable how
one approach/person can create success where others appear
unable to cope.
Challenging times for us all.
DIRECTOR DISQUALIFICATION STATISTICS
The Insolvency Service advised recently that there were 51
disqualification orders in calendar year 2008, which is more
than each of the previous three years, but less than in the
period from 2001 to 2003 when more than 100 disqualification
orders were made annually. The Director Disqualification
Unit is to be applauded for taking steps to focus
disqualification activity upon those showing lack of ability
to be a director of a UK company. This is reflected by the
fact that there were ten Disqualification Orders for five
years and twelve for eight years in 2008.
Contravention of a Disqualification Order carries a criminal
penalty of a period of imprisonment for up to two years or a
fine: or both! Disqualified directors can also face a jail
sentence if they fail to pay a charge imposed by the Unit
for its costs incurred in bringing the disqualification
proceedings. Further, if a person acts in contravention of a
Disqualification Order, such person becomes personally
liable for all the debts of a company for which he/she is
appointed to act. Experience suggests that personal
liability for company debts is a significant reason not to
breach an Order and thus, disqualification tends to be the
most effective deterrent for directors found to be
delinquent by court. It should be remembered that the
insolvency practitioner is responsible for the initial
submission to the Director Disqualification Unit which is
why creditors are often asked for information in order to
ensure that all actings are brought into consideration.
Directors can be subject to an adverse report for a range of
misconduct including failing to keep correct accounting
records or failing to file accounts on time, in addition to
criminal matters such as theft and fraud relating to the
period shortly before a business collapsed. It is the Unit
which instigates legal proceedings, many of which include an
action for wrongful trading.
PERSONAL DEBT: YET ANOTHER DEBT RELIEF OPTION
A recent survey by YouGov indicated that 43% of the adult
population have an overdraft, 34% have a credit card which
is not repaid in full each month and 24% have an unsecured
personal loan. Scary statistics, compounded by the fact that
the number of sequestrations in Scotland mushroomed in 2008
as a result of the LILA route into bankruptcy which has had
the effect of almost doubling the number compared to 2007.
The first quarter of 2009 showed no sign of abatement.
Individuals unable to exercise self restraint on consumer
spending in England and Wales have been given another way to
escape their debts. A Debt Relief Order “DRO” allows someone
with little or no income and debts of less than £15,000 to
ask the government to write off their debts. A DRO lasts for
12 months during which period a creditor can only take
action to recover a debt if they obtain court authority
(which the legislation anticipates as being unlikely). If
the individual’s circumstances remain unchanged after a year
the debts are written off by law.
The guidelines require a person to have assets worth less
than £300 and disposable income of no more than £50 per
month after taxes and reasonable household expenses. Time
will tell how many people in England and Wales are able to
avail themselves of a DRO but the introduction of this piece
of legislation encourages individuals to divest themselves
of assets and seek a DRO in order to dump their creditors,
and permits individuals who are stressed by creditor
pressure to alleviate the position and start afresh. It all
depends upon one’s point of view as to whether or not this
is a good or a bad initiative but one media commentator has
already suggested that introduction of the DRO system could
mean a write-off of UK consumer debt in 2009 of up to £1
billion.
Given the change to Scottish bankruptcy law in April 2008
which largely mirrored that which operated in England, it
may not be long before a DRO is introduced north of the
border.
HERE THERE AND EVERYWHERE
Insolvency work recognises that national boundaries are
often crossed when dealing with a business entity. The
Meston Reid & Co association with Nexia International (www.nexia.com)
allows work to be undertaken in whatever jurisdictions are
necessary whilst providing the benefit of someone locally
who understands legislative requirements. Currently, work is
ongoing in Hungary, France, Jersey, USA and England for
liquidations handled from an Aberdeen base.
The international reach enjoyed by Meston Reid & Co makes us
large enough to cope but small enough to care.
EMPLOYMENT RIGHTS ACT 1996
The Employment Rights (Increase of Limits) Order 2008
increased the compensation limit from 1 February 2009 to
individuals who have lost their job as a result of the
formal insolvency of their employer. The maximum amount of
one week’s pay for the purposes of calculating redundancy,
unpaid salary and notice pay is now £350 per week.
PRE-PACKAGED SALES IN ADMINISTRATIONS
The CA Institutes both north and south of the border have
issued a statement of insolvency practice “SIP” regarding
the sale of a business immediately following the appointment
of an administrator. A pre-pack is an arrangement where sale
of the business, or part of the business, is arranged before
an administrator is appointed and takes effect virtually as
soon as the administrator takes office.
A number of adverse views have been expressed regarding such
process and whether there has been an abuse by selling a
business back to the former directors/shareholders without
an attempt being made to find a different buyer at a higher
price. The SIP, which came into effect in January 2009,
clarifies the basic requirement to ensure full transparency
in order that creditors can receive an explanation of the
reason(s) surrounding a pre-pack sale. An administrator owes
a duty to all creditors and has a professional reputation to
consider and similarly, an experienced professional should
be able to determine if a business has any chance of either
survival or being sold at an early stage in the process.
Further, if the business is to continue trading, an
administrator will require funding and he will need to
demonstrate a realistic expectation of being able to find a
third party buyer at a price greater than that offered by
the existing directors/shareholders. Funding is often an
insurmountable hurdle and perhaps explains why a pre-pack
sale has become more popular in the current economic
climate.
JIEB SUCCESS
In order to hold an insolvency permit in the UK an
individual is required to pass the joint insolvency exams
which are sat annually each November. Some adjustment is
made to the exam questions in order to cater for Scottish
legislation and, by general consensus, the exams are thought
to be a thorough test of one’s insolvency knowledge.
We are pleased to advise that Graham Smith is one of only 4
candidates in Scotland who passed the 2008 exam.
Congratulations Graham: hopefully an example of the depth
and quality of insolvency work experienced at Meston Reid &
Co.
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 May 2009
Return to Top
