Economic Recovery Comes With Cash Flow Woes For Some

The number of businesses just paying the interest on their debts – a key characteristic of ‘Zombie businesses’ – has jumped from 103,000 in November 2013 to 154,000 now, according to research by insolvency trade body R3. This is at its highest level for eighteen months.

But rather than a return of the ‘zombie business’ phenomenon, insolvency practitioners suspect that late payment and over-trading problems associated with economic recovery are behind the rise.

‘Zombie Businesses’ emerged after the 2009 recession when thousands of businesses that might have been expected to fail were kept afloat by a combination of low interest rates, lenient creditors, and a sluggish recovery.

100,000 businesses say they would not be able to pay their debts if there was a small rise in interest rates, while 64,000 say they struggle to pay their debts when they fall due.

‘Zombie business’ numbers peaked at 160,000 in November 2012 before falling back to 102,000 in August 2013.

Source: creditman.co.uk

WHY THE HURRY TO PRODUCE GDP FIGURES IF THEY COULD BE MISLEADING?

We are now being told that better than expected construction figures may well mean that the second quarter GDP figures published last month will be revised upwards. The Office for National Statistics (ONS) reported last month that the economy shrank by 0.7% and based on this more recent data this may well now be revised upwards to 0.5%. 

The initial estimate was based partly on the assumption that construction output fell by 5.2% but now more data has been analysed, the ONS believe that the reduction was only 3.9%.

The ONS admits that much of the data gathered for the second quarter was a ‘best guess’. It bases its initial estimates solely on a monthly survey of 44,000 businesses covering the production, manufacturing, services, retail and construction industries. It polls firms of all sizes, but admits that those with fewer employees are less likely to be included – meaning that small fast growing businesses would be excluded from the calculation.

By the time the preliminary estimate is released, the ONS will have around 70%to 80% of responses back from its survey covering the first two months of the quarter (April and May) but for June the responses received is only around 20% to 30% and the ONS fill in the gaps based on historical data and a lot of assumptions.

The ONS admits that the bad weather and extra bank holiday made the estimate ‘more challenging’! These figures are unlikely to be fully revised for up to five years by which time who will care! Are we really to believe that Spain’s economy declined by 0.4% while the UK’s economy was down by 0.7%?

Tim Corfield commented “Given the political turmoil that these figures can produce and influence on business wouldn’t it be better to hold fire with producing figures that could indicate the wrong trends? Sending out the wrong signals could be damaging for the economy.” 

Andrew Sentence (a former member of the Bank of England’s monetary policy committee) has called for the ONS to include broader data including employment information. He commented “What the ONS is not very good at is taking a common sense view of economic data. They need to be much better at cross-checking technical data to give a true picture.”

Written by Tim Corfield

http://straightalkdebt.com/

Financial Pressures Hitting the Older Generation Harder

The latest available data from The Insolvency Service shows that while the 35-44 year old range has the largest number of individual insolvencies, the 45-54 year old group had leapt from representing fewer than 15% of individual insolvencies a decade ago to making up 25% in 2011. 

The older generations are now being hit harder by insolvency and the number of individual insolvencies for over 55’s increased between 2009 and 2011.

Tim Corfield commented “The impact of insolvency on an older person is much greater. Younger people have a much better opportunity to start again and psychologically won’t have felt such an impact of losing everything. It’s much more difficult for older people to re-train and re-enter the job market even though they may well have great skills to compliment any business or workplace.”…“I am seeing many more situations where the younger generation are now supporting the older generation rather than the other way around.”

The good news is that the overall number of personal insolvencies has fallen from 135,089 in 2010 to 119,031 in 2011.

Written by Tim Corfield

New High Court Ruling On Pension Pots

The High Court has recently ruled that untouched private pension pots of undischarged bankrupts can be used to pay off creditors.

Bernard Livesey QC judged that pensions of bankrupts yet to be accessed should no longer be off limit to a Trustee in Bankruptcy.

“Why should it be that a person who elected on the day proceeding his bankruptcy should be in a position where his entitlement to enjoy the fruits of his pension is liable to be subject to right of the trustee to apply for it to go to his creditors … whereas the person who had not yet done so is immune from the impact of the section and can enjoy the full fruits of his pension to the detriment of his creditors?”.

This case follows a Trustee who brought an application to force an undischarged bankrupt to draw his pension which he was eligible to do.

This judgement, which is subject to appeal, may have some far reaching consequences. We need to bear in mind that we need entrepreneurs to get this country bank on its feet. Many of these people will be sole traders and may not have been particularly well advised before they start out. The difference between such a person and one who take limited liability protection can have a massive effect if the business fails. For a great many, by the time they have decided to take the leap to set up their own business, they have accumulated a pension pot from previous employers. Why should they have to release this at a later date having fuelled the economy for a number of years in order the send the majority of this cash back to the creditors?

The whole question of risk and benefit needs to be taken into account when framing the law in this area.

I suspect there will be much more on this particular subject…

written by Tim Corfield

http://straightalkdebt.com/

SHOWDOWN ON AUSTERITY GATHERS PACE

Germany and France have moved towards a bruising and potentially destabilising showdown on how to tackle the European debt crisis.

Francois Hollande has made a presidential pledge to re-open the EU’s financial pact. Angela Merkel said in response “the fiscal pact has been negotiated; it has been signed by 25 Government leaders, and has already been ratified by Portugal and Greece. Parliaments all over Europe are about to pass it. Ireland has a referendum on it at the end of May. It cannot be negotiated anew”.

There is a backlash across Europe against austerity and a greater emphasis on boosting growth and job creation. If Hollande wins the French presidency and also secures a parliamentary majority in June he and his team are committed to not ratifying the EU pact unless it is modified to include growth boosting policies. Technically, the pact can come into force without French ratification but this is politically inconceivable.

The Dutch Government has collapsed recently over a failure to agree on spending cuts and comply with the new rules.

Spain’s credit rating has been revised downwards recently because the austerity is defeating the chances of economic growth.

The Romanian Government has recently been ousted in a vote of no confidence triggered by opposition budget cuts.

The Czech Government is fighting for its survival.

Herman Van Rompuy said “Over the past two and a half years the EU has had to react to the economic and financial crisis. This has not been easy and lead to some frustration at times and strains. We have had to deal with the urgent pressures of the sovereign crisis. The emphasis should now shift increasingly to measures that can boost growth and jobs.”

Hollande responded robustly to Merkel “it’s not Germany that decides for the whole of Europe”.

Tim Corfield

WRONGFUL TRADE - WHAT AMOUNTS TO A DEFENCE?

The High Court recently judged that the liquidator of a company had been wrong to pursue two companies’ directors for wrongful trade.

In this case the company had been set up to utilise satellite technology and offer broadband internet access to the rural areas in the UK which was seen as a market opportunity that was not being taken by other providers.

The factor that triggered the directors’ decision to cease trade was that its main supplier of satellite services ceased the supply without providing any notice leaving the company unable to trade.

Under Section 214 of the Insolvency Act (wrongful trade) directors can be personally liable if they allow the company to carry on trading after the point when they “had known, or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation”.

The company had always been under capitalised, had always traded at a loss and it probably had been always insolvent on a cash flow basis.

However, the High Court Registrar believed that the directors had genuinely and reasonably believed right up to the point of liquidation that the company could be saved and had done all that they reasonably could to minimise the potential loss to creditors.

The Registrar appeared to acknowledge that the main reason for the liquidation was probably the failure of the any available satellite provider.

What can be learnt from this recent decision?

It is all too easy to assess director’s conduct with the benefit of hindsight. The Registrar said that the question of culpability is based purely on the information which was know or ought to have been known by the directors at the relevant time.

It is up to the liquidator to identify the precise date which he believes the company became insolvent and then consider the reasonableness of every director’s decision.

Another important lesson arising from this case is that directors should always make careful and dated notes and document all decisions and actions that they take to protect the creditors.

Only one in thirteen with debt concerns intend to seek advice

Although debt concern now affects over 18 million (39%) of GB adults, only 1.4
million individuals (or 3%) intend to seek debt advice in the next six months. R3’s
latest Personal Debt Snapshot also reveals that only 6% of the GB population has
ever sought debt advice in the past.

R3 President Frances Coulson commented:

“This snapshot uncovers the huge unwillingness to take debt advice – while at the
other end of the balance sheet, if you had a sum of money to invest, you wouldn’t
think twice about taking advice first - and what is more, in that event, the advice
would be regulated and with an obligation to give “best advice”.

“This is frustrating as we know the experience of those who seek proper advice is
invariably positive. While there is some confusion about where to seek clear advice
for about a quarter of the population, there seems to be a ‘head in the sand’
approach or maybe it is the stigma of bankruptcy.”

The snapshot indicates that one in four (25%) do not think it is clear where to go
for good, impartial debt advice, yet 41% of those who had taken debt advice wish
they had done so sooner. This is set against a backdrop of record personal
insolvencies for 2011 and a tendency for more people to think their financial
situation will worsen rather than improve, with nearly a third (32%) stating their
financial situation will worsen in the next six months. However, there has been a
slight decrease in the number of people with no savings, now at 1 in 5 of us.

Of greater concern are a group of over 2 million GB adults who say they are
currently in a Debt Management Plan, much higher than estimates from previous years.

Administration fees courting controversy

Companies which could have been rescued face the prospect of closure and unnecessary job losses because of a Government refusal to introduce new laws, according to R3, the trade body that represents more than 300 insolvency practitioners in Yorkshire.

R3 says recent court cases have added to the financial burden facing administrators when they are called in to rescue a company, making it less economic in some cases.

In the past, administrators were liable for the trading costs like wages, rent, rates and new supplies that followed their appointment, but new court judgments mean they may also be liable to meet other rent and pensions obligations of the collapsed company.

R3 wants new laws that clearly state what charges administrators are liable to pay.

Yorkshire chairman and Irwin Mitchell partner Andrew Walker said: “These court rulings and the continued uncertainty has had an unhelpful impact on the UK’s rescue culture, with far reaching, adverse consequences for the UK economy.

read more:
http://www.thestar.co.uk/news/business/administration_fees_courting_controversy_1_4176421

P35 (PAYE) Deadline 19 May: Comment from Frances Coulson, President of insolvency trade body R3

“Typically many businesses will be caught out by the P35 deadline on 19 May, having been ‘getting by’ and not submitting the full amount of PAYE they owe each month. This deadline is traditionally a time when HMRC uncovers any shortcomings in the payments due and the payments made in terms of PAYE, as well as those businesses which do not file at all.

“I suspect this will lead to an increase in actions by HMRC in a couple of months time, as well as pushing up corporate insolvency numbers towards the end of the year.

“One in four (24%) businesses are concerned about their debts, according to the R3’s latest Business Distress Index. Of this group, 37% are worried about Crown debts and this deadline will be a test for them. Seeking professional advice as soon as possible is the best way to allay those fears.”

Frances Coulson, R3 President

Methodology note on R3’s Business Distress Index: BDRC Continental conducted 501 telephone interviews with small, medium and large business owners and Financial Directors between 7th and 18th March 2011. Quotas are set by size, region and sector and the data weighted to the profile of GB businesses. The respondent in each case is a senior financial decision maker. Small businesses are those with a turnover of £50,000 to £1million pa.

R3 is the trade body for Insolvency Professionals, representing 97% of the UK’s Insolvency Practitioners.

Credit Action releases May Debt Statistics

May 6 2011
Money education charity Credit Action has today released the May debt statistics, a monthly release which details the level of debt in the UK.
Key statistics from the release, which shows month-by-month trends, include:

* CAB deal with 8,004 new debt problems each working day
* 1,392 people are made redundant daily
* 847,000 people have been unemployed for more than 12 months
* £55,870 is the average household debt (including mortgages)
* £29, 843 is the average amount owed by every UK adult (including mortgages)
* £180m is the personal interest paid in UK daily
* £24.88m is the daily write-offs of loans by banks & building societies
* Every 17 minutes a property is repossessed
* £67.90 is the amount it costs to fill a car with a 50-litre tank with unleaded petrol
* £133,200,000 is the daily increase in Government national debt (PSDN)
* £1,156,000,000 is the total value of all purchases made using plastic cards today

Joanna Parsley, Associate Director at Credit Action says, "May's debt statistics show some interesting trends. Although the amount owed by every UK adult has fallen by approximately £30, in light of rising credit card interest rates- which at an average of 19.1% are now at the highest levels seen in 13 years- paying down debt has never been more sensible advice.

"With the cost of petrol rising still and with households experiencing the changes made last month to tax, national insurance and welfare benefits, 2011 looks set to be a year where household budgets are further squeezed."

The full debt statistics can be accessed from the Credit Action web site:
http://www.creditaction.org.uk/helpful-resources/debt-statistics.html

Mediocre GDP figures highlight need to nurture fragile recovery

Commenting on the GDP preliminary estimate for Q1 2011, published today by the Office of National Statistics (ONS), David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:

“These figures were mixed and well below the OBR prediction that the economy would grow by 0.8% in the quarter. On the basis of these figures, we reiterate our forecast that in 2011 as a whole GDP is likely to grow by 1.4%, much lower than the OBR’s expectation of a 1.7% increase. There are some positive features in these figures, particularly the 1.1% growth in manufacturing and the 0.9% increase in services. But construction fell sharply for a second quarter in a row and the economy’s overall performance is still mediocre. Total economic activity has only just returned to the levels seen in the third quarter of 2010.

“Given the fragility of the recovery, it is vital for the Government to persevere with policies that support growth, and remove the obstacles that prevent businesses from creating jobs and exporting. For the MPC, these figures reinforce the case for postponing increases in interest rates until much later in the year. It is crucial to avoid any measures that could derail the recovery.”