Monday 14 September 2009

One year on from Lehman

It is 2 years since the run on Northern Rock and one year since Lehman Brothers failed. Remarkable how fast this year has gone!

In that time RBS effectively went bust, Bank of Scotland was rescued by Lloyds, itself now struggling with the burden; interest rates are at all time lows, printing money is seen as a great solution to preventing financial meltdown and some £175bn has been pumped into the economy alongside the cost of bank rescues. Yet growth is nowhere to be seen.

When you read the paragraph above, it brings home just what a huge hit the UK ecomony has taken, yet like a punchdrunk boxer it keeps swaying along from crisis to recovery to crisis. Optimists claim that the ecomony is growing well, pessimists wonder if a second leg to the recession is imminent.

It's a question we will never know the answers to, but I wonder what would have happened if the government had not rescued the banks and let capitalism work?

Morever, how will we pay for all of this desperate stuff?

The Sunday Times reported yesterday that 60% of voters expect severe spending cuts alongside tax rises from June 2010 (after the general election).

Some hangover ahead?

Wednesday 9 September 2009

"You won't get a company voluntary arrangement approved by HMRC".

To be honest we are getting really angry about the incompetence and arrogance of certain UK insolvency practitioners towards the concept of company voluntary arrangements.

In the last month I have heard this ridiculous claim in 4 separate cases/potential clients/banks.

All statements were from IP's from large firms who frankly should know better. Or if they don't it suggests to me that they simply have never bothered to use a CVA properly or they have followed the daft view that 100% of the debt MUST be repaid in the shortest time possible. Or, being cynical, they wanted the bigger fees and control of administration.

This is not true, factually incorrect and basically misleading clients, creditors and banks.

In our long experience it is true to say that the Combined Voluntary Arrangement Service (VAS HMRC) is tough but it is always fair. Indeed the service has an online guide to its approach here
http://www.hmrc.gov.uk/manuals/insmanual/ins10105.htm

This open and fair approach to CVA's includes accepting well proposed CVA's that offer the best deal possible for creditors. Remuneration levels of directors will be scrutinised and if necessary reduced as a condition of its support. If excess cash is generated by say year 5, they will ask that some of that is paid to creditors.

All fair enough.

The VAS does not expect a CVA to offer 100p in £1 in 2 years as many practitioners falsely claim. Indeed the Insolvency Act is not prescriptive about dividend levels or time frames anyway. The framework created by the '86 Act is deliberately loose to allow ANY deal to be put in front of creditors, who decide by majority vote whether to accept, modify or reject that deal.

This framework highlights the brilliance of the CVA legislation to my mind.

For proof of this being more than a rant by yours truly, please see an extract from the VAS (HMRC) guidelines below in italics. I have underlined the key points.

INS10167 - Introduction to Voluntary Arrangements
A fair and optimum offer is made to creditors
A 'fair and optimum offer is made to creditors' means that there is

•no unacceptable expenditure
•the arrangement cannot be improved upon
•all obligations under the arrangement are achievable.

Companies need working capital and some leeway for investment to keep them competitive and for contingencies such as bad debts

•saying 'no' to unnecessarily high drawings or personal expenditure does not compromise the rescue culture.

It simply requires those running a business to adjust their personal expectations to their current circumstances.

support of a proposal is not dependent upon receipt of a minimum level of dividend.

•Judge each case separately on its merits and the available information.

If the criteria are satisfied accept it on the basis that saving viable businesses will stimulate enterprise and ultimately generate more revenue.

Explore arrangement prospects yet remain fair to those who pay on time


So the next time an insolvency practitioner says, "You won't get a company voluntary arrangement approved by HMRC" or you must pay 100p in £1 in say 3 years", tell them they are wrong.

Wednesday 2 September 2009

Banks hoard cash, lending to business down £8bn

Well who would have thought it? Banks get rescued, money gets pumped into the system (QE) and the next thing you know is, lending to businesses and consumers falls!

In July net lending to non bank businesses fell by a staggering £8.4bn in July. The reason, bad debts and the bank's fear that much more bad debt is in the pipeline.

Vicky Redwood, UK economist at Capital Economics, noted Bank figures that showed a £365m, or 40pc, increase in write-offs on conventional corporate debt and £250m rise in write-offs on unsecured lending in the second quarter.

"While the biggest losses on 'toxic' assets may be behind us, recession-related losses on conventional loans are only just starting to come through," she said. "These losses are likely to erode much of the capital that banks have raised. Accordingly, it is understandable that banks are being cautious about lending more, even though their funding costs have fallen.

So what is going to happen in the next 2 quarters for companies looking for working capital support? I guess more of the same is on the way. Tighter business lending will inevitably lead to more pressure on businesses to cut costs, they'll avoid taking sales where they worry about getting paid, more redundancies will result and ultimately more business closures.

Would it not have been easier to let the banks go bust or agree to rescue them on condition that there was full and frank disclosure on the bad and doubtful debts the banks hold? Or is the banking system's ability to assess bad and doubtful debts so poor that they simply don't know?

Until we know what the bad debts are likely to be, I believe the banks won't lend. How to unpick that impasse is one for the debate up to and beyond the next election.

Going back to SME business lending "Vince Cable, Liberal Democrat Treasury spokesman, added: "It is becoming clear that the Bank's attempts to boost lending are only having a limited impact as banks continue to hoard money. If firms are unable to access credit it is likely we will see even more companies going under, deepening the recession and driving up unemployment."
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