Credit Union Insolvencies

I’ve been looking at the number of credit unions that have gone into formal insolvency over the last ten years or so.

I did this because I simply do not believe all the hype coming from trade associations like ABCUL and some individual credit unions’ marketing departments – you see I think there are major hidden problems in the sector.

The figures  speak for themselves – there’s no let up in the number going under! To me that is a concern when there remains a massive demand for credit union services and the government are saying they’re supporting the movement.

If Abcul and credit unions were more honest about the condition of the sector, perhaps the government would provide more, much needed, support?

By the way, credit union insolvency is a very specialist field.  If you are looking for some insolvency support, my advise to you is to shop around – you see not all insolvency practitioners have any experience in thsi field (however big they may be) and choosing the wrong IP is like marrying in haste – you will repect at leisure the day you make a quick decision.  So carry out a beauty parade of insolvency practitioners – ask them about their previous experience in the sector, get them to be very specific as to how, if you choose them, they will conduct every aspect of the insolvency – make them go into detail, don’t let them take  a broad brush approach, get into the specifics.

Perhaps you should also note that unlike all other firms, I do not charge my travelling time, accommodation or other travelling costs – this could form a big part of the eventual bill.  For you it’s dead money, no value is being delievered for it. You see, it is my policy not to charge these things because my view is if I choose to accept an assignment, wherever it may be, because it’s my choice, the client should not pay for it.  I also don’t charge for attending the board meeting at which the credit union’s board are considering their options, or for preparing a formal written report on their options.  Again something to think about.

 

If you’d like some support with your credit union, call or email me.  My mobile number is 07813 102014, it’s almost always on. My email is paul@midlandsbusinessrecovery.co.uk

Here’s the list…

2015 – 4 so far

Enterprise The Business Credit Union – May 2015; Derby United Credit Union – April 2015; Haven Credit Union Limited – March 2015; Castle & Minster Credit Union – March 2015

 

2014 – 5

Lower Iveagh Credit Union Limited – November 2014; Redcar & Cleveland Money Tree & Glen Credit Union – October 2014; Ballymacarrett Credit Union – October 2014; Glenard Credit Union – June 2014; Wantsum Savers: The Isle of Thanet Credit Union Ltd – 10 February 2014

2013 – 8

South Birmingham Community Credit Union Ltd (know as CommuniSave Credit Union) – July 2013; Carleton Credit Union Limited – June 2013;  Millom & District Credit Union – May 2013;  South Warwickshire Credit Union – April 2013;  Portadown Diamond Credit Union – April 2013; Marches Credit Union – April 2013; Severn Four Credit Union – March 2013;  Cornwall & Isles of Scilly Credit Union – February 2013

2012 – 6

North Yorkshire Credit Union Limited –  November 2012; Tamworth Credit Union Limited – September 2012;  Waltonian Community Credit Union Limited – August 2012;  Pallister Credit Union Limited – May 2012;  Hull East of the River Credit Union Limited – January 2012; Handsworth Breakthrough Credit Union Limited – January 2012

2011 – 8

Gallowhill Credit Union Limited – September 2011;  Lee Bank/Highgate Credit Union Limited – July 2011; Caribbean Parents Group Credit Union Limited – June 2011; Worcestershire Credit Union Limited – June 2011;  Southend Credit Union Limited –  May 2011;  Ilfracombe & District Credit Union Limited – March 2011;  South East Birmingham Communuity Credit Union Limited – January 2011;  Havant Area Savers Credit Union Limited – January 2011

2010 – 10

South Kintyre Credit Union Limited – November 2010;  Tower View Community Credit Union Limited – November 2010;  Three Bees Credit Union Limited – October 2010;  Landsker Community Credit Union Limited – September 2010;  Elswick and Cruddas Park Credit Union Limited – August 2010;  Hackney Credit Union Limited – July 2010;  Splotlands Credit Union Limited – June 2010;  Forest of Dean Credit Union Limited – May 2010;  Edinburgh Hackney Cab Trade Credit Union Limited –  March 2010;  Redcar and District Credit Union Limited – March 2010

2009 – 6

Derby City Credit Union Limited – August 2009;  Hull Northern Credit Union Limited – August 2009;  Eastbourne Community Credit Union –  July 2009; Irvine North Credit Union –  July 2009; St Brendan’s Credit Union Limited – May 2009; South West Durham Credit Union – May 2009

2008 -6

Polmaise Community Credit Union Limited – November 2008;  Khalsa (Bradford) Credit Union Limited – October 2008;  Inner Preston Credit Union – May 2008;  Peterlee Credit Union – March 2008; Rotton Park and Winson Green Credit Union –  March 2008; Edmonton Credit Union Limited – January 2008

2007 -8

Caia Park (Wrexham) Credit Union Limited – December 2007; Streetcred Credit Union Limited – October 2007; Corby Community Credit Union Limited – July 2007;  Ferries Credit Union Limited – July 2007; Fleetwood and District Credit Union Limited – June 2007; Clydesdale Credit Union Limited – May 2007; Skelmersdale Credit Union Limited – April 2007; L27 (Liverpool) Credit Union Limited – January 2007

2006 – 6

Breightmet Credit Union Limited – December 2006; Sheldon Credit Union Limited – November 2006; St Columba’s (Bradford) Save and Credit Union Limited – October 2006; Furness Credit Union Limited – September 2006; Money Tree Credit Union Limited – August 2006; South Airdrie Credit Union Limited – April 2006

2005 – 1

Greater Pollokshaws Credit Union Limited – June 2005

2004 -5

Hackney South Credit Union Limited – November 2004; Employee Credit Union (Luton Borough Council) Limited –  September 2004; Raffles Area Credit Union Limited – July 2004; Dalston Social and Business Credit Union – January 2004; Dudley Estate (Newcastle) Credit Union – January 2004

2003 -9

Ruabon, Cefn and District Credit Union Limited – October 2003; Croydon Branch Union of Communication Workers Credit Union – October 2003; Shepherds Bush Social and Welfare Credit Union – September 2003; Leicester City Council Employees Credit Union – May 2003; Leasowe Credit Union – May 2003; Tendring Dial Credit Union – March 2003;  Guide Post and Scotland Gate Credit Union – March 2003; Fairswan Credit Union – March 2003; Cathall Community Credit Union – March 2003.

Another (small) screw in the coffin of smaller community credit unions

A good many small community based credit unions have had a torrid time in recent years and probably right now aren’t seeing much of an improvement.  The Co-Op Bank’s decision to cut the interest it pays on its community bank accounts – such s their Community Directplus, Co-Operatives Directplu and Social Enterprise Directplus accounts – will prove to be another, small and slow, but certain turn on the screw in the coffin of already beleagured credit unions.

Small community based credit unions are really struggling – at best, they have seen flat income levels, at worst they’ve seen their income fall away, especially from grants and interest receipts.   Yet there is often little opportunity for them to reduce their overheads in line with the fall in income.  Trying to increase income by growing the loan book can often carry a disproportionate risk of bad debts so for some they have a stark choice – grow or merge or die a death of a thousand cuts.  The Co-Op decision will prove to be just another cut…

Let’s look at what the Co-Op is doing…

Interest rates paid on customer balances have never been lower, certainly not in my lifetime.  Until June the Co-Op will be paying a tiered rate of interest – Nil% on balances up to £1,999; 0.12%  on balances £2,000 to £9,999; 0.15% on balances £10,000 to £24,999; 0.18% on balances £25,000 to £99,999; 0.21% on balances £100,000 to £249,999; and 0.25% on balances over £250,000.

That’s to say the most the Co-Op will ever pay any credit union right now is one quarter of one per cent per annum… peanuts.

Yet those peanuts are being crushed!

The new rates from June 2015 will be: balances up to £24,999 Nothing, yes absolutely nothing – the Co-Op will get to keep your money for free!; £25,000 to £99,999 0.06% – a third of the already derisory amount it had paid previously; £100,000 to £249,000 0.09% – less than half it had previously paid; £250,000 to £499,000 0.18% – a cut of one third from the rate it had paid previously; over £500,000 0.25%, no change.

The message is clear… the Co-Op isn’t interested in supporting small organisations, it’s using you, the small credit union, to extract itself from its own financial difficulties … it doesn’t have the cohonas to abuse bigger organisations in the same way as they’re prepared to abuse you.

So it’s you, the smaller community based credit unions, and organisations just like you who will feel the brunt of this decision… it will be another straw on the camel’s back…

You see, right now, because you’re getting virtually nothing on the money you are sitting on and with additional grant income difficult to come by, the only way you can meet the regulator’s solvency targets might be by increasing the interest you receive on your loan book.  As you’re limited by law as to the maximum interest rate you can charge on the loans you make, this means you need to grow your loan volumes – the number of loans you put out and the amount you loan out.

The issue is you need to do this without increasing your bad debts.  Desperate people will go to any lengths – you will be lied to, some applications will be pure fabrication. How robust are your application procedures throughout your credit union?  You might get credit reports on potential new lending, but how reliable are those reports? – they are not as accurate as you’d hope!  And you probably can’t always rely on your longstanding members’ past savings history as an indication of their ability to repay any new loans – because people have so many ways nowadays of avoiding repaying their debts – not just the formal insolvency processes of bankruptcy, DRO, and IVA, and informal debt solutions such as DMP and DRO, but also pleading poverty in any debt collection process passing through the courts, and even disappearing.

It’s easy to see the situation whereby a credit union that’s already struggling with the the regulator could be forced into administration and then closure because of its bad debt experience and low level of bank interest income.

 

Another (small) screw in the coffin of smaller community credit unions

A good many small community based credit unions have had a torrid time in recent years and probably right now aren’t seeing much of an improvement.  The Co-Op Bank’s decision to cut the interest it pays on its community bank accounts – such s their Community Directplus, Co-Operatives Directplu and Social Enterprise Directplus accounts – will prove to be another, small and slow, but certain turn on the screw in the coffin of already beleagured credit unions.

Small community based credit unions are really struggling – at best, they have seen flat income levels, at worst they’ve seen their income fall away, especially from grants and interest receipts.   Yet there is often little opportunity for them to reduce their overheads in line with the fall in income.  Trying to increase income by growing the loan book can often carry a disproportionate risk of bad debts so for some they have a stark choice – grow or merge or die a death of a thousand cuts.  The Co-Op decision will prove to be just another cut…

Let’s look at what the Co-Op is doing…

Interest rates paid on customer balances have never been lower, certainly not in my lifetime.  Until June the Co-Op will be paying a tiered rate of interest – Nil% on balances up to £1,999; 0.12%  on balances £2,000 to £9,999; 0.15% on balances £10,000 to £24,999; 0.18% on balances £25,000 to £99,999; 0.21% on balances £100,000 to £249,999; and 0.25% on balances over £250,000.

That’s to say the most the Co-Op will ever pay any credit union right now is one quarter of one per cent per annum… peanuts.

Yet those peanuts are being crushed!

The new rates from June 2015 will be: balances up to £24,999 Nothing, yes absolutely nothing – the Co-Op will get to keep your money for free!; £25,000 to £99,999 0.06% – a third of the already derisory amount it had paid previously; £100,000 to £249,000 0.09% – less than half it had previously paid; £250,000 to £499,000 0.18% – a cut of one third from the rate it had paid previously; over £500,000 0.25%, no change.

The message is clear… the Co-Op isn’t interested in supporting small organisations, it’s using you, the small credit union, to extract itself from its own financial difficulties … it doesn’t have the cohonas to abuse bigger organisations in the same way as they’re prepared to abuse you.

So it’s you, the smaller community based credit unions, and organisations just like you who will feel the brunt of this decision… it will be another straw on the camel’s back…

You see, right now, because you’re getting virtually nothing on the money you are sitting on and with additional grant income difficult to come by, the only way you can meet the regulator’s solvency targets might be by increasing the interest you receive on your loan book.  As you’re limited by law as to the maximum interest rate you can charge on the loans you make, this means you need to grow your loan volumes – the number of loans you put out and the amount you loan out.

The issue is you need to do this without increasing your bad debts.  Desperate people will go to any lengths – you will be lied to, some applications will be pure fabrication. How robust are your application procedures throughout your credit union?  You might get credit reports on potential new lending, but how reliable are those reports? – they are not as accurate as you’d hope!  And you probably can’t always rely on your longstanding members’ past savings history as an indication of their ability to repay any new loans – because people have so many ways nowadays of avoiding repaying their debts – not just the formal insolvency processes of bankruptcy, DRO, and IVA, and informal debt solutions such as DMP and DRO, but also pleading poverty in any debt collection process passing through the courts, and even disappearing.

It’s easy to see the situation whereby a credit union that’s already struggling with the the regulator could be forced into administration and then closure because of its bad debt experience and low level of bank interest income.

 

Customer deposits and insolvency

As a licensed insolvency practitioner I am often asked to advise directors who are in a very dark place – whose company is on the brink of liquidation. I guess you might be in such a place?

 

Insolvency law requires that when a company is insolvent, and even when its solvency is in doubt, its directors have a duty to place the interests of creditors above those of themselves and the shareholders. The law looks at it this way – you’ve been given the privilege of limited liability; a cost of that privilege is that you have to do the right thing at the right time for those innocent third parties you might hurt by your actions.  Pretty much common sense, but can be difficult to implement in the real world.

If you don’t place the interests of the creditors above yours or the company’s, you as a director expose yourself to being disqualified for 7-10 years, and could see you personally paying compensation for your ‘wrongdoing’.  You could even be forced into personal bankruptcy.  And in the most severe cases, where a lot of the public’s money is lost and you continue to take money long after a judge thinks you should have known you would not be able to supply the goods or services that have been paid for, you could even go to prison.

The penalties for getting it wrong are severe so it’s vital, if you normally take deposits or payment for goods or services up front, especially from the public, that you get advice from an insolvency expert.  Take that advice at the earliest possible opportunity.  And then follow it. Be aware that turning a blind eye or ignorance is no excuse, this is something you’d be a fool not to address.

When I get involved with companies in this position the first thing I have to do is explore with the directors whether they should allow the company to continue to trade at all or whether they shut simply shut up shop.  This may sound harsh to you, especially as it’s your business and you have sunk so much time, money and effort into it, but all the other questions that follow on depend on it.  If you have come to me for advice early and you have forecasts showing that things are likely to get better, the answer is often that you can allow the company to continue trading. Often though the forecasts show a worsening position or are not certain to be achieved – in either case you should think seriously about protecting customer deposits, ring-fencing them so the customer gets their money back if things don’t go to plan.

The safest way to do this is either to stop accepting deposits.  The next safest is pay them into a trust bank account and only release the cash into your company’s own account as and when the goods or service are delivered. Both of these options make an already tight cash position worse and could make your turnaround plans unworkable.   Either way you have to manage your cash position.   If you choose not to do either of these and continue to accept deposits, you need hard evidence supporting that decision. And you should continue to revise that information and monitor the decision. This is an area where you might need my help.

How important is it you take and follow professional advice?

It’s vital. You see taking customer deposits can expose you to a wrongful trading and/or a fraudulent trading action – the first civil, the second civil and criminal action.  Case law has determined that ignorance, a lack of knowledge, skill or experience, and a failure to take all possible steps to minimise deposit creditors’ losses once the company is past the point of no return is no excuse. And that’s why you need my help.

Let’s now look into a real life case … a few years ago but the principles remain true today…

Uno plc and its subsidiary World of Leather were large retailers of furniture to the public. Furniture was bought in from manufacturers after a customer order had been placed. Customers paid a deposit when they placed the order and paid the balance on delivery.

They got into financial difficulties. Their directors allowed the companies to continue to trade for four months while investigating options for restructuring the businesses. During this time they held discussions with venture capitalists and competitors, none of which were successful and the companies were placed into administration. By then, the deposit creditors were owed £26 million. Unsecured creditors would receive nothing.

The companies had continued to accept customer deposits during that four-month period. Those deposits were not placed in a separate trust account, even though the directors knew that the company was having problems. In fact during that four-month period, the company actively sought to take more cash deposits from customers as part of a strategy to increase the money in the companies to prevent them from going under. Unsuspecting customers were encouraged to pay in full for their furniture in order to qualify for a substantial discount or early delivery.

Were the directors liable to repay those deposits?   Were the directors unfit to be involved in the management of a company?

In their defence, the directors argued two things:

• While they were investigating options for restructuring there was a reasonable prospect that the companies could avoid insolvent liquidation and
• After they became aware that the company had no such prospects, they took every step to minimise potential losses to creditors.

In particular, they claimed that by continuing to accept customer deposits— in fact, increasing them—they improved the cash flows of the business in line with a viable rescue plan that, if successful, would have enabled the companies to avoid liquidation.

The directors produced evidence of their plan which was based on accurate, timely financial information. They also showed that they had taken, and acted in accordance with, appropriate professional insolvency advice throughout.   In summary, they had made informed decisions.

The court decided that the directors were not guilty of wrongful trading and should not be disqualified. The judge explained that a director is not unfit and will not disqualified merely because he knowingly allowed a company to trade and take customer deposits while insolvent.

Key to the case were the following:

1. The directors had continued access to reliable financial information as to the existing financial position and forecasts demonstrating the proposed rescue plan.
2. The directors obtained and followed full legal and professional advice in allowing the companies to continue to trade and take deposits.
3. There was a huge amount of documentation and written evidence that supported and evidenced the directors’ decisions.
4. The directors not only kept their major creditors informed of the companies’ situation, they told them of their strategy to restructure the business, and got them to buy in to the plan. The point is they were not just trusting to luck. Not every business can do this – it’s particularly difficult for a small business to do.
5. The judge said that company directors have no duty to segregate customer deposits once a company gets in financial difficulty. Continuing to pay monies into the general company account is not on its own a reason to disqualify a director, it is not irrefutable evidence of improper or dishonest conduct, a lack of probity or incompetence.
6. Based on the legal and professional advice they received, the directors formed a reasonable belief that there was a reasonable prospect of finding a satisfactory outcome for the creditors. They held this belief properly and honestly based on hard written evidence and professional advice.
7. The directors made no effort to shirk their responsibilities, no one resigned. They were just trying to work their way through a very difficult position.

The case gives some useful guidance on what you as a director need to do to avoid personal liability. The directors weren’t flying blind. No one ran away. A proper comparison was made of the effect on creditors of closing down and continuing the business. The figures justified their restructuring plan and decision to carry on accepting deposits and paying them into the companies’ normal bank accounts. The decisions were made on the basis of prudent management, accurate financial information, and legal and professional advice. A professional analysis of the situation and comprehensive reporting are vital. Evidence is key – minute all decisions, retain all the financial documents. Get independent professional advice from the right insolvency specialist.

Here are some questions for you to ask yourself:

1. Is the company insolvent or at risk of insolvency?
2. Should you continue to accept customer deposits?
3. What do you tell major creditors, if anything?
4. What steps should you take to protect your personal position?
5. Can you resign if you don’t like what is going on?
6. Do you have all the evidence you need to justify your decisions?
7. Are you taking the right professional advice?

Who pays business rates after a liquidator has disclaimed a lease?

What was thought to be the situation has recently been confirmed in the High Court, when a landlord was told to pay up £0.6m to Birmingham Council for business rates accruing after a tenant went into liquidation and disclaimed the lease – click here to read the judgement.

Thus any uncertainty there was that payment of business rates post disclaimer was the landlord’s problem has now evaporated.

This is a mixture of good and bad news…

Good for local authorities …

Bad for landlords who now know that unless they have the benefit of a strong covenant or strong Authorised Guarantee Agreement could end up with a big rates bill at a time when a property is earning no income …

Good for prospective tenants of empty properties as they could be in a better negotiating position when it comes to rent free periods or other ‘perks’…

Good for tenants of tertiary properties who could go to the wall unless they can renegotiate leases and rent payment dates with the landlord.

In fact it’s good news for everyone but landlords and people who’ve signed an authorised guarantee agreement!

If you’re a tenant who has massive problems because of their rent bill, and you’d like some help renegotiating it, call me on 01902 672323.