First ever disqualifications of directors of a credit union

Here’s a link to a news article that recently appeared on the government’s website, gov.uk about what I believe to be the first disqualifications of directors of a credit union – The Enterprise The Business Credit Union Ltd T/A DotcomUnity Credit Union (EBCU).

So how did we get to the stage where directors of credit unions can be banned?  Let’s look at the background behind the law we have today…

In the Mid 1980s, at a time of massive change in insolvency legislation, the Company Directors Disqualification Act (CDDA) was brought in so that the government could hold directors of limited companies and similar to account for shortcomings in their conduct – the previous law did not make this an easy task, the CDDA made it so.  You see the CDDA made it easier for the authorities, then the DTI, to get disqualifications through the courts at first but later by mutual agreement (an undertaking by the director).  But credit unions were not covered by the CDDA.  It took until 2010 for the government to put forward an act of parliament, the Co-operative and Community Benefit Societies and Credit Unions Act 2010, to make it possible for the first time for directors of credit unions to be held to account in a similar fashion to the directors of limited companies.  The Act became law 3 years later, in early December 2013.  The credit union that was the subject of this disqualification failed a year and a half later.

Why the delay in bringing in this legislation?

We can only guess, but I suspect the reason was few credit unions failed until the 2010s, so there was simply no need to extend the legislation.  But now that more credit unions are failing and with pressure for continuing improvements in standards across the wider financial and banking sector, the attention turned to the credit unions, where some thought a more professional approach to management was needed.

So we now have a law whereby we, as insolvency practitioners, have a duty to report on the conduct of directors of an insolvent credit union we are liquidating or administering, which report might lead to their disqualification.  And that report covers all directors whether or not they work in the business on a day to day basis or act in a non executive capacity, and whether they get paid or not for their services.

This raises the question of how the standards expected of the individual members of the board of a credit union should be measured, after all they are often quite a mixed bunch.  For example would a non exec be measured in the same way as the exec director(s)?  What standard would be required of a non exec with 30 years experience as a captain of British industry and now brought in to bring some commercial acumen compare to that expected of a retired housewife who simply sat on the board because of her interest in supporting the local community?  What standards would be required of an accountant who sits on the board to oversee the finances, or a lawyer to help on its legals?

The answer is, in broad terms the standard by which they will be judged will be the higher of:

  1. The actual skills the person has ie what professional qualifications they have and what business experience they have
  2. The skill that you would expect a person to have in such a position of a credit union of that size and complexity.

Therefore…

A higher standard would be expected of directors of bigger more complex credit unions than small ones.

A higher standard would be expected of the former captain of British industry, even if he is unpaid and a NED, and a professionally qualified accountant or solicitor who sits on the board than the retired lady who works a collection point but also sits on the board.

The point is there are no firm standards, every instance is different as it depends on the circumstances, it’s a matter for the courts to assess what that standard was and whether the person failed to meet it.  Of course, in some instances it’s easy, blatant fraud or personal profiteering renders the person liable to be banned and attacked for the recovery of money, but not all cases are so straight forward.  What of the lawyer, accountant or captain of British industry who was supposed to be overseeing this particular aspect of the credit union’s affairs – are they liable too?

There is a major point here… where different standards there is a potential for major conflict within the board.  The actions and inaction of the more professionally qualified members of the board will come under more scrutiny, and they could be held to account more than others.  Put simply, some are at more risk than others, and this is likely to reflect in their actions and decisions. The opportunity for conflict within the board tends to heighten when credit unions come under increasing financial pressure and pressure from the regulator.  One option would be for the board to engage an insolvency practitioner or lawyer (provided both have relevant credit union experience) to support them in these difficult times – taking, relying on and acting in accordance with an insolvency practitioner’s advice can provide a shield against or a defence in any attack.

So let’s look at the Bournemouth credit union disqualifications…

Here’s the link again to the government website’s press release – LINK.

I’ve read the article several times.  Maybe it’s just poorly written, but to me it doesn’t explain properly why these directors should have been banned. (I find that government press releases often lack clarity or balance, this one is as clear as mud)

Let’s start to pick it apart…

There’s a focus right from the very start on a figure of £7.3m, the total estimated creditor claims.  The way the article is written sends out a message that this was a big failure where the reader is led to assume that creditors lost the entire £7.3m.  It’s not until much further down the article that there’s a mention that the deficiency is £1.5m.  It’s only by deducting one from the other that we get to calculate there were £5.8m of expected assets.  The assets, even though they are very large indeed, are conveniently ignored. (why do the government do this?  If we were to merely focus on the fact the UK government has over a trillion pounds of debt and ignored the UK’s assets, politicians and civil servants would be pilloring us, why shouldn’t we do the same to them here?)

So let’s talk about the assets… it’s worthwhile pointing out that in any credit union insolvency a good proportion of the members will do their level best not to repay their loans.  This means a large provision is required against member loans, arising purely as a result of the formal insolvency.  With the £5.8m representing the level of estimated realisable assets after a provision for loan debt write offs and any other asset provisions, undoubtedly the financial position of the credit union prior to the withdrawal of approvals would have showed a far smaller a deficiency than £1.5m.  Yet there was no mention of book values or the position shown in the financial information on which the directors relied and acted.  The focus was simply on the credit union owing £7m…this was done for effect…

Turning now to the issue of inter-company billing… Here a figure close to £0.4m was mentioned for ‘additional billing’, the article quotes the figure in an effort to suggest to the reader that the director(s) somehow got away a big sum of money himself.  Nowhere was there mention of a figure by which the director(s) might have profited – so that figure could be anything between £1 and £0.4m.  The article lacks balance, the focus is on the big figure for effect and not on the most relevant figure.  The directors could and should indeed have communicated the contract terms to the board formally, and got its approval to them, but that does not address all the points.  Would the government have sought the disqualifications if the directors’ costs in that other company had been £1m and they had lost £0.6m on the work? Presumably no, the size of any ‘secret profit’ is highly relevant.  Sure, they might have failed to get proper board approval, but sometimes things get missed because a lot is going on.  Put another way, the ‘doers’ on the board, rather than the NED ‘watchers’, got taken to task.  Doesn’t bode well for boards all working together does it?

Why was the name of the associated company or organisation not reported?  Was it to stop people like me who don’t take any form of ‘news’ from any party at face value?  By not reporting the name we are prevented from checking up on the story… Let’s remember there are hundreds of other disqualification press releases where the government are more than happy to report the associated company’s name.  This is a departure from the government’s standard practice.  Why is that?

Turning now to the submission of incorrect accounts to the PRA… Perhaps this is where the directors might be culpable… The press release suggests that the credit union’s net assets were overstated because a provision for fees paid/payable to the associated company had been understated by £150k.  It actually looks like they have explained the government’s views properly!  Crikey, there’s a first time for everything!

But I would point out that throughout that period back in 2015 and even now there are numerous credit unions who were/are years in arrears with their accounts, and the authorities then and now did and still do nothing about it.  Yet credit unions deal with the public, they take money from them.  Isn’t one of the main planks of UK insolvency law that where anyone dealing with the public through an organisation with limited liability there should be a high level of accountability, including the lodging of accounts so the public can at least in theory assess the financial strength of who they are dealing with? (why is it anyone enquiring as to a credit union’s finances has to pay £12 for each of a set of credit union accounts, administrators’ and liquidators’ reports etc when all these documents for limited companies and almost all other organisations are available free of charge to all on the Companies House website? ).   In Bournemouth’s case I would like to have seen the accounts, the administrators’ and liquidators’ reports without having to pay for each document – I’d then be better able to comment, but given the weakness of the Insolvency Service’s statements elsewhere, I suspect their press release on this aspect is misleading too.

Let’s look at the point the press release raises over the billing of fees payable to the associated company in the latter period of trading – the press release almost suggests  the board’s plan for repairing the credit union’s financial position included the associated company foregoing fees, and reporting that none had been billed when a good amount had.  This aspect is skated over again.  I think I know the identity of the associate.  Was it looking for funding elsewhere to meet its running costs?  Where was it on getting that funding?  Would receipt of that funding enabled it to repay the fees billed?  Were the directors of the credit union aware of the situation and working on the assumption that funding would be coming into the credit union albeit indirectly?  How was this reported to the regulator? – all regulators and government officials like standard forms, on which there is often no space for detailed explanations.  Were the other members of the board aware of the turnaround plan that was reported?  Why have they not been held accountable for any misreporting to the regulator (the entire board should be involved in producing any turnaround plan)?

Put another way, I believe that here we have a case of government officials acting like the worst possible journalists – not letting the facts get in the way of a good story – they have purposely gone out of their way to manage the public’s perception of the credit union’s financial position and the directors’ actions, they have done noting to explain the true position.  I understand that press releases have to be short by definition, but this release is incredibly misleading, to the extent that, to me, the Insolvency Service did not prove any part of its case for disqualification.  How would you and your board feel if the government adopted the same conniving approach with you should your credit union fail?  I can only guess how these 3 directors feel, pretty buried I’d think.

The next point I’d like to raise is the fact that the disqualifications did not pass through the courts, they were just agreed between the directors and the government.  Put another way, the directors’ guilt – if there was any – was never tested in a court of law.  The government acted as judge, jury and executioner simply because the law enables them to be so.

I have found over the years that the Insolvency Service are frankly like school playground bullies – they have the full financial backing of the government (they pay out huge sums to some of the most expensive lawyers in the country) while the directors often have little or no funds to pay lawyers to defend themselves.  It’s an uneven fight, many directors simply capitulate and accept a ban just to avoid the substantial legal costs they would be incurring defending themselves.

Yet the article is written in very matter of fact terms – nowhere does it say ‘the Insolvency Service took the view that…; conversely the directors argued that…; it was expedient in everyone’s interest to agree a compromise and one was agreed whereby a ban of x years was accepted without the directors accepting liability’.  Now imagine yourself arguing with someone over a money issue where you agree a compromise – how is that compromise worded?  That’s right, without an admission of liability.   Let’s remember, this has not been tested in court, there must be some doubt, so to me it’s pretty incredible the Insolvency Service can say what they have said, and with so many holes, with such certainty.  Of course the directors are never asked to comment on the wording of the press release, they’ve had no say at all in its drafting.  There’s nothing they can do to get them to withdraw it.

There’s another thing worth taking on board.  Directors who fail to take, or take but choose to ignore, professional advice taken at the right time from the right people, who fail to take advice from their auditors and solicitors about such things as the inter-company billing referred to in the press release, who fail to take advice from a licensed insolvency practitioner in the lead up to insolvency, often have little defence to the DTI’s disqualification efforts.  Ignorance is no excuse.  The authorities expect you, someone who probably has no prior experience of such difficulties or issues to go and get help, not somehow muddle through, trust to luck or take advice and do what you want to anyway (especially if doing so profits you).  Credit unions often muddle through without professional support because they can’t afford it or they choose local accountants/IPs with little credit union experience.  The point is this puts the board at risk, more its ‘professional’ members.

Going back to the agreement of disqualifications, the undertaking, typically often directors who are relatively advanced in years in employment terms (each here was in their 5os, and we do live in an ageist society in terms of work) have problems finding decent employment after a business failure.  Their income earning capacity is at best reduced, sometimes it’s disappeared completely.  They also only have a limited time before retirement, they don’t have tens of years of potential future employment or engagement in business to protect.  The upshot of this is they are vulnerable, and will often throw the towel in to best protect their worsening financial position in the lead up to retirement.  It’s often a matter of the director taking the rap in order to best protect their family. I’d like to see the Insolvency Service taken to the courts to see whether their approach generally on these things is an abuse of a person’s human rights, especially in the case of middle aged and older directors.

Interestingly, only 3 directors were subject to disqualification undertakings.  The FSA website lists 25 directors, although I don’t know when each acted as a director.  The point is the other directors appear to have walked away scot-free.  With probably more getting away than being taken to task there is massive opportunity for conflicts within boards – consider my comment above.  Why the others were not included in the disqualification proceedings is unclear, it was not explained why these 3 were the focus of attention while others were not… you see doing nothing, not addressing the affairs of a struggling entity, turning a blind eye to what’s going on, failing to exercise close financial control and thus facilitating another’s withdrawal of cash and assets  has opened up directors of limited companies to personal attack, both in terms of being banned and financially compensating the company for the losses the creditors suffered.  So why not here? Perhaps it’s an oversight?

My take on all this, in overview?

The Bournemouth experience does not set much of a precedent.  It shows that the government are committed to sending out a message they will be cracking down on the directors of insolvent credit unions.  But I get the feel that these 3 were nowhere near as culpable as the government would have us believe.  What is clear is that directors of credit unions are at risk of personal attack and being banned whether executive, non-executive, paid or voluntary, some more so than others – the execs and professional directors more so. You would be wise to do what you can to try to ensure it’s not you who comes within the Insolvency Service’s gaze and that conflicts with the board are managed.   You might just need my help to ensure that…

 

 

 

 

Credit union still banking with the Co-Op Bank?

You might have seen today’s – I have to say not completely unexpected – news news that the Co-Op is up for sale.

It’s been coming for a long time.

So, you’re a director of a credit union that is still banking with the Co-Op that still has hundreds of thousands of pounds in it?

Let me ask you something …Why is that?

Is it simply that because you believe in the co-operative movement you will support it where ever you can?

That’s great, the co-operative movement has done and continues to do a lot of really very good things.  But the problem is if you’d been acting on purely commercial grounds – which is the test you are required to satisfy as a director – you would probably have moved the money out of the Co-Op a long time ago.

Let me ask you, given that there’s no certainty that the Co-Op Bank can be sold, and won’t instead be either broken up or go bust, do you think you might be playing Russian roulette with your members’ money given today’s news – which after all followed a pretty inglorious few years (facts like this will be relevant to the points below, it’s not as if you’re in the dark about the Co-Op Bank’s problems or that they’ve happened overnight)?

The point is you might only have a short period of time now to get your members’ money out of the Co-Op and into something safer…

And if you don’t do so, let me ask you another question…

If your credit union should be forced under by the problems at the Co-Op Bank and your liquidator took you personally to court for negligence, would you be able to defeat such an action?

It might just be worthwhile you asking your lawyers this question… you see, your following a principle that is not built on hard commercial grounds is probably no defence.

Oh, and an afterthought… some directors of your credit union will have deeper pockets than others and will therefore be the main targets of such a negligence action.  Are you one of the prime targets? You see it’s easier for board members who have nothing to lose personally to stick to their principles, but if your home and savings are on the line, then it’s a completely different proposition.

Credit Unions – it’s far from good news, in fact it’s awful!

I don’t know if you saw the news today?  – How the UK’s credit union assets hit £3 billion for the first time ever?  – click here to see the news from ABCUL

Great news, eh?

Well no…

Why?

Well, today, yes the very same day that ABCUL announced this ‘great news’ about assets, a letter hit my desk from the Co-Op Bank saying that they are reducing the interest they will be paying on bank balances me as liquidator of credit unions, and indeed credit unions themselves, hold with them.

The interest rate?    O.03% on balances up £500k.  That’s right, one thirty third of one per cent in interest.

To put it bluntly, bugger all on balances most credit unions might be holding with the Co-Op Bank…about one fiftieth of the inflation rate.

Please let me ask you something…

What’s exactly is the point of credit unions putting their savers’ money with the Co-Op?

Why do they do it?

The vast bulk of the £1.23 billion in credit union saver deposits – the ‘good news’ is its ‘s by 7.8% over the previous year –  yes, one and a quarter billion pounds, a lot of money, and counting! – is earning nothing for savers, not after the credit union costs.

I tell you what the point of credit unions putting their savers’ money with the Co-Op and them paying nothing in interest is…

The Co-Op is bust…

And if it goes under – and it is a shambles – the FSCS also goes under, its pocket is simply not big enough to cope with the Co-Op’s failure.

Put another way, all you savers in credit unions are propping up a bust bank because (1) Co-Operatives are incapable of surviving in this country today in the way they used to be able to, and management are incapable of turning the Co-Op Bank around, it’s a shambles internally; (2) The FSCS cannot pay out if the Co-Op goes bust – we’re talking about a bail-in, rather than bail out (a bail out, some government organisation pays you back all your money: a bail in, you do not get all your money back, you have to write some of it off, you might be told that the £1,00 you had with so and so bank is no only £500.

If Co-Op goes bust, there will be a run on all of the banks.  Co-Op is propped up by credit union savers’ and other ‘soft’ money – if you’re a saver in a credit union, have you really asked where the credit union puts your money?  Hopefully time will paper over the cracks at the Co-Op…- but will it, and why haven’t you been told that your money is at risk, why are you being told that credit unions are a good place for you to put your money safely?

Thanks to all you savers, old and new, you are propping up a bust bank that we cannot afford for it to fail because the system can’t cope with it doing so!

Oh, did no one, not ABCUL, not any credit union, tell you why you’re being encouraged in?

It’s a huge game of pass the parcel!

If you are a saver, you are playing the game, the problem is you’ve no chance of winning a prize, because the music will never stop when you’re holding the parcel.   Instead you’ll be left holding all the wrapping paper for which you will have paid handsomely, and you’ll not get your money back because you will be bailed in…

Still happy with the advice you got to ‘save’ with that credit union?

Will you be suing the advisor for bad advice, like the PPI sellers of yesteryear?