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.

 

Bank sold your property for less than it’s worth?

I’m seeing a good number of customers of the banks complaining that their assets have been seized and sold at a massive undervalue, often leaving them with a personal guarantee liability that could lead to them losing everything.

Why is that?

Is it just because of where we are in the recovery/recession? Are the banks merely taking the opportunity, as they always do at the end of recessions, to reduce their loan books by selling out at a time they, but their customers don’t, consider to be optimum?  Or is there a concerted land grab going on? Are the banks really not best set up to, or interested in, maximising realisations?  Are the people that come to see me the victim of the negligent actions of a few?  Are some individuals within the banks acting fraudulently to feather their own nests or those of preferred clients/contacts?

All these views have been expressed to me and more… exactly where the truth lies differs from bank to bank, department to department.  Suffice to say there is a growing number of former clients of the banks who tend towards the blacker views…

It’s clear to me that the banks are flexing their commercial muscle and ‘burying’ many claims for having (at least allegedly) sold assets at an undervalue.  You see it’s really not very easy for anyone, however knowledgeable they are in the law and resources they have, to take the banks on.  The banks will wheel out their tame, (very) expensive, and (very) experienced legal eagles – I say tame because they do the banks bidding without any exploration as to whether their arguments have any legal or moral foundation.  The banks have simply bought them to cover up their malpractice.

What I’ve seen several times recently could potentially be attributed to mere incompetence.  5 years on from the start of the recession, the banks have been holding on to a lot of property, in one way or another, for a long time, longer than they want.  Unable to sell it until now, they’re now shifting far more property.  But what they are not doing is:

  1. Casting a fresh pair of eyes over cases.  Old mistakes are being perpetuated.  There’s no vision.
  2. Getting a fresh agents’ report advising on how best, at this time, in these market conditions, to expose the property to the market.  They’re adopting a tick box  approach more appropriate for an earlier time.  If they marketed it previously, they’re relying on that.

Let me give you an example of one case I am working on right now.  In the 3 or so years between the bank’s repossession and ultimate sale of a piece of land, some laws changed and the market for development land in the area improved massively.  My client’s property turned out to be a ransom strip, holding up a £30m residential development, making it very valuable indeed on a Stokes v Cambridge basis.  The bank had even failed to heed their own agents’ advice to investigate the possibility of the land being a ransom strip.  They’d sold it as a piece of pretty useless land yet still chased the personal guarantors for their alleged ‘losses’ – had they sold the land for what it was really worth my client would have had a serious amount of money handed to him, there would have been no loss.   Negligent? Fraudulent?  Whatever it proves to be, it is actionable, although the bank will fight us every step of the way.

My advice?

Be prepared for a long fight – the bank will not give way unless forced to do so in court.

You can expect judges to give you every chance to present your case.  It is almost as if they have seen a lot of other similar cases to yours and are driven to see justice done for you, the small man.  Do your best to present your case properly, backed up by lots of hard evidence – after all you can expect the banks to best present their own position and you need to prove they were somehow lacking.

Expect the fight to be costly in money terms.  Your lawyers, agents and other experts will be expensive.  And if you lose you can expect the bank to seek costs against you – and that will be at their lawyers’ extortionate rates, meaning you not only pay your own costs, but also a good proportion of the other side’s.

Expect the bank to play the giant’s role in your David v Goliath fight.  They will use every trick in the book to bully you into giving up the fight.  They will try to wear you down over time.  They have systems to take care of things, to manage the litigation, but for you it’s personal and there is no escape.  You’ll not sleep properly, this will be a constant worry.  To win you will need to be resilient and in good health.

If you’d like some help fighting a bank, I’d be delighted to help… just call or email me.

Bank sold your property for less than it's worth?

I’m seeing a good number of customers of the banks complaining that their assets have been seized and sold at a massive undervalue, often leaving them with a personal guarantee liability that could lead to them losing everything.

Why is that?

Is it just because of where we are in the recovery/recession? Are the banks merely taking the opportunity, as they always do at the end of recessions, to reduce their loan books by selling out at a time they, but their customers don’t, consider to be optimum?  Or is there a concerted land grab going on? Are the banks really not best set up to, or interested in, maximising realisations?  Are the people that come to see me the victim of the negligent actions of a few?  Are some individuals within the banks acting fraudulently to feather their own nests or those of preferred clients/contacts?

All these views have been expressed to me and more… exactly where the truth lies differs from bank to bank, department to department.  Suffice to say there is a growing number of former clients of the banks who tend towards the blacker views…

It’s clear to me that the banks are flexing their commercial muscle and ‘burying’ many claims for having (at least allegedly) sold assets at an undervalue.  You see it’s really not very easy for anyone, however knowledgeable they are in the law and resources they have, to take the banks on.  The banks will wheel out their tame, (very) expensive, and (very) experienced legal eagles – I say tame because they do the banks bidding without any exploration as to whether their arguments have any legal or moral foundation.  The banks have simply bought them to cover up their malpractice.

What I’ve seen several times recently could potentially be attributed to mere incompetence.  5 years on from the start of the recession, the banks have been holding on to a lot of property, in one way or another, for a long time, longer than they want.  Unable to sell it until now, they’re now shifting far more property.  But what they are not doing is:

  1. Casting a fresh pair of eyes over cases.  Old mistakes are being perpetuated.  There’s no vision.
  2. Getting a fresh agents’ report advising on how best, at this time, in these market conditions, to expose the property to the market.  They’re adopting a tick box  approach more appropriate for an earlier time.  If they marketed it previously, they’re relying on that.

Let me give you an example of one case I am working on right now.  In the 3 or so years between the bank’s repossession and ultimate sale of a piece of land, some laws changed and the market for development land in the area improved massively.  My client’s property turned out to be a ransom strip, holding up a £30m residential development, making it very valuable indeed on a Stokes v Cambridge basis.  The bank had even failed to heed their own agents’ advice to investigate the possibility of the land being a ransom strip.  They’d sold it as a piece of pretty useless land yet still chased the personal guarantors for their alleged ‘losses’ – had they sold the land for what it was really worth my client would have had a serious amount of money handed to him, there would have been no loss.   Negligent? Fraudulent?  Whatever it proves to be, it is actionable, although the bank will fight us every step of the way.

My advice?

Be prepared for a long fight – the bank will not give way unless forced to do so in court.

You can expect judges to give you every chance to present your case.  It is almost as if they have seen a lot of other similar cases to yours and are driven to see justice done for you, the small man.  Do your best to present your case properly, backed up by lots of hard evidence – after all you can expect the banks to best present their own position and you need to prove they were somehow lacking.

Expect the fight to be costly in money terms.  Your lawyers, agents and other experts will be expensive.  And if you lose you can expect the bank to seek costs against you – and that will be at their lawyers’ extortionate rates, meaning you not only pay your own costs, but also a good proportion of the other side’s.

Expect the bank to play the giant’s role in your David v Goliath fight.  They will use every trick in the book to bully you into giving up the fight.  They will try to wear you down over time.  They have systems to take care of things, to manage the litigation, but for you it’s personal and there is no escape.  You’ll not sleep properly, this will be a constant worry.  To win you will need to be resilient and in good health.

If you’d like some help fighting a bank, I’d be delighted to help… just call or email me.

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?