Here are my views on what’s been happening in the world of insolvency during the last month or so.
The global economy
2011 is going to be an interesting year. Here are a few links to events I think are important but have somehow failed to grab the headlines:
- The World Economic Forum, in its 2011 Global Risk Report said that ‘The world is in no position to face major, new shocks. The financial crisis has reduced global economic resilience, … governments and societies are less able than ever to cope with global challenges. Yet, ..we face ever-greater concerns ….’ The report warns of ‘economic disparity’ between and within nations; ‘global governance failures’; ‘a cluster of economic risks including macroeconomic imbalances and currency volatility, fiscal crises and asset price collapse’; ‘tension between …. emerging economies and the high level of debt in advanced economies’; ‘increasingly unsustainable’ savings and trade imbalances; ‘unfunded liabilities’; the failure of 20th century systems to manage 21st century risk; and the long tail of the financial crisis.
- In a separate report Zurich Finance’s Chief Economist said ‘Age-related liabilities dwarf … the … fiscal stimulus’ and ‘under a proper accounting framework, most advanced economies would be fiscally insolvent’, creating ‘extreme long term pressure’.
Crikey! I expect to see the global economy stumbling from one crisis to another not just in 2011 but for the foreseeable future, with governments forced to adopt a crisis management role, papering over major systemic weaknesses. This does not mean it’s all doom and gloom though – it will mean British management must now actively manage their businesses. We are returning to the good old days when to succeed people have to be doing the right thing in the right way. A time when those who innovate, invest and have the right team around them will prosper, while those who simply sit back and watch things happen will wither on the vine.
In previous newsletters I spoke about the OFT’s long overdue action within the debt management industry. Of the 129 firms told to clean up their act, the OFT recently advised that 35 have voluntarily handed back their licences; another fifteen have either been told their licences are being removed or are now being followed up because they did not respond to the initial warning; the OFT is now reviewing the ‘independent audits’ of the other 79. The divisional head of the OFT said ‘we are determined to improve standards in this sector’. I suspect there will be more casualties among the 79 being reviewed. Hopefully this is just the first stage of an ongoing process of improvement both by the OFT and those in the industry: I am still seeing some pretty awful advice being given out.
The High Court recently held that where the pensions regulator issues, after the date of insolvency, a Financial Support Direction – a pay up notice where the company has a final salary scheme with a shortfall – the cost of that direction is an expense in the insolvency, raising it above even super-creditor status. This is a huge blow to the rescue hopes of businesses with final salary schemes, the level of security available to lenders, directors’ guarantee exposure, creditors’ distribution prospects, and the employment hopes of the existing staff. The rescue culture, at least for businesses with final salary schemes, through a formal insolvency process is essentially dead. Administrations of such businesses no longer work. The court decision works on no level, not for the company, its current or recent owners, anyone in or associated with the company – including many of the pension fund members themselves. It doesn’t even work for the pension industry because it could be the final nail in the coffin for final salary schemes.
The ruling is having a huge influence on banks’ relationships with their larger under-performing customers – the banks are supporting them, within limits, in the hope that the law will be changed. But there’s no guarantee that will happen, either at the anticipated appeal hearing or by changing the law – UK governments have consistently placed the interests of pension scheme members above all others’.
Directors of struggling companies can never address pension issues too early, yet doing so is time and resource consuming, at a time when these are already under pressure. We have seen few big company failures of late, smaller businesses seem to be bearing much of the brunt of the recession. With credit insurance largely a thing of the past, your clients who are dealing with companies that are or may be struggling and which have a final salary scheme need to start managing their exposure now – the timebomb may already be ticking. Withdrawal of bank support, unreasonable pension demands, or just simply their running out of steam could see their demise.
Things may be difficult, but there’s always time for a smile. Here’s what has made me laugh recently. As it’s holiday time, Fascinating Aida – Cheap Flights. Michael Jackson’s Thriller being performed by inmates in a South American jail – this has attracted 46 million views! ‘My Blackberry is not working’ – the One Ronnie – Absolutely brilliant! The Two Ronnies’ ‘four candles’ sketch – timeless!
Finally, I would really appreciate your feedback, good or bad, on my newsletter.
Midlands Business Recovery
‘Doing more for Black Country Businesses’
Midlands Business Recovery, Alpha House, Tipton Street, Sedgley, West Midlands, DY3 1HE.
telephone: 01902-672323 fax 0705-343-7063
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