How do you solve a problem like……..?

Last weekend I went to see the Sound of Music at the Birmingham Hippodrome and was reminded of the similarities between Maria and directors of failed companies who want to try again.  They are both freespirits; they have had a difficult past; they lack proper guidance and focus; they do not have a clear masterplan; they fail to grasp all the realities of the present.  It’s no wonder those around them get hurt and often feel abused!

During this recession all manner of trade associations have given their opinion on phoenix operations and pre-packaged sales by insolvency practitioners, mostly concluding that they should be banned.  Yet anyone who cycles around the canals of the Black Country will tell you that closed businesses never re-open, the jobs and wealth they created are lost to the region, often the country.  This is one of the reasons why the Black Country is no longer black!

In broad terms the DTI does not share the trade associations’ views – the DTI wants to encourage responsible entrepreneurial activity so that the country as a whole will prosper.  Yet there are clear faults in the present system as evidenced by a general lack of confidence in the ways things are.  Trade creditors lay the blame at the hands of ‘unscrupulous insolvency practitioners, who make a lot of money out of encouraging directors to walk away from their debt and start again’.  Insolvency practitioners argue that they are only dealing with the reality of the situation – that companies which approach them are often too far gone to be saved, that trading on in insolvency in the forlorn hope of somehow finding an independent buyer of someone else’s basket case (there are few such buyers about, and even they cut hard bargains) cannot be funded.  The Insolvency Service has the tools to prevent repeated phoenix operations but lack the resources and political will to do so to the degree trade creditors would like to see.  The nub of the problem lies in the crisis of confidence of trade suppliers in the integrity of insolvency practitioners and effectiveness of the system generally to weed out the serial rogues from the unfortunate or those whose skill set is incomplete.  At a time when the government’s stated policy is to reduce bureaucracy and it necessarily has to encourage more would-be entrepreneurs to give it a go without spending any cash, the answer must come from elsewhere.

Here are my own personal views and suggestions:

  1. Phoenix operations and pre-packs are, I believe, a necessary tool for preventing wealth leaking from the local and national economy.  I do not believe the incumbent insolvency practitioner on a case should act as judge and jury of directors looking to try again.  No one forces trade suppliers to extend credit to phoenix operations, but they do lack meaningful and timely information to decide whether the phoenix is a good credit risk.
  2. There needs to be some new safeguards put in place to ensure directors fully recognise the responsibility that comes with the privilege of their being given limited liability and to ensure they have, or gain, a full toolset of the skills needed to run a successful business.
  3. Mandatory training should be given to everyone whose business fails – this should be provided free of charge by the replacement of the Business Links working with Companies House and accredited training agencies.  (given that two thirds of start-ups fail in the first few years, I would make such a ‘business driving test’ mandatory for every new business too).
  4. Directors’ and officers’ insurance should be compulsory for all companies turning over, say, £ ½m or more a year.
  5. Directors whose business fails for a second time should be given an automatic two year ban. However, they would have a right of appeal to a panel comprising of the DTI, an experienced company director, and an insolvency practitioner.  This panel would assess the director’s culpability for the previous failures and the steps required to try to avoid a similar situation recurring.  The panel could attach conditions, such as further training or increased supervision of the director’s activities, to any licence it may grant enabling the director to continue to act.   These bans, and the conditions attached to licences, would be open for all to examine at Companies House, in far more detail than currently shown.  As with the present system, personal liability of the director and any ‘stooge’ would follow if the ban or any conditions to the licence are broken.  The process would be conducted similar to mediation, so as to avoid the delays encountered in the present system.
  6. Insolvency practitioners should be required to give their opinion on a director’s fitness in their reports to creditors and to set out what they know of any phoenix operation.  IPs should be immune from the UK’s laws of libel and slander on a public interest basis, provided they have followed procedure for forming and reporting their view – this would include giving the director an opportunity to comment .  IPs must improve their communication skills – the style of writing and content of letters and reports are simply a huge turn-off for readers.

It is clear that an innovative, low cost solution involving all interested parties is needed if we are to win people’ confidence and improve the conduct of directors.  Simply carrying on the current regime, hindered by delays and poor communication, yet somehow hoping that things will get better is not an option.

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4 thoughts on “How do you solve a problem like……..?

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  • October 25, 2010 at 10:51 am

    Ltd cos were originally set up to protect innocent shareholders, not directors who are in day to day charge of the companies they run.

    If a company fails, then it creates a vacuum which is an opportunity for another enterprise to step in and fill. This is healthy. Allowing people to try again at the expense of others is not.

    “Rescued” companies, wiped clean of debt by IPs, can carry on undercutting their competitors.

    And I’m afraid that most sole traders (like me) have no option other than to extend credit to ltd cos if we want to do business with them.

    In my opinion the government should clamp down on the antics of directors and IPs. The only time that directors should be allowed to escape liability for the debts they have run up is when they themselves have been victims of bad debts.IPs should be appointed by and responsible to creditors. Their main role should be to maximise returns to creditors, not to maintain the lifestyle of failed directors as it is at present.

  • October 26, 2010 at 3:12 pm

    Richard, I agree that failure can indeed be healthy – pruning a tree enables fresh, strong, growth. But I do not think directors should be limited to giving it a second go only when their business has been taken down by something outside of their control such as a bad debt. After all, it could be argued that incurring bad debts of a magnitude sufficient to wipe the company out is itself mismanagement, deserving of them not being given another chance.

    I do think that allowing more bad companies to fail, and indeed disappear forever, quicker would be a good thing – Jon Moulton – remember his statements regarding Rover? – argued a similar point in the Insolvency Today Magazine that landed on my desk yesterday. I e-mailed him agreeing with his suggestion that bad businesses are doing a lot of long term harm to the economy – but I added that this had been so for a good number of years and not because of current government policy – it was because of bad management and the then ready availabilty of cash. There is now far less cash around, but directors continue to confuse ‘managing’ the business with ‘directing’ it. It is for this reason that I have suggested a change to the system with a two strikes and you’re out rule – directors need to learn from their mistakes, learn what they don’t know.

    Surely my suggestion there should be a two strikes and you are out rule represents a huge tightening up of the system? – let’s not forget that being banned doesn’t stop people from earning a living, it just shift the financial risk onto their own shoulders, and reduces the creditors’ risk.

    As regards your views on IPs, I suspect your comments represent your own personal experiences. I can assure you that we IPs are aware of our duties to creditors but what is often forgotten is that we operate in a litigious society where someone else is always to blame for everything bad that happens, and the IP is the soft target. The other thing that is forgotten is that we operate in a far from perfect world where we do not often have many choices – it is very difficult for example raising money to trade a business on while we look for a buyer (try asking my wife to put our house up as security either to try to save someone else’s business or try to increase the dividend for the creditors of a company?) or selling an ailing business on the verge of liquidation at the moment! If you have any specific issues on the IPs you have come across, have you put your concerns in writing to them and given them the opportunity to explain themselves? – IPs are not very good at communicating in the formal reports they give creditors, there may have been a communication problem with them failing to explain why they did when they did. If you have done so and you are still not happy, you could always complain to the IPs’ governing body – that way you can do so from a position of strength, having heard the counter arguments.

    Speaking as an IP it would be great to see more open, greater and more constructive IP / creditor dialogue – again that is why I have suggested immunity from libel / slander – that way we can say what we really think, at the moment we can’t. And that is why I blogged on this topic and am now blogging semi-regularly, to start dialogue with people like you. That way you will see how I tick, and we can do something to improve the laws and systems.

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