Here are my views on what’s been happening in the world of insolvency during the last month or so.
The world economy – how recent and not so recent events will effect us all
You may recall from my last newsletter that I said this year would be ‘interesting’. It certainly will be!
You may have read that China has recently started selling debt owed to it by the USA, $34 billion in one tranche in February. Some mainstream reports suggest this is a short term strategy. Don’t bet on it! Back last June the Chinese credit rating agency, Dagong, downgraded US debt, and berated the US government’s handling of its economy. The report , click here, pulls no punches. A few weeks ago Dagong issued its first Annual Sovereign Credit Risk Outlook, talking of a ‘global credit war’ between the developed and developing nations. Hard words indeed. The 2008 banking crisis was in part caused by the main credit rating agencies simply not doing the job people expect of them. The agencies again seem blind to things close to home, for example Moody’s have recently downgraded Portugal for reasons similar to those which should lead to them downgrading the US. There appears to be a long time lag in the recognition of problems within economies and big business: common sense – harsh reality – reflection in the markets – recognition by the rating agencies. So what’s the use of rating agencies?
Can you imagine the conversations between Obama and the Chinese President when they met in Washington in January? There are huge power struggles going on behind the smiles and handshakes, which struggles will affect us all. China is promoting its own currency as an alternative to the $ – and once that really kicks in, the US will not be able to simply print money to ‘deal with’ its problems. In the meantime China is buying gold and oil to offset its losses as the $ depreciates. This will drive up inflation in the UK. So we all suffer. There is some good news though, the UK government is not following the US path of simply printing money and borrowing more. Our austerity measures will hurt, but we need to be seen by our lenders to be addressing the root causes, and not as the US is doing by diverting the agenda away from the real economic issues. In the long term our strategy could see creditor countries supporting us more. In the meantime, when you are advising clients, you probably need to tell them that high, indeed higher, inflation and, in due course, interest rates will be the norm for the foreseeable future.
Here’s something else for you to think about. The recent appalling events in Japan are likely to have a long as well as an obvious short term impact on both the markets and the global economy. There are two opposing schools of thought: (i) that rebuilding will ultimately stimulate the world economy and end Japan’s ‘lost decade’; and (ii) the opposite will be true because the Japanese, one of the main lenders to the US, will draw back their funds to finance the rebuilding. China won’t buy the debt Japan sells: they are already reducing their exposure to the US; they’re setting up the yuan as the world’s next reserve currency; surely they will focus on helping finance Japan’s rebuilding rather than roll over US debt? And with the world debt markets awash with US debt, how will it continue to finance its fiscal stimulus, or should I say ‘fiscal stand still’ in the future?
It’s more difficult than ever to get phoenixes off the ground, most of the traditional routes for financing such ‘bust and starts’ have disappeared, so businesses are holding on for longer. And in doing so, the directors are often exposing themselves personally. One of the governing bodies of IPs has spoken about a crisis of confidence in the Insolvency Service’s disqualification procedures. The Insolvency Service publishes every month a list of its outside spend. It’s interesting to note that the January and February lists show a much reduced spend on IT, lawyers’ costs and agency workers. I suspect this could be the start of a virtual embargo on spending, presumably because the Service is having to make some pretty savage cuts, including making 400 plus redundancies. What a sorry state! During the last 6 months or so I have had several articles published on how I would change the UK insolvency law and legal systems, to improve how British management operate and how the Insolvency Service police things. Here’s a link to one such article, in which I suggest that directors involved in two failures within a five year period are given an automatic ban, but have a right of appeal to an independent review body, who could set conditions. I dared to put these suggestions to the policy unit of the Insolvency Service. Here are extracts from their response:
‘was contained in the Insolvency Bill …. in 1985, but … was withdrawn in the face of opposition from nearly all quarters’.
‘the Companies Act 2006 ….. introduced a requirement that at least one director …. must be an individual …. at least 16 years old’
the Companies Act 2006 ‘codified directors’ duties. …for listed companies, the combined code includes a requirement that .. directors must undergo appropriate training – such as the Institute of Directors’ qualification for Chartered Directors’
‘the enforcement regime we have in place to deal with rogue directors strikes the right balance between promoting enterprise ………and dealing with those who have abused the privilege of limited liability’.
Well there you have it! Something that was talked about 25 years ago holds true today. There is an appropriate training requirement set for all directors. And the right balance is being struck generally.
It seems as if those of us who inhabit the real world have got it all wrong! With so many businesses starting up, and most of their owners having no experience of what it’s like to be in business, there will be much pain ahead.
Pensions and insolvency
Last month I gave you the bad news about how pensions are effecting insolvent and near-insolvent situations. Well, I am glad to say that it’s not all bad news. There is one way in which pensions can actually help a company out of its difficulties.
Often the directors will have squirrelled away during the good times reasonable sums of cash into personal pension schemes, only to now find that now the business is in danger of going under, leaving them with personal guarantee commitments and a very much reduced income. For some years now, it has been possible for directors over the age of 55 to draw down up to a quarter of their personal fund value in cash, which they could then put into the business. Nowadays, those clever IFA chappies have come up with several schemes whereby more than 25% can be drawn down, and by younger directors. But this is a complex area, where specialist help is essential, and there does have to be enough time to do it, it cannot happen overnight. These schemes can be the difference between the directors of businesses losing much of that they have worked so hard for – if you have a client whose business is struggling and they have a reasonable pension pot, get them to come to me early! I won’t know the answer, but I know a man who can!
And here’s another way to raise cash!
Wouldn’t it be good if your client could somehow generate the cash they need to finance that new project, to grow, or just to survive, without going cap in hand to the banks, putting everything they have on the line, signing that personal guarantee? And just how sweet would it be if they could get that cash from HM Revenue & Customs? What would your client think about you if you didn’t bring this to his attention, but someone else did?
Mark Evans of Tax & Grants will help raise cash through the Research & Development Tax Relief Scheme. Here’s a link to his website. And here’s a link to his exploration of the impact of the recent budget on such credits. It’s surprising what can be ‘research’ or ‘development’. If your client is doing something new, whether it be an entirely new field (‘new’ for him) or improving the way he does his old things, he could be in for a hefty windfall. But it will involve you letting another professional ‘borrow’ your client for a while. Better that than lose him forever though!
Something to make you smile
I like Steve Mugglestone’s articles, they are will written and make you think. Here’s a more light hearted one for you accountants ‘Are accountants really boring or really, really boring?’.
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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