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A survey late last year by Experian, the global information services company, highlighted how small and medium sized enterprises (SMEs) are heavily dependent on directors using their personal funds to finance their companies.  The personal funds are raised from mortgages, credit cards and current and savings accounts.

Nearly half of the directors admitting to funding their own businesses used the funds to set up their business, over a third to buy new equipment or premises and the rest to pay off debt or suppliers.

I have seen directors become ever more resourceful in finding ways to fund their businesses and raising personal money is often easier than securing business funding.

Unfortunately, however, what directors nearly always forget is that when they invest their own money in their company they should take some form of security, usually a floating charge debenture, over the assets of the company.  By doing this they ensure that if things do go wrong they stand a much better chance of getting their money back than if no security is held.

A director’s debenture is very easy to put in place and costs a few hundred pounds.  As the Experian survey highlighted, almost a third of directors investing funds did so by using a personal mortgage.  Therefore, if things do not work out they may not only loss their company but also their home.

My advice is that every director who is investing personal money into their company should investigate putting in place a director’s debenture to secure their investment.  As long as the debenture is registered at Companies House before the funds are introduced, the security is immediate.  Even if the funds are already in place it is still possible to take security by way of a director’s debenture but it will take two years before it becomes effective.   

If you have a client looking to invest in their own company please speak to me first about how they can be better protected for the future.   

Posted by tonycranfield

If ever a reminder was necessary as to the seriousness of bankruptcy it has been given by HHJ Kelson Q.C at Sheffield Crown Court in January 2014.

The judge sentenced a bankrupt to two years imprisonment for failing to disclose cash of £33,160 at the time of the bankruptcy and failing to account for payments totalling £97,074 out of personal bank accounts in the 12 months before he became bankrupt. In addition, the bankrupt’s discharge from   bankruptcy has been suspended indefinitely.

The prosecution came about following an investigation by the Insolvency Service and the Department for Business, Innovation and Skills (“BIS”). The undeclared   cash was discovered when the bankrupt was the victim of armed robbery a few weeks after he declared himself bankrupt when a holdall in his possession with £33,160 in cash was stolen from him. Subsequent enquires into the source of the cash revealed that a further £97,000 remained unaccounted for from his personal bank accounts.

The robust approach to the case by the Criminal Investigations and Prosecutions team is part of BIS’ mission to build a dynamic and competitive UK economy by investigating and prosecuting a range of offences, primarily relating to personal and company insolvencies.

Posted by patcranfield

After yet another visit to Birmingham Children’s hospital to visit a very brave little girl, I decided to enrol for the Wolf Run Challenge taking place on the 27 April 2014.  My goal is to raise at least £5,000 for the Ronald McDonald House charity which provides free accommodation for the families of sick children who are inpatients at Birmingham Children’s Hospital thereby ensuring that during the most testing of times, loved ones and siblings can be close by, providing a brief respite from the ward.

The brave little girl is Georgia who is 12 years old and has overcome so many challenges and obstacles in her life that has seen her face over 60 brain surgery operations, as a result of which, she has been rushed into Birmingham Children’s Hospital on many occasions as a medical emergency. During these times her family has been provided with free accommodation at Ronald McDonald’s House in Birmingham, one of the 5,000 families that have been provided with accommodation since the house opened in November 2009.

Despite the many medical issues and setbacks Georgia has experienced, she remains positive and upbeat, inspiring everyone that surrounds her. On the many occasions I have visited Georgia at hospital and the first question she asks is “How are you?” which as you can imagine is completely humbling.  So as a fitting tribute, if I reach the £5,000 target, I will be able to rename one of the rooms “Georgia” at the Ronald McDonald House in Birmingham.  I also want to raise awareness about the charity so they can help more families like Georgia’s. 

It is appropriate that to raise funds in honour of such an important person the challenge I should choose should be one that tests my psychical abilities.  WOLF is an acronym that stands for Woods, Obstacles, Lakes and Fields, and contestants have to complete a 10k off-road run that features a series of man-made and natural obstacles located throughout the course.  The race takes place three days after my 40th birthday and at the start of 2014 I weighed 18½ stone and my BMI was well inside the critically obese category.  As I write this blog, with 66 days to go and after 7 weeks of gruelling workouts and a tailored diet, I find myself half way to completing this challenge, having lost 2 stone in weight and more motivated than ever to reach my fund raising target.  I have also run my first 5k park run race (first time in over 15 years I have run this distance) and plan to walk up Snowdon as part of my training plan.

If you feel that you can help there is a limited opportunity for ten companies or organisations to sponsor a space on the t-shirts that I and the other wolf pack members will be wearing on the day.  For a donation of £200, your logo will be added to the t-shirts and you will get a special mention in the build up to the big event and in the post-race photo/media coverage.  I’m already half way there and would like to say a big thank you to my first five t-shirt sponsors The Brooke charity, GVA Grimley, Bridge PR, Wright Hassall and Murphy Salisbury for their support.  If you are interested in becoming a t-shirt sponsor, please contact me.

Any amount you are able to donate will be gratefully received, also, I would like to thank Patrick and Tony, my fellow directors, who have agreed to match the funds I manage to raise.  To find out more or to make a donation please click here.

Posted by brettcranfield

How the world of debt has changed over the years.

In 1839, over 4,000 individuals were arrested for debt in London and put into prison, and nearly 400 of those unfortunate men remained in prison for the rest of their lives”.  Notice the word “men” because up until 1864 and the case of Jolly v Rees, it was men who were responsible to pay the debts of their wives and although judges slowly began to find women liable for their debts, married women did not gain full contractual rights and liabilities until 1935.  It was not until the Debtors Act of 1869 that imprisonment for debt was abolished, although debtors who had the means to pay their debt, but did not do so, could still be incarcerated for up to six weeks.

Under the Bankruptcy Acts of 1883 and 1914, the constraints imposed on a bankrupt were designed to ensure his co-operation in the administration of his estate as well as to prevent him from participating in some of the aspects of public life and from engaging in activities that required a degree of trust. This clearly demonstrated the sentiment of the day that a debtor, by the very fact of becoming bankrupt, was not someone in whom society could place its trust or confidence.

A debtor could not apply for his discharge from bankruptcy until a public examination had been concluded which was heard in open court.  In practice, a bankrupt usually waited a considerable time before making such an application, if he applied at all.  Many bankrupts who had moved on with their lives did not want their conduct examined in public once again. Accordingly, a large proportion of the bankrupt population remained bankrupt for many years, sometimes for a lifetime.

The Insolvency Act 1976 introduced a form of automatic discharge from bankruptcy which usually meant that the debtor was released after 5 years.  In the Insolvency Act 1986, the automatic discharge period was reduced to 3 years and in 2004, under the Enterprise Act 2002, this was further reduced to 1 year.   

Whist some may argue that personal insolvency was becoming less penal, The Cork Report of 1982 introduced the idea that one of the aims of good modern insolvency law was “to provide means for the preservation of viable commercial enterprises capable of making a useful contribution to the economic life of the country”.  This was followed in 2001 by the publication by the Insolvency Service of a report entitled “Insolvency – A Second Chance” which argued that companies should not be allowed to close down unnecessarily and that honest individuals should be given a “fresh start”.

It was this kind of modern thinking that was first incorporated in the Insolvency Act of 1986 which introduced the concept of the Administration Order (an attempt to replicate the American Chapter 11 regime) and the Individual and Company Voluntary Arrangement. The Enterprise Act of 2002 subsequently sought to further encourage and promote the culture of entrepreneurship and rescue.

So has the promotion of the rescue culture had an impact on the attitudes of debtors and directors?  In my opinion, yes as it has led to a decline in the moral code of individuals and company directors towards the obligation to repay money due to creditors.

The explosion of personal debt pre 2008, with little regard to how such debt was going to be repaid, resulted in unprecedented numbers of bankruptcy orders being made.  I am sure such individuals would have preferred not to have been made bankrupt but the reality is that many saw little or no noticeable difference in the way they lived and were automatically discharged from bankruptcy after 12 months.

A survey in 2012 by R3, the insolvency trade body, reported that 58% of the British public felt that bankruptcy is too lenient and it found that almost 82% of people surveyed believed that some people were taking advantage of the bankruptcy system to get rid of debts they had built up through reckless spending.

The survey highlighted that 64% would like to see the system altered by changing how people were treated in bankruptcy dependent on their previous spending patterns, potentially introducing a direct correlation between prior spending habits and the term of the bankruptcy.  A similar number also thought that a majority of people might be able to avoid bankruptcy if they altered their current spending habits.

So in an attempt to give everybody “a fresh start”, has the bankruptcy regime become too lenient in its approach and therefore a review needed to see whether the current approach is fit for purpose?   

Posted by tonycranfield

Five years into the longest recession that any of us have seen, I am still seeing situations where shareholding directors have continued to draw money in lieu of salary, in anticipation of the overdrawn loan account that this creates being repaid by the dividend to be declared at the end of the year.

By adopting this strategy, there is an obvious saving to be made in the amount paid in National Insurance contributions by both the company and the director and this is all perfectly legal. The problem arises, however, when the company does not have sufficient profits or distributable reserves to declare a dividend at the end of the year. In such circumstances there is an overdrawn director’s loan account sitting in the accounts at the end of the financial year which will attract a S455 taxation liability which is payable by the company.

Far worse than this, however, is if a director has been withdrawing funds by way of an overdrawn director’s loan account, as described above, but the company becomes insolvent and a liquidator is appointed before dividends can be legally declared to repay the loan account, the consequences are very serious indeed.

One of the duties of a liquidator is to review payments made to directors and shareholders in the period leading up to the insolvency of the company. I am experiencing cases where an overdrawn director’s loan account is sitting in the accounts at the date the company ceases to trade and the director explains to me that on the advice of his accountant, he had been taking drawings instead of a salary through the PAYE system and therefore it is not really an overdrawn loan account. Unfortunately the law does not see it this way and the overdrawn loan account is repayable in full to the company. Had the money been taken as a salary in line with the director’s terms of employment, then nothing would have been repayable.

Problems also arise where in earlier years dividends have been declared to clear a director’s overdrawn loan account but when a liquidator looks at the financial position during the period in question, it can be shown that the company did not have sufficient reserves to declare such dividends. In such cases, again, a director may be required to repay the value of the illegal dividends back to the company.

During these uncertain times, my advice to all directors is that if there is any doubt about the solvency or profitability of the company, consider very carefully whether the savings that can be made in National Insurance contributions are worth the possible claim by a liquidator for the repayment of previous drawings received.

Similarly, accountants and financial advisers should review all their client’s arrangements where directors are taking minimal salaries and receiving drawings in anticipation of future dividends to test the solvency position of the company and if necessary advise their clients to join the PAYE system, even if this adds additional costs to the business.

Posted by tonycranfield

The debate continues about the effect Zombie companies are having on the economy and I even saw the other day the term “Zombie bank”.  The FT has also extended the debate by highlighting the rising number of European Zombie companies that exist and in part, blaming them for the weak economic recovery in Europe.

The definition of a Zombie company is well rehearsed, being a company only able to cover interest on its borrowings and making no inroads into capital debt.  Last November R3, the insolvency industry trade association, reported that one in ten companies in the UK is able to pay only interest on their debts but not reduce the debt itself, an increase of 10% over the preceding five months.  The term must surely also be applicable to certain members of the Euro zone creating the frightening term “Zombie countries”.

There are two very distinct schools of thought on the subject of Zombie companies.  The first is that the existence of such companies is stifling growth by utilising scarce resources in the form of available funding to keep alive an entity that has no future.  The belief is that market forces should dictate whether a company is good enough to survive and a company should not be propped up for artificial reasons.  Zombie companies could be likened to the Red Weed in the War of the Worlds, choking everything in its path and leaving a trail of death in its wake.

The second school of thought is less dramatic advocating that stability and employment at the moment is of greater importance than adhering strictly to the law of true market forces and by supporting Zombie companies, time is being given to allow the economy to recover rather than pushing such companies into insolvency.

History will be the judge of which view was correct but in my opinion, Zombie companies will continue to exist for the next few years until the economy starts to properly recover, the Banks have strong enough balance sheets to act against non performing borrowers  and the pressures of growth finally brings the existence of the Zombie to an end.

Posted by tonycranfield

In the 1990’s the Government sold a number of licences for mobile phone networks to be erected across the UK.  It was in 1994 that Orange was officially launched and since then, telecommunication and electronic giants have been fiercely competing to bring us the latest in technology.

We have seen an increase in internet speeds and the evolution of hand held tablet devices and smart phones.  There are in excess of 190 million active websites now available at your finger tips, wherever you happen to be.  Would your grandparents have believed you if you had told them 50 years ago they could watch television on a small handheld device that makes phone calls, with no wires, anywhere in the UK.  They would be amazed and rightly so.

The electronic age has certainly had a big impact on the traditional high street.  The increase in online spending has contributed to the downfall of iconic stores such as Our Price, Woolworths, TJ Hughes, Adams and Peacocks.  The list of casualties continues to grow and in 2012 saw the permanent closure of Habitat and Comet stores.

Recent reports in the media suggest that the signs don’t look good for the small independent retailer with average sales during the lead up to Christmas unable to repair what has been a poor 2012.  With business rates set to increase and the rent falling due on 21 December 2012, it looks like the retail sector will continue to face very difficult trading conditions.

My message is therefore very simple.  If you wish to retain the character of your local high street and enjoy your weekend amble with the family, make sure you buck the trend of online shopping and get out there and support your local independent retailers.  In my experience, the little bit extra that you pay is more than offset by the level of customer service that you receive.

Posted by brettcranfield