Insolvency Assist CIC’s contribution to The Insolvency Services recent request for a ‘new approach to business failure and insolvency’
The commission’s recommendations are sound in their objectives and should be widely enjoyed within the SME community we represent.
Sensibility to not curtail or preclude entrepreneurship from a result of ‘honest failure’ is a step forward.
Second chances in genuine cases of failure can often result in lessons learnt being the very reason the business person(s) succeed from being more financially astute in the future, but at present not without the battle to regain respect and trust on their own accord.
When starting new ventures, from concept to execution, a new business will often need financial support. It is the basis of this financial support that causes concern alongside the archaic attitude of insolvency practitioners in assessing the reasoning the business failed. When honest entrepreneurs are in need of funding they often look to organisations and lenders who require suitable security. Sometimes Joint & Several liability by way of guarantees; both personal and cross option, which when combined with Debenture taking can lead to to an in‐balance in Power at time of assessing solvency.
In cases where it is now proven the lenders did not disclose the true liabilities on which they executed their security (collateral) this leaves the question of
“what happens when the business failed as a result of the Creditors dishonesty ? ”
The best example of this is when banks have been able to position themselves to sell Derivatives to SME’s under the guise of ‘normal variable rate loans’ that by the banks by their own admissions are ’missold’ and simply not fit for purpose; deemed a ‘missale’ (no legal definition yet)
The current FCA voluntary review is curtailed to non‐sophisticated businesses and the FCA detail some 2000 insolvent companies are in this review. Of course many were not affected by the missold irhp but a lot were from the end of 2008.
The current chain of events can represent a true ‘honest bankruptcy / failure’ ; Debenture (or/and first charge) = Missale = Position to Abuse = Invalid Insolvency appointment
As a self‐started entrepreneur exposed to this type of Abuse, they are exposed to the Debenture holder (bank) and find themselves being able to be positioned with no appeal process. The Debenture holder can manufacture the business into a ‘default’ position and appoint their own selected insolvency practitioner (IP), often the same firm as may now carry out future Audit work or Advisory work for the bank.
This conflict of interest only comes home to roost and questioned when the bank admit it’s wrongdoing by way of a missale.
Under current legislation the Debenture Holder is able to liquidate the company(s) assets and leave it facing the necessity to litigate with a willing IP and often no funds, be it LASPO carve out benefits assist the financial burden.
On a grass roots level it will be common that the Directors invest their wealth, full time and assets in new business ventures. Leaving the individual exposed to an in‐balance of empowerment should the Debenture holder be able to have access to and unauthorised use of use the Entrepreneurs assets to ‘missell’ pre‐designed products to make gain for their own position only.
So when we look at Restructuring being assets and liabilities at appoint of perceived insolvency, time needs to be given to not only the actions of the Directors, be them innocent or dishonest, but also the empowered Appointer be them first charge and/or Debenture holders in a position of empowerment through supporting legislation. This is the role of the insolvency practitioner.