Bankruptcy and Debt Relief Order changes – R3 comments

Commenting on the proposed increases to the creditor bankruptcy petition threshold (from £750 to £5,000) and increases to Debt Relief Order debt (from £15,000 to £20,000) and asset (£300 to £1,000) limits, insolvency trade body R3 president Giles Frampton says:

“We are really pleased the Government has listened to the concerns of the insolvency profession and others about Debt Relief Orders and bankruptcy.”

“Insolvency solutions can often be a suitable way for heavily indebted individuals to deal with their debts but it is important that people are in the type of debt solution most appropriate for their situation. The changes will make it much easier for indebted individuals to deal with their debts effectively.”

“The rise in the creditor bankruptcy petition threshold is welcome, although £5,000 is far higher than expected. It is right that the petition be increased: £750 was an entirely inappropriate level and the protection it offered debtors had been steadily eroded by inflation over the last three decades.”

“The rise in the petition threshold will require creditors to look at other options for the pursuit of low value debts. While a bankruptcy petition is not always the most proportionate tool for this, it’s very important that the insolvency regime maintains a balance between protecting the interests of both debtors and creditors. How the new threshold works in practice should be monitored closely.”

Submitted by R3

Informal corporate insolvency procedures up by a quarter since 2010

The number of companies opting to be simply removed (‘struck-off’) from the Companies House register has jumped by 28% from 139,594 in 2010-11* to 178,996 in 2013-14, according to research by insolvency trade body R3.

The new data provide a more complete picture of company closures than the formal insolvency statistics alone – and may help explain the lower than expected number of formal insolvency procedures since the recession.

​Creditors’ Voluntary Liquidations – an equivalent formal company winding-up procedure that may involve debts being distributed to creditors and the conduct of directors investigated – fell by 1%.

​​Andrew Tate, Deputy-Vice President of R3, says: “Ordinarily, insolvencies rise following a recession, due to problems like ‘over-trading’ during recoveries or as a delayed impact of the recession itself. Since the 2008 recession, however, insolvencies have fallen.”

​​“The phenomenon of ‘zombie businesses’ – businesses that survived due to the unique circumstances of the last recession but had little chance of long-term recovery – could partly explain lower than expected insolvency numbers, but falling numbers of ‘zombie businesses’ have not been matched by rising insolvencies.”

​“It may well be that many of the UK’s ‘zombie businesses’ have been just removing themselves from the Companies House register rather than opting for a formal insolvency procedure.”

​‘Strike-offs’ are designed for companies that have settled business and trading debts, and are now dormant or no longer trading.

​Andrew Tate adds: “In cases where there are no assets to distribute to creditors to make, simply ‘striking-off’ a company makes a lot of sense. However, creditors do need to keep an eye out for ‘strike-off’ notifications and object if necessary: their interests may be better served by seeing a company entered into a formal insolvency procedure instead, particularly where there may be hidden assets which could be investigated by a liquidator.”

Creditor objections to ‘strike-offs’ grew by 38% during the same period, rising from 1,738 in 2010-11 to 2,406 in 2013-14 – roughly one objection for every 74 applications, up from one in every 80.

​Andrew Tate continues: “In formal insolvencies, creditors’ interests are paramount. Insolvency practitioners will treat them on an equal basis and carry out important tasks like investigating directors’ actions. Although growing faster than the number of applications, it’s slightly surprising that objections to ‘strike-off’’ applications are relatively low: it may be that many creditors aren’t aware of their rights.”

​“Creditor interests also risk being undermined by this Government’s proposed changes to civil litigation funding – the Jackson reforms. From April 2015, the changes will make it much harder for insolvency practitioners to return money to creditors from insolvent companies’ directors, and mean up to £160m a year of creditors’ money could stay in directors’ hands following insolvencies. Insolvency litigation must be made exempt from the reforms.”

Submitted by R3

Debt Relief Order/Bankruptcy rules should be changed, says R3

R3 has called on the government to change the entry requirements for Debt Relief Orders and to raise the minimum level of debt for which an individual can be made bankrupt, in its response to a government ‘call for evidence’ that closes today (9th October).

R3 says the changes are needed to bring the England & Wales personal insolvency regime up-to-date, and to ensure indebted individuals are able to access a debt solution suitable to their needs.

However, R3 president Giles Frampton warns that it is important the ‘call for evidence’ is not a missed opportunity for a much-needed review of the whole personal insolvency landscape. He says:

“R3 has been very keen for Debt Relief Order entry requirements to be reviewed. At the moment, these requirements are unnecessarily restrictive and prevent people from accessing a debt solution that could really help them.”

“Quite frequently, people can be caught between Debt Relief Orders and bankruptcy. They can’t afford the up-front £705 cost of entering bankruptcy but they have too many debts or assets to qualify for a Debt Relief Order. The end result is often that they don’t deal with their debts: this is bad news for both the indebted individual and their creditors.”

“We’re relieved that this ‘call for evidence’ means there is a very real chance that the ‘creditor bankruptcy petition threshold’ will finally be raised. This was last set in 1986 so its value has been eroded by inflation over time.”

“Bankruptcy may be an appropriate way for some to deal with their debts, but it is not an option suitable for everyone. This makes effective safeguards important: placing someone in bankruptcy over a low value debt could be a disproportionate response. Raising the creditor petition threshold would restore some strength to what is currently a weak safeguard.”

“However, it is disappointing that the ‘call for evidence’ only focuses on these two issues. The personal insolvency landscape is inter-connected and should not be updated piece-by-piece. It is to be hoped this is the prelude to a comprehensive review of the personal insolvency landscape. There has not been such a review for three decades – one is long overdue.”

R3 is calling for:

Debt Relief Orders (DRO)

  • The current DRO asset and debt thresholds act as barriers to entry into a DRO. R3 believes that the debt threshold should be increased to £30,000 and the asset threshold to £2,000 in order to ensure that those individuals who need access to debt relief are able to enter the most appropriate debt relief solution for their circumstances.
  • The DRO surplus income threshold should be maintained at a maximum of £50 per month.
  • Where an individual’s circumstances change, such as an increase in salary or an asset windfall, and they no longer fulfil the DRO eligibility criteria, they should be offered the option to transfer into bankruptcy.
  • Revocation of a DRO should apply retrospectively where the individual has provided false information or deliberately sought to mislead or leave out information on their DRO application form.
  • A Debt Relief Restrictions Order should only be imposed for reasons of an individual’s behaviour prior to the DRO and should not be applied simultaneously with the revocation of the DRO.

Creditor bankruptcy petition threshold

  • R3 believes that the creditor’s bankruptcy petition threshold should be raised to £3,000 (from £750). This level would both cover the creditor’s petition costs and ensure an element of legislative ‘future-proofing’ against inflation.

Submitted by R3

Nortel/Lehman – R3 comments

Responding to this morning’s landmark win for Nortel/Lehman at the Supreme Court, Giles Frampton, vice-president of R3, the insolvency trade body, says:

“The Nortel decision is to be welcomed in that it appears to restore a fair balance between the rights of pension funds and other creditors in administrations.”

“Over time, the rules on the expenses involved in administrations have moved from the principle that expenses should relate to just the outlays that are necessary to implement the administration to a much broader definition. This has hampered business rescue. The Supreme Court’s Nortel decision looks like it could help a move towards that original principle.”

“There are still areas that need clarifying though, for example, the treatment of rent payments as an administration expense. The current rules on this are a bad deal for both businesses and landlords, and put jobs at risk.”

Submitted by R3

InsolPro website update

InsolPro now optimised for tablets and smartphones

If you’ve visited in the last couple of days you may have noticed that the design is slightly different.  If you’ve visited the website on your smartphone you will have most certainly noticed the difference.  Gone is the cumbersome mobile theme, replaced by a new ‘responsive’ layout.  The website now automatically resizes to virtually any screen resolution so that it works on any computer, laptop, tablet or smartphone flawlessly.

Jobs Board temporary fix

We’ve had a couple of enquiries regarding the jobs board not being able to list more than 10 jobs due to a second page error.  The problem has been rectified temporarily until we find a permanent fix; the jobs board will now list every job on 1 page.

Rising costs of living the main trigger into debt

Half of those with debt concerns now blame rising costs of living above traditional reasons such as job loss or the end of a relationship for pushing them into debt. Research by insolvency trade body R3 revealed the next trigger was loss of employment, cited by one in five (20%) of respondents followed by paying for non-essential items, such as a holiday (17%).

R3 President Lee Manning comments:

“In the past those worried about their debt spoke of one-off events that happened to them, such as losing their job or partner or something they did such as paying for an expensive holiday being the cause. Nowadays, rising living costs and wages failing to keep up is a reason alone, and the prolonged effects of this squeeze are taking their toll on the nation’s finances.”

Today’s picture is no brighter for those with specific debt obligations – nearly half of those (46%) with a payday loan had prioritised paying back the loan over buying food, and 62% paying back the loan over buying clothes for themselves or family members.

Lee Manning continues:

“According to the providers, payday loans were created as one-off fix to a financial shortfall, but in reality leave some unable to buy clothes for their family or even buy food. These findings illustrate that while these loans are convenient and quick to access, paying them back can be a much greater slog. I would question whether the loan was right in the first place if repaying it means someone has to prioritise that over food.

Of those who currently pay for childcare, 33% have at some stage had to use their savings, and 24% their overdraft to meet these costs.

“The crippling costs of childcare are well reported: this research shows us that of those who currently pay for childcare, many are dipping into savings or an overdraft. In addition, 17% of respondents use loans from friends and family, or credit cards, to meet these costs. It is clear that paying for childcare is proving a real struggle.”

Looking ahead, there is a change of mood. For the first time since July 2010, more think their financial situation will improve (21% of respondents) than worsen (18%) in the next six months.

Lee Manning concludes:

“Signs of optimism are clearly to be welcomed, and many have tailored their budgets to suit their circumstances by now. I remain concerned for those on the extremities of the debt landscape, those with no savings or saddled with high cost loans, and would urge this group to consider all their options, including speaking to a professional.”

Submitted by R3

R3 comments on Q4 Insolvency Service Statistics

Personal Insolvency levels fall

“Total individual insolvencies in 2012 are down 8% from 2011 figures, while bankruptcy orders have fallen 24% year on year which is encouraging, however this should not be taken as an indication that people are prosperous and financially secure. There remains a vast majority of individuals who are still struggling with their personal finances. This is evidenced by consumer spending falling as people continue to prioritize paying down their debt.

“Individuals typically petition for bankruptcy because of credit card and bank debt that they cannot repay however in recent times we have seen more manageable repayment plans put in place by lenders. This has allowed indebted individuals to pay off their debts over a longer period of time instead of entering formal insolvency. If lenders were to become more aggressive in their pursuit of debts owed it is likely that we will see more individuals becoming insolvent.

“Stagnating wages and rising living costs continue to push household budgets to breaking point, causing debt concern to be rife amongst the UK population. R3 research shows that six in ten (59%) worry about their current levels of debt, while nearly half of the British population (47%) struggle to make it to payday each month, with rising food and fuel costs being the main reasons behind their struggle. Of those who struggle to payday, 67 per cent blame rising food costs while 58 per cent blame rising fuel costs for this.

“In addition, many other people, outside of these official figures, are likely to be in an informal insolvency procedure such a debt management plan or have resorted to taking out a payday loan to make ends meet. R3’s research has revealed 5 million adults say they are likely to seek a payday loan in the next six months; an increase on 3.5 million adults at the end of 2011.”

Decreasing levels of corporate insolvency

“Following the shrinking economic output in the latest GDP figures, and fears of a triple dip recession, today’s drop in corporate insolvencies is a welcome sign. Year on year, the total number of Company Liquidations in 2012 has fallen 4% from 2011, and administrations are down 12%. Corporate insolvency rates remain historically low, especially when contrasted with previous recessions.

“However, these figures do not take into account the size and impact of the businesses that fall into insolvency. In 2012 we saw some high profile retail casualties including Comet, La Senza, Game and Clinton Cards. The biggest 12 retail insolvencies accounted for over 1,700 store closures and 26,500 jobs. That is over a fifth of the total redundancies resulting from insolvency in a year.

“R3 research shows there are now 160,000 zombie businesses in the UK, that is businesses only able to pay the interest on their debt but not the debt itself. Zombie businesses have remained in distress for some time, they are unable to invest or expand, but are nonetheless being kept alive by lenient creditors and low interest rates. Whilst low insolvency rates are good for employment, this stagnation does tie up capital that could be used for other, healthier businesses. We may need to have an honest and realistic assessment of when resuscitation of zombies is impossible, and take action accordingly if we are going to secure long-term growth.”

Lee Manning, R3 President

Submitted by R3

Basic bank account lifeline extended to bankrupts

Insolvency trade body R3 welcomes the news that undischarged bankrupts should find it easier to access a high street bank account – currently there is only one mainstream provider offering them. This move comes as research by R3 reveals 79% of the British population agreed that undischarged bankrupts should have access to a basic bank account.

Today Business Minister Jo Swinson agreed legislative changes to the Insolvency Act 1986, which will restrict the circumstances in which a trustee in a bankruptcy can make a claim against a bank.

R3 President Lee Manning commented:

“This is a positive move, and recognises that there is life after bankruptcy. Quite simply bank accounts are a necessity not a luxury – imagine trying to run your life without one. In the past undischarged bankrupts would have found it impossible to pay in wages or pay out bills easily.

“Furthermore, making this change through law rather than by a voluntary code or guidance ensures that the insolvency practitioner’s statutory duties remain clear, and there will be no conflict with their duty to recover funds for creditors. Currently, the banks are worried that a trustee in bankruptcy could claim compensation from the banks where funds have passed through a bankrupt’s account. This perceived risk has put off banks from offering even a basic account to undischarged bankrupts.

“We hope this solution will ensure the banks now offer this lifeline to undischarged bankrupts simply trying to get their finances back on track.”

Submitted by R3

Debt Advisor: “Insolvencies could be five times higher”

Figures published today by the Insolvency Service show that company liquidations in England and Wales in the third quarter of this year were down 2.8% on the previous quarter and down 6.6% on the same quarter in 2011. Personal insolvencies dropped in the third quarter 2012 to 28,062 and were 7.2% less than the same period 12 months ago.

Bev Budsworth, managing director of multi award-winning The Debt Advisor said: “It’s good to see that today’s corporate insolvency figures are down but they really don’t tell the whole story – we know from previous experience that for every one of today’s statistics, there are bound to be at least four or even five companies with no assets or cash to fund the liquidation process who will simply be struck off for failure to file their accounts.”

Wading through treacle

“These companies are effectively ‘wading through treacle’ at the moment – faced with so many urgent issues, they are completely paralysed to respond. Given enough time and inaction, these so-called ‘Zombie companies’, maybe as many as 20,000 a year, will eventually go to the wall in effective silence, unable to afford the liquidation process.

“I believe that today’s figures mask the true problem and the reality is that level of corporate insolvency could be up to five times higher.”

Bev’s comments come at a time of intense pressure on companies who are trying to keep themselves solvent. Although recent GDP figures painted a more optimistic future for the country, the level of output in the third quarter of this year was almost exactly the same as it had been in the third quarter of 2011, therefore, remaining relatively flat.

“We continue to see proof that it’s the smaller businesses that are failing,” added Budsworth. “According to Experian, over 44% of corporate insolvencies in September were smaller businesses – between one and ten employees. In our experience, while the sluggish economy is certainly not helping, there are other ‘human’ factors including shareholder or director disputes, poor management or just naivety that have ultimately led to their downfall.”

Nightmare on the High Street

Bev continued: “It continues to be tough for High Street retailers despite a recent rise in retail sales. Sales in September were up around 2.5% on the same month in 2011 and 0.6% up on August 2012 figures, with the Olympics cited as a reason people put off clothing purchases.”

“The real problem we are seeing now is the type of retailers going under. We are seeing more and more insolvencies in larger retailers, those with multiple outlets, affecting many staff.

“Yesterday’s announcement that electrical retail giant Comet will be placed into administration next week reminds us that regardless of whether we are out of a recession, we are certainly not out of the woods yet with this being the biggest casualty of the High Street since Woolworths in 2008. Up to 6,500 jobs and 240 stores are now at risk at the retailer that has been established for nearly 90 years.

“Earlier in the week, Home Retail Group also announced plans to shut or relocate 75 of its Argos stores in the next five years, with 10 stores due to close before the end of the year.”

Bev’s comments are echoed in a recent retail report from PwC and Local Data Company. The report found that as many as 20 stores a day closed throughout the first half of the year. This figure rose to 32 closures per day throughout July and August.

Over expansion was blamed for the closures, with toy shops, clothes shops, jewellers and furniture stores making up the bulk of those shutting their doors and coffee shops, discount stores, bookmakers and charity shops bucking the trend.

The big squeeze

“Today’s figures for personal insolvency were down – which is good news and also good to see that more people had opted for an Individual Voluntary Arrangements (IVA). However, our whole economy remains extremely fragile with insolvency in general showing no dramatic reduction,” said Budsworth.

“We are now officially out of a recession and unemployment continues to decline. However, the big squeeze on people’s finances continues. Only this week, KPMG reported that one in five people, that’s nearly five million people across the UK, failed to earn the living wage – a wage that enabled a basic standard of living.

“This is a real problem; with energy prices on the rise again, fuel poverty will again hit the headlines this winter as many more people struggle to pay their bills. Add to this the fact that more and more companies are downsizing to improve the bottom line, it could really shape up to be a bleak winter for many.”

Today’s personal insolvency figures cover formal insolvency plans such as IVAs, bankruptcies and Debt Relief Orders (DROs).

Bev continued: “The figures don’t tell the real story. For every 9,000 people that choose a formal insolvency plan each month, around 15,000 opt for an informal debt management plan.”

Debt management plans are often preferred as a ‘softer’ option to the IVA and while they can be in the short term, for longer term debt, interest may continue to accrue and creditors are not stopped from taking action.

“Worse still, we are seeing more and more people coming to us after taking out payday loans which they can no longer afford. These types of loans are easy to obtain but notoriously difficult to pay off with APRs often over 4,000%.

“Resorting to pay day loans when you are already in debt just adds to the misery. These loan companies are not the most patient if you cannot pay back the loan – and the added pressure can often seriously affect your wellbeing.”

Bev concluded: “If you are unable to afford your commitments, there are a number of formal and informal plans that enable you to work with your creditors and repay your debts at a level you can afford.”

The figures from the Insolvency Service consisted of 12,668 Individual Voluntary Arrangements, a decrease of 2.9% on the corresponding quarter in 2011, 7,617 bankruptcies, representing a decrease of 20.5% on the corresponding quarter of 2011 and 7,777 Debt Relief Orders, up 2.3% on the corresponding quarter in 2011.

Submitted by Good Relations North

Corporate insolvency levels fall

“The drop in corporate insolvency numbers is reassuring, especially as it comes after last week’s upbeat GDP figures, showing that Britain exited recession in the third quarter.

“Whilst this decrease in corporate insolvencies is to be welcomed, there are many other businesses stagnating – being kept alive by the forbearance of banks, rather than being shut down as they would have been during previous recessions. Our research shows 146,000 businesses are in fact ‘zombies’, whereby at best they are able to pay the interest on their debts but not reduce the debt itself. Whilst there is always a population of businesses that are treading water, there has been an increase in the number of businesses that are doing so and subsequently delaying their collapse.

“Some of these businesses have been ‘running on empty’ for quite some time now, and with no reserves left in the tank, they may not be able to carry on for much longer. The ‘zombie’ phenomenon is exemplified by the increasing time larger businesses are undergoing a bank led “workout” as funding structures have become far more complicated – it is taking businesses longer to either recover or enter formal insolvency.

“If growth continues, as the latest retail sales and GDP figures suggest, many of these zombie businesses may face closure. We would urge these businesses to seek professional advice in order to lift them out of the ‘zombie zone’, enabling them to withstand unfavourable changes in circumstances and eventually take advantage of growth when it happens.”

Personal insolvency increases quarter on quarter but down from this time last year

“It comes as little surprise that we have seen increases in personal insolvency levels this quarter, as a sizeable proportion of the population have been struggling with their personal finances for quite some time. It appears for some their debt has spiraled out of control, forcing them into insolvency.

“More worryingly is these official figure only paint a partial picture, many others are likely to be in an informal insolvency procedure such a debt management plan or have resorted to taking out a payday loan to make ends meet. R3’s research, conducted by Comres, in July revealed that 4 million adults said they are likely to seek a payday loan in the next six months.

“Debt concern is also rife amongst the UK population. Research by R3 indicates that over half the population (54%) worry about their current levels of debt, while 51% struggle to make it to payday each month, especially in the 35-44 age group (average of 68%).

“This debt concern may be compounded over the next few months with additional pressures being applied to the purse strings through energy price hikes and Christmas; these seasonal expenditures are likely to be reflected in the next quarter’s personal insolvency figures which may see a further rise.”

Lee Manning, R3 president

Submitted by R3