TaxPersonal TaxThe stigma of failure lingers on

The stigma of failure lingers on

Peter Mandelson was keen to adopt the US attitude to going bust. But, as Peter Williams reports, his replacement at the DTI is in no hurry to make changes to insolvency law

As Peter Mandelson, the former Secretary of State for Trade and Industry, was packing up removal boxes in the Notting Hill home which caused his downfall, his successor at the DTI was quietly packing away Mandelson’s plans for a new rescue culture in the UK.

In early June, Stephen Byers decided that there would not be parliamentary time to change the law on insolvency to give Company Voluntary Arrangements (CVAs) a better chance.

The idea of beefing up rescue procedures was one of two Mandelson ideas based on his enthusiasm for the US attitude to the entrepreneur who goes bust. Before he had to pay back his own personal creditors, Mandelson last autumn set off for the US. He returned determined to ’emulate the successful formula of US dynamism and enterprise’.

At the time, he said: ‘We must tackle the stigma of failure. In the US, some of the most successful entrepreneurs are those who have failed once or twice. Banks and society as a whole don’t write people off, they see them as people who have learned, people who are worth backing again.’

As a result, he ordered two reviews: one looking at corporate rescue procedures, including the position of the Crown as a creditor; and the other on whether the law could be changed to reduce the stigma of financial failure.

The review on how to reduce stigma was an internal DTI report, which has been sitting on the desk of Kim Howells, the Competition and Consumer Affairs minister, since the end of April. There is no word on when it is likely to leave that desk and what will happen to it. The review into the legal aspects of the rescue mechanism is in the hands of a joint DTI/Treasury working party and, according to a DTI spokesman, is due to report later this year. An interim report is promised in the summer. One idea to emerge, however, is a moratorium on creditors taking action on companies in financial difficulty. The working party is arguing that a breathing space would give fundamentally sound businesses a chance to get a viable plan in place.

At the time the reviews were initiated, Mandelson’s suggestions were given a cautious welcome by the insolvency profession. Murdoch McKillop, then president of the Society of Practitioners of Insolvency, which represents 95% of the insolvency industry, says: ‘It must be right to encourage enterprise and ‘serial’ entrepreneurs. Nevertheless, limited liability is a privilege that should only be extended to those that play by the accepted rules.

‘We must always remember that serial entrepreneurs are usually risking other people’s money – which is fine; risk and failure are part of business life – but people need to act responsibly and there should be penalties for those directors and entrepreneurs who act irresponsibly.’

The SPI did give a more enthusiastic welcome to reconsidering the position of the Crown as a preferential creditor. However, even if trade creditors find that they no longer have to stand in a queue behind preferential creditors – the Inland Revenue and Customs & Excise – the bank is bound to retain its privileged position as a secured creditor.

As John Davies, secretary to ACCA’s business law committee, says, ‘if banks were to lose their position they would stop lending’ – a move that would strangle British business.

Even the Forum for Private Business recognises that banks are different. Nick Goulding, policy director of the Forum, says: ‘We’re not against banks having charges. There is a good reason why security is important, especially for those who are lending money. We don’t want to make it harder for businesses to obtain finance.’

Jackie Stephenson, an SPI council member and head of corporate recovery and insolvency in London for Mazars Neville Russell, points out that the banks’ ability to secure a fixed charge was unsuccessfully challenged in the Siebe-Gorman case 20 years ago. She says: ‘It would be very difficult (even if you wanted to) to remove the right to grant a mortgage and give a fixed charge on book debts.’

However, as John Alexander, head of insolvency at Pannell Kerr Forster, suggests, the government could do a deal with the banks where the banks forego the floating charge in exchange for the government losing its preferential status.

Such a move sounds neat, but there are disadvantages. Alexander says: ‘It would transform at a stroke the way that companies obtain their finance. At the moment, there is a very heavy bias towards the overdraft which is flexible. Before such a move, there would have to be wide consultation.’ But there is one change which the Forum is calling for. Goulding says: ‘We think that banks should have responsibility for their own costs. At the moment, receivers’ fees are effectively paid out of the ailing company’s funds.

If banks had to foot the insolvency practitioner’s bill, Goulding argues that not only would there be more cash available to other creditors, but the banks would have a powerful incentive to control the cost of the receiver, and the interests of this powerful creditor would be more closely aligned with those of the unsecured creditor.

Whether such a change happens remains to be seen. However, the position of preferential creditors is much more likely to change first. Groups representing industry and commerce are unanimous.

ACCA’s Davies says: ‘From the point of view of the unsecured creditor, it would be a very good thing if preferential creditor status were to go. The Revenue and Customs have first stab after secured creditors, which usually means that trade creditors lose everything.’ Richard Baron, deputy technical director at the Institute of Directors, is also keen on the idea of government creditors ranking alongside other trade creditors.

And Goulding says: ‘The position of unsecured creditors has always been our biggest concern. The rules are too tilted against the unsecured creditor. The government should take a broader view of the damage done to the economy of companies going into insolvency procedures. It would be much better to leave the decision on these matters in the hands of private creditors who are, after all, dealing with their own money.’ On the other hand, insolvency practitioners can see why the government has kept its privileged position.

Stephenson says: ‘If you are facing cash flow difficulties, it is very tempting to allow VAT and PAYE to slip into arrears. Over the years, Customs and the Revenue have become better at chasing the debts. They now have targets but, particularly within a group of companies, it is still possible to build up arrears of six months.’

But the government agencies are still perceived as being too willing to sacrifice sound businesses in order to safeguard their pound of flesh. As Dom-enic Sidonio, insolvency service manager at Euler Trade Indemnity, says: ‘Customs in particular aggressively forces companies under when they are unable to pay their VAT bill due to temporary cash flow problems.’

But, as Sidonio also points out, non-payment of VAT is often the first sign of trouble and a more relaxed stance could just be storing up trouble. Mandelson’s brief sojourn at the DTI promised much on insolvency. What is actually delivered remains to be seen.

There are several factors reducing the chances of real reform: the relatively benign state of the economy suggests insolvency is unlikely to become a political issue; the current politicians behind the ministerial desk at the DTI do not appear to share Mandelson’s vision for changing the British culture on going bust; and it’s hard to see the Treasury willingly relinquishing its statutory right to jump the queue. Radical insolvency reform may have to wait.


There was no great outcry when insolvency practitioners learned the idea of a 28-day moratorium was being dropped – for the time being at least. Introduced by the Insolvency Act 1986, Company Voluntary Arrangements (CVAs) were the last attempt to bring a little US culture into UK insolvency procedures.

A voluntary arrangement for a company is a procedure where a plan of reorganisation or ‘composition’ in satisfaction of its debts is put forward to creditors and shareholders. There is limited involvement by the Court and the scheme is under the control of a supervisor.

CVAs have never taken off in the UK, compared with the Chapter 11 procedure in the US, although there are signs they are growing in popularity. According to the SPI, CVAs accounted for 19% of all insolvencies in 1998, compared with just 1.2% in 1990.

One of the reasons that CVAs have struggled is because creditors often take their own legal action to recover the monies owed before the company can work out and propose a voluntary arrangement.

Stephenson says: ‘Debtor-led legislation would inevitably lead to some relaxing of the CVA requirements. At the moment, Revenue authorities vote down most proposals and they are not going to be keen on any change to that position.’

Latest figures from SPI suggest the 28-day breather may not make much difference. In its eighth annual survey, 90% of insolvency practitioners said that a negotiated compromise would not have provided a realistic chance of survival, even if creditor action could have been held up for a while.

Richard Baron from the IoD warns that any changes to the CVA rules would have to be carefully implemented. He says: ‘You can see the reason behind the idea of a 28-day moratorium, but you would have to be careful that funds or assets didn’t leak out of the company during that time.’ Imagine the fury of other creditors, if it emerged that money had been paid to a connected company while the troubled organisation was supposedly sorting out a rescue plan.

It is this lack of trust which has been one of the main hindrances to the development of the CVA.

It is the Crown creditors, according to insolvency practitioners, who are often the most reluctant to agree to a CVA. Stephenson says: ‘A lot of creditors do not want to leave the existing directors in place. In particular, we find the Revenue and Customs are opposed to the idea.

‘The supervisor is not in control in the same sense that a liquidator is.

So, if anyone feels that the directors have not been up front with them or have tried to rip them off, then they don’t want to know.’

Peter Williams is a freelance journalist

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