THE Scottish Government has seriously underestimated how many people would take advantage of its new bankruptcy rules.
New legislation brought into effect on 1 April last year enables those classed as low-income, low-asset debtors (LILA) debtors to petition for their own bankruptcy. In the past, creditors showed little appetite for legal action against those owing relatively small sums and with few if any assets to their name. Unable to petition for their own bankruptcies, such debtors had insufficient means to pay off their dues and could only watch as the interest on outstanding credit rolled up.

Now, the law allows individuals in this position actively to petition for insolvency and escape a debt trap that would otherwise ensnare them indefinitely.

Initially, the government predicted that LILA bankruptcies in the first year would be as low as 2,000, although it has since upgraded the forecast to between 3,500 and 6,500. Unfortunately, it seems unlikely that the total number of LILA bankruptcies will fall within the 6,500 upper limit forecast for the year, given the insolvency figures recently published by the Accountant in Bankruptcy (AIB).

In the first three months from 1 April 2008 there were 1,709 LILA debtor applications. In the following quarter the figure jumped by 62 per cent to 2,773, making a total of 4,482. Even if the next six months only return the same number of applications, which would appear highly unlikely given the increases in unemployment, that would make a grand total of 8,964 LILA applications for the year.

This is 2,464 above the top estimate of 6,500 and given the numbers involved, it seems unhelpful that the government's review into LILAs, which had access to the latest AIB insolvency figures, is so sanguine over the number of bankruptcies it expects to see from this channel.

Why is this so important? In the first instance, it is worrying that the government is apparently in denial over the extent of the problems faced by those struggling with debt. If we are to deal effectively with the problems that lie ahead, then factually sound and incisive analysis of the figures is a must. There is also a huge cost to be borne by the Scottish economy, given the amount of debt that is being written off through LILA bankruptcies. The average debt in such cases is £17,288 and in light of the 2,464 cases that are due to come in over and above what has been publicly estimated, there will be a further £42.6 million of debt to write off.

History has shown us that failing to confront a problem simply leaves us with a bigger one to deal with tomorrow and it would be much better to be realistic about the size of the financial commitment we are going to have to make as a nation if the new LILA rules are to be kept in place.

Equally, let's not scrap the legislation and heap more misery on those who can least afford it.

Instead, we need a frank and accurate appraisal of the data so that we can deal effectively with what is coming our way.

For those facing debt, seeking independent, professional advice as early as possible will help then stave off bankruptcy, whether brought on voluntarily or not.


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A Derbyshire travel firm has gone into voluntary liquidation but holidaymakers have been told most of them will get their money back.

Draycott-based Winter Sunshine Holidays (WSH) ceased trading after 20 years.

One woman said her mother had arrived in Spain only to be told she had to pay £800 to stay in a hotel because WSH had not paid for the accommodation.

A spokesman for the liquidators said the company had set up a trust fund and most people would get a refund.

Elena Gallagher told the BBC her mother found out about the company's problems only when she arrived in Spain.

"The hotel manager told her that WSH Travel had not paid for the accommodation and the only way that they could stay there would be to pay £800.

"She was panicking how to pay for it but she did have her debit card with her. She had no choice really or there was nowhere to stay."

Bob Young from liquidators Begbies Traynor said: "Those who've paid on a credit card will get all their money back from their credit card provider.

"Those who paid by debit card or cheque will get most of their money back from this trust fund, so even thought the company's going into liquidation, steps have been taken to protect holidaymakers.


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Four out of five UK suppliers may have to write off unpaid debt due to “ineffectual” new rules governing so-called “revolving-door” administrations, according to the country’s largest credit insurance broker.

Aon is calling for change in legislation to give unpaid suppliers of collapsed companies the opportunity to seek recourse before a pre-pack deal - sometimes known as a “revolving door” administration - is drawn up. The pre-pack process - which lines a buyer up before an insolvency technically occurs - has been surrounded by controversy as they have been accused of leaving creditors out of pocket.

In a pre-pack deal, a collapsed company can be sold on without its liabilities, leaving creditors such as HM Revenue and Customs, suppliers and landlords stranded with unpaid invoices on their hands.

They have also come under fire as a way for the management which oversaw the downfall of the company to buy back the collapsed business minus the debts attached - often in a rapidly-executed deal behind closed doors.

Pre-packs have become increasingly popular as the downturn bites - the Insolvency Service recently forecast at least 100 pre-pack administrations every month - and firms such as USC, Whittards of Chelsea and The Officers Club have opted for the process in the last few weeks.

Currently there is no legal obligation for administrators of pre-packs to involve suppliers of the failed business in creditors meetings.

But January 1 saw the introduction of new rules, called Statement of Insolvency Practice 16 (“SIP 16”) rules, which aimed to increase transparency by requiring administrators to release full details of the pre-pack to all creditors.

Under the new rules administrators should provide creditors with the reason a pre-pack deal was chosen and any links the new owners had with the previous management team as well as the price paid. But Aon said this was unlikely to happen before the insolvency has taken place and is calling for a review of the controversial insolvency legislation to give creditors a greater say.

Aon Trade Credit director James Bowker said: “The new insolvency rules don’t go far enough and legislation must be reviewed to support the UK supplier. Often the first knowledge the supplier has of the pre-pack is when the new owners contact them to discuss new supply arrangements – the ultimate indignity being that there is no recourse to the new company in respect of debt attaching to the old company.”

But many insolvency practitioners believe pre-packs offer the only hope of stability for a collapsed company and the best way to preserve jobs.

James Martin, Midlands chair of insolvency trade body R3 and partner at the Birmingham office of Begbies Traynor, defended pre-packs, saying suppliers’ losses were not due to the administration process but are down to the fact a company had failed.

He said: “A loss is caused by the failure of their customer, against which they will of course seek to defend themselves, but for the moment this is on the increase. The pre-pack is an increasingly useful way of trying to preserve businesses.”

“Independent research has shown that pre-packs perform better than business sales in preserving employment – in 90 per cent of such cases, 100 per cent of jobs are saved.”

A committee of MPs is set to consider plans to reform administration processes with Peter Luff, Tory chairman of the Department for Business, Enterprise & Regulatory Reform committee planning to use an inquiry into the operations of the Insolvency Service as an opportunity to examine the practice of pre-packs.

Insolvency Service chief executive Stephen Speed is due to be questioned about potential abuses of the system and his proposals for changes when he appears before MPs on January 27. The number of company collapses in England and Wales has snowballed in the past year, with 1,006 companies in administration in the third quarter of 2008.


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CANADA – Quebec employment minister Sam Hamad has proposed legal measures to guarantee pension benefits to pensioners and workers whose schemes go bust as a result of the financial crisis.

The bill, which the minister tabled at the Quebec National Assembly, applies to 950 defined benefit (DB) corporate plans, which group one million participants and beneficiaries and have C$98bn (US$79bn) of assets under management.

Public employees’ retirement plans, as well as certain corporate plans subject to federal provisions, will be excluded.

Under the proposal, the Quebec Pension Plan - the compulsory public insurance plan – would take over the management of insolvent pension plans and guarantee payments to entitled members of the scheme.

Hamad said: “We are offering an advantageous option to pensioners: guarantee their benefits and possibly improve them by having the Quebec Pension Plan managing schemes’ assets if a company goes bankrupt. All investments will be managed prudently.”

In addition, Quebec companies will have 10 years instead of five to make up for their total solvency liabilities. They will also be able to smooth over a period of maximum five years the assets of the plan, in order to spread out the losses on their investments.


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The Business and Enterprise Regulatory Reform (BERR) committee is launching an investigation into the way failed businesses are being put into "pre-pack" – where a buyer is lined up before they go into administration – amid allegations that the practice enables them to escape debts and creditors.

Creditors have voiced concern about the steady trickle of businesses involved in what is described as "revolving door" administration by critics and a "legitimate process" by the failed operations.

Retailers such as Whittard, USC and The Officers' Club are among the more prominent business failures pre-packaged for administration in recent weeks.

Sir Tom Hunter's West Coast Capital group immediately bought back USC after the business went into administration. The deal caused a stir but a spokesman for the Scottish billionaire said yesterday the arrangement had saved jobs without producing protests from creditors.

He added: "We used a legitimate scheme to rescue as many jobs and stores as possible. The alternative was closure of the entire business, losing 1,427 jobs, leaving suppliers and landlords with effectively nothing.

"USC's largest creditor was West Coast Capital. That, I hope, speaks for itself, as does the fact we are working very well with all our suppliers going forward and have received not one complaint from them."

Peter Luff, Tory chairman of the BERR committee, plans to use an inquiry into the operations of the Insolvency Service as a platform to examine the administration system and the pre-packaged practice. Stephen Speed, head of the Insolvency Service, will be questioned about whether the scheme is being abused and asked if changes are needed when he appears before MPs on January 27.

Business advisers, creditors and other groups are being invited by Mr Luff to submit their views. He said yesterday: "We may well expand the inquiry."

• Lord Mandelson, the Business Secretary, is expected to come under pressure from Labour members of the committee to give more details of the planned part-privatisation of Royal Mail when he appears before MPs on Wednesday.



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The company behind the controversial Lapland New Forest Christmas theme park is to go into liquidation.

The move, by the company's director Victor Mears, from Brighton, means that thousands of people may not get a refund for their tickets for the park dubbed a “winter blunderland”.

People paid up to £30 each to visit the site on the Hampshire-Dorset border which promised to be a snow-covered winter wonderland.

But families arrived to find a few sickly-looking animals and a fairground in a muddy field where customers queued for hours to pay £10 to see a Santa who lifted his beard to wipe his mouth while bewildered children sat on his knee.

The park shut after more than 5,000 people complained to Trading Standards about the “attraction”.

Ivan Hancock, Dorset Trading Standards divisional manager, said: "Members of the accounting and consulting firm Grant Thornton UK LLP have met with Victor Mears.

"Mr Mears has asked Grant Thornton to take steps to place his company into creditors' voluntary liquidation (effectively close down the company and handle any claims).

"We understand that two partners at Grant Thornton will be appointed as joint liquidators in due course.

"Once they have control of the company, customers will have the opportunity to lodge a claim against Lapland New Forest Limited."



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The last Woolworths stores closed their doors yesterday as just one of a series of massive businesses collapsing in the economic slowdown. Peter McCusker discovers what choices are available to struggling businesses

LAST year saw company after company going into administration in a last ditch effort to sell their business as cash-flow was hit by the looming recession. But experts fear 2009 will see many more businesses going directly into liquidation.

In 2008 the number of companies described as being distressed more than doubled as directors struggled to find ways to meet debt repayments and battle against falling sales.

The latest figures available show that, here in the North East, the number of companies going into administration has risen by 50% year-on-year.

With the country heading into recession, and cash and confidence draining out of the economy, more managing directors are expected to choose liquidation in 2009, accepting there is no way of securing their company’s future.

Simon Lundy, of the Newcastle office of insolvency experts Begbies Traynor, has worked in business recovery for over 30 years and says this is the worst economic situation he has witnessed.

“We are heading into a severe recession. This is far different to any other recessions I have witnessed. The problems with the banks and bank lending is something which we have not experienced before.

“In many cases there is not going to be the chance for companies to carve up their business. In many cases there is little or no confidence in the future as consumers have stopped spending.

“Then, even if the company is confident, it also has the problem of securing funding from the banks and that route does not seem to be available either.

“In many cases companies are going to be left with just one choice, and that choice is to close the business down.”

Here in the North East there have been a number of high-profile administrations in recent months including Newcastle-based Arctic Windows and the Officers Club, the Cramlington-based clothing retail chain.

In the case of the Officers Club a new company was formed out of the remnants of the old one by the same management team. This so-called pre-packed administration allows directors to jettison loss-making parts of a business, along with its debts, while almost immediately setting up a new one to take over the profitable operations.

Mr Lundy said in many cases such moves are the only viable alternatives. “It is better than closing the business down. It means there is still a business there and the new company will be preserving jobs. In the long run it may even be better for the creditors.”

Mr Lundy said new rules which came into force on January 1 legislate for administrators to provide greater disclosure on what steps have been made to sell the business, or restructure its operations. He said he had not yet had any complaints from any creditors as a result of a businesses being reborn in a new form.

Colin Stratton, the regional chairman of the Federation of Small Businesses, likewise said he had not yet been approached by any of his members with similar concerns.

He said: “Cashflow is vitally important at a time like this and I expect to see many of members turning to factoring organisations in the coming months.

“Factoring companies are popular as they charge a premium for chasing the recipient companies for payment while guaranteeing the cash to the supplier.”

Begbies tend to work with SMEs employing between 20 and 200 people, with a turnover of between £10m and £15m, and Mr Lundy says it is hard to find any sector that is not affected by the downturn.

Mr Lundy added: “There is a general lack of confidence across the whole economy and no-one knows what is going to happen, just how bad it is going to get.”

Alan Kelly, a partner at Tait Walker accountants in Gosforth, believes the problems in the economy are set to last until well into 2011.

He said: “We are witnessing increased volumes of businesses with problems, and with the economic situation set to deteriorate further, we have not seen the worst of it yet.

“Administrations allow viable businesses to start again. There is still money available and there is still some appetite in the market for asset-based lending.”

One of the problems administrators are having, which is exacerbating the problem of selling the businesses, are the difficulty of determining the value of assets.

Mr Lundy recalls how he was unable to even to get a second-hand furniture company to come and collect, free of charge, office chairs, tables and equipment from a business which recently went under.

Mark Firmin, a restructuring partner at KPMG in Newcastle, has been leading the firm’s restructuring in the region for the last two years.

Last year he handled the administration of stock-market listed Sunderland company ScS and its subsequent sale to private equity firm Sun European Partners.

He said: “It’s a fact that we have entered difficult times but there are a number of steps management can and should take to address the double whammy of a tightening of both lending and spending.

“Given we’ve all enjoyed 20 odd years of a benign economic environment, it’s understandable that some management teams will not necessarily have the skills to effectively steer their business through a downturn so calling in advisors who specialise in stabilising and turning around organisations makes a lot of sense.

“The worst thing a management team can do for their business is nothing. Sticking their head in the sand when the finances start looking tricky will only reduce the options available to them and any advisers they may bring in later, whereas a restructuring professional brought in at the first warning signs has several routes open to them for re organising the business.”



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