Well dependent upon the business within which you are engaged it may be the case as certain industries appear to encounter bad debts more than others. However the extent to which bad debts are a fact of your life will depend upon your attitude to extending credit to your customers.

For many of us we suffer bad debts without much thought until the debt really hurts or when we suspect misconduct by the party who has caused our loss.

However, it does seem that many of us trade with people at some point who appear incapable of distinguishing us from a bank. This is of course notwithstanding that very few of us have a banking licence. So why do some of our customers or clients treat us as if we have one?

It boils down to perceptions of what is normal business practice.

The problem arising from this (which can be poor credit management) is that we may get drawn into a cycle of acting like our customers, unless we have the cash flow to support an alternative approach. For many of us if our customers take 60 days instead of 30 to pay us then we may need 60 days to pay our suppliers. If this becomes a significant problem for us then we may get drawn into a cycle that could leave us without supplies to our business in the short term and even lead unintentionally in the longer term to wrongful trading should our business fail for any reason.

The question is - are customers who stretch our terms of credit worthwhile keeping? If you can afford to retain such customers because such trading is profitable then no doubt you may not be overly concerned. However, for many of us it is done because we are concerned to let the customer go elsewhere and lose their business. We sometimes overlook that the cost of a slower payer is not just the cost of the extra banking facility we need to support slow payers but also the time and costs associated with chasing such customers for money.

My message is chose your customers carefully. Spot those warning signs when slow payers first appear on your radar and take the appropriate action for the circumstances immediately not when it is too late.

The credit crunch hit us largely due to casino banking operations, over leveraging and speculation.

In the US, the sub prime property market collapsed due to the extensive lending to those who could not afford to sustain their mortgage payments.

The banks have been involved in the sale and purchase of over valued mortgage securities resulting from the over-valued property markets. This resulted in trading activities whereby banks obtained portfolios whose values were supported in some instances more by speculation rather than substance.

You only have to look back to the last bubble that burst to consider how substance matters far more than speculation in the longer term. The dotcom boom was a drop in the ocean compared to this credit crunch but it demonstrated how speculation is no substitute for substance. So many internet companies went to the wall once the demand for their websites simply was found not to be there and no income stream resulted.

The tragedy in this whole mess is that many of us have suffered due to the actions of a few bankers, whose bonuses packages encouraged short termism and excessive risk taking. In some instances this approach led to the acquisition and the trading of derivatives whose values were not even understood. The risks associated could not really be quantified in some instances.

The structure of banking risk / reward systems needs to change to prevent the re-emergence of casino banking which has not been eradicated notwithstanding the credit crunch and the recession. I believe that letting banks go bust would have been painful but bailing them out will also be and this approach now affords them the luxury of being able to do this again.

Indeed we could now be suffering the after effects for a generation. Had banks gone bust the banking culture would have needed to change rapidly and a return to more traditional banking practices reinstated with the emergence of a gap in the market for new banks to enter and compete.

 Sometimes it is necessary to be cruel to be kind. Bailing out the banks means we have taken the easier option. The pain will be spread far and wide for a very long period. No-one will escape punishment given the bailout. Surely those who caused the mess should be brought to book, stripped of their bonuses and prosecuted where appropriate?

Directors of owner managed businesses often draw money out of their companies, intending it to be remuneration without apparently realising the gamble they may have taken when things go wrong. The punt is that when remuneration is wrongly drawn they may at sometime in the future have to pay these drawings back to the company, for example on the request of a future Liquidator or some other successor.

The incorrect belief of many directors is that they have an absolute entitlement to the monies they draw from their companies. However, unless express provision has been made within the company’s Articles of Association for the directors to be remunerated, then the case of Guinness plc v Saunders [1990] 2 AC 663 evidences that they have no entitlement whatsoever to receive any salary at all.

It may seem harsh but the reality is in such circumstances where there is no express provision in the Articles, that the fruits of such a director’s labour can only be rewarded via their ability as shareholders to take dividends. Drawing dividends has its own issues as they are strictly subject to the existence of sufficient distributable reserves and implementation of the proper procedures for declaring the same.

Unfortunately for many directors the drawing of monies from a company during a financial year results in their loan account becoming overdrawn. Consequently the regrettable temptation to backdate a dividend to clear an overdrawn account can arise but also can lead to problems later as the same is ultra vires and not permitted. The case of First Global Media Group Limted v Larkin [2003] EWCA Civ 1765 demonstrates that directors cannot take monies in advance of dividend declarations and then later claim the drawings were in fact dividends.

So if you do want your trip to the roulette table to result in the banker winning all the time my recommendation is to ensure that you take professional advice on all matters of remuneration and be mindful of how you might draw the same. Certainly do not backdate dividends or documents to try to legitimise ultra vires acts. After all this is simply not your Saturday night punt on red or black, this is your livelihood.

Well as ever it depends!

It would be impractical in a blog such as this one to consider all the circumstances in which you could receive money from someone but to pick a few examples from an Insolvency Practitioner’s and Accountant’s perspective, the below will give you an idea of when it might not be such a straightforward matter.

If you are in receipt of a gift, the question is whether or not it really was a gift. The question of the intentions of the parties is at the heart of the matter and also the subsequent conduct of the parties following on from those intentions could be relevant to determination.

If it is a temporary gift then it might be a gift with reservation whereby for Inheritance Tax purposes the same ultimately could be taxable.

If you receive money from someone who has creditors snapping at their heals then your receipt of such a gift could be construed as a Transaction at an Undervalue and pursuant to Section 339 of the Insolvency Act  1986 you could be forced to hand the gift back, if the person from whom you received the gift subsequently went bankrupt.

Indeed likewise, if you are in receipt of monies from someone who is insolvent and if they are repaying money that you have lent to them and you are for example a family member, then this could be construed as a Preference. Pursuant to Section 340 of the Insolvency Act 1986 you could be forced to hand this money back.

Money received which originated from tainted assets, arising for example from unlawful acts can be clawed back under the Proceeds of Crime Act 2002.

If you receive money in circumstances under which you might fall within the definition of a regulated activity for the purpose of the The Financial Services and Markets Act 2000 then in light of Section 28 your agreement(s) might be unenforceable and you might have to hand the money back.

My message to you on this very wet Monday morning is to consider the circumstances under which you receive money. If you have any doubts whatsoever consider avoiding giving into the temptation of banking such monies.

For businesses cash is king. If you drained the blood out of your body, your cells would become starved of oxygen and they along with you would depart from this world. Cash is the lifeblood of any business and without it they cannot survive.

However, there is another side to cash which instead of being king, might for some be associated with corruption. Cash is a commodity capable of breeding suspicion.

Now I do not mean that any cash transaction is inherently suspicious, far from it, given it would be impractical to undertake all transactions electronically or by debit and credit card. Imagine turning up to buy the morning paper and saying to your local newsagent, do you take Mastercard – they’d rightly wonder what you were thinking.

However, it is the untraceable nature of many cash transactions which gives cash its unusual perception.

Remember Cash for Questions? Of course you do, its sticks out like a sore thumb. Brown envelopes allegedly given to Members of Parliament in exchange for questions. I have always wondered why brown envelopes are allegedly used to transfer cash between people. What is wrong with white ones?!

Does it however matter that cash can have this unhealthy perception. Well some of us would suggest that cash transactions above a certain level maybe inherently suspicious. For example whether or not as income all cash receipts in a business will be declared and taxed will be of concern to HRMC and those looking after the public purse.

Such cash transactions need to be carefully considered because if undeclared then the recipient is potentially opening themselves up to offences in light of the Proceeds of Crime Act 2002.

Furthermore, until the intended new Bribery Bill reaches the statute book, then the presumption of guilt set out in Section 2 of Prevention of Corruption Act 1916 still applies in relation to a person charged with corruption upon receipt of a cash gift. They will currently be unable to rely upon the presumption of innocence normally applicable to so-called fair trials.

So beware of cash!

The short is no, but why not?

In the majority of cases where an IVA is proposed to creditors by a debtor, it is more likely than not that the IVA will produce a better result for them when compared to bankruptcy.

IVAs are intended to be an option for a debtor to propose to his or her creditors, but creditors should not be obliged to accede to the proposal. They should not have their existing freedoms further restricted and consequently legislation currently does not obligate creditors to approve an IVA.

In seeking to strike a balance between what the majority of creditors wish for and what the legislation imposes on creditors, an IVA needs 75% of those creditors who vote to approve it. If any creditor objects to the proposal but cannot carry more than 25% of the vote then currently they are arguably disenfranchised.

Given it is creditors who are suffering loss under their contracts and not the debtor, should they not be able to decide whether or not they want to be bound by an IVA?

Why should a creditor who has entered into an independent agreement with a debtor be compelled to entertain a permanent write off of any portion of their debt to which they are entitled by virtue of the decisions of other creditors who have entered into different independent agreements. Well the answer to the question is because the Insolvency Act 1986 provides for this, but it is fair? Well what is fair is a matter of opinion, it is not a matter of fact.

My concern is that it is likely that there are a not insignificant number of debtors out there who submit proposals to creditors in circumstances where full and frank disclosure may not have been made but where nobody other than the debtor is aware of this position. In addition there maybe instances of asset transfers to defeat creditors, whereby property of the debtor prior to submission of an IVA proposal is transferred to be held on trust for the debtor unknown and not disclosed to creditors. This is capable of creating a misleading picture for creditors and can result in reduction of their entitlements.

I believe that the investigations conducted under an IVA regime given the same is heavily dependent upon the debtor’s disclosure of their affairs can result in some creditors getting a raw deal. Remember it is at the end of the day the “debtor’s” proposal.

I believe that there will be instances in which creditors would actually have enjoyed a better result if the debtor had been made bankrupt and this is because the investigatory powers available to a Trustee in Bankruptcy, usually will be far greater than those available to the Supervisor of an IVA.

It seems to me that given an IVA procedure could be said to be beneficial in terms of the freedoms afforded to a debtor over and above their creditors, that consequently we should be wary of circumstances where the statutory freedoms that creditors currently enjoy are further restricted and compel them to approve IVAs.

Many creditors are surprised that they receive little or nothing from the insolvency process when an individual goes bankrupt, into an IVA or a company goes into liquidation.

Whilst I have a great deal of sympathy for the position of creditors, I wonder how many creditors have asked themselves the question as to what they did to engage in the process. More often than not creditors leave matters to the insolvency practitioner (”IP”) and arguably hope for the best.

Whilst many creditors maybe unfamiliar with the process there is a great deal of information which they are given by the appointed IP and there is more online to review. 

Would they have instructed their own advisers in such a fashion or would they scruitinise their own advisers more closely? Admittedly the relationship between an IP and creditors is not contractual and an IP’s duty is to the general body of creditors, not to each one individually.

Creditors must remember that it is their money that is at stake and if the IP feels that no creditors have got an interest in the case or their priorities lie elsewhere then he or she may fulfil their duty but not go the extra mile. Unfortunately when misconduct is found and litigation is required to set aside transactions entered into to defeat creditors, the requirement for funding can result in creditors becoming disillusioned with the process. However, it is worth remembering that an IP is not obliged to place themself at risk for the purposes of enabling litigation to proceed.

An IP enters his role as a stranger, so unless creditors do engage and participate in the process to bring matters to the insolvency practitioner’s attention if there has been some misconduct by a debtor or a director, it is perfectly possible that the IP may not become aware of the same.

I would therefore strongly encourage as many creditors as possible to engage in the process and if you do not get the results that you are looking for then you can with the support of a majority of creditors remove and replace an IP if necessary.

Creditors are ultimately in control of the process and an IP is a servant of the creditors, not a slave.

I would like to hear from as many of you out there with your views on this matter. Be brave, tell me if you think an IP’s duty should go further and why.

It is the responsibility of a liquidator to realise and distribute company property upon appointment.

Property disclosed to a liquidator by the company’s directors, typically will be the physical assets, cash and debtors.

It is commonly overlooked that a company’s property is defined for example in Section 436 of the Insolvency Act 1986, extending to things in action and contingent assets having a degree of uncertainty.

It is not unknown for directors to fail to disclose company property to a liquidator. The Insolvency Act 1986 affords wide powers to assist a liquidator’s investigations into a company’s affairs and dealings and the pursuit of its property to maximise realisations for creditors.

A liquidator has office holder claims such as ability to correct so-called antecedent transactions, including but not limited to Transactions at an Undervalue (Section 238 of the Insolvency Act 1986) and Preferences (Section 238 of the Insolvency Act 1986). The same may come to light for example in instances where a director has transferred in anticipation of liquidation, assets to a new phoenix company. However, the same will remain part of the company’s property notwithstanding any conversion.

In addition, recoveries can be made where directors have been negligent in handling the company’s property, causing needless loss. The same may arise where a director allows his or her personal interests to conflict with their fiduciary duty to the company, to act bona fide at all times and in the best interests of the company. A liquidator is enabled under Section 212 of the Insolvency Act 1986, to seek relief by way of compensation from a director causing loss due to a breach of duty.

Claims capable of being brought via Sections 212, 238 or 239 of the Insolvency Act 1986, essentially are claims for relief seeking restitution to restore the company to the position that existed prior to any conversions by the directors.

Claims such as Wrongful Trading (Section 214 of the Insolvency Act 1986) and Fraudulent Trading (Section 213 of the Insolvency Act 1986) where applicable will also form part of the Company’s property available to a liquidator to realise via an action seeking relief by way of compensation from company directors for such mis-management. Unlike the above they are not part of the pre-liquidation property structure of the company per se, they relate to a period of trading and thereby are not usually individual transactions correctable via restitution.

For those of us who want to obtain information from a government department which maybe of interest to us, the word “Freedom” in the Freedom of Information Act 2000 (“the Act”) arguably might be a long way from our minds after engaging the Act’s procedures.

Whilst we are at liberty to apply for information held by government bodies, the ability to obtain the same is affected by the accompanying bureaucracy.

Part of the problem appears to stem from the safeguards within the Act involving items of information which are protected from disclosure. There are a whole host of exemptions under the Act, including but not limited to matters applicable to national security and commercial sensitivity.

However, I have experienced responses to requests where I might be forgiven for thinking that a standardised procedure of rejection on the grounds of commercial sensitivity resulted. In such instances, although the rejections were later overruled after internal review the question of whether the initial rejection should have ever occurred springs to mind.

Furthermore, you may find that if the cost of compliance with a request is deemed to be excessive in terms of time, then the same may be rejected.

In the first instance the government department has 20 working days to respond to the request. Frequently many requests lead to lengthier periods of time taken to respond, notwithstanding the mandatory nature of Section 10 of the Act. If a request is then rejected you would need to engage in an appeals process known as internal review, which itself can unhappily take many weeks to be completed. If your request is still rejected then the bureaucratic process takes you to the Information Commissioner’s Offices (“ICO”). Again many of us may have experienced a period of many further weeks before a substantive response is issued by the ICO.

In my experience, having undertaken a number of such requests in recent years the process is not assisted by first being assessed for relevance by the ICO and then once approved it would appear that the same is queued again for allocation to a case officer to determine the request.

Why can the same not be reviewed for compliance and determined upon intial receipt by the ICO without the need for a double queuing system? Well your guess is as good as mine and I am tempted to say that this is an example of bureaucracy at its best! You do need patience and persistence.

Even when your case goes to the ICO, you may not have your freedom of information request approved and a further lengthy process leading to the Information Tribunal may result. Of course that is if by now your patience has not run out altogether and your faith in the system extinguished.

It took a two year battle for the request for MPs expenses to be finalised and more recently it has been reported that the Labour MP, Gordon Prentice has been recently engaged in a three year campaign to obtain information from the Conservative Party about the tax status of one of its members. Is this Act really a Freedom of Information Act? Are our rights really safeguarded by the Act and its procedures? Have your say and share with me your experiences on this subject.

It would appear that many of us think that directors are automatically entitled to be remunerated for their time and trouble in running companies. This is not the case.

Directors are not entitled to remuneration as a matter of law or as a matter of equity.

No-one forces a director to hold office and consequently Article 4 of Schedule 1 of the Human Rights Act 1998 does not appear to enable a director to claim remuneration on grounds of for example enslavement.

Directors can be remunerated by the companies they oversee if the Articles of Association (“Articles”) make provision for the same. It is therefore a privilege not a right.

The Articles generally will provide for the directors to have an entitlement to remuneration. Indeed at Schedule 1 paragraph 19 of The Companies (Model Articles) Regulations 2008 laid down by the Secretary of State, provision to enable directors to be remunerated is made. However, Section 19 of the Companies Act 2006 affords members considerable discretion on adoption of these Model Articles and Section 21 of the Companies Act 2006 enables the members to amend the Articles.

Even if the Articles provide for directors to be remunerated, the Companies Act 2006 requires evidence of the same to be recorded and retained in writing. No doubt this is to demonstrate that the members have properly applied their minds to the question of directors remuneration.

The case of Guinness Plc v Saunders [1990] 2 AC 663 is a leading decision on directors remuneration and remains good law. This case demonstrates that without provision for directors to be remunerated in the Articles, that there is no entitlement for them to receive remuneration. The Guinness case demonstrates that the courts generally will not seek to overrule the Articles and impose reasonable remuneration on a quantum meruit basis on an implied contract.

This position is somewhat consistent with the case law on dividends as set out in Bairstow v Queen’s Moat Houses plc [2001] 2 BCLC 531, in which it was held that compliance with certain mandatory legal requirements such as the need for dividends to be drawn with reference to relevant accounts, is necessary before a dividend could be deemed intra vires.

In the Bairstow case, as in the Guiness one, it can be inferred that due to the mandatory nature of certain requirements in the Companies Act 2006, that the Duomatic principle as set out in Re Duomatic Ltd [1969] 2 Ch 365 will not assist directors in obtaining remuneration if the same is neither provided for in the Articles nor if the same is not recorded properly in the company’s books.

Directors should take every step to ensure that they are complying with the rules on taking remuneration, failing which they may encounter an unwelcome and for them arguably an unpleasant surprise if called upon to repay monies they have taken from the company.