It is a bit of a daunting task and, quite frankly, as with all such submissions, one never knows whether a submission from the man in the street will be taken into consideration – or if the conclusions have already been reached. However, the subject matter of this request for submissions is very important to the future of all SMEs – so please have a look.
The overall subject is insolvency and business failure and the report is divided into 5 parts:
I. Objectives and Subject Matter
III. Preventative restructuring framework
IV. Second chance for entrepreneurs
V. Supervision and reporting
In theory, it's an excellent idea to look closely at these issues and create a uniform and better environment to allow businesses to continue to trade even after disaster has struck. It recognises that many people or businesses are what they term 'honest bankrupts' and that they should be given a second chance – although it considers the definition of these terms may be unclear.
Where, in my opinion, this document falls down, is that it doesn't once mention the word 'bank' except when included in the words 'bankrupt' or 'bankruptcy'. So it totally fails to recognise that, whatever good intention the Government or the EU Commission has, it is doomed unless it tackles the root cause of insolvency – which is banks.
For example: there is a whole section on restructuring which, to many SMEs, has a totally different connotation to the Government version. When I think of restructuring, the first thing that comes to mind is bank divisions like GRG, Barclays Business Support or even HBOS Reading. And all of these so called restructuring units would be better called 'destructuring'. Yes I know such a word doesn't exist but maybe it should because that is what they did after they had destabilised the businesses they were supposedly restructuring.
Quite naturally the word 'creditor' is mentioned frequently and how the interests of the creditor should be considered in the restructuring process. Which is another huge problem because, in so many cases, banks are: The main creditor; the people behind the failed restructuring which causes the businesses to fail and; also the people in control (working hand in glove) with the LPA receivers, administrative receivers, administrators and/or liquidators, dealing with the insolvency. Nothing in this document explains how you get around that one!
But assuming your business has been successfully restructured and on the subject of 'Protection of New Finance' the document says:
The Recommendation argues that new financing which is agreed in the restructuring plan should not be able to be declared void or unenforceable as an act detrimental to the general body of creditors. In turn, the providers of new financing should be exempted from civil and criminal liability relating to the restructuring process. The exception is where fraud is subsequently established.
What does that mean? Given banks can and do withdraw facilities at the drop of a hat (and that is a major cause of insolvency), does it mean that if Bank A is a creditor of company X and then Bank B supplies new finance, Bank B can't withdraw that finance if Bank A doesn't want it to? Would anyone care to bet on that? And why the bit about exemption from civil and criminal liability relating to the restructuring process – isn't that a bit of a giveaway on how these deals have been operating and the fact everyone knows some of them are as dodgy as hell?
Unfortunately the end result of much modern day restructuring means the really correct terminology would be 'asset theft'. Which is why our big banks, over and above running their tax evasion and money laundering divisions, are also running our pubs, hotels, airlines, railways, farms, shops, you name it – they have a finger in the sector somewhere (that’s what PFI is about).
In general, I can't talk about HBOS Reading because of sub judice. But as the remit of the criminal investigation is very narrow (although it seems to be getting bigger – maybe so more details can be buried), I can mention things like Corporate Jet Realisations - CJR (formerly Corporate Jet Services Ltd [CJS]). And that company is the best example I can give of how the whole insolvency, restructuring, second chance situation is being so badly manipulated, it is really nothing more than daylight robbery of the SME sector.
This has already been all over the press – so I'm not breaching anything here. In a nutshell: HBOS, who some would say caused a massive debt to this small company, put a private jet company into administration to recover the £15M claimed as being due to the Bank. The Bank brought in its own 'experts' to restructure the debt using the same assets but created a new Company. The Business got a new name and new funding of £15M. So – total to that point in theory, £30M though the new £15M was presumably used to repay the original £15M owed to the same Bank, by the same Bank. That was in 2002. The company made acquisitions over the next few years including Euromanx, the Isle of Man airline. And it made those acquisitions even though it was permanently running at a loss – so it was insolvent but for the fact the Bank, who technically owned it, kept pumping millions in.
In September 2007, Bank of Scotland put the company into administrative receivership and PwC announced CJR owed the Bank £113M. So, in 5 years the £15M debt of the original SME which had been running successfully for 20 years, turned into a £113M debt (actually it was more like £150M) when being run by the bank's restructuring team. Of course, the original owners lost everything including the family home.
It gets worse – when CJR was put into receivership, PwC sold all the assets (including Euromanx, Club 328, JETS, 328 Support Services [now 328 Group] and others) for peanuts and to the people who ran up the £150M debt. In turn, some of those assets (subsidiary companies) like Euromanx, also hit the wall causing 70 people to lose their livelihoods and leaving a huge trail of debts like a £1.5M debt to the Government of the Isle of Man. But others – which are no longer owned by the Bank – are being very successfully and profitably run by the directors of the failed CJR.
It gets worse – remarkably, CJR, according to PwC, didn't have many creditors – some might say the big boys like the fuel companies somehow managed to get paid before the proverbial hit the fan. But one creditor who didn't get paid, felt something was amiss and managed to get PwC (who did very nicely from the deal earning fees of circa £2+ million) taken off the case and replaced. But the new liquidator (because CJR is now in the liquidation process) hasn't been able to get much of the paperwork, which he needs to do his job, from PwC. Just before Christmas last year, the liquidator took PwC to Court. But the judgement for the case only arrived yesterday and while the liquidator will be given some documents, he won't be allowed others. Those he will be given (according to PwC) will take months to produce and it will be a very costly process. So it will go on and on. But who knows when and if the creditor will ever get paid?
My point: On the one hand, the whole restructuring of SMEs has been completely manipulated by banks and their often third party and so called 'turnaround' experts. On the other hand, the resulting insolvency process has been completely manipulated and hijacked by banks working with their preferred IPs or LPA receivers. Which isn't to say all banks are bad and all IPs are bad. They're not. But unfortunately the balance of the scales is heavily tipped towards bad practice at this point.
So you can't possibly produce a good and fair template for best practice in insolvency & restructuring until somebody recognises the role bank misconduct is playing in this very unhealthy game. Yet again – it's all down to bank reform. And as Martin Wheatley said to the TSC earlier this week:
“I think it’s quite clear that the number of scandals that we’ve seen in financial services, particularly in banks, has been staggering, and the latest allegations I think are equally scandalous.”
Given he went on to say he didn't know about the latest allegations of scandal in HSBC until he read it in the newspapers, I would say effective bank reform is not on the horizon any time soon.
All the same, I'm going to have a shot at submitting evidence on this subject to the EU Commission. And on the last question (24) “Do you have any other comments?”, I will point out (with evidence) that you cannot stop businesses failing if you don't stop banks mugging them.
If any other members do make a submission, please add that you are a member of SME Alliance and please let us know you have done. Or better still, maybe we could submit collectively under the one banner. Strength in numbers! Let me know what you think.