Demanding times

Sitting in a court waiting room a few weeks ago, I overheard a woman speaking to the usher as she waited to see the district judge. 'Will she ask a lot of questions? Will

I have to explain everything?' she asked him, clearly desperately worried that the district judge would be critical of her situation. 'No,' he replied, 'don't worry. I often find when people come out they feel as if a great heavy burden has been lifted.'

Five minutes later she came out of the district judge's chambers and beamed at the usher, 'You were right, I feel so much better!'

The woman in question had just presented a petition for her own bankruptcy and her relief was evident to everyone in the waiting room. With increasing food prices, housing costs and oil and petrol costs there would be little surprise if the number of bankruptcies was increasing. However, the reality of the situation appears to be rather different.

According to the statistics released by the Insolvency Service on 1 August 2008, there were 24,553 individual insolvencies in the second quarter of 2008. This is a decrease of 2.0 per cent on the previous quarter and a decrease of 8.3 per cent on the same period a year ago. These figures include IVAs.

From debt management plans to illegal money lending

R3, the Association of Business Recovery Professionals, recently expressed concern that these figures may be hiding the true picture as individuals try to avoid formal insolvency by way of debt management plans and has called for further consideration of debt management plans as part of the insolvency landscape. It may also be the case that by making reductions in their monthly expenditure, individuals are hopeful that they can weather the storm although whether such savings are sufficient to repay their debts is another question.

However, in light of a recent press release from the Department for Business Enterprise & Regulatory Reform it appears that as debtors become more desperate they find other ways, often illegal, of surviving from one financial crisis to the next. The government has announced a crackdown on illegal money lenders or loan sharks, and has successfully prosecuted numerous individuals for lending monies to financially vulnerable people (including children in some cases). It is known that some unscrupulous lenders loan money with interest rates of 100 per cent and APR of 384 per cent, often on the basis that the first repayment is due immediately, while the lender retains games consoles, bank cards and other valuables until the loans have been paid.

While no one can condone the use of threat, violence or extortion in any circumstances, the fact that such practices exist demonstrates that there are some extremely desperate debtors in the UK who do not feel that the current insolvency proceedings can assist them. It must be hoped that in the absence of illegal money lenders following such a crackdown, these debtors will seek professional (and legal) help.

Debt relief orders

It is these people that the Insolvency Service hopes to assist so that they may in future avail themselves of debt relief orders under the Tribunals Courts and Enforcement Act 2007, although these will not be available until April 2009. Such orders are aimed at debtors who owe approximately £15,000, have assets of less than £300 and a surplus income of less than £50 per month. At the moment such debtors have no assets to pay creditors, cannot afford an IVA or other debt management plan because they cannot afford to make monthly contributions and cannot afford the professional fees. The order, if made, will provide a stay against enforcement by creditors for 12 months and after the 12 months has expired, those debts subject to the order will be discharged. The debtor will be subject to restrictions throughout the lifetime of the debt relief order and if the debtor's circumstances improve while the order is in effect the debtor will be expected to make arrangements to pay their debts. It is understood that the mechanics of the scheme are still being considered by the Insolvency Service and until those mechanics are set out it is difficult to assess the impact of debt relief orders.

Redundancy and insolvency

The Office of National Statistics has released figures to the end of June 2008 showing that 126,000 people were out of work following redundancy, which is up 14,000 for the quarter and 6,000 over the year. These figures do not take into account the redundancies made over the summer by the various house builders and more recently as a result of the well-publicised demise of Lehman Brothers. Redundancies in the legal profession have been widely reported in the legal press. Overall the unemployment rate has increased to 5.4 percent.

These figures also reveal that those claiming Jobseeker's Allowance has increased by 10,900 over 12 months in all regions of the UK. Job vacancies have fallen by 47,400 from the previous quarter and 23,200 over the year. The biggest losers are the distribution, hotel and restaurant and finance and business sectors.

Further, growth in earnings has slowed by 0.4 per cent to 3.4 per cent. With more people fighting for fewer job vacancies, the employment market is becoming more and more difficult. At the same time household inflation rates of between 2.7 per cent and 6.1 per cent have been reported so any increase in income is often at best set-off against the increase in expenditure and at worst is simply insufficient.

Other factors

It is not only house prices that have decreased but the number of sales of properties. As individuals struggle to meet mortgage payments, as is likely following the end of a fixed-rate period, the equity in the property is also likely to be diminishing. Secured creditors are increasingly seeking possession only then to sell the property at a price that is only just sufficient to discharge the mortgage leaving second chargeholders out of pocket and the debtor without a home. It is worth noting that in these circumstances there is a duty to sell the property at the best price but it is increasingly difficult to tell in the current climate if the best price has not already been achieved.

As we head towards Christmas these figures are bound to affect retail sales in what is already an overly competitive and now cautious market. Should Christmas sales be significantly affected, the post-Christmas period could be extremely difficult for companies and individuals alike.

The Insolvency Service figures state that compulsory liquidations and creditors' voluntary liquidations for the second quarter of 2008 have increased by 11.6 per cent from the first quarter and by 15.0 per cent from 12 months ago. Further, it appears that administrations have increased by approximately 60 per cent in 12 months. According to the Office for National Statistics, sales from May to July 2008 increased by 3.9 per cent from the sales for the same period 12 months ago.

While this accords with the decrease in personal insolvencies, seemingly demonstrating that some individuals still have surplus disposable income, it does not reflect the cost of sales or the reduction in prices that retailers are conceding to get the sales.

With costs of utilities, raw materials and oil fluctuating, it is an uncertain time for manufacturers, the effects of which will ripple through the chain to the retailers and eventually consumers.

Creditors becoming more demanding

Experience shows us that the earlier a debtor, whether an individual or a company, seeks advice the better the chance of turnaround or rescue. That said, creditors are becoming more demanding and as things take a turn for the worse, creditors will look for as much as they can get, however they can get it. It is likely that solicitors will see an increase in actions to recover debts and enforce security arrangements. As with debtors, creditors will also consider more imaginative ways in which to recover monies owed to them such as in the case of First Independent Factors and Finance Limited v Mountford [2008] EWHC 835 (Ch), in which First Independent Factors and Finance Limited took as assignment of a claim against the directors of a company under s.216 of the Insolvency Act 1986 (the phoenix provisions).

The defendant director submitted that it was an abuse of process for an assignee that has not traded with the company to bring proceedings under s.217. The judge did not hesitate to reject this submission, describing debt factoring as 'perfectly legitimate' and referring to the creditor as entitled to salvage what they can out of a bad trade debt. As the court has seemingly endorsed the practice, it would seem likely that use of this practice is set to increase.

It is not only insolvency lawyers and commercial litigators that will be busy. Many suppliers will look to review their terms and conditions of business to ensure that retention of title clauses are valid and effective, and landlords may seek to ensure that they are adequately protected in their leases. This may be an opportunity for lawyers in other specialisms too.