What is insolvency?
25th April 2014
\In*sol”ven*cy\, n.; pl. Insolvencies. (Law)
(a) The condition of being insolvent; the state or condition of a person who is insolvent; the condition of one who is unable to pay his debts as they fall due, or in the usual course of trade and business; as, a merchant’s insolvency.
(b) Insufficiency to discharge all debts of the owner; as, the insolvency of an estate.
(c) Relating to persons unable to pay their debts.
The oldest record of insolvency can be found in the Bible:
DEUTERONOMY 15: 1-2
“At the end of every seven years you are to cancel the debts of those who owe you money. This is how it is done. Everyone who has lent money to his neighbour is to cancel the debt: he must not try to collect the money: the Lord himself has declared the debt cancelled.”
Brief History of Insolvency
In ancient times, an insolvent debtor was subject to very harsh treatment. As trade and commerce developed, steps were taken to ease these severe treatments.
In Ancient Rome, creditors had the right to enslave the debtor as well as his family. In seventeenth century, during golden days of British Empire, a debtor who could not give genuine clarification for unsolved debt had to bear public humiliation.
In the Victorian era, and even up until the late 50’s, it was not unusual for an individual who could not pay his or her debts to spend a period of time in debtor’s prison.
The original purpose of a bankruptcy was a solution to insolvency, and not a method of avoiding debt. The aim was to liquidate all assets of an individual’s estate (large or small) in order to pay creditors as much of what was owed as possible. The creditors would accept a portion of what was owed, as it was clearly all that the debtor possessed.
The aim of bankruptcy in the literal sense remains the same, although there are now many more options open to individuals finding themselves, or their business, insolvent (or close to it).
21st April 2014
As a director of a limited company, it is standard practice for lenders (and indeed some suppliers) to request that you sign a Personal Guarantee (PG) to act as security for company borrowing. By doing this, the creditor will have recourse to the director personally in the event the company defaults. PGs are not used for sole traders or partnerships (except LLPs) as any debt of the “company” is deemed as a personal liability of the business owner(s) and so a PG is not required.
If you have been asked to sign a PG, you should always seek independent legal advice before signing anything as the terms can vary (it is not uncommon for the banks to request a legal charge over your home at the same time). It is also worth noting that most banks will keep a PG on file indefinitely, even once the borrowing has been repaid.
In the event that a PG is called upon, the next step can vary depending on the creditor and the amount being called on. The usual routes are:
- The creditor will issue a Statutory Demand. This will give you 21 days to either settle the debt or reach an agreement to pay. If this is not possible, the creditor can start bankruptcy proceedings (providing of course that the debt is over £750 which is usually the case with PGs).
- The creditor can apply for a County Court/High Court Judgement. The usual results will be that they then wither get a Warrant of Execution and get the bailiffs in, or they go for a Charging Order to secure the debt against your home.
If a PG is called upon, the first route is to get legal advice to ensure it is valid. If it has not been drawn up and/or executed correctly, it could well be invalid. The second route is to talk to the creditor (if you haven’t already). Legal action can be a lengthy and costly affair and most creditors would entertain a negotiated settlement as long as there is a strong commercial case for them to do so.
The best way to protect yourself would be to seek professional help prior to the default event which causes a PG to be called upon. The earlier the professionals get involved, the more tools they have at their disposal to help you. If you have a PG that is being called upon, do remember there is still help at hand, but the available options are somewhat reduced.
A history lesson
19th April 2014
Everyone has heard about the “economic cycle”, but few people really understand the history behind it. As the old saying goes “what goes up, must come down” is as true to global economics as anything else. Everyone has heard about The Wall Street Crash in 1929 which started the Great Depression. More recently, there have been crashes in 1987 (“Black Wednesday”) and the dot-com bubble in 2000. These crashes have always had some kind of catalyst.
The first financial crash in the Western world can be dated back to 1622 when the Holy Roman Empire debased its coins, triggering the equivalent of a modern banking panic. That was followed by the 1637 tulip boom-and-bust in Holland and the 1720 South Sea bubble.
Eight more crashes then occurred in the 18th century, culminating in the Hamburg commodities bubble of 1799. Then in the 19th century, the pace of financial disasters sped up with 18 financial storms erupting in Europe, and increasingly in the US too. These included bank crises that hit the US in 1819, 1837, 1847, 1857, 1873, 1884, 1890. A financial crisis even struck Australia in 1893.
The 20th century saw an incredible 33 market storms with the best known being the stock market crashes of 1929 and 1987.
What lessons are to be learned from this? Every time, there have been people saying that the old fundamentals of economics no longer apply, only to find that of course they do! Remember all the dot-com millionaires who kept saying that it was a brand new economic model, so old rules don’t apply (like Cashflow and profit?). Gordon Brown even claimed to have “abolished the cycle of boom and bust” when Chancellor. The commodities may have changed over time, but the fundamental rules of economics never do!