Tag: Insolvency

A Political Manifesto

A few years ago I penned some policy suggestions for a new political party. I just had a clear out of some of my old files and thought it was worth publishing as it’s still very topical.

Reference Policy Suggestions My suggestions for policies in those areas and others are below:

Finance

1.       The personal taxation system is way too complicated and needs drastically simplifying. At the lower end the tax credit system is wide open to fraud while those on low incomes are taxed when they should not be. The personal tax allowance, both the basic rates, and higher rates, need to be raised to take more people out of tax altogether.

2.       The taxation of capital gains is also now too complicated, while tax is paid on capital gains that simply arise from inflation, which are not real gains at all. They should revert to being indexed as they were some years ago. For almost anyone, calculating your own tax that is payable is now way too difficult and hence requiring the paid services of accountants using specialist software.

3.       Inheritance tax is another over-complex system that wealthy people avoid by taking expert advice while the middle class end up paying it. It certainly needs grossly simplifying, or scrapping altogether as a relatively small amount of tax is actually collected from it.

4.       The taxation of businesses is inequitable with the growth of the internet. Small businesses, particularly retailers, pay a disproportionate level of tax in business rates while their internet competitors often avoid VAT via imports. VAT is now wide open to fraud and other types of abuse such as under-declarations, partly because of the EU VAT arrangements. VAT is in principle a simple tax and the alternative of a sales tax would create anomalies but VAT does need to be reformed and simplified.

5.       All the above tax simplifications would enable HMRC to be reduced in size and wasted time in form filling by individuals and businesses reduced. Everyone would be a winner, and wasted resources and expenditure reduced.  

6.       The taxation of company dividends on shares is now an example of the same profits being taxed twice – once in Corporation Tax on the company, and then again when those profits are distributed to shareholders. This has been enormously damaging to those who receive dividends and the lack of tax credits has also undermined defined benefit pension funds. The taxation of dividends should revert to how it once was.

7.       The regulation of companies and financial institutions needs very substantial reform with much tougher laws against fraud on investors. Not only are the current laws weak but the enforcement of them by the FCA/FRC is too slow and ineffective. Although some reforms have recently been proposed, they do not go far enough. Individual directors and senior managers in companies are not held to account for gross errors or downright fraud, or when they are, they get off too lightly. We need a much more effective system like they have in the USA, and better laws.

8.       Shareholder rights as regards voting and the receipt of information have been undermined by the use of nominee accounts. This has made it difficult for individual shareholders to vote and that is one reason why investors have not been able to control the excesses in director pay recently. The system of shareholding and voting needs reform, with changes to the Companies Act to bring it into the modern electronic world.

9.       The pay of directors and senior managers in companies and other organisations has got wildly out of hand in recent years, thus generating a lot of criticism by the lower paid. This has created social divisions and led partly to the rise of extreme left socialist tendencies. This problem needs tackling.

10.     Governance of companies needs to be reformed to ensure that directors do not set their own pay, as happens at present, but that shareholders and other stakeholders do so. Likewise shareholders and other stakeholders should appoint the directors.

11.     Insolvency law needs reform to outlaw “pre-pack” administrations which have been very damaging to many small businesses. They are an abuse of insolvency law.

Transport

1.       Way too much money is spent on rail transport and trams which cannot be justified on any cost/benefit analysis. HS2 is just one extreme example of this. Meanwhile the road system does not receive enough investment – this has resulted in traffic congestion, wasted time which is damaging to the economy and lots of poorly maintained roads (e.g. potholes). Only 25% of direct tax on vehicles is spent on the roads.

2.       Public transport should generally pay for itself. In London alone there is a subsidy of £1 billion per year on buses which is totally unjustified. Many of these subsidies are given to people who could afford to pay for their travel, even when they are receiving social security benefits.

3.       Road safety has flat-lined due to an excessive focus on speed reduction and the perversion of the law by the use of police waivers to force people to take useless “education” courses. Policies have been distorted to enable the police to make money from drivers, while improving the roads, better education and other policies to reduce road casualties have been ignored.

4.       Charging of drivers via road pricing to reduce congestion should be opposed (as it does not work and is just a money-making taxation scheme). Likewise Clean Air Zones where drivers are taxed for driving some vehicles, all of which were legal when purchased, should be stopped and the whole focus of environmental legislation should be reviewed. EU regulations in this area have made illegal air pollution levels when there is no real evidence of danger from them. ULEZ and CAZ schemes are just a way to raise taxes with little real benefit on health grounds and no cost/benefit justification.

5.       Likewise the EU has mandated speed limiters (ISA – Intelligent Speed Adaptation) for all vehicles in future which will delay vehicles and not contribute to road safety, while generating millions of speeding fines on innocent drivers. There should be a commitment not to follow the EUs lead on such legislation.

Education

1.       Education should be free for all those who can justify they will benefit from it. At present too many people go to university who will be unlikely to benefit from it and they should be redirected to lower cost vocational courses.

2.       Loans to support students taking courses should be interest free.

3.       There needs to be a much stronger focus on technology education in the UK as only people with such education will contribute positively to the economy.

4.       There needs to be more emphasis on the use of technology in teaching to improve the productivity of that profession which has basically not changed in hundreds of years. The use of on-line resources can assist and would enable teachers to be more productive and hence be paid more.

Environmental, Climate Change, Population and Housing

1.       There should be more attention paid to the real science of environmental impact rather than the hysteria of left-wing campaign groups.

2.       Mrs May’s commitment to a zero-carbon economy, which is financially unaffordable, should be scrapped because there is no practical way to achieve it and it is based on very dubious scientific analyses.

3.       The population of the UK needs to be controlled, if not reduced, to improve living conditions and ensure a healthy economy. This can be achieved by tougher limits on immigration (along with better enforcement of existing rules), and encouraging the population to procreate less.

4.       Housing costs, and the inability to find suitable accommodation, are major problems for the young. Controlling/reducing population would help but other measures need also be considered including the financing of more social/rented housing.

Local Councils and London

1.       The funding of local authorities, and some of their important functions such as providing social care, needs to be reformed. At present they are too dependent on central Government funding which means obligations are often put on them without the funds to cover the cost.

2.       There are wide variations between the efficiencies of different local councils with many being wasteful. They should have guidelines and limits on how they spend their money, laid down by central Government, to avoid waste.

3.       London is a particular problem where it has become dominated by populist Mayors (both Labour and Conservative) and where elections are driven by national politics rather than local issues. The most recent Mayor, Sadiq Khan, has been pursuing a “gerrymandering” policy of increasing immigration to gain more people that are likely to vote for him, thus making London even less acceptable as a place to live than it has been for years. Crime, transport and housing are all in a major crisis. I suggest the position of the Mayor, and the Greater London Authority be scrapped as Mrs Thatcher did with the GLC when Ken Livingstone became so damaging. In other words it should revert to central Government control, with the local boroughs having more control over their own affairs. That would no doubt be popular with London borough councillors.

4.       Transport for London should be taken out of the control of the Mayor be made an independent body with an objective of making it a profit centre rather than a consumer of enormous subsidies. They should also lose control of the road network (the TLRN) where they currently have a perverse incentive to make the road network unfit for purpose so that more people use public transport from which they gain income.

I hope you find the above useful.

Yours Roger W. Lawson, M.B.A., M.B.C.S. ++++++++++++++++++++++++++++++++++++++

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by entering your email address in the box below.  You will then receive an email alerting you to new posts as they are added. 

Whitewash at Gordon Dadds AGM, and Insolvency Warnings

I attended the Annual General Meeting of law firm Gordon Dadds Group (GOR) this morning. The company was tipped as a buy in Investors Chronicle on the 3rd August so I bought a few shares. It’s always good to go to the AGMs of new investments to get an impression of the management and ask a few questions. This is one of only three listed legal firms (the others being Gateley and Keystone which I do not hold).

This AGM was very unusual in that both on the “show of hands” vote and the proxy vote counts, there were no votes against at all, i.e. exactly zero on all resolutions. That is exceedingly unusual for a public company. As I said to the Chairman, he managed to achieve that by not having a share buy-back resolution on the agenda as I normally vote against such resolutions. Likewise no resolution to change to 14 days notice of general meetings. I congratulated him on that and a well run AGM where questions were taken first before the formal business.

There were about a dozen shareholders present, some of whom might have been staff. I questioned the increase in overheads in the last year – they are working to bring that down but it was increased as they “set up to expand” – and the high debtors. Although they bill work in progress monthly, it seems their corporate clients are slow payers. Another shareholder asked how work in progress was valued, and it’s at cost apparently. Otherwise I did not pick up any concerns although the legal market does seem fragmented and it is not clear to me how they are differentiated from others although they do have some specialisations. One might see it as a market ripe for consolidation with too many small firms and Gordon Dadds seem to have acquisition ambitions.

The company only listed on AIM a year ago so it’s early days as yet.

Interesting that the national media failed to pick up on the changes to the insolvency regime announced by the Government last Sunday. Perhaps not surprising on a Bank Holiday weekend although I covered it here: https://roliscon.blog/2018/08/26/insolvency-regime-changes-a-step-forward/

Perhaps private investors were not concerned because they think they can bail-out before such events unlike institutional shareholders who frequently have such large holdings that they can’t place them on the market at any price. But you cannot always do so. I have been caught twice in over twenty years of investing by unexpected administrations of retailing companies who often appear to have lots of revenues and positive cash flows. But a retail market turn-down can catch them unawares when they have high fixed costs (staff and property rentals). The result is often a cash flow problem when quarterly rent payments are due, or an unexpected tax bill appears, or suppliers’ insurers simply get nervous and withdraw cover.

A simple ratio to look at to pick up businesses at risk of insolvency is the Current Ratio which I like to see above 1.4. Remember business only go bust when they run out of cash. However, retailers often pay their suppliers after they have sold the goods to their customers so the Current Ratio is not a reliable measure for retailers. Likewise it tends to be unreliable when looking at software companies where they might have deferred support revenue in their current liabilities which should really be ignored as it will never be paid.

The Current Ratio is easy to calculate (it’s Current Assets divided by Current Liabilities). A better measure but a more complex one is the Altman Z-Score. This was very well covered in this week’s Investors Chronicle where it was argued that it was also a good measure of the overall performance of companies. It’s not foolproof in terms of predicting insolvency but it’s certainly a good warning indicator – the big problem is that accounting figures on which it is calculated are often out of date.

The Z-Score can be obtained from a number of sources as it’s a bit tedious to calculate it yourself – for example Stockopedia display it on their company reports.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Insolvency Regime Changes – A Step Forward

There’s nothing like issuing a major Government announcement on the Sunday of an August bank holiday weekend to get good media coverage is there? But as it’s raining and I have nothing much else to do, I have read the announcement and here is a summary:

The announcement is entitled “Insolvency and Corporate Governance – Government Response” (see https://www.gov.uk/government/consultations/insolvency-and-corporate-governance ). It is the Government’s response to past public consultations on how to tackle some of the perceived problems when companies get into difficulties or go bust. Such examples as House of Fraser (see my past blog posts on that subject where I called for reform of pre-pack administrations), Carillion, BHS, et al.

It aims to tackle issues around company director actions when a company gets into difficulties but one of the main proposals is very significant. That is that the Government intends to introduce a “Moratorium” scheme where a company can hold off its creditors for up to three months while it seeks to develop a restructuring proposal. Although a Moratorium will be a court process and will be supervised by a “Monitor” who is likely to be an insolvency practitioner, the directors of the company will remain in control albeit with some limitations.

Representatives of secure creditors (e.g. bank lenders) did not seem to like this idea at all based on their responses to the consultations, but it’s not quite as generous as first appears. Apart from the “monitoring” requirement to protect the interests of creditors, the initial period of a Moratorium will only be 28 days and can only be extended to 3 months if justified, and the company must be able to meet the normal insolvency rule that current obligations must be capable of being met as they become due during the Moratorium. But it is surely a step in the right direction in that it will provide more chance of those businesses that are not pure basket cases of being rescued to the advantage of trade creditors, pensioners and shareholders. That’s as opposed to the present situation where a pre-pack administration can instantly dump everyone except the secured creditors with massive damage to everyone else.

But directors of companies will need to act more in advance to ensure that a Moratorium is of help. To encourage them to do so the Government hopes to improve shareholder stewardship by identifying means to help the actions of institutional shareholders and others to escalate their concerns about the management of a company by its directors.

In addition the Government wishes to improve board directors effectiveness and training including raising awareness of their legal duties when making key decisions, and developing a code of practice for board evaluations. Comment: it is certainly the case that in smaller public companies the directors often seem to be unaware of their legal obligations and this sometimes extends to larger companies. I have argued in the past that all public company directors should have some minimal education in company law and their other responsibilities when acting as a director.

One issue examined was the payment of dividends by companies when companies were apparently in a weak condition such as having substantial pension liabilities or were paying dividends shortly before they went bust. Whether a company can pay dividends is governed by the calculation of whether it has “distributable reserves”, but that is a calculation that only the company and its auditors might be able to do. It’s not obvious from the published accounts. The Government is to work with interested parties on a possible alternative mechanism.

There were also concerns expressed that some companies are now paying dividends only as “interim dividends” which can escape approval by shareholders at Annual General Meetings. The Government has asked the Investment Association to report on the prevalence of the practice and they will take further steps to ensure that shareholders have an annual say on dividends if the practice is widespread and investor pressure proves insufficient.

In summary, I welcome all of these proposals as a step forward in rectifying some of the defects in the existing insolvency regime. The slight concern is that companies will be reluctant to enter a “Moratorium” due to the adverse publicity it might generate and the costs involved so we will have to see whether that turns out to be the case or not. But almost any restructuring solution is better than a formal administration or liquidation.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Conviviality Fire Sale

Conviviality (CVR) has now gone into administration, and the ordinary shares are probably worthless (they were suspended some days ago and are likely to remain so). The administrators have already sold the major parts of the business in “pre-pack” administration deals. That’s where arrangements are made to dispose of assets in advance of the appointment of administrators by the prospective administrators before they have in fact been appointed. Is that legal you may ask? Yes it is because of a past legal case however perverse the result might be.

It’s interesting to look at the deals done by the Conviviality administrators:

  1. Retail chains Bargain Booze and Wine Rack have been sold to Bestway for £7 million.
  2. The wholesale division comprising the former businesses of Mathew Clark and Bibendum has been sold to C&C (owners of Magners Cider) for £1, although it seems the new owners have taken on some of the debts owed.

Matthew Clark was bought by C&C for £200 million three years ago and Bibendum was bought for £60 million in 2016. You can see why I call this a “fire sale” when the administrator seems to have lined up buyers in just a few days and disposed of these businesses at a value that seems to be a great bargain for the buyers.

One of the problems with administrations is that often the administrators have an objective to sell the business absolutely as soon as possible. This is to protect their own financial interests it frequently appears to me as much as it is to protect the jobs of employees and maintain a business as a “going concern”. Administrators can only get paid out of the cash that is present in the business or can be collected. That’s why nobody wanted to take on the administration of Carillion and it went straight into liquidation.

Administrators have an obligation to market a business for sale but can that be done adequately and the best price obtained when the deal has clearly been done in just a few days? That obviously does not allow any time for the normal due diligence on a substantial deal so the buyers won’t have paid anywhere near the normal market price for the assets.

In summary, the buyers of the assets get a great deal, the jobs get preserved (at least to some extent), the bankers to the company often get their loans back and the administrators get well paid while minimising their risks. But the previous owners of the business (the ordinary shareholders) get left with nothing. Is that equitable?

In effect the current legal structure, and particularly the pre-pack arrangements, enable the rapid dismantling of a business when it might have been recoverable if the company had been able to have more time to refinance the business and stave off its creditors for just a few weeks.

This is why I argue that the current UK insolvency regime needs reform. It destroys companies in short order when ordinary shareholders have often invested in the company to grow the business in the past. In the case of Conviviality it only listed on AIM in 2013 and did subsequent placings to finance its expansion.

The reason for the invention of “administration” in the insolvency regime was to enable a more measured wind-up, disposal or restructuring of a business rather than a liquidation. But insolvency practitioners (i.e. administrators) seem to have changed it into a short-cut to wind-up. Reform is surely needed.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.