Many entrepreneurs who started up in the 1980s only to be struck down in the 1930s have been beaten about the head by banks and receivers. Many have lost their homes. Yet it is these same people who must take risks again if the recovery is to be sustained. Will they be too traumatised by the experience of going bust to try again? 'The problem now is one of fear,' says Eddy Weatherill, chief executive of the Independent Banking Advisory Service (IBAS).
There seems to be something peculiarly British about the way business people who run into financial problems are treated in this country. The social stigma of going bust is still high, despite three years of record failures.
Indeed, many people think it is quite right that we should continue to view business failure as a deep personal humiliation. This will surely encourage people to work harder, goes the theory.
In America, they do things differently. There, going bust is almost a rite of passage, part of the process of making it big. Entrepreneurs set up, go bust and set up again with much the same abandon as they get married, divorced and marry again. The system of receivership reflects this - it is, if anything, too forgiving to people who have 'failed' (see panel).
No-one could accuse the British insolvency establishment of such weakness. Many people who have gone through the process feel they have been unfairly treated. A common complaint is that they have been made to feel like a criminal by the receiver or liquidator. Peter Lole, a 29-year-old entrepreneur in the music business, has already been involved in two insolvencies - once as a director of a company that went into volunatry liquidation, then again while acting on behalf of a creditor to a company that had gone out of business. 'The awful thing about the whole liquidation process is that it makes you feel so dishonest,' he says, 'when in fact all you have done is to continue doing business as usual. The process seems to imply you have suddenly gone crazy.'
Some of the complaints made against liquidators are undoubtedly whinges by people who have had bad luck and are looking for someone to blame. But there are also many honest, hard-working business people who feel passionately that they have not been fairly treated by the insolvency system itself, and that it should be changed. They say that liquidators' fees are too high, that they sell assets too cheaply, that they supply too little information to managers and creditors.
Yet for every business person who is prepared to speak openly about his or her traumatic experiences, there is a host who dare not speak out. Many are still embroiled in a liquidation or receivership: when you are on the operating table you do not want to start criticising the surgeon too loudly.
Others whose problems are behind them do not want to have the past raked up. So those who do speak out can safely be viewed as the tip of a very large iceberg. One of the thorniest issues when companies go bust is the fee paid to the receiver, a fee that must come out of the company's own funds before creditors can be paid.
In 1984, Paul Jackson and his wife Pauline set up a publishing company, Triangle Communications, in High Wycombe, to produce a fortnightly newspaper Freight News and arrange exhibitions. The recession took its toll and in September 1991 MacIntyre Hudson, the Jackson's accountants, recommended they put the company into voluntary receivership. They suggested Leonard Curtis, a London-based firm of insolvency specialists, should act as administrative receivers.
Mr Jackson says they asked how much this was likely to cost and were told by Leonard Curtis - in the presence of MacIntyre Hudson - that the bill should be in the region of pounds 10,000.
Leonard Curtis was appointed, and it was agreed at the outset by the Jacksons that they would collect part of the outstanding debts themselves - those on the sales ledger. The Jacksons thought this would considerably reduce the cost of the receivership.
In the end, the receivers sold the newspaper - and in October 1992 deducted pounds 23,000 from the Jackson bank accounts.
Mr Jackson said the receivers later claimed that the original pounds 10,000 quote was made on the basis that the receivers would do no more than collect debts. But the Jacksons say that all aspects of the receivership were discussed and that the original fee included collecting the sales ledger, which they did themselves. The Jacksons have appealed to the Fee Arbitration Scheme of the Institute of Chartered Accountants but were told they would need an invoice that they do not have. The receivers and the Jacksons would also have to agree to fund the case.
David Swaden, a partner with Leonard Curtis, said: 'This is a matter of dispute. We are entirely satisfied with our work and the explanations we have given him, and we believe this man (Paul Jackson) is a disgruntled director.'
Mr Jackson remains unhappy with the whole process. 'Receivers seem to be unaccountable and uncontrollable. Our 'quote' was completely disregarded. Most people are unaware of the likely costs, and although probably horrified by them, do not have the strength or tenacity to challenge them.'
He also makes a common complaint, that it was difficult to get information from the receivers. 'They were always too busy.' The banks should take a greater interest in what the receivers do, he says, and he supports a recent initiative by the Royal Bank of Scotland to seek written quotes for fees by receivers before they are appointed.
In the Jacksons' case, Barclays Bank appointed the receivers and agreed the fees. 'Barclays now says it is up to us to challenge the receivers' bill,' Mr Jackson says. 'The bank does not want to know, despite the fact that it appoints the receiver and approves his fees. Bankers are the ones who have experience with receivers - not the businessman who has just lost everything and is feeling very vulnerable.'
Keith Raven, who ran a Corby-based adhesive tape maker, Tape-Wyse (UK), is still fighting a pounds 20,000 fee charged by receivers who are unrepentant: the battle shows how the same events can be viewed in quite different ways.
Tape-Wyse had a turnover of pounds 250,000 and employed 10 people. But the recession bit, and in 1990 NatWest withdrew its support. Mr Raven and his fellow directors contacted another tape-maker interested in buying the company and also consulted an insolvency practitioner, who backed the sell-off plan. He said he would deal with the matter for a fee of pounds 5,000.
This plan would have left the three directors with a liability of pounds 25,000 between them. But the bank still demanded that 'investigating accountants' be sent in to decide the company's fate.
Miles Halley, an insolvency partner with KPMG Peat Marwick, arrived and looked around the factory. 'He didn't take one look at the books before advising us that we should put the company into receivership,' Mr Raven says.
'He quoted us between pounds 5,000 and pounds 10,000 for the job. I said that we already had an insolvency practitioner and a buyer lined up. He then said he would advertise the business as a going concern in the Financial Times and would therefore get more money for us.'
The directors were attracted by this idea and decided to accept his offer. On Friday 13 July 1990, receivers were appointed and asked the directors to produce a cash-flow plan based on the current order book. They did this over the weekend, concluding that if the staff was cut back to three, the company should make a net quarterly profit of pounds 6,000 in three months' time.
Mr Raven handed over the plan on the Monday morning. 'By ten past ten, the receivers had sacked everyone and told us the company was no longer a going concern. They then spent pounds 1,000 advertising it in the FT as a going concern. We had about 15 prospective buyers in, most of whom we knew, and they expected to see the machinery working.'
The original potential buyer, whom Mr Raven had found, had offered pounds 56,000 for the company. The receivers sold it for pounds 65,000, less payment to a creditor of pounds 6,000. They then deducted their fees of pounds 20,000.
'That was for a month's work. Time-wise they didn't stay more than a day inside the company,' said Mr Raven. 'I asked them to justify it, to break the figure down. I've never received a breakdown either from them or the bank.'
The final liability to the directors, including the Peat's fee, was pounds 90,000, as opposed to their original estimate of pounds 25,000. One director sold his house, another had to raise a second mortgage. Mr Raven contacted the Independent Banking Advisory Service and is fighting to get back some of the fee.
Mr Halley fights back. He recommended the business should go into receivership only after seeing the financial information provided by Mr Raven, he says, which showed the company was clearly insolvent. He said that the price he obtained was not only more than the the pounds 56,000 Mr Raven claimed he could raise, but because the directors' buyer would have been buying only the business and assets of the company, the three directors would still have had to pay the company's liquidation costs. He also disputes the amount of time Mr Raven says the Peat's team put into the receivership.
Mr Halley reckons he was still dealing with various details of the case two years after it started. The job included investigating the conduct of the directors, managing the company for several weeks and then marketing and selling it, dealing with employees' claims and making quarterly reports to the bank.
He is unimpressed with the proposal to make receivers quote a fee before they get an appointment. 'You might trade a company for one month and sell it for pounds 1m, or three months and get pounds 3m. So what fee would you quote?' He also points out that in this particular case he was never paid as an investigating accountant, only as a receiver.
Thomas Craig, managing director of Craig Corporate Management, a Glasgow firm that advises companies in trouble on how to handle their financial problems, attacks 'the absurd practice' of banks using insolvency practitioners to investigate whether troubled companies can be saved. If the accountants give the company the thumbs down, current practice is to appoint them as the receiver. This often outrages the directors concerned, who assumed the accountants were there to help save the company.
'There is as much professional independence in this process as an undertaker running a doctor's practice on the side,' Mr Craig says. 'If a company did not have financial problems, there would be no need for an accountant's report. What is needed is not confirmation that the company is ill, but what medicine it can be given and by whom.'
These difficult situations require creativity to seek out possible recovery solutions, Mr Craig says. 'Frankly, in my opinion and experience, insolvency practitioners are more used to burying corporate corpses and are unlikely to provide many innovative answers. Recovering sick companies involves risk. Killing them is a no-risk route - especially for the insolvency practitioner. It is madness for the banks to be seeking advice in these situations from a group who are by necessity and training very risk averse.
'I would like to see insolvency practitioners barred from work as investigating accountants, or at a minimum prevented from taking follow-on work as receivers or liquidators. Those of us who help nurse private companies back to good health should be more vociferous in lobbying the banking community.'
Shareholders also have complaints over the way company collapses are handled. Andrea Bonomi, a director of Luxembourg-based Invest International Holdings, feels he was badly treated by receivers appointed to a public relations company, Corporate Communications, in August 1992. His complaint is mainly about the lack of information supplied to him by the receivers, Ian Bond and Chris Hughes, of Cork Gully, Coopers & Lybrand's insolvency arm.
Corporate Communications owed creditors roughly pounds 20m. Creditors and shareholders were stunned when PR subsidiary Charles Barker and investor relations company Georgeson International were sold off by the receivers to the existing management within 24 hours of the company going bust. Cork Gully insisted that it was vital to sell the businesses quickly as their main assets were people, who could simply walk out of the door at any moment.
Mr Bonomi, whose company was the second largest shareholder with 33 per cent and was left with an estimated pounds 1m loss, feels the receivers treated him badly even though they did remain within the law. Mr Bonomi's company was also a secured creditor, and he says that the amount of information supplied to creditors was 'practically zero'. He only learnt about the management buyouts at the last minute, he says.
He says the receivers supplied creditors with a year-old annual report from the company and two other sheets of paper. 'They gave us very bland assurances, saying nothing about the buyouts. As long as the bank was covered, they were happy. They had no incentive to do anything for the other creditors.'
Mr Bonomi's main point is that under the present system receivers will always feel more responsibility to the banks, who appoint them, than to creditors. The banks use them regularly, whereas the creditors will probably never have contact with them again.
The receivers are 'undertakers', he believes. 'All they do is take the body, put it in the box and bury it as fast as they can so they can get on with the next one. The system does not encourage rescue.'
Mr Bond does not agree. 'The whole point about Corporate Communications was that we didn't bury it, we rescued the business.'
Mr Bond says that the secured creditors were kept fully informed of developments, and that the management buyouts were subject to confidentiality clauses in the sale agreements. 'Shareholders and creditors are not allowed to see sales contracts of solvent companies.'
The directors of Corporate Communications were advised not to attend the creditors' meeting by their lawyers, he said. As for receivers only feeling responsible to the banks, not the creditors, Mr Bond insisted that firms such as Coopers were aware they would meet creditors in different parts of their business in the future. 'Of the five or six thousand businesses that went into receivership last year, in the overwhelming majority of cases the directors were perfectly happy with the performance of the receivers.'
How to come to the rescue
WHAT needs to be done for a fairer system for insolvency? The CBI had these suggestions:
Ensure that insolvency practitioners concentrate more on rescue operations.
Make it easier to obtain administration orders, which, when granted, can be used to keep companies afloat.
Allow companies a defined period of grace while rescue plans are drawn up.
Revise bank collateral rules to give unsecured creditors better treatment. The average payout for unsecured creditors in receiverships in the UK is roughly 2p in the pound. The banks, however, are understandably opposed to a lessening of the distinction between secured and unsecured creditors.
Ensure that unsecured creditors can recover goods they have delivered unpaid to a company that subsequently has gone bust.
More vigorous enforcement by regulators against directors of 'Phoenix' companies that go into liquidation but rise again under a new name without paying their previous creditors.
Abolish the Crown's right to rank ahead of other unsecured creditors.
HERE are some additional suggestions from the Independent on Sunday:
Investigating accountants to a company should be barred from subsequent appointment as receivers or liquidators to the same company. Alternatively, an independent body should decide whether troubled companies survive or not.
Require insolvency practitioners, before they take a case, to supply a written quote for their fees which can only be modified under agreement with creditors.
Make liquidators and receivers provide regular written details, perhaps on a standard form, to directors on how they are getting on with the case - in particular how much money they have recovered and at what cost.
Create an independently funded office for an insolvency ombudsman.
Encourage the DTI's consideration of easing Company Voluntary Arrangements - rescue deals that are cheaper than administration.
(Photographs and graph omitted)