What are we going to do with small businesses that are flirting with bankruptcy? This week, I have had numerous ‘end-of-season’ conversations with businesspeople about the state of the nation. One of the recurring subjects was what are we going to do with the thousands of businesses that are close to going bust.
More significantly, because of the banking practice of getting personal guarantees from small business people for basic working capital, many good individuals face personal bankruptcy because they were caught on the wrong side of the cycle.
Without credit to keep the businesses going, many will have to decide to shut up shop in the new year.
I am not just talking about property people here, the troubles are across the board. The business model of our country is broken. Costs, rates, rents and taxes are too high, and debts are crippling businesses, with the real rates of interest above 11 per cent for many. In normal times with a properly functioning credit system, businesses would be able to survive through the recession, staying open and waiting for the cycle to turn – but not this time.
Thousands are now technically bankrupt and people are thinking of moving abroad to avoid the stigma of bankruptcy here. In Ireland, we treat our bankrupts with particular vindictiveness.
A bankrupt person in Ireland has to wait 12 years before the stain of bankruptcy is lifted, and they can borrow again to create a business. In Britain it is one year.
Equally, bankruptcy proceedings have to be heard in the High Court, with all the expenses that incurs.
In other countries, people who take risks, build things and employ others are supported by the law so that if they fail, they will start again. Not so in Ireland. Here, if you fail, you fail spectacularly and everything is structured to make sure that, if you fall, you don’t get back up again.
How does that facilitate a recovery?
Societies are made up of all sorts, as different as the average school classroom in terms of abilities and personalities. While entrepreneurship is not for everyone, the people who get up in the morning and take risks, creating things and expanding businesses, are crucial to the welfare of others. If they make mistakes, they shouldn’t be hammered for it.
In Ireland, if we examine our bankruptcy laws, what we see is that the weight of the law is there to protect the creditor, not the borrower. But the creditor creates nothing. The creditor, normally a bank, simply acts as a middleman, passing on other people’s savings to those who would use the savings to create things.
Why should the creditor be so protected in a crisis? Surely the balance of risk in the deal should be more evenly distributed. In the crisis, if our law hammers the risk-takers and protects the creditors, the entrepreneurs will just leave and the lawyers, civil servants and banks will win.
Without entrepreneurs, the society doesn’t create wealth, and we end up being a large debt-servicing agency dancing to the bankers’ tune rather than a vibrant, competitive economy where businesses are started and people are encouraged to go and do things for themselves.
One of the reasons the US is such a dynamic capitalist society is because, as one of its core values, it allows people to make mistakes. People aren’t regarded as a success until they have failed. Failure is not a stigma; it is a war wound, a battle story to be remembered fondly in better times.
In the US and Britain, bankruptcy is part and parcel of business; here, in contrast, it is a stick with which to bash people.
More worryingly, by treating unlucky risk-takers as outcasts, we reinforce the conservatism which characterises our country and reinforces the bias towards the professions, which afflicts so much of Irish society.
The day the Irish mammy tells her clever child to start a business rather than become a lawyer is the day we start turning the corner. However, that day will only come when we change the way we treat people who are bankrupt.
The more the law upholds the age-old social stigma of bankruptcy, the more the mammies will funnel their smart kids into medicine, law or some other profession, and the fewer wealth creators we will have.
The best way to gauge this deep and unproductive bias at the heart of our society is to look at the number of people who entered formal bankruptcy proceedings here.
In Britain in 2008, 67,000 people entered formal bankruptcy, with another 39,000 entering an individual voluntary arrangement (an IVA is a legal alternative to bankruptcy in Britain that does not exist in Ireland). In an IVA case, a third party negotiates with creditors and, if those holding more than 75 per cent of a debt agree, a binding scheme of arrangement is entered into. This is a sensible arrangement, as it gives people a chance.
In Ireland, this kind of scheme doesn’t exist and, in 2008, fewer than 100 people entered bankruptcy. Put another way, in Britain 1 in 580 people entered bankruptcy/IVA in 2008; in Ireland, the number was less than 1 in 45,000.
Now look at the figures for the US. In the US, there were 1,074,225 bankruptcy filings by individuals in 2008.That is one in 283 of the population. Many of these are personal bankruptcies rather than business-related.
Bankruptcies happen, and to deny them simply clogs up the system and punishes the entrepreneurs who get into trouble. But fluidity in business where people can deal with creditors rationally is a sign of health not weakness. Easier bankruptcy laws are not a delinquents’ charter, but a logical reaction to the fact that risk exists.
Some argue that the easier it is to declare yourself bankrupt, the higher the risk of ‘moral hazard’.
Moral hazard is the risk that a bankrupt will just go bankrupt again and again and that in a sense you risk accommodating ‘bad behaviour’.
But forget moral hazard for a minute and think about real hazard. Real hazard is when you drive away your creative and entrepreneurial class by attaching a stigma of failure to them too easily. Real hazard is when you make it so difficult for them to recover that you freeze them out after one mistake.
Real hazard is when you uphold the age-old Irish bias against risk-takers and turn large parts of the society into employees waiting for someone else to take the lead. These are the actual rather than the moral hazards which can ruin a society and eliminate the chance that the economy can recover. In short, by hounding bankrupts, we weaken ourselves.
So are we going to give ourselves a chance? Are we going to condemn businesses that are in trouble to years in the wilderness? Are we going to let people who have made mistakes, recover and start again? Or are we going to be vindictive?
The choice is ours. If we change our bankruptcy laws, we can give people a second chance, make creditors know that the risk of investing in businesses is shared and, more to the point, allow the brains and initiative of the Irish people to flourish without the stain of failure being permanent.
The recession gives us a chance to change our mindsets. We could begin with banishing the stigma of a listing in Stubbs Gazette and realising that, in every venture, there is risk. The country that takes no risks goes backward.
Good article David, and it leaves you wondering why our laws are so archaic. I suspect those in power have been under the illusion over the last decade or so that they were the ‘wealth generators’. How often did we hear self-crediting for economic success. Now the illusion is shattered, the complacency exposed, and all that government can do is go into a holding pattern whilst sticking their fingers in the dam. It’s as if we’re waiting for some external force to take the pressure off, but with changes as suggested by your article it would at least invoke sparks… Read more »
Arra, would you look at this Sh1t:
http://www.independent.ie/business/irish/namabound-developers-loans-get-valuation-1981672.html
Surprise, surprise!
Garrett Fitgerald’s young-fella is going to make a fortune out of NAMA.
Well, well, well……
David, from one perspective, business-people take no “risk”, whatsoever in Ireland.
I have seen countless people go “bust” in their business, close-down (as Ltd. companies, owing hundreds of thousands in tax and payments to suppliers) and open up for business, under a new company name, within weeks.
How would alleviating the bankruptsy-laws in Ireland improve matters, when, as it is, the cowboys rule?
David, You write: “if our law hammers the risk-takers and protects the creditors, the entrepreneurs will just leave and the lawyers, civil servants and banks will win” They’ve already won – in fact they were never in any danger of losing. Ireland has fucked itself – again. I’d advise the angry, disadvantaged and disenchanted to re-direct their energies into rebuilding a life elsewhere – in a country where they are valued as citizens, entrepreneurs and people. To take such a course of action is far more positive and life-affirming than to pursue the noble, but frankly, hopeless notion of actually… Read more »
Sub
How many school leavers want to start a business?.You need capital, contacts etc.A cushy job in the local bank or civil service is the easy option.There is too much competition in business and the hassle isn’t worth it.How many businesses have you run David?.You have the acumen!.Nollaig shona.
Hi David, You are right that we need to give entrepreneurship more of a chance. However, I dont think that it is being held back by the lack of protection in bankruptcy situations. Indeed, as Tim and others have pointed out and as you will no doubt know, many Directors/Owners of companies have a Ltd go bust only for them to open a new company and leave creditors up the swanee including our government. I do think that culturally there should be less emphasis on bankruptcy being a ‘disease’ of some sort, but it only holds back a real entrepreneur… Read more »
David. The ‘system’ in which entrepreneurs swim is rigged. So, the systems failure you rightfully bring too light in above article is no accident. The circles closest too the ‘magic money making machine’ control the ‘system’ in which entrepreneurs function so we get what your article puts in the frame. We get a ‘system’ that risk takers / outsiders set up in in which the risk taking and future success of which is all tied into the use powers in the hands of the insiders. So we are back to the insiders v outsiders theme again, and again and again.… Read more »
A sobering article to read as the Christmas cards arrive from Ireland. As The Solstice descends, I go through certain rituals to do with ‘the turn of the year’. One of them is visiting the graves in Birmingham. Those of my parents, one of my uncles, and that of my paternal grandfather. All driven from their home in Ireland by personal and social ‘economic’ calamities arising from the foundational errors of the Republic. Now another one appears to be in full swing, as exemplified by this recent article in The Sunday Times which encapsultates the current situation: ‘Despite liquidation Mooney… Read more »
Folks, this is what govt (via Enterprise Ireland) thinks of our entrepreneurs – closed for business! (Thanks, Liam):
http://www.enterprise-ireland.com/Grow/Finance/Applicationforms.htm
Seasons Greetings to All here , regarding this article , well Yes our system has to be changed , Ireland has to change and more importantly what we need over the next few years is Political Change. Our third generation civil war parties are now defunct , we have seen that with the budget all the talk from backbenchers and yet they voted in a budget that hits at the weakest an most unrepresented groups within our society. So what do we need to do ? Well Tim , could start with getting his local TD to vote against this… Read more »
On a happier note, Rage Against the Machine beat the X Factor winner to the number one spot (in the UK at least). The song “Killing in the Name” has been described as “a howling, expletive-driven tirade against the ills of American society.”, but, this song could be about any modern society, it applies to all. So, that bit of news cheered me up on a cold Monday. :-)
Posters –
The ground is been softening up for nationalisation of the main banks.
Softy softly as they go.
Why oh why are they taking the long way round on this one, when it is now obvious they are readying themselves up for the inevitable announcement.
http://www.independent.ie/business/irish/aib-and-boi-risk-state-ownership–warns-honohan-1983227.html
Hi David, A good article. The bankruptcy laws in Ireland clearly excessively favour the creditor which, in effect, give another stick with which to beat the risk-taker. They gear the interest based on the risk plus, if that fails, they have bankruptcy laws which effectively trap the weak in insolvency. Forgetting for a minute the fact that they will write off the bad debt (tax free). You are right that it is effectively killing any incentive to take risk in Ireland. It is something that should have been reformed long ago. An efficient bankruptcy system is fundamental to any healthy… Read more »
Folks, Roubini at 19:19 this evening:
My column on The Gold Bubble and the Gold Bugs. The gold bubble is already deflating
http://www.project-syndicate.org/commentary/roubini20
Shane –
What do you reckon is the next telecommunications leap coming for us all.
I’d agree with David that our Lawmakers haven’t an original thought in their collective bewigged heads. Nothing changes from a legal POV until the Brits have executed due diligence on their side. That is unless any old shite emergency law (NAMA) has to be enacted to save the collective bacon.
From an entrepreneurial perspective, the levels of inane bureaucracy and hidden hindering hoops one has to contend with are a certain route to bankruptcy. Every small business person in the country knows you only smile sweetly at the system but float your own boat.
Tim –
Interesting roubini link. Have read before he attributes global credit crunch too barrel of oil bubble out costing demand and closing down economy consquently.
I say he is wrong and that the credit crunch originated from mortgage insurance fraud.
But am i a mere student of such things. alas!
http://www.athenaalliance.org/weblog/archives/2005/04/financial_risk.html
This is an interesting take on the Entrepreneur / Innovator V Bankruptcy theme.
Posters –
In relation to risk taking in good faith Vs risk taking in bad faith one could do better than too go to link and see serious questions been raised in USA over mortgage lending standards.
What’s rather bizarre on this is that both customer and lender are in unison regarding loan transaction breaking of rules.
How rampant is similar malpractice here.
Imagine, how big the % of mortgages loaned out too customers telling porkies too bankers turning a blind eye on a wink and a nod.
An excellent fast and speedy way to reveal the truth with public enquiry into banking malpractice here.
http://www.nytimes.com/2009/12/20/opinion/20partnoy.html
Tim , below is what I went to post on Pat Kenny’s facebook page,….but I was not let post it !! ..what’s going on ? So Are we better off today than ten years ago ?….How condescending can you get Mr Pat Kenny , you of course are better off , the rest of us sure we have Twitter,Face book and Emails but we also have property going to half what we paid for it and over due E.S.B bills to put off till we get Christmas out of the way . But forget out Ireland been €24 better off… Read more »
In all the years that I’ve been in business, I never realised that bankruptcy carried a 12 year disqualification and I went bust, but not bankrupt, three times in the early days. The last one, though, was a close call, because I failed to get the overdraft down to zero at the end of a twelve month period – wasn’t able to do a Seanie Fitz trick – so the AIB implemented a penalty clause and imposed punitive interest rates. There was nothing for it but to wind down, sell off equipment and pay up. It took four months to… Read more »
Brian Cowan is my shepherd, I shall not work. He leadeth me beside still factories. He restoreth my faith in the Final Fail party. He guideth me to the path of unemployment. Yea, though I wait for my dole, I own the bank that refuses me. Cowan has anointed my income with taxes, my expenses runneth over my reduced income. Surely, poverty and hard living will follow me all the days of his term. From henceforth, we will live all the days of our lives in a rented home with an overseas landlord. I am glad I am Irish, I… Read more »
Tim – Teachers Pensions .I was listening to Riviera Radio Monty Carlo on sunday morning in Nice and it was advised that people over 50 should consider taking their lump sum now and remain in employment until retirement date – this is an option in normal insurance private policies ……however I learned from the Dept of Ed that theirs is a Dept Matter only and that choice is not available to Irish Teachers .
Sorry for UK slant – but people are being driven to bankruptcy in the rush to the bottom. Jobs being outsourced via massive corporations to cheaper economies. I have no doubt it happens in Ireland as well.
http://www.dailymail.co.uk/news/article-1237712/Computer-giant-IBM-run-Tory-council-5bn-deal-thousands-job-losses.html
Posters –
Primtime RTE 1 21 december will go down in ‘our’ Republics history as a watershed moment, in my pov.
The report showed ‘banksters’ ducking in and out of shadows and basement stairwells and the like.
Even the sheeple, watching, will have registered with what appeared on screen as quite unbelievable and bordering on a forsythe novel.
Le Grand Emprunt 55bn€ a la Francaise – definitely the French care for their ENTREPRENEURS . It’s a French Word so they should .Their country’s international borrowings will finance research and development and bring France to lead Europe and The World.
Slave traders in Ireland will repay more than that plus interest to save Bank Criminals & Developers .It’s time to reclaim our Provinces again with local leadership and aspire to Les Principalite sur Atlantique .
Local Empowerment and foreign sponsors will do the trick.
Wills : Beards in October is all I can find of Honohan .( dont have the date ) .If he is a Scorpio then we have a Very Very Secret Intense Thick Bearded Realistic Detective that can lay a poison to friend or foe is the shadow of the night.A FOX in sheeps clothing to be more precise.
When I’m driving in the snow and ice, as today, I go very slowly indeed as I am terrified of skidding off the road. Even if it looks ok I won’t take the risk. I am happy to let more adventurous souls overtake and I’ll speed up along behind. That way the traffic moves quicker and things get done today rather than next week. I think that sums it up.
Apropos nothing here’s a recent erudite review by our old friend John Gray:
http://www.guardian.co.uk/books/2009/dec/13/value-nothing-raj-patel
Folks, the NAMA board is announced: http://www.irishtimes.com/newspaper/breaking/2009/1222/breaking65.htm “Chairman of the board will be Frank Daly, former chairman of the Revenue Commissioners. Mr Daly will be stepping down from his current role as a public interest director at Anglo Irish Bank. The other members are Eilish Finan; Michael Connolly; Peter Stewart; Brian McEnery and Willie Soffe National Treasury Management Agency chief executive John Corrigan and the chief executive of Nama will be ex-officio members of the Board. Steven Seelig will be appointed to the board in May 2010, when he retires from the IMF. The Minister also announced that a Planning… Read more »
Folks, partial CVs of our NAMA overlords: Frank Daly * Chairman of the Revenue Commissioners March 2002 to March 2008 * Revenue Commissioner since 1996 * Formerly Accountant General of Revenue and Head of Strategic and Business Planning * Joined Revenue in the Customs and Excise Service since 1963 and has since had wide experience of all areas of Revenue including Taxes and the International areas. * Member of the Top Level Appointments Committee 2003 to 2008 (body responsible for selecting top level managers in the Civil Service) * Chaired the Commission on Taxation 2008/2009 * Public Interest Director of… Read more »
Folks, meanwhile, the sheeple paying for NAMA continue to suffer job-losses and pay-cuts that are causing them to fall further into arrears on their own homes:
http://www.financialregulator.ie/press-area/press-releases/Pages/NewDataonResidentialMortgageArrearsandRepossessionspublished.aspx
Folks, here is Seelig’s full email (only partially reported in the Times) on NAMA, from the IMF:
http://www.karlwhelan.com/IrishEconomy/StevenSeeligFoI.pdf
And here is the draft of the NAMA Bill he was reponding to:
http://www.finance.gov.ie/documents/pressreleases/2009/bl103drftleg.pdf
So, you can, if you wish, print out both and see his comments section-by-section.
Hint: the term “Long Term Economic Value” is described by the IMF man as “masterful” (at what? and of whom?)
Hmmmmmm…….
Tim ~( bocht tu) – cornmarket I understand are the Pension company that accepts teachers premiums who want to buy years to retire sooner.If that is the case they must be the pension company that receives the monthly teachers pension premiums .Maybe then they can be consulted to make the lump sum payment to teachers that opt to ahave it when they are over 5there must be some contractual agreement with teachers rights .What do you think?
John ALLEN, unfortunately, no. Teachers who wanted to buy-back years did, indeed, invest in Cornmarket’s “AVCs” (Additional Voluntary Contributions), but these monies were invested in the gambling-system-markets, just like all private-sector pension-funds and they have lost the money. The Teachers’ pension premium-proper goes into central exchequer funds and is paid to retired teachers every year out of current spending (just like social welfare and salaries). That is except, of course, the NTFS fund that McCreavy set up in order to plan for future public service pension requirements. That fund has now been pilfered of €11 billion by the current government,… Read more »
Tim – thanks for your assistance
Folks, “The Emergency” has a take on the NAMA Board announcement:
http://www.theemergency.ie/breaking-news/master-thief-announces-heist-crew/
wills, yes, the public sector pension fund has been scalped. (that’s where they got the €11 billion for the banks.)
I have been “bitchin'” on this site for a long time about that.
(can’t believe you missed it!)
Folks,
Bertie Ahern’s appointments: 2006:
http://url.ie/4epe
(via Gavin Sheridan http://www.gavinsblog.ie)
to tired to debate the double talk.
here is a description of all the monetary tools that could easily fix our own money problems here at home. It’s not rocket science,no sarcasm intended, it really is that simple. Anyways , enjoy.
http://www.webofdebt.com/
Also David, you should already know about this stuff. It would be nice if you penned a few articles that really drilled down in the details of banking mechanisms and the science of money and credit systems, because ultimately, the ignorance of these subjects is what is killing us
bankstershill:
If only we could all post such truth!
http://www.webofdebt.com/
Monti – Carlo – try to listen to this station over Christmas .It’s refreshing .You can link to it on your pc
Sunday morning ( and others) financial advice is often given by a local taxation firm and worth listening to.All the D4- set there listen to it attentatively.
http://www.rivieraradio.mc