This phoenix / prepack lark again

[zadumbreion]

Today one of my customers told me that he is going to "fold" the company and "lose" his debts (getting on for £250K by the sounds of it). He will then start up again with the pick of the staff, in the same offices, with the same clients.

Whilst I still find this morally repugnant - after all, the £160K he owes in tax will presumably need to be recovered eventually through those of us still paying tax - is it really that easy? He's doing it partly because he saw his main competitor do the same thing a few weeks back.

I'm starting to really regret NOT having run up huge debts whilst stuffing money into pensions and mortgages. Just as savers are getting shafted, so I am really feeling like the mug here.

Is it really that easy? If so, why don't I start overspending, run up a nice lot of debt and do the same damn thing??

[GreenV8S]

Surely no supplier that has been shafted like that would do business with him afterwards?

[Simpo Two]

GreenV8S said:

Surely no supplier that has been shafted like that would do business with him afterwards?

Agreed, but there are plenty more suppliers out there who'll be happy for any business. I call it 'slash and burn'. Unfortunately there are some people who think that the more businesess they start and then fold up, the cleverer they are. I'd suggest it's cleverer to start one business properly and keep it working properly.

[zadumbreion]

Simpo Two said:

GreenV8S said:

Surely no supplier that has been shafted like that would do business with him afterwards?

Agreed, but there are plenty more suppliers out there who'll be happy for any business. I call it 'slash and burn'. Unfortunately there are some people who think that the more businesess they start and then fold up, the cleverer they are. I'd suggest it's cleverer to start one business properly and keep it working properly.

Me too, but after you've seen competitors and clients take advantage in this way, you start to feel like you're a mug for trying to do it properly.

In this particular case, the primary "supplier" is the government - it's largely unpaid tax he is planning to ditch.

I thought that "trading insolvently" was illegal - surely if you know you owe £150K of tax, and you can't pay it back, you are trading insolvently??

[Plotloss]

GreenV8S said:

Surely no supplier that has been shafted like that would do business with him afterwards?

You'd have thought wouldnt you.

I know someone who shafted a particular building materials supplier 4 times on the same site before they asked for a personal guarantee, which finally led to him being declared personally bankrupt when it went tits up for the 5th time.

[jamesuk28]

zadumbreion said:

Simpo Two said:

GreenV8S said:

Surely no supplier that has been shafted like that would do business with him afterwards?

I thought that "trading insolvently" was illegal - surely if you know you owe £150K of tax, and you can't pay it back, you are trading insolvently??

It Is, but try proving it or even harder prosecuting.

[Digga]

It's true that very few companioes are prosecuted under insolvency laws - and have a look on the Companies House website to see how few directors are ever barred from running subsequent businesses, it's laughable.

It's gaulling when one of your competitors does it, although often they rely on the word not getting out to customers, especially if they are selling high value products or services.

A key competitor of one of my companies pulled a pre-pack last October. I now make sure I 'name and shame' everytime we quote business against them! This is the phoenix outfit: Red Rhino Crushers

[seaninog]

zadumbreion said:

Today one of my customers told me that he is going to "fold" the company and "lose" his debts (getting on for £250K by the sounds of it). He will then start up again with the pick of the staff, in the same offices, with the same clients.

Whilst I still find this morally repugnant - after all, the £160K he owes in tax will presumably need to be recovered eventually through those of us still paying tax - is it really that easy? He's doing it partly because he saw his main competitor do the same thing a few weeks back.

I'm starting to really regret NOT having run up huge debts whilst stuffing money into pensions and mortgages. Just as savers are getting shafted, so I am really feeling like the mug here.

Is it really that easy? If so, why don't I start overspending, run up a nice lot of debt and do the same damn thing??

I just want to say someting on the "morally repugnant" part of this: I am an investor in a company that is about to go under and a Pre-pack was something we looked at before Christmas. Like you some of the investors raised a moral objection to it and I will admit that it troubled me and was certainly not a preferred course of action. However, I justified it as a course of action on moral grounds because as this stood, the whole business was going to go under, all employees would lose their jobs and no creditor would get paid. With a prepack we had the opportunity to keep half the staff in employment (and they continue paying tax, so too would the business and our suppliers who we would be able to pay etc) and give ourselves a fighting chance of repaying some/all of the creditors over a longer period of time. To me, though it still left a bitter taste in the mouth, it was a morally justifiable course of action for this reason.

Regarding the "ease" with which you fear people can do it, I don't think that is the case. It does leave a huge stain on the business and the individuals involved and isn't to be considered lightly. While I don't think the legislation allowing it should be scrapped, I think an amendment insisting upon a change of management should be added. One has to ask that if the same individuals who got the company into the mess are allowed to continue to run it after a Prepack, surely that's only going one way, no?

Just my two cents worth

[zadumbreion]

seaninog said:

I think an amendment insisting upon a change of management should be added. One has to ask that if the same individuals who got the company into the mess are allowed to continue to run it after a Prepack, surely that's only going one way, no?

Exactly. Change in management - or the competitors should be entitled to bid to acquire the business. Whilst this may be the current legislation in theory, that's not how it works in practice.

Edited by zadumbreion on Tuesday 10th February 10:25

[richardxjr]

seaninog said:

give ourselves a fighting chance of repaying some/all of the creditors over a longer period of time.

Is the prepacked 'NewCo' actually proposing to repay the debts of the bust co?

This would be unusual in a pre-pack. Perhaps a CVA would be a better option, and keep the company intact?

[seaninog]

richardxjr said:

seaninog said:

give ourselves a fighting chance of repaying some/all of the creditors over a longer period of time.

Is the prepacked 'NewCo' actually proposing to repay the debts of the bust co?

No. My understanding of the process (and I'm no expert) is that NewCo cannot favour any of the creditors that OldCo has defaulted to.

In practice, however, I learned that NewCo frequently agrees to pay above market rates for, say, the first six months to key suppliers that OldCo has defaulted to. Were this arrangement formalised it is illegal but it's hard to police and, I'm told, it happens all the time.

In our own case we did not go down this route (no point as the management was simply shocking and we couldn't get them out so the whole thing will go into administration later this month) but we had several "annoying" creditors that a Prepack would have been good to jettison. E.g. A former Director was launching a highly spurious legal case against us for non-payment of bonuses (!!), a PR agency wanted payment for work that we felt was sub standard, a consultant wanted holiday pay (these examples should give you a feel for you how badly run the company was!) and a few others. In this case, were it not for the management, I think a Prepack would have been a sensible and possibly morally justifiable option (though that is subjective, of course).

[richardxjr]

^ I see. Shame for you as an investor it would have been easy to have shares in NewCo issued to protect your investment.

Oh well, doesn't stop you looking at the assets & underlying business once the administrators are called in and boot out the useless management!

[therealpigdog]

for the amusement of those who like to berate the lawyers - we're not immune!

i've just had a client go pop on me owing a fair sum. the really annoying part is that they chose a different firm to carry out the prepack and have now come back wanting me to act for them again.

"money on account" and "personal guarantee" now springs to mind - a distinct case of me not having followed my own advice.

[skwdenyer]

seaninog said:

zadumbreion said:

Today one of my customers told me that he is going to "fold" the company and "lose" his debts (getting on for £250K by the sounds of it). He will then start up again with the pick of the staff, in the same offices, with the same clients.

Whilst I still find this morally repugnant - after all, the £160K he owes in tax will presumably need to be recovered eventually through those of us still paying tax - is it really that easy? He's doing it partly because he saw his main competitor do the same thing a few weeks back.

I'm starting to really regret NOT having run up huge debts whilst stuffing money into pensions and mortgages. Just as savers are getting shafted, so I am really feeling like the mug here.

Is it really that easy? If so, why don't I start overspending, run up a nice lot of debt and do the same damn thing??

I just want to say someting on the "morally repugnant" part of this: I am an investor in a company that is about to go under and a Pre-pack was something we looked at before Christmas. Like you some of the investors raised a moral objection to it and I will admit that it troubled me and was certainly not a preferred course of action. However, I justified it as a course of action on moral grounds because as this stood, the whole business was going to go under, all employees would lose their jobs and no creditor would get paid. With a prepack we had the opportunity to keep half the staff in employment (and they continue paying tax, so too would the business and our suppliers who we would be able to pay etc) and give ourselves a fighting chance of repaying some/all of the creditors over a longer period of time. To me, though it still left a bitter taste in the mouth, it was a morally justifiable course of action for this reason.

Regarding the "ease" with which you fear people can do it, I don't think that is the case. It does leave a huge stain on the business and the individuals involved and isn't to be considered lightly. While I don't think the legislation allowing it should be scrapped, I think an amendment insisting upon a change of management should be added. One has to ask that if the same individuals who got the company into the mess are allowed to continue to run it after a Prepack, surely that's only going one way, no?

Just my two cents worth

So is the situation that you'd have to invest more money into NewCo to allow it to buy the assets of OldCo? Or is it a case of the assets being worth essentially nothing?

The one thing I would say looking from outside is that if the shareholders take money out of OldCo in dividends, they potentially have money to put into NewCo to keep staff employed. If, on the other had, all the money had been kept in OldCo, it might have gone "quietly bankrupt" (i.e. without large debts) but with no prospect of a fresh start.

The moral position is always difficult, I feel.

[seaninog]

To answer your question skwdenyer it's the former. You put money into NewCo to buy the assets (be they physical or more likely the goodwill and IP) of OldCo and begin from there. Capitalise NewCo with, say, £50k, first thing you do is buy OldCo's assets out of administration for say £20k and you've got £30k left for working capital.

Regarding shareholders taking money out of OldCo in dividends, I don't believe it's that easy. I think the Administrator has the power to reclaim dividends/loans etc paid with a certain period of OldCo going into administration (not certain about that but I think it's the case). Of course, once OldCo goes into administration the Directors are investigated to see that they have acted in a fit and proper manner and in the best interests of the shareholders (I think).

Like I say, we didn't go down this road so my facts are not certain but that s how I understand the process.

[skwdenyer]

seaninog said:

To answer your question skwdenyer it's the former. You put money into NewCo to buy the assets (be they physical or more likely the goodwill and IP) of OldCo and begin from there. Capitalise NewCo with, say, £50k, first thing you do is buy OldCo's assets out of administration for say £20k and you've got £30k left for working capital.

Regarding shareholders taking money out of OldCo in dividends, I don't believe it's that easy. I think the Administrator has the power to reclaim dividends/loans etc paid with a certain period of OldCo going into administration (not certain about that but I think it's the case). Of course, once OldCo goes into administration the Directors are investigated to see that they have acted in a fit and proper manner and in the best interests of the shareholders (I think).

Like I say, we didn't go down this road so my facts are not certain but that s how I understand the process.

Thank you. I wasn't suggesting that the OldCo shareholders should take money out whilst OldCo is "going down". But, in the general sense, the payment of dividends out to investors as one goes along seems to have many potential benefits beyond the obvious financial ones to the investors! That is, of course, presupposing that the investors continue to want to invest!

[poj]

Digga said:

It's true that very few companioes are prosecuted under insolvency laws - and have a look on the Companies House website to see how few directors are ever barred from running subsequent businesses, it's laughable.

It's gaulling when one of your competitors does it, although often they rely on the word not getting out to customers, especially if they are selling high value products or services.

A key competitor of one of my companies pulled a pre-pack last October. I now make sure I 'name and shame' everytime we quote business against them! This is the phoenix outfit: Red Rhino Crushers

It seems to me that this going bump/restarting immediately is quite commonplace within the construction industry,up here in the North East a Plant Hire/civils guy has just done it for the 3rd or 4th time,yet people seem to be surprised when he shats on them.I know any business can and will have hard times,but when it KEEPS happening something should be done.

Aaahhh...sips beer,feels better,rant over

[therealpigdog]

for what it's worth, the Insolvency Service have just launched a service designed to invite complaints from creditors who feel they have been unfairly treated by a pre-pack.

Details can be found here: http://www.insolvency.gov.uk/howtocomplain/complai...

[johnfm]

part of the trouble is who can make a complaint re: fraudulent or wrongful trading. I think onlth the liquidator/administrator can do it - rather than the creditors.