How the sharks picked the bones of my company when it went bust

0
1022

After seeing our article about agency SBS going into liquidation, a reader gives us an insight into what happened when the company that he was a director in went under

Reader‘s Memories

My experience of liquidators is still current – they haven’t finished spending the remaining funds yet!!!

This was as an employee rather than a commercial creditor, but the effect is
just the same.

The Story

The story is that I was part of a tech startup working in the area of mobile
communications.

We created a software product and technology for SMS, WAP and Web
integration, then got VC funding to go forward with the product. Their
instructions were to increase the development team and not to concentrate on
sales (dot-com approach, admittedly) and this is what we did.

We did make some sales as well, but at every board meeting the message was to increase the development capability of the company and this would result in a better value and greater ability to deliver to the market.

Having employed a good bunch of guys (and girls) and worked on increasing
the product range, the time for a second round of funding came along and the
original investors indicated that they would be happy to put in the extra
funds to continue the growth of the company.

We also approached other VC’s with a view to getting a better deal if possible.

Dot Bomb

Unfortunately, this is around the time when the dot-com stuff turned into dot-bomb. And mobile technologies were not unique either, even if we had a good working product (I would say that, wouldn’t I) with a small number of sales.

We did not manage to get funds from other sources, and when it came down to
the crunch, the original investors turned their back on the company without
any qualms at all. With the monthly wages bill and office overheads, the
company was running out of time (and money) before it would be technically
insolvent.

An ‘insolvency specialist’ was called in to review the situation, for which
they had preferential payment terms for their own bills, and they made the
recommendation that the majority of staff were laid off and a core team kept
going for a further effort at getting last-ditch funding.

So, about two dozen staff were given their P45s.

The remaining dozen staff continued working on funding, but in this situation any potential investor could easily see the route ahead and saved their money – it was going to be easy to buy the Intellectual Property and any hardware owned by the company when it folded.

Much cheaper than buying a ‘live’ company, after all.

Cannot pay the Bills

Insolvency is determined when a company does not have the funds to pay its
bills, and cannot realistically see any way of getting the funds in an
acceptable timeframe. What makes this worse is that any notice periods for
staff have to be calculated into the potential debts for the company, and as
we had a CEO on 12 months notice, that meant a potential bill equivalent to
that persons (high) salary, plus the tax bill that would come with it.

This person was also brought in on the request – or command – of the VC director.
The CEO had also brought in a further member of staff in a senior position, also on a high salary and long notice period.

The insolvency practitioners were involved in this process, and two weeks
after the first tranche of staff were ‘let go’, the remaining dozen staff
were also out of a job as the company had reached a point of technical
insolvency.

It still had some money in the bank, but with a tax bill due to
be paid and the one-year notice period not being waived by the CEO, the
company had to stop trading.

In Administration

With the company put into administration, in the hands of the same
practioners, the effort than was to seek to obtain any value from the
company so that it may either continue trading or go into full liquidation.

The first part of this is essentially a ‘fire sale’, where the I.P. and
hardware are sold off for little return. The administrators also go through
the accounts to verify the level of debtors and creditors claims on the
company and do a report to show that all correct actions were taken.

They seek to obtain any money still owed to the company, including VAT money due
in the coffers. With the figures all sorted, company meetings are held to
confirm the position.

The company was clearly not going to be a viable concern again, so it then
went into the process of liquidation, which is where all of the assets are
distributed equally between the creditors. After the Inland Revenue had
their tax bill paid (as preferential creditors), the remaining funds meant
that other creditors were told that they could expect about 11p in the pound
for repayment of their debts.

This was also after the liquidators had their fees paid as further preferential creditors. I might point out that it also took over a year to get the VAT repayment, but that’s a different issue that

I will try not to mention again! The company was in administration for over
a year, amassing bills along the way.

Further Complication

A further complication appeared in this instance, when it turned out that
the administrators raised an issue of ‘vested interest’ and declared that
they could not perform the task of liquidators for the company. This
interest turns out to be that they had accepted a position as auditors for
the original VC investors for the company, who of course are creditors
looking for a share of the assets on winding-up.

Now, I personally think that the vested interest issue should have come to light beforehand and that they should not have been able to accept the job of auditors, but guess which of these jobs will pay the best (and would lead to further work in future)?

New Lot In

So, a new set of insolvency practitioners had to be brought in to handle the
liquidation of the company. The first thing that they did was to go through
all of the creditors and debtors figures, and the actions of the company
leading to insolvency.

Yep, exactly the same process that the other crowd
did as administrators.

Surely this would have been something that did not need to be repeated, as both parties are reputable legal concerns and followed the rules? But not to worry, the liquidators then apply a similar charge to that of the administrators in repeating their work (which would not have been repeated if the original company continued with the process).

These charges were of course covered directly from the remaining assets of
the insolvent company, on a preferential creditor basis.

Final Steps

The company has still not yet been wound up and is awaiting the final steps
of this liquidation process, so all creditors other than the I.R. and the
insolvency practitioners have had to wait over two years to see anything.
But due to the ongoing fees and duplicated efforts (don’t forget the costs
charged by legal firms for writing letters, answering the phone, or just
getting out of bed in the morning), the amount due to creditors was
apparently down to 5p in the pound last year.

The last I heard, it is likely to be perhaps 1p or 2p in the pound from the original debt. The longer this protracted process takes, the smaller the remaining funds, the less available to the original creditors – and the more to the insolvency pirates…

There have been changes in legislation lately (or due shortly, I can’t
remember which) so that the Inland Revenue are no longer to be treated as
preferential creditors, and also that time limits are to be proscribed for
insolvency cases.

No Change for Practitioners

These changes may be useful in these instances, but I haven’t heard of any changes to the fees that are charged by the insolvency practioners, which will still leech away company assets ahead of other creditors.

See – a somewhat bitter tale to tell! And not just about VC investors and
dot-com business approaches, but more to do with how a failed company is
picked to the bones once it reaches this unfortunate stage.

I should point out that I was on the board of this company but am not happy
about how things went in the fund-raising process, the VC involvement, and
especially in the winding-up process that followed the declaration of
insolvency.

Most of what happens is taken out of the hands of the founders, and is dictated by the VC investors and then by the practioners given a licence to deal with the closing down of a company (a licence to print/spend money, I would say) with little real interest in getting best returns for the creditors.

Contact and Comment

If you want to comment on this article use our new ‘Article Comments’ facility below.

Or contact us at [email protected]

“”If you know anyone else who would find this article useful, please email the article to them using facility below””.

ad