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Tears, laughter and bankruptcy: How not to go bust

Guess who just tried to break into the warehouse?

Feature Bankruptcy? You don't know whether to laugh or cry.

It was a lunchtime tech awards ceremony in the West End many years ago. The trophies were polished, the golden envelopes were ready to be opened to gasps of joy and waiters were circulating with the canapes and fizz.

Suddenly some rather large men in suits appeared among the throng, grabbing glasses. Then bottles. Then the furniture. The venue had gone bankrupt, and the men in suits were bailiffs, attempting to repossess anything that wasn't nailed down and the gobsmacked attendees couldn’t get down their throats.

That one was a laugh. For a cry, try this on for size.

Lost in France

An insolvency practitioner, a partner at BDO, the accountancy and auditing firm, tells us of the director of a reseller who "lost it" just ahead of the administrators arriving at his premises with their chains and locks. He just took off.

He recalls: “We received a phone call in the afternoon. The director had run away and left his children at school. There was no one to pick them up. He’d last been seen climbing into a van.”

The director was found a few days later meandering around Northern France in his van which he’d stuffed full of kit before the administrators closed in. It was a quick get away with as much "loot" as he could carry. But clearly he'd not thought it through. He’d had a nervous breakdown.

While this is a harrowing tale, it illustrates the impact of bankruptcies and the personal cost they can have.

Bankruptcies in the technology channel were pretty rife at one point and in comparison, credit crunch notwithstanding, are thankfully less so these days.

This year, of course, saw the mega collapse of 2e2, which focused attention on the ramifications of having your key tech supplier go up in a puff of smoke. However, 2e2 apart, fewer firms are going bust.

Credit referencing agency Graydon UK reported in April that 64 tech suppliers had hit the wall in the first quarter, down 28 per cent on the same period in 2012. This brought company failure rates back in line with the trend before the credit crunch. It also represented the third quarter in a row where the level of collapses had dipped.

The big boys can generally absorb the cost of bankruptcies but it’s the little players who often get stung badly - financially and emotionally. The effect can often be seen at creditors' meetings when the directors often have to do a perp walk in front of those who’ve lost out.

The BDO partner says: “Creditors are understandably angry and I’ve seen people smashing up tables and chairs. They want their pound of flesh and in some cases they’re justified.”

I recall seeing angry creditors and distraught staff hurling wild accusations at directors, from claims of shenanigans over sports club contributions, to charges that companies were happy to take delivery of stock knowing full well they were going under, to dark mutterings about the number of trips taken by directors to the Isle of Man, and just how much luggage they took.

It's a heartache

Illicit relationships between directors and their secretaries aren’t strictly part of the administrators’ responsibilities, but these usually got a good airing too.

Often the wilder claims are simply the result of the confusion surrounding the rapid implosion of a company. Try explaining the intricacies of cashflow and the Darwinian nature of business to someone who has just realised their quarterly bonus has gone up in smoke.

Sometimes the angry outbursts contain a grain of truth, and the creditors’ meeting turns into a sort of scandal souk, where dirty linen is exposed and very publicly examined. You might even feel some pity for the poor director caught off guard, apparently unaware of just what his fellow directors were up to. But the creditors won’t.

Who's that trying to ransack the place? Some geezer who's lost money...

As for the locks and chains that appear around bankrupt premises, these are sadly all too necessary: “You’d be surprised at the number of people who try and break in because they’ve lost money and they’re trying to get something back,” our insolvency specialist says.

The effect of bankruptcy on directors can go two ways. There’s the guy who shipped off to France trying to salvage what he could of his business and then there are those who understand the rules of the game and don’t take it too personally.

Veteran credit maven and managing director at channel consultancy EP Credit Management, Eddie Pacey reckons most savvy directors ensure they don’t have much in the way of personal liabilities and will often sign large assets, such as the house, over to their spouse.

Pacey says: “There was one reseller who went down who had been doing quite well for a long time. He was selling hard drives from the major manufacturers. We reckon the company was turning over at least £500,000 from drives, not to mention other products. The director originally had personal guarantees with the vendors to insure against losses, but he moved all of his personal assets over to this wife so when the company went down he had very little. He had to sell his Rolex watch. But so what? What about the yacht held in his wife’s name?”

While things are not as bleak perhaps as they were in the early '90s, the recent credit crunch certainly took a toll. Gordon Davies, founder of Microsoft reseller Adepteq, reckons he was close to the wall: “When I set up and needed to borrow a lot of money I knew I was taking a risk. The deeds of the house were provided as collateral. Sitting down with the bank manager was amicable but we both knew that if the business didn’t succeed my house would be taken by the bank. It’s a scary feeling.

“We’ve been in business for some time but the credit crunch was horrible. It was 18 months of uncertainty and sometimes near terror. Customers were going bankrupt all over the place and at one point I owed a lot of money to creditors. I was receiving advice that effectively said I should declare bankruptcy. Thankfully I didn’t do it and we’re out of the other side now.”

The point about customers going bankrupt is a moot one. Davies, Pacey and Alex Tatham, managing director at Westcoast, all point out that the bankruptcy of some customers is questionable.

“You’ve got to weigh up each situation. Some bankruptcies are genuine but others perhaps not. You develop an instinct for these things and sometimes you question the integrity of the people involved,” says Davies.

Total eclipse

In short, some customers deliberately mislead the reseller or distributor when faced with financial extinction. Rather than come clean they’ll continue to take product and kit even though they know their days are numbered. Davies cites a case where one customer took £200,000 worth of stock and within a few days had stopped trading and disappeared. Along with the stock.

Tatham at Westcoast says he's more than familiar with this type of situation. In the nineties when he was commercial director at Ideal Hardware, there was so much VAT and carousel fraud going on in the technology channel that resellers seemed to be appearing and disappearing like bubbles on the surface of water.

“It was a difficult time. You didn’t know who you were selling to or who to trust. One day a company was trading and the next it had closed due to bankruptcy, only to reappear with a new name a short time later. It was affecting everybody’s revenues and despite it being totally illegal it was practiced very openly.”

It takes a certain length of brass-necked nerve to go back to the same supplier when you’ve gone into bankruptcy and resurfaced again. Tatham says that during the nineties many bankruptcies were essentially criminal undertakings with the companies just set up to cream off VAT revenues.

Adepteq's Davies recalls a small regional retailer his firm had done some work for, implementing a system in its shops: “The company looked healthy, it looked strong. We were two months into the contract and had booked about £50,000. In the third month, it went belly-up. We took the hit which caused all sorts of problems. A short while later it reappeared under another name. It’s frustrating to say the least.”

Those directors who have genuinely tried to avert bankruptcy but are unable to stave it off gain the sympathy of Davies: “Many resellers have failed and the genuine directors tend to get tarnished. It’s often unfair on them because they can get pulled down by economic conditions or their customers failing and yet they can get a bad name in the industry.”

Still, even bankruptcies can have silver linings. The recent collapses across the UK high streets have resembled a blood bath with Comet et al sinking beneath a mountain of debt.

A restructuring consultant involved in Comet’s winding down pointed to one of its suppliers which put about a third of its product through the chain. When it sank, the supplier apparently took a loss in the region of £500,000. However, the margins for its product going through Comet were razor thin. After some serious scrabbling for other outlets, the supplier was able to jack up the margins to a more profitable level. It’s now on course to cover its losses and in time turn a higher profit.

Creative destruction is what the economists call it. But if it's not bringing a smile to your face, that's because it hurts. ®

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