Neither a Borrower or a Trade Creditor be

Attended a breakfast seminar, hosted by S J Berwin, entitled "January Sales! How to get a Real Bargain from a Distressed Seller." The seminar discussed the options available to bidders and the risks and rewards associated with acquiring the business assets of companies entering administration.



One slide illustrated controversial 'Pre-packed' or 'Phoenix' administrations. Here a new company with the same secured creditors, same equity holders, same management (possibly) and of course the same assets, emerges from the flames of a failing business leaving behind the unsecured creditors with a bad taste in their mouth.



A recent example of a successful phoenix administration is the Michelin-starred restaurant chain run by Tom Aikens last October. Mr Aikens recently opened his soul to the Evening Standard expressing his guilt over the plight of his suppliers. These were mainly small businesses struggling to survive while his restaurants didn't miss even one day's trading. That did indeed leave a bad taste in many people's mouths. Not however for his staff, who got to keep their jobs, and (hopefully) not for his customers who were able to continue to enjoy a Michelin-starred service. In fact, according to Mr Aiken, 80% of his suppliers have continued to trade with his new company despite writing off their past debt with him. They are, of course, supplying on a cash basis which is sound risk management and to be expected given their recent experience. It is easy to criticise the practice of phoenix administrations and the impact they have on unsecured creditors, who always seem to be the ones to lose out. However, business continuation, particularly from the point of view of employees, is arguably the best result from an administration. Unfortunately this often means that the villain of the story does not get their just desserts. For the sake of employment and continued trade this may be a small price to pay, unlike for the meals served up by Mr Aiken. Over pricing, he admits, was one of the reasons for his business failure.


Businesses seek to limit their exposure to credit risk by having a diversified customer base, carrying out due diligence on potential customers and agreeing credit terms with customers. There will always be a risk that a customer will not be able to settle their outstanding invoices. Businesses understand, accept and take this risk. The focus is often on the plight of unsecured creditors during high profile business failures.



A more worrying concern for me is the way big businesses treat their small business creditors on a daily basis. Having worked in the temporary recruitment sector I have experience of the extraordinarily long credit terms the large banks command and their inability to meet even these deadlines on time. Similarly a large supermarket chain is currently sitting on tens of thousands of pounds worth of invoices owed to a small business recruitment contact of mine. This equates to the level of his monthly payroll and can be the difference between survival and failure for his business.


There has been a lot of focus on the treatment of borrowers by the banking sector. I suggest that multi-billion pound businesses, such as banks and supermarket chains, have as big a responsibility to their small business creditors. They should be doing their part to ensure the flow of cash throughout the economy by sticking to the credit terms they have agreed. Fair trade should surely start at home.



Mark Widnall