Channel sees red over debt policy

Are we looking at a worrying new business trend? John Oates reports.

The fallout from SCH's takeover of Preview Data Systems has led tos. fears in the channel that the practice of debt forgiveness could become an accepted part of British IT business custom.

The practice allows a company that is being taken over to offer its creditors a percentage of what they are owed as an alternative to the firm's liquidation.

This means that the price paid for a company can be reduced. If a majority of creditors accept the offer then the deal can go through. It saves the company from going through a creditors voluntary agreement (CVA). But it also stops creditors from seeing a full statement of affairs, as required by a CVA.

In the Preview Data Systems case, a letter was sent to creditors offering 33 per cent of sums owed or the risk of the acquisition falling through.

Without the acquisition by SCH, it was generally believed that Preview would go into liquidation. Creditors had 24 hours to respond and no other information was provided.

John Alexander, head of corporate recovery and insolvency at Pannell Kerr Forster, pointed out the dangers of such an informal agreement. 'The risk is that a large maverick creditor could either petition for liquidation of the company or push for full settlement of its debt,' he said. He added that to prevent this from happening, a CVA binds all creditors once 75 per cent of them, by value, vote in favour of the agreement.

Some creditors have said that in this case, the deal was reasonable and better than the likely outcome of a CVA. However, the fear is that it will become the norm when companies are acquired. If two companies were negotiating to buy a third, then debt reduction could become a strong tool in forcing down the price of the deal. This will increase risks, and therefore costs for vendors.

SCH, in a letter to PC Dealer, claimed the move was made only because time was too short to seek a full CVA. The group also claimed it was an honourable action which benefited creditors who would have got much less than 33 per cent in the event of Preview going into receivership.

Alan Thompson, director of Toshiba's PC division, warned that this practice would make accurate valuation of a company almost impossible if it became part of takeover negotiations. He also expressed fears that the last company to hold out on such a deal risked action from its credit agency, not only for its own debt but also for any debt held by the agency. Thompson conceded that companies had to follow the advice of their insurers.

Richard Holway, analyst at Holway, said the practice penalised well-run companies. He added: 'I agree completely - if I buy something from IBM I expect to pay the full price not 33 per cent.'

However, Holway said he knew of a number of reputable suppliers which had done such deals in the past.

What seems certain is the unwillingness of the industry to take the practice of debt forgiveness lying down. This was demonstrated in the letter sent out by giant reseller Computercenter, imploring creditors not to accept the terms offered by SCH.

In the letter, addressed to creditors and obtained by PC Dealer, CEO Mike Norris expressed his confidence that 'any reputable supplier in this industry would not let this happen'.