Credit where it is due

When does business failure warrant a withdrawal of credit?

Pacey: It's how you fail and your recovery that count

Business failure does brand directors somewhat for the way they have led a business to such an ‘undignified’ end. Such disdain can be regrettably brought to the fore through the actions of a minority of business owners hiding behind limited liability.

Their methods and lack of care overshadow hard-working individuals and entrepreneurs occasionally at the mercy of cataclysmic and unexpected events that may precipitate failure. There is a massive difference between the two.

Much criticism was made of changes to the Insolvency Act that initially made it so much easier for those few intent on serial failure to escape with impunity, and in some cases, arrogance. Perhaps at some point government may wish to tighten control to make life just a little more difficult for those involved in serial failure or who act totally irresponsibly.

I recall a case not so long ago when a director who failed and started up again the next day had the affront to suggest all his suppliers were insured so therefore none lost money. He did not know this, of course, and neither would he know the nature of the policies held but listening to this lame excuse for failure probably explains why credit insurers are so wary of some types of businesses and the individuals running them.

This director’s nonchalant approach aptly demonstrates the irresponsibility evident, thankfully, in few cases. The fact that it is there is nonetheless a real worry. I have also seen businesses move to administration, pre-packs, and other forms of insolvency where current owners come out of the mist like knights in shining armour, buying certain specified assets, suddenly finding the money to ‘invest’ in their new business.

Shame, really, that in many cases this new-found investment is less than that required to have kept the failed business going. It is so much easier to shut down, and avoid some 60 per cent of your total liabilities.

I have also seen the other side of the story: businesses that have been around for years, endured ups and downs and directors who would gladly peel the skin off their back to keep their people in employment and limit their supplier loss. Not only this, they learn from experience and avoid repeating their mistakes.

I met a director of a business and his advisor late one Friday afternoon just after he had laid off all staff. He apologised profusely for having to close the business leaving us with an unpaid debt. My response was he had nothing to apologise for; we had done great business for more than 14 years, we had worked together during his difficult period aiding and assisting him in winding down his business and in the process, limited our loss and that of other creditors substantially.

In this case, the model of his business had run out of steam, overtaken by change and he was a little too late to act. We knew that; we had tried to influence him before this but this was not a time for recrimination. He asked if we would support with credit if he started again and my response was unequivocally, ‘yes, so long as you are not the same business’. In fact, he moved on in life and worked for others.

The Companies Act lays down pretty precisely what director responsibility means and what the implications and penalties are of non-compliance (as does the Insolvency Act). Few creditors would throw more money at an insolvency practitioner to pursue directors personally -- although this is something that many more are looking at more closely. While limited liability exists, it does not give carte blanche security for cowboy-style activity.

In some cases, Department of Trade and Industry (DTI) reports are no hindrance as it is easy to have relatives or similar registered as directors with those disqualified calling the shots.

Many successful names are owned and managed by directors with failure parked on their CV. Unlike some, however, they learn to avoid the unexpected and even plan for it.

I have actively supported or recommended some liquidations or pre-packs where it made sense and there was simply no alternative. There is nothing shameful in failure but the manner in which it occurs and the actions of those managing the business are what determine goodwill and support.

Eddie Pacey is director of credit services at Bell Micro Europe