My mate John didn’t make it

2008-10-13 00:00

A couple of weeks ago, I devoted this column to the plight of my friend John in England, whose SME, after 30 years’ trading, had got into dire straits. It is sad for me to report that he didn’t make it and the bank has appointed a receiver. Heading up to the last few days of business, John wanted me to outline to him exactly what would be involved once a receiver is appointed to administer his business. He didn’t have a clue what was to happen and this was having a terribly debilitating effect on him mentally.

Before shedding a little light on what happens when a receiver is appointed, I feel I must say that the ongoing credit crunch and the response to this by world leaders, leaves me cold. I mean, British Prime Minister Gordon Brown announces that a £300 billion saviour plan is to be put in place. Within an hour of making this statement, he tells us that another £50 billion will be made available to help save SMEs — like John’s! The world is still reflecting enormous levels of poverty, hunger and destitution, yet the so-called First World does next to nothing in terms of aid. The greedy banks get it wrong and here come billions to bail them out. This just doesn’t sit right with me.

It is illegal for any business to continue trading once it has become insolvent. Any creditor of an insolvent business can apply to law to have an administrator appointed to take over the management of an insolvent company. In John’s case, the bank, which is his biggest creditor, felt he had no reasonable opportunity to trade out of his unprofitable circumstances and restore solvency, so it moved to have a receiver appointed. This means that John and his fellow directors move out and have no more responsibility for managing the business. The receiver’s people move in and they set about disposing of all assets and inventory, returning the proceeds of this to the creditors, in order of their priority. Disposing of all assets can mean a number of things. The business could be sold as a going concern or parts of the business could be sold, such as stocks or trademarks.

Equally, the receiver may continue to allow the company to trade for a period of time, in which he feels strongly that he could get greater benefit (payback) for the credits if he converted raw materials into finished goods against a strong outstanding order book.

The point is that the owner/directors have nothing further to do with decisions made or the business operations once the receiver is appointed. They cannot return to the premises without an invitation from the receiver. In John’s case, the bank wants to get as much money as possible from the business to offset against the overdraft. In many circumstances, a bank will have a charge over the owner/director’s personal assets, such as his house and/or life policies. Who will get their money first is determined by a strict order or priority. Number one slot is held by the government — PAYE and VAT being the principal amounts concerned. Depending on circumstances, the next priority could be payment of minimum required employee termination settlements. Obviously, everyone who is owed money will be banging on the door to get their slice of the pie, even to the point where a supplier may illegally enter the premises with a view to reclaiming their (unpaid for) stock before the receiver gets his hands on it.

It is for such reasons as this that receivers by nature have to be cold and calculating. They are charged with maturing the best possible return from the business that they can for all creditors.

Unfortunately, for those suppliers in the lower pecking order, who have delivered and not yet been paid, they may only get a few cents for every rand they are owed.

Over the next two weeks I shall deal with why businesses fail, followed with what makes some business so successful.

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