Friday, 6 January 2012

Should we Allow Phoenix'ing a Company?

It seems a weird thing when accountants suggest a course of action that deliberately puts a company into administration in order to be bought by someone else free of any old accountability but that's what 'Phoenix'ing' is all about. And accountants seem to love it.

Blacks is the latest firm to go into administration for a very short period so that the company can be bought free of creditors snapping at their backs. In this case, it is Dragon's Den Peter Jones who appears to be the buyer after Mike Ashley of Sports Direct, the biggest shareholder, refused to rescue the company.

I have seen it argued that by doing this Blacks saves the employees, around 3,500 of them, from the vagaries of going bust and the wrath of the creditors who will haggle over the assets left to pay outstanding bills. However, the Phoenix process avoids this by declaring the company safe from creditors then allowing the good assets to be bought cheaply by a new buyer and the debts left behind and so the new owner gets the good bits while the creditors and shareholders get nothing but losses. Nice.

Of course, in saving the workers a good thing has been done, argue the accountants. However, it seems they have lost their capacity to add up as debts remain and the creditors don't get paid and shareholders lose their capital. Some may not shed a tear for investors as they should know the risk but all companies need creditors and if they have to write off bad debts then they suffer the consequences of Blacks' demise. It is the creditors who have to lose the money, lay off staff or curb their plans etc. They may get some insurance back but there are always losses.

And of course, this ensures that banks and insurers get more prudent and so there is less insurance cover and creditors lend less after getting stung. The argument is that this is better than Blacks going out of business as it could not be sold as a going concern.

So who is to blame here? Well the survivors are generally the same managers and directors who have brought the company to its knees as they are the magicians who use the Phoenix system. The workers will inevitably suffer as there will have to be severe restraints put on the business by the new owner to stem the losses. The accountants, meanwhile, get fat fees for their wizardry.

There is something cheap and nasty about the whole thing. There is something laissez faire about the management cavalier use of it. There is something distinctly odd about accountants using it. There is something very unfair about it for creditors. There is something downright shameful for the directors who leap from one boat to another freeing themselves of the responsibility of failure.

But the new owner won't care about that. The assets are bought for a song and it's back in business. I wonder, in the world of 'zero sum accounting' that governs all such matters whether the spread of losses make this any the less traumatic in the long run or is this just a convenient way for directors to get away with daylight robbery?

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