[PaulB]

There are numerous instances where businesses go bankrupt/into receivership or liquidation and people who they owe money to lose out as do the “shop floor” staff.

One group that often seems not to lose out is senior management. They are often reported to have received bonuses and “fat cat” pay when the company has perhaps expanded too fast or taken on too much debt, or not moved into the 21st century.

There were accusations of this with the recent Thomas Cook failure, and now there are worries about Pizza Express.

What can be done to ensure that senior managers who manage a business into failure do not grossly profit from their actions? Or am I seeing it from a too “left wing” perspective and these guys (it nearly always is guys) have nothing to answer for?

[egbgnewbie]

Where foul play is found, directors can expect to be told off - however what's foul is probably more the point.

Operations Director for example could probably argue that it's not his/her fault a business went under - and how should they have known (for example) that debt wasn't sustainable or would be withdrawn....

Fact is usually (certainly in medium sized businesses) there are so many "ifs", it's hard to actually point the finger! That combined with the little guy (the staff) not having the funds to bring action against those directors.

[JoeC]

There's a model that is regularly repeated.

Company gets large enough to interest backers/venture capitalists who will fund growth.

They MUST have an exit strategy (ie recoup their investment) within a timeframe. So they fund the flotation or expansion of the company.

This generates more money (along with the original venture capitalist money) so that the company now has a 'value' that is based on confidence. With the new pot of cash in the bank the original owners take a share and then management spend the rest 'expanding' - usually by buying competitors.

There is an immediate increase in revenue due to the addition of the competitors turnover which is hailed as a great success. Without reference to the capital investment / potential loss over time.

Rinse and repeat this a few times and you have a company that looks like it is doing great but in reality its got loads of borrowed money and is robbing Peter to pay Paul - only being kept afloat by new 'investments' into and out of the company.

Backers get scared. Remove their 'confidence' and cash in their chips. Investors, creditors, employees can't see any of this happening and are left with nowt.

It's just a big confidence game that works when it works but is surprisingly flakey. Thomas Cook ran out of confidence not money (they ran out of that about 1.5 billion pounds ago!)

So it's not really the directors, its the system that the UK has created and actively supports. That's why no-one goes to jail.

[Flyingfemme]

What Joe said.....it is the modern way.

Everything is about fast profit and fancy figures. Growing a business "organically" is unsexy and not attractive to "investors" any more.

I see a lot of guff about businesses claiming to be "sustainable" but can't actually understand what they mean by "sustainable". In a business sense I would expect it to mean a company that is on a firm financial footing and paying its way/making a profit. Going to be around for a while, paying wages, rent and buying/selling stuff. That seems to be the last thing actually considered.

Banks are only bothered with lending vast sums of money that may not be paid back so they can foreclose.

[PaulB]

Banks are only bothered with lending vast sums of money that may not be paid back so they can foreclose.

How do banks make money out of that? I guess they just lend some more?

Pizza Express is said to have £1bn of debt. If the banks foreclosed, would they see their money? I’m guessing that the senior management team would.

Is this a U.K. disease or a worldwide phenomenon?

[Grelly]

Pizza Express is said to have £1bn of debt

How can Pizza Express be in debt!?

It's basically cheese on toast sold at a vastly inflated price.

[romille]

Pizza Express is said to have £1bn of debt

How can Pizza Express be in debt!?

It's basically cheese on toast sold at a vastly inflated price.

It is also a cash business, so there are no debtors and because of the nature of the business I imagine they will not be funding a substantial stock holding. The only thing they should need to borrow for is investment in fixed assets.

[rikur_]

I agree with much of what @JoeC said - albeit I think there are some key differences of context.

Investors, particularly seed, VC and PE backers are gamblers. They're not looking for a steady 5% - 10% per year return ....... they're looking for doubling their value or more within 3 years, and are willing to back a few failures to get there.

At one end of the spectrum this feels ok - start-ups. An entrepreneur courts investment to try to rapidly grow their start-up into something bigger. You're all in the gamble together. I'm grateful that someone is willing to take a gamble on my 50:50 idea. Banks won't lend anymore, so thank goodness for VC's to give an idea a chance. I wouldn't necessarily think badly of a senior manager who has been in 5 start-ups, 3 of which failed, that might be just more about risk appetite than ability.

At the other end of the spectrum there are the end-of-life businesses. Businesses that have historically been successful, but for one reason of another are now in a less certain place. Many reasons they might be in that position - the unsustainable valuation growth described by @JoeC, or asset stripping and under investment by a previous owner; alternatively a business that's taken its eye of the ball and got bloated and unfocused; or just in a sector that's declining.

There are gamblers approach this end of the market too. Arguably many of the businesses would have been wound up a few years earlier without them - but there's a bunch of investors attracted by the prospect of one or more of turn-around; restructure and divest; asset strip; etc.
It's much harder at this end of the spectrum to separate the good from the bad. I've been approached for roles in companies on the rocks. Rationally you ask for a premium on the salary as it's going to be a lot harder work than coasting elsewhere, and you're potentially looking at finding yourself out of work with a tarnished CV at pretty short notice if it doesn't turn around.

It's not all good, but not all bad either. Only the individuals will know their own motives.

[Kittyhawk]

There is a wider question regarding the relationship of the auditors in this. Companies turn out to have enormous black holes in their balance sheets despite seemingly positive audits, almost always by one of the ‘big four’, who also often have lucrative consultancy contracts with the same companies. Thomas Cook, Carillion, Patisserie Valerie. The list goes on

[JoeC]

If the banks foreclosed, would they see their money?

Oh yes.

The banks will not be exposed in anyway. Their money will be secured against property or assets that they have first dibs on if the company goes bust. Even if they cause that by refusing any additional credit.

They simply wouldn’t even enter into an arrangement without some sort of security.

They usually withdraw when there is no more security available.

Despite what you hear they take zero risk in such matters. It’s only when they are concocting bizarre byzantine deals that make them money without anyone knowing that things go wrong for them. If being bailed out by the taxpayer can be deemed as things going wrong.

[Charles Hunt]

The whole thing stinks, and makes me ashamed of this country.

[avtur3]

If the banks foreclosed, would they see their money?

Oh yes.

The banks will not be exposed in anyway. Their money will be secured against property or assets that they have first dibs on if the company goes bust. Even if they cause that by refusing any additional credit.

They simply wouldn’t even enter into an arrangement without some sort of security.

They usually withdraw when there is no more security available.

Despite what you hear they take zero risk in such matters. It’s only when they are concocting bizarre byzantine deals that make them money without anyone knowing that things go wrong for them. If being bailed out by the taxpayer can be deemed as things going wrong.

I understand how the banks work, I've been on the receiving end (actually that should be the giving end ) of their security arrangements. It cost me every last penny I had, yes they only provided what they knew they could recover from me. Once that limit was reached they pulled the plug.

What I don't understand with something like this Thomas Cook business is they were £1.7bn in debt when their plug was pulled, what was that secured against because I can't see how they had assets to that value? The high-value assets like the aircraft were leased so how was such an amount of debt allowed to build up? Do they have a property portfolio to match this level of debt? The thought that they could ever trade their way out of that level of debt just seems like an impossible task, and probably was some time ago.

[spaughty]

Thomas Cook's debt is summarised on page 14 of this Half-year Financial Report

I guess the "Revolving Credit Facility" might be from banks, but the bulk of the debt is Eurobonds. No doubt when they issued the bonds, the company looked a lot more rosy, which is why people bought them.

Unlike banks, bond holders can't just pull their money. Even if the company breaks a bond covenant, that doesn't mean investors can get their money back, except perhaps in a liquidation. See eg this.

On page 6 we see a negative free cash flow of £849m for the first half of 2019, and on page 1 they say the summer could be "challenging".

I think their bond-issuing days were already over...

[JoeC]

I doubt that debt was with the bank. Probably with creditors such as aircraft leasing companies, hotel groups, fuel providers etc who would have extended credit because the bank was ‘supporting’ Thomas Cook.

Edit: crossed with Spaughty.

[Bob Bevan]

Pizza Express is said to have £1bn of debt

How can Pizza Express be in debt!?

It's basically cheese on toast sold at a vastly inflated price.

Perhaps they sold too many Calzone and folded!