Director loans to failed companies being inflated for 'phoenixing'
Published 13/10/2010 | 05:00
DIRECTORS' loan accounts are being "fabricated" and inflated in more than a quarter of company liquidations, according to a new survey by debt monitoring agency BusinessPro.
BusinessPro, the publishers of 'Stubbs Gazette', analysed the statement of affairs of 100 companies in liquidation and compared them with the firms' last audited accounts.
The random survey, which included a business that was liquidated but continued to trade with the same directors, suggested that directors' loan accounts had been fabricated in some 25pc of cases, leading to fears of a wave of pre-pack liquidations.
Pre-pack liquidations, also known as the "phoenixing process", allow a new company to be formed that then buys the assets of the old failing business.
Employees may be transferred to the new business, which gains a competitive advantage over rivals due to reduced costs and a major writedown of company debts.
James Treacy, managing director of BusinessPro, said the agency conducted the random survey of 100 companies following a series of tip offs from liquidators that unsecured creditors of companies facing liquidation were being "stitched up".
It is feared that the alleged fabrication of loan accounts granted directors greater powers to nominate their own liquidator.
Insolvency experts also reported anecdotal evidence of employee creditors voting in tandem with their employers in the hope of being reappointed by the new firm.
"Creditors only see the company statement of affairs directly before the commencement of the creditors meeting," said Mr Treacy.
He has called on the Government to grant the Revenue Commissioners the power to block the appointment of a director or the incorporation of a new company if the directors of a failed company do not have their tax affairs in order.
"More seriously, in very many cases, it becomes apparent that the directors have the entire process stitched up by way of what appears in many instances manipulation of the director's loan accounts and the treatment of employee creditors.
"Most creditors arrive at their creditors' meetings to find that among the unsecured creditors' names are those of the directors of the failed company, who are very often owed comparatively enormous sums.
"This would imply a valiant and selfless attempt to save the company by way of pouring personal assets into the company. In reality it is nothing of the sort."
In the United Kingdom, employees are banned from taking part in proxy voting in a liquidation scenario and directors with a history of non-compliance can be made personally liable for the equivalent of PRSI contributions collected by a failed company.