Monday, 17 October 2016

Its time the FCA protected creditors from this abuse

For all you caveat emptors, red in tooth and claw, you 'entrepreneurial' go getters who believe blindly that equity crowdfunding is gggreat. Here's one for you.

When a business goes bust, for whatever reason, you can be pretty sure there will be unpaid creditors - the amount will depend on the scruples of the directors. If these unpaid creditors are a result of a plan that was flawed and funded via a model that is also flawed then something should be done to prevent it's repetition - dont you think? Ignoring the idiots (shareholders) who backed the idea, creditors who may have run thorough credit checks and read news items, should be protected from this abuse.

East End Manufacturing is one such example. 

A recent report from the liquidator, not published yet, shows how flawed this business was. It went from this statement on the Crowdcube blog in May 2016  - 

Our sales topped £1m last year and we are expected to turn a profit for the first time this year, so we are moving in the right direction.

To admitting to the liquidator that by June 2016, the business was in dire trouble; ultimately resulting in its closure last month. You have to say that takes some believing.The Crowdcube projections show YE February 2016, that this company was making over £600k net profit. Pure fantasy passed and stamped by the FCA as good to go.

So these poor creditors, who being sensible businessmen and women, would have read up on East End Manufacturing, run credit checks and seen the good news story carried by Crowdcube in May 2016. Hey, no problem with this company's credit, they say, we can do business. 

By their own account only a month later in June the company was toast - having lost 60% of its revenues via 4 customers moving on. Was there no hint of that in May? Again by their own admission during the summer they entirely failed to get any new customers - is that really possible for a business 'moving in the right direction'?

The two main trade creditors have been hit with debts of £55k and £47k. Even for a substantial SME those are heavy debts likely to lead to lay offs or even closure. These creditors were misled by output from Crowdcube and the company. For the one owed £55k, this will put the company balance sheet into the red. Likewise the other one is small start up. 

So where does the responsibility lie? Could this company have run up these debts without Crowdcube? Simply put no. Who ran a piece praising this company and its future prospects just weeks before it was hung. Crowdcube. Have at least two small SME's been very badly damaged as a result. Yes. Is that really a sensible way to help the UK's SME's?

Quod erat demonstrandum.

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