Pre-pack phoenix com­­panies dominated the headlines in 2009, attracting much derision from the industry and particularly on the printweek.com forums. Hence, it will come as no surprise to many that bad debts in the industry are expected to be £20m for the year ending 30 December 2009, according to the National Association of Paper Mer­chants (NAPM).

The prevalence of printers being bought out of administration in distressed sales was brought home last week by insolvency practitioner trade body R3, which revealed research suggesting that sales of companies through insolvency routes has trebled in 2009 compared to 2008.

This practice of compa­nies going under and reappearing with the same directors is an emotive issue – local competing printers suffer, as do paper merchants.

Worry­ingly, 2010 looks set to tell a similar story. And the scale of the problem is posing a challenge to merchants, especially with reducing margins and volumes and the fact the practice is apparently increasing merchants’ credit insurance premiums, or leading to insurance being withdrawn altogether.

Warning signs
However, while many merchants state publicly that they do not supply phoenix companies, it is alleged that many do continue to supply them beyond the first warning signs that administration is likely.

Mike Gee, president-elect of the NAPM and managing director at merchant Den­maur Paper, says the issue is of great concern. He adds, however,  that because of competition law and advice from lawyers, the association feels it is unable to instigate a joint policy to deal with the problem.

Instead, it falls on individual companies to deal with these matters and issue individual policies if and as they see fit, he says.

In the case of Denmaur, the company has a policy of not dealing with phoenix and companies and is also circumspect in its dealings with Company Voluntary Arrange­ments (CVAs).

Somewhere near 80% of all of these vehicles fail again, leaving creditors stranded, often for the second time round, says Gee. However, Den­­maur has on a few occasions dealt with some form of re-birth if we felt the directors and shareholders put some of their own wealth on the line, and have been victims of circumstances beyond their control.

Gee warns that the issue  needs careful examination and that more legal control would be desirable.

I don’t buy the argument that pre-packs are there to help staff, who are often the victims of rogue companies, he says. Insolvency practitioners are in many cases as bad as the failing companies and often encourage people to fail as long as they get their fat fee.

He also objects to people ganging up on one supplier anonymously, without knowing the facts, and calls on companies to be responsible.

Owners of businesses should do everything they can to iron out these rogue traders that damage a highly competitive industry that has too much overcapacity.

But Steve Parkins, regional credit manager UK & Ireland at sister companies Antalis and James McNaughton, warns that having a policy on phoenix companies can cause other problems.

Those that do have a policy have to compete with those that do not exercise restraint. Taking a stance against phoenix companies is the right approach, but there is a cost to the merchants of the lost future business that may be available, he says.

Fact checking
Parkins says Antalis makes a thorough check at Com­­panies House that failed directors are not at the new company. He also insists on viewing business plans and investment/capital structure before agreeing to offer any credit facility.
We take this seriously, and it often includes a personal visit to interview the new directors, he says.

If new information comes to light that has a significant impact on the company’s original decision, it will be investigated and then the offer may change.

The last thing we want to do is offer a new business credit that is unstable and then take another bad debt six months later, he adds.

Despite the potential financial cost of not dealing with phoenix and pre-pack companies, Tim Elliott, Elliot Baxter managing director, says paper companies must still take a stance on company re-starts.

Our industry needs to take the issue more seriously and paper suppliers must not support them.

With 2010 following the 2009 pattern, the resilience of the merchants to implement Elliot’s call looks set to be tested.

Whether they manage to avoid phoenix companies remains to be seen, but it is an issue that looks set to continue causing debate and, for some, pain.