The news that Pepper Post finally went into liquidation last week owing money to a string of creditors has once again focussed our attention on the growing problem of the Phoenix deal in the post production sector.
It’s the third time that the business has gone bust owing money, having been re-launched last summer
Time will tell if Pepper will re-emerge once again, but there is no reason why it shouldn’t. Phoenix deals are legal permitted arrangements whereby failing businesses are allowed to close and are rapidly re-opened under the same or similar management without settling their debts to creditors.
It's a phenomenon which has become particularly rife during the recession in the retail and media sector where financial pressures have increased.
In post-production in particular it's a problem because business margins have come under severe pressure in recent years as a result of the combined effect of the media downturn and the pressure that broadcasters have put on production budgets. Much of that pressure has been passed on to the show’s post production.
Phoenixing is unfair in many ways because it can be exploited by unscrupulous individuals to create an unfair playing field by avoiding obligations to creditors as well as the taxman.
In post production wages are probably one of the biggest costs, so if you don’t pay VAT you have 20% more income. If you don’t pay your PAYE bill you have 40% less costs. What this means is that companies that play it by the book can be at a considerable disadvantage - as much as 50% in some cases.
A business which is competing for work whilst not paying PAYE and VAT has a 50% revenue advantage which is can use to bid very cheaply for work.
Particularly in an area such as post production where there are too many companies fighting to too little business this makes a huge difference.
Those who suffer most are usually the small businesses with debts around £10-15k, with the bigger creditors having most say in how the businesses are wound up or sold off.
I don’t suggest that we get rid of the ability to Phoenix a company as it can be a powerful tool for creditors to have their debts settled and for the business to carry on, avoiding mass redundancy. It can be used responsibly so that nobody gets their fingers burned.
At the moment in the world of post production the concern is that this isn’t always the case.
What needs to happen is that the insolvency practitioners – those who are legally bound to act in the best interest of creditors – should ensure that they do. In cases of unscrupulous trading they should take a moral stand and not serve to legitimise it.
Peter Savage is managing director of Azule Finance, which provides consultancy advice on finance, leasing and business management in the broadcast and media sector.