The question of whether the management team of an insolvent company should be permitted to mount a buyout is as important as it is complex, especially in the case of a publicly owned company.
At Media Square, despite their best efforts the incumbent managers had failed to restore the company’s fortunes, so why should they have been “rewarded” with a second chance?
And who determines whether the price paid for the buyout is the best available, or whether the management should be allowed to buy at a price that may be less than it would have been if the business, or its component parts, had been sold sooner?
A deal of this type is often described as a “phoenix”. That term is commonly applied where creditors as well as shareholders in the failed business lose money only to find that the same management team reappears from the ashes to carry on the same business with an ownership interest cloaked in new corporate clothing.
At Media Square, the initial indications are that the bank and the shareholders have lost serious sums of money, but that the ordinary creditors have been paid or will be paid in the ordinary course of business. Even assuming that proves to be the case, is it reasonable for the bank and the administrators to have done a deal with the former management behind the scenes without first seeking the approval of either creditors or shareholders of the failed business? Clearly Bob Morton, whose company Hawk Investment Holdings had a 7% stake, thinks not (see Media Square MBO “in breach of duty to shareholders” ).
Insolvency specialists will be the first to point out that time is of the essence in the face of financial failure. Once the clients and staff jump ship, nothing remains to be sold.
It might be argued that a deal could have been struck that was contingent upon shareholder and/or creditor approval. But what would happen in the meantime? The trade would probably grind to a halt as no-one would extend any further credit while the situation remained in limbo, clients would lose confidence, and good staff would be open to seduction by every head-hunter in town.
So if there is anything unsavoury about a pre-packaged phoenix deal, perhaps it would be better to make it unlawful for a former director of an insolvent company to become a director of or shareholder in any company that acquires a business from that insolvent company or any of its subsidiaries within five years of the insolvency. At least everyone would then know where they stood.
