The Business Book

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liabilities. This method can be
especially controversial, since it
can allow the owners of the original
business to sell the “pre-packaged”
new entity and still be involved in
the business. In August 2008 the
London-based restaurant business
of Michelin-starred chef Tom
Aikens went into administration.
It was bought by TA Holdco Ltd.,
of which Aikens was appointed
partner and shareholder. Around
160 suppliers were left nursing
losses that would never be
recovered. However, by early 2010
Tom Aikens’ business achieved a
financial turnaround, and opened
three new ventures in London.
When pre-pack administration
is utilized, suppliers are revealed
to be in a much more vulnerable
position than might otherwise be
expected. The financial losses
incurred by Aikens’s restaurants
were effectively absorbed by
suppliers, not shareholders. In a
world of pre-pack administration
and Chapter 11 bankruptcy

protection, the creditors can find

themselves in a riskier position

than the shareholders.

Employees at risk

Staff employed by a business is

also at risk when a company fails.

When US energy company Enron

collapsed in 2001, an extraordinary

feature of the unfolding story was

the plight of many employees.

Unlike the senior executives, rank-

and-file staff had been part inspired

and part browbeaten into “showing

faith in Enron” by investing

WHO BEARS THE RISK?

personal pension funds in Enron

shares. When the business was

liquidated, employees not only lost

their jobs, but also their pensions.

When the collapse of the business

was becoming clear, Enron froze

its pension fund, preventing

employees switching their pension

holdings out of Enron shares.

Employees can also be

vulnerable due to the predations of

the investment market. If a company

is bought through private equity,

employees can find themselves

worse off if the business fails. A

private-equity purchase is when a

publicly traded company is bought

by a “private-equity group,” often

through a leveraged buy out, where

the assets of the purchased

company are used as security to

borrow funds with which to finance

the purchase. In so doing, the burden

of risk is on the business (and its

employees), not on the owners.

The UK franchise of Canadian

underwear business La Senza

collapsed in 2012, with 1,100

employees losing jobs. In cases like

this, the staff has little to gain when

things go well, but everything to

lose when they go wrong. Suppliers

Suppliers are among the last to receive
compensation for their goods or services
if a business goes bankrupt. If, in the
UK, it enters “pre-pack administration,”
suppliers might receive nothing at all.

Private-equity ownership

is typically structured in an

asymmetric way. If things go

well the private-equity owner

gains, and if things go badly

the subsidiary business loses.

“Heads I win”—in good
times, the business
owner stands to gain,
whereas the position of
employees changes little.

“Tails you lose”—in bad

times, the owner is protected

from losses, but the business

and its employees suffer.