Unscrupulous behaviour doesn’t always take the form of theft or embezzlement. Company directors will take advantage of legal loopholes to avoid paying their debts, and these practices can be just as dangerous.
A common example is Rapid Succession, which presents a growing threat to small businesses. The practice can be difficult to spot with a standard company director search, but we’re here to help. Here’s a closer look at Rapid Succession, and how our Aphrodite® tool can spot a Rapid Succession company and keep you out of harm's way.
Rapid Succession is the rapid movement of incorporation(s) either prior to or following insolvency action against a company where the new company or companies are linked to the company that experienced insolvency action by one or more common directors. Although the population of companies that meet these criteria are legitimate and of no legal concern, the population also includes legitimate phoenixisms (if incorporated and operated in accordance with the law), and a subcategory of illegitimate phoenixisms where the applicable law has not been followed or where the director(s) intend or intended to commit fraud.
The exact number of Rapid Succession companies is unknown, but we've found 104,000 links identifying over 58,000 Rapid Succession directors over the last two years. Anecdotal evidence also suggests an increase in Rapid Succession companies in recent years, and it’s easy to see why this might be the case. With interest rates continuing to rise, borrowing money to save a struggling business is no longer a viable option for many companies.
When faced with this situation, the temptation to write off debt and start again is understandable. The problem comes when directors take advantage, repeating the process over and over, leaving a trail of hollowed-out companies in their wake.
“Rapid Succession is sometimes done with the best of intentions, but it also creates a temptation for unscrupulous directors. When this behaviour becomes widespread, it can be extremely detrimental to the economy".
While Rapid Succession isn’t technically illegal in most cases, it can have serious consequences for the suppliers of phoenix companies. Smaller businesses may work with these companies in good faith, only to find themselves saddled with huge amounts of debt when the company declares bankruptcy. For an SME with tight margins, this is often enough to wipe them out completely.
Learn 10 vital things you should do, and 10 risks to watch out for when extending credit to a customer in our free guide.
Rapid Succession has become part of the culture of UK business. Sales teams are under immense pressure, and this encourages them to do business with a Rapid Succession company even if it could ultimately lead to losses.
To make matters worse, the laws around Rapid Succession are murky. During his time as Secretary of State for Business, Innovation and Skills, Vince Cable launched an investigation into “Pre-Packs” - businesses sold just before they go bust. It found that, when done correctly, this process can benefit the economy by saving jobs and allowing businesses to keep trading.
A good example of this is the clothing brand Joules, which was bought by Next during insolvency proceedings. This saved an estimated 1,500 jobs and gave the UK fashion sector a much-needed boost. The government is understandably reluctant to introduce laws that could limit economic growth, meaning that Rapid Succession is unlikely to be made illegal anytime soon.
Without the law to back them up, companies have to take the initiative to protect themselves against Rapid Succession. This means thoroughly investigating every potential business partner for previous insolvencies. The problem is that, with so much information available, this is an impossible task for most companies:
Most small businesses don’t have the resources to trawl through these records. Instead, many opt for an automated credit check, hoping that it will flag up suspicious activity in a company’s past. Unfortunately, this is unlikely to work.
A standard credit agency will base its score on readily available information. If evidence of Rapid Succession has been obscured from the public, it probably won’t be factored into a credit score. This can create a false sense of security, putting small businesses at even greater risk.
SMEs deserve better. They need a reliable way to identify Rapid Succession companies without expending huge amounts of time and money. This is where we can help.
We believe the odds are unfairly stacked in favour of Rapid Succession companies and their directors. Aphrodite® is our way of levelling the playing field. Our advanced director matching tool uses the latest in machine learning to help you find company directors with a hidden history of insolvency in a matter of seconds:
Like all our tools, Aphrodite® is designed to prevent losses.
By spotting Rapid Succession companies at an early stage, you can refuse to extend them credit, avoiding potentially catastrophic debts down the line. Along with other tools such as Forecast View™ and TextScore®, you can use Aphrodite® to build a more accurate picture of company risk.
As Philip King puts it:
“The key is to get the information you need and use it well. Neglecting due diligence means you are effectively giving away money”.