Jason T Hesse explores the details
behind the collapse of Smartfundit – and wonders if the online
broker model just does not work.
Allegations have emerged that the
now-defunct lease broker, Smartfundit.com Limited, and its parent,
Corporate Computer Lease Limited, were involved in financial
mismanagement prior to their collapse into administration in
June.
Go deeper with GlobalData
This is not good news for an already-battered
broker industry, which recently saw both Hitachi Capital and
Lombard sever links with their intermediaries (see Death by a
thousand cuts, pages 20-21). Indeed, one industry leader commented
that the recent revelations at Smartfundit will have done “an awful
lot of damage” to trust in the industry, and that it would be
“highly unlikely” that Smartfundit’s business model would be
replicated anytime soon.
Before going into administration,
Smartfundit.com boasted that it had generated over $1 billion (€677
million) of finance demand from over 4,000 businesses. So, what
happened to this fast-growing company? Was it the model itself that
was destined to failure – or was the company’s leadership to
blame?
Financial irregularities
BayTech, the venture capital firm
that invested £3.3 million (€3.7 million) into Smartfundit’s
defunct parent Corporate Computer Lease (CCL), believes it was
“misled” by Justin Floyd and Suki Gallagher, the companies’
founders, over alleged financial irregularities at the two
companies.
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By GlobalDataBayTech’s main concern over the management of
Smartfundit and CCL was the use of funds transiting between the
finance companies and equipment suppliers.
But, through his solicitor, Floyd strenuously
denied any wrongdoing.
“He denies it adamantly. As far as he is
concerned, he is whiter than white in this,” said Floyd’s
solicitor, Mark Boardman, of Boardman Solicitors.
“If one is to take what [BayTech] are saying
as correct, one has to wonder why they are not doing anything about
it. There is no litigation at all – Justin Floyd is not involved in
any litigation, either with the administrator, or with
BayTech.”
Investigations by corporate recovery firm
Vantis have uncovered that over £750,000 worth of funds provided by
finance companies had been absorbed into the company’s balance
sheet, pending onward payment to vendors.
“There is certainly evidence that these funds
were not placed in separate trust accounts pending the deals being
finalised, and that these funds were used by CCL and Smartfundit as
internal working capital,” said Peter Wastell of Vantis Business
Recovery Services, who is acting as joint administrator for the two
companies alongside Vantis’ Michael Young.
Creditors
This could also explain why so many
companies have found themselves owed money. The administrator’s
report showed that the two businesses owe considerable sums to a
host of companies, including lessors, as well as HM Revenue &
Customs for unpaid taxes.
For example, Smartfundit’s largest creditor –
apart from parent CCL – is the software manufacturer Infor, which
is owed £131,584.49.
“It was difficult to tie up the business after
we had signed contracts,” said Chris Grosvenor, vice-president for
the UK, Ireland, Middle East and Africa at Infor. “Everything was
agreed – done and dusted – but we were finding it difficult to get
our money, and then the company just disappeared.”
“In the greater scheme of things, it is
obviously not a major issue,” added Grosvenor. “We clearly don’t
like to lose money like that, but we have picked up the bill and
have sorted out the customer.”
Catering firm Graffters also experienced
payment difficulties with Smartfundit.
“They were just shocking,” said Clive Steer,
the company’s finance and operations director. “Although they were
quite efficient to start with, once the initial paperwork had been
signed off, they kind of disappeared.”
Graffters, a catering business with a turnover
of more than £7 million, went through Smartfundit to secure funding
for a new CRM system through Sage reseller FD Systems.
When funds were not released by Smartfundit,
FD Systems stopped working on Graffters’ project, leaving Steer in
a difficult position.
“We ended up having to pay FD Systems £22,000
directly, putting the new system onto our balance sheet,” Steer
added. “It put a huge strain on us; it nearly took us under.”
In total, records show that CCL owes over £1
million to a wide range of companies including major lessors and
vendors such as Bank of Scotland Equipment Finance, CIT Vendor
Finance, Dell Computer Corporation, Grenke Leasing, ING Lease UK,
Sage UK, Salesforce.com EMEA, Siemens Financial Services, Universal
Leasing and Zetes Ireland.
CCL also owes HM Revenue & Customs nearly
£400,000 in arrears for corporation tax, VAT and PAYE.
Separately, Smartfundit owes over £3.3 million
to creditors such as Axicom, Dell Corporation, Infor, Investec
Asset Finance, Leasing World, Regus, Version One, and VSC Mobile
Solutions, although £2.9 million of the total amount is an
inter-company debt owed back to CCL.
Administration and secondary
income
The administrators are hopeful that
the companies will meet their obligations and that sufficient
realisations will be made to repay the creditors, however.
“It obviously depends what values we achieve
for the remaining assets, including the secondary income,” Wastell
said.
He estimated that CCL could generate up to
£1.35 million in secondary income, by running off its book over the
next three years.
To achieve this, the administrators received
two offers for assisting in the collection of this secondary
income.
The first was from Longwood Capital, a company
in which Adrian Leach – who was acting chief executive at CCL when
Gallagher left – is a director; and the other was from Vantis
Corporate Asset Finance (VCAF).
Leach’s company offered to collect the
secondary income in return for a 25 percent commission of all sums
collected, but because VCAF only asked for a 15 percent commission
– which could therefore result in a potential saving of £135,000
for the creditors – the administrators decided to go with VCAF.
This application was made at the High Court in
the summer and was subsequently accepted, Vantis confirmed.
Director’s loan
The administration of Smartfundit
and CCL also brought to light a £289,545 director’s loan at CCL,
which Floyd now owes to the company’s creditors.
Speaking to Leasing Life, Floyd’s
solicitor said he does not recognise owing this money.
“There is no director’s loan,” said Boardman.
“I’ve explained this to the administrator – there are no director’s
loans. It was in fact put in the books wrongly.”
According to Boardman, the loan was an
intercompany account for a previous company in which CCL owned
shares. When the company was disposed of, the account was put in
CCL’s accounts as a director’s loan, he said.
“You must draw your own conclusions – you said
it was a mistake, but I said it was put in wrongly,” said Boardman.
“I’m not sure who put it in as a director’s loan, but Justin didn’t
actually get any company accounts to sign. They were signed off by
other directors.”
But for the administrators, Floyd is still
liable.
“We still believe the director’s loan is due,
and have not seen evidence to the contrary. We are pursuing this,”
Wastell said.
Impact
It is difficult to say what impact
Smartfundit’s demise will have on the industry. However, the full
picture may not become clear for some time. For Floyd and
Gallagher, however, it seems unlikely the saga will end here.
Although Boardman said there was no pending
litigation against Floyd, it would be surprising for BayTech not to
bring proceedings against the directors, should their claims of
having been misled prove true. It also seems that Vantis’
investigation would support this.
Boardman said he is ready for this.
“There are no grounds for BayTech or the
administrators to commence any proceedings. But if they would like
to do so, then bring it on,” he said.
The collapse of Smartfundit raises some
important questions as to whether the online broker model can work.
Indeed, Smartfundit was not the first company to attempt to break
the broker mould – several others have tried, and also failed.
“The basic problem with these automated online
platforms is that, although they are trying to keep some standards
up and base things on service, ultimately it comes down to price,”
said Peter Kainradl, chief executive of White Clark Europe.
“Customers don’t buy based on service – they will inevitably look
for the lowest price, and as a result this ends up generating low
margins, which funders aren’t happy with.”
But Kainradl also said Smartfundit’s collapse
came as a surprise.
“The forefront of Smartfundit’s technology was
its sales platform,” he added. “If anybody could make it work, it
would be these guys. These were downright salespeople to the last
bone of their bodies, so if they couldn’t make the model work, then
we may as well forget about it.”
It will certainly be interesting to watch a
new company try to fill the space that Smartfundit occupied. But
whoever does – and there certainly will be someone else – they will
need to think long and hard about whether the industry is ready for
a comparison site, and about how they can make such a venture a
success.
Both BayTech and Gallagher declined to
comment.
|
Year/period end |
Turnover (£) |
Gross profit (£) |
Directors’ remuneration |
Dividends (£) |
Net profit/ (loss) |
Balance on P&L account |
|
Smartfundit.com |
||||||
|
31/12/08* |
4,356,798 |
389,430 |
(349,878) |
(2,892,899) |
||
|
28/02/08 |
2,377,923 |
274,433 |
(1,027,837) |
(2,543,021) |
||
|
28/02/07 |
248,740 |
237,810 |
(990,917) |
(1,513,184) |
||
|
31/12/06 |
21,667 |
21,667 |
(434,317) |
(522,067) |
||
|
Corporate Computer Lease |
||||||
|
31/12/08 |
5,750,867 |
1,511,576 |
173,810 |
253,483 |
(27,189) |
30,309 |
|
31/12/07 |
8,135,195 |
1,587,888 |
213,923 |
249,440 |
373,390 |
310,981 |
|
31/12/06 |
7,323,422 |
1,450,384 |
252,228 |
171,919 |
(97,331) |
69,708 |
|
31/12/05 |
6,539,758 |
1,645,026 |
413,653 |
1,299 |
338,958 |
|
|
*period 1/03/2008 to 31/12/2008 Source: |
||||||
Creditors
|
Smartfundit.com |
|
|
Total (£) |
|
|
Leasing creditors |
262,863 |
|
Trade creditors |
173,415 |
|
Inter-company (CCL) |
2,907,183 |
|
Total |
3,343,461 |
|
Corporate Computer Lease |
|
|
Total (£) |
|
|
Leasing creditors |
545,162 |
|
Trade creditors |
123,307 |
|
HMRC – VAT |
245,292 |
|
HMRC – PAYE/NIC |
78,384 |
|
HMRC – Corporation tax |
74,322 |
|
Employees/Redundancy |
49,037 |
|
Other |
3,035 |
|
Total |
1,116,497 |
|
Source: Leasing Life |
|
