Company cash ringfencing by banks is illegal, says ex-Dragon
The tactic used by banks to ringfence the cash of troubled companies, which is believed to have played in part in the collapse of wedding gifts firm Wrapit, should be reviewed by the government, former Dragons' Den star Rachel Elnaugh has demanded.
In a much publicised downfall, Wrapit went into administration earlier this month leaving around 60,000 gifts undelivered to disappointed brides and grooms. Peter Gelardi, managing director of the company, said a key factor in its demise was HSBC's decision to withhold £1m of the company's money which he claimed could have been used to fulfil customer orders.
HSBC has defended its actions but writing in her blog, Rachel Elnaugh, a former panellist on BBC TV's Dragons' Den, claimed the practice known as 'bonding' is illegal under current insolvency laws.
Elnaugh herself experienced something similar during the crash of her experience voucher business Red Letter Days in 2005. According to the entrepreneur, Barclays bonded £3m of the firm's cash "causing a cashflow crisis which forced the company into administration".
She added: "The practice of 'bonding' a company's takings...will almost always certainly cause the business to fail.
"It's quite easy to see why the bank takes the action it does, justifying that it needs to protect itself in the event the company fails but this always becomes a self-fulfilling prophecy."
Elnaugh called on the legality of the practice to be reviewed by the Department of Business, Enterprise and Regulatory Reform. "In my view bonding acts to make the bank a preferential creditor which I believe under current insolvency law is illegal," she said.
Post a comment
BusinessZONE - 13-Aug-2008
Categories: News
Story read: 2846
