Was AVRO trading illegally or fraudulently for the last 2+ years? Was it like a Ponzi Scheme?

ihatetrump

In another post, I discussed the possibility that maybe AVRO had been trading while insolvent:

https://forums.moneysavingexpert.com/discussion/6298311/how-can-so-many-energy-companies-fail-whos-next-avro-igloo-symbio-colorado-neon-reef#latest

Begbies Traynor are recognised as one of the leading insolvency practices in the UK. Here's a quote from their website:

Trading while knowingly insolvent may lead to accusations of wrongful trading, or the more serious charge of fraudulent trading if you are thought to have deliberately attempted to deny creditors what they are owed.

Both wrongful trading and fraudulent trading are offences under the Insolvency Act 1986 and the Companies Act 2006. Wrongful trading is a civil offence, while fraudulent trading is a criminal offence.

It is incumbent on a director to be aware of their company’s financial position at all times, and putting forward a defence that you were unaware of the insolvent situation will carry little weight. Failing to realise that a company is in financial difficulties may be regarded as negligent, irresponsible, or proof of ‘unfit conduct’ of directors, which will add to the seriousness of the situation.

AVRO's last audited financial statements ending June 30, 2019 showed them to have negative assets of £27M and yet they continued trading. They prepared financial projections that apparently convinced their auditors that they were still viable and could continue to trade. When OFGEM finally got their act together in August of this year and asked for copies of those projections, AVRO failed to deliver them and then today they announce they are ceasing to trade.

Directors who knowingly allow their company to trade when insolvent can be held personally liable for the debts owing by the company.

Jake Brown (CEO and founder) of AVRO is clearly an intelligent guy - he has a law degree and as he said back in 2016 in an interview with the Daily Telegraph  '

The energy market? It's simple economics says 22-year-old

The administrators/liquidators of AVRO should have a field day with this one.

MWT

Negative assets does not = insolvent, as long as those financing the company are happy to do so without requiring repayment. 

ihatetrump

And I'm sure they asked their 590,000 customers - did they even know they were financing the company? - thought not, most probably thought they were saving up for their winter fuel bills.

jimjames

MWT said:

Negative assets does not = insolvent, as long as those financing the company are happy to do so without requiring repayment. 

Problem is that many customers leaving wanted repayment and didn't get it. If the owner has only put in £100 then who is financing the company other than customer balances?

indigoben

As I understand their last statement, they had £18.5m in cash, and were owed £52.3m, presumably from customers. So they had £70.8m total in credit.

Against this, in the coming year they had calculated that they would need to pay out £98.3m leaving a difference of £27.5m to find. Given their stated growth from 2017 to 2019 saw them basically doubling in size, it's not unreasonable to consider that they would have grown the customer base enough to cover that difference.

They look like they were essentially trading on credit, but their cashflow was fine. That is not unreasonable for a growing company - credit is what allows businesses and economies to grow. Ultimately the energy generators are going to absorb the loss as they have supplied energy that isn't going to get paid for. But that was their risk.

BobT36

Sounds to me like the goal was never to make "profit", it was to run a ponzi scheme with customer's advance payments, and make (the owner's) money by siphoning funds out via loans and "marketing services" (to a separate company that they also own). 

Surely that can't be legal? The owner apparently did study law so maybe it's a loophole. 

ihatetrump

@indigoben

Against this, in the coming year they had calculated that they would need to pay out £98.3m leaving a difference of £27.5m to find. Given their stated growth from 2017 to 2019 saw them basically doubling in size, it's not unreasonable to consider that they would have grown the customer base enough to cover that difference.

They look like they were essentially trading on credit, but their cashflow was fine. That is not unreasonable for a growing company - credit is what allows businesses and economies to grow. Ultimately the energy generators are going to absorb the loss as they have supplied energy that isn't going to get paid for. But that was their risk.

Of course many businesses exist on credit - however, any sound business would have have established that credit in one of the following ways:

1. Shareholder Equity

2. Shareholder Loans or 

3. Bank Loans with established repayment terms and stress tested (ability to repay out of earnings).

To use customer advance payments and to expect those payments to continue to grow is not by any stretch of the imagination a viable method of credit.

I think you're wrong - the energy suppliers will get paid - the customers advance payments will transfer through SoLR - just not the cash - only what is left - pennies in the pound.

AVRO had an Operating Loss of £28M in the 18 months to June 30 2109 (Lord knows what it is now). - in other words, it had no ability to repay any loans - no bank or reputable financial institution would have given it credit and the shareholders only put in £100.

What is interesting in those 2019 statements is that Administrative expenses went from £3M in 2017 to over £28M by 2019 - it would interesting to see what that was spent on - it only had 69 employees and spent £2M on payroll, so what about the rest? £2.25M in payments to it's marketing company (Sentido) owned by the Directors was part of it, but the rest?



BobT36

Yes it is most likely a legal loophole - but trading while insolvent is Not - but that will be for the Administrator/Liquidator to determine

jimjames

BobT36 said:

Sounds to me like the goal was never to make "profit", it was to run a ponzi scheme with customer's advance payments, and make (the owner's) money by siphoning funds out via loans and "marketing services" (to a separate company that they also own). 

Surely that can't be legal? The owner apparently did study law so maybe it's a loophole. 

I've commented elsewhere but it's a tactic used by many mini bond companies to extract cash so when the company folds they've got their money out. Much the same as the accounting trick to adjust the date to delay filing for another 3 months to avoid scrutiny.

inspectorperez

This whole scenario of using customers advance payments could be easily avoided if this industry was more stringently regulated.

Solicitors, travel agents, insurance brokers are examples of businesses where customer/client money is ring fenced and not available for operating costs until a right has been established to draw on these funds, i.e. supply of services/product complete. This would certainly be an incentive to supply companies to bill accurately and promptly in order to allow themselves to draw on customer funds.

Maybe I am oversimplifying as I am not that familiar with the industry, but there has to be a way of achieving this without re-inventing any wheels and which would safeguard customers in the event of insolvency/administration proceedings.

Sea_Shell

inspectorperez said:

This whole scenario of using customers advance payments could be easily avoided if this industry was more stringently regulated.

Solicitors, travel agents, insurance brokers are examples of businesses where customer/client money is ring fenced and not available for operating costs until a right has been established to draw on these funds, i.e. supply of services/product complete. This would certainly be an incentive to supply companies to bill accurately and promptly in order to allow themselves to draw on customer funds.

Maybe I am oversimplifying as I am not that familiar with the industry, but there has to be a way of achieving this without re-inventing any wheels and which would safeguard customers in the event of insolvency/administration proceedings.

I think most of us thought (or hoped!) that this WAS the case with Energy supplier, in that our payment were ringfenced towards our bills.   It's shocking that it isn't.

Does the same principal apply to the big 6 too, in that the customer cash is not ringfenced?!?

inspectorperez

Sea_Shell said:

inspectorperez said:

This whole scenario of using customers advance payments could be easily avoided if this industry was more stringently regulated.

Solicitors, travel agents, insurance brokers are examples of businesses where customer/client money is ring fenced and not available for operating costs until a right has been established to draw on these funds, i.e. supply of services/product complete. This would certainly be an incentive to supply companies to bill accurately and promptly in order to allow themselves to draw on customer funds.

Maybe I am oversimplifying as I am not that familiar with the industry, but there has to be a way of achieving this without re-inventing any wheels and which would safeguard customers in the event of insolvency/administration proceedings.

I think most of us thought (or hoped!) that this WAS the case with Energy supplier, in that our payment were ringfenced towards our bills.   It's shocking that it isn't.

Does the same principal apply to the big 6 too, in that the customer cash is not ringfenced?!?

As I said in my earlier post, I am not that familiar with the industry. It would appear however that certainly by reference to the filed accounts I have read, customer advances are treated as unsecured liabilities of the company. I would envisage in the absence of statutory regulations, this is common practice within the industry.

The upshot is, that customers rank virtually right at the bottom of the priority list of who gets paid out and who doesn't. To some extent this is academic in that OFGEM do underwrite these situations by the SOLR process. However, it certainly does not prevent the companies, while they are still trading, using those funds for whatever purpose the directors deem fit! This really is an extremely poor discipline in my view and one which arguably a more active involvement from OFGEM would flag up such abuses.