Competitor deliberately undercuts our quotes - Auditors Notes: trading at a loss.

C

CorkBoss2010

Guest
Hi,

I have a reasonably successful business that seems to be weathering the recession not too badly.

However I have a local competitor that has decided to deliberately undercut any quote we do as their strategy to fight back. I know from my experience of what their running costs/wages etc... that the rates that they are charging are simply not viable. e.g a Certain job, we quoted €450, they quoted €70 !!! The materials involved alone would have been over €200, never mind any labour/travel considerations....and a little profit.

This evening I decided to look at their accounts via Company Registration Office and Solo Check and according to their latest submissions, they are trading at significant losses. Their auditor even makes the point in their notes of this.

"The net assets are less than half the amount of it's called up share capital...in our opinion there may exist situation may arise under section (40)1 of companies act 1983, that requires the convening of a extraordinary general meeting"

It goes on to quote the loss incurred during the year and that the liabilities exceed it's assets by a very large sum.

The auditors state that they "have significant doubt over the companies ability to operate as a going concern."

This company is a company owned by someone (managed by someone else) who is a shareholder in several other businesses. It would be my opinion that these other businesses would be very profitable.

It appears to me that the owner of my competition is deliberately operating this business at a loss (and selling at a loss), but it is being subsidised by the other profitable businesses.

The auditors state in their notes, that my competitior is completely reliant on the goodwill of the major shareholder (and banks) to keep trading.

Is there anything that I can do about this? I thought there was rules about an insolvent business knowingly trading at a loss?

Some of their quotes are ridiculous, and they make my business look disreputable if we are quoted against each other....it appears to be their tactic of choice at the moment.

Advice welcome.
 
"The net assets are less than half the amount of it's called up share capital...in our opinion there may exist situation may arise under section (40)1 of companies act 1983, that requires the convening of a extraordinary general meeting"
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This is a fairly standard wording found in auditors' reports.

Is there anything that I can do about this? I thought there was rules about an insolvent business knowingly trading at a loss?
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I don't think so. A company is not allowed to trade recklessly. But if the owner of the company is guaranteeing to pay the creditors, then they are not trading recklessly.

This company is a company owned by someone (managed by someone else) who is a shareholder in several other businesses. It would be my opinion that these other businesses would be very profitable.
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This suggests to me that the unofficial "group" is not trading recklessly.

Is there anything that I can do about this?
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The only avenue I can think of is a complaint to the Competition Authority. But if they are very small businesses, then they are unlikely to be interested.

Some of their quotes are ridiculous, and they make my business look disreputable if we are quoted against each other....it appears to be their tactic of choice at the moment.
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This is difficult. You should make sure that your quotes are itemised as much as possible. That you show the true cost of the materials.

If there is a long-term customer service aspect to the business, then you could explain that your company will be around for the long term. You could consider providing a copy of the accounts of your competitor if someone questions the pricing.

In a sense this has happened in the Irish mortgage market. Bank of Scotland caused the profit margin to be reduced to an unsustainable level. The other lenders had to follow suit or disappear from the market. Everyone lost out, except the customers.
 
The company would appear to be trading recklessly.

What do the financial statements say about loans from related companies? You should do a search into the related companies to see if they are in breach of Section 31 ie if the loans are in excess of 10% of net assets.

Nevertheless there is not much you can do except maybe make your findings known to the Office of the Director of Corporate Enforcement and possibly a bit of whisle blowing to the Revenue Commissioners.

The Revenue may take an interest if there is a large amount owed to them and it appears that the company is using Revenue liabilities as working capital.

There are two test for insolvency, being unable to pay its debts as they fall due or on a simple balance sheet test the company in question is obviously in breach of the balance sheet test.
 
jack2009 said:
The company would appear to be trading recklessly.

What do the financial statements say about loans from related companies? You should do a search into the related companies to see if they are in breach of Section 31 ie if the loans are in excess of 10% of net assets.

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Loans from X Group to competitor = €920k

Total Assets less liabilities = (605k) Deficiency
 
jack2009 said:
The company would appear to be trading recklessly.
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I think that's a very strong statement to make on the facts as given. Many companies trade at a loss & can do for long periods. So long as they are funded by (revenue/sales) or shareholders, I don't believe this qualifies as reckless trading, a bar that is set very high.

jack2009 said:
What do the financial statements say about loans from related companies? You should do a search into the related companies to see if they are in breach of Section 31 ie if the loans are in excess of 10% of net assets.
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Section 31 only applies to loans to directors from what I can see. Also, there is an exemption for loans to subs/parents.

jack2009 said:
The Revenue may take an interest if there is a large amount owed to them and it appears that the company is using Revenue liabilities as working capital.
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This would indeed be a serious issue, if true; I can't for the life of me see how you can infer this from the information given.

jack2009 said:
There are two test for insolvency, being unable to pay its debts as they fall due or on a simple balance sheet test the company in question is obviously in breach of the balance sheet test.
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As I've said, there are many, many companies trading at a "balance sheet" loss - just about every software company in Ireland for its first few years, for example.

I think Brenden's advice about providing a copy of the accounts is a good one, particularly if the companies are in a service-type business where continuity and stability are important. OP needs to be very careful not to say or imply anything further (e.g. along the lines you have said Jack) - if OP says to customers that the company/directors are trading recklessly, then that could lead to a defamation action.
 
Although admittedly not in the same predicament as the OP, we regularly find ourselves having to justify what appear to be inflated prices compared with some of our competitors. They are often much much bigger outfits (catalogues etc) who can buy in large qties, command high purchase discounts and sell at very low margins.

We always emphasise experience, knowledge, flexibility (custom stuff) after sales - things like that. The fact is, IME anyway, most of the time people are willing to pay more for that.

Also, if you are very careful, you can sew seeds of doubt about your competitor and his prices with your customers: disbelief; quality implications etc etc - but do be VERY careful how you phrase things.

Don't know if that's any help to the OP.
 
WaterSprite said:
I think that's a very strong statement to make on the facts as given. Many companies trade at a loss & can do for long periods. So long as they are funded by (revenue/sales) or shareholders, I don't believe this qualifies as reckless trading, a bar that is set very high.

On the face of the information provided the company is trading recklessly as it is carrying substantial losses and is not doing anything to remedy the situation ie it is quoting jobs at a significant loss.

Also, I would be interested to learn what year end the accounts relate to and when the next set of accounts are due to be submitted to CRO.

I do not understand why you say "reckless trading, a bar set very high"! Do you mean that it is similiar to determining the length of a piece of string?


Section 31 only applies to loans to directors from what I can see. Also, there is an exemption for loans to subs/parents.

OP has not provided enough info on the loans for the moment this was why I did suggested to OP to do searches on the member groups so that we could investigate further. But alarm bells should be going off in such situations especially since we do not know the status of the company that made the loans/guarantees.



This would indeed be a serious issue, if true; I can't for the life of me see how you can infer this from the information given.

Please note the use of the word "if" in my sentence! However, it is unfortunately common place and the Revenue Commissioners are usualy the worst hit creditor in cases of liquidation.


As I've said, there are many, many companies trading at a "balance sheet" loss - just about every software company in Ireland for its first few years, for example.

Agreed, and in accordance with companies acts every such company is required to hold an EGM and the directors have a duty of care to show some reason why they continue to trade in such situations. Start up companies are different in that the started trading with a view to developing a product and with no source of income except from funding but they would not generally be seen to be trading recklessly as long as the flow of funds continued and the company had some sort of strategic direction. ie if we can finish the product and get it to market we will earn x and be able to pay off debts and if we give up now we lose everything. However, if funds were to cease coming in and there was no end of completion in sight then to continue the project and would be reckless.

I think Brenden's advice about providing a copy of the accounts is a good one, particularly if the companies are in a service-type business where continuity and stability are important. OP needs to be very careful not to say or imply anything further (e.g. along the lines you have said Jack) - if OP says to customers that the company/directors are trading recklessly, then that could lead to a defamation action.
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Posting the details of the company is not a good idea as it may have people walking on egg shells and it means that OP can ask questions in a more open manner. However, if Op was to redact sufficient details of the company before posting this would be best.
 
jack2009 said:
Posting the details of the company is not a good idea as it may have people walking on egg shells and it means that OP can ask questions in a more open manner. However, if Op was to redact sufficient details of the company before posting this would be best.
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I wasn't suggesting that OP posts the company's accounts here & I don't think Brendan was either. The suggestion was to use the information in the accounts for OP to prove that his is the more stable business and will be around for the long haul - to let the competitor's accounts speak for themselves to customers.

When I referred to a "high bar" for reckless trading, I meant that it's very difficult to prove. Merely trading at a loss does not equate to reckless trading.

The 10% you refer to has nothing to do with group loans - it is only relevant to loans to directors, which would have been stated separately in the accounts. OP did provide enough information - i.e. that they are group loans.

If the existing shareholder/parent is happy to continue funding the company, then the fact that there's a loss on the balance sheet means very little. We have no idea what the relationship between the parent and sub is - if the sub is basically operating on the assumption that the parent will continue to fund the company, without any basis for that assumption, then there could be a case for reckless trading. But we know precisely zero about the intra-group arrangements.

We also have no idea that the company has not called an EGM to put the financial position to the shareholders, which is what would be required per the auditors' notes. That in itself is a fairly simple procedure and is only a requirement to make the shareholders aware of the level of net assets.

I'm not saying that other shareholders may not have an action here & good reason to ask for further information, but I don't see that the statements in the accounts help OP.
 
WaterSprite said:
I wasn't suggesting that OP posts the company's accounts here & I don't think Brendan was either. The suggestion was to use the information in the accounts for OP to prove that his is the more stable business and will be around for the long haul - to let the competitor's accounts speak for themselves to customers.

When I referred to a "high bar" for reckless trading, I meant that it's very difficult to prove. Merely trading at a loss does not equate to reckless trading.

The 10% you refer to has nothing to do with group loans - it is only relevant to loans to directors, which would have been stated separately in the accounts. OP did provide enough information - i.e. that they are group loans.

If the existing shareholder/parent is happy to continue funding the company, then the fact that there's a loss on the balance sheet means very little. We have no idea what the relationship between the parent and sub is - if the sub is basically operating on the assumption that the parent will continue to fund the company, without any basis for that assumption, then there could be a case for reckless trading. But we know precisely zero about the intra-group arrangements.

We also have no idea that the company has not called an EGM to put the financial position to the shareholders, which is what would be required per the auditors' notes. That in itself is a fairly simple procedure and is only a requirement to make the shareholders aware of the level of net assets.

I'm not saying that other shareholders may not have an action here & good reason to ask for further information, but I don't see that the statements in the accounts help OP.
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It is easy to prove if a company traded reckelssly, granted it is quite often a matter of opinions that has to be settled in the High Court.

Again, with a company carrying substantial losses and trading in such a manner that it does not have any chance in reducing these losses is reckless.

Even with the supporting of an inter co. this is reckless as you say the company cannot expect to continue to receive funding. Should funding continue it could be argued that the directors of the inter co. have not acted responsibly.

I dont see how you can say the 10% rule does not apply as we have no details of the "Group" structure!
 
jack2009 said:
It is easy to prove if a company traded reckelssly, granted it is quite often a matter of opinions that has to be settled in the High Court.
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We'll have to agree to differ then. In my view there are actually extremely few findings of reckless trading made.

jack2009 said:
I dont see how you can say the 10% rule does not apply as we have no details of the "Group" structure!
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The 10% rule does not apply because s31 does not apply to intra-group loans (or shareholder loans, for that matter) & only applies to loans to directors (or connected persons). OP says that the loans have been made to the company. If the loans were made to the directors, then the 10% rule would apply and they would be mentioned separately in the accounts, which they are not.

I had originally decided to post on this thread because of the statements of opinion as to reckless trading. I didn't think that OP should get his hopes up by relying on such opinion advice from AAM without hearing a different view and felt the need to post merely to let OP know that (i) reckless trading is hard to prove (ii) a statement such as that included in the accounts is not unusual and (iii) trading at a loss is not in itself reckless trading. One can add to that list: (iv) if a party isn't in a dominant position, below-cost selling is not illegal.

This further discussion may be of interest to other posters generally but I think it's run its course.
 
OP

Forget about reckless trading. It's something which no one would look at now. A liquidator might well look at it after the company goes into liquidation, but that is no use to you now.

As you are in the same industry, do you have the same suppliers? Can you check with them if they are getting paid on time? Obviously, you have to be careful how you ask this. Maybe show a supplier a quote and ask how can your competitor be doing it. Maybe they are supplying them at a much lower price. Maybe put a bit of pressure on the suppliers to reduce the prices. They might then put pressure on the competitor to pay quicker if they are slow at the moment.

Do you have mutual competitors who are also suffering? Is there a trade body? Maybe ask them about it, although you have to be very careful here as this could be deemed to be anti-competitive under the Competition Act.

One problem for some legitimate businesses is that their competitors operate in the black economy and don't pay taxes, social insurance, VAT etc. If there was any suspicion here, you could report them to the Revenue.
 
Thanks for input on this thread from everyone. I am extremely happy of my business's recent achievements and results, we are winning business with the 'better' customers through word of mouth and our general reputation. I know that in the long run this is the important point.

When I saw the accounts last night of my competitor and it's relationship with it's larger connections.... the penny just dropped and answered a few questions that I had been asking myself .... such as "How the hell can they do that job for that price?... it's simply not possible"

Thanks again, I won't be doing anything rash or stupid, will just keep the head down and continue as we are.
 
is it not a case of a loss leader...... doing it for less, win the biz, competition goes away, next job that comes up, do it for a more etc etc... you are developing a relationship with the client etc , making good contacts etc, is it just biz ? maybe unfair but does the client actually care if they are making a loss, answer is yes if they become insolvent ,can't finish project etc, might be no harm to mention this if you can to clients..

have exp of having actual done this in the past. as the loss leader went into receivership and actually got work as a result...
 
How long has the other company been in business? Could they be setting their prices low initially to build up a customer base?
 
Other business has been in business an awful lot longer than we have. We're in business approx 4 years, they are approx 30 years.

We've obviously taken business from them, as well as organically grow business from different niche areas and by utilising contacts from personal and previous 'business life'.
 
Hi,

I have a further question, but the above background info may help readers with their advice/comments.

We have recently been approached by local business community group to quote for quite a large community project ... so has our competitors.

As this is a local project, it would be important for us to win the job, from a prestige/local recognition point of view, as much as the profitability from the job.

I was wondering if it was possible for us to insist to the local business group (the purchaser) to request of our competitor that they provide a tax clearance cert to prove that they are tax compliable, as we are.
 
Unless they are a public body then you cant insist anything

I know of one particular company that is trading at a loss at the moment, he told me "For years I've made a paper profit and paid tax on it, now I'm making a paper loss"

Going back on the original post, if the major shareholder is ready and willing to pump money into them then its not illegal, it might be stupid but there is no law against been stupid in business (as opposed to wreckless). Soccer club chairmen in the UK pump millions into their loss making football clubs, what is to stop the major shareholder of this business doing the same?
 
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