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Sweet nothings – what happened to the profits at Patisserie Valerie?

October was not a good month for the 92-year-old cafe chain, Patisserie Valerie. The recent financial crisis of the café chain has been ‘the most harrowing of his life’ for chairman, seasoned investor, serial entrepreneur and business columnist, Luke Johnson.

Since uncovering “significant and potentially fraudulent accounting irregularities and therefore a potential material misstatement of the company’s accounts”, the company, which has a market valuation of nearly £450 million, suspended trading on the AIM junior stock exchange on 10 October. This was after it was notified of an estimated £20million accounting black hole, now suspected to be more in the region of £40 million according to the Times.  

Mr Johnson, who has a 37% share in the company, committed to personally lending £20 million to Patisserie Valerie and raised a further £15.7m through share sales at 50p a share (a 90% discount to the share price before suspension), to save the company from the brink of collapse.

It seems like the recent revelations have taken everyone by surprise, since they are poles apart from the company's position reflected in their May 2018 trading accounts. Patisserie Valerie reported half-year profits were 14.2% up on the previous year at £11.1m with £28m of net cash, as opposed to the £9.8m current net debt position owing in part to the discovery of two “secret” overdrafts.

An internal investigation is underway, after Chris Marsh, the chain’s finance director was arrested and released on bail. Mr Marsh has been the finance chief of Patisserie Valerie since its 2006 acquisition and had previously worked with CEO Luke Johnson.

Johnson, who once remarked that a good finance director was key when investing in a business, is estimated to be worth around £125m due in part to the Pizza Express success and other diverse ventures. He has been described by some of his colleagues as "exacting with money and he likes everyone to know it" and "he reads the documents, he pays attention".

It is understood that regulatory bodies, Financial Reporting Council and Financial Conduct Authority are looking in to the matter and it has been reported that the Serious Fraud Office have opened a criminal investigation. Invesco, one of the top ten shareholders have told the board of parent company Patisserie Holdings, to hand over the investigation to a law firm or an independent investigation firm and are considering taking legal action to force the board to cede control of the investigation.  

Mr Johnson said: "We are all deeply concerned about this news and the potential impact on the business. We are determined to understand the full details of what has happened and will communicate these to investors and stakeholders as soon as possible."

To further worsen the situation, it transpired that a winding up petition had been filed against Patisserie Valerie's principal trading subsidiary Stonebeach, by the HMRC over a £1.4 million unpaid tax bill almost a month prior. The Patisserie Holdings board revealed they had been ‘unaware’ of the winding up petition, filed at the High Court of Justice on 14 September and listed in the London Gazette on 5 October.

It is apparent that there are some serious internal faults at Patisserie Valerie and moreover; surprising they occurred under the watchful eye of a chairman who is an author on the subject of internal fraud and business management.

In this light, it can serve as a reminder to businesses to ensure internal systems are comprehensive and current, to aid in preventing and detecting potential irregularities with efficient processes to deal with incoming mail, court documents and notices promptly.

The presentation of a winding up petition to the court is the first stage of the winding up process (or, as it is also known, compulsory liquidation).

When a winding up petition is served on a company it can have serious consequences, particularly when not dealt with expeditiously. If the company is already experiencing internal issues, missing a court document of this nature can be disastrous because the company’s bank may freeze a company's accounts at any time after presentation of the petition.

Once its accounts have been frozen, the company may find itself unable to pay its employees and suppliers and so may be forced to cease trading. In order to deal with these difficulties, the company will normally have to seek a validation order under section 127 of the Insolvency Act 1986.

Furthermore, the presentation of a winding up petition against a company can cause substantial harm to the commercial reputation of a company. Hence, it is advisable for companies to have a set procedure to ensure court documents and incoming mail are not missed and should be handed immediately to a senior member of the company, after being scanned and saved. Legal advice should be sought straightaway on how best to respond, since it will depend on who has filed the petition and why.

The specialist dispute team at Acuity Legal has a strong reputation for providing commercial, pragmatic and solution-focused advice, with a wealth of experience in complex and high-value litigation. Call our expert dispute resolution team for more information on 029 2048 2288 or email info@acuitylegal.co.uk.

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