TOTO Pty Ltd background
Empty vessel, a very high net worth individual, loaned money, approximately $400,000, to a start-up, TOTO in return for a 30% stake in TOTO. TOTO did not achieve its business objectives and within a year, ceased to trade. The loan therefore would not be repaid. Empty Vessel now has a loan to a start up that has failed, and wants his loan repaid, in any way he can.
SIDE NOTE: WHEN AN INVESTMENT IS NOT A REAL INVESTMENT:
Note, Empty Vessel describes his financial dealings as investments, but in reality, he is not an investor, but a money lender charging interest. I have seen this happen many times where an investor is actually putting money into a start but it is treated as a repayable loan, in return for shares. It sounds far more sophisticated to call one self an “investor” rather than a “money lender”. Be very careful to be clear on whether someone is actually investing or lending money to your start up.
A Corp Pty Ltd
Empty vessel was also a money lender, in my start up A corp. The monies were always referred to as an “investment”, but were in fact were the provision of shares for money lending at high interest rates. Within two years all the loans + interest were repaid to Empty Vessel. So Empty Vessel obtained a fabulous deal, shares in a company with $0 invested, and no outstanding loans.
The Loan Fiasco
Further to having no investment or loans, Empty Vessel actually borrowed money from A Corp (but when borrowing money as opposed to lending, the interest rate goes from as high as 15% to 0%). The borrowings by shareholders were agreed to and pro-rata loans were taken by all shareholders. In early 2016, it came time to call upon those loans from all shareholders. The other shareholders repaid their loans without any concerns, but when it came to Empty Vessel being asked to repay the monies he borrowed from our start up, he saw it as an opportunity to take advantage of the start-up for a personal gain, and the turn of events that followed can only be described as, well, pretty bizarre.
On the 18th of March, the company CEO and also the Financial Controller of A Corp requested via email an urgent meeting of shareholders to agree to the repayment of shareholders loans in order to meet immediate cash flow requirements of the business.
On the 18th of March 2016, a meeting was held in Empty Vessel’s offices. the CEO presented a cash flow spread sheet and all the loan amounts that had been taken by the shareholders. The CEO explained that due to timing of expenditure, our company required urgent cash in order to pay operational costs, payroll and taxes. A timetable was presented for all shareholder repayments, the following were the dates requested for re-payment by Empty Vessel:
21st March Empty Vessel loan repayment – $67,992.54
21st April Empty vessel loan repayment – $71,300.00
The timetable for loan repayments was agreed by all parties at this meeting. And the CEO and financial controller were confident about the business meeting its payment requirements on time.
Following the meeting A Corp’s Financial Controller emailed all parties and copied in Empty Vessels, financial Controller Elmo, and confirmed the re-payment schedule as agreed to by everyone. Following which, the CEO made repeated requests for the funds from Empty Vessel as agreed. The other shareholders paid what was required on time. But Empty Vessel didn’t pay, and more confusing, he and Elmo went completely silent. No response at all. The CEO starting to get concerned, and asked me if I knew why they were not responding to his requests for the agreed re-payment, and I replied that I was sure they were just busy and they would get back to him very soon.
Empty Vessel and his finance controller Elmo waited till after the due date of the March 21st payment, where they knew full well the urgent payments due to be made by the business. Now that the funds were overdue, and the company in quite a precarious position, Empty Vessel’s financial controller, Elmo told our CEO that he would not repay any loans he owed to A corp, unless A corp agreed to take over the loan obligation in full that he had put into the failed entity TOTO.
On the 22nd March the CEO wrote that “the amounts agreed to be transferred in Friday’s meeting are being delayed until matters regarding TOTO are finalised with Empty Vessel”. The CEO further highlighted the urgency of the need for the agreed funding, tax and rent payments, and the “major risk” of suppliers not being paid.
Effectively we were being extorted. Empty Vessel and Elmo knew that the company desperately needed the loan repayments to meet current liabilities, waiting till after its due date, then demanding “Repayment to Empty Vessel of $414,867” by A Corp for the loans it had made to a completely separate company. This may sound confusing and perhaps the assumption that here was some legal connection or commercial agreements between A corp and TOTO. In fact TOTO was an independently registered company. It had no connection legally to A corp at all. There was no loan agreement or any form of security by A Corp. In other words, TOTO, and any loans or liabilities it had to anyone, had nothing whatsoever to do with our start-up A corp.
The CEO’s urgent email was simply ignored by Empty Vessel and Elmo, and he continued to withhold the repayment of agreed loans. I was incredibly frustrated about the overdue payments the company needed to make, but outraged at the underhanded tactics to take advantage of a start up and its very difficult financial position as a threat to obtain a personal gain. I communicated to Empty Vessel in various emails that the situation was unacceptable, and that his loans owed and agreed to be repaid to A Corp had nothing whatsoever to do with any loss he suffered in TOTO. Even worse, Empty Vessel was also a director of A Corp, meaning there was a clear legal obligation to act in the best interests of A Corp, an obligation that was completely ignored for self interest.
I was deeply disturbed at the prospect of agreeing to a substantial liability that the company did not owe, and much more so where it was done through extortion. I flat out refused to pay the monies. I told our CEO not to worry, and that I would provide all the cash that Empty Vessel was meant to repay, so that the company would pay all its outstanding accounts. For the next few months I simultaneously provided all the cash requirements for the business, and asked repeatedly during this period for Empty Vessel to either repay his loans, or, if in fact he believes that A corp legitimately owed the $414,000, to provide any evidence whatsoever of any such obligation. Empty Vessel never provided any piece of evidence, because there was none. But that was just a technicality to Empty Vessel and Elmo.
As there was no evidence provided by Empty Vessel, and he continued to withhold much needed loan repayments for months, I sought to resolve the impass in May by providing all of the relevant background and emails I had on the matter to the officers of A Corp and to empty Vessel’s company. I requested that both offices review all the available information, and advise objectively on whether A Corp had any such liability. I asked Empty Vessel to await the outcome of this review by A corp and his own office. Seems like a pretty reasonable request? My problem was I was trying to use commercial and rational logic, but the other side were not interested in what was actually owed or not, they just wanted to get in money any way they could.
It was clear what any review would determine, even by Empty Vessel’s own office. Aside from Elmo, as the two of them concoct their schemes together. Its ironic to watch, as if they have some symbiotic relationship where they both say things they know to be scams, and make out that they are rational, but somewhere their guilt or anxiety manifests in external signs. Empty Vessel has this odd deep breathing he does when saying things that aren’t true. Elmo has this weird neck twitch. Its as if their bodies are physically uncomfortable with what their mouths are saying.
In any event, a logical evaluation would never end well for the investors, so instead of waiting for this advise, Empty Vessel resigned as director (totally fine) and tried to coerce the other directors of A corp to resign too (totally NOT fine). One of the other directors was a position filled by Empty Vessel, and so, simply resigned without so much as a single conversation with anyone in the company to understand the matter at hand. This further illustrates the imbalance investors can have, and how they can use their position to take advantage of start-up’s. This was now escalating into a significant internal issue, as all staff knew something very unsettling was occurring, and other directors were being brought into the mess. If your ever trying to get your way in a business, and have no moral compass, a brilliant strategy is to cause maximum havoc and disruption as a deliberate strategy in order to get your desired outcome, on the basis that the start-up might agree to almost anything to avoid the nuisance.
At that point, despite having already fronted all the cash needs for A corp, I thought the reputational damage could destroy the business, and despite the deep resentment ethically of giving into clear manipulation for self interest, I agreed to allow A corp to take over the liability of an unrelated entity in order to maintain an effective corporation and board. As soon as this was agreed to, Empty Vessel repaid the loans he had taken from A corp.
KEY LESSONS:
- Don’t provide shareholders with loans on the basis that they will be given back when the company requires them. Retain cash in the bank, and avoid the option of it being used to put you over a barrel.
- Any rorting or inappropriate actions will never be an isolated incident, but a sign of things to come. The earlier rent rort with Empty Vessel was an expensive lesson, but the TOTO incident cost us far more. After Rent Rort we should have seen a much bigger red flag, and sought ways to part company then. At the first sign of unethical practices, get out of the relationship.
- Director appointments should be looked at very carefully when recommended by an investor. While things are going well, all will be well. But as soon as there is a misalignment, what you thought may have been a director serving the interests of the company, may quickly become a puppet diligently following the instructions of an investor.