Page 69 - Stakis Consolidated Teaching Note

Essentially, Stakis, under Andros was embarking on a

programme of expansion funded by borrowings and the

hope of increased profit generation from new ventures.
This was just at a time when the economy was moving into

recession and interest rates were taking off.

The result was inevitable, as gearing climbed revenues fell

and Stakis moved ever deeper into trouble.

Period (b)

One of the first questions to answer here is "What is

meant by the term trouble"? In essence it could mean

going bankrupt. Technically a company has to declare itself

insolvent (and therefore cease trading) if it cannot pay its
debts as they fall due, and the directors are guilty of

wrongful trading if they incur liabilities that they know

there is little or no prospect of paying. This is where the

banks come into the picture. Default on interest payment
would give the banks the right immediately to sue for

repayment of all debt which at the time was rapidly

moving towards £230 million. Sir Reo and his family
owned some 23% of the shares in Stakis. The result of the

family’s purchase of an additional 4 million shares at

130p per share taking his shareholding to 27% meant

that when the share price fell to its low of 19p the share
value of Sir Reo’s holding suffered a massive loss with the