Last night, journalist Philip Boucher-Hayes went on RTÉ R1’s Drivetime, hosted by Mary Wilson, to explain how Presidential candidate Sean Gallagher funded the start of his entrepreneurial career.
Mary Wilson: “In a nutshell tell us what did you find?”
Philip Boucher-Hayers “I’ve been spending a lot of time looking back through records in the companies office and interviews that Sean Gallagher has given in the course of the last five years. I suppose it’s best summed up this way.
Sean Gallagher, as you said, got seed capital for his business from the State.Then he re-registered that business, that company under a different name and he transferred all of the benefits that had accrued, thanks to the State investment, to a new limited liability company.
But the debt was left with the first company and he said, acting on advice, because, that company was no longer trading, he believed that he was absolved of any responsibility to pay the State back.
But the business that had got the benefit of the State’s investments, research, development and learning and so on, went on to become a multi-million euro success. Now he did, it’s important to state, eventually pay back most of the debt to Louth County Enterprise Board but only after three years of legal dispute.”
Mary Wilson: “Tell us more about this first business and the size of the seed capital that he received.”
Boucher-Hayes: “It was called Home Wiring Systems. Essentially the business idea was to put all the wiring you’re ever going need for your computer, your TV, your stereo and so on behind the wall panelling, behind your skirting boards, so you don’t have to go punching holes in the wall to put stuff in later on.
He got an investment of €20,000 from the Louth County Enterprise Board, of which he had previously been chief executive until less than a year earlier. And that investment appears as shares in Home Wiring Systems.
About a year later though, he created this new company, Smart Homes, and three very short months after creating Smart Homes, Home Wiring Systems ceases trading.
But while Home Wiring Systems and Smart Homes are the same business the debt to the State was never transferred from Home Wiring Systems over to Smart Homes.”
Wilson: “So what, you might ask? Businesses are allowed to fail, businesses fail? And their directors have the protection of being limited liability companies, so how is this case for Sean Gallagher any different?”
Boucher-Hayes: “Yeah, you’re absolutely right. If Home Wiring Systems had failed, Sean Gallagher would indeed have been able to have its affairs wound up and seek protection from all of his creditors.
But, separate to the documents that I’ve been looking through in the company’s office, I came across an interview which he gave for a book that KPMG produced back in 2008 on start-up entrepreneurs.
And in it he indicates that Home Wiring Systems and Smart Homes were basically one and the same business. That he had just changed the name because it improved the business branding, quote: “I had initially called the company Home Wiring Systems but that confuses in people’s minds with electricians.”
So it would appear that Home Wiring Systems, the company that owed the State money, ceased trading within three months of the creation of Smart Homes and the question for Sean Gallagher here is: Was Home Wiring Systems allowed to wither on the vine, you might say, and was he happy that its debt would die with it, as he was advised.
Also another question – all the benefits of the State’s investments in Home Wiring Systems which were, as I said, were passed on to Smart Homes, the other question for him is did he not feel, on some level, obligated to pay the State back, because he had benefited from this investment.
He says, as I pointed out, his legal and financial advice was that he didn’t have to pay the money back. But ultimately he did pay all of that money back, or the vast majority of it.”
Wilson: “And another question for you, was he in a position to repay the investment.”
Boucher-Hayes: “Well yeah it would, again looking at the company’s office documents it would appear he was in a position to repay the investment. Louth County Enterprise Board came looking for the money back in 2005.
He had at that time, according to documents, that he’s lodged with the company’s office, €650,000 euro on hand or in the bank. But more than that, more about what passed between him and Louth County Enterprise Board we cannot say because he and they have been bound to silence as the terms of their agreement.”
Wilson: “You spoke to him today?”
Boucher-Hayes: “And I did, I did. And I asked him initially what was the money that he got from Louth County Enterprise Board used for and what value was it to his company?”
[plays pre-recorded interview With Sean Gallagher]
Sean Gallagher: “The funding from the enterprise board was for working capital to buy, to buy products, to buy materials, to do market, to do market testing but to do mostly to do product-type testing. And that worked quite effectively.
So I guess much of the learning was taking place at that stage which is, you know, standard with most companies starting off.”
Boucher-Hayes: “And was that investment of benefit to Home Wiring Systems?”
Gallagher: “Yes, I mean in terms of working capital to buy prototype materials and to install the products and test them, it was certainly helpful.”
Boucher-Hayes: “So the key question here then really is what is the difference between Home Wiring Systems and Smart Homes?”
Gallagher: “Well Home Wiring Systems was set up as a company to do the development. And I had envisaged that that’s what we would do and roll it on into the ongoing company. But what transpired then was I brought in a business partner, Derek Roddy, who had technical skills in the area, and we changed the name.
And my intention was to perhaps keep the first company on as a research development company to create other companies, and keep it separate.
As it happened we moved forward with a new company, given the financial advice I had at the time was to create a new company, a new brand, and perhaps leave the other company that could be used at another stage for research and development.”
Boucher-Hayes: “Was there any difference though ostensibly between HWS and SM, other than a name change?”
Gallagher: “Well there was the name change obviously the shareholding. We branched off out of the original product and diversified I guess off the back of I guess what we had learned in the first phase.
So it was a continuation and perhaps more of an expansion out from the original product that we had developed, based on the learning I suppose that had taken place in the first company.”
Bouchere-Hayes: “Based on the learning from HWS, based on the materials that you say the Louth County Enterprise Board’s investment had provided to the company, all of these assets to the company would have been transferred effectively from HWS to SH, but you didn’t transfer that debt, why not?
Gallagher: “Well, in truth, at the beginning, the debt wasn’t repayable for a period. It’s important maybe to explain. There was a two-year moratorium which, on repayment, which meant that no monies were to be repaid for two years.
And then the balance was to be repaid over a five-year period. I sought financial and legal advice at the time and the advice that I was given was that the liabilities did not follow the new company.
Now once the enterprise board made me aware of their view that it did, I then instructed my finance and legal advisers to meet or to address the issue and to find a satisfactory solution for both. And so the money was due to be paid in full in November 2008. It was a settlement figure, agreeable to both sides. It took place or was reached in February 2009, three months later.”
Boucher-Hayes: “Did you effectively sidestep this debt, the repayment of this investment, by changing the name of the company?”
Gallagher: “I think by 2003, if my memory serves me well, we had launched the company, we had now begun to recruit and we were probably employing about 10-12 people and obviously cashflow was an issue. So I sought advice from my financial advisers and legal advisers at the time.
Their professional advice was it did not need to be repaid. I took that advice. Later the enterprise board then asserted a different view. I was happy to consider that and I instructed my finance and legal team to address it and to make sure they came to a solution that was acceptable to both sides. And that did take place.”
Boucher-Hayes: “OK. But you have said that this money was of use to the company when it was started up. Did you not feel a moral obligation to pay the money because at the point in time the enterprise board came looking for it in 2005 the company’s office records suggest that you had €650,000 on hand, or in the bank, so you would have been more than able to pay it back.
Gallagher: “Well we were in a very aggressive growth stage at the time trying to keep up and to grow, to grow the business but, as I say, I met with my finance and legal advisers and I asked them to give me their view on it. As professionals, they felt that it wasn’t a liability of a new company.”
Boucher-Hayes: “Do you not regret, having followed the advice that you were given. Because, really, for all intents and purposes, HWS and SH were one and the same company, and you sidestepped that debt.
Gallagher: “No I don’t believe it was an issue of sidestepping at all. I don’t accept that. I mean, certainly we were in the process of creating jobs and developing a new business and as soon as the enterprise board asserted the view that it felt, contrary to my advice that I had received from my financial and legal advisers, I instructed immediately my financial and legal advisors to an acceptable solution on both side and that settlement…
Boucher-Hayes: “So obviously you did make a payment back then. So your financial advisers, your legal advisers, were wrong. You did owe that money from the beginning.”
Gallagher: “Well I don’t believe that’s either the case because it didn’t go through court. There was a settlement arrived at and I mean, unfortunately, I can’t give you the figure because it was a confidential settlement. I would personally be happy to give it to you because it was substantial.”
Boucher-Hayes: “Well why don’t you then? Because I’ve talked to the chief executive of the county enterprise board and I infer from that conversation that the only person binding him to confidentiality is you.
So if you are happy to give us the figure, tell us how much of the money you paid back, why not just release yourself from that obligation then?”
Gallagher: “Well no I mean this was settled between the various solicitors. But it was a figure that was substantial, substantially close to the full amount.
It was accepted on terms and acceptable to both sides. So, as far as I’m concerned, that matter was put to bed. The legal advice I got and the professional advice I got was what I received at the time and as soon as I was informed or asserted by the enterprise board that they felt it was a liability of the new company, I did set the process in train, I did have the issue resolved and I’m happy that it as..”
Boucher-Hayes: “Do you regret anything about how you handled this episode?
Gallagher: “I wouldn’t use the word regret. I mean I think one makes judgments and decisions all the time in business and for me what you have to do, and I was starting out in business, my first business, and I took the financial and legal advice that was available to me at the time. If I was doing it again perhaps I would have done it differently.
But, you know, all of use develop and grow and…but I’m happy that the matter has been resolved to the satisfaction of the enterprise board and indeed of Smart Homes.”